MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014.
Where Do We Stand ?
When we timed the bottom of the Q4 bear market rally, on October 13th 2022, we outlined our road map with a target of 4’100 / 4200 on the SP 500, sometimes in February with a potential extension to 4’300. We hit a high at 4195 on February 2nd 2023 right on target and started falling in March.
We made the case that the final peak would probably be at the time of the Q2 earnings reporting season which is just finishing right now with a potential extension to 4’300.
On Friday, the SP500 ended at 4282, closing in on the ultimate target in the region of 4311-4370.
What took us by surprise the later phase of this bear market rally, which has been the spectacular advance of a few large cap technology stocks (+50 and + 200 % ) and the extreme concentration of the rally into those 10 to 15 stocks.
Today, Microsoft and Apple Inc alone account for 15 % of the SP500 Market cap
And the 6 largest US technology stocks have gained more than $ 3trillion in market cap in 2023.
That gain in mallet capitalisation :
1. exceeds the total market capitalisation of the entire US industrials and consumer staples sectors
2. surpasses the market cap of the entire 2,000 constituents of the Russell 2000 index
3. is larger than the market cap of the US materials, real estate, and utilities combined
4. is now almost equating the market cap of the EuroStoxx50 index
As we are approaching our final target for this rally, it seems that many in the media and investing community are now turning bullish. In fact, with the SP500 now rallying 20% off the October lows, many are declaring the end to the bear market and proclaiming the start of a new bull market.
This renewed bullishness is also coming with investors pouring money into equities again. Equity funds attracted $14.8 billion of inflows in the week through May 31, a sixth week of additions, and tech stocks posted the biggest inflows on record ever at $8.5 billion.
The buzz around artificial intelligence has investors pouring a record amount of money into tech and AI related stocks as investors imagination has been captured by the potential of AI and “Monopolistic” technology companies ” are seen as winners through their pricing power and ability to squeeze suppliers.
The , Nasdaq 100 is now up +37 % from its October low, Apple and Microsoft are back to their all-time highs on record valuations despite declining or modestly growing earnings, and NVIDIA has reached a USD 1 Trillion market cap after a historical 24 % melt-up in one singe day that left it trading at trading at USD 400 ( Book Value of USD 9,92 ), 190x its 2.06 annual earning per share and 38x its sales.
We accurately predicted the 2022 bear market in equities and It has constantly been our analysis that US equities marked a secular peak of three bull markets in December / January 2021 and we accurately timed the various tops and bottoms of the market until March 2023.
It has also been our base case that we would enter the second phase the of the secular bear market in Q2 2023, with a ultimate target of the SP500 in the 2700 – 2900 region by the fourth quarter of the year, a – 35 % decline from current levels, as investors re-assess their bullish assessment that the 2022 surge in inflation would be tamed without a recession and that corporate earnings would quickly recover in the latter part of the year.
With investors now having turned resolutely bullish and becoming fully invested ,and rotation having started last week, with Tech stocks losing upward momentum while the Dow Jones and Main Street stocks bouncing, the stage is set for the beginning of the decline phase.
Although we could push a little bit higher in the coming week, an impulsive decline afterwards and break below 4’130 will signal the beginning of that phase, and the extreme concentration and prevalence of CTA’s could make that decline much sharper than anybody expects.
The catalyst for the turn will probably be a very sharp withdrawal of liquidity in the coming weeks.
Bond Markets on the Edge
With a debt ceiling deal freshly signed into law by Joe BIDEN, averting a massive financial crisis, the US Treasury is about to unleash a tsunami of new bonds to refill its coffers. This should cause a major drain on liquidity as bank deposits are raided to pay for it.
Wall Street strategists are warning that the markets aren’t ready for what is to come. The negative impact could easily dwarf the after-effects of previous standoffs over the debt limit. In 2011, the SP500 lost 11 % of its value in a few weeks. JPMorgan strategist Nikolaos Panigirtzoglou estimates a flood of Treasuries will compound the effect of Quantitative Tightening on bonds, knocking almost 5% off their performance this year. Citigroup Inc. macro strategists offer a similar calculus predicting a 37 basis-point jolt for high-yield credit spreads.
And indeed, bond yields are on the edge with the 10-Year Govt yield threatening to re-test its October highs at 4.38 %
The bonds sales are set to begin on Monday, withdrawing vast amounts of liquidity. The US Treasury has been relying on extraordinary measures to help fund itself in recent months as leaders bickered in Washington. With default now averted, the Treasury will kick off a borrowing spree that could top $1 trillion by the end of the third quarter, starting with several Treasury-bill auctions on Monday that total over $170 billion.
JPMorgan estimates the broad measure of liquidity M2 will fall $1.1 trillion from about $25 trillion at the start of 2023, or contracting at an annual rate of – 6%., further accelerating the downtrend already observed in February, March and April.
“This is a very big liquidity drain,” says Panigirtzoglou. “We have rarely seen something like that. It’s only in severe crashes like the Lehman crisis where you see something like that contraction.” With yields at 5 % or higher, there are plenty of buyers for short-term Treasury bills now that default risk has been averted. Institutional asset managers who are sitting on massive cash will certainly put their money to work, but we could also see depositors, shifting even more money out of bank deposits onto Treasury bills, heightening risks on the banking system.
The shift from “inflation” to “Recession”
2022 was all about the return in inflation, and it took until August 19th, so 8 months into the year, for Central Banks and the market narrative to evolve from the “Inflation is transitory” narrative to a realisation that inflation was there to stay and interest rates to climb sharply with all the consequences we know for equity markets between August 13th 2022 and October 13th 2022.
Interest rates rose by the most in 4 decades and 10 year bond yields surged from 0.25 % in October 2021 to 4.50 % as we speak, a twenty fold increase in the cost of money.
Today, inflation is clearly on the mend. As we accurately predicted in the summer of 2022, Energy and food prices collapsed taking the US CPI back down to 3.70 % year on year, to 8,70 % in the UK and to 6.10 % in Germany. But most of the decline is attributable to the base effect as in May 2022, inflation has already risen considerably, making the current increase that much less significant in percentage terms.
However, looking at the GDP price indexes, both Consumer and Core, the trend is significantly up and the loss of real disposable income and wealth value in real terms since 2022 is staggering.
US Prices have increased by + 21.9 % in two years and are still very much trending higher even if mechanically the rate of growth is declining thanks to the base effect, and US Core Prices ( excluding food and energy ) have risen by almost 14% and still accelerating upwards.
US Consumer Price Index for All Urban Consumers
Core PCE Price Index in the United States
And they are still climbing at 0.5 % Month on Month for the CPI and at 0.4 % Month on Month for the Core CPI.
