US equity futures are lower, as treasuries also dropped across the curve, with the two-year yield rising for an eighth day, after the latest round of talks between Joe Biden and Kevin McCarthy Monday ended without a deal, while Eurozone manufacturing activity shrank at the fastest pace since the pandemic shuttered factories three years ago, threatening to sap momentum from an economy driven by services. The dollar rose as did bitcoin, gold fell again while oil reversed earlier losses and jumped to session highs after Saudi Arabia's energy minister told oil speculators to “watch out” just over a week before the OPEC+ alliance is due to meet.
At 7:45am ET, US equity futures dropped 0.2% to session lows, dropping back under 4,200, whlie the Nasdaq was shocking in the red perhaps finally realizing where the 10Y yield is. Lowe’s slipped 1.5% in pre-market trading after cutting its sales outlook. In Europe, a rout in luxury-goods makers including Hermes International and LVMH dragged the Stoxx 600 lower after Deutsche Bank AG analysts warned the sector is crowded and valuations are lofty. Tokyo’s Topix index fell for the first time in eight days, with semiconductor-related stocks turning lower on news that Japan’s tighter export controls will take effect July 23.
In premarket trading, one of the last major retailers left to report Lowe's slumped after it cut its comparable sales forecast for the full year. Here are the other notable premarket movers:
The neverending debt drama continued overnight after Joe Biden and House Speaker Kevin McCarthy called their discussions on Monday productive, but an agreement remains elusive. That left traders on tenterhooks with only a few days left before June 1, when Treasury Secretary Janet Yellen said her department may run out of cash. Any deal would have to be approved by Congress before then.
“I think a default is very unlikely as I don’t think either Democrats and Republicans want it, but we could get close to it and the deadline,” Fabiana Fedeli, chief investment officer for equities and multi-asset at M&G Plc, said on Bloomberg TV. “The closer we get to the deadline the more nervous clients will get. You could have a move towards safer havens, perhaps the long end of yield curve" she warned.
Today’s macro focus will be May PMIs at 9.45am, where consensus estimates the Mfg PMI to print to dip to 50.0 from 50.2 while the Services PMI is also expected to drop to 52.5 from 53.6 prior.
European stocks slumped as a rout in luxury-goods makers including Hermes International and LVMH dragged local markets lower after Deutsche Bank AG analysts warned the sector is crowded and valuations are lofty. The Stoxx 600 was down 053% with consumer products, retailers and industrials the worst-performing sectors. Among individual stock movers, Vivendi SE tumbled after billionaire Vincent Bollore sold shares of the media conglomerate, a sign that he’s isn’t planning a buyout. Swiss asset manager Julius Baer Group Ltd. sank after disappointing results. Here are the most notable European movers:
Earlier in the session, Asian stocks were mized as participants digested the latest from the debt limit negotiations with the meeting between US President Biden and House Speaker McCarthy said to be productive but still lacked any major breakthrough.
In FX, the dollar index rose 0.2%, hovering near its two-month high, after talks between Joe Biden and Kevin McCarthy Monday ended without a deal, though they called their discussions productive and vowed to keep negotiating. The Japanese yen is the best performer among the G-10’s, rising 0.2% versus the greenback. The Norwegian krone is the weakest. GBP/USD fell as much as 0.5% to 1.2373, its lowest since April 21 after disappointing PMI prints; EUR/GBP trades 0.1% higher at 0.8703.
In rates, treasuries added to Monday’s losses with front-end underperforming led by two-year Treasury yields rising another 5bps to 4.36% and flattening the curve even as stock futures also dropped as European names stumbled after euro-zone manufacturing activity shrank at the fastest pace since the pandemic. Treasury yields cheaper by up to 7bp across front-end of the curve with 2s10s, 5s30s spreads flatter by ~4bp on the day; 10- year yields around 3.745%, cheaper by ~ 3bp with gilts following suit, lagging by 1bp and 5.5bp in the sector. European bonds are also in the red and Gilts also fell, underperforming their European counterparts, as UK services PMI data showed cost pressures in the services sector increased at the fastest pace in three months. The Treasury auction cycle begins 2-year note sale, and Fed Chair Powell reportedly will make an unscheduled appearance. $42b 2-year note auction at 1pm New York time begins cycle that also includes 5- and 7-year sales Wednesday and Thursday. WI 2-year yield at 4.335% is ~37bp cheaper than last month’s, which tailed by 0.3bp.
In commodities, crude futures rose with Brent trading near $76.70 of session highs after Saudi Arabia's energy minister threatened bearish oil speculators. Spot gold falls 0.6% to $1,960.
