After starting off strong, US equity futures have again faded a modest attempt to rally, and are back to unchanged as they revert to the declining trendline from the 2023 high hit on June 16 but followed by the worst week since March amid rising recession fears. At 7:45am ET, S&P futures were just barely in the green. Nasdaq 100 futures added 0.4%, as traders positioned for a rebound after the tech benchmark sank 1.4% on Monday.
In Europe, the Stoxx 600 Index also ceded its opening gains after ECB President Christine Lagarde dashed hopes of an imminent end to the interest-rate hiking cycle in her opening remarks to the ECB retreat in Sintra; global equity markets are attempting to shake off recent weakness amid renewed expectations for China stimulus which helped push HK/Mainland stocks higher after Premier Li reiterated the 5% GDP target remains on track. This optimism is pushing base metals higher ex-copper; the moves are aided by a slightly weaker USD while 10-year Treasury bond yields rose; crude dropped more than 1% and copper followed. Today, we have a 5Y bond auction which JPM says should be well digest given yield levels. IMF’s Gopinath says central banks may need to tolerate higher inflation to avoid financial crises, indicating once again that the Fed will inevitably have to raise its inflation target. Today’s macro data focus includes Durable/Cap Goods, Home Price data, regional Fed mfg indicators, and Consumer Confidence.
In premarket trading, Tesla shares rebounded by 1.7% after the electric-vehicle maker slid over 6% Monday following a downgrade from Goldman Sachs on a difficult pricing environment; Advanced Micro Devices and Meta Platforms advanced. Here are some other notable premarket movers:
Markets are coming to terms with the view that the Federal Reserve won’t cut interest rates this year and other central banks will continue raising rates to quell inflation. Morgan Stanley economists said in research note on Tuesday that they see the Fed hiking by 25 basis points next month. On the positive side, there’s also growing speculation among investors that any recession may be shallow and less damaging to earnings than expected.
“Growth has held up well thus far,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “With central banks nearing the end of their rate hiking cycles, this has fed hopes of a relatively soft landing in economic terms, without a more severe recession.”
Earlier in the session, Asian stocks were mostly positive as the risk tone improved following a weak US session, encouraged by a fresh round of China stimulus hopes.
In Europe, the Stoxx 600 Index dipped 0.1%, marking a seventh day of declines and the longest losing streak since February 2018. Among individual stock movers, Amsterdam-listed Prosus NV jumped 6% after winning regulatory approval to remove its cross-holding structure with Naspers Ltd. Volkswagen AG dragged autos stocks down following a report that it’s planning to cut back production of one of its electric SUV models due to weak sales.
Lenders were the best performing sector in Europe as ECB officials reiterated their view that interest rates hikes will continue. ECB President Christine Lagarde said the central bank probably won’t be able to declare the end of its historic cycle of interest- rate increases anytime soon and reiterated plan for another hike at the next meeting in July. Lagarde speech kicked off annual ECB retreat in Sintra, Portugal. The Stoxx 600 Banks Index was 0.5% higher as of 11:20am in London vs a 0.2% decline in the Stoxx 600 Index. Santander +2.8%, CaixaBank +2.5%, Banco BPM, +1.5%, Commerzbank +1.5%. Here are some other notable European movers:
In FX, the euro is sitting atop the intraday G10 rankings, rising 0.2% versus the greenback following Lagarde's hawkish comments. The Bloomberg Dollar Spot Index is down 0.1%. AUD/USD leads gains rising as much as 0.7%. USD/JPY falls 0.2% as investors mull future yen intervention potential.
In rates, Treasuries are lower with the US 10-year yield adding 1bps to 3.73%. The long-end of the curve underperforms, pushing 5s30s spread toward steepest levels of the day into early US session. Bigger losses hit gilts, where front-end and belly yields are cheaper by more than 3bp on the day. US session has busy economic data slate and a 5-year note auction, following strong reception for Monday’s 2-year sale. Treasury yields are cheaper by ~1.5bp across long-end of the curve with 5s30s spread steeper by 0.5bp on the day; 10-year yields around 3.73% with gilts trading 2.5bp cheaper vs Treasuries in the sector. 2-year treasury yields rise two basis points to 4.67% after yesterday’s auction narrowly missed being the most expensive since 2007. Longer-dated treasuries remain little changed; focus turns to the five-year note auction later Tuesday. US auction cycle continues with $43 billion 5- year notes at 1pm, and concludes with $35 billion 7-year notes Wednesday; Monday’s 2-year note auction stopped 0.8bp through the WI yield in a strong reception.
