GLOBAL CAPITAL MARKETS OVERVIEW:
The three major U.S. stock indexes were mixed on Friday, with the tech-heavy Nasdaq up 1.4%, the S&P 500 up 0.2%, and the Dow lagging, closing down 0.1%, top losers, down buys Home dominates. Still, the major averages fell for a third straight week, with the S&P down 5.7%, its most significant drop of 2020, the Dow down 4.8%, and the Nasdaq down 4.4% as investors grew increasingly concerned about rising interest rates. Dealing with soaring inflation would drag the economy into recession. On Wednesday, the Federal Reserve raised its benchmark interest rate to its highest level since 1994, before the Swiss and Bank of England hikes on Thursday. Several economic indicators, from retail sales to housing starts and industrial production, point to a slowdown in economic activity. U.S. markets will be closed on Monday for the June 10 holiday. Canada's main stock index S&P/TSX fell 0.4% to 18,930.48 on Friday, led by energy and base metals sectors and weaker commodities. On the other hand, healthcare, technology companies, industrials, and financials rose, recovering from sharp losses in the previous session on recession fears. On the data front, producer prices rose 1.7% in May, driven by higher fuel prices. The index fell 6.6% on the week, its worst weekly performance since the pandemic slump in March 2020, as fears of a global recession due to sharp interest rate hikes rattled stocks. European stocks closed somewhat on Friday, with Germany's DAX up 0.6%, the regional Stoxx 600 up 0.1%, France's CAC 40 flat, and Britain's FTSE 100 down 0.6%. Commodity-related shares fell on lower oil and metals prices. At the same time, financials closed on a positive note, focusing on BNP Paribas, which has approached the Dutch government for a possible takeover of ABN Amro, the Netherlands' third-largest lender. The Stoxx 600 fell 4.6% week-on-week, and the DAX fell 4.9%, with all sectors in negative territory over the weekend, mainly Energy (-10.1%), Basic Resources (-8.9%), and Chemicals (-7.3%) %). It's been a turbulent week, with investors jittery about rising rates and the possibility of a recession after the Federal Reserve, Bank of England, and Swiss National Bank raised interest rates to curb inflation. With European energy supplies in focus, the MOEX Russia Index fell 0.7% to end at 2,354 on Friday, pulling back from two straight sessions of gains. Shares continued to fall after Gazprom cut the capacity of its Nord Stream 1 pipeline to 40% last week. European authorities have accused Moscow of weaponizing energy to trigger a crisis, raising fears that Russia's economic isolation could deepen. Russia's energy exports to Asia surged in May, with India's Urals crude oil imports up more than 800 percent from before the invasion, the latest Kpler data showed, while Russian Prime Minister Alexander Novak said natural gas supplies had also increased. Elsewhere, Sberbank and VTB edged up after the CBR said big banks did not need additional capitalization. At the same time, builders rose after President Putin proposed lowering subsidized mortgage rates in a speech at the St Petersburg Economic Forum. The benchmark MOEX index rose 3.1% for the week. The FTSE MIB index rose 0.3 percent to close at 21,789 on Friday, just above a 16-month low hit in the previous session, as investors priced in further gains from major central banks last week while monitoring gas supply levels in Russia. Hawks turn. Healthcare, technology, and auto sectors rose sharply, with Nexi and Pirelli gaining more than 5%. Banking was also in the green, with BPER Banca and Banca Generali up 2%. On the other hand, the energy sector extended yesterday's losses, with Eni shares falling nearly 5% after Gazprom cut gas supplies further to 65% of demand, sparking concerns over Europe's stock levels and expectations that the Italian energy giant will have to pay soaring prices for future supplies. The index ended the week down 3.4% as markets reacted to rate hikes by the Federal Reserve, Bank of England, and Swiss National Bank. The CAC 40 edged lower to 5,882.65 on Friday, mainly offsetting early gains as major central banks, including the Federal Reserve, the Swiss National Bank, and the Bank of England, aggressively tighten monetary policy and lingering fears of a