After Tuesday's sharp rout, US equity futures are higher despite another slump in Asian markets and mixed European bourses, potentially setting up a relief rally as yields are lower with 10Y under 4.50% even as investors keep a close eye on the risk of a government shutdown and the Dollar keeps rising to the point where another Plaza Accord may be required.
As of 7:45am ET, S&P futures were 0.4% higher while Nasdaq futures rose 0.3%; on Tuesday the DJIA fell below its 200-day moving average, a technical signal that suggests the index has become oversold while the VIX retreated after hitting its highest level since May. Commodities are mostly higher with WTI back above $91, leading Energy. Today's macro data focus is on durable goods and the 5Y Treasury auction ($49bn). Tomorrow we resume with Fed speakers and Friday’s PCE/Consumption data are the most impactful data points of the week.
In premarket trading, Costco fell 2% despite beating earnings estimates. The firm held back from commenting on the timing of its membership-fee increase, something Morgan Stanley sees as a slight disappointment. US cryptocurrency-related stocks rise in premarket trading while European peers also gain as Bitcoin jumps, halting a three-day losing streak. Bitcoin was up 2.5% at $26,790.63, as of 7:53 a.m. in New York.
Treasury yields slipped two basis points, backtracking from a 16-year high sparked by speculation the Federal Reserve will keep policy restrictive into next year, or longer. A gauge of the dollar traded near its highest this year. As Bloomberg notes, much rests on the bond market, which is guiding the direction for stocks and currencies, and ultimately the economy, according to Derek Halpenny, head of global markets research at MUFG Bank Ltd.
"If yields continue to move higher, at some point relatively soon we will see even larger equity market declines and a hit to the main engine of the US economy – the consumer,” Halpenny wrote in a note. “Falls in equity markets would impact expectations further and begin to impact consumers’ appetite to spend.”
As Bloomberg notes, US stocks are heading for their biggest monthly decline since December as investors worry the Fed would keep interest rates higher for longer at a time when economic growth is slowing. The Federal Reserve Bank of New York’s measure of how much bond investors are compensated for holding long-term debt turned positive for the first time since June 2021, suggesting traders are betting on elevated policy rates.
And in bad news for inflation, oil resumed its climb to $92 a barrel even as US consumer confidence has taken a knock from higher costs at the pump and the spreading impact of aggressive rate hikes. Consumer sentiment dropped to 103 from a revised 108.7 in August, missing the median estimate of 105.5 in a Bloomberg survey of economists.
Meanwhile, Senate Democratic and Republican leaders agreed Tuesday on a plan to keep the government open through mid-November and provide $6 billion in assistance to Ukraine. The plan to avert a shutdown on Oct. 1 still needs to overcome gridlock in the House.
European stocks are in the green, the Stoxx 600 is up just barely 0.1% and set to snap a four-day losing streak with technology, media and industrial names leading gains. Here are the biggest European movers:
Earlier in the session, Asian equities declined, headed for a third-straight day of losses, as a bounce in Chinese stocks on strong economic data failed to offset investor concerns including higher US interest rates. The MSCI Asia Pacific Index declined as much as 0.6% before paring much of the loss, with industrials and financials the biggest drags. Stocks rose in Hong Kong and mainland China after data showed industrial profits for August grew at the fastest pace in at least a year. “There is quite a lot of negative sentiment and people are waiting to see good news before they are willing to jump in in China,” Alexander Treves, investment specialist at JPMorgan Asset Management, told Bloomberg Television. “There is just so much fear in the market, I think people are just nervous,” he said.
