US futures were modestly in the green, reversing an earlier drop in Asian markets as traders awaited signals from central banks in a week full of monetary policy decisions. Europe’s Stoxx 600 benchmark climbed 0.3%, lifted by energy names with oil majors TotalEnergies, BP and Shell among the biggest contributors. As of 7:45am, S&P 500 futures and Nasdaq contracts were both up around 0.1%; crude rallied to a new 10 month high with Brent surpassing $95. The dollar and gold were flat while Bitcoin rose.
In premarket trading, mega-cap Tech names were mostly higher. Keep an eye on AAPL which is reportedly seeing better than expected iPhone demand despite a tepid reception to its announcement a week ago. Block, formerly known as Square, shares fall as much as 1.7% after the digital payments firm said that Alyssa Henry, the CEO of its Square business, is leaving, with Jack Dorsey to take over. Analysts said that the development was a surprise and may add to other concerns about the company, but welcomed Dorsey stepping in to the role. Here are some other notable premarket movers:
In other news, the UAW set a Friday at 12pm ET deadline for a deal before expanding the strike. Macy’s is said to hire 38k holiday workers vs. 41k in 2022 and 76k in 2021. Today’s macro data focus is on Housing Starts and Building Permits; we'll see if the hard data matches yesterday’s soft data which showed the NAHB Housing Index fall to the lowest level since April.
With the Fed forecast to keep interest rates on hold this week, traders will be focused on the so-called dot plot summary of economic forecasts. The two main questions are whether policymakers will retain their projections for one more 25 basis-point hike by year-end, and how much easing they are penciling in for 2024. In June, they projected one percentage point of cuts.
“The Fed is likely to highlight that in its collective view the fight against inflation has not yet been won and that the FOMC will be highly data-dependent in terms of future rate decisions, leaving the door open for a possible rate hike later in the year,” said Richard Flax, chief investment officer at European digital wealth manager Moneyfarm. “If the Fed sounds a more hawkish tone, we could see a continuation of the higher-for-longer trend that we’ve seen recently, with lower probability of significant rate cuts in 2024.”
Meanwhile, as reported yesterday, crude has soared by about a third since mid-June as Saudi Arabia and Russia joined hands to curb supplies and drive a rebound in prices. That has sustained the pressure on central bankers as they seek to cool inflation, while managing risks to their economies. The Federal Reserve sets policy Wednesday, the Bank of England Thursday and the Bank of Japan Friday.
“Central banks have done a rather good job so far, but there’s little room for manoeuvre now,” said David Kalfon, chief executive officer of Sanso Investment Solutions. “They made clear since the start of the cycle that beating inflation is the key, not growth.”
The prospect of rates staying higher for longer has not only drained some of the enthusiasm toward tech shares, after they led the rally in US stocks earlier this year, but may have popped the AI bubble. Flows suggest investors are positioning for more losses in the Nasdaq 100, according to Citigroup's Chris Montagu who said that Nasdaq futures continued to attract bearish flows last week, leaving positioning heavier on short bets rather than long. That suggests “few investors are comfortable taking a bullish view on the possibility of a near-term reversal for the growth/tech related index,” they wrote in a note dated Sept. 18. The Nasdaq 100 is down about 3.9% from a peak on July 18.
European stocks managed to shrug off opening declines to trade slightly higher. The Stoxx 600 is up 0.2% with real estate, financial services and autos the best performing sectors. Oil majors TotalEnergies SE, BP Plc and Shell Plc were among the biggest contributors as Europe’s Stoxx 600 benchmark climbed 0.3%. Here are Europe's biggest movers:
Earlier in the session, Asian stocks fell for a second day as traders awaited a slew of major central bank decisions, with rising inflationary pressure from higher oil prices keeping the door open for hawkish messages. The MSCI Asia Pacific Index dropped as much as 0.4% on Tuesday before closing almost flat, led by technology and health-care shares.
In FX, the Bloomberg Dollar Spot Index is down 0.1%, the Norwegian krone and the Swedish krona were among the best performers in the Group-of-10 ahead of central bank decisions in both countries on Thursday The pound and euro are flat with the latter showing little reaction to a downward revision to euro area CPI.
In rates, treasuries are little changed as US trading day begins, with futures near high end of Monday’s ranges, after plying narrow ranges during Asia session and London morning. Volumes and flows remain thin ahead of Wednesday’s Fed policy announcement. Tuesday session includes 20-year bond reopening and housing starts data. Yields across the curve are higher on the day by less than 2bp, 10-year near 4.32%, rising 2bps from Monday's close with bunds and gilts outperforming by 1.5bp and 6bp in the sector; UK bonds outperform in Europe ahead of domestic August CPI due Wednesday. Dollar IG issuance slate includes World Bank 5Y and is expected to grow; 10 issuers sold almost $15b Monday and at least one issuer stood down. Treasury coupon auctions resume with $13b 20-year bond reopening at 1pm New York time; this week also includes a $15b 10-year TIPS reopening Thursday.
In commodities, oil continues to climb with WTI futures up 1.1% at YTD high and approaching $93/bbl while Brent briefly rose above $95 for the first time this year.
Looking to the day ahead now, and data releases include US housing starts and building permits for August, as well as Canada’s CPI for August. Otherwise, central bank speakers include the ECB’s Elderson.