Investors who are short sightedly focusing on the decline in inflation growth rates to predict a quick pivoting by Central Banks are dangerously underestimating the core priority of Central Banks to see those indicators plateau and start declining BEFORE easing monetary policies.
The FED may well raise rates next month again, or maintain its pausing stance, but it is extremely unlikely to see any shift of policy towards easing any time soon, particularly considering the resilience of a two-tier job market where low paid jobs are in demand while higher paid jobs are being cut forcefully by corporations managing their operating margins.
The European Central Bank is very far away from ending its tightening campaign with rates at 3.5 % and core inflation at 6.10 % and Japan is seeing a massive surge in inflation as the Bank of Japan is making a voluntary decision to allow inflation to run ( 4 % today and rising ) to deflate in real terms its massive stock of public debt ( 269 % of GDP ) accumulated over decades of deflation, at the expense of the Japanese consumer.
With a CPI falling to 0.10 %, China is the only economy on the verge of deflation, and a continuation of the trend downwards will force the PBOC to ease monetary policy decisively, providing a massive tailwind to its asset markets,
The significant increase in Western inflation of the past two years represents a significant LOSS of purchasing power and disposable income for consumers, on top of the loss coming from much higher costs of servicing their large accumulated debt in auto loans, student loans, credit cards, bank loans and mortgages, leading to a significant decline of consumption in Volume terms, that is already visible in the abyssal decline in manufacturing survey, as well as is the clear shift from luxury and big-ticket item consumption towards bare necessities consumer staples.( see our section on luxury Below )
Consumers are reining in, Corporations are freezing investments, Banks are tightening credit availability, Governments are sailing though the conflicting forces of surging costs of servicing their debt on one hand, and the decline in tax receipts on the other hand, forcing them to cut on spendings if they want to avoid a lethal debt spiral.
An extremely worrying sign for the US is that due to shortsightedness by the various Treasury Secretaries over the decades of zero interest rate policies, the US treasury has failed to borrow at low rates for the long term and concentrated its 32 Trillion of accumulated debt in very short term tenures.
More than 50 % of its outstanding debt – or USD 16 Trillion – is maturing in less than five years, and has to be refinanced at rates that have jumped form 0.25 % to 5 % in the past two years.
That represents an increase of USD 800 Billion of debt servicing cost per annum, over a budget deficit that already reached USD 1.4 Trillion in 2022, and the cost of servicing the debt will exceed the primary deficit significantly in the coming years, taking the US in the debt spiral we have predicted many many months ago already.
To give a sense of the dynamics at play, in the first seven months of the 2023 fiscal year, the budget deficit stood at $925 billion, marking a 157% jump from the $360 billion deficit a year earlier with Revenues decreasing by 26% to $639 billion.
Considering the sharp miss in the US GDP numbers in the first quarter ( 0.6 % instead of 1.1 % ), mainly due to a sharp decline in the month of March, Tax receipts in the coming quarters are bound to be trending even lower.
Retail Sales in the United States increased barely 1.60 percent in April of 2023 over the same month in the previous year, trending towards negative numbers in nominal terms,
With The Federal Reserve Bank of Dallas’ general business activity index for manufacturing declining by – 5.7 points from the previous month to -29.1 in May of 2023, the lowest since the pandemic-induced crash in the second quarter of 2020.
And with the Government having to cut down on spendings following the debt ceiling bi-partisan deal, and the sharply negative dynamics of its finances, Q2 public spendings are due to take a hit as well.
The THREE components of demand and consumption of the economy are DECLINING sharply, pointing to an economic contraction in the second half the year, regardless of what overly optimistic commentators may say.
Numbers are numbers and trends are trends… Investors may chose to ignore them. We do not.
The USA is entering a recession, Germany and Sweden are already in recession, countries like France are now being pinned for the extraordinary spending and massive accumulation of public debt of the MACRON tenure since 2017 and in the past few years to create jobs and keep the economy from falling into recession, but rating agencies are already circling the Macron administration and it is only a matter of time before France starts falling as well.
The UK has barely avoided recession in Q1 2024, but its trends are definitely going to see it plunging in the coming quarters and and most other European economies are also in sharply declining trends while inflation remains high.
Only Japan, thanks to the ultra monetarist policies of the BOJ and China thanks to the recovery of its massive consumer market are growing, together with India, Indonesia and other Asian Nations.
Real Estate and Recessions
Unfortunately for the Western economies, an additional headwind is real estate is plunging almost everywhere, adding another layer of deflationary pressure on their economies. As we have highlighted many times when we accurately predicted the peak in real estate prices in June 2022, Construction and Real Estate represent 17 to 20 % of the GDP of most Nations, and declining real estate prices have a significant “Negative Wealth effect”* on consumption.
History shows that there HAS NEVER BEEN a down cycle in real estate WITHOUT an ENSUING RECESSION.
Again these are historical facts, not wishful thinking.
This time round with interest rates surging at a pace not seen in 40 years, the cost of servicing mortgages is surging, affordability is collapsing, demand is collapsing and supply is increasing under the combined forces of corporations and households wanting to exit a declining market and the record amount of supply coming from new developments launched 3 to 4 years before.
In the US
The travails of the Commercial real Estate market are well known and documented with some cities seeing vacancy rates exceeding 35 % and developers and their financial backers going out of business. The impact on the US banking system and its regional and niche banking segment that is extremely active in that segment is still to come.
When it comes to housing, In March 2023, the S&P CoreLogic Case-Shiller 20-city home price index in the US fell -1.1% yoy, the first decline since May 2012, after the massive bubble of the past few years induced by too lax monetary policies.
As the following chart shows, when real estate prices start declining. they tend to accelerate downwards and the downturn lasts between 5 and 7 years, taking the economy lower.
As most people will remember, it was precisely the peaking of US real estate prices that we accurately timed in the summer of 2006 that led to the 2008 recession and the Great financial Crisis.
Roiled by rising borrowing costs and falling valuations, European landlords and home owners are bracing for a new wave of pain.
In the commercial property market, a crash in office values from the City of London to Paris and Berlin, is leaving commercial property owners bloated with debt and many landlords having to turn to asset sales, dividend cuts and rights issues in an attempt to rightsize the firms for a more turbulent future. Property companies have about $165 billion of bonds maturing through 2026, while banks are reducing their exposure to the industry and credit costs are at their highest since the financial crisis. Property firms are at risk of being downgraded to junk status, making it even more expensive for them to borrow.
The poster child for the rout has been Swedish property firm Samhallsbyggnadsbolaget i Norden AB, the stock price of which has plunged more than 90% since its all-time high.
