Summary: US equities advanced sharply yesterday, with Tesla among the leading megacap performers even before jumping further in after-hours trading as GM announced it will join Tesla’s super-charging network. Gold rose after a spike in US weekly jobless claims reversed much of the prior day’s advance in treasury yields as the market eyes next week’s key May US CPI release and FOMC meeting. The oil market has been buffeted by rumors of a US-Iran nuclear deal.
US equities (US500.I and USNAS100.I): resurgent, still just below cycle highs
US equities rebounded yesterday, with mega-caps leading the way after stumbling in the prior session, while the oddly resurgent small-caps and value pockets of the market posted a slightly weak session after a week of sharp gains. The focus in the S&P 500 is on the 4,300 are area resistance, which has held the line for a week. Next week’s CPI number on Tuesday and the FOMC Wednesday will likely provide the next tests for market sentiment, with yesterday’s weak jobless claims tempering expectations for a hike from the Fed, which today is priced with a 25% probability.
Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index continues to recover; China producer deflation accelerates
The Hang Seng Index managed to rally 0.7% in the early afternoon local time after choppy trading in the morning. China’s CPI inflation came in at 0.2% Y/Y in May, ticking up from 0.1% Y/Y in April and in line with expectations. The bounce in CPI was mainly due to an increase in vegetable prices as other components moderated. However, PPI deflation intensified as the producer price measure slumped 4.6% Y/Y in May, a steeper decline than the -4.3% expected and -3.6% in April and reflecting board-based declines in commodity prices. Consumers, EV, and China Internet stock, and energy names advanced on Friday. PetroChina (00857:xhkg) advanced 2.5%, reaching a new high last seen in 2018. In A-shares, the CSI300 Index ticked up 0.2%.
FX: Dollar slumped as jobless claims spiked
The US dollar weakened yesterday Thursday on a spike in the initial weekly jobless claims number (more below). CHF was the strongest performer on the day on hawkish remarks from SNB Chair Jordan, who noted that inflation is more persistent than the bank had predicted and was leading to second- and third-round effects. Lower Treasury yields initially underpinned a rebound in the yen, with USDJPY slipping to sub-139 levels, but the JPY then broadly weakened overnight and EURJPY trades above 150.00 this morning. EURUSD rose above 1.0780 despite Q1 GDP data confirming a technical recession for the Eurozone. AUDUSD rose back to the 0.6700+ area after a rally the prior day into this zone was rejected. GBPUSD traded above 1.2550 as EURGBP is heavy near the lows of the year and last December below 0.8600.
Crude oil trades lower on US-Iran rumour, later denied by the U.S.
Crude oil suddenly fell sharply on Thursday amid rumours about a possible US-Iran nuclear deal which, if true, would pave the way for more supply hitting the market as sanctions get removed. The United States and Iran are close to reaching a temporary deal allowing Iran to export 1 million barrels of oil each day, according to a report by London-based news site the Middle East Eye on Thursday. WTI prices slumped to sub-$70 on the news before recovering to close around $71 after the US said that the news was "false and misleading." Brent, likewise, slid to $73.50 before closing at $75.50. Near-term demand concerns remain the biggest headwind for crude oil prices for now.
Gold finds support in US data and China’s reserve accumulation
Gold once again rose to challenge the 21-day moving average, currently at $1967, after recovering from RBA and BOC surprise rate hikes. A spike in US jobless claims once again raised doubts about the short-term direction of US rates with traders pricing in a pause from the Fed in June but a rate hike in July and one cut later in the year. Moreover, China expanded its gold reserves for the seventh consecutive month with an increase of 16 tons in May, reinforcing the sustained global demand for the precious metal among central banks and further underpinning strength in the yellow metal. Support at $1935 remains key to hold, while a break above the 21-day SMA may indicate fresh upside momentum with $1985 the next level to watch.
The US Treasury announced it will sell $296bn in debt in just two days next week (2YYM3, 10YM3, 30YM4 TBIL:xnas).
Next Monday and Tuesday, the market will need to digest $296bn between bills and coupon issuances, testing market appetite for what's to come during the next three weeks. Yesterday’s 4- and 8-week T-Bill issuances were mixed, with the former tailing by 4.5bps and the latter stopping though by 0.5bps. We expect the US to continue to bear steepen slightly, with most of volatility concentrated in the front part of the yield curve. Despite the long part of the yield curve will remain anchored, yields have potential to rise marginally. Ten-year yields might rise to test resistance at 3.75%, a level which if they break above might see yield rising fast towards next support at 3.90%.