Bitcoin is bid and has convincingly surmounted the USD 27k handle to a USD 27.47k peak as we await a busy US agenda where the debt ceiling, Powell and PMIs are all potential macro movers.
To the day ahead now, and the main highlight will be the flash PMIs from Europe and the US. Other US data releases include new home sales for April, and the Richmond Fed’s manufacturing index for May. From central banks, we’ll hear from ECB Vice President de Guindos, the ECB’s Muller, Villeroy and Nagel, the Fed’s Logan and the BoE’s Haskel.
Market Snapshot
Top Overnight News
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were indecisive as participants digested the latest from the debt limit negotiations with the meeting between US President Biden and House Speaker McCarthy said to be productive but still lacked any major breakthrough. ASX 200 was kept afloat but with the upside capped by weakness in the consumer sectors and after Australia’s Flash Manufacturing PMI remained in a contraction. Nikkei 225 initially climbed to its highest level since August 1990 and was on course to match its longest win streak in around four years, before eventually deteriorating in afternoon trade. Hang Seng and Shanghai Comp. were subdued following Hong Kong’s failure to sustain the early tech-led momentum from China’s approval of 86 domestic online games in May, while the mainland was pressured after Chinese press reports noted expectations for the PBoC’s benchmark lending rates to remain unchanged for some time and after the US denied it was planning to lift sanctions on China's defence minister.
Top Asian News
European bourses are pressured, Euro Stoxx 50 -0.5%, with the exception of the FTSE 100 +0.1% which is deriving some support from regional banking names on post-PMI hawkish BoE implications. Back to Europe, bourses came under pressure from the region's PMIs as it has hawkish ECB implications and with the Manufacturing sector still under marked pressure. Sectors are somewhat mixed with Real Estate bolstered while Luxury names are tarnished after a cautious note from Deutsche Bank. Stateside, futures are essentially flat with the ES pivoting 4200 as we await more substantive debt ceiling updates and remarks from Fed's Powell. Lowe's Companies Inc (LOW) Q1 2023 (USD): adj. EPS 3.67 (exp. 3.44), Revenue 22.35bln (exp. 21.6bln); SSS -4.3% (exp. -3.2%); updates outlook
EU is seeking to reimpose a EUR 14.3bln tax demand on Apple (AAPL), via FT; Competition Commissioner Vestager is looking to overturn the EU's 2020 legal defeat over a tax bill to Ireland.
Top European News
FX
Fixed Income
Commodities
Debt Ceiling News
Geopolitics
US event calendar
Central Bank Speakers
DB's Jim Reid concludes the overnight wrap
Since it’s AI week, it’s probably worth mentioning that there was a very brief selloff in markets yesterday after unconfirmed reports circulated on Twitter about an explosion near the US Pentagon. For all of a few minutes after the US open, that saw the S&P 500 shed around a quarter of a per cent, whilst yields on 10yr Treasuries moved about 4bps lower as well, even though nothing had been officially confirmed. The tweet was deleted shortly after and the Pentagon confirmed that no explosion had taken place, meaning that markets snapped back those moves in short order. But given the suggestions that the initial photo might have been AI-generated, it just shows the potential pitfalls for markets if fake news driven by AI can cause concrete movements in asset prices. That could be a growing issue over the months and years ahead, particularly if the technology is able to provide increasingly convincing images and that’s before we get to deep fakes. Indeed who knows if it’s really us typing this.
Actually typing is a bit more difficult than normal this morning as I burnt my hand yesterday. File this under first world problems but a power cut/surge blew our boiling water tap yesterday. As we don’t have a kettle I had to make a coffee by putting a pan in the oven (normal for our type of oven when cooking). I took it out carefully with the oven glove and then went over to get my cup. In the 10 seconds I was away I forgot the pan was piping hot and picked it up to pour and scolded my hand.
That’s how you maybe prove this isn’t AI as no robot would be so stupid. Anyway, whilst AI might be the long-term focus right now, in the short term the main issue for investors continues to be the debt ceiling, as the clock ticks towards a potential deadline in early June. Last night’s meeting between Biden and McCarthy seemed to be constructive with Speaker McCarthy saying, “The tone tonight was better than any other time we have had discussions” and President Biden adding “that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement.” This meeting came shortly after Treasury Secretary Yellen’s announcement that it was now “highly likely” that the Treasury would run out of cash in early June with a default possible as soon as June 1. Prior to that meeting President Biden and Speaker McCarthy told reporters that a deal needed to get done in the next few days to avoid hitting the debt ceiling, with the latter saying “decisions have to start being made.”