According to Savill’s, we are observing the fastest correction of any recent downturn, twice as quickly as during the GFC. Prices are falling more quickly than ever recorded in mainland Europe.
In Q1 2023, Commercial real estate prices fell the most in Amsterdam (-33%), Berlin (-33%), Cologne (-32%) and Paris (-31%) while Lisbon (-11%), Dubai (-10%), and Stockholm (-9%), have observed smaller corrections so far. For Dubai it is only the beginning of the downturn, for Sweden the 1st quarter numbers come on the back of already sharply negative numbers in 2022.
The impact of such historical declines and surge in vacancy rates has considerable consequences for the construction sector, with most new projects being frozen, developers and real estate agents going bust and the banking system being significantly affected through Non Performing loans, further constraining the availability of new credit to the economy and the real estate sector.
Here again, as as was the case in 2008 and previous real estate cycles, the downturn is only starting and will last for years, impacting the economies for much longer than most people expect.
What is truly worrying today, is HOW FAST the real estate crisis is spreading.
In the Housing market, suffice to show the pace at which Germany’ house prices are collapsing and entering contraction for the first time since 2007 or the UK’s similar pace of decline.
Here again, only Japan and now China that is puling out of its self-engineered real estate crisis are seeing rising house prices.
These are FACTS, FIGURES and MACRO ECONOMIC TRENDS.
With due respect to the commentators who see NO recession ahead or only a short soft landing, the trends above paint a drastically different picture and, unfortunately, some of them point to a much deeper economic contraction than was the case in 2008, due to the extreme level of accumulated debt and the rapid surge in interest rates.
As was the case with inflation in 2022, it will probably take until the summer for investors, analysts and economists to fathom the magnitude of the deceleration ahead and its potential impact on asset markets.
Inflation, Recession and Equity Markets
INFLATION + RECESSION is the WORST POSSIBLE COMBINATION for equity markets as it usually leads to both a decline in corporate earnings AND a sharp compression of valuations. And this is exactly what we have today.
Contrary to bond investors who have already priced in a deep economic contraction though the most inverted yield curve since the 1980’s, ( a record 168 basis points 3MO / 10 Yr inversion ) that have always heralded economic contractions in the past,
Equity investors have been bidding up European and US equity markets on the hopes of a quick economic and earnings recovery, taking the French CAC 40 to all-time highs and Apple Inc, back to its December 2022 high despite sharply declining earnings.
Equity investors and analysts are expecting earnings to rebound sharply after their recent decline that saw then fall by -6.8 % year on year in the first quarter of 2023. But their hopes will be dashed and that will start appearing in the release of the second quarter earnings in July 2023.
For now, corporations have been hiking prices while cutting costs through redundancies and squeezing suppliers. At the same time, consumers have been running down their savings accumulated during the pandemic times and increased their debt levels, especially credit card balances, to sustain their consumption levels and lifestyle.
This is now coming to an end. All the data coming out of the credit cards companies show a decline in spending and sharp shift in consumption as well as the beginning of a decrease since March. US credit-card spending, tracked by analysts at Citigroup Inc., has been weakening for the past year and showed no improvement in April, Citigroup said.
As we go deeper into 2023, corporations will see less demand and therefore less pricing power to compensate for inflation while costs keep rising with capacity utilisation dwindling. As testified by TESLA’s record sales but dwindling profits, corporations are now entering the stage where they have to cut prices to sustain sales in volume and keep their factories running.
Warren Buffett who has been divesting form equities and is keeping the highest allocation to cash in a decade confirmed last month that his wide portfolio of industrial companies is facing difficult times and seeing pressure on their operating margins. He prefers to stay in cash or invest in Japan.
JP Morgan’s model for corporate earnings, which has been pretty accurate in the past, believes that current estimates my the consensus of analysts is at least 20 % too optimistic on the predicted income and the earnings recession has way further to go. According to JP Morgan, the SP500 earnings will DECLINE form the current USD 210 to USD 185 by the end of the year.
And Indeed, if history is any guide, there has never been any situation in the past where earnings would grow in a recessionary environment, and even less so in a stagflationnary environment.
Finally, and again using history as guide, contrary to the sharp rise in valuations of the past few weeks, equity valuations tend to compress significantly during bouts of inflation, as high interest rates and declining earnings combine to make equity investments far les attractive than bonds or cash.
Besides the fact that the P/E ratio of the SP500 fell to 10x in December 2009, the last episode of Inflation and recession in the 1980s saw the SP500 P/E ratio stay between 7,5x and 10x for many years. less than half the current 20x level.
Chinese equities P/E ratios are currently 7.5x on the HSCEI despite an economy expected to grow by 5 % in 2023 and inflation at 0.10 %.
A Quick update on Luxury goods
What a difference a few weeks make…
In January 2023, we were publishing an article calling the Luxury sector and the European Luxury giants ” THE BIG SHORT” based on their extreme valuations and the late cycle nature of their business. In the past two months luxury stocks kept rising as they reported spectacular earnings, making Bernard Arnault the richest man on the planet for a couple of weeks, and LVMH the first European Company to ever reach a USD 500 Billion market capitalisation.
Since then, our core thesis that the luxury groups would see a sharp decline in their businesses in the US and Europe that would not be compensated by China finally filtered through investors minds.
Johann Rupert, chairman of Cartier-owner Richemont, earlier this month confirmed that the US market had been slowing since November, something that we highlighted in LVMH results, and then Burberry Group Plc reported a
7% decline in American sales in its most recent quarter. While the super-rich continue to spend, Burberry
Chief Executive Officer Jonathan Akeroyd said younger, more aspirational US consumers were starting to cut back on purchases of sneakers, hats and belts.
Last Tuesday analysts at Deutsche Bank AG said the US deceleration was a “building concern.”
The US, alongside South Korea, has been the driver of luxury fortunes for the past three years. As Chinese regions yo-yoed between lockdowns and reopening, Americans, particularly young consumers who had discovered European luxury, kept spending. It helped that they were flush with stimulus payments
as well as stock market and cryptocurrency gains.
This encouraged luxury brands to open new stores in the US, particularly away from the main shopping hubs of New York and Los Angeles and in locations such as Austin, Texas. While the slowdown in US luxury buying isn’t severe enough to imperil those stores for now, we expect luxury brands to soon become saddled with underperforming outlets from their recent expansion at a time where European sales slow down as well.
Investors would be wise to remember the wave of luxury store closures in China seven to eight years ago, after brands opened stores in smaller cities only to see spending in the country contract.
Against this backdrop, LVMH and Hermes look particularly exposed, as they generated 20% to 23% of their sales from the US in its first quarter with 36% of its sales from Asia, excluding Japan, and the rest coming from Europe.
