US stock futures are off to a muted start to the week as investor focus turns to first-quarter earnings for clues on the health of corporate America amid the Fed's own admission it is hoping to trigger a recession in the coming months. Futures on the Nasdaq 100 and the S&P 500 were both up a modest 0.1% following Friday's drop despite better-than-expected quarterly reports from the big banks as markets were unnerved by Fed Governor Christopher Waller’s hawkish comments favoring further policy tightening. His views caused investors to ramp up bets on another rate rise in June, following one in May, and also to scale back expectations for rate cuts later in the year. In Europe too, the Stoxx 600 Index erased an earlier gain.
Among notable premarket movers, Chinese EV maker XPeng soared after the firm unveiled a plan to cut manufacturing costs at the Shanghai International Auto Show. Other US-listed Chinese stocks also rise, rebounding from last week’s slump. Prometheus Biosciences shares surged as much 71% in US premarket trading after Merck struck a deal to buy the biotech company for around $10.8 billion, though traded slightly below the $200/share offer. Analysts were positive on the deal despite its 75% premium to Prometheus’s closing price last Friday, saying that it will help Merck to diversify away from its traditional focus on oncology, while brokers saw no obstacles to the transaction going through. Here are the most notable pre-market movers:
US stocks have swung around in a tight range in April after a strong rally in the first quarter as investors veered between worries about a recession and bets that cooling inflation would prompt the Federal Reserve to stop rate hikes soon. Corporate earnings will provide the next clue about the impact of slowing growth, with analysts expecting the biggest year-on-year decline since 2020.
Richard Hunter, head of markets at Interactive Investor, said market participants have remained cautious despite the strong showing from the big banks as economic data suggest the Fed could hike rates again at its next meeting. Recent data points to inflation and employment markets steadily softening, encouraging some equity bulls. First-quarter earnings from JPMorgan and Citigroup also outpaced expectations on Friday.
“After the data last week, there is a less pressing need to hike rates, plus there is an apparent easing in banking tensions,” said Peter Kinsella, head of FX strategy at Swiss asset manager UBP. “If we get a Fed rate hike in May, I think it will be one and done.”
Despite this, Kinsella predicts headwinds for equity markets from share valuations that remain expensive, especially in relation to a slowing economy. Investors are preferring to park their cash in money-market funds, he noted.
“The current season’s earnings profile is rather opaque,” Kinsella added. “The banks last week did better than expected, but we have to see what the reporting season will be like from everyone else. But the S&P is expensive at current levels so you have to ask yourself if there is really much material upside from here.”
Meanwhile, Morgan Stanley strategist Michael Wilson once again - and for the 6th month running - said profit expectations were still too high even as that has been long factored into prices. The strategist also warned - as per usual - that the S&P 500 was at risk of further declines as the percentage of stocks outperforming the index on a three-month rolling basis was at a record low. Wilson sees the biggest risk to the rally in technology stocks if bond yields rise. The tech-heavy Nasdaq 100’s so-called MACD momentum — which shows the relationship between two moving averages of a security’s price — is now weakening, Bloomberg noted while Goldman's Prime Brokerage notes that "franchise flows have shifted to local selling of tech this week and Nasdaq is only up in two of the past ten sessions (also note that it stands exactly where it stood in ... the spring of 2021)."
European stocks are on course to extend their winning streak to six sessions as investors turn their attention to earnings season starting later this week. The Stoxx 600 is up 0.1% while the FTSE 100 outperforms its regional peers with a gain of 0.5%.
Earlier in the session, Asian stocks advanced as investors bet on a faster-than-expected recovery in China ahead of key economic data releases, offsetting losses in technology names. The MSCI Asia Pacific Index rose as much as 0.3%, with Hong Kong and China benchmarks leading gains in the region. GDP and retail sales data due Tuesday will probably show the economy picked up in the first quarter after Covid Zero ended. The housing market also showed signs of stabilization, with home prices increasing for a second consecutive month in March.
