US equity futures are flat, bond yields are lower, the dollar is higher, and commodities (ex-Ags) are weaker as the excitement over the Saudi 1mmb/d production cut fizzles and as hedge fund shorts once again take the upper hand. Ags are higher led by wheat on headlines from Ukraine, where a dam was damaged in an explosion.
As of 7:45am ET, S&P futures were unchanged with the Nasdaq fractionally in the red as well, with Apple down 0.4% in premarket trading on concern the ludicrous price ($3500) of its much-anticipated mixed-reality headset will crater demand. European semiconductor firms slid after Taiwan Semiconductor — the main chipmaker to Apple — said capital spending will be at the lower end of its guidance range. Overall, there appears to be a mild risk-off tone pre-market, With the S&P 500 on the edge of a new bull market, there’s a sense among traders that markets have run up too fast on the hype for artificial intelligence. The balance of the week is light on macro data points so markets may trade in a tight range into CPI/Fed next week.
In premarket trading, tech Mega caps were mixed pre-mkt as investors digest AAPL’s developer day. AAPL is down 0.7% in early trading after the iPhone maker launched its much- anticipated mixed-reality headset at an eye-popping price of $3,499. While analysts were optimistic about the product and technology, they acknowledged that the price point was high and that it would limit the number of shipments in the near- term. Chevron fell 1%, while declines in Shell and BP weighed on Europe’s main stock benchmark after crude gave up all its gains spurred by news of Saudi Arabia’s supply cut. Other notable premarket movers:
“Our stance towards equities is a cautious one,” said Steven Bell, chief economist for EMEA at Columbia Threadneedle Investments, noting the asset class doesn’t look cheap and earnings growth forecasts look too optimistic. “We don’t expect a dramatic decline, but bonds look more attractive on a relative basis.”
European stocks slipped into the session as energy, telecom and autos underperform. Euro Stoxx 50 falls 0.4%. Stoxx 600 drops 0.1%, FTSE MIB lags regionals, sliding 0.6%. Meanwhile, the euro weakened and German bonds gained Tuesday after the European Central Bank said euro-area consumer inflation expectations eased significantly in April. Here are the most notable premarket movers:
Earlier in the session, Asian stocks rose to a three-month high, helped by a rally in Chinese developers. There are signs that Beijing is taking steps to bolster the economy, with authorities asking some of the biggest banks to lower their deposit rates. Elsewhere, stocks traded mixed with price action rangebound following on from the subdued performance stateside where participants 'sold the news' following Apple's headset announcement and with sentiment clouded by weak data releases.
Elsewhere, Australia unexpectedly hiked on Tuesday and kept the door open to further increases, sparking a rally in the country’s currency.
In FX, the Bloomberg Dollar Spot Index was up near session highs, recovering from early weakness; AUD and JPY are the strongest performers in G-10 FX, NOK and GBP underperform. The EUR/USD dropped -0.2% after after the latest ECB survey shows consumers’ inflation expectations fell significantly in April. AUD/USD leads gains, rallying as much as 1% after the RBA increased its cash rate by a quarter percentage point and said further tightening may be needed. Only 10 of 30 economists surveyed by Bloomberg predicted the rate hike
In rates, German bonds outperform Treasuries and gilts across the curve as yields drop, led by short-end bunds. Treasuries are slightly richer across the curve, following wider gains in bunds after an ECB survey shows consumers’ inflation expectations fell significantly in April. Yields are richer by 1bp-2bp across the curve with intermediates outperforming slightly, steepening 5s30s by 1bp on the day; 10- year yields around 3.66%, richer by 2bp vs Monday’s close with bunds outperforming by 3.5bp in the sector. The two-year Treasury yield slips 1bps to 4.45%, 10-year yield down 2bps to 3.66%, slightly steepening the 2-year/10-year curve. German curve sharply bull-steepens over early London session following consumer inflation expectations data — Germany 2-year yields remain richer by 8bp on the day with 2s10s spread steeper by 2.5bp, 5s30s by 4bp. Dollar IG issuance slate includes NAB 2Y/5Y and ADB 2Y/10Y; twelve companies priced $20.1b Monday, surpassing weekly volume projection in a single day; desks project around $80b for the month of June.
