US equities jumped significantly this week, partly attributed to the short covering by hedge funds. It is the highest net buy in notional in 3 months. Equities are resilient despite higher yields.
Hawkish Plan: Both Fed and ECB mentioned that further rate hikes are possible, maintaining their hawkish stance. Markets are pricing 30bps and 50bps of hikes from the Fed and ECB by the year-end. The market-implied likelihood of a 25bps hike in the upcoming July meeting has jumped to 83%.
Currency Risks: Market participants around the world are talking about currency intervention risks. For instance, the yen to dollar dropped below 145, and government officials in Japan warned about the selling and might take corresponding actions to respond. Similarly, government officials in Sweden announced a warning about the speculation against krona.
China Growth: The recovery is losing momentum. Weak economic data offset the optimism of further stimulus. The three-day Dragon Boat holiday did boost domestic consumption but it is still below the pre-COVID level (i.e. same period in 2019). Markets believe the growth has peaked in Q1 and cut their forecast in Q2.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Bank of America: Given the outlook of lower profits and higher interest rates, the rally in stock prices is mainly driven by the rising valuation rather than an improved outlook for either profits or interest rates.
Blackrock: Japanese stocks are under the spotlight, and they are expected to outperform their peers in other developed markets. The main catalysts include supportive monetary policy, less supply constraints and corporate reforms.
Morgan Stanley: Investors are recommended to add duration as the short-term rates top out, plus bills and bonds rollover. Credit spreads are expected to widen as data showed an increase in rejected credit applications and bankruptcy filings.
J.P. Morgan: Fed is expected to raise hikes two more times by the year-end. The policy error risk has increased, which may trigger a recession. Investors are suggested to focus on quality assets and maintain short-to-intermediate for the duration.
Goldman Sachs: Economic data came in strong this week. GDP is higher than expected (2% actual vs 1.4% expected). Job market is strong too, with initial jobless claims dropped to 239k. The strength in the economy is boosting market confidence.
J.P. Morgan: Banks, especially the small ones, are still facing risks such as losing deposits and losses on their portfolio due to the elevated interest rates that are staying for longer. Thus, credit conditions are not going to improve soon.
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