In FX, the Bloomberg Dollar Spot Index rises 0.1%. The Norwegian krone is the best performer among the G-10’s, rising 0.2% versus the greenback. USD/JPY is little changed around 149.10. The Scandinavian currencies led gains as short-covering set the tone while quarter-end flows made their way through the market as spot transactions cover month-end value date. EUR/SEK fell as much as 0.5% to 11.5609, its lowest level since July 31; EUR/NOK fell as much as 0.6% to 11.3684, its lowest since Aug. The pound fell against the US dollar for a sixth session, hitting its lowest since March, as traders home in on a diverging outlook for the US and UK economies; GBP/USD -0.1% to 1.2149. AUD/USD reversed gains to fall 0.3% to 0.6381; it rose earlier after data showed Australia’s inflation quickened last month, bolstering the case for the Reserve Bank to hike at least one more time. The yen remained steady after weakening beyond 149 per dollar for the first time since October 2022 on Tuesday
In rates, treasuries are slightly richer across the curve with gains led by long-end, following bull-flattening move in core European rates. US yields have pulled back from cycle highs with 30-year borrowing costs falling 4bps to 4.63%. Long-end yields richer by more than 3bp on the day, flattening 5s30s spread by 1.5bp as belly lags; 10-year, down 3bp at 4.51%, outperforms bunds by ~1bp in the sector while gilts keep pace. Treasury auctions resume with $49b 5-year note sale at 1pm; cycle concludes Thursday with $37b 7-year note. The US session includes 5-year note auction poised to draw highest yield since 2007; Tuesday’s 2-year sale stopped on the screws. Dollar IG issuance slate includes World Bank 7Y with moderate issuance expected; five companies sold about $10b of new debt Tuesday, bringing weekly volume to $14.4b vs $15b-$20b estimate.
In commodities, crude futures advance, with WTI rising 1.2% to trade near $91.40. Spot gold falls 0.3%.
Looking to the day ahead, data releases include the Euro Area money supply for August, and in the US there’s the preliminary August reading for durable goods orders and core capital goods orders.
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APAC stocks traded mixed as a rebound in Chinese Industrial Profits partially offset the subdued handover from Wall St. where the major indices extended on losses heading closer to month-end. ASX 200 was lower albeit with downside stemmed as participants digested the monthly CPI data from Australia which matched expectations at 5.2% Y/Y but accelerated from the prior. Nikkei 225 initially underperformed and briefly dipped below 32,000 before bouncing off lows. Hang Seng and Shanghai Comp were positive after the PBoC pledged to step up policy coordination at its quarterly policy meeting and noted the need to enhance efforts of macro policy adjustments, while sentiment was also underpinned by the improvement in Industrial Profits which returned to growth for August.
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European bourses are firmer in early trade, albeit it is hard to see today’s bounce as much more than a reprieve from recent losses with not a great deal changing since yesterday’s close other than a rebound in Chinese industrial profits which helped buoy sentiment overnight. Sectors in Europe are mostly firmer with Tech top of the pile alongside Autos and Banks. On the downside, Utilities sit at the foot of the leaderboard. US futures are trading firmer, with sentiment improving following yesterday's sell-off, which was ultimately void of any pertinent data releases. The docket remains lacklustre for the remainder of the day, with a focus on US MBAs and Durable Goods.
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DB's Jim Reid concludes the overnight wrap
It was another rough session in markets over the last 24 hours, with a fresh sell-off taking place across several asset classes that accelerated into the US close. Multiple factors were responsible, but an important one was the US Conference Board’s latest consumer confidence data, which showed a larger-than-expected decline in September. That led to growing concern about the economic outlook, and it meant the S&P 500 (-1.47%) fell to a 3-month low, having now shed -3.83% over the last week alone. It also pushed the VIX index of volatility up to a 3-month high of 18.94pts. But despite the weak numbers on the economy, sovereign bonds saw little respite either, with 10yr yields inching their way to new highs on both sides of the Atlantic. So a tough backdrop across the board, and overnight we’ve also seen oil prices move back up to their recent highs, with Brent crude at $94.90/bbl .
When it came to that Conference Board data, the main takeaway was the decline in the consumer confidence measure to 103.0 in September (vs. 105.5 expected). Not only was that the lowest reading since May, but it also marked the biggest decline relative to the previous month (-5.7pts) since August 2021. And looking at the components, we also saw the expectations reading fall to a 4-month low of 73.7, suggesting that the cautious optimism of the summer months might turn out to have been short-lived. To be fair though, it wasn’t all bad news from that release. For instance, the difference between those saying jobs are plentiful compared with those who say they’re hard to get actually improved in September, rising to +27.3%.