With the US and European markets moderating, there is even more need for Chinese consumers to pick up the bling baton. But as we argued then and still do now, China in 2023 is not China in 2010. The Chinese economic recovery will not be about splashing wealth and buying Louis Vuitton bags, its will be far more discreet and domestically oriented. Young Chinese females have stopped buying luxury bags and are saving money as they face the highest youth unemployment rate in a decade.
So far, Chinese spending has been concentrated in domestic locations, such as Hainan, or in trips to nearby destinations, such as Macau and Hong Kong. Large scale group tours to Europe have not yet begun, which is
needed to keep Chinese consumption going in the right direction. Richemont’s Rupert confirmed that Chinese shoppers remained cautious.
As we are seeing the US and Europe accelerating downwards and consumption shifting from expensive and unnecessary items to staples, Luxury groups are bound to suffer, particularly if as we expect, China does not deliver the kind of growth that has been priced in luxury stocks trading at 60 x earnings.
And as we expected, most large luxury stock prices peaked last month, and are now entering a bear market that will see the value of their companies decline by 40 to 50 % in the coming months.
Global Investor fickleness when it comes to China is amazing and just testifies of their lack of knowledge and comfort when it comes to dealing with a country that does not share the US political model or set of values for society.
The wild swings in equity prices in the past 2 years just reflects swings in sentiment that are totally disconnected with the reality of the Chinese economy, and it is not because China has a different public governance that its economy does not function like any other economy. The differences is that China is governed in a much safer and prudent way than the US and that the extreme greed and fascination for Billionnaires of the US culture and get-rich-quick through gambling in the stock market attitudes are not in fashion there.
As detailed in our recent post titled Buying China and More, China’ is on the verge of deflation, its economy is recovering strongly, even if not as strongly as expected by some economists who were to same that called its demise only a few months ago, its consumer market is strong with retail sales growing at 18 % year over year, manufacturing growing at 5.6 %, investments climbing at 4.7 % and its real estate market is climbing again after three years of a sharp de-leveraging.
With inflation at 0.10 %, the PBOC will ease monetary policy decisively ahead and industrial profits have hit their bottom in March and are now recovering.
China’s equity markets are the cheapest of the investable universe and they are starting the second leg of a secular bull market that will see them reverting to the mean in 2023, a potential 50 % Increase from current levels, under the combined effects of strong economic growth, easier monetary policies, growing industrial profits and valuation expansion.
Both the HSCEI and thE CSI300 Indexes formed a higher low last week, marking the second shoulder of an inverse head and shoulder pattern.
With flows into global equity funds hitting all time highs and investors having shifted form the extreme bearishness of October 2022 to extreme optimism now,
With tech stocks have surged 32% this year on wagers the Federal Reserve will stop raising rates, and that the sector will be more immune to an expected recession, driving their valuations to sustainable levels,
With optimism around AI-related stocks briefly sending Nvidia Corp.’s market capitalisation to $1 trillion, but the bubble now losing momentum,
With the sharpness of the rally raising significant flags on technicals and the Nasdaq 100’s relative strength index back above 70, the threshold for overbought, and a usual precursor to a selloff.
With Long positions in Nasdaq 100 futures at the highest in three years, increasing the
risk of a rout and extreme concentration in a few stocks,
All this within a macro environment that points to a persistence of high interest rates, a looming economic contraction and a continuation of the earnings recession,
The conditions are in place for a significant down leg in US and European equities starting in June and extending into the fall with a potential downside of -38 % on the SP 500.
Bank of America’s strategist Michal Hartnett — who correctly predicted the stock slump
in 2022 — said he remains bearish on stocks, joining the chorus of seasoned market strategists and hedge fund managers who conclude to the same.
In his note published last week, Hartnett emphasises that the contrarian trade at this point would be to sell US tech and AI and buy Hong Kong Shares.
We add to this strategic positioning going Long Gold and Silver, and long volatility
Weekly Market Review 3 June 2023
US Jobless Rate Rises to 7-Month High
The unemployment rate in the US increased to 3.7 percent in May 2023, the highest since October 2022 and above market expectations of 3.5 percent. Despite this uptick, the jobless rate remained historically low and suggested the labor market remained tight. The number of unemployed people increased by 440 thousand to 6.10 million and employment levels declined by 310 thousand to 160.72 million. The so-called U-6 unemployment rate, which also includes people who want to work, but have given up searching and those working part-time because they cannot find full-time employment, rose to 6.7 percent in May, also above forecasts of 6.6 percent. The labor force participation rate was unchanged at 62.6 percent, remaining at its highest level since March 2020.
US Job Growth Beats at 339K
The US economy unexpectedly added 339K jobs in May 2023, the most in four months, and way above market forecasts of 190K. Figures for March and April were revised up, bringing employment 93K higher than previously reported. In May, job gains occurred in professional and business services (64K), namely professional, scientific, and technical services; government (56K); health care (52K); leisure and hospitality (48K); construction (25K); transportation and warehousing (24K); and social assistance (22K). Employment was little changed over the month in other major industries, including mining, quarrying, and oil and gas extraction; manufacturing; wholesale trade; retail trade; information; financial activities; and other services. Figures continue to point to a tight labour market, with employment rising by an average of 314K per month so far this year. Leisure and hospitality is still trending up, with the sector adding an average of 77K jobs per month over the prior 12 months.
US Factory Activity Shrinks Again in May: ISM
The ISM Manufacturing PMI in the United States fell to 46.9 in May of 2023 from 47.1 in April, compared to forecasts of 47. The reading indicated a seventh consecutive month of contraction in the manufacturing sector, as companies “manage outputs to better align with demand in the first half of 2023 and prepare for growth in the late summer/early fall period. However, there is evidently increased business uncertainty in May,” stated Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee. In May, new orders (42.6 vs 45.7), inventories (45.8 vs 46.3) and backlogs of orders (37.5 vs 43.1) contracted again. On the other hand, production rebounded (51.1 vs 48.9) and employment rose at a faster pace (51.4 vs 50.2), although companies continue to indicate near equal levels of activity toward expanding and contracting head counts, amid mixed sentiment about when significant growth will return. Also, price pressures decreased significantly (44.2 vs 53.2).
