1H June Global Market Recap
1st June 2021 – 15th June 2021
The U.S. non-farm payrolls increased 599k in May, falling short of expectations for a second consecutive month and below the medium estimates of 650k. Altogether, the U.S. economy is still about 7.6 million jobs short of its pre-pandemic levels from February 2020. The unemployment rate dropped to 5.8% from 6.1% last month, marking the lowest level since March last year. However, the drop in unemployment was due to an unexpected falling labor participation rate, which fall to 61.6% from 61.7% last month. Labor shortage has been a critical factor for the jobs miss attributed to generous unemployment benefits and childcare issues, among others. The headline CPI Index rose 5% from a year ago, a level never seen since August 2008, higher than the medium consensus of 4.7%. Core inflation index rose by 3.8% from a year ago, marking the highest level since May 1992. At the recent FOMC meeting, the Fed raised its expectations for headline inflation this year to 3.4%, 1% point higher than the March projection. Fed signaled that they expect to raise interest rate by late 2023, sooner than they anticipated in March as the economy recovers rapidly from the effects of the pandemic and inflation heats up. The Fed repeated that it expects to continue bond purchases until “substantial further progress” has been made in the recovery.
China’s Caixin manufacturing PMI index expanded at the fastest pace in five months as domestic and overseas demand picked up, despite the surging commodity prices as manufactures passed on some of the pressure to the customers. The Caixin Manufacturing PMI index rose to 52 in May, slightly beating consensus of 51.9. While the service sector expansion slowed down a bit in May, as Caixin service PMI index dropping to 55.1 from 56.3 last month. Slowing expansion pace was partially due to a fall in overseas demand as export orders index slipped into contraction.
Recent job market data has indicated that the U.S. economy is regaining momentum but not still far below pre pandemic levels. The U.S. Federal Reserve sees two rate hikes by the end of 2023 and had begun a discussion about scaling back bond purchases and projected a faster-than-anticipated pace of tightening. The S&P 500 rose 1%, the blue-chip Dow dropped 0.7% while the technology-heavy Nasdaq increased by 2.4%. Most China stock index registered losses except for ChiNext in the first half of June. The blue-chip CSI 300 index dipped 2.9%, while both the Shanghai and Shenzhen Composite Index slipped 1.2%. ChiNext Index gained 0.9%. CSI 300 Index was one of the worst performers globally so far, which is down 0.9% year to date. While Ho Chi Minh Stock Index has been the best performing index this year, gaining 23.9% year to date, supported by retail demand for stocks at relatively attractive valuations.
The USD three-month Libor rate hit a record new low of 0.118% on 14th June, since its inception in 1986. The huge liquidity in the financial system has continue to shrink demand for commercial paper and the drawdown of the treasury’s cash pile have facilitated the decline in the LIBOR rate. The amount of cash in China’s banking system is shrinking and local government debt sale rose.
The pressure on long bond yields is going global, with the U.S. Treasury 5-year to 30-year yield spread narrowing to its smallest gap since August last year. The gap reflects the balance between the interest-rate outlook and inflation expectations. Bonds of Evergrande Group and Huarong Asset Management slumped in recent weeks widen concern over spillover risk in China’s bond market. China Cinda and China Orient Asset Management told banking regulators that they are concerned about losing access to offshore funding due to the recent turmoil by the two most prolific debt issuers. These incidents are challenging the long-held assumption that the state would bail out investors in the country’s biggest firms.
The dollar index rose by 0.6% in the first half of the month after two months of continuous decline since the start April. China is trying to rein in the yuan as it surges to a 3-year high against the dollar. The PBOC announced at the start of the month that financial institutions will need to increase the ratio of their foreign exchange deposits and set the yuan’s midpoint fix weaker against the dollar.
Brent and WTI crude oil prices rose in the first half of the month by 6.3% and 8.7% respectively due to the optimism in the recovery of global oil demand and restricted Iranian oil supply due to U.S. sanctions. The CoreCommodity CRB Index hit a 6 year high with the index reaching levels back in mid-2015. Meanwhile, Bitcoin price rose by 13.4% as Elon Musk tweeted that Tesla would resume allowing bitcoin transactions when miners who verify transactions use more renewable energy.