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MARKETS

Despite indications of a slowing U.S. economy, Monday witnessed a mixed performance in U.S. stocks. However, the S&P 500 appears to have weathered the weaker growth environment, with investors seemingly less concerned about it than the positive outlook for potential rate cuts, at least to this point.

The S&P 500 inched up by 5.89 points, or 0.1%, to 5,283.40, despite most stocks within the index taking a dip. It's akin to celebrating your team’s goal while they're still trailing behind. Meanwhile, the Dow Jones Industrial Average dropped 115.29 points, or 0.3%, to 38,571.03, and the Nasdaq composite rose 93.65 points, or 0.6%, to 16,828.67. It's a classic mixed bag, like a trail mix, where you keep picking out raisins instead of the chocolate chips you hoped for.

According to the first of this week's top-tier macroeconomic releases, the key measure of U.S. factory activity took another dive into contraction territory in May. The ISM manufacturing index came in at 48.7, missing the consensus estimate of 49.5, confirming that March's brief flirtation above the 50 mark was merely a false dawn. It's like thinking winter is over at the first sign of sunshine, only to be hit by a blizzard the next day. This is the 18th contraction in the past 19 months, with the new orders gauge tumbling to 45.4—about as satisfying as that third cup of office coffee. "Demand remains elusive as companies show reluctance to invest due to current monetary policy and other conditions," commented ISM’s Tim Fiore on Monday.

It could be a bit of a rollercoaster ride for Asian markets on Tuesday as investors grapple with the mixed signals coming from the U.S. On one hand, there's the sharp decline in U.S. Treasury yields and the dollar, which could be seen as a green light for risky assets. But on the other hand, this could also be interpreted as a red flag signalling faltering growth.

Monday witnessed a robust rally in Asian shares, but the abrupt decline in US yields, driven by weak US manufacturing data, could pause investors. Rather than plunging headfirst into riskier assets, some investors might opt to tread cautiously and scale back their risk exposure.

With China navigating its delicate post-lockdown recovery and yields in Japan rising, investors in the region are eagerly watching how things unfold across Asia. The US growth engine is vital for Asian exporters, as the health of the US economy directly impacts demand for Asian goods and services. A slowdown or weakness in US growth can lead to reduced demand for exports from Asia, affecting the region's economic performance. Therefore, any fluctuations or uncertainties in the US economy can significantly affect Asia's export-driven economies.

If caution prevails, it suggests that the "bad news is bad news" narrative is gaining ground. Simply easing financial conditions might not be enough to lift asset prices; what really matters are the underlying macroeconomic conditions driving down yields and the dollar. The temporary buzz from rate cut expectations can only prop up markets for so long. Until expectations intersect with reality, expectations can only hold up the market for so long. 

FOREX MARKETS

With factory output hitting a stagnation phase, the 10-year Treasury yields plummeted by 11 basis points to 4.39%, a key technical level that cleared the way for the DXY to also breach important thresholds at 104.35 and 104.00. The yield decline threw a wet blanket over the dollar bulls, dampening their momentum.

This week, all eyes are on the US dollar as it navigates the terrain of the Fed's dual mandate, with a particular focus on employment. The upcoming JOLTS job opening data release in the New York trading session will provide crucial insights into the labour market's balance. A decrease in job openings could signal a more balanced equilibrium between job demand and supply, influencing the Fed's stance on labour dynamics and wage pressures.

However, the main event of the week looms large: Friday's US job report for May. Anticipating a sub-160k figure, if realized, could deliver a significant blow to the dollar's vigour. This data point will be closely scrutinized, as it can reshape market sentiment and expectations regarding the pace of economic recovery and future Fed policy decisions.

OIL MARKETS

Oil prices took a nosedive on Monday, plummeting by $3 a barrel to their lowest point in nearly four months. Investors were spooked by concerns that a complex OPEC+ output decision might lead to increased supplies later in the year despite sluggish demand growth.

In a move widely expected by the market, OPEC+ reached an agreement at their Vienna meeting on Sunday to extend most production cuts into the year's second half. The original 3.66 million barrels per day (bpd) cut was prolonged until December 2025, while the additional 2.2 million bpd voluntary output reduction by eight members will only be sustained until the third quarter. Afterward, there are plans to increase production until September 2025 gradually.

This decision to unwind production cuts ahead of schedule might not necessarily reflect robust expectations for demand growth. Instead, it could be viewed as a concession to persistent overproducers who are eager to boost oil production revenues to fund various endeavours.

Oil demand growth has been lacklustre this year, with a manufacturing downturn in both the Eurozone and the U.S., alongside a slower-than-expected industrial rebound in China, significantly dampening diesel demand. While OPEC hoped China would drive demand growth, those expectations have fallen short. As a result, OPEC may find itself reluctantly surrendering or risk losing further market share to non-OPEC producers.

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