Just over two weeks after the VIX almost touched 70, the market's freakout is completely forgotten as futures continue rising and a global gauge of stocks approached a record high as traders are now convinced the Fed will deliver its first interest-rate cuts in more than four years, which will take place with both stock and housing prices at all time highs. One can only imagine what happens next. The MSCI’s All Country World index ticked up 0.1%, trading near its all-time record close on July 16. As of 7:45am, S&P futures were 0.2% higher with the index on pace to be up 10 of the past 11 days, while Nasdaq futures gained 0.3%. Europe’s Stoxx 600 index advanced 0.5% as Deutsche Bank AG rallied after predicting a boost to third-quarter results. US futures edged higher. The Bloomberg dollar index is up after rebounding from a 5 month low, while 10Y TSY yields are higher by 3bps to 3.83% after dropping 4 days. Oil is also higher after tumbling to the lowest price of 2024 yesterday. The macro calendar is busy with Initial and jobless claims, Chicago Fed and and existing home sales for July. The Jackson Hole symposium begins tonight with Powell's highly expected speech due tomorrow at 10am.
In premarket trading, Charles Schwab shares fall 4.3% after Toronto-Dominion Bank has raised $2.5 billion in pricing the sale of Schwab shares at $61.65 each. Paramount Global shares rose 3.7% after media investor Edgar Bronfman Jr. raised his offer to take control of thee CBS parent to $6 billion, according to Bloomberg News. Here are some other notable premarket movers:
Expectations for US rate cuts have completely erased the market slump at the start of August that was sparked by recession fears in the US and a rapid unwind of the yen carry trade. Now, investors are focused on Powell’s speech at the Jackson Hole economic symposium on Friday for further evidence a September cut is coming, but even without it, about 100 basis points of easing are already priced in this year after some -818,000 payroll revisions reinforced the case for lower rates.
“We’ve been long Treasuries for a week now — it’s quiet and yields can grind lower from here,” said Matt Amis, investment director at Abrdn Investment Management Ltd. “Jackson Hole is obviously all the market is waiting for. Powell is desperate to cut, we don’t see why he would want to push back on current market pricing for September.”
The Stoxx 600 rises 0.6%, led by retail and travel names. Retail is the strongest-performing sector, wihle basic resources stocks are the biggest laggards. Here are the most notable European movers:
European data showed a mixed picture for the region’s economy, despite a surprise boost from the Paris Olympics. French services expanded at the fastest pace in more than two years, while in Germany a composite PMI added to evidence that the country’s recovery has fizzled out. Britain’s private sector companies reported their strongest growth in four months alongside cooling price pressures. In company news, shares of Deutsche Bank jumped more than 3%. The lender said it expects a €430 million ($479 million) boost to pretax profit in the third quarter after reaching agreements with more than 80 plaintiffs in a long-running dispute.
Earlier in the session, Asian stocks eked out small gains. The MSCI Asia Pacific Index rose as much as 0.4% after fluctuating in early trading. Tencent contributed the most to the gauge’s increase, while AIA Group also surged after the insurer’s new business value jumped to a record in the first half of the year. Equities in Hong Kong led the gains in the region, as several major companies including Xiaomi reported upbeat results. Those in the Philippines and Japan also advanced, partly helped by expectations of US rate cuts, which may provide support to shares ranging from technology companies to machinery makers. Indonesia and Taiwan markets declined. Bank of Japan Governor Kazuo Ueda, meanwhile, faces intense market scrutiny on Friday when he speaks to lawmakers, after the central bank’s hawkish signals contributed to the global market turmoil earlier this month.
In FX, the Bloomberg Dollar Spot Index is up 0.1% while the Japanese yen falls 0.3%; the pound has risen to the top of the G-10 FX pile, climbing 0.2% against the dollar after UK manufacturing and service PMIs topped estimates. The euro falls 0.1% after more mixed readings from the bloc - manufacturing was weak but services outperformed, in part due to the Paris Olympics.