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APAC stocks were mostly lower following the flat performance stateside amid a lack of catalysts and with risk appetite sapped as markets brace for the approaching flurry of central bank meetings. ASX 200 was pressured as weakness in real estate and financials led the declines from early on, while the RBA minutes from the September meeting provided very little in the way of new information. Nikkei 225 underperformed as recent losses in the region caught up to the index on return from the holiday closure and with sentiment also dampened with participants second-guessing if BoJ Governor Ueda will lay the groundwork this week for a future exit. Hang Seng and Shanghai Comp were choppy owing to the pressure in tech and mixed fortunes among the property stocks but with downside stemmed following further US-China talks and the PBoC’s continued liquidity efforts.
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European bourses are in the green, Euro Stoxx 50 +0.2%, though only modestly so with the space struggling to reclaim lost ground from Monday. Sectors are primarily in the green, with outperformance seen in Autos following a double-upgrade to Volkswagen while Retail lags in the red amid pressure in Kingfisher who cut FY guidance. Stateside, futures are in-fitting with European peers in posting a slight positive bias but generally struggling for direction as we await the Fed to kick off a blockbuster week of Central Bank activity; ES +0.2%.
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DB's Jim Reid concludes the overnight wrap
The overarching narrative behind the trilogy is that the financial world experienced a unique golden era during 1980-2020, but that the trends that enabled this super-cycle are set to reverse going forward. The pandemic accelerated this process, but we think those forces would likely have arisen in the 2020s regardless. For instance, inflation is back in a way we haven’t experienced in a generation, and there’s been a rapid rise in real yields over the last couple of years as well. All this is going to severely constrain the ability of policymakers to manage the business cycle. As a result, we think there’s going to be a higher frequency of recessions over the coming years and decades.
The second half of the study includes our updated multi-asset class returns across numerous DM and EM countries going back over 200 years where possible. We review the decade so far, which for bonds and 60/40 portfolios is up there with the worst on record. Commodities are outperforming, whilst equities are mixed depending on the country. For instance, US, Japanese and Indian bourses are outperforming history and leading the way. But others are still down over the 2020s in real terms.
From 300-plus years of history to the last 24 hours and the main story as we start the big central bank week has been the relentless rise in oil prices over recent weeks, with yesterday seeing Brent Crude climb a further +0.66% to $94.55/bbl. That’s its highest closing level in over 10 months, and comes on the back of 3 consecutive weekly gains which have shown no sign of stopping yet. This morning in Asia we're up another +0.75% to over $95/bbl. The recent rises are already filtering through into retail gasoline prices, with the US daily average from the AAA at an 11-month high of $3.88/gallon on Sunday.
Given those fresh signs of inflationary pressures, investors moved to price in that interest rates would remain higher for longer into 2024. For instance, the rate priced in for the Fed’s June 2024 meeting hit a new high for this cycle at 5.16%, suggesting that investors don’t expect much in the way of cuts anytime soon. It was the same story for other central banks, with the June 2024 rate for the ECB (+7.9bps) and the BoE (+2.2bps) also moving higher. Remember that we’ve got the Fed’s decision tomorrow, the Bank of England on Thursday, and then the Bank of Japan on Friday, so this is an important week in mapping out the path towards year-end, and how far they want to keep tightening policy.
In turn, that helped spark a decent sell-off amongst most sovereign bonds. In Europe, yields on 10yr bunds were up +3.1bps to 2.70%, whilst those on 10yr OATs (+3.1bps), BTPs (+4.9bps) and gilts (+3.2bps) also moved higher. Over in the US, the 2yr Treasury yield (+2.0bps) closed at 5.055%, which is just the 3rd time in this cycle it’s closed above the 5.05% mark. Meanwhile, the 10yr yield bucked the global trend and was down -3.0bps to 4.30% after flirting with August’s post-2007 intra-day highs and above 4.35% early in the US session.
For equities, this pattern of heavier losses in Europe and a steady US performance was also evident. In fact, the STOXX 600 (-1.13%) saw its worst daily performance in over a month, and there were heavy losses for the DAX (-1.05%), the CAC 40 (-1.39%) and the FTSE 100 (-0.76%) as well. But in the US, the S&P 500 (+0.07%) managed to eke out a very small gain, aided by a strong outperformance from energy stocks (+0.68%). Tech stocks saw a mixed day, with the IT sector outperforming within the S&P 500 (+0.47%) but with the Magnificent Seven mega cap index down -0.19% after a -3.32% fall for Tesla. Small caps underperformed, with the Russell 2000 index (-0.69%) falling to its lowest since June.
Overnight in Asia, Japan is leading the declines across major indices with a -0.96% drop in the Nikkei after it returns from holiday. China’s CSI 300 is also weaker (-0.23%) this morning but sentiment for the Hang Seng is slightly better (+0.02%). S&P 500 futures are flat and 10y Treasury yields are up +0.6bps.
There was little in the way of economic data yesterday. But in the US, we did get the NAHB’s housing market index, which fell more than expected to 45 (vs. 49 expected). Housing is an interesting sector, as it’s one of the most sensitive to changes in interest rates, and this index declined in every single month of 2022. At the start of 2023, it then recovered for 7 months in a row, but the last two months have seen two further declines, with the index at a 5-month low amidst higher long-term interest rates.
To the day ahead now, and data releases include US housing starts and building permits for August, as well as Canada’s CPI for August. Otherwise, central bank speakers include the ECB’s Elderson.