US equities marched higher on the back of increased optimism that US lawmakers would be able to resolve its debt ceiling standoff. The S&P 500 rose 1.60% as US President Joe Biden and congressional Republican Kevin McCarthy are set to resume talks this week and hopefully reach a consensus to avoid a default.
According to Reuters, Biden met for about an hour with McCarthy, Senate Republican leader Mitch McConnell and House Democratic leader Hakeem Jeffries after their aides met over the weekend to try to strike a deal.
Republicans have refused to vote to lift the debt ceiling past its USD 31.3 trillion limit unless the Democrats agree to spending cuts in the federal budget. However, McConnell reportedly said after the meeting, "We know we're not going to default."
Hawkish cues from US Federal Reserve (Fed) officials propped-up US Treasury yields last week with the benchmark 10-Year closing at 3.67%. Top Fed policy members including Lorie Logan and Philip Jefferson said in separate comments that US inflation does not appear to be cooling fast enough yet to warrant a pause in interest rates.
However in a contrasting remark, Fed Chair Jerome Powell signalled that he was inclined to pause interest rate increases when it meets at its policy meeting next month.
The central bank would have to consider a raft of economic data that are pointing to resilience in the US economy. US retail sales in April excluding auto-related figures increased 0.4% which beat expectations. Industrial production also rebounded strongly in April exceeding forecasts.
In Asia, the broader MSCI Asia ex-Japan was barely unchanged at 0.60% as the latest economic data from China disappoints. Retail sales rose by 18.4% which was lower than economists’ forecast a surge of 21%. Industrial production for April rose by 5.6% y-o-y which came below expectations.
China equities have largely stayed flat this year as tailwinds from its post-COVID reopening begin to dwindle. Despite a surge in travel bookings during the holiday period, the average spending per person has largely remained weak.
This weakness in consumer sentiment was apparent in the latest labour data showing youth unemployment surging to 20.4%. Without job security, there are increased concerns that consumption recovery could taper off as more citizens hold off from spending on big ticket items. Tech titan’s Alibaba latest quarterly results similarly showed e-commerce sales staying tepid.
On the flipside, Korea and Taiwan staged a strong performance last week buoyed by increased confidence that the tech sector is bottoming out with major players seen cutting back on supply. The KOSPI index jumped 2.50%, while Taiwan’s Stock Exchange vaulted 4.30%.
On portfolio positioning, we nibbled into select semiconductor names to build exposure. We have also toned down on our positivity in China until there is clearer certainty on its economic trajectory or major stimulus announcements to spur consumption growth.