The optimism about China countered weakness in tech, with shares of Indian IT services firm Infosys slumping the most in three years after disappointing earnings guidance and a wave of brokerage downgrades. Taiwan’s MediaTek also contributed to the sector’s losses on profit concerns. Investors grappled with expectations of elevated inflation, with most seeing at least one more interest rate increase from the Federal Reserve this year. Still, a raft of strong earnings from US banks including JPMorgan and Citigroup have helped calm concerns around lenders’ stability.
“Asian equities registered positive returns amid the limited spill-over effects on Asian financials and overall regional indices in Asia from the US and European banking crises,” said Marty Dropkin, head of equities Asia Pacific at Fidelity International. He added that China’s reopening is “providing a significant boost for equities within the broader market.”
Japanese stocks climbed for a seventh day, with the Topix completing its longest winning streak in 13 months, as strong earnings from JPMorgan Chase and Citigroup helped calm concerns around US bank stability. The Topix rose 0.4% to 2,026.97 as of the market close in Tokyo, while the Nikkei 225 advanced 0.1% to 28,514.78. Both gauges reached their highest level in a month. Toyota Motor contributed the most to the Topix’s gain, increasing 1.4%. Bank stocks such as Mitsubishi UFJ, Sumitomo Mitsui and Mizuho were also among major contributors. “The biggest driver is that the financial instability in the US has subsided considerably,” said Takeru Ogihara, chief strategist at Asset Management One.“However, Japanese equities are now hovering at the upper end of the range, a level that at which further rallies could trigger a selloff.”
Australian stocks rose to an eight-week high, boosted by banks; the S&P/ASX 200 index rose 0.3% to close at 7,381.50, rising for a second session to the highest level since Feb. 16. The benchmark was boosted by gains in banks and real estate stocks. US and European futures made small gains along with Asian stocks Monday as investors weighed the prospects for more rate hikes and an economic slowdown. In New Zealand, the S&P/NZX 50 index rose 0.5% to 11,936.15.
India stocks gauge snapped its longest run of advances in more than two years as cautious outlook and lackluster earnings by technology bellwether Infosys weighed on investor sentiment. The S&P BSE Sensex fell 0.9% to 59,910.75 in Mumbai on Monday, while the NSE Nifty 50 Index declined 0.7%. The gauges had risen for nine consecutive sessions through Thursday. Trading in India was shut due to a local holiday on Friday. BSE’s gauges of small- and mid-sized firms however extended the rebound, stretching gains to the 10th consecutive day as they trim yearly losses to less than 3%. Infosys contributed the most to the index decline, decreasing 9.4%, its biggest single-day plunge since March 2020. Out of 30 shares in the Sensex index, 16 rose, while 14 fell
In FX, the Bloomberg Dollar Spot Index is up 0.2%. The British pound is the weakest of the G-10 currencies, falling 0.3% versus the greenback.
In rates, treasuries slightly cheaper across the curve with front-end underperforming, two-year yields rising 2bps to 4.12% after jumping 13bps on Friday, and extending Friday’s flattening move as 5s30s spread briefly drops below 10bp. 10-year yields around 3.54% are cheaper by 2.5bp vs Friday’s close with bunds lagging slightly in the sector and gilts outperforming. Odds of an additional 25bp rate hike for May meeting firm, while some small amount of hike premium is also priced into the June Fed OIS. German two-year yields are flat at 2.89% while the UK equivalent drops 3bps to 3.59%.
In commodities, crude futures are in the red with WTI losing 0.4% to trade near $82.20. Spot gold add 0.4% to around $2,011.
Bitcoin is softer in otherwise limited trade, back below the $30k mark and shy of the recent USD 31k peak; the current pullback keeps BTC well above last week's $28k trough.