Canada GDP Growth Stronger Than Expected
The Canadian economy grew by 0.8% in the first quarter of 2023, bouncing back from the stall in the previous period and well above market estimates of a 0.4% expansion. The result overshot the BoC’s forecast that growth would remain weak throughout the whole year, adding leeway for the resumption of its tightening cycle should inflation remain stubbornly elevated. Exports of goods and services advanced by 2.4%, accelerating from the 0.5% increase in Q4 amid a pickup in sales of automobiles, precious metals, and grains. Imports edged up at a slower 0.2% as higher imports of energy offset lower purchases of automobiles, precious metals, and clothing. In the meantime, household consumption expanded for both goods (1.5%) and services (1.3%), gaining traction after two quarters of minimal growth. On the other hand, housing (-3.9%) and business investments (-2.5%) both declined, largely due to higher interest rates from the BoC. On an annualized basis, the GDP expanded by 3.1%.
Brazil Q1 GDP Growth Beats Forecasts
The Brazilian economy expanded 1.9 percent during the first quarter of 2023, reversing the previous period’s contraction of 0.1 percent and surpassing market expectations of 1.3 percent growth. The agricultural sector played a key role in driving the expansion, with output surging by 21.6 percent, helped by a solid soybean harvest. In addition, services activity advanced by 0.6 percent, while there was a slight decline of 0.1 percent in industrial production. From the expenditure perspective, household consumption was slightly up by 0.2 percent and government spending increased by 0.3 percent. External demand also made a positive contribution to the GDP, as imports decreased more significantly than exports. By contrast, fixed investment tumbled 3.4 percent. Compared with the same period of the previous year, the economy expanded 4.0 percent.
Mexico Retail Sales Growth Misses Forecasts
Retail sales in Mexico advanced by 2.5% from the previous year in March of 2023, following a 3.4% increase in the prior month and missing market estimates of a 2.9% rise. Higher sales of motor vehicles, spare parts, fuels and lubricants (+6.9%); stationery items, recreation and other articles of personal use (+6.3%) were offset by sharp declines in hardware, hardware and glass items (-9.6%); household goods, computers (-5.2%) and groceries, food, drinks, ice and tobacco (-4.8%). On a seasonally adjusted monthly bases, Mexican retail sales were unchanged in March, after an upwardly revised 0.6% fall in the prior month and compared with market forecasts of a 0.1% increase.
UK House Prices Fall Most Since 2009: Nationwide
The Nationwide House Price Index in the United Kingdom dropped by 3.4 percent from a year earlier in May 2023, an acceleration from the 2.7 percent decrease observed in April and the largest fall in house prices since July 2009. According to the survey, the housing market in the country will likely face considerable challenges in the coming months due to the rapid increase in interest rates and ongoing inflationary pressures, which have been major factors in dampening the demand for new housing. “Nevertheless, in our view a relatively soft landing remains the most likely outcome since labour market conditions remain solid and household balance sheets appear in relatively good shape,” Robert Gardner, Nationwide’s chief economist, said. On a monthly basis, house prices edged down 0.1 percent in May.
Germany Retail Sales Rise Less than Expected
Retail sales in Germany rose 0.8% month-over-month in April of 2023, rebounding from a 2.4% decline in March, but less than market forecasts of a 1% rise. Sales at food retail increased 0.5% as food prices fell slightly. Sales of non-food rose 0.7% and online and mail order sales jumped 5.9%. Meanwhile, retail sales were 4.3% lower than in April of 2022, with food sales sinking 4.4% as food price inflation remains elevated. Sales of non food went down 4%.
German Inflation Rate Slows More than Expected
Germany’s consumer price inflation declined to 6.1% year-on-year in May 2023, compared to 7.2% in the previous month and below market expectations of 6.5%, according to a preliminary estimate. It was the lowest rate since March 2022, partially due to slower increases in both energy and food prices. Energy costs rose by 2.6% in May, easing from the 6.8% increase recorded in April. Similarly, the price of food advanced by 14.9%, which is lower than the 17.2% increase seen in the previous month. Additionally, services inflation slightly decreased to 4.5% from 4.7% in April. The EU-standard harmonized index of consumer prices, a measure used for cross-country comparisons, rose by 6.3% in May, marking the lowest level since February 2022. Despite the recent slowdown in inflationary pressures within Germany, the consumer price inflation rates remained significantly above the European Central Bank’s target of 2%.
Spain Jobless Lowest Since 2008 for a May Month
The number of people registering as jobless in Spain fell by 49,260 people, or 1.8 percent, to 2.74 million in May 2023, the lowest unemployment level for a month of May since 2008. By category, unemployment fell in services (-34,665 people), construction (-3,896), industry (-4,622), agriculture (-2,501), and among people without previous employment (-3,576). By region, the biggest decreases were reported in Andalucía (-6,521), Castilla-La Mancha (-6,138) and Galicia (-4,909). Compared to May 2022, unemployment has decreased by 183,881 people. Meanwhile, Spain gained 47,883 net formal jobs in May to 20.71 million jobs, a separate report from the Social Security Ministry showed.
Italy Factory Activity Shrinks the Most in 3 Years
The HBOC Italy Manufacturing PMI fell to 45.9 in May 2023 from 46.8 in April, the steepest contraction for three years and compared with market expectations of 45.6. Production experienced the most significant decline since October of the previous year, while new work fell at a rate not seen since November 2022. However, there was an increase in hiring activity, albeit at a modest rate, which was the slowest growth observed so far this year. In terms of prices, input prices recorded the most substantial fall in 14 years, while output prices decreased for the third consecutive month and at the steepest pace in three years. Finally, although optimism dropped to a three-month low, it remained above the long-term trend.
French Q1 GDP Growth Confirmed at 0.2%
The French economy advanced 0.2% on quarter in Q1 of 2023, rising from flat reading in Q4, in line with market consensus. Household consumption rebounded (0.1% vs -1% in Q4), driven up by energy consumption (5.7% vs -8.0%). Further, gross fixed capital formation declined (-0.8% vs 0.2%) because of investment in construction (-1.1% vs 0%). Meantime, net foreign demand contributed positively to the GDP, as exports slumped more moderately (-0.2% vs 0.2%), while imports fell firmly (-2.8% vs -0.8%), due to the sharp drop in imports of goods. On a yearly basis, the GDP expanded by 0.8% in Q1, after a 0.5% growth in Q4.
Japan Capital Spending Up 11% in Q1
apanese companies increased spending on plant and equipment by 11% year-on-year in the first quarter of 2023, rising for the eighth consecutive period as corporate activity continued to recover from the pandemic-induced slowdown. Industries that contributed most to the gain in capital spending were business-oriented machinery (71.3%), real estate (27%) and goods rental & leasing (25%). Meanwhile, industries that reduced capital spending included fabricated metal products (-29%), petroleum & coal products (-23.1%) and production machinery (-21.1%).