In commodities, crude futures decline with WTI falling 0.6% to trade near $68.95. Spot gold is little changed around $1,925. Bitcoin rises 0.7%.
To the day ahead now, and US data releases include the Conference Board’s consumer confidence for June, the preliminary reading of durable goods orders for May, new home sales for May, the Richmond Fed’s manufacturing index for June, and the FHFA’s house price index for April. Elsewhere, we’ll get the Canadian CPI reading for May, and Italian consumer confidence for June. Otherwise from central banks, we’ll hear from ECB President Lagarde, as well as the BoE’s Dhingra and Tenreyro.
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A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks were mostly positive as the risk tone improved following the predominantly negative handover from the US where the major indices were subdued heading into quarter-end and the Nasdaq underperformed amid weakness in tech and communications. ASX 200 gained as strength in financials and cyclicals picked up the slack from the losses in tech and telecoms. Nikkei 225 was pressured in a continued pullback from the 33,000 level amid increasing speculation that the recent currency weakness could force the BoJ’s hand regarding YCC. Hang Seng and Shanghai Comp were firmer with Hong Kong led by gains in tech and property after the PBoC’s continued liquidity efforts, while Premier Li pledged to roll out effective policy measures during his speech at the WEF in Tianjin and it was also reported that US Treasury Secretary Yellen is planning a trip to China in July
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European bourses have been edging lower throughout the morning despite the enthusiasm seen ahead of the cash open, with the ECB Sintra Forum underway. US equity futures are seeing modest gains with the NQ attempting to recoup some of its tech-driven losses on Monday. Equity sectors in Europe are mixed with Banks top of the leaderboard whilst Autos and Parts lag.
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DB's Jim Reid concludes the overnight wrap
If you're reading this in the UK, and large parts of Europe, this might be the first day in a few weeks that you're not waking up feeling like you've slept in a sauna. Never has a drop in temperature and a touch of wind been so well received. On Sunday evening we had a rare 5 minutes of rain and I took my glasses off and sat outside in it and soaked in every drop.
Talking of the seasons, this morning we’re launching our summer survey aimed at market participants (link here). The survey will be open until Thursday and all responses are anonymous. In this edition, we’re interested in your thoughts on when the next US recession will occur, and how severe that might be. We’re also curious if you think central banks are making a policy error, and if so whether they’re being too dovish or hawkish. Finally, we have several questions on ChatGPT and the impact of AI on markets and economies. So do you think this is a short-lived fad or a game-changer for human productivity. All responses very much appreciated.
Of course, the biggest international news right now has come from Russia, but when it came to global markets over the last 24 hours, there weren’t many implications outside of a few specific assets. For example, European natural gas prices initially saw a strong uptick at the open of more than +13%, but more than reversed this gain by the end of the session to close -3.0% lower. Oil prices similarly posted initial gains, and after an up-and-down day, ended closing slightly higher, with Brent crude up +0.5% from its levels on Friday. Prices of wheat (for which Russia is a big exporter) had been on course to close at a 4-month high, but ended up closing -1.24% lower.
To be honest, one of the few areas where the impact was clearly obvious was for Russian assets themselves. The country’s equity indices, which these days are largely separated from international markets, underperformed but even they recovered from their initial losses, with the MOEX Russia index shedding -1.92% at its intraday low, before partially recovering to close -1.36% lower. The Russian ruble also lost a bit of ground, but had likewise recovered by the end of the session and was only -0.04% weaker against the US Dollar (in the offshore market). Conversely, investors became a lot more optimistic about Ukraine’s economic prospects yesterday. It’s worth noting that these are pretty illiquid markets, but the country’s GDP-linked dollar bond due in 2041 hit its highest level since Russia’s invasion began.
