First Plus Market Update June 2022
June 2022 Global Market Recap
1st June 2022 – 30th June 2022
FULL REPORT ACCESS LINK: First Plus Market Update June 2022
Macro:
The US economy added 390,000 jobs in May, beating the market expectation of 325,000, though slightly lower than April’s 436,000. The unemployment rate remained unchanged at 3.6%, 1% higher than analysts’ forecast. Average hourly wage grew 5.2% over the last year, in line with expectations while lower than last month’s growth of 5.6%. The consumer price index gained 8.6% year-over-year in May, a record-high in over four decades, surpassing consensus of an 8.3% increase. Retail sales surprisingly declined 0.3% in May over the previous month, lower than consensus estimate of a 0.1% gain and lower than April’s revised figure of 0.7% gain. Durable-goods orders in the United States gained 0.7% in May month-over-month, above consensus estimate of a 0.1% rise, and higher than the revised 0.4% increase a month prior.
China’s official Manufacturing PMI recovered from 49.6 to 50.2 in June, back to expansion territory for the first time since February this year, with strong recovery from both new order index and production index. The official Non-manufacturing PMI recovered significantly from 47.8 to 54.7, well above pre-February levels, which also suggests that the non-manufacturing recovery accelerated amid the easing of the restrictions. China’s exports increased 16.9% year-on-year in May, well above the market expectations of 8% and April’s growth of 3.9%. A relatively low base, the mitigation of COVID-19 conditions and covid resurgence in Southeast Asia and other regions contributed to the positive surprises. Imports increased 4.1% over last year, surpassing market expectations of 2%. Fixed Assets Investment (FAI) and financial data both showed positive surprises in May, indicating a strong pro-growth stance. FAI YTD increased 6.2% year on year, and infrastructure investment marked the highest marginal gain among FAI. New total social financing (TSF) increased by RMB838bn year on year to RMB2.79trn, far exceeding the market forecast of Rmb2.37trn. Inflation remained modest in May with YoY CPI unchanged and PPI down 1.6% to 6.4%.
Stocks:
Rising inflation and policy tightening remain major challenges for developed markets amid mounting recession concerns. The S&P 500 finished the first half of 2022 down 20.6%, marking the worst first half year performance since 1970. The Nasdaq's 29.5% slide so far in 2022 is the worst start on record. Both indexes are in bear market territory. In addition, the Dow Jones Industrial Average has fallen 15.3% year to date, marking its worst first half since 1962.
In June, A-shares and H-shares performed well due to easing of COVID-19 restrictions, strong economic data, and expectation for continued policy support. All major A-share indexes posted decent gains in June. The SHCOMP rose 6.7%, Shenzhen Component Index was up 11.9%, the CSI 300 gained 9.6%, and the ChiNext Index rose 16.9%. Average daily turnover last week continued to increase to around RMB1.5trn in June from below RMB700bn in late April, thanks to the improving risk appetite. We believe China’s A-share market may remain resilient compared to overseas markets in the second half of this year given further policy support and moderate inflation.
Rates:
The 10-year U.S. treasury yield increased by 16.88bps during the month, reaching a high of 3.48% not seen since April 2011. The 2-year yield momentarily exceeded the 10-year yield and reverted, and it is the second time that this yield curve inversion has happen this year, with the last being in April. The market is expecting that there will be either a 50bps or 75bps increase in the next meeting in July and Fed Chair Jerome Powell mentioned that there is a possibility of a recession as rates continues to go up. The People’s Bank of China kept the five-year loan prime rate and the one-year loan prime rate unchanged at 4.45% and 3.70% respectively, in-line with market expectations. The PBOC reiterated a pledge to provide stronger monetary policy support for the economy, emphasizing goals to stabilize jobs and inflation and providing further signals it will focus on boosting credit growth rather than lowering interest rates. The European Central Bank has indicated that they are likely to start raising interest rates by 25bps in July, the first time in more than 11 years to control soaring inflation in the eurozone. The bank also intends to end its bond-buying stimulus program on 1 July.
Credit:
Bonds denominated in the world’s leading currencies are suffering double-digit losses following the European Central Bank’s decision to end quantitative easing. The market is expecting bond issuance from blue-chip firms to be light or even nonexistent as borrowing costs surge and recession fears mount. US credit funds saw its third biggest record weekly outflows since March 2020 and funds that buy high-grade bonds have now seen 12 straight weeks of cash withdrawals, making for the longest streak of outflows on record as rate hikes reignite recession fears, as reported by Bloomberg. China’s offshore bond defaults have topped their prior full-year high and stress in the debt-saddled property sector has been largely contained to the offshore market partly because global investors have absorbed the bulk of losses, as reported by Bloomberg. In a bid to facilitate foreign investment in its U$20 trillion bond market, China says it would cut service fees, improve overseas access to foreign exchange hedging, and streamline the process of opening accounts.
FX:
The Dollar Index rose by 2.9% in the month as the Federal Reserve officials projected an accelerated timetable for rate increases, began talks on how to end emergency bond-buying, and said the COVID-19 pandemic was no longer a core constraint on U.S. commerce. The Japanese Yen continues to depreciate and fell by 5.5% as the Bank of Japan will remain the only major central bank to maintain ultra-loose monetary policy despite its counterparts in the US and Europe entering an interest-rate raising cycle. The Swiss franc is the only other major currency that did not depreciate in the month as the Swiss National Bank raise rates from -0.75% to -0.25%, a huge move that was totally unexpected. Central banks are increasingly keen to hold China's yuan as a reserve currency, as the country's growing economic and political power threatens to erode the US dollar's global dominance.
Commodities:
Brent crude and WTI oil prices declined by 6.5% and 7.8% respectively during the month of June, over worries of an impending US recession. European Union members also met to discuss a plan to implement a price cap on oil imports from Russia, but buyers from Asia are propping up Russian oil demand. Natural gas prices tumbled 33.7% as Russia reduced gas exports to Europe by up to 60% compared to a year prior, amid a background of falling gas demand due to high prices. The London Metal Exchange Index has plunged 25% since the end of the first quarter of the year, although the fall has been heightened due to prices surging in March following the start of the Russia-Ukraine conflict. It was the most severe 3-month decline for the entire index since the great recession in 2008. Wheat prices corrected sharply by 19.5% to a 3-month low, under the twin pressures of the imminent winter wheat harvest and weak U.S. exports. The price of corn declined 13.3% in June to the lowest in 4 months as the U.S. Department of Agriculture (USDA) increased its forecast of domestic corn plantings month-on-month slightly to 89.9 million acres of corn. Bitcoin continued its downward slide, falling by more than 40% in June due to a confluence of factors that include interest rate hikes, diminishing speculative sentiment and meltdown of certain cryptocurrency projects.