Japan Industrial Output Unexpectedly Falls
Industrial production in Japan unexpectedly declined by 0.4 % month-over-month in April 2023, swinging from a final 1.1% growth a month earlier, preliminary data showed. This was the first decline in industrial output since January, mainly contributed by production machinery (-7.4% vs 5.8% in March), iron, steel and non-ferrous metals (-1.1% vs 0.3%), and transport equipment (1.6% vs 4.9%). On an annual basis, industrial output fell 0.3% in April, the sixth consecutive period of decrease, following a 0.6% decline in March.
China Manufacturing Unexpectedly Grows
The Caixin China General Manufacturing PMI unexpectedly rose to 50.9 in May 2023 from 49.5 in the previous month. While beating market consensus, the latest result highlighted a patchy recovery in the economy amid insufficient demand and deflation risks. Output rose the most in 11 months, new order growth was at 2 year-high, and foreign sales continued to increase. Meantime, buying activity expanded the least in 4 months; while employment fell at the steepest pace since February 2020, with backlogs down for the first time in 5 months. Delivery times got even shorter as suppliers kept sufficient stocks. On the cost side, input prices fell for the 2nd month on the back of better supply chains and lower prices of metals, food, and fuel. However, selling prices dropped solidly, due to intense market competition. Finally, sentiment slipped to a 7-month low, on concerns over lingering uncertainty, particularly from overseas.
China Industrial Profits Drop 20.6% in Jan-April
Profits earned by China’s industrial firms dropped by 20.6% from a year earlier to CNY 2,032.88 billion in the first four months of 2023, amid a weakening economic recovery, feeble demand, and margin pressures. The decline followed a 21.4 % plunge in the prior period and a 4% fall in 2022, with profits shrinking in both state-owned firms (-17.9% vs -16.9% in Jan-March) and the private sector (-22.5% vs -23.0%). Among the 41 industries surveyed, 27 saw losses, namely ferrous metal smelting and rolling (-99.4%), petroleum, coal (-87.9%), chemical products (-57.3%), non-ferrous metal smelting and rolling (-55.1%), computer, communication, & electronic equipment (-53.2%), agricultural & food processing (-36.3%), textile (-30.2%), non-metallic mineral product (-27.4%), coal mining & washing industry (-14.6%), special equipment manufacturing (-7.4%), and oil & natural gas extraction industry (-6.0%).
Macau Economy Grows for 1st Time in Over A Year
Macau’s economy expanded 38.8% year-on-year in Q1 of 2023, rebounding from a 23.4% contraction in the previous period. This was the highest growth rate since Q2 of 2021, and ending five consecutive quarter of economic contraction, with a significant rebound in exports of services (71.5% vs -27.1% in Q4). Consumer spending continued to contract (-7.5% vs -10.5%) while government spending jumped (30.1% vs 1.9%). At the same time, gross fixed capital formation fell less (-0.5% vs -13.9%). Regarding net foreign demand, exports of goods slumped much (-40.6 % vs -14.1%). Meantime, imports of goods dropped less (-6.9% vs -7.9%), whereas those of services (24% vs 12.6%) surged.
Russia Industrial Output Growth at Over 1-Year High
Industrial production in Russia surged by 5.2% year-on-year in April of 2023, quickening from a 1.2% rise in March and slightly below market forecasts of a 5.3% growth. It was the strongest increase in industrial activity since February 2022, partly due to low base effects from a year ago. Manufacturing production expanded faster (8% vs 6.3% in March), mainly the manufacture of finished metal products, except for machinery and equipment (30%); electrical equipment (29.3%); motor vehicles, trailers and semi-trailers (27.3%) and computers, electronic and optical products (23.8%). Additionally, output rebounded for mining activities (3.1% vs -3.6%) and it fell less for electricity & gas supply (-1.4% vs -4%) and water and sewerage distribution (-1.2% vs -13.3%). On a monthly basis, industrial production shrank by 5% in April, after jumping 13.4% in the previous month. Year-to-date, industrial activity grew by 0.6% over a year ago.
The Week Ahead
As the United States Senate successfully passed bipartisan legislation to raise the government’s debt ceiling, preventing a potentially disastrous default, attention now shifts to the upcoming macroeconomic calendar. Fresh figures are awaited for services PMI, foreign trade, factory orders, and inventory data. The ISM survey for May is expected to reveal a strengthening in service sector growth, reaching its highest level in three months. Investors will be particularly interested in the gauge that measures price pressures, as there are concerns about service-led inflation, which could influence central bankers to adopt a tightening bias. Additionally, the final estimate of the Markit survey is likely to confirm that business activity growth reached its highest point in over a year in May. Moreover, the trade deficit is expected to have widened in April due to a decline in exports and an increase in imports. On the other hand, factory orders are anticipated to rise for the second consecutive month during the same period.
Elsewhere in America, the Bank of Canada is scheduled to announce its monetary policy decision on Wednesday. Market expectations lean towards no change in the key interest rate, which is anticipated to remain at 4.5%. In addition, important economic data to watch for includes Canada’s foreign trade and Ivey PMI, Mexico’s CPI data and consumer morale, and Brazil’s inflation rate and services PMI.
In the Euro Area, market forecasts suggest a downward revision to a modest 0.1% Q1 GDP growth figure, indicating that the bloc’s economy failed to grow for a second consecutive quarter. Meanwhile, retail sales in the Eurozone are expected to rebound from declines in March and April, and Germany’s industrial activity is set to rise after experiencing its biggest drop in a year, aided by a recovery in factory orders. Other releases include Germany’s balance of trade, as well as the inflation rates of Switzerland, Turkey, and Russia. Additionally, the UK’s Halifax house price index and updated Services PMI will also be released. On the monetary policy front, the National Bank of Poland is expected to maintain its benchmark reference rate at 6.75% for the ninth meeting.
In China, the trade balance and inflation rate for May will offer more metrics on the country’s post-COVID performance, as recent data continues to undermine previous recovery expectations. In Japan, investors await the current account for April. Elsewhere, the Reserve Bank of India is expected to hold its interest rate steady for a second consecutive meeting before the MOSPI releases industrial and manufacturing output data for April. Meanwhile, South Korea, the Philippines, and Indonesia will publish inflation rates for May.
In Australia, the Reserve Bank is expected to hold its cash rate unchanged following last month’s unexpected 25bps hike, as policymakers may opt to wait and see inflation developments. This is followed by Australia’s GDP growth figures for the first quarter and the trade balance for April.
Treasury Yields Climb Following Labor Data
The yield on the 10-year US Treasury note rose to the 3.63% mark on Friday, after domestic labor data added confusion to the expected path of US monetary policy. Recent speeches by Fed officials indicated that the central bank might skip a rate hike in the next meeting, but the latest jobs report increased the likelihood of a 25bps rate hike this month. The US economy added 339 thousand jobs in May, well above market estimates of 190 thousand and upwardly revised 294 thousand in April. On the other hand, the unemployment rate rose by 0.3 percentage points to 3.7% and hourly wage growth slowed. Meanwhile, the US Congress approved the deal to suspend the government’s debt ceiling until 2025, erasing concerns of a default.
