US

Stocks closed higher in a session marked by exhausting gyrations, with investors trying to make sense of comments from a multitude of Federal Reserve speakers ahead of key inflation data on Wednesday (11 May).

The S&P 500 bounced back after a selloff that erased USD9t from the US equity market this year, but finished well below its Tuesday’s highs. Several traders were still reluctant to call a bottom amid worries over inflationary pressures, tighter monetary policy, and an economic slowdown. The tech-heavy Nasdaq 100 outperformed following its biggest three-day wipeout in at least two decades. Treasury 10Y yields fell. Oil settled under USD100 a barrel, shedding almost 10% in two days.

Fed officials reinforced Chair Jerome Powell’s message that half-point hikes are on the table in June and July, but a larger move of 75 bps could be warranted later in the year. Cleveland Fed President Loretta Mester told Bloomberg Television that “we don’t rule out 75 forever”. Her New York peer John Williams expects the central bank “will move expeditiously in bringing the federal funds rate back to more normal levels this year”. Fed Governor Christopher Waller said a strong economy can take higher rates. – Bloomberg News.

The S&P 500 Index climbed 0.25% to 4,001.05 on Tuesday, the Dow Jones Industrial Average declined 0.26% to 32,160.74, and the Nasdaq Composite Index closed 0.98% higher at 11,737.67.

EUROPE

European stocks gained slightly on Tuesday (10 May) as traders returned to risk assets, encouraged by cheaper valuations following four straight days of steep declines amid fears of a recession and tighter monetary policy.

The Stoxx Europe 600 Index climbed 0.68% to 420.29 after hitting a two-month low in the previous session. Still, the index pared intraday gains of as much as 1.9% following a jump in gas prices on a report that Russian flows will be disrupted. US stocks turned negative as Fed Bank of Cleveland President Loretta Mester said 75 bps rate hikes cannot be ruled out forever.

Financial services and insurance shares were among the biggest gainers today, while media and mining stocks underperformed.

The European gauge has been roiled this year as central banks start to tighten policy at a time when inflation is surging, fuelling concerns of a sharp economic slowdown. The war in Ukraine has accelerated a jump in commodities, further weighing on sentiment, but some strategists say the stock market rout may be reaching a floor with most of the headwinds priced in.

The declines this month pushed the index into oversold territory on Monday, with the relative strength index of the Stoxx 600 hitting 27, the lowest since March. The previous four times this happened in recent months, the level was a precursor to a small rebound in the equities gauge, and in March the Stoxx 600 gained 12% from lows.

Among individual movers, Swedish Match shares soared 25% to a record after Philip Morris International said it is in talks to buy the maker of smokeless tobacco products. Bayer advanced after reporting first quarter profit that topped expectations. – Bloomberg News.

JAPAN

Japan’s household spending climbed for the first time in three months in March as virus restrictions were lifted across the nation, offering some support for private consumption at the end of a bruising quarter for the economy.

Outlays advanced 4.1% from February, led by spending on transport, communications, and clothing, the ministry of internal affairs reported Tuesday (10 May). Spending was still down from a year earlier, but not by as much as expected.

The figures point to a stronger-than-expected recovery in household spending as the first quarter came to a close after two weak months when the economy was hit by a resurgence in Covid cases.

While the gain suggests a recovery is under way, it was not enough to stop spending over the three months falling by 1.8%, an outcome that adds to evidence the economy shrank at the start of the year. Economists also fear that rising prices amplified by the weak yen will limit the uptick in spending going ahead.

Economists estimate that gross domestic product contracted 0.5% in the first three months of the year as the omicron wave and resulting restrictions damped consumer spending, according to a Bloomberg survey.

The softness of the currency is set to continue with the Bank of Japan (BOJ) vowing to keep up its monetary easing to support economic growth, in contrast to the most other developed world central banks, which are raising interest rates to tackle inflation.

After factoring in rising prices, incomes actually fell 0.2%, another indication that once a post-virus surge in demand fades, spending will remain muted. – Bloomberg News.

The Nikkei 225 Index opened 0.09% lower at 26,142.50 on Wednesday morning, extending its decline of 0.58% to 26,167.10 the previous session.

MAINLAND CHINA & HONG KONG

Chinese tech stocks fell as Hong Kong markets reopened after a holiday to face renewed growth worries and persistent regulatory risks, sparking another bout of selling.

The Hang Seng Tech Index tumbled 3.2% on Tuesday (10 May), extending its slide into a fifth day. JD.com and Alibaba Group Holding were among the biggest drags. Key equities gauges across the region all slumped, with an index of Chinese firms in the city sliding more than 2%.

The broad decline tracks a global selloff that intensified after the Federal Reserve hiked rates by 50 bps last week. Beijing is showing no signs of letting up in its stringent Covid Zero policy that is already hurting businesses, and there are growing indications the damage is rippling through the global economy.

Meantime, Chinese regulators further tightened their oversight on the Internet industry over the weekend, banning younger users from sending virtual gifts on livestream platforms. The latest action came despite a string of recent promises by the authorities to take a softer stance on the sector.

Authorities tried to reassure investors again on Tuesday. The onshore market has “solid” foundations for stability, according to a CCTV report citing China’s securities regulator. The short-term market fluctuations will not change the long-term good momentum of the nation’s capital market, the report added.

The message came amid mounting concerns over growth prospects. Chinese Premier Li Keqiang warned of a “complicated and grave” employment situation on Monday as Beijing and Shanghai tightened curbs on residents in a bid to contain recent outbreaks. Chinese exports also weakened to the slowest pace since the early days of the pandemic, capturing the impact of Covid restrictions.

Large investors have also started turning away. BlackRock said it is jettisoning its bullish stance on China given the lockdowns. Chinese authorities have made repeated promises in the past couple months to support the economy and stabilise markets, but that has so far failed to give a sustainable boost to stock prices. – Bloomberg News

The Shanghai Composite Index upped 1.06% to 3,035.84 on Tuesday, while the Hang Seng Index slid 1.84% to 19,633.69.

REST OF ASIA

The benchmark Philippine stock index dropped amid a global selloff, as investors awaited economic plans of Ferdinand Marcos Jr who, based on an unofficial count of Monday’s (9 May) vote, is headed for a landslide win in the presidential election.

Equities are unlikely to rally until Marcos lays out a plan to spur growth, tame inflation, and address the nation’s ballooning debt, according to analysts. The slide in the benchmark gauge also reflects losses in regional shares as rising US interest rates and slowing Chinese growth hurt sentiment.

Based on the broader Philippine Stock Exchange All Share Index’s loss of up to 2.9%, the selloff on Tuesday erased as much as PHP488b (USD9.3b). Market capitalisation dropped by PHP168.27b at the close.

Over a longer timeline, losses in the nation’s equities pale in comparison to the declines in regional shares. The Philippine Stock Exchange Index has fallen 5.6% this year, outperforming the MSCI AC Asia Pacific Index which dropped more than 17%. – Bloomberg News.

The S&P/ASX 200 Index opened 0.02% lower at 7,032.30 on Wednesday morning. The benchmark fell 0.99% to 7,033.90 the previous session.

South Korea’s Kospi Index declined 0.55% to 2,595.20 in early Wednesday trading, after losing 0.55% to 2,596.56 on Tuesday.

The Taiwan Stock Exchange Weighted Index upped 0.08% to 16,061.70.

COMMODITIES

Oil continued its retreat into a second session as galloping US inflation fuelled concerns it would force moves that risk pushing the economy into a recession.

West Texas Intermediate (WTI) fell 3.2% to settle below USD100.00 a barrel for the first time since late April. The dollar advanced amid worries over tighter monetary policy, making commodities priced in the currency less attractive. Meanwhile, French President Emmanuel Macron and Hungarian Prime Minister Viktor Orban discussed energy security on Tuesday (10 May) as the European Union seeks to persuade Budapest to drop its opposition to proposed sanctions on Russian oil imports.

The market has swayed in recent weeks as interest rates rise, and China’s fight against Covid-19 threatens demand. At the same time, Saudi Arabia’s oil minister warned that the entire energy market is running out of capacity, a concern that could potentially drive prices higher. His United Arab Emirates counterpart added that without more global investments, the Organization of Petroleum Exporting Countries + (OPEC+) would not be able to guarantee sufficient oil supplies when demand fully recovers from the pandemic.

A broader market selloff on Monday pushed oil down by the most since the end of March. Oil options markets were also caught up in the downturn, with bearish put options fetching a premium to bullish calls for the first time since the outbreak of the war in Ukraine in late February.

China’s Covid-19 resurgence has further added to volatility. Virus lockdowns have strained the economy, while Chinese Premier Li Keqiang warned of a “complicated and grave” employment situation as Beijing and Shanghai tightened curbs in a bid to contain outbreaks. – Bloomberg News.

CURRENCIES

Hedge funds are increasingly betting on a slide in the euro to parity with the dollar for the first time in two decades.

It is the most popular wager in the options market among bets on a further drop in the common currency. Options pricing shows the odds of the milestone being hit in the next 12 months have risen to about 50%, a coin toss.

That has drawn more than USD4b in notional value staked on USD1.00 since the European Central Bank’s (ECB) last meeting on 14 April, according to data from the Depository Trust & Clearing Corporation. Traders are betting against the consensus of analysts, who see the euro recovering to USD1.11 by year-end. Yet with the currency already down 7% this year to about USD1.05, more banks are also hedging their forecasts.

The euro has been battered by the region’s proximity to the Ukraine war, which has simultaneously fanned price pressures while denting the economic growth outlook. That has left the currency suffering even as ECB policymakers signal the need for the first rate hikes in a decade.

With funds adding euro downside exposure in options, that has left dealers in a so-called short-gamma position, which can amplify volatility. That means if the euro hits fresh lows, currency desks will have to sell into weakness to hedge their position, only bringing parity closer.

The common currency could still get propped up by further verbal intervention by ECB officials. That could result in hedge funds trimming their short option bets and thus balance out market makers’ exposure. Still, that is not swaying the euro’s naysayers. – Bloomberg News.

On Tuesday, the US Dollar Index gained 0.26% to 103.920, the euro fell 0.30% to USD1.0529, the pound lost 0.13% to USD1.2316, and the yen weakened 0.12% to 130.45 per dollar.