In rates, treasuries are under pressure in early US trading with the yield curve flatter as front-end yields are about 3bp higher on the day. US rates track a bigger selloff in core European bond markets sparked by August preliminary PMIs for France, Germany and euro-zone. Treasury yields are cheaper by at least 2bp across the curve with 2s10s, 5s30s spreads flatter by about 1bp on the day; 10-year is around 3.82% with comparable bunds and gilts cheaper by an additional 1.7bp and 1.5bp. German government bonds are lower and didn’t show much reaction to a slowdown in euro-zone wage growth in the second quarter.
In commodities, oil prices are little changed, with WTI near $72 a barrel. Spot gold drops $8 to around $2,504/oz.
Bitcoin is flat and holds just beneath USD 61k, with Ethereum also rangebound just above USD 2.6k.
Looking at today's calendar, the economic data includes July Chicago Fed national activity index and initial jobless claims (8:30am), August preliminary S&P Global US manufacturing and services PMIs (9:45am), July existing home sales (10am) and August Kansas City Fed manufacturing activity (11am). Fed speaker slate empty for the session
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded with a mild positive bias after the gains on Wall St where a downward payrolls revision and the FOMC Minutes further supported the consensus for a September Fed rate cut. ASX 200 edged higher but with gains capped as participants digested a slew of earnings, while data showed an improvement across Australia's flash PMIs although manufacturing remained in contraction. Nikkei 225 marginally outperformed its peers and returned to above the key 38,000 level. Hang Seng and Shanghai Comp. wer e somewhat varied with notable strength in Hong Kong tech stocks after a solid earnings report from Xiaomi, although pharmaceutical stocks and WuXi biologics were at the other end of the spectrum after the latter reported a 24% drop in H1 net, while the mainland remained lacklustre amid growth concerns, trade frictions and a net liquidity drain.
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European bourses, Stoxx 600 (+0.5%) began the session flat/modestly firmer. Indices were choppy following the various PMI releases, but ultimately trudged higher as the morning progressed. European sectors hold a positive bias, albeit with the breadth of the market fairly narrow. Retail takes the top spot, propped up by post-earning strength in JD Sports (+3.1%). Basic Resources lags, paring back some of the strength seen yesterday, in line with a pullback in metals prices. US Equity Futures (ES U/C, NQ U/C, RTY U/C) are flat/firmer, with traders mindful ahead of the beginning of the Jackson Hole Symposium and Fed Chair Powell's speech on Friday.
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MIDDLE EAST
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DB's Jim Reid concludes the overnight wrap
Markets put in another decent performance yesterday, as the S&P 500 (+0.42%) posted a further advance that left it less than 1% beneath its record high from July. The gains happened despite some negative revisions to US payrolls, but given the widespread expectations that they’d be revised down anyway, the news didn’t lead to a big reaction among risk assets. Plus the revisions only affect the numbers up to March, and don’t change our understanding of the more recent figures, which is ultimately what the Fed cares about. Later on in the session, we then received some dovish-leaning minutes from the Fed’s July meeting, which along with the payrolls revisions helped to cement expectations that the Fed would cut rates pretty rapidly over the coming months, with over 100bps of cuts priced in by year-end again.
In terms of the details of those revisions, what we got yesterday was the preliminary estimate for the annual benchmark revisions, which included an -818k downward revision to the March payrolls number. In other words, that means the monthly payroll numbers would be -68k lower if you assume the revisions are spread evenly across the year. Before the revisions, nonfarm payrolls had been running at an average pace of +242k per month over the year to March, so a downward revision that big would mean the pace was actually +174k instead. So these are still steady gains that are well clear of recessionary levels. But they’re noticeably less robust than previously thought, and the revisions have added to the narrative that the labour market is weakening, particularly after the jobs report at the start of the month.
The dovish mood then got a further boost from the minutes of the July FOMC meeting, which solidified the prospects of a September cut. Several FOMC participants even “observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case” for a 25bps cut at the July meeting. And while all of the FOMC supported the decision to keep rates unchanged in the end, a “vast majority” saw a September rate cut as appropriate if data came in as expected. There was also a shift in the economic assessment, as most of the FOMC “remarked that the risks to the employment goal had increased” and “some participants also noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration”.
