U.S. equities finally managed to rebound, at least for now.

What’s happening in markets?

Quarter end rebalancing and derivative expiry helped drive a rally in the U.S. equities

After the drastic sell-off last week, U.S. equities managed to rally more than 2% yesterday, led by energy counters and assisted by portfolio rebalancing demand and hedging activities approaching the June quarter end.  The U.S.  yield curve steepened modestly as long-end yield rising 5 basis points but the front-end yield being up 2 basis points ahead of today’s US$14 billion 20-year auction and Powell’s testimony before the Senate Banking Committee.

Mixed APAC markets as US futures turn negative

While the Wall Street bounce from last night was a respite after a dreadful week, and more bounce backs can be expected in US markets as we approach month end, caution still prevails as we remain in a bear market. US futures are turning negative in the Asian hours, weighing on local APAC market sentiments. Singapore’s STI (ES3) was lower by 0.3% ahead of Singapore’s inflation report on Thursday which is likely to show price pressures building further. Travel stocks like Singapore Airlines (C6L) and Genting Singapore (G13) were lower on reports of a pick-up in Covid case numbers and Monkeypox making its way into Singapore as well. Tightening of movement restriction in neighboring countries like Indonesia also weighed on the reopening sentiment. Japan’s Nikkei (NI225.I) was in mild gains as the yen receded from its record lows.

Hong Kong and mainland China equities’ recent rally is losing momentum

After having outperformed global markets recently, Hang Seng Index (HSI.I) and CSI300 (000300.I) consolidated this morning, down 1.3% and 0.4% respectively, despite a strong U.S. session overnight.  Hang Seng TECH Index (HSTECH.I) fell 2.5%.  Alibaba Health (00241) and JD Health (06618) fell 12% and 9% respective, more than giving back all their impressive gains yesterday, following media reports saying the Chinese authorities might prohibit third-party e-platforms from selling medicines online.  EV makers did well. Li Auto (02015) rose 5% after unveiling a new EV model.  Geely (00175) surged 5% as the company’s Swedish EV arm, Polestar, is on track to be listed via SPAC. 

Oil prices back lower in Asia

WTI futures slid to fresh one-month lows of sub-$106 while Brent crude futures were slid below $112/barrel. While recession fears remain at play and risk remains from Fed Chair Powell’s testimony in the day ahead, we believe there are also concerns around Biden administration’s fight against high gasoline prices are summer gets underway. Officials from the Biden administration are set to meet oil company officials on June 23 to discuss the federal gasoline tax and how to bring down gasoline prices and price pressures ahead of the midterm elections.

What to consider? 

USDJPY lower in Asia after breaking through a key resistance earlier

USDJPY broke to fresh highs of 136.7 overnight, as both the government and the Bank of Japan continued to press for easy policy. Pair turned lower towards 136 in the Asian session but the BoJ minutes from the April meeting reaffirmed the Bank’s dovish stance in order to stoke up inflation even though FX concerns were seen. Several members asserted that BOJ conducts monetary policy to achieve price stability, not at controlling forex moves. With energy and food prices coming off for now, it may signal some inflation respite for the authorities and the focus will likely stay on wage inflation and inflation expectations. Kuroda lives in the hope that a major recession comes and US yields top out, which will help the yen recover strongly. But until that plays out, markets are likely to continue testing Japan’s yield curve control policy.

Expect U.S. housing to severely curtail in the coming months

Existing homes sales were down 3.4% m/m to 5.41mn units in May, which is a new post-pandemic low. They are down 17% from January. The biggest and most worrying drops are in the Midwest, the West and the South. At the same time, median prices continue to jump (+15% at $408 000 – this is a new all-time high). Inventory is very low at only 2.6mn. The market is very unbalanced. Housing affordability is actually at the lowest levels since 2007 as mortgage payments have increased by 50% since last year. This signals stress and any slide in demand could potentially mean that property prices could crash going into the next year.

Potential trading and investing ideas to consider?

Respite in food inflation may not last

While the easing of food price pressures, mainly led by wheat and edible oils, have been a welcome news, we remain concerned about the supply tightness in the markets. Weather worries are still a key focus in countries like India and key growing regions in France. In addition, and important from a food security perspective next winter, negotiations to export Ukrainian grain through a protected corridor in the Black Sea has made little progress, and unless Ukraine can empty its silos before the next albeit much reduced harvest arrives, the prospect of lower-than-expected available supply will linger on.

Powell's testimony today and tomorrow

Fed Chair Powell delivers his semi-annual testimony on monetary policy before the US Senate Banking Committee. He will likely be grilled on what a more aggressive Fed could mean for jobs and the economy. This could be key as the debate around a 50 vs 75bps rate hike in July is still open. Although Fed’s Barkin was slightly more hawkish yesterday, he is not a voter. With only a few days from the Fed meeting, not a lot is expected to change in Powell’s rhetoric and he will continue to signal that Fed is data dependent and will slow down the pace of rate hikes after the neutral rate is reached.

 

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