global economic slowdown, a weekly decline of 4.9%. Gains in banks and autos were offset by technological and energy losses. Among individual stocks, TotalEnergies fell the most, down 5.06%, followed by Eurofins Scientific, down 3.49%, after Societe Generale downgraded its rating. In contrast, EssilorLuxottica rose 3.8% after announcing a share buyback, and Michelin rose 2.2% on upbeat sales from rival Nokia Renkaat Forecast, hoping for strong demand. Safran rose 1.56%, and BNP Paribas reiterated its "outperform" view on the aircraft maker. Elsewhere, BNP Paribas rose 0.46% on reports it may acquire ABN Amro. On Friday, the FTSE 100 fell 0.4% to close at 7,016 points, extending a 3.1% drop in the previous session and recording a weekly loss of 4.1%, as the world's major central banks tightened monetary policy to curb inflationary pressures. Recession fears linger. On the corporate front, oil companies and heavier miners dragged the market down, with Glencore heading into negative territory even after forecasting half-year adjusted operating profit for its trading arm of more than $3.2 billion. In addition, Tesco warned of an unprecedented increase in the cost of living, noting that while the retailer maintained its full-year profit guidance, the market environment "remains extremely challenging." On the other hand, Future rose more than 5% as the media company reiterated that it is on track to meet its full-year 2022 guidance. On Friday, the Shanghai Composite rose 0.96% to close at 3,317 points, while the Shenzhen Composite rose 1.48% to close at 12,331 points, the highest level in about three months, continuing its recent performance relative to its global peers. Markets are hoping for further stimulus as Chinese policy becomes more accommodative. Beijing also announced an initial victory in the recent fight against the coronavirus, further supporting market optimism. Global stock markets rallied on Friday even as the Fed's aggressive fight against inflation fueled fears of a potential recession. New energy, healthcare, and consumer stocks led gains, with strong gains from Contemporary Abe (5.6%), Tianqi Lithium (3.7%), Jiangxi Special (10%), and Changchun Hi-Tech (10%) and Kweichow Moutai (3.9%). The benchmark index rose for a third straight week.The Nikkei 225 fell 1.8% to 25,963. The broader Topix index fell 1.7% to 1,836 on Friday, closing at its lowest level in a month, even as the Bank of Japan fended off by maintaining massive stimulus to support the growth. Aftermarket pressure on the yen and government bonds. The Bank of Japan on Friday kept interest rates ultra-low. It guided borrowing costs at "current or lower" levels, signaling its determination to focus on supporting the economy's recovery from the coronavirus pandemic. Meanwhile, Japanese stocks tracked overnight losses on Wall Street as the Federal Reserve's aggressive blow on inflation fueled fears of a potential recession. Nearly all sectors participated in the sell-off, with index heavyweights falling sharply, including SoftBank Group (-4.2%), Tokyo Electronics (-5%), Toyota Motor (-3.6%), and Recruit Holdings (-5.8%) and Shinyue Chemical (down 5%). Benchmarks snapped a four-week winning streak, with each index down at least 5% for the week. Australia S&P/ASX 200 index fell 1.76% on Friday to close at 6475, falling to its lowest level in 19 months after sharp losses on Wall Street as the Federal Reserve's aggressive fight against inflation fueled fears of a potential recession. Technology stocks led losses, with Block Inc (down 7.8%), Xero (down 5.6%), and Seek (down 1.9%) falling sharply. Mining and energy companies also fell, including BHP Billiton (down 3.4%), Rio Tinto (down 4.2%), Fortescue Metals (down 5.3%), Woodside Energy (down 0.9%) and Santos Ltd (down 4.2%) 2.9%). Elsewhere, financial firms widened their losses, with the "big four" banks falling between 0.7% and 3.6%. Meanwhile, gold stocks outperformed the market as investors used the metal to hedge against economic uncertainty. Gains in the sector were led by Newcrest Mining (3.7%), Northern Star Resources (5.1%), and Evolution Mining (5.4%). The benchmark index fell 6.6%, its biggest weekly loss since March 2020. The S&P/New Zealand shares fell 57.39 points, or 0.54%, to settle at 10,589.19 on Friday, their