Global Markets Update: Equities Lean Defensive, Treasuries Rally, and Commodities See Two-Way Risk

There has been a skew towards more defensive positioning, with the aggregation of US economic data coming in on the soft side, while guidance from Walmart priming consumers for price rises also getting some attention. A 7.6% close lower in Alibaba ADR, in response to its earnings, may not have impacted the SPX tape, but it should weigh on the HK50 and H-shares on equity cash open, and our HK50 index opening call of -0.8% reflects that.

On the data side, US retail sales fell 0.2% in the ‘control group’ element, which won’t do the Q2 GDP tracking rate any favours. US Core PPI came in at -0.1% m/m / 2.9% y/y, which, when married together with the recent CPI print, suggests that the US core PCE inflation print (due on 30 May) is likely to come in at a relatively benign 0.15% m/m. US weekly jobless claims and continued claims were also a touch higher than the consensus estimates, and while not offering any real signal, are well worth monitoring, as the rate of change in continued claims offers a higher frequency gauge on the labour market and has historically been well correlated to the unemployment rate.

US Treasuries have been the beneficiary of the data flow on the day, with yields across the curve lower by 7- 11bp. UST 2yr are 10bp firmer (yields -10bp) with US swaps adding 5bp of implied Fed cuts by December and 13bp of additional cuts to terminal Fed pricing. The rally in duration taking the immediate focus away from the US fiscal position, with the House mulling over the Reconciliation Bill that, on current tariff rates, suggests we are set to see the US deficit pushed to even greater levels.

S&P500 futures closed +0.5% (SPX cash closed +0.4%), printing a new high in the bull run and keeping the momentum towards 6000 in check. This time tech, growth and high beta equity plays took a back seat and underperformed, with the low beta/low vol beneficiaries - utilities, staples, REITS and healthcare - attracting the flows. The bears will point out that rotation into defensive equity sectors/factors signals that the bull run may be on its last legs, and the risk vs reward in positioning is shifting. The bulls – many gunning for a re-test of the February ATHs – will argue that the S&P500 had the chance to roll over, and despite trading below Wednesday’s low, saw the buyers step back in with the futures closing above the prior highs – granted, it was defensives that drove the move, but rotation is typically a sign of a healthy market.

For now, I remain on the long side of US equity risk and while there is little doubt that the risk of a 3-5% pullback is building - until the sellers show their hand and this trend reflects a change in dominance and structure, the art of holding even when it doesn’t feel right, is one that all momentum and trend players know only too well.

On the defensive vibe, WTI crude further reversed the recent rally into $63.90, with the sellers taking the price into $60.47. Solid buying and the resulting lower yields in both US nominal and real yields have in part compelled traders/funds to cover aggressive gold shorts, with better organic buying to initiate new longs also in play. The buying of broad gold exposures kicked in at the start of European trade, with the volumes in gold futures notably building in US trade and as the price approached $3200. The big picture on the higher timeframes highlights strong support and defence of the 3 April highs at $3167, and while we watch to see how Asia, and notably China, trades the move, I am yet to be compelled to chase the upside, with the set-up offering two-way risk.

We’ve seen a mixed picture in the USD pairs, with LATAM/carry FX underperforming (ex-CLP) – with better selling in the BRL, MXN and COP, with AUDUSD and NZDUSD sold through European trade before trading a tight range through US trade. Conversely, the ZAR has been the standout play of the day, with the JPY also working, and we see USDJPY lower for a third day and closing below the 8-day EMA, which, for me, now negates the idea of buying this dip from 148.50 to 145.60.

In Aussie rates/swaps, we see that the market remains steadfast in its view that the RBA will cut the cash rate by 25bp at next week’s meeting. The RBA have had every chance to guide market expectations, and while we only saw the hot jobs numbers yesterday, it is incredibly rare that any central bank would go against such high conviction in market pricing. Arguably, the bigger debate is around pricing expectations of policy further out, and making assumptions of growth, inflation and labour market trends by year-end. With a further 50bp of implied RBA easing priced by December, one questions how this will play out - but on current trends, it feels like the risk is for fewer cuts than what’s priced.

Looking at the session ahead, while we should see Alibaba holding back the HK50 index, it’s the ASX200 which interests most from the long side, with the index printing a higher high with the cash market eyed to open 1% higher. With the index now just 3% from the ATH printed in February, the highs are obviously within striking distance and on the current set-up it's hard to bet against the market – but we remain at the mercy of US equity and while long/short strategies may become more appealing with the trend maturing, for now, this is a buyers’ market.

Good luck to all.