In response to the payroll revisions and Fed minutes, the most obvious market reaction was that investors dialled up their expectations for Fed rate cuts. For instance, futures are now pricing in 103bps of cuts by the December meeting (+4.3bps on the day). Bear in mind there’s only three meetings left this year, so that’s implicitly pricing in at least one meeting where they deliver a larger 50bp move. The chance of a 50bp move in September also ticked up from 34% to 36% by the close. Those growing expectations of a 50bp rate cut helped to weaken the dollar further, and the dollar index (-0.40%) fell back for a fourth consecutive session to its lowest since December. In turn, front-end Treasury yields moved noticeably lower with the 2yr yield (-5.3bps) down to 3.93%. This was accompanied by a sizeable steepening of the curve, with the 10yr yield (-0.6bps) down marginally and the 30yr (+1.7bps) higher on the day.
When it came to equities, there was a solid performance yesterday. The S&P 500 (+0.42%) saw a moderate but broad advance, with 80% of its constituents higher on the day and its equal-weighted version (+0.71%) posting a new all-time high. Target (+10.34%) was the second-best performer in the index after it reported that comparable sales were up +2% in Q2, ending a run of four quarterly declines. And it was a strong day for small-caps, with the Russell 2000 posting a +1.32% gain. However, there were a few signs of moderate stress, as the VIX index of volatility ticked up +0.39pts to 16.27pts.
Over in Europe it was a similar story, with moderate gains for the major equity indices that left the STOXX 600 up +0.33%. The broad dollar weakness also helped the Euro to strengthen for a fourth consecutive day, closing at a one-year high of $1.1146. At the same time, investors mirrored the US in dialling up their expectation of rate cuts from the ECB, and sovereign bond yields fell to their lowest in months across several countries. For example, yields on 10yr French OATs (-4.0bps) closed at 2.90%, their lowest since May, whilst yields on 10yr Italian BTPs (-3.4bps) closed at their lowest since December.
The dovish narrative about rate cuts got another boost from lower energy prices, which added to the sense that inflationary pressures were easing. For instance, Brent crude oil prices were down another -1.49% yesterday to $76.05/bbl, which is their lowest closing level since January. It now means that Brent crude is negative on a YTD basis again, and the effects have already been seen filtering through to lower gasoline prices. For example, the AAA’s daily tracker of US gasoline prices was down to $3.40 on Tuesday, which is its lowest level since March.
Overnight in Asia, markets have been trading more cautiously as investors look forward to Fed Chair Powell’s speech at Jackson Hole tomorrow. The Nikkei (+0.38%) has posted a decent gain, along with the Hang Seng (+0.40%). But elsewhere things have been more muted, and the CSI 300 (-0.13%), the Shanghai Comp (-0.04%) have both posted modest declines, whilst the KOSPI (+0.02%) has seen little movement after the Bank of Korea left their policy rate unchanged, in line with expectations. Looking forward, US and European equity futures are also pointing lower, with those on the S&P 500 (-0.14%) and the DAX (-0.08%) falling back slightly.
Elsewhere, one of the main highlights today will be the release of the August flash PMIs, which will offer an initial indication of how the global economy has been performing into this month. Overnight, we’ve already had some of those releases, which have painted a stronger picture so far. For instance, Australia’s composite PMI was back up to a three-month high of 51.4. And in Japan, the composite PMI was at a 15-month high of 53.0.
There was very little other data yesterday apart from the payrolls revisions. However, we did get the MBA’s weekly data on US mortgage applications. That showed the number of applications to purchase a home were down to their lowest since February, even though the contract rate fell to 6.50%, which is the lowest since May 2023.
To the day ahead now, and data releases include the August flash PMIs from Europe and the US. In addition, we’ll get the US weekly initial jobless claims and existing home sales for July, whilst in the Euro Area there’s the European Commission’s preliminary consumer confidence indicator for August. From central banks, the ECB will publish the account of their July meeting.