lowest close since April 26, 2020, after a sharp overnight sell-off in U.S. stocks plunged 4.9% for the week, after the Federal Reserve's weakest close since 1994. Recession fears intensified as global central banks took steps to cool soaring prices after the most significant rate hike in 2018 and the Swiss National Bank for the first time in 15 years. Locally, the New Zealand economy unexpectedly fell 0.2% quarter-on-quarter in the first quarter after growing by 3% in the fourth quarter, with a negative contribution from net exports offsetting solid domestic spending. Meanwhile, inflation in China was 6.9% in the first quarter, well above the central bank's 1%-3% target range. RNZ has hiked rates by 225 basis points since October 2021 and has signaled further tightening. The biggest losers were Chatham Phosphate Rock (down 7.4%), Tourism Holdings Ltd (down 7.1%), Goldfish Ltd (down 6.9%), and DGL Group (down 6.6%). Australia S&P/ASX 200 index fell more than 2 percent to below 6500 on Friday, hitting its lowest level in 19 months, after sharp losses on Wall Street as the Federal Reserve's aggressive fight against inflation fueled fears of a potential recession. Energy and mining companies fell, with Woodside Energy (down 2.3%), Santos Ltd (down 4.1%), BHP Billiton (down 2.8%), Rio Tinto (down 3.6%), and Fortescue Metals (down 4%). Financial firms also widened their losses, with the "big four" banks falling between 2.2% and 3.2%. Tech stocks also fell after another Nasdaq sell-off, including Block Inc (down 7.6%), Xero (down 5.6%), and Altium (down 4%). Meanwhile, gold stocks outperformed the market as investors used the metal to hedge against economic uncertainty. The industry's biggest gainers were Newcrest Mining (2.2%), Northern Star Resources (3.1%), and Evolution Mining (3.1%). The benchmark index was on track for a second straight weekly decline.
REVIEWING ECONOMIC DATA:
Looking at the last economic data:
- RU: In the first quarter of 2022, Russia’s gross domestic product (GDP) grew by 3.5% year-on-year, in line with preliminary estimates and a slowdown from the 5% growth in the previous period. It was the slowest growth in a year as domestic demand weakened due to the impact of the Russia-Ukraine war and related international sanctions. Among different activities, growth slowed mainly in hotels and restaurants (6.2% vs. 14.8% in Q4); construction (4.7% vs. 6.1%); wholesale and retail trade; motor vehicles, and motorcycles Maintenance (3.7% vs. 5.7%) and agriculture, forestry, hunting, fishing, and fish farming (1.5% vs. 4.7%).
- US: In May 2022, U.S. manufacturing production fell slightly by 0.1% month-on-month, the first decline in four months, missing market expectations for a 0.3% increase. Durable goods production fell 0.2%, led by declines in wood products (-2.6%) and machinery (-2.1%). On the other hand, nondurable goods production rose 0.1%, as a 2.5% rise in petroleum and coal products outpaced a less than 1% decline in food, beverage, and tobacco products; paper and printing and support.
- US: In May 2022, U.S. industrial production rose 0.2% from the previous month, after increasing 1.4% in April and market expectations for a rise of 0.4%. This was the weakest growth in industrial activity so far this year, mainly due to a 0.1% drop in manufacturing, namely wood products (down 2.6%) and machinery. On the other hand, mining rose 1.1%, and utilities rose 1% as unseasonably warm weather in May boosted demand for air conditioners. Electric utility production rose 1.9%, while natural gas utility production fell 4.5%.
- CA: In May 2022, Canada's producer price index rose 1.7% month-on-month, up from 0.8% in April. This was the ninth consecutive month of gains, with the central upward pressure coming from energy and petroleum products (10.7%), mainly due to higher gasoline (14.6%) and diesel (10.6%) prices during the war in Ukraine. Plastic resins (7.5%), petrochemicals (6.9%), and food products (2.2%) contributed to higher costs for chemicals and chemical products (3.5%) due to higher food prices. The Canadian IPPI rose sharply as the price of primary non-ferrous metal products fell sharply (-8.1%) due to increased production in China. Compared with the same period last year, the IPPI rose 15%, down from 16.4% in the previous month.
