US equity futures are sliding as bond yields spike to 4.36%, the highest level since November, and the price of Brent crude rises to a new five-month high above $89 driven mostly by supply/demand dynamics but a geopolitical fear premium over the brewing Israel-Iran conflict begins to build, and as fears that the Fed may not cut rates in June start to percolate. The rest of the commodities complex is also pushing higher with strength in metals notable as Ags come from sale and gold jumps right back to all time highs despite the recent strength in the dollar. As of 7:50am, S&P and Nasdaq futures drop 0.4%, as health insurance stocks tumbled after regulators didn’t boost payments for private Medicare plans like the industry had come to expect; Mag7 names are mixed with Semis up small despite NVDA sliding. In Europe, most markets are mostly higher after reopening after the Easter holiday with only Spain in the red: energy, AI, and semis the best performing segments with additional support from banks, as regional curves bear steepen. The risk-on tone in APAC where HK showed significant outperformance. The yield curve is steeper, and the Bloomberg dollar index dropped. Bitcoin slumped after several sharp sell orders hit futures during Asian trading. Today’s macro data focus is on JOLTS and 3x Fedspeakers.
In premarket trading, crypto-related stocks fell with Coinbase Global down 2.5%, as pressure continued to build on Bitcoin, which shed 5% to trade below $67,000, having fallen about 10% from its mid-March peaks. US health insurance stocks were the other big premarket losers, after regulators didn’t boost payments for private Medicare plans like the industry had come to expect. Humana heavily exposed to Medicare, fell 9.2%, while UnitedHealth Group Inc. dropped 4.3%. Here are some other notable premarket movers:
All eyes were on interest rates as 10-year treasury yields rose about three basis points, adding to a 10 basis-point jump on Monday, when data showed an unexpected expansion in US manufacturing for the first time since September 2022. The impact was felt worldwide, with British 10-year yields climbing as much as 12 basis points, and German borrowing costs up almost 10 basis points.
As a result of rising oil price inflation, traders now reckon that the Fed will deliver fewer than three rate cuts this year, a view that could be bolstered if data at the end of this week show the US economy continued to add jobs at a healthy clip in March. They also see a good chance the central bank will push back the timing of its first rate cut, with odds of a June cut briefly falling below 50% on Monday.
Fed Chair Powell, who is due to speak again on Wednesday, said Friday that officials are awaiting more evidence prices are contained, adding that it wouldn’t be appropriate to lower rates until officials are sure inflation is in check. “The Fed is a difficult spot right now because if it eases too soon it could reignite the economy and inflation comes back, but if it doesn’t ease quickly enough, you get a bigger-than-expected economic slowdown,” said Andrew Pease, global head of investment strategy at Russell Investments Ltd. “At the margin, the data noise could convince the Fed to wait beyond June.”
Expectations of higher-for-longer Fed rates kept the dollar close to six-week highs against a basket of Group-of-Ten peers. The yen also stayed in focus, as the Japanese currency slipped further toward the 152-per-dollar level that many traders believe could force authorities’ hand toward intervention.
Markets are also keeping a close eye on geopolitical developments, as an Israeli airstrike on Iran’s embassy in Syria sent gold prices surging to a record high. Oil rallied above $85 