German 10-Year Bond Yield Drops to 3-Week Low
Germany’s 10-year government bond yield maintained its downward trend, dropping below 2.3% and hitting its lowest point since May 11, primarily influenced by economic data suggesting a cooling inflation rate in Europe’s largest economies during May. Notably, recent data from Germany, France, Italy and Spain indicated a significant slowdown in inflation, which have instilled optimism among investors as it raises the possibility that the European Central Bank might not need to implement as many interest rate hikes as initially anticipated. However, it is still expected that the ECB will continue its campaign of tightening monetary policy throughout the year.
Italy 10 Year Bond Yield Hits 1-1/2-Month Low
Italy’s 10-year bond yield experienced further losses, approaching the 4.0% mark and touching the lowest level since early April, following the release of data indicating a cooling inflation rate across Europe’s largest economies in May. While this raised expectations of a potential slowdown in the European Central Bank’s tightening measures, it is still anticipated that the central bank will move forward with at least two additional rate hikes in the coming months. The latest CPI reports showed that Italy’s inflation rate dropped to 7.6%, matching the one-year low reached in March. However, it slightly exceeded market consensus, which had anticipated a rate of 7.4%. In other European countries, cost pressures in France, Spain, and Germany slowed down more than expected.
French 10-Year Bond Yield Falls to 3-Week Low
The yield on the French 10-year OAT continued to decline, dropping below 2.9% to touch its lowest level since May 11, as weaker-than-expected inflation data from Europe’s largest economies fueled hopes of a potential reduction in the number of interest rate hikes by the European Central Bank. However, it is still anticipated that the ECB will continue to tighten monetary policy gradually. The latest CPI report from France showed a decline in the inflation rate to 5.1% in May, which is the lowest rate seen in over a year and below market expectations.
The dollar index rebounded to 103.7 on Friday as mixed jobs numbers reduced investors’ expectations of a pause in the Federal Reserve tightening cycle. The US economy unexpectedly added 339K jobs, surpassing the forecast of 190K. However, the unemployment rate rose to a 7-month high of 3.7%, higher than the expected 3.5% and wage growth slowed as expected. Earlier, Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker indicated that the central bank might skip a rate hike in the next meeting but emphasized that such a decision should not be interpreted as the end of the tightening cycle. Additionally, the House of Representatives approved the Fiscal Responsibility Act of 2023, which is expected to be approved by the Senate before the June 5 default deadline. For the week, the DXY is down 0.7%.
Japanese Yen Rebounds on Intervention Warning
The Japanese yen rose to around 139 per dollar, rebounding further from six-month lows after the country’s top currency diplomat said the government “will closely watch currency market moves and respond appropriately as needed.” US policymakers also suggested the Federal Reserve could pause its interest rate hikes in June to allow itself to see more data before making decisions about the extent of additional policy tightening. The yen has weakened significantly this year and declined for the second straight month in May as the Bank of Japan has maintained its policy of ultra-low interest rates despite market pressure and persistent inflation. The headline inflation rate in Japan unexpectedly accelerated to 3.5% in April despite forecasts for a further slowdown to 2.5%, while the core inflation rate rose to a three-month high of 3.4%.
CRYPTO – CURRENCIES
Wall Street Ends Higher, Books Winning Week
The Dow Jones closed 700 points or 2.1% higher on Friday while the S&P 500 added 1.4%, reached its highest level since August 2022 and the Nasdaq topped its April 2022 highs gaining 1%. Investors welcomed a mixed payrolls report showing hotter-than-expected payrolls white an unexpected rise in unemployment and a slowdown in annual wage growth. The data could influence the Fed’s decision to maintain the Fed funds rate steady this month, as they may seek more clarity on the state of the economy. However, there has been a slight increase in the likelihood of a 25bps hike occurring this month. Meanwhile, the passage of the Fiscal Responsibility Act in the Senate also lifted investors’ moods. On the corporate front, shares of Lululemon jumped 11.3%, after the company lifted its full-year outlook. Week to date, the Dow added 2.4% while the S&P 500 and the Nasdaq gained 2.6% and 3.4%, respectively.
Canadian Stocks Close Higher
The S&P/TSX Composite index advanced almost 1.8% to close at the 20,000 mark on Friday, extending gains from the previous session and tracking the strong session for US equities as investors welcomed mixed data from the US labor market. While the unemployment rate rose well above expectations and wage growth slowed, non-farm payrolls surpassed market forecasts and lifted North American bond yields. Energy stocks led the gains and advanced 2.8%, while banks and industrials shares added 2.1% each. Policy-sensitive tech shares and cannabis producers also booked gains. On the other hand, gold miners traded under pressure amid lower gold prices. In corporate news, Suncor Energy was up nearly 3% after announcing 1,500 planned job cuts by the end of the year. On the week, the S&P/TSX was slightly up by 0.3%.
Brazilian Equities Rise, Book 6th Weekly Gain
Brazil’s Ibovespa stock index ended 1.8% higher around the 112,590 level on Friday, extending Thursday’s sharp gains, in line with its global counterparts. Investors reacted positively to a mixed US jobs report and the approval of the US debt ceiling bill by the Senate. The latest US non-farm payrolls report for May showed employers added more jobs than expected, despite a surprise increase in unemployment. On the domestic data front, Brazil’s industrial production fell more than expected in April. On the corporate front, several companies posted solid gains, notably Cosan (+7.9%), Sendas (+4.8%) and CSNMineracao (+4.7%). Heavyweights miner Vale (+4.2%) and Petrobras (+0.7%) also traded in the green. Week to date, the Ibovespa added 1.5%, marking the sixth straight weekly gain.
European Shares Rise on Friday
European stocks maintained their early gains on Friday, with Germany’s DAX 40 and the pan-European STOXX 600 both rising more than 1%, as investors digested the latest US jobs report. The data revealed a larger-than-expected increase in non-farm payrolls in May, although the unemployment rate exceeded expectations by rising to 3.7%. Further boosting sentiment, US Senate yesterday passed legislation to temporarily suspend the government’s $31.4 billion debt ceiling. On the corporate front, British veterinary drugmaker Dechra Pharmaceuticals agreed to be acquired by Swedish investment firm EQT for £4.88 billion. For the week, European stocks edged up slightly, recovering from an over 1.5% loss in the previous period.