- HK: The Hang Seng rose 1.1% to 21,075 on Friday, the technology index rose 2.3%, and the China Enterprises index rose 1.5% on optimism that monetary and fiscal support will help support the economy. Jingdong shares. com (6.1%), Meituan (5.2%) and Alibaba (2.1%) rose strongly. However, Hong Kong's main stock index fell 3.4% for the week.
- HK: In the three months to May 2022, Hong Kong's seasonally adjusted unemployment rate fell to 5.1% from 5.4% in the previous three months. The improving labor market comes as COVID-19 cases fell to the lowest level since January, and policymakers lifted some social distancing restrictions. As a result, the number of unemployed declined by 14,700 to 191,400, but the number of workers fell by 5,400 to 3,553,800. Among industries, unemployment fell sharply in construction, retail, accommodation, food services, and the arts, entertainment, and entertainment sectors. The Minister of Labour and Welfare said domestic economic activity and the labor market would continue to improve, assuming the local outbreak remains under control.
- EU: Annual inflation in the eurozone was confirmed to hit a record 8.1% in May 2022, above 7.4% in the first two months and four times higher than last year. Prices generally rose, with energy (39.1%), food, tobacco, and alcohol (7.5%), services (3.5%), and non-energy industrial products (4.2%) experiencing the most upward pressure. Eurozone inflation remains well above the ECB's 2% target, and the central bank will raise borrowing costs to bring it back to target starting in July.
- NZ: New Zealand's BusinessNZ manufacturing index rose to 52.9 in May 2022 from an eight-month low of 51.2 in the previous month but remained below the survey's long-term average of 53.1. This marked the ninth month in a row that China's manufacturing sector expanded faster. Production (52.8 vs. 49.4 in April), employment (53 vs. 49.8), and raw material deliveries (55.4 vs. 49.7) managed to resume expansion. On the other hand, new orders recorded the weakest growth since the August 2021 lockdown (53 vs. 55.2).
Today, investors will receive:
- USD: Existing-Home Sales and FOMC Member Mester Speaks.
- EUR: Current Account.
- GBP: MPC Member Pill Speaks, CBI Industrial Order Expectations, and MPC Member Tenreyro Speaks.
- NZD: Westpac Consumer Sentiment, and GDT Price Index.
KEY EQUITY & BOND MARKET DRIVERS:
- EU: European bond yields retreated from recent highs as the European Central Bank's pledge to avoid a split between member states calmed markets on the back of accelerated tightening by other central banks. However, investors continued to assess the ECB's ability to support indebted eurozone members without compromising the transmission of tightening policy after the Federal Reserve, Swiss National Bank, and Bank of England raised interest rates in the same week. As a result, yields on German and French 10-year bonds fell from eight-year highs to 1.7% and 2.2%, respectively. Meanwhile, Italian bond yields fell sharply after European Central Bank President Christine Lagarde said the bank's new anti-crisis tools would kick in if tightening policy sparked a sell-off in bonds from more vulnerable economies. As a result, the closely-watched spread between the Bank of England and Germany's central bank narrowed 50 basis points to 2, reflecting a sharp drop in the Italian debt risk premium.
- FR: French 10-year OAT yields fell to 2.2% from an eight-year high of 2.4% on June 14, as investors continued to assess the impact on the transmission of tighter monetary policy from the European Central Bank's new measures to avoid a split in the eurozone. The new tools announced by the central bank have capped the rise in bond yields amid a push to tighten tightening measures from major central banks. The Fed raised its fund's rate by 75 basis points, the most significant increase since 1994, while the Swiss National Bank surprised markets by raising its policy rate by 50 basis points, and the Bank of England extended its tightening cycle for a fifth meeting. Despite looming recession fears, the Bank of France revised its second-quarter growth forecast to 0.25% quarter-on-quarter, compared with a previous forecast of 0.2%.
