Last week was quieter in terms of newsflow and volumes as we had a few different holidays throughout the week to contend with, notably in the United States, United Kingdom and China. May month-end did see elevated volumes thanks to a MSCI reweighting. Aside from that, a cautious interview with JPMorgan CEO Jamie Dimon was one of the few highlights. Market performance lacked direction, and most markets drifted lower, with the MSCI World Index down 0.8%, the S&P 500 Index down 1.2%, the STOXX Europe 600 Index down 0.9% and the MSCI Asia Pacific Index up 1.3%.1
European Central Bank (ECB) in focus this week
All eyes are on this Thursday’s ECB meeting after last week’s Eurozone Consumer Price Index (CPI) data came ahead of expectations at 8.1%, putting further pressure on the ECB to rein in inflation. Market consensus is that the ECB will terminate the net asset purchase programme in June and start raising interest rates in July (the policy rate is currently at -0.5%). The key will be President Christine Lagarde’s press conference and any clues around the likelihood of a 50-basis-point (bp)2 interest rate increase in July instead of 25 bps. The market is pricing in nearly 1.25% of rate hikes by the year end; as the ECB is behind the Bank of England (BoE) and the Federal Reserve (Fed), there is pressure is on Lagarde to outline the path ahead.
With the ECB’s €20 billion-per-month asset purchasing programme winding down, the impact on European bond yields will be closely watched. Since 2014, the ECB has bought €4.9 trillion of bonds, more than half of the €8.8 trillion assets making up the ECB balance sheet.
Italian bond yields will be of particular interest given the high debt levels and volatility. The Italian 10-year yield (3.37% as of this writing) is at levels last seen in 2018. In addition, the spread between German and Italian 10-year government bonds is now at its highest levels since 2020, comfortably over 2%. With that in mind, the ECB’s Governing Council is reported to be working on proposals to create a new bond-buying programme in order to tackle any extreme moves in debt market. The pressure on peripheral yields will be a key dynamic to watch as the ECB embarks on policy tightening.
The week in review
Equities traded down 0.9% on a very quiet week for markets in Europe. With US markets closed last Monday, UK markets closed last Thursday and Friday, and Asian holidays through the week, volumes were significantly lower (aside from the month-end MSCI rebalance). Market-moving newsflow has also been scarce, with most of Europe now focused on this week’s ECB policy meeting and announcement (9 June).
There were a few data-point misses in Europe last week, with the Eurozone Services Purchasing Managers’ Index (PMI), French industrial output, German trade surplus and Italian PMIs all weaker than expected. Importantly, earlier in the week, the latest Eurozone CPI report showed inflation had risen to 8.1%. Unfortunately, the week brought an acceleration again in European equity fund outflows—while in contrast, US equity funds saw inflows.
Last week, the European Union (EU) agreed a deal to partially ban the import of Russian oil and products, with concessions for Hungary. The EU reached consensus on measures that would affect Russian oil and petroleum products, around two-thirds of the ~4 million barrels per day of Russian exports. Specific details of the agreement are still being finalised, but the plan is reportedly to bring the ban on oil into effect within six months and on refined products within eight months. Hungary and other landlocked European nations will still receive oil via the Druzhba, which is world’s longest oil pipeline, transporting ~700,000 barrels per day.
However, the bulk of oil via Druzhba flows to Poland and Germany, both of which have already committed to halting Russian crude oil purchases. The EU agreement, combined with measures imposed by individual countries and companies, will eventually cut off ~90% of Russian exports. One key question is whether the EU will also impose restrictions on the provision of insurance and related services to ships transporting Russian crude oil, greatly restricting Russia’s ability to redirect crude previously destined for Europe to buyers in India, China and elsewhere.
US equities traded lower last week as investors continue to fret over the growth of the economy. The S&P 500 Index traded down 1.2%, after snapping seven weeks of losses the previous week. It was a holiday-shortened week, with US markets closed last Monday for Memorial Day. Sector performance was mixed. Energy was the outperformer amid higher oil prices, as OPEC+3 production hikes underwhelmed the market, and the EU agreed to a partial ban on Russian oil. In addition, Shanghai’s recent easing of COVID-19 lockdown restrictions was seen as likely to boost demand. At the other end, health care stocks lagged last week.
The key market themes we have seen recently continued to persist, with inflation at stubbornly high levels. Yet, last week, the Beige Book seemed to hint that inflation was moderating slightly, with price increases in some districts appearing to abate. With companies passing on costs on to customers, the report noted consumer pushback, as some either made smaller-volume purchases or purchased less expensive brands.
In terms of interest rate hikes, market expectations are still for 50 bp hikes in June and July, with September acting as an important pivot point. Atlanta President Bostic said that a 25 bp or 50 bp hike should remain an option in September if inflation is too high, but admitted it would “make sense” to pause, depending on the economy. On the other hand, Governor Waller supported 50 bps hikes for “several” meetings and agreed with market pricing of around 2.5% total rate increases this year, which would be consistent with 25 bps hikes from September onward, bringing the year-end rate above his neutral estimate of 2%-2.25%.
