S&P 500 FX Empire

Equities Start the Week Positively: a Return to Trend Growth, Not a Recession

Global Macro and Stock Markets Analysis

Equity futures start the week positively, with news of easing mobility restrictions across several districts in Beijing and Shanghai supporting risk sentiment, illustrated through strength in travel and luxury sectors.

Thoughts of a slower Fed rate hike glide path continue to send positive reverberations across global stock markets. And the resulting softer US dollar provides a tailwind for most commodity and other risk markets.

But the most significant readthrough during the past week is the markets are now pricing in return to trend growth, not a recession. While the market-implied growth rate is a long way below the pricing at this cycle’s peak in Q2 ’21, it is only a touch lower than what was being priced just before the Covid outbreak.

Today, China’s May manufacturing PMI will likely remain below the 50-mark, demarcating expansion, and contraction. However, such weakness should be shrugged off as economic recovery starts to be priced in.

Oil Fundamental Analysis

Brent breached $121/bbl overnight as Crude prices were supported by news that Covid cases are dropping in China and restrictions are being eased further. Hence the market is in the throws of pricing in some semblance of mobility normality in China’s largest cities.

Expectedly, the EU reportedly disagreed on the proposed embargo on Russian oil over the weekend, but discussions will continue today.

Oil traders view the EU agreement as a bit of red herring, given that individual member states and key corporate buyers in Europe are already phasing out purchases of Russian oil through self sanction. For instance, while Russia is still producing oil, a record amount of output from the Urals is now on the high seas looking for a home.

A unified EU deal may help the political optics. Still, significantly less Russian oil will flow to Europe over the remainder of this year, a comprehensive deal, or no deal.

FOREX Fundamental Analysis

Asia FX

A rally in US equities and waning China pessimism provided a platform for a rally in Asia FX, with the much-beleaguered ringgit trading below 4.37. However, for the USDMYR to challenge the low 4.30s and the rest of Asia FX, including the Yuan, to bounce significantly higher, there may need to be a more comprehensive China economic reopening which will unlock gushers of regional positivity

Euro

German inflation again surprised substantially to the upside at 8.7% year-on-year, on the back of higher Spanish CPI earlier Monday. And this drove the EURUSD slightly higher on the day. Indeed, this will put significant pressure on the ECB to consider a 50bp hike in July and remove negative rates in one go.

However, ECB Lane pushed back against 50bp hikes: removing stimulus “should be gradual”, quarter-percentage increases in July and September will be “benchmark pace.”

But this holiday-shortened economic calendar will be packed with important US data releases that will inform the Fed’s near-term growth and labour market outlook heading into the June 15 FOMC meeting. Hence, traders were reluctant to push the envelope above 1.08 just yet.

British Pound

GBP continues to polarise views across the investment community, with a general sense of bearishness seeming an ever-constant reality. BAML is the latest to warn of an “existential” GBP crisis and a perfect storm due to the current account deficit, EU/Northern Ireland, and questions over the BoE’s credibility. This toxic combination of factors could make it increasingly challenging to attract portfolio flows to finance the widening current account deficit. Keeping the GBP soft on the crosses and straight up against the US dollar if US economic data positively surprises this week