With the issue still not resolved at yesterday’s close, markets grew increasingly alarmed about the potential implications of a default, and yields on short-term T-bills continued to rise. For instance, the 1-month T-bill yield surged by +13.2bps yesterday to 5.46%, which was just under the highs reached early last week. This morning we've reversed yesterday's losses on the overnight headlines from Biden and McCarthy
As investors were focusing on the debt ceiling, US Treasuries came under further pressure from a collection of hawkish Fed speakers yesterday. That started with St Louis Fed President Bullard (non-voter), one of the most hawkish FOMC members, who said that “I think we’re going to have to grind higher with the policy rate”, and that his thinking was for “two more moves this year”. Earlier in the day, Minneapolis Fed President Kashkari (voter) had also sounded open to another hike in June, saying that “I think right now it’s a close call, either way, versus raising another time in June or skipping.” Later on however, San Francisco Fed President Daly (non-voter) didn’t give an obvious signal, saying that there was still a lot of time to collect information ahead of the June meeting.
With Fed speakers sounding more hawkish, investors continued to dial up their expectations for the fed funds rate over the months ahead. For instance, the chances of a June hike moved back up to 22.5%. And the rate priced in for the December meeting was up +6.1bps to a post-SVB high of 4.696% (just above the midpoint of its intra-day range of 3.40% to 5.56% this year), which speaks to the increasing scepticism that the Fed will be able to cut rates this calendar year. In turn, that meant yields on 10yr Treasuries rose for a 7th consecutive session, rising +4.2bps to 3.715%. That’s the longest string of increases in over a year, having been at just 3.38% before this current run began a week and a half ago.
Equities were more resilient than bonds yesterday though also seemed to be waiting for the resolution of the Biden-McCarthy talks last night. The S&P 500 closed largely unchanged (+0.02%) but tech stocks again outperformed as the NASDAQ (+0.50%) hit another post-August high, which takes its YTD gains to +21.54%. Back in Europe, equities were broadly flat as well, with the STOXX 600 up +0.01%. However, there was a massive outperformance in Greece, where the Athens Stock Exchange General Index surged +6.09% after Sunday’s election. That was the index’s best daily performance since 9 November 2020, back when Pfizer announced that their vaccine had an effectiveness of over 90%, and global risk assets soared as investors saw a path out of the pandemic. Similarly, the Greek 10yr government bond yield came down -14.2bps, which contrasted with the rest of Europe where yields on 10yr bunds (+3.1bps), OATs (+2.8bps) and BTPs (+4.2bps) all moved higher.
In Asia the Nikkei (+0.64%) is leading gains, pushing towards a fresh 33-year high aided by a weaker yen and stronger PMI data (more below) while the KOSPI (+0.62%) is also trading in the green. Elsewhere, Chinese stocks are losing ground with the Shanghai Composite (-0.58%), the CSI (-0.53%), and the Hang Seng (-0.34%) all edging lower. Outside of Asia, US stock futures are reflecting a more positive tone on the debt ceiling talks with the S&P 500 (+0.21%) and NASDAQ 100 (+0.28%) trading up as we type.
Coming back to Japan, the manufacturing sector witnessed an expansion for the first time in 7 months as the PMI came in at 50.8 in May, up from a reading of 49.5 in April, as output and new orders rose for the first time in 13 months. At the same time, service-sector activity expanded at the strongest pace on record in May, advancing to 56.3, from 55.4 in April, indicating that the post-COVID recovery is showing signs of continuing momentum.
Elsewhere, Australia’s manufacturing sector continued to contract in May, with the PMI remaining unchanged at 48.0, marking the joint-lowest reading since May 2020. The survey also showed that the services PMI fell from 53.7 in April to 51.8 in May with the composite index edging lower from 53.0 in April to 51.2 in May.
Finally, there were some fresh developments in the 2024 US presidential race yesterday, as Senator Tim Scott announced his candidacy on the Republican side. But so far at least, polls continue to suggest that former President Trump is the overwhelming frontrunner for the nomination ahead, with the RealClearPolitics average currently placing Trump at 56%, and Florida Governor Ron DeSantis in second place on 19%. Speaking of DeSantis, several media outlets including CNN and CBS have reported sources saying that he’ll will formally announce a run tomorrow, so the field of candidates is beginning to emerge now.
To the day ahead now, and the main highlight will be the flash PMIs from Europe and the US. Other US data releases include new home sales for April, and the Richmond Fed’s manufacturing index for May. From central banks, we’ll hear from ECB Vice President de Guindos, the ECB’s Muller, Villeroy and Nagel, the Fed’s Logan and the BoE’s Haskel.