One of the more notable themes last week was the rather downbeat commentary from corporate CEOs. Elon Musk announced that Tesla would be cutting 10% of its staff and applying a global hiring freeze. He stated in an internal email that he had a “super bad feeling” about the economy.4 Earlier in the week, JP Morgan CEO Jamie Dimon said that a hurricane was bearing down on the economy. He noted there were “big storm clouds” coming and encouraged attendees at the financial services conference to “brace yourself”.5 His comments got some traction in the market on Wednesday, triggering a 2% selloff. However, there was some more upbeat commentary from companies, too. American Express CEO Stephen Squeri said he did not expect a recession and did not expect defaults to rise to pre-pandemic levels in 2022.
There were a few notable data reports last week in the United States. The May employment was the highlight, with nonfarm payrolls coming in at +390,000, ahead of expectations. The unemployment rate came in at 3.6% (slightly higher than expected) and the labour force participation was up a touch to 62.3%. Despite the robustness of the report last week, there is a view, alongside the announcement from Elon Musk regarding Tesla trimming its staff, that the US labour market could be about to turn as companies worry about future growth.
May’s ISM Manufacturing survey was also out last week. The report showed demand remained strong and inflation was not waning; 94% of ISM manufacturing industries reported paying increased prices for raw materials. The story told by the panelists’ commentary was still one of broken supply chains and shortages.
Last week finished on a positive note for Asian markets, with the MSCI Asia Pacific Index up 1.27% and Japan’s benchmark index up 3.66%, the best regional performer.
Japanese equities rallied as strict border controls there were eased, and China decided to allow segments of the economy to reopen. The daily number of visitors allowed to arrive in Japan was increased to 20,000 (vs.10,000 prior) and, from 10 June, tourists will be allowed back, albeit under somewhat strict rules. Bank of Japan (BoJ) Deputy Governor Masazumi Wakatabe reiterated the bank’s commitment to monetary easing, if required, stating that it is necessary for the BoJ to persistently continue with monetary easing and to not rule out taking additional easing measures without hesitation. This statement helped market sentiment.
China’s markets had a better week, albeit shortened by the Tuen Ng Festival holiday last Friday, closing the week up 2.1%. Better PMI data offered support, along with Beijing’s unveiling a raft of support measures to cushion an economic slowdown the country’s zero-COVID policy triggered. In addition, COVID-19 restrictions eased in Beijing last week, with public transport reopening and entertainment venues opening on a limited capacity.
On the macro front, the Caixin/Markit Manufacturing PMI rose to a stronger-than-expected 48.1 in May from 46.0 in April, when it hit its lowest level in 26 months. The latest Caixin/Markit reading reflected a similar improvement in the official manufacturing PMI in May, which also beat forecasts and signalled that the worst of the country’s lockdown-related disruptions was over.
Finally, earlier in the week we saw some interesting intelligence from Bloomberg, which reported global funds have turned net buyers of China stocks.
Hong Kong’s equity benchmark was up 1.9% in a holiday shortened week. Sentiment improved on Shanghai’s gradual exit from lockdown, while details of Beijing’s new stimulus measures added to the optimism. Reopening names performed well amid an easing of COVID restrictions in Bejing and Shanghai.
South Korean equities closed the week up 1.2% in an election week; it was pretty much a clean sweep for the ruling party. Index-provider MSCI’s month-end rebalance helped drive foreign money into the KOSPI, as investors turned to risk-on mode after US macro data showed moderation in inflation pressure and firmer US dollar/South Korean won. Additionally, China’s reopening helped investors gain confidence in the market and China-related plays.
The week ahead
Expect a quiet start to the week for European markets, with several markets closed for Whit Monday. As discussed above, the main event in the region is Thursday’s ECB meeting. In terms of macro data, German Industrial Production (IP) should shed light on the impact from supply chain disruption.
Market holiday on Monday 6 June for several countries: Austria, Denmark, Hungary, Norway, Sweden, Switzerland.
Elsewhere, Friday will see inflation data from a number of major economies with the United States, China and Japan all releasing CPI or Producer Price Index (PPI) data.
Monday 6 June
- Chinese Caixin PMI composite and service
- Euro area: Sentix investor confidence
Tuesday 7 June
- RBA rate decision (survey +0.25 bps to 0.6%)
- US trade balance
- Germany factory orders
- Spain IP
- UK PMI services/PMI composite output
Wednesday 8 June
- Japan GDP
- Germany IP
- Italy retail sales
- Euro area: GDP (first quarter final)
Thursday 9 June
- Chinese trade balance
- UK RICS house price balance
- ECB deposit facility rate/end of net asset purchases
Friday 10 June
- US CPI
- China CPI and PPI
- Japan PPI
- University of Michigan Sentiment survey
- Italy IP
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2. One basis point is equal to 0.01%.
3. OPEC is an intergovernmental organisation with 13 current members: Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC+ includes select allies.
4. Source: Reuters.
5. Source: Financial Times, “JPMorgan chief says ‘hurricane’ is bearing down on economy,” 1 June 2022.