US housing starts rose to 1.631 million in May, way above the 1.400 million expected by economists. The housing market is doing well, despite the Fed Funds rate being at the highest level since 2001. Housing starts in April climbed to a 1.401 million annualized rate from 1.371 million.

Indices didn’t react much to the data. The Dow Jones Industrial Average futures was down 0.2%, and so were the S&P 500 futures and the Nasdaq futures an hour before the opening.

To satisfy their investment needs in 2023, investors are looking for artificial intelligence and Chinese growth. Unfortunately, it’s not going according to plan. It remains to be seen if China will continue to be the focus this week, as Wall Street returns to business after a three-day weekend.

Wall Street holidays left other Western markets without direction yesterday, with the Stoxx Europe 600, French CAC40, and German DAX all losing 1%. Belgium's Bel20 and Nordic's OMX fared worse, dropping 1.7%. European markets were heavily impacted by ongoing concerns about China's economic momentum, particularly affecting luxury goods stocks and raw materials companies. Healthcare also experienced significant sell-offs.

This was particularly true of luxury goods stocks, which weigh heavily in France and in pan-European indices. The rise of LVMH, Kering, Hermès and Compagnie Financière Richemont is largely due to the prosperity of Chinese people. To borrow a famous phrase, when China sneezes, luxury catches a cold. The same analysis applies to companies linked to commodities, which also fell yesterday. The commodity-rich FTSE 100 in Britain fell 0.7%. Investors’ hopes that the Chinese economy would rebound after ending its Covid restrictions have now faded. On Friday, authorities said they’re looking to implement some stimulus but didn’t give any details.

This morning, it's once again China that takes center stage in the financial arena. Its central bank has cut two of its key rates in an attempt to revive the economy. The one-year prime lending rate (LPR) was cut from 3.65% to 3.55% and the five-year prime lending rate from 4.3% to 4.2%. This represents a ten-point drop, the first for these two maturities since August 2022. The thing is, economists were expecting it, and some were even hoping for a 15-point drop in the 5-year LPR. As a result, disappointment dominates this morning. Particularly in the listed real estate sector, since the 5-year rate is used as a barometer for mortgage lending, and the players involved would have liked to see stronger support. In the end, history has been repeating itself for months, if not years. Beijing continues to take minimal action, while the financial markets, exhilarated by exuberant Western stimulus packages, are clamoring for far-reaching action. The MSCI China and Hang Seng lost 1.5% during the session, weighed down by the rate issue and not at all impressed by the handshake between Antony Blinken and Xi Jinping yesterday.

In other news, signals are multiplying that the Ukrainian counter-offensive is stalling. Russian forces are better prepared than last year, even by the admission of Ukrainian fighters, and benefit from more effective artillery and air superiority. The EU is due to release €50 billion in aid to Kiev today. The Paris Air Show continues, with new orders likely to come in for the industry, following a particularly good first day for Airbus and its suppliers.

 

Today's economic highlights:

Today, we have US building permits and housing starts for May. John Williams of the New York Fed is due to give a speech. The full agenda is here.

The dollar is flat against the euro at EUR 0.9157 and is up 0.4% against the pound to GBP 0.7851. The ounce of gold is trading at USD 1948. Oil is stable, with North Sea Brent at 75.80 USD a barrel and US light crude WTI at USD 71.11. The yield on 10-year US debt stands at 3.79%. Bitcoin is trading at around USD 26,700.

 

In corporate news:

  • Automakers are down in pre-market trading after Reuters reports that a bipartisan group of U.S. lawmakers will urge Ford and General Motors executives at a meeting on Tuesday to reduce their reliance on Chinese parts, particularly electric car batteries.
  • Adobe was down 1.3% in premarket trading after reports in the Financial Times that the European competition regulator will launch an investigation this year into the proposed $20 billion takeover of the Figma platform.
  • Alibaba, announced on Tuesday that its CEO Daniel Zhang would be stepping down to focus on the company's cloud division, as the Chinese e-commerce giant pursues its plan to split into six business units.
  • Eli Lilly will acquire Dice Therapeutics in a $2.4 billion cash transaction, the two companies announced.
  • Nasdaq said it had reached an agreement with EEX, the European energy exchange, to transfer its European electricity trading and clearing business to the company, without giving financial details.
  • Faraday Future - The electric vehicle manufacturer announced a reverse stock split, in the range of 1 for 2 to 1 for 90 shares, in order to comply with Nasdaq listing requirements. The group also announced that it was behind schedule on vehicle deliveries. The share price fell by 37.6% in pre-market trading.

 

Analyst recommendations:

  • Ball: Wells Fargo Securities upgrades to equal-weight from underweight. PT down 5.9% to $55.
  • Barclays: Jefferies remains Buy with price target raised from 300 to 320 GBp.
  • Entegris: BMO Capital Markets initiated coverage with a recommendation of outperform. PT set to $129.
  • Imperial Brands: Citigroup remains neutral with a price target reduced from 2300 to 1865 GBp.
  • Ocado: HSBC maintains its Buy rating with a price target reduced from 375 to 370 GBp.
  • Performance Food: Morgan Stanley downgrades to equal-weight from overweight. PT up 17% to $66.
  • Philip Morris: Citi upgrades to buy from neutral. PT up 23% to $117.
  • Tesco: HSBC remains Buy with price target raised from GBp 305 to GBp 330.