The UK Gilt curve continues to bear flatten after the Bank of Canada shock (FLGM3, FLGU3).
Despite the BOE successfully ending its corporate bond sale program on Tuesday without much ado, Gilts remain vulnerable to a hawkish tilt in monetary policies. We still see scope for 2-year yields to soar to test resistance at 4.68%. It's unlikely rates will soar to break 5%. As yields rise towards the 5% level, the financial sector will begin to suffer, as happened last September during Truss' mini-budget crisis. Therefore, the BOE must rescue, limiting rates' upside to avoid a financial crisis.Weak China inflation numbers suggest room for stimulus
China reported May CPI and PPI numbers overnight, with the former coming in at +0.2% YoY as expected and vs. +0.1% YoY in April, while the May PPI figure came in at –4.6% YoY, a new cycle low and versus –4.3% expected and –3.6% in April. The weak inflation data suggests room for China to add stimulus, and one influential voice and government adviser from a Shanghai university argued that the government should cut interest rates, though observers note that the private sector often pays far higher rates than state-owned-enterprises for credit.
US jobless claims spikes another signal of loosening labor market
US initial jobless claims for the week ending June 3rd spiked to 261k from 233k, well above the expected 235k and now at the highest weekly level since October 2021, with the 4-week average rising to 237k from 230k. Weekly data can be choppy, especially as the week included the Memorial Day holiday, but is getting relevance as it comes just ahead of the FOMC meeting next week. The read would likely be that labor market is cooling even as it is still quite tight.
GM to join Tesla’s EV charging network
General Motors will adapt its electric vehicles to Tesla’s Superchargers, following Ford’s lead and all but ensuring it will become an industry standard in the US with the three largest companies joining forces. Tesla was up 4.5% for the day, closing higher for a tenth straight day.
Troubled US – Saudi relations exposed in documents
Last fall, President Biden vowed to impose “consequences” on Saudi Arabia for its decision to slash oil production amid high energy prices and fast-approaching elections in the United States. In public, the Saudi government defended its actions politely via diplomatic statements. But in private, Crown Prince Mohammed bin Salman threatened to fundamentally alter the decades-old U.S.-Saudi relationship and impose significant economic costs on the United States if it retaliated against the oil cuts, according to a classified document obtained by The Washington Post.(Washington Post)
Norway reports hot inflation numbers for May
Norway’s May CPI number this morning was hotter than expected, at +0.5% MoM and 6.7% YoY for the headline numbers versus +0.3%/6.3% expected, respectively. The core numbers are likely to trigger the most concern from the Norges bank, with core inflation rising 0.7% MoM vs. 0.4% expected and 6.7% YoY, the latter a new cycle high. One contributing factor has to be the weak NOK, which has dropped over 10% this year alone against the euro. EURNOK dropped sharply on the news.
El Niño has officially begun says NOAA raising weather fears
The National Oceanic and Atmospheric Administration issued an El Nino advisory on Thursday, announcing the arrival of the climatic condition. Having formed a month or two earlier than most El Ninos “gives it room to grow,” and there’s a 56% chance it will be considered strong and a 25% chance it reaches supersized levels, said climate scientist Michelle L’Heureux, head of NOAA’s El Nino/La Nina forecast office. El Nino strongly tilts Australia toward drier and warmer conditions with northern South America — Brazil, Colombia and Venezuela — likely to be drier and Southeast Argentina and parts of Chile likely to be wetter. India and Indonesia also tend to be dry through August in El Ninos. El Niño Has Arrived With Promise of Worldwide Weather Turmoil
Technical update
The more concentrated energy becomes in a system the more fragile it becomes to adverse changes so the fact that the 10 largest stocks in the S&P 500 now have a combined index weight of 30.4% is a very bad sign. It tells us several things. First, it shows that competition is going down in the US economy. Second, it shows that the US equity market offers less and less diversification thus inherent risks to a smaller set of risk factors. With technology stocks being so dominant in US equities sentiment changes and thus the underlying risks are much higher than what is signaled in the VIX Index.
Earnings to watch
To round out the earning season this week, which is at low ebb, we await China’s troubled EV maker NIO, which has fallen over 80% from bubbly valuation levels during the pandemic in early 2021. A couple of interesting names are reporting next week, including Adobe, which has recently gotten a boost on the announcement of AI-driven products.
Earnings highlights for next week:
Economic calendar highlights for today (times GMT)
1230 – Canada May Employment Data
1600 – USDA's World Agricultural Supply and Demand Estimates (WASDE)
1930 – CFTC's Weekly Commitment of Traders Report
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy