Equities declined on Tuesday with yields rising on Treasury bills as negotiations on the US debt ceiling remained at an impasse.
United States
US President Joe Biden referred to the most recent talks as productive, but an agreement is still elusive. US House Speaker Kevin McCarthy told Republicans Tuesday that debt-limit talks still have some distance to go and pleaded with them to stay united on the party’s demands for spending cuts. Invesco Chief Global Market Strategist Kristina Hooper commented, “The negotiating parties have gotten more pessimistic,” adding, “and it suggests to me that we’ll see more market turbulence in coming days”. Meanwhile, Minneapolis Fed President Neel Kashkari added to investor uncertainty by stating that the Federal Reserve could keep interest rates elevated for longer if inflation stays rapid. In economic data, the composite PMI report for May improved unexpectedly to 54.5 with analysts expecting a decline to 50 from 53.4 previously. The improvement for the composite measure was driven by services which rose 55.1 from 53.6 previously, while manufacturing was lower than expected at 48.5 vs estimates of 50. Elsewhere, new home sales in April also surprised, rising 4.1% vs -2.1% expected, although the March figure was revised lower to 4% from 9.6% previously.
US PMI (MoM) source: Bloomberg
The S&P 500 closed -1.12% lower on Tuesday in broad-based selling with 77% of stocks lower for the session. Materials was the biggest underperformer, declining by -1.54%, followed by information technology by -1.50% and communications by -1.48%. The energy sector bucked the trend by rising 1.04% as the price of oil rose. The Dow fell by -0.69%, the Nasdaq lost -1.26% while the Russell 2000 index fell by -0.43% with the VIX climbing 7.67% to 18.53. The yield on the 2-year treasury was little changed at 4.321, with Treasury bills for June continuing to rise over expectations the Treasury will run out of money as soon as June 1st with the US Dollar index benefiting from a safe-haven bid, up 0.28% to 103.49.
Europe
In Europe, equities were weighed by weaker manufacturing PMI reports, offsetting services which remain at expansionary levels. For the Eurozone, manufacturing PMI for May missed expectations for an increase to 46.2 from 45.8 previously, instead declining to 44.6. Meanwhile, services PMI declined to 55.9 in line with forecasts of 55.6 remaining well above the 50 level which defines expansion or contraction with reports for the UK and Germany presenting a similar picture.
Eurozone PMI (MoM) source: Bloomberg
The Euro Stoxx 600 weakened -0.60% along with the DAX -0.44%, CAC -1.33%, and FTSE100 -0.1% with major benchmarks across the region all lower. France’s CAC was weighed by a fall in luxury goods makers including Hermes International, LVMH, and Kering SA.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open lower on Wednesday, with ASX futures down -35 points or -0.48% to 7,241. The ASX 200 was little changed on Tuesday, edging -0.05%, amid mixed sector performance. Consumer discretionary which declined by -1.04%, consumer staples fell by -0.83% and materials sank -0.74%. Financials were the best performer, rising 0.77% amid expectations the RBA is not done raising interest rates, real estate gained 0.57% and energy firmed 0.35%. Qantas, the country’s flagship carrier, saw its share price drop by 2.2% to $6.36 despite announcing it expects a record pre-tax profit up to $2.48 billion for the year ending 30 June and a share buyback plan by $100 million. Brisbane-based Technology One jumped 2.8% after announcing a rise in net profits by 24% to $41.3 million. WiseTech edged -0.1%, Afterpay’s owner, Block gained 4.5%, while Catapult added 8.2%. In energy, Woodside and Santos gained 0.3% each. The biggest underperformer of the market was Brainchip, plummeting -17.8% after warning investors of weakening demand for its Akida processor at the company’s AGM. In economic data, manufacturing PMI for May remained unchanged in contractionary territory at 48 while services weakened to 51.8 from 53.7. The yield on the 10-year Australian bond was 6.5 basis points higher at 3.65% , while the local currency weakened by -0.6% against the USD to 0.66.
Commodities
In commodities, the price of oil was up with WTI and Brent crude rising by 1.19% and 2.28%, to $73 and $78 respectively. The rise follows an unexpected draw of -6.799m barrels in API crude stocks for the week ending May 19th compared to expectations of a 525k barrel increase. Additionally, Saudi Arabia’s top energy official warned short sellers to “watch out” on Tuesday ahead of OEPC+ next meeting on June 3rd and 4th suggesting OPEC’s key member stands ready to defend the oil price. In precious metals, spot gold rose by 0.17% to $1975.23, spot silver declined -0.76% to $23.44 with Bitcoin 1.2% higher at US$27,223. In industrial metals, copper fell by -0.88% to $364, while SGX Iron Ore sank by -3.07% to $102.14.
Economic Calendar
24th May 2023
Australia Westpac Leading Index (MoM April) 11:00
New Zealand RBZ Interest Rate Decision 12:00
New Zealand RBZ Press Conference 13:00
UK Inflation Rate (YoY April) 16:00
Germany Ifo Business Climate Survey (MoM May) 18:00
USA MBA Mortgage Applications (19th May) 21:00
25th May 2023
USA Fed Waller Speech 02:10
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
