


Global stocks and US equity futures are starting the week lower as investors tread cautiously after the attempted armed uprising in Russia over the weekend, and as we move towards month and quarter-end where stocks are expected to come for sale as part of sizable rebalancing. S&P 500 and Nasdaq futures swung from initial gains to modest losses this morning, declining 0.1% and 0.2% respectively as of 7:30 a.m. in New York. Bond yields are also lower, as the TSY curve steepens amid a capital flight to safety following the latest disappointing German IFO print (88.5, Exp.90.7 didn't help). The Bloomberg dollar index is slightly lower slightly while gold prices rise as investors look for havens. Oil is slightly higher as are natgas, wheat, and gold which may be getting a lift from events in Russia over the weekend; on the other end, base metals including iron ore prices are underperforming on weaker China macro data as well as on China's growing economic gloom. This is another light macro data week before we get ISM/NFP next week; keep an eye on housing data a sector that seemingly completed its recession last year and is now poised to boost GDP growth.
In the premarket, Tesla shares fell 2% after the automaker was downgraded to neutral from buy at Goldman Sachs (full report available to professional subs). Hong Kong-listed shares of Russian aluminum producer United Rusal International PJSC fell almost 9%. Cryptocurrency stocks drop, tracking a dip across Bitcoin as the digital asset slips lower after reaching its highest level in a year last week (Riot Platforms -2.2%, Marathon Digital -2.2%, Coinbase -1.6%)> Here are some other notable premarket movers:
Investors have been growing more anxious that central banks determined to extinguish inflation will keep pushing rates higher and risk breaking fragile economies. Futures on the S&P 500 fluctuated after the index suffered its worst week since March, while yields on benchmark US Treasury yields dropped five basis points.
“As central banks remain hawkish on the back of persistent inflationary pressure, the likelihood of a soft landing is falling,” said Andrew McCaffery, global chief investment officer at Fidelity International, in a note published Monday. “Investors should be wary of taking on too much risk at this late stage of the cycle.”
Meanwhile, markets quickly absorbed the biggest threat to Vladimir Putin’s grip on power in decades. Russian officials met key partners, including in China, a day after Yevgeny Prigozhin halted the advance of his Wagner mercenary group toward Moscow.
“This weekend’s happenings make us realize is that it’s important to have geopolitical hedges in the portfolio, so we’ve always had commodities fulfil that role,” Trevor Greetham, head of multi asset at Royal London Asset Management Ltd, said in an interview with Bloomberg TV. “When there is suddenly a big military event, commodity prices can surge and you’ve got that protection.”
Gas traders braced for more market turbulence, with European gas already seeing the highest volatility since the invasion of Ukraine.
In Europe, the Stoxx 600 dropped 0.4% and on course for its sixth consecutive decline, while Germany’s 10-year benchmark yield tumbled five basis points as latest German IFO data showed the business outlook deteriorated to the lowest seen this year as Europe’s biggest economy struggles to emerge from recession. Banks are the worst-performing sector among Stoxx 600 groups Monday, with Raiffeisen -1%, OTP -0.9%, UniCredit -1.7% all down on Russia exposure fears. Here are some of the most notable European movers:
Earlier in the session, Asian stocks traded subdued after Friday's losses on Wall St owing to weak global PMIs and amid a lack of fresh catalysts to spur markets with weekend newsflow dominated by the brief uprising of the Wagner Group in Russia.
In FX, the Bloomberg Dollar Spot Index falls 0.1% while the Japanese yen tops the G10 intraday rankings, rising 0.4% versus the greenback after more jawboning from the government. AUDUSD was little changed at 0.6680, lagged kiwi all day on cross sales. The Norwegian krone and Canadian dollar outperformed among G-10 currencies as crude oil gained.
In rates, treasuries extended gains in early US session as 10-year note futures push through Friday session highs, following rally in core European rates and the weekend's geopolitical news. Treasury yields richer by 4bp to 6.5bp across the curve with gains led by belly, steepening 5s30s spread by 2.5bp on the day; 10-year yields around 3.69%, richer by 4bps vs Friday close with bunds outperforming slightly in the sector. 30Y TSYs are lowest since May 12 and drop below major moving averages as the 10Y breached its 200-day average. Bunds and gilts also rise. The US auction cycle resumes with $42BN in 2Year paper sold at 1pm ET. The WI yield 4.64% ~32bp cheaper than last month’s, which stopped 1.5bp through the WI level, and exceeds 2Y stops since Feb multiyear high 4.673%. Today's auction is followed by $43 billion 5-year notes Tuesday and $35 billion 7-year notes Wednesday.