- US: Stock futures contracts linked to the three major stock indexes rose about 1 percent on Friday, putting Wall Street on track for a rebound after a massive sell-off triggered by fears of slowing economic growth. On Wednesday, the Federal Reserve raised its benchmark interest rate to its highest level since 1994, before the Swiss and Bank of England hikes on Thursday. More worryingly, such an aggressive tightening could jeopardize a fragile recovery, with several economic indicators, ranging from retail sales to housing, pointing to a slowdown in activity. The S&P 500 and the tech-heavy Nasdaq have been underwhelming last week, down 6% each and the Dow down about 5%.
- US: The yield on the Australian government's 10-year bond fell to 4.1 percent since hitting a more than the eight-year high of 4.259 percent on June 15, as investors bought back government bonds amid growing concerns about the central bank's efforts to curb inflation. Efforts could lead the world economy into recession. However, there was less buying pressure than a nearly 50 basis point surge in Australian 10-year bond yields last week, after stronger-than-expected job growth and a busy week for central bank policymaking. In the U.S., the federal funds rate rose by a more-than-expected 75 basis points. In Switzerland, the Swiss National Bank surprised markets with its first-rate hike in 15 years, boosting bets that the Reserve Bank of Australia will tighten tightening faster. As a result, investors now expect the RBA to raise rates by 50 basis points per meeting for the remainder of 2022, taking rates to 3.75 percent from the current 0.85 percent.
- CN: China's 10-year government bond yield hovered around 2.8% as the country's bond market remained under pressure as worries over the economic impact of the lockdown, China's zero-coronavirus approach, and the ongoing property crisis, and investors' shift to other assets with better returns. The Fed's tightening monetary policy has narrowed the spread between Chinese and U.S. bond yields, making it less attractive to buy riskier Chinese assets. In May, foreign investors reduced their holdings of Chinese bonds for the fourth consecutive month, at a pace of nearly five years, according to data from depository institutions China Central Depository & Clearing Co. and the Shanghai Clearing House. Fastest halfway.
- JP: The yield on Japan's benchmark 10-year bond fell to 0.22%, escaping its implied yield cap of 0.25%, after the Bank of Japan kept its ultra-easy monetary policy unchanged, signaling its determination to support the economic recovery. The decision was widely expected, but it puts the BOJ's stance even more at odds with other major central banks aggressively tightening policy to curb soaring inflation. At its June meeting, the Bank of Japan kept its key short-term interest rate unchanged at -0.1% and the 10-year bond yield around 0%. The Fed committee also said it would propose unlimited bond purchases to defend the 0.25% cap implied by each market day, repeating the market operating guidance is set in April. In addition, the central bank resisted market pressure on the yen and government bonds amid speculation earlier last week by mainly foreign investors that the central bank might adjust its current yield control policy.
- JP: As widely expected, the Bank of Japan voted 8-1 at its June meeting to keep its key short-term interest rate unchanged at -0.1% and the 10-year bond yield around 0%. The Fed's board said it would offer unlimited bond purchases to defend the 0.25% cap implied by each market day, repeating its April guidance. Policymakers believe Japan's economy has picked up despite some weakness due to Covid-19 and soaring commodity prices. Private consumption has recovered, especially in the services sector; exports and industrial output continue to grow. On the price front, the year-over-year rate of change in the CPI (all items minus fresh food) will be around 2%. The Bank of Japan reiterated that it would not hesitate to take additional easing measures if needed. It expects short- and long-term interest rates to remain at current or lower levels. Regarding the weakening of the yen, the committee said that the possible impact of exchange rate movements on the economy must be closely watched.
- EU: European futures rose nearly 0.6% on Friday after falling more than 3% on significant exchanges the day before. Market volatility will continue, however, and the rally is likely to be short-lived as investors remain concerned that rising interest rates will take a significant toll on the economy, corporate profits, and the stock market. Stocks are set for heavy losses last week, with the Dax down more than 5% and the Stoxx 600 down more than 4%. It's the worst week since Russia invaded Ukraine.