It's a slow start to the week with just the April Empire Manufacturing index on deck (est. -18.0, prior -24.6) and the April NAHB Housing Market Index (consensus expects it to rise from 44 to 45. After the close we get the latest TIC flow data. Investors are awaiting reports on Monday from Charles Schwab and State Street. The former will be in particular focus after a 40% share price plunge year-to-date, caused by rising interest rates. Later in the week, Bank of America Corp. and Goldman Sachs Group Inc. are due to deliver results along with Netflix Inc. and Tesla Inc.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mostly higher albeit with gains capped in the absence of any major macro catalysts from over the weekend and as participants brace for upcoming economic releases from China including GDP data. ASX 200 was positive as gains in tech and financials atoned for the losses in the commodity-related sectors. Nikkei 225 was indecisive around the 28,500 level with some of the biggest movers driven by their outlooks. Hang Seng and were underpinned after the PBoC vowed to make prudent monetary policyShanghai Comp precise and forceful, as well as increase support to expand domestic demand and keep liquidity ample
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European bourses are mixed after initial tentative upside, with newsflow limited and specific catalysts light currently. Sectors feature Tech names as the laggard, with chip names pressured amid FT reports that Musk intends an AI start-up to rival OpenAI and has purchased Nvidia (NVDA) processors. Stateside, futures have been pivoting the unchanged mark throughout the APAC session and European morning ahead of earnings. Apple's (AAPL) sales in India reportedly rose to almost USD 6bln (prev. USD 4.1bln) in the past year, according to Bloomberg sources. ChatGPT and other advance AI are reportedly facing a new regulatory push in Europe, according to WSJ.
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Commodities
Fixed Income
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US Event Calendar
DB's Henry Allen concludes the overnight wrap
Since our last edition on Friday, there’s been no doubt that markets are continuing to shrug off the financial turmoil that brought such volatile conditions only a month ago. In fact by the end of last week, the VIX index of volatility had closed at just 17.07pts, which is its lowest level since 4th January 2022, on the same day that the S&P 500 hit its record intraday high. Other measures are painting a similar picture as well, with the MOVE index of Treasury volatility beneath its pre-SVB levels again, whilst Bloomberg’s index of US financial conditions has now erased more than 80% of the tightening seen last month. So for all the fears that we might have been on the verge of another financial crisis, for the time being at least we’ve seen a remarkable decline in volatility.
With growing signs that markets have stabilised, there’ve also been growing expectations that the Fed are set to deliver another hike at their next meeting on May 3. That was ramped up on Friday by several factors. One was a speech by Fed Governor Waller, who explicitly said that “monetary policy needs to be tightened further.” Second was the University of Michigan’s survey of inflation expectations in April, where the 1yr measure bounced up to 4.6%. That was a full point higher than the previous month, as well as the biggest monthly jump in nearly two years. And third, measures of core retail sales were a bit stronger than expected in March, with the measure excluding autos and gas stations only down by -0.3% (vs. -0.6% expected).
With all that in mind, futures took the chances of a rate hike in May up to 81% by the close on Friday, where it remains this morning. That’s the highest it’s been since the SVB collapse, and further out the curve we’ve seen much the same picture. For instance, the rate expected by the December meeting is now up to 4.50% this morning, having closed as low as 3.75% at the height of the turmoil in mid-March. Remember that the decision is now only two weeks on Wednesday, and this week is the last time we’ll be able to hear from Fed speakers before their blackout period begins on Saturday.
This morning in Asia, equity markets have put in a mixed performance. Chinese equities have outperformed, with the Shanghai Composite (+0.98%) leading gains, followed by the CSI 300 (+0.86%) and the Hang Seng (+0.54%). That’s come in spite of the fact that the People’s Bank of China only made a net injection of 20bn yuan in April to banks through the medium-term lending facility, which is the lowest since November. They also left the 1yr medium-term lending facility rate at 2.75%. Elsewhere in Asia, the Nikkei (-0.03%) and the KOSPI (-0.12%) are trading slightly lower. And looking forward, futures for the S&P 500 (+0.14%) are pointing to mild gains.