In commodities, oil turned higher, with traders alert to the risk that any prolonged turmoil in Russia could reverberate through global oil markets. The country’s war in Ukraine has already upended trade flows, with major consumers in Asia including China boosting imports of Russian energy. WTI rose 0.2% to trade near $69.30. Spot gold adds 0.6% to around $1,932.
Looking at today's calendar, there are no Fed speakers today; we will get June Dallas Fed Manufacturing Activity data at 10:30 a.m., and the US will sell $65 billion 13-week and $58 billion 26-week bills at 11:30 a.m. and another $42 billion 2-year notes at 1:00 p.m. Earnings today include Carnival.
Market Snapshot
Top Overnight News
A more detailed look at global markets courtesy of newsquawk
Asia-Pacific stocks traded mostly subdued after Friday's losses on Wall St owing to weak global PMIs and amid a lack of fresh catalysts to spur markets with weekend newsflow dominated by the brief uprising of the Wagner Group in Russia. ASX 200 was lacklustre with price action rangebound as weakness in the top-weighted financial sector offset the modest gains in real estate and tech. Nikkei 225 lacked decisiveness as participants digested the latest BoJ Summary of Opinions which mostly stuck to the dovish script as it stated it is appropriate to maintain current monetary easing and premature to shift policy, although a member suggested the BoJ must consider reviewing YCC at an early stage even as it maintains easy monetary policy. Hang Seng and Shanghai Comp were somewhat varied with the Hong Kong benchmark kept rangebound, while the mainland underperformed on return from the Dragon Boat Festival where travel spending was below pre-COVID levels to add to the weak domestic demand and slower consumption narrative.
Top Asian news
European bourses trade on the backfoot following on from the soft close in the US on Friday with losses having picked up since the cash open. US equity futures are extending on Friday’s losses as traders continue to debate whether the pullback is a consolidation of recent gains or a more sinister reversal. Tesla is lower by some 2.1% in the pre-market after being downgraded to neutral from buy at Goldman Sachs with GS of the view that the Co.’s long-term outlook is already priced in. Equity sectors in Europe have a slight negative bias with underperformance in the banking sector. Defence names are also enduring a session of losses potentially as a read-across from events in Russia which could bring the end of the Russia-Ukraine conflict nearer.
Top European news
FX
Fixed Income
Commodities
Geopolitics
US Event Calendar
DB's Jim Reid concludes the overnight wrap
Markets will start the week trying to work out what to make of the volatile situation in Russia that saw a remarkable turn late Friday and into Saturday. In truth perhaps the mutiny and then truce, all within 24-36 hours means more political instability longer-term than shorter-term. At one point on Saturday though, when the Wagner group's Prigozhin had his troops march towards Moscow, it felt that there was a lot of potential global market event risk over the next few days. That has perhaps died down but this whole episode probably increases both the positive and negative tail risks a bit. It could increase the risk of escalation by Mr Putin to reinstate an air of authority, or it could leave him vulnerable which could be seen as positive or negative for Europe, Ukraine and wider markets. It's just impossible to tell at this stage.
Looking at the markets this morning, risk sentiment has remained resilient across the Asian region. As I check my screens, the KOSPI (+0.47%) is trading in the green with the Nikkei (+0.20%) and the Hang Seng (+0.12%) rebounding from its opening losses. Equities in Mainland China are sliding with the CSI (-1.00%) and Shanghai Composite (-0.81%) catching down after holidays late last week. Outside of Asia, US stock futures are regaining some ground with those on the S&P 500 (+0.29%) and NASDAQ 100 (+0.34%) edging higher after US stocks posted their worst weekly performance since March. Yields on 10yr USTs are around -1bps lower, trading at 3.72% as we go to press.
Looking forward now, the US PCE (Friday) and Eurozone CPI releases (Wednesday to Friday) are the obvious focal points this week. Rivalling these for top billing, the ECB annual forum in Sintra (Mon-Weds) will feature plenty of speakers, including the heads of the Fed, the ECB, the BoJ and the BoE on a panel together on Wednesday.
Elsewhere German IFO (today), US new home sales and durable goods (tomorrow), results of US bank stress tests (Wednesday), US jobless claims (Thursday), China PMI (Friday), and Tokyo CPI (Friday) are also important with US claims possibly the one to watch most given the recent increase. This increase hasn’t filtered through into continuing claims yet so that is the current shield to worrying about a deteriorating US labour market.