French Shares Up 1% on Friday
The CAC 40 index rose about 1% to trade around the 7,210 level on Friday, tracking its European peers, as investors were relieved by the US Senate’s approval of the text on the suspension of the debt ceiling. Meanwhile, the market is hopeful that the Federal Reserve will pause its tightening policy in June as suggested by certain US policymakers. Traders will also closely monitor today’s release of US nonfarm payrolls figures. The luxury sector was among the top performers, with LVMH (2.1%), Hermes (1.3%) and Kering (1.8%) booking strong gains. Shares of Alstom also rallied more than 2% after announcing it has signed a contract for the delivery of 130 electric trams to the Southeastern Pennsylvania Transportation Authority, valued at over 667 million euros. On the opposite side, Thales (-0.8%) and Cap Gemini (-0.4%) were the worst performers. On the week, the CAC 40 is on track to lose nearly 2%.
Spanish Stocks Rise to End the Week
The IBEX 35 rose about 1.6% to close at 9,317 on Friday, tracking its European peers higher, as investors digested a mixed payrolls report for the US and the US Senate’s approval of the debt deal. Although nonfarm payrolls increased way more than expected, wage growth slowed and the unemployment rate increased. Meanwhile, figures for Spain showed the number of people registering as jobless fell to 2.74 million in May 2023, the lowest unemployment level for a month of May since 2008. Within the Spanish selective, the biggest movers were Grifols (+6.5%), ArcelorMittal (+4.7%) and Merlin (+4.3%). The IBEX 35 advanced about 1.4% this week.
Italian Stocks Extend Gains
The FTSE MIB index closed 1.9% higher at 27,070 on Friday, notching a 1.4% gain on the week with support from banks, commodity-backed stocks, and automobile producers. Fresh data showed that the US economy added more jobs than expected in May, although wage growth slowed and the unemployment rate exceeded expectations. The results supported rallies for equity markets worldwide, despite the increase in US bond yields. Oil companies led the gains on the corporate front, benefiting from another upturn in crude oil prices with Saipem surging 5.6% while Eni and Tenaris both added more than 2%. Banks also extended the last session’s strong momentum. Lastly, Moncler added 4% to track the rise in luxury brands amid hopes of Chinese demand.
Japanese Shares Track Wall Street Higher
The Nikkei 225 Index jumped 1.31% to 31,556 while the broader Topix Index rallied 1.55% to 2,183 on Friday, closing at their highest levels in over three decades and tracking gains on Wall Street overnight as the Fiscal Responsibility Act was passed by US lawmakers, allaying fears of a potential default and removing a source of uncertainty in the markets. Japanese stocks have outperformed global peers since May on strong domestic earnings and a weak yen, while market enthusiasm over artificial intelligence and related technologies provided additional boost. Notable gains were seen from index heavyweights such as Toyota Motor (3.4%), Rakuten Group (1.9%), Nintendo (1.6%), Daikin Industries (3.4%), Sony Group (1%) and Panasonic Holdings (4.2%). Elsewhere, SoftBank Group rallied 4.3% amid the investing giant’s exposure to semiconductor and AI-related companies.
China Stocks Gain on Upbeat Global Sentiment
The Shanghai Composite gained 0.79% to close at 3,230 while the Shenzhen Component jumped 1.5% to 10,998 on Friday, rising for the second straight session and tracking global peers higher as sentiment improved after US lawmakers passed a bill to raise the debt ceiling. Domestically, hopes for further policy support also buoyed mainland stocks as mixed economic data in China pointed to an uneven post-pandemic recovery. New energy and consumer-related stocks led the charge, with strong gains from Contemporary Amperex (2.4%), Tianqi Lithium (5.4%), Longi Green Energy (2.2%), Kweichow Moutai (2.2%) and Wuliangye Yibin (2.8%). AI-related and other technology stocks also advanced, including iFLYEK (1.3%), and Kunlun Tech (1.1%).
Hang Seng Surges 4% at Close, Gains 2.2% Weekly
Equities in Hong Kong soared 733.03 points or 4.0% to finish at 18,949.94 on Friday, booking a 2.2% surge for the week, powered by a surge in US stock futures after the US Senate passed legislation to suspend the country’s debt ceiling. The Hang Seng also tried to recover from two-day losses that saw the index plunging to its lowest level in six months, with confidence building about an eventual rebound in China this year following Thursday’s private survey data that showed factory activity picked up pace last month. Recent dovish comments from Federal Reserve officials also eased investor worries about further tightening in the US. All sectors contributed to the upturn, with tech, consumers, and property jumping over 5%, respectively, while financials also posted sharp wins. Among the biggest performers of the day were Longfor Group (15.9%), Zhongseng Group (11.2%), Li Ning (10.7%), China Resources (10.6%), Meituan (6.9%), Fosun Intl. (6.3%), and Tencent Hlds. (5.5%).
WTI crude futures jumped over 2% to above $71.5 per barrel on Friday as investors welcomed the US Senate’s passage of the debt deal and a mixed payrolls report in the US, while also anticipating the OPEC+ meeting over the weekend. While most market participants do not expect the cartel to announce further oil supply cuts, it is worth noting that in April, OPEC+ surprised the market with a cut of 1.16 million bpd, and Saudi Arabia’s energy minister recently cautioned speculators to “watch out.” However, Russian Deputy Prime Minister Alexander Novak expressed his belief that OPEC+ would not implement any new measures, as the group had just implemented production cuts last month. In May, oil prices sank nearly 11%, amid concerns surrounding a slowdown in demand, mainly from top crude importer China.
US natural gas futures dropped below $2.2/MMBtu, the lowest in four weeks driven by record domestic output, increased gas exports from Canada, and a higher-than-expected storage build last week. US gas production hit a record high of 102.5 bcfd in May, surpassing April’s all-time peak. Also, gas imports from Canada were nearing a four-month high of 9.7 bcfd at the start of June. On top of that, the latest EIA data showed US utilities added 110 bcf of gas to storage, exceeding expectations. On the other hand, gas exports to Mexico reached a preliminary daily high of 7.7 bcfd, surpassing previous records. Looking ahead, weather forecasts indicate near-normal conditions through June 11, before turning warmer than normal from June 12-16.
Gold prices edged slightly lower to $1970 an ounce on Friday, after the payrolls report showed a surprise strong job growth in the US. Traders now assign a nearly 66% chance the Fed will leave interest rates steady this month, compared to 75% before the release. About 34% of investors now see the Fed raising rates by another 25bps. Meanwhile, the US Senate approved a bipartisan deal that would increase the federal debt ceiling, allaying fears of a historic default in the US. On the week, gold prices are on track to gain nearly 1%, its first weekly advance in four.
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