Turning to the week ahead now, today will likely see the US debt ceiling rise up the agenda again, since House Speaker Kevin McCarthy is giving a speech at the New York Stock Exchange that’s expected to cover the Republicans’ position on the issue. As a reminder, the US is expected to come up against the debt ceiling again this summer, and the Republicans have said they want concessions like spending cuts in return for passing an increase. Since the Republicans now have a majority in the House of Representatives, at least some of them will need to be on board to pass an increase. The situation has several echoes to the last major fight over the debt ceiling in 2011, when there was also a Democratic president negotiating with a Republican majority in the House. Although an agreement was eventually reached, that episode coincided with a noticeable slump in the S&P 500 alongside a sharp decline in consumer confidence.
In the meantime, there are a few highlights ahead on the data side. Tomorrow sees the release of China’s Q1 GDP growth, where our economists are expecting an above-consensus print of +4.5% year-on-year. Then on Friday we’ll get the April flash PMIs from around the world, which will offer an initial indication of how the global economy has been performing into Q2. Otherwise, inflation will remain in the spotlight, with this week seeing the March CPI releases from Japan and the UK. In Japan, our economist expects core-core inflation excluding fresh food and energy to tick up slightly to 3.6%, up from 3.5% the previous month. And in the UK, we’re anticipating a decline to 9.7%, down from 10.4% in February.
The final big highlight this week will be earnings season, which is increasingly ramping up now as 59 companies in the S&P 500 will be reporting. Some of the financials will be of particular interest given the market turmoil last month, and we’ll get results from Bank of America, Morgan Stanley, Goldman Sachs and Charles Schwab this week. Elsewhere, some of the highlights will include Tesla, Netflix, IBM and Johnson & Johnson.
Recapping last week now, those US data releases mentioned above led to a cross-asset selloff on Friday. In fixed income, the more policy-sensitive 2yr Treasury yield climbed +13.1bps on Friday, and +11.8bps on the week, reaching its highest level since the mid-March banking strains. 10yr Treasury yields similarly advanced, climbing +12.2bps last week (+6.8bps on Friday), whilst 10yr bund yields were up +25.5bps (+6.7bps on Friday) in their largest weekly rise since September. With a May rate hike now firmly on the table, as well as the upside surprise to core measures of US retail sales, the US dollar index jumped +0.54% on Friday, although it was still down -0.53% in weekly terms. That also followed on from strong earnings posted by US banks Friday morning, with first quarter revenue results from the likes of Wells Fargo and JPMorgan beating expectations despite the banking turmoil.
The selloff in fixed income was echoed in US equity markets, as the S&P 500 modestly retreated -0.21% on Friday. But in weekly terms, the index was up +0.79%, aided by the soft inflation prints earlier in the week. Back in Europe, we saw the STOXX 600 outperform on a relative basis, advancing +1.74% week-on-week (and +0.58% on Friday).
In commodity markets, oil secured its fourth consecutive week of gains as Brent crude advanced +1.40% last week (and +0.26% on Friday) to $86.31/bbl. WTI crude was likewise up +2.26% in weekly terms (+0.44% on Friday). And that’s increasingly being felt in the real economy too, with average US gasoline prices hitting a post-November high of $3.669/gallon on Saturday. In the meantime, gold ended the week at $2004/oz after retreating -1.77% on Friday, and -0.19% on the week.
Finally, it was a big week for cryptocurrencies, as Bitcoin broke through the $30,000 mark to reach its highest level since June 2022, up +8.21% on the week (+0.61% on Friday). The second largest cryptocurrency in terms of market capitalisation, Ethereum, outpaced Bitcoin however, advancing +14.58% (+4.90% on Friday) on the week after a major upgrade on Wednesday.