Summary: US equity markets bobbed back higher after a sharp intraday sell-off never quite poked at the cycle lows from Friday. US yields dropped sharply at the short end of the curve in the wake of a very weak US New Home Sales number for April and the flash Services PMI for May, helping to keep the US dollar on its back foot. Overnight, New Zealand’s central bank hiked rates 50 basis points, boosting the kiwi sharply.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures were under pressure yesterday with Tesla shares down 7%. Nasdaq 100 futures broke lower through key support levels but found support and bounced back, but still ended the session lower locking in the lowest close price since the current drawdown began. This morning the futures are attempting to move higher but have already lost momentum with yesterday’s close at 11,771 being the big level to watch on the downside. If sentiment improves today the 12,000 in Nasdaq 100 futures will likely be the gravitational level to watch on the upside.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - both indices gained modestly. China’s banking regulators called on banks to make more lending. The People’s Bank of China (“PBoC”) held an internal meeting to call on ranks and files at the central bank to step up efforts to encourage banks to lend to SMEs. In addition, the PBoC jointly with the China Banking and Insurance Regulatory Commission to meet with 24 financial institutions and to call on the latter to lend to SMEs, home buyers, truck drivers and households. Kuaishou Technology (01024) rose 4% after reporting results beating market expectations.
EURUSD – the pair marked out new territory on this rally with a move above 1.0700 yesterday in the wake of solid flash EU Services PMI, easing a tad lower after posting a high just shy of 1.0750 overnight. The US dollar was weighed down by lower US yields in the wake of soft US economic data points (more below). If US yields continue lower, the pair could continue to rise and threaten the 1.0800+ zone that would open up for a possible consolidation all the way to 1.1000 and possibly even 1.1200 on a more profound reassessment of the Fed’s potential to tighten. But those latter levels may require new specific positive catalysts in Europe.
USDJPY and JPY pairs – USDJPY broke down through the 127.00 area support yesterday, just as the entire US yield curve dropped on weak US economic data points, with the 10-year yield dropping below 2.75% at one point to trade its lowest since late April. The price action was orderly, suggesting that heavy short-JPY speculative positioning is not driving any immediate panic (relatively stable risk sentiment and a fresh rise in oil prices working against the yen’s favour), with a low of 126.36 before bouncing back toward 127.00 overnight. The 125.00 area is the next focus if the sell-off continues amidst lower treasury yields. In the crosses, the JPY moves tell us that USDJPY punching lower yesterday was only briefly about the JPY strengthening and more about the USD weakening.
Crude oil (OILUKJUL22 & OILUSJUL22) trades higher with Brent once again challenging resistance in the $115-area after the American Petroleum Institute reported a 4.2 million barrels decline in gasoline stocks. If confirmed by the EIA later today, it will mean US stockpiles are at the lowest level for this time of year since 2013, just ahead of an expected busy driving season. An offer from the US DOE to sell up to 40 million barrels of crude had no impact with Saudi Arabia saying they have done what they can and there is no shortfall of crude. The current oil market strength happening without the support from a struggling China where demand remains challenge by covid-19 related lockdowns. A break above $115 in Brent may signal a fresh attempt being made towards $124.
Gold (XAUUSD) as expected has found resistance at $1868, the 38.2% retracement of the recent 210-dollar correction, with silver (XAGUSD) in need of a break above $22.20 before focusing on $22.65. Renewed strength driven by weak US economic data (see below), a weaker dollar, Wall Street getting beaten up and concerns over a central bank policy mistake with aggressive monetary-policy tightening driving concerns over a potential US recession. Despite these latest tailwinds, the recovery has not been strong enough to seriously challenge those looking for lower gold prices, hence a continued focus on economic data, the dollar and yield developments.
US Treasuries (TLT, IEF) - weak US data yesterday (more below) punched US yields lower all across the curve, with the 10-year Treasury benchmark nearly touching the pivot lows from late April around 2.71% and the two-year yield dropping as much as 15 basis points intraday before settling near the 2.50% level. The next key US data point for the treasury market is the April PCE inflation data point up this Friday, with 5-year and 7-year Treasury auctions set for today and tomorrow, respectively, after a 2-year auction yesterday went off smoothly despite yields having dropped to their lowest level in nearly a month.
What is going on
Very weak US data yesterday. The flash US May S&P Global Services PMI was out at 53.5 versus 55.2 expected and versus the 55.6 reading for April. This survey has often undershot the traditionally more influential ISM Services survey many times in recent months, but the market reaction was clear as Fed expectations seem extremely tuned to any hint of slowing activity that might drive a drop off in inflation. As well, the US April New Home Sales release (annualized pace of sales dropping to 591k versus 748k expected and 709k (revised from 763k) in March) pointed to a massive deceleration in activity in the new housing sales after the steep rise in US mortgage rates this year. Finally, despite a strong flash May survey for the S&P Global US Manufacturing PMI, the regional Richmond Fed manufacturing survey dropped into negative territory at –9 versus +10 expected and +14 in April. This is the third US regional manufacturing survey in the US this month after the Empire and Philly Fed surveys to show a steep drop from April levels.
RBNZ stays hawkish, supporting NZD. Another 50bps rate hike by the RBNZ along with no signs of parting with its ahead-of-curve tightening path put in a further bid for the kiwi. NZDUSD shot up to 0.6500 from intraday lows of 0.6423 while AUDNZD gave up the key 1.1000 level to plunge to 1.0928. Even though RBA is catching up now, RBNZ remains ahead of other central banks, having tightened by 175 basis points since last October, and will likely be the fastest to reach neutral rates. Guidance was key in driving further kiwi strength as the RBNZ raised its projection for peak cash rates to 3.95% from 3.35% earlier.
What are we watching next?
Food protectionism increases the odds of inflation being sticky. India will limit sugar exports as a precautionary measure to safeguard its own supplies, after banning wheat sales just over a week ago. While the overall impact of this move is smaller than the wheat ban, it is more a concern in terms of the rising food protectionism trend at a time when the weather conditions are weighing on output and Russia is hoarding its food exports. Fitch said in a report that around 30 countries have now taken steps to limit their food exports since the start of Ukraine/Russia war.
Fed meeting minutes from the May meeting are due today. While the hunt for any mention of a possible 75bps rate hike may be futile, the base case stays at a series of 50bps rate hikes to follow. But investors are also increasingly parsing Fed talk to look for signs of stagflation or economic slowdown and that really is driving the market sentiment for now. Fed minutes will be especially key for the FX markets, and the focus will be on EUR and JPY, but also the commodity currencies. USD bulls may be back in action, but lower long-term yields may mean more gains for the yen too. AUDJPY remains a key risk sentiment play.
Earnings Watch. Today’s key focus is Nvidia and Snowflake with the former being the one with the biggest sentiment impact given its $404bn market value and still elevated equity valuation (2% free cash flow yield). The worry around Nvidia is to what extent the decline in cryptocurrencies is beginning to weigh on sales due to a slowdown in crypto mining. This was a negative driver for Nvidia’s stock back in the years 2018 and 2019 following the big drawdown in Bitcoin. Snowflake was one of the hottest IPOs in recent memory attracting even Berkshire Hathaway as one of its investors and top line growth has been strong, but the market is getting increasingly nervous that growth is decelerating faster than initially expected.
Economic calendar highlights for today (times GMT)
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy