Key market moves
Source: Bloomberg
Macro Overview
Americas:
US markets slid for a third straight session ending the week down 6.6%, 5.6% and 7.9% for the S&P 500, Dow and Nasdaq Composite respectively. Hotter than expected US CPI data boosted bets that the Fed Reserve will remain aggressive in its rate hike path. The US Treasury yield flattened further, with 2 years at 3.06% and the 30’s at 3.19% pointing to a faster pace of Fed tightening. Headline CPI rose to 8.6% a new 40-year high, month on month rose by 1%, both above expectations. Only the yearly core CPI excluding food & energy fell slightly to 6% whilst the monthly data came in unchanged at 0.6% both, again above expectations.
Three half point hikes are now likely, according to market-derived prices OIS, in June, July and September following the data release. Unsurprisingly, the University of Michigan’s consumer sentiment reading slumped to a record low of 50.2. There were no comments from Fed members as the blackout period commenced going into Thursday morning’s FOMC meeting. Earlier in the week, stocks climbed on a report that Chinese financial regulators have started discussions on a potential revival of Ant Group’s IPO fueling optimism that a crackdown on the tech sector is easing. Re-openings in parts of Shanghai had also helped fuel overall sentiment. However for now, despite reported peaks in semiconductor and fertilizer prices as well as general shipping rates, key data releases supporting this has yet to manifest. We will have PPI, retail sales and the FOMC outcome to contend with this week. The press conference post FOMC will be closely watched for further direction the Fed takes.
Cryptos were softer maintaining its correlation to risk sentiment trading below BTC $28k and ETH $1500.
Whilst it looks cloudy on the horizon, Goldman strategists pointed that PE multiples have come down and dividend yields are still reasonably high, citing a gap there, which could provide a bit of a cushion for risk assets going forward.
Europe / Middle East (EMEA):
European shares fell on Wednesday with concerns around economic growth slowdown and a gloomy forecast by Credit Suisse weighing on banks, while investors braced for the European Central Bank’s meeting on Thursday. The pan-European STOXX 600 index declined 3.95%.
The European Central Bank will pull the plug on years of stimulus on Thursday and signal a string of rate hikes to fight surging inflation, leaving markets only to guess the size and speed of policy tightening. Details remain elusive, however, as predicting inflation has proven impossible, suggesting the ECB will only signal its initial steps on Thursday and maintain plenty of discretion further down the line. What appears certain is that the ECB will end its long-running Asset Purchase Programme at the end of this month, promise a rate hike on July 21 and signal that the deposit rate will be out of negative territory in the third quarter.
UK services PMI beat, revised 1.6pts higher in the final read for May, to 53.4, but still down 5.5pts from April.
A miss on German factory orders, down 2.7%mom in April, consensus looked for a 0.4%mom rise. The decline follows a 4.7%mom fall in March. Amid supply problems, a meaningful recovery in industrial production looks unlikely before the second half of the year.
Turkey’s lira continued its slide towards a record low after President Recep Tayyip Erdoğan vowed once again to cut interest rates despite spiraling inflation.
The EU voted to ban combustion engines in 2035. In the fight against climate change, the mandate would help speed up the transition to fully electric vehicles.
Iran on Thursday dealt a near-fatal blow to chances of reviving the nuclear deal as it began removing essentially all the International Atomic Energy Agency monitoring equipment installed under the deal.
Asia:
With the exception of China and Hong Kong, all Asian markets closed the week down. MSCI Asia index lower by 1.14%, and MSCI Asia ex Japan lower by 0.68%.
At the close on Friday, the Shanghai Composite index was up 1.42%. The blue-chip CSI300 index was up 1.52%, rising 3.65% for the week – its biggest weekly gain since early February 2021. The sharp rises in A-shares were driven by foreign buying, with Refinitiv data showing inflows of nearly 18.2 billion yuan through the Stock Connect programme’s Northbound leg, the largest daily inflow since Dec. 9, 2021.
Some good economic data from China last week- Trade Balance came in at +78.76 billion versus +58 billion expected. Exports YoY up +16.9% vs. street expectations of +8.0%. Chinese producer prices rose at their slowest rate in more than a year in May however, prices rose 6.4% vs last year. Prices rose only 0.1% compared with April. US Treasury secretary Janet Yellen said some China tariff cuts may be warranted. But she warned that such cuts are not a “panacea” for easing soaring inflation in the US.
Shanghai locked down a district in the south west on Saturday morning to conduct a mass Covid-19 testing drive. Beijing is also on high alert after a cluster of cases was detected in Chaoyang last Thursday, linked to entertainment venues in the capital’s largest district.
Japan’s economy shrank less than initially reported in the first quarter, contracting by an annualized 0.5% on the back of improved private consumption. Analysts had expect Japan’s GDP to rebound in Q2 2022 on pent-up consumer demand after virus-related restrictions were lifted in March. The yen hit a fresh two-decade low at 134.56 against the US dollar on 9th June, the weakest level since 2002. It reached a high of 135 levels today.
The US and South Korea launched missiles into the sea. The tit-for-tat launches reportedly aimed to demonstrate the countries’ ability to respond swiftly to North Korean attacks. North Korea is reportedly building out its main nuclear site.
South Korea is facing growing supply chain risks as thousands of truckers went on strike for a fourth day on Friday. About 7,800 members, or roughly a third, of the truckers’ union will join the strike on Friday, demanding the new government maintain current rules that guarantee minimum wages for the drivers amid higher fuel prices. Experts said the strike would probably be prolonged, slowing industrial activities in Asia’s fourth-largest economy.
The Reserve Bank of India’s key interest rate was raised by 50 basis points on Wednesday. The central bank also dropped its long-standing phrase that future policy would remain ‘accommodative’. The central bank raised its inflation forecast for the year ending March to 6.7% from 5.7% seen previously. That would be outside the RBI’s mandated target range of 2%-6%.
Thailand’s central bank kept its benchmark interest rate steady as it flagged mounting inflation risks, and signaled its next move might be an increase. The Bank of Thailand’s rate-setting committee voted 4-3 to keep the benchmark rate at a record low 0.5%. The central bank Wednesday raised its inflation forecast for this year to 6.2% from 4.9% predicted in March and expects the economy to grow 3.3%.
Finance minister Lawrence Wong to be promoted to deputy prime minister with effect 13 June (today) whilst retaining the finance portfolio. Wong, was selected by his fellow cabinet ministers to be the next generation PM, paving way for him to eventually succeed PM Lee as the next prime minister
China and Cambodia officials revealed a new naval port. The countries dismissed US concerns that it would provide Beijing with a strategic military outpost on the Gulf of Thailand.
COMPANIES
Didi jumped more than 50% in pre-market trade. Chinese regulators are lifting a ban that kept China’s ride-hailing giant from adding new users, and will reinstate the apps on domestic app store.
China approved its second batch of games this year following a months-long freeze. Shares of Tencent and Netease rose more than 3% on Wednesday, amid a broader surge in Chinese tech stocks. The approval of 60 new titles by the National Press and Publication Administration marks an acceleration from April’s 45.
Apple announced the launch of Apple Pay Later as part of a range of product updates at its annual developer conference. Apple Pay Later will be built into the Apple Wallet and can be used at any location that supports Apple Pay, both online and in physical stores. The announcement came just months after Apple acquired UK-based fintech start-up Credit Kudos, which uses machine learning to create an alternative to traditional credit scores.
GrabMaps currently provides location-based intelligence and services to all Grab verticals in seven out of the eight countries it operates in. Grab will no longer depend on paid map and location-based services from third party providers by the third quarter of this year, though it will continue to use OpenStreetMap as its base layer map via an open database license. Through GrabMaps, companies will be able to get base map data such as places, road & traffic and imagery for a license fee, among others solutions.
Indonesia’s biggest start-up GoTo is expanding its “buy now, pay later” loans as it pushes for profitability. Patrick Cao, president of the tech group that offers everything from online shopping to ride-hailing, said GoTo would launch more lending products to capitalize on Indonesia’s significant population of consumers who lack access to traditional credit.
Twitter has agreed to share a vast trove of data about the content on its platform with Elon Musk after the billionaire entrepreneur threatened to abandon his $44bn acquisition of the social media company if it did not provide more information about fake accounts and bots.
Investors aren’t quite sure who to believe about Ant’s IPO. Reports that Chinese regulators were working on reviving Ant Group’s market debut briefly saw Alibaba shares jump, but the company’s statement that no such revival was planned sent them down again. Shares of Alibaba Group slid over 8% after the news.