In commodity markets, wheat surged after Ukraine said Russian forces blew up a giant dam in the country’s south, unleashing a torrent of floodwater that threatens thousands of people and poses a potential threat to Black Sea grain supplies. Meanwhile, crude drifted 2.2% lower to trade near $70.58. Most base metals trade in the green; LME nickel rises 1.4%, outperforming peers. LME aluminum lags, dropping 1.1%. Spot gold is little changed at $1,962/oz
Looking ahead, the US session has no economic data releases or Fed speakers scheduled, amid quiet period ahead of June FOMC meeting.
Market Snapshot
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A more detailed summary of global markets courtesy of Newsquawk
APAC stocks traded mixed with price action mostly rangebound following on from the subdued performance stateside where participants 'sold the news' following Apple's headset announcement and with sentiment clouded by weak data releases. ASX 200 was led lower by underperformance in the consumer-related sectors and top-weighted financial industry, with losses later exacerbated after the RBA delivered a surprise 25bps rate hike to lift the Cash Rate Target to 4.10% and it also kept the door open for further policy tightening. Nikkei 225 was initially pressured after disappointing Household Spending and Labour Earnings data which briefly dragged the index beneath the psychological 32,000 level where it then found support and staged a recovery amid dip buying. Hang Seng and Shanghai Comp. were somewhat varied with the former boosted by strength in property names, although the mainland was less decisive and lagged amid mixed US-China rhetoric.
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European equities trade with little in the way of firm direction as incremental catalysts for the region remain light. Equity sectors in Europe are mixed with Health Care top of the leaderboard whilst Energy lags to the downside with WTI and Brent both below Friday’s closing levels despite efforts by OPEC+. US equity futures are hugging the unchanged mark with the ES around 20 points shy of the 4300 mark after venturing as high as 4305.75 yesterday.
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US Event Calendar
DB's Jim Reid concludes the overnight wrap
DB Research has just released our latest World Outlook featuring our updated views on economics and markets. We’ve called this edition “The Waiting Game…” because we maintain our call for a US recession in Q4 as the lags from tighter monetary policy really start to hit. As we've felt for a while, you have to respect the lag and be patient. Markets on the other hand are anything but and want instant gratification. That's what makes it an interesting time now and for the next few months ahead.
To recap we think this hard landing is the logical next step in a succession of all-too foreseeable events since the pandemic: the biggest increase in the money supply in decades, followed by the highest inflation in decades, and then the most aggressive series of rate hikes in decades. A hard landing is just the next phase of this. If you're looking for hope we are optimistic about the prospects of AI changing the nature of our economies in the years ahead. We desperately need a new source of growth given weak productivity and poor demographics. And although AI is unlikely to help us out of this cycle, its promise is a hope we cling onto as we move deeper into the 2020s after a very challenging start to the decade.
Finally in terms of adverts, Steve Caprio on my credit team has an update to our view this morning (link here). He posits that while the consensus view among clients is for a summer squeeze, we see little reason to chase the market and so we retain our defensive positioning across ratings and tenors.
Markets certainly stopped chasing and squeezing yesterday, in part thanks to a weak ISM services print that helped to ramp up fears about a recession. Earlier in the day it had looked rather different, and at one point the S&P 500 was even on track to close in bull market territory, having risen by over 20% since its closing low last October. But the negative data surprise ultimately dominated, and that led to a decent risk-off move that meant the index fell short of that milestone by the close.
In terms of the release, the ISM services for May came in at 50.3 (vs. 52.4 expected), so just above the 50-mark that separates expansion from contraction and the second lowest since the pandemic, only beating a strange out of the blue plunge in December. The sub-components didn’t look too promising either, with new orders down to 52.9, whilst employment at 49.2 was in contractionary territory for the first time since December. Other releases out yesterday were a bit weaker-than-expected too, with April’s factory orders only up by +0.4% (vs. +0.8% expected), alongside downward revisions to the previous month.
Treasuries rallied on the back of the ISM, and the 10yr yield gave up its initial rise to fall by almost -8bps intraday straight after the release, before closing -0.1bps down on the day at 3.683%. Another contributing factor was that the weak data led to growing expectations that the Fed would pause their rate hikes at their meeting next week, with only a 24.5% chance of a hike now priced in down from 30.5% at the end of last week. Ultimately, markets are increasingly coalescing around the idea that the Fed will skip a meeting in June before delivering another hike in July, which is in line with the updated call from our US economists in the World Outlook. This morning in Asia, yields on 10yr USTs (+1.73 bps) are slightly higher again as we go to print.