That weakness in consumer confidence comes as the US government is still days away from a potential government shutdown, unless Congress can agree to pass funding beyond September 30. In terms of the latest, a bipartisan deal has emerged in the Senate, which would keep the government open until mid-November. However, it’s uncertain as to whether that would be brought to a vote in the Republican-controlled House, and Speaker McCarthy said that he’d put a different stopgap funding measure on the floor this week, saying that a vote would probably be on Friday. If there is a shutdown, that could affect several upcoming data releases depending on how long it lasted, including the September jobs report on October 6 .
Rising pessimism about the near-term outlook meant that equities lost significant ground yesterday. That included the S&P 500 (-1.47%), which hit a 3-month low thanks to a broad-based decline. Furthermore, the losses yesterday mean that the equal-weighted S&P 500 is now in negative YTD territory again at -0.16%, which just shows how narrow this year’s rally has been, given the overall index is still up +11.30% YTD. Tech stocks saw a slight underperformance, mostly due to a -4.03% fall for Amazon on news of an antitrust case being launched by the Federal Trade Commission. Elsewhere, European equities saw further losses as well, and the STOXX 600 (-0.61%) closed at a 2-month low. Amid the broad equity weakness, the MSCI All Country World Index (-1.20%) fell for an eighth day in a row. Likewise, there were also signs of the risk-off tones weighing on credit markets, with US HY spreads (+9bps) widening to a 2-month high of 396bps .
Whilst this backdrop might have seemed more favourable for sovereign bonds, yesterday saw modest losses for long-end bonds, and Bloomberg’s aggregate bond index hit a fresh low for 2023 so fa r. In the US, the 10yr Treasury yield rose +0.2bps to 4.54%, which is their highest closing level since 2007, although they’ve slipped overnight and are back down to 4.52%. Similarly, the 30yr yield (+2.3bps) also hit a new cycle high of 4.68%. Moreover, it was real yields that continued to drive those moves, leading to another set of milestones across the curve. Among others, yesterday saw the 2yr real yield (+5.9bps) close at 3.19%, the 5yr real yield (+4.0bps) close at 2.43%, and the 10yr real yield (+4.5bps) close at 2.22%. In every case, that’s their highest level since the GFC, and it demonstrates how the impact of higher borrowing costs is still filtering through into the economy.
Sovereign bonds also struggled in Europe, but it was Italian BTPs that saw the biggest underperformance, with 10yr yields up +8.0bps. That comes as the Italian government is set to present its latest budget projections today, and the focus will be on what deficit level is expected. Bloomberg reported yesterday that the deficit could be as wide as 4.5%, and our own European economists examine the issue in more depth here. Ahead of the announcement, the spread of Italian yields over bunds widened to 193bps, which is its highest closing level since March. Nonetheless, the sell-off among European sovereign bonds wasn’t confined to Italy, and yesterday saw yields on 10yr bunds (+1.1bps) close at 2.80%, which is the highest they’ve been since 2011 .
Asian equity markets have posted a mixed performance this morning, with losses for the Nikkei (-0.36%) and the KOSPI (-0.22%), alongside advances for the Hang Seng (+0.64%), the CSI 300 (+0.31%) and the Shanghai Comp (+0.33%). In part, that boost for Chinese equities followed data showing that industrial profits in China were up +17.2% year-on-year in August, up from a -6.7% year-on-year reading in July. Elsewhere, the main data release was the Australian CPI for August, which saw an uptick to +5.2%, in line with expectations .
Lastly, we had a few data releases on US housing, which painted a divergent picture. On the one hand, new home sales fell to an annualised rate of 675k in August (vs. 698k expected). That’s the lowest they’ve been in 5 months, and the -8.7% decline on the previous month was the largest since September 2022. But on the other hand, the July house price data showed faster-than-expected growth. For example, the S&P CoreLogic Case-Shiller 20-City index was positive for a 5th consecutive month, at +0.87% (vs. +0.70% expected), which took the year-on-year number back into positive territory for the first time since February, at +0.13%. Meanwhile, the FHFA house price index was up +0.8% in July (vs. +0.4% expected).
To the day ahead now, and data releases include the Euro Area money supply for August, and in the US there’s the preliminary August reading for durable goods orders and core capital goods orders.