STOCK MARKET SECTORS:
- High: Real Estate, Health Care, Consumer Discretionary, Information Technology, Communication Services.
- Low: Energy, Utilities, Consumer Staples.
TOP CURRENCY & COMMODITIES MARKET DRIVERS:
- USD: The U.S. dollar index rallied above 104 on Friday, recovering from a one-week low and on track for a third straight weekly gain as investors reassessed the path of U.S. monetary policy. On Wednesday, the Federal Reserve raised its benchmark interest rate to its highest level since 1994, before the Swiss and Bank of England hikes on Thursday. Meanwhile, Federal Reserve Chairman Jerome Powell reiterated at a conference on the dollar's international role that the central bank is committed to reducing inflation to its 2% target. Powell also stressed that developing an official digital version of the dollar would help protect its global dominance when other countries issue the dollar.
- GBP: Sterling, which changed hands at around $1.23, fell to a two-year low below $1.2 on June 14, as the Bank of England raised its benchmark interest rate by 25 basis points to 1.25% as expected, the fifth consecutive hike. Despite a 11-year high in borrowing costs, the euro remained under pressure as the Bank of England's rate hike did not match the Fed's 75 basis point hike and the Swiss National Bank's surprise 50 basis point hike. In addition, inflation in the UK is at its highest level in 40 years and is expected to hit double digits in the third quarter and 11% in the latest estimate for October. To make matters worse, recession fears remain widespread, with the UK economy shrinking by 0.3% in April and 0.1% in March.
- NZD: The New Zealand dollar held above $0.63 in mid-June after hitting a two-year low of around $0.62 earlier this month, as investors raised expectations of rate hikes amid a deepening wave of global central bank tightening aimed at lowering inflation. Markets are betting the Reserve Bank of New Zealand will more than double interest rates to 4.25 percent by the end of the year, implying a series of half-percentage-point hikes at the upcoming meeting. The Royal Bank of New Zealand raised the official cash rate by 50 basis points to 2% in May and said rates needed to be grown "more and more quickly." As a result, inflation took three 25 basis point hikes. As a result, in the first quarter of 2022, New Zealand's inflation rate reached 6.9%, well above the central bank's 1%-3% target range.
- JPY: The yen fell 1.8% to 134.6 yen per dollar on Friday, retreating to a 24-year low after the Bank of Japan kept its ultra-easy monetary policy unchanged, continuing to maintain policy divergence with its global peers. The central bank also resisted market pressure on the yen and government bonds, with foreign investors speculating earlier last week that the central bank might adjust its current yield-control policy. However, as widely expected, the Bank of Japan kept its key short-term interest rate unchanged at -0.1% and the 10-year bond yield around 0% at its June meeting. The Fed committee also said it would propose unlimited bond purchases to defend the 0.25% cap implied by each market day, repeating the market operating guidance is set in April. Meanwhile, the Bank of Japan made a rare reference to money markets, saying it needed to observe its impact on the economy and markets.
CHART OF THE DAY:
With European energy supplies in focus, the MOEX Russia index fell 0.7% to end at 2,354 on Friday, pulling back from two straight sessions of gains. Shares continued to fall after Gazprom cut the capacity of its Nord Stream 1 pipeline to 40% last week. European authorities have accused Moscow of weaponizing energy to trigger a crisis, raising fears that Russia's economic isolation could deepen. Russia's energy exports to Asia surged in May, with India's Urals crude oil imports up more than 800 percent from before the invasion, the latest Kpler data showed, while Russian Prime Minister Alexander Novak said natural gas supplies had also increased. Elsewhere, Sberbank and VTB edged up after the CBR said big banks did not need additional capitalization, while builders rose after President Putin proposed lowering subsidized mortgage rates in a speech at the St Petersburg Economic Forum. The benchmark MOEX index rose 3.1% for the week.
- Russia MOEX index - D1, Resistance around ~ 2523.21, Support around ~ 2188.53