Sovereign bonds in Europe lost ground more consistently yesterday after ECB President Lagarde continued to signal more rate hikes ahead at the European Parliament. Among others, Lagarde said that the ECB’s “future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive”. And in turn, that helped to cement investors in their conviction that the ECB would proceed with another 25bp hike next week. As a result, yields on 10yr bunds (+6.9bps), OATs (+6.3bps) and BTPs (+6.8bps) all moved higher on the day.
For equities, it was an up-and-down day, and in the end the S&P 500 (-0.20%) closed lower, after being +0.40% at the day’s highs. In addition to the weaker US data, specific factors appeared to weigh during the day. Oil majors reversed their initial gains from the OPEC+ news over the weekend, while Apple closed -0.76% lower, after being up over 2% intra-day at one point. This comes as the world’s largest technology company unveiled their new “mixed reality” headset with a sticker price of $3499. With tech stocks slipping, the NASDAQ (-0.09%) was largely flat on the day, though its YTD gains still stand at +26.40%.
Back in Europe, the more negative tone continued to take hold, with the STOXX 600 (-0.48%) getting the week off to a rough start. In part, that reflected a surge in European natural gas prices (+24.9%) following their recent declines. And that occurred alongside a broader spike in energy prices, following the decision from Saudi Arabia to cut its oil output by 1 million barrels per day. However a late drop in risk sentiment near the US close meant Brent crude (+0.76%) ended the day at $76.71/bbl, whilst WTI (+0.57%) closed at $71.89/bbl with both contracts trading comfortably off their intraday highs.
Overnight, the Reserve Bank of Australia (RBA) lifted its official interest rate by +25bps to 4.1%, a level not seen since early 2012 amid concerns inflation is taking too long to come down. Markets overall had anticipated no change for this month but a number of economists (including DB's) had made a late call for a hike in recent days so it wasn’t a total surprise. Markets have repriced terminal 20bps higher in the few minutes between the hike and us going to press. Looking ahead, speeches from the RBA Governor Philip Lowe and Deputy Governor Michele Bullock scheduled for tomorrow will be the key to gaining any hints for future rate hikes from the central bank. DB still think they have two more hikes in the pipeline in August and then September.
Asian equity markets are extending their recent gains this morning even with the western world risk off yesterday. As I type, the Hang Seng (+0.43%) and the Nikkei (+0.41%) are edging higher while the CSI (+0.09%) and the Shanghai Composite (+0.05%) are just above flat. Meanwhile, markets in South Korea are closed for a holiday. US stock futures are flat to down with those tied to the S&P 500 (-0.02%) and NASDAQ 100 (-0.03%) struggling to gain traction.
Early morning data showed that Japanese household spending remained weak, dropping -4.4% y/y in April (v/s -2.4% expected) and recording its sharpest decline since July 2021, underlining a patchy economic recovery. It followed a -1.9% contraction in the preceding month. Other data showed that cash earnings/nominal wages, grew +1.0% y/y in April (v/s +1.8% expected), smaller than expected and an upwardly revised +1.3% rise logged in March. Meanwhile, real wages fell -3.0% y/y in April (v/s -2.0% expected; -2.3% in March), marking the 13th straight month of year-on-year declines, as persistently high inflation is outstripping nominal pay growth.
In the political sphere, the 2024 US presidential field is continuing to take shape, and yesterday saw former Vice President Mike Pence jump in on the Republican side. According to the FiveThirtyEight average, Pence is currently polling in third place for the primary on 5.4%, but is still well behind former President Trump on 53.9%, and Florida Governor Ron DeSantis on 21.1%. Separately, former New Jersey Governor and 2016 candidate Chris Christie is expected to announce his candidacy today as well.
Finally, when it came to yesterday’s other data, the final Euro Area PMIs were a bit weaker than expected. For instance, the Euro Area composite PMI for May came in at 52.8 (vs. flash 53.3), and the services PMI was revised down to 55.1 (vs. flash 55.9), adding to a trend of negative European data surprises since late April. In the meantime, data showed that PPI inflation in the Euro Area fell to just +1.0% in April (vs. +1.7% expected), which is its lowest level since January 2021, and down from a peak of +43.4% back in August.
To the day ahead now, and data releases include German factory orders and Euro Area retail sales for April, along with the German and UK construction PMIs for May. Otherwise, the ECB will be releasing their Consumer Expectations Survey, with our own European dbDIG survey suggesting that the ECB survey should show an easing of inflation expectations.