Going through some of the top tier events in a little more detail, let’s start with US PCE on Friday which comes as part of the personal income and consumption report. DB expect the core PCE deflator to soften a tenth on both the monthly (0.3% MoM vs 0.4% last month) and YoY (4.6% YoY from 4.7% last month) readings. Our economists point out that to meet the Fed’s forecast of 3.9% YoY core PCE this year we would need around 27bps of monthly prints into YE. DB actually expects 3.6%. So all else being equal these prints could be the swing factor between 1-2 Fed hikes out to YE in their own dot plots.
Something that could be interesting is the results of the annual US bank stress tests on Wednesday. Those will be closely watched following the regional banking turmoil this spring that resulted in several bank failures as well as lingering concerns over risks to the banking system tied to deposit dynamics and interest rates. For the first time, the stress test will include an "exploratory market shock component", for the largest banks. The "severely adverse scenario" will focus on the effects of "a severe global recession" coupled with turmoil in real estate markets, both commercial and residential, and corporate debt markets. These stress tests are always a double edge sword. Too onerous and they can create their own turmoil, but too loose and they lack some credibility. So an interesting one to watch.
Later in the week, Italy will kick off European CPI releases on Wednesday, followed by Germany on Thursday with France and the Eurozone on Friday. Our European economists' inflation chartbook looks at the latest trends and developments here. The team's forecast for the June Eurozone print due on Friday is 5.8% YoY for headline (vs 6.1% in May) and 5.7% for core (vs 5.3% in May). It will be the last set of inflation readings ahead of the July 27th ECB meeting. See the day-by-day calendar at the end as usual for the full week's docket.
Looking back on last week now, on Friday, we had a round of soft manufacturing PMI data that played on growing fears of recession. In the US, the composite PMI data for June came in below expectations at 53.0 (vs 53.5 expected). Although services were a touch stronger than expected at 54.1 (vs 54.0 expected), manufacturing surprised to the downside at 46.3 (vs 48.5 expected), firmly in recessionary territory after its largest down move since November 2022. The softening in manufacturing was mirrored in Europe, as the manufacturing PMI for the Eurozone in June came in at 43.6 (vs 44.8 expected). The services component also weakened to 52.4 (vs 54.5 expected), bringing the composite down to just barely a sliver above recessionary territory at 50.3 (vs 52.5 expected).
This sustained weakness in manufacturing added to the negative bias to last week’s trading. In US equities, the S&P 500 slipped -0.77% on Friday, and -1.39% week-on-week, its worst week since March. Information technology slightly underperformed on Friday, with the NASDAQ sliding -1.01% on the day, and -1.44% in weekly terms. Over the course of the week, the risk-off tone was more pronounced in Europe, as the STOXX 600 fell back -2.93% (-0.34% on Friday).
In contrast to the sell-off in equities, fixed income rallied across both sides of the Atlantic on Friday as the soft manufacturing data highlighted recession risks and pointed to easing inflationary pressures. The rally was more significant in Europe, as 10yr bund yields fell -14.1bps on Friday to 2.35%, the largest daily decline since late April, erasing gains earlier in the week to be down -12.1bps in weekly terms. US 10yr Treasury yields fell by -6.0bps on Friday to 3.735% (down -2.7bps week-on-week). With the short end rates rally less pronounced, the 2s10s slope turned more negative for the seventh week in a row, standing at -100.6bp for US Treasuries and at -75.3bp for bunds, the latter a new post-1992 low and the former only trading lower for a couple of days (earlier this year) in the last 40 plus years.
Lastly, turning to commodities, oil retreated further on Friday as recession fears revived in the latter half of last week. Brent crude fell back -3.60% last week to $73.85/bbl. This was the largest weekly decline since early May, coming despite a strong rally late on Friday from an intra-day low of $72.11 (-0.39% overall on the day). WTI crude likewise fell back -3.65% week-on-week (and -0.50% on Friday) below $70/bbl to $69.16/bbl. Copper similarly fell back last week amid concerns of soft manufacturing data, down -2.20% (and -2.22% on Friday). In other commodity news, Bitcoin hit its highest price since early June last year, breaching the $30,000 level to hit $31,105 on Friday after gaining +3.74% on the day, and +16.86% over the five working days to Friday, though it has partially reversed Friday’s rise over the weekend standing at $30,298 as we type this morning. Last week’s gains came as the cryptocurrency market speculated on the arrival of new cryptocurrency ETFs delivered by a number of key traditional financial institutions, as reported by Bloomberg.