Market Wrap: 31 May 2023

Market Wrap: 31 May 2023

Stocks Slump on China Economy Worries; Bonds Gain: 

  • Debt-limit deal faces final test in Congress to avert default
  • Oil trades below $70 per barrel; euro falls on inflation data

China’s economic woes reverberated beyond the country’s domestic markets on Wednesday, with European and Asian stocks falling along with US equity futures, while bonds gained.

Hawkish comments from Federal Reserve officials added to headwinds for stocks after a rally on Wall Street, fueled by excitement over artificial intelligence, fizzled on Tuesday. Contracts on the S&P 500 and Nasdaq 100 were lower, while Treasury yields fell as traders reconsidered market pricing for a pause in monetary tightening. A gauge of the dollar gained for the first time in four days.

The Stoxx Europe 600 index retreated about 0.7% at the open, with luxury-goods makers including LVMH, Richemont and Burberry Group Plc among the biggest laggards. Shell NA led a decline in oil majors as crude oil held its biggest drop in four weeks. 

An Asian equity gauge headed toward the lowest close in more than two months as regional benchmarks’ losses accelerated after China reported the softest reading in its purchasing managers’ index since December. Hong Kong’s Hang Seng Index fell more than 2%, with a bear market on the horizon. The offshore yuan hit its weakest level versus the dollar in six months.

Copper extended its worst monthly loss in almost a year and iron ore fell further below $100 a ton, as China’s slowing manufacturing raised concerns about demand from the top metals-consuming economy. 

 

The euro fell to a two-month low against the dollar after data from Germany’s North Rhine Westphalia state signaled inflation may be falling more quickly than expected in the region’s biggest economy, while France’s consumer price index also rose below estimates. Money-market traders trimmed bets on the path of future interest-rate increases after the release and are no longer fully pricing another 50 basis-points of hikes this year. German bonds rallied, with two- and five-year yields falling as much as 10 basis points.

AI Exuberance

In Tuesday’s trading in the US, the Nasdaq 100 added 0.4% to extend this year’s surge to 31%. Yet it ended off its high for the day as investors assessed the artificial-intelligence hype that’s boosted the index. Nvidia Corp. hovered near $1 trillion in value after announcing several AI-related products. 

AI-related software providers now stand to reap the benefits that Nvidia has laid, according to Cathie Wood, CEO and founder of Ark Investment Management. “For every dollar of hardware that Nvidia sells, software providers, SaaS providers will generate eight dollars in revenue,” she said on Bloomberg Television.

Investors also remain focused on the debt-limit deal forged by President Joe Biden and House Speaker Kevin McCarthy. The bill is heading for a House vote Wednesday after clearing a crucial procedural hurdle with just days remaining to avoid a US default. Congress is racing to pass the measure before June 5, the date when Treasury Secretary Janet Yellen has warned the US risks default. 

Meanwhile, Federal Reserve Bank of Richmond President Thomas Barkin said he is looking for signs that demand is cooling to be convinced that US inflation will ease. His Cleveland counterpart Loretta Mester said she sees no “compelling reason” to pause interest-rate increases, particularly in the wake of the debt-limit deal. 

Fed officials raised the central bank’s benchmark rate above 5% earlier this month and signaled they may be ready to pause the rapid tightening campaign they began last year. Stronger-than-expected economic data since then have built market expectations for another rate hike in June.

 

Source: Bloomberg.com 

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