The aftermath of the dramatic weekend events in Russia continued to draw headlines. We heard from both President Putin and Wagner group’s Prigozhin for the first time since Saturday night’s apparent compromise, but there was little new in these comments. Putin decried the “mutiny” but said that Wagner group fighters “who did not shed blood” could “sign a contract with the Defence Ministry or move to Belarus”, while Wagner’s Prigozhin denied that Wagner’s “march for justice” was ever aimed at regime change. So plenty of head scratching as to the motivation for the actions and the wider implications. Our EM strategists yesterday published a note outlining their initial takeaways on the weekend’s developments here.
Away from Russia, markets generally had a risk-off tone yesterday as fears continued to rise about a potential recession. In fact, the classic leading indicator, namely the 2s10s yield curve inverted a further -1.2bps to -102.7bps, which is just shy of the -108.7bps level right before SVB collapsed. Indeed, if that level is breached over the coming days, then the curve would be more inverted than at any time since 1981, back when Paul Volcker was Fed Chair and holding rates at very restrictive levels. This flattening was evident across the curve, and the 1s30s curve (-1.4bps) is now at its most inverted since available data begins in 2002, having now reached -148.9bps.
Those fears about a recession were given support by several factors. One was the latest Ifo business climate indicator from Germany, which fell to 88.5 in June (vs. 90.7 expected). That’s the second consecutive decline in that indicator, and now leaves it at its lowest level since November last year. In addition, the expectations component fell to 83.6 from 88.3 in May, which is the largest one-month decline in 11 months, and further adds to the picture that last month’s decline wasn’t just a blip. This backdrop meant that sovereign bonds put in a strong performance in Europe with 10yr bunds (-4.4bps), OATs (-3.9bps) and BTPs (-2.9bps) rallying, although a partial sell-off later in the day saw yields on 10yr Treasuries down by a more modest -1.4bps to 3.721%.
Given the general risk-off tone, equities struggled to gain traction, and the S&P 500 (-0.45%) and the STOXX 600 (-0.10%) both posted declines. Tech stocks also continued to slip, with the NASDAQ (-1.16%) and the FANG+ index (-2.98%) both falling to a 2-week low and with the latter seeing its sharpest daily fall since February. The FANG+ decline came as all 10 stocks were lower with Tesla down -6.0% and Nvidia down -3.7%. On the other hand, small-cap stocks were one of the outperformers, and the Russell 2000 (+0.09%) eked out a gain after a run of 5 consecutive declines. With the pullback in equities the VIX index rose 0.8pts to over 14.0 once again, but at that same time EURUSD vol was still subdued as the currency pair traded in just a 32pips range yesterday. That is the tightest range of the year, with the last day of such little volatility coming back in November 2021.
Asian equity markets are mixed this morning. As I check my screens, the Hang Seng (+1.53%) is sharply higher, rebounding from a five-day losing streak while mainland Chinese stocks are also in the green with the Shanghai Composite (+0.93%) and the CSI (+0.52%) moving higher. Otherwise, the Nikkei (-0.77%) is extending its losses for a third consecutive session with the KOSPI (-0.36%) also lower at the moment. Outside of Asia, US stock futures are shrugging off overnight weakness with those on the S&P 500 (+0.23%) and NASDAQ 100 (+0.19%) trading modestly higher.
Early this morning China’s Premier Li Qiang stated that the nation is still on course to reach its growth target of around 5% for 2023, set by the administration earlier this year while highlighting that Q2 growth is expected to be faster than it was in the first quarter.
In FX, the People’s Bank of China (PBOC) stepped up its efforts to slow the slide in the yuan after the central bank set the daily fixing stronger than market expectations for the second day in a row. The move is the PBOC’s biggest upward deviation that the central bank has made since May when the current selloff began. As we go to press, the onshore yuan (+0.35%) is trading at 7.215 versus the dollar.
To the day ahead now, and US data releases include the Conference Board’s consumer confidence for June, the preliminary reading of durable goods orders for May, new home sales for May, the Richmond Fed’s manufacturing index for June, and the FHFA’s house price index for April. Elsewhere, we’ll get the Canadian CPI reading for May, and Italian consumer confidence for June. Otherwise from central banks, we’ll hear from ECB President Lagarde, as well as the BoE’s Dhingra and Tenreyro.