CREDIT
The US Treasury curve flattened last week and especially last Friday after the release of the May CPI (headline printed at +8.60% Vs 8.30% expected and core CPI printed at +6% Vs 5.90% expected, but 0.20% lower than previous Month) which surprised the market on the upside but also by the University of Michigan sentiment which came out much lower than expected at 50.2, its lowest level over the last 40Years. Current conditions as well as expectations printed also much lower than survey. The 2Years US Treasury yield rebounded by an amazing 41bps last week, up 28bps last Friday only. The 5years gained 32bps, the 10Years was up 22bps and the 30years gained “only 11bps. The 5years is now the highest point on the curve.
Huge widening of the spreads between Germany and Italy following the ECB meeting. This spread last Thursday widened by 25bps and is now trading at +2.24%. As a reminder, this spread started the year at 1.34%. Deutsche bank’s new ECB hiking baseline is +25bp in July, +50bp in September, +50bp in October and +25bp in December. The deposit rate will be 1% by year-end, lifting it to the lower end of the range for estimates for the nominal neutral rate. Expectations for back-to-back 25bp hikes to continue in H1 2023.
More than 60 central banks have hiked rates this year and 50 of them have raised rates by at least 50bps in one go. Last week was the turn for RBA & the RBI to surprise the market on the upside with both central banks hiking rates by 50bps, above what the market was expecting.
FX
DXY USD rose 1.97% to 104.148, as surprisingly high US May CPI sets hawkish tone for June FOMC meeting. Headline CPI rose 1.0% mom (consensus at 0.7% and lifted the y/y rate to 8.6% (consensus at 8.3%), a new 40-year high. Core CPI rose 0.63% mom as core goods prices reaccelerated, driven by new and used car prices while core services inflation remained strong, driven by rent and owners’ equivalent rent (OER) as well as airfares. May marked the fastest sequential pace of rent inflation since 1987 and the fastest sequential pace of OER inflation since 1990. Michigan consumer sentiment hit a record low of 50.2 against consensus of 58.1. Immediate resistance level at 105.
USDJPY rose 2.70% to close at 134.41, supported by the strong US CPI last Friday. Before the CPI data, JPY had outperform supported by squaring of the short JPY position. In addition, Japan Ministry of Finance, FSA, and BoJ officials held a tri-party meeting to discuss market developments and expressed concern for the recent rapid JPY weakness. USDJPY broke below 133.50 alongside the verbal intervention, but gradually recovered ahead of the US CPI print. Strong resistance level on USDJPY at 135.
Movement on European G10 currencies direction was dominated by broad based USD strength. EURUSD fell 1.87% to 1.0519, GBPUSD fell 1.39% to 1.2315 and USDSEK rose 2.63% to 10.0285. SEK weakens the most due to deteriorating risk sentiment. ECB announced it will end its APP on July 1, pre-announced a 25bp hike in July and opened the door to a 50bp hike in September. In addition, ECB revised its 2022 GDP forecast down to 2.8% yoy (prior at 3.7%), and its inflation forecast up to 6.8% yoy. In UK, UK Prime Minister Johnson wins the Conservative Party leadership vote 211-148, limiting the weakness in GBP.
RBA delivers a surprise 50bp rate hike (consensus at 25bp) to bring the cash rate to 0.85%. Inflation risks likely drove the distinct change in messaging from the RBA who removed the term “steady” and signalled “further steps in the process of normalising monetary conditions in Australia over the months ahead.” Despite the hawkish hike, AUDUSD fell 2.07% to 0.7058, while AUDNZD rose slightly at 0.05%.
CAD rose 0.85% against AUD, as unemployment rate reached a new low of 5.1% against consensus of 5.2%. In addition, net change in employment beats estimate and average hourly wages rose 4.5% yoy, above consensus of 3.8%.
Oil. In U.S. supply, the U.S. oil rig count, an indication of future supply, rose six to 580 this week, their highest since March 2020.
ECONOMIC INDICATORS
M – UK GDP/Indust. Pdtn/Mfg Pdtn/Trade Balance
T – NZ Food Prices, AU Biz Confid., JP Indust. Pdtn, UK Unemploy. Rate, EU Zew, US PPI, CA Mfg Sales
W – JP Core Machine, AU Cons. Confid., CH Indust. Pdtn/Retail Sales, EU Indust Pdtn, US Mortg. App/Empire Mfg/Retail Sales/FOMC Rate Decision
Th – NZ GDP, JP Trade Balance, AU Unemploy. Rate, UK BOE Rate Decision, US Housing Starts/Initial Jobless Claims
F – UK Retail Sales, EU CPI, US Indust. Pdtn/Leading Index
Sources – Various news outlets including Bloomberg, Reuters, Financial Times, Associated Press
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