US EARLY MORNING: US equity futures are flat as traders eye further debt ceiling talks later today

OVERNIGHT: APAC stocks were mostly positive but with price action rangebound amid cautiousness as the debt limit deadline draws closer. Aussie shares were subdued amid weakness in financials, though losses were contained amid the improving trade environment between Australia and its largest trading partner. China shares were up amid mixed commentary from the G7, where the Group said there was no legal basis for China’s expansive maritime claims in the South China Sea and that they oppose China’s militarisation activities in the region, although US President Biden expects relations with China to thaw soon. Furthermore, there were also frictions after China’s cyberspace regulator banned operators of critical information infrastructure in China from purchasing Micron Technology’s products following its review, while the PBoC provided no surprises and kept its benchmark lending rates unchanged with the 1-year LPR and 5-year LPR maintained at 3.65% and 4.30%, respectively. Our APAC wrap is here. In Europe, stocks start the week in a subdued fashion, meandering around neutral after the open as continued global angst around the US debt ceiling persists; ahead European traders will be focussing on a heavy amount of ECB speak, as well as flash consumer confidence data. Our European cash open note is here.

US PRE-MARKETS: US equity futures are trading just below flat as lawmakers in Washington failed to secure a debt ceiling deal by the weekend; House Speaker McCarthy has previously said that the House would need to vote by this week on any compromise to avoid a historic US default. But the constructive tone of President Biden is still offering hope that a near-term deal can be secured, and he is set to meet McCarthy for talks later today; we recap on the latest debt ceiling news below. Treasuries are rallying this morning, with short-end yields outperforming amid an injection of dovish repricing into the Fed's expected course for policy ahead; market's fear of a hawkish outcome at the Fed's mid-June were mitigated after Chair Powell on Friday appeared to signal a preference to stay unchanged at the meeting, which added dovishness into market pricing for the Fed trajectory (we recap, below). The Dollar Index, however, is a touch firmer amid the cautious global risk mood, where activity currencies are lower. Crude benchmarks are in the red, having last week put in its first week of gains since mid-April. Baker Hughes weekly rig count data jolted markets again on Friday, reporting that US oil rigs were down 11 in the week, while natgas rigs were unchanged, which ING said shows that drilling activity in the US continues to slow. While recent analyst polls still see upside in crude prices this year, weekly positioning data for Brent oil shows specs remain bearish on the market, with longs liquidating in the latest reporting week. Ahead, the docket is quiet today, but the debt ceiling talks will likely be the key focus. For the rest of the week, PCE data will help colour market expectations of the Fed's trajectory, while we'll get a second look at US Q1 GDP data this week. See Day Ahead, below.

JPM REITERATES UW VALUE: JPMorgan’s strategists note that general sentiment among investors is bearish, but many still believe a downturn will be mild and not impact profits, sales, or credit significantly. However, JPM says that challenges may arise due to a trade-off between economic growth and policy decisions in the second half of the year. It argues that growth indicators have weakened, profit margins seem to have peaked, and certain labour and consumer market indicators are also softening. In terms of policy, the market expects the Fed to cut rates significantly, but if that doesn't happen, JPM warns that it could lead to a stronger USD and increased market risk. The bank thinks inflation will decline, but high inflation expectations and wage growth are potential uncertainties. Overall, the bank says that the market may face a difficult situation in the coming months. The recommendation is to underweight value stocks and have low-risk positions, while looking for better entry points in the second half of the year. JPM reiterated its UW Value style for this year, and low beta positioning, and said that overall market levels mean that a better entry point could be provided in the second half of the year.

RECAP - DEBT CEILING: President Biden and Republican House Speaker McCarthy had a positive phone call regarding the US debt ceiling, BBC reports, and the two will meet on Monday for talks. Washington Post said Republican negotiators turned down a White House proposal to cap spending on defence and vital domestic programs in debt ceiling negotiations. A failure to raise the ceiling by June could lead to a default, causing financial market chaos and higher interest rates. Treasury Secretary Yellen again warned that the US was unlikely to have enough funds to meet its obligations by mid-June, emphasising the need for a debt limit agreement with Republicans. Politico notes that progressive lawmakers have urged Biden to bypass Congress to prevent a default by use of the 14th Amendment, though the White House remains resistant, with the President's advisers fearing such a move would trigger a legal battle, undermine global faith in US creditworthiness and damage the economy.

RECAP - FED CHAIR POWELL: Fed Chair Powell on Friday signalled an inclination to pause interest-rate increases in June, stating that policy tightening has come a long way, and the stance is restrictive. Powell also said that uncertainty remains about the effects of previous tightening and recent banking stresses. His remarks were judged as dovish, and traders lowered bets on the probability of a June rate hike from around 33% to around 13% after his remarks. Powell's comments also align with other influential Fed members, NY Fed President Williams and Vice Chair Nominee Jefferson. Looking ahead, money markets are on Monday pricing in no move at the Fed's June 14th meeting (around 12% chance of a +25bps hike), while further out the year, pricing has moved dovishly, with around 46bps of rate cuts priced. 











22 May 2023 - 09:01- Research Sheet- Source: Newsquawk

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