Summary: Risk sentiment weakened sharply yesterday as the US debt ceiling talks went nowhere and risk no further progress at least until next Tuesday after the US Memorial Day holiday weekend. The US dollar was bid once again, with the JPY trying to keep pace this time as the risk-off tone tempered the recent risk in US treasury yields. Overnight, New Zealand’s central bank shocked by declaring a sudden end to its tightening cycle after a final 25-basis point hike.
Equities capitulated yesterday on no specific news so repositioning in the market drove S&P 500 futures down 1.1% to s close of 4,159, the weakest close in a week, which put the index futures back into the trading range established since early April. The debt ceiling negotiations are still hanging over the US equity market as dark clouds with no breakthrough yet, but with the VIX Index at ~18.5x the options market is still quite relaxed, but things can change fast as we approach the 1 June deadline. More US equity strategist among the big investment banks are joining the crowd of lowering their outlook fo US equities over expected slowdown in the US economy and increasing wariness over the explosion in trading of zero-day-to-expiry options (ODTE).
The Hang Seng Index declined 1.2% and breached the support its recent trading range while the CSI300 closed slid by 0.95% to the worst level in five months. U.S. debt ceiling, Japan’s additional curb on the export of chip-making technology to China, and lack of confidence about the Chinese economic recovery weighed on stock prices. Alibaba (09988:xhkg). Alibaba (09988:HK) dropped by 2% on chatter about the Chinese tech giant could be laying offing 7% of its employees in the cloud division.
The US dollar was firmer once again yesterday on the risk-off tone across markets, with a slightly change of focus, as the JPY also found strength on the recent sharp rise in US treasury yields partially reversing. EURUSD focus on the 1.0750 area looks important as a last gasp support zone ahead of 1.0500. But the big news overnight in FX was the sharply weaker kiwi on the RBNZ surprising by declaring it is done tightening for this cycle (more below).
A warning to markets from Saudi Arabia triggered a relief rally in crude oil. Energy Minister Prince Abdulaziz bin Salman told oil speculators to “watch out”, raising the spectre of OPEC further intervening in the oil market to support prices. Our Head of Commodity Strategy Ole Hansen writes that his comments highlight the growing unease with the price weakness seen during the past month. Meanwhile, the API reported a 6.8m barrels drop in crude stocks while gasoline fell 6.4m barrels last week suggesting demand is intact. A Reuters report suggested that Russia is considering a possible gasoline export ban to prevent domestic shortages and price hikes. WTI is testing resistance at $73.90 while Brent has reached a three-week high above $77.70 with $80 still the big level to break before talking of a change in direction.
Gold trades firmer after once again finding support ahead of $1950 with US debt ceiling talks continuing to be the main source of inspiration for traders. Lack of progress leading to fears of a US default has driven up yields while supporting the dollar, both unfriendly developments for gold, but against these the turmoil caused by the political standoff, let alone a default has led to some fresh buying of bullion. Overall, the rising risk of recession later this year, potentially forcing another U-turn in rate projections, remains an underlying support, and with gold holding above $1950 hedge funds have not been forced to make further reductions in their elevated long futures position. To regain some positive momentum gold would need to break back above its 21-DMA currently at $2002.
Yesterday’s 21-day T-Bill auction drew 6.2% in yield, the highest in two decades, indicating investors are uneasy about the debt ceiling discussions in Washington. To make it worse, a report came out saying that Republicans do not believe Yellen’s X-date is accurate.
Yesterday’s 2-year auction was one of the best we have ever seen. Indirect bidders were at 68.2%, the highest since June 2009 and the second highest on record. The auction was allotted at 4.30%, the highest yield since February. It’s a clear sign that markets believe the Fed is done hiking rates, hence are positioning to benefit from any future rate cut.
LVMH shares suddenly lost altitude yesterday, dropping some 5% in Paris in the worst sell-off for the stock in over a year. The sell-off spread to other luxury stocks and the catalyst seemed to have been comments at a luxury conference in Paris organized by Morgan Stanley where data were presented showing a more subdued development in US sales adding to the growing evidence that the US economy is slowing down.
UK April CPI is out this morning at +1.2% MoM and 8.7% YoY vs. 0.7%/8.2% expected and 10.1% in March. The Core YoY reading for April jumped to 6.8% vs. 6.2% expected and 6.2% previously, an ugly rise in inflation that will demand a Bank of England response.
New Zealand’s central bank hiked 25 basis points to take the Official Cash Rate to 5.25% as the majority expected, but surprised the market by declaring that its tightening cycle is now done after proving one of the first to begin the cycle and one of the more hawkish central banks of the last couple of years among the G10 currencies. The guidance was an expression of confidence that the 5.50% policy rate would do the trick in keeping inflation risks at bay, even as the coming slowdown in the economy is now seen as less pronounced than earlier anticipated. The kiwi understandably sold off sharply as the market priced out the additional tightening from the forward curve. AUDNZD reversed hard back above the pivotal 1.0600 area and may have put in an important low for now there, with NZDUSD also over 1.2% lower and likely to soon challenge the lows of the year just below 0.6100.
Palo Alto Networks reported better than expected Q3 billings and earnings while lifting the lower end of their previous fiscal year revenue guidance.
Apple and Broadcom have struck a “multibillion-dollar” agreement for the chip company to provide US-made 5G components to the iPhone maker, as part of Apple’s push to source more parts from American facilities. Apple said the partnership was part of its 2021 commitment to spend $430bn with US suppliers and manufacturers over five years.
The most monitored results announcement in the US market will be from Nvidia on Wednesday after the close. The chipmaker’s share price jumped 114% and was the biggest winner within the S&P 500 in 2023 so far. Investors have high expectations of the company’s advantageous position in the rapid development in AI and the resulting demand for computing power. But valuations are also lofty with a P/E of 134x compared to industry median of 55x. Expectations are high with revenue forecast at $6.5bn from $6bn in the previous quarter and adjusted EPS seen at $0.92 per share from $0.64 in Q4. The announcement from Nvidia will be key not just for the stock but for the path of NASDAQ100 as well.
Flash manufacturing PMI for the Eurozone slid to 44.6 from 45.8 last month, coming in below expectations of 46 and at its weakest since Covid lockdowns. New orders continue to fall and backlogs of work are becoming smaller, adding to output concerns in the manufacturing sector. Services PMI also weakened to 55.9 in May from 56.2 in April but was a notch better than expectations. The numbers have highlighted the manufacturing drag from Germany for the rest of the region, and casts doubts on the economic momentum that the Eurozone can sustain. May’s PMI release confirms that concerns about elevated core inflation should centre around services, while goods inflation is set to ease markedly from here on.
Meanwhile, the headline S&P Global flash US PMI composite PMI was at 54.5 in May, up from 53.4 in April, to signal a solid and faster expansion in private sector business activity.
One of Republican House Speaker McCarthy’s chief negotiators said yesterday that the negotiations are in a state of stand-off, with no additional meetings set up, which could mean no further meetings are set to take place until next Tuesday after the US Memorial Day weekend. Some Republican members of Congress question whether Treasury Secretary Yellen’s June 1 deadline for a default risk is credible. In an interesting twist on McCarthy’s status as House Speaker, a number of Democrats are ready to support his status as speaker should he come under pressure from his own party if he were to move in favor of a bipartisan deal to lift the debt ceiling. McCarthy has been seen as having very little wriggle-room in negotiations due to threats from within his own Republican ranks to withdraw support if he softened on key points.
Today’s US earnings focus is Nvidia (see above for earnings preview) and Snowflake both reporting after the close. Analysts expect Snowflake to report FY24 Q1 (ending 30 April) revenue growth of 44% and EBITDA of $22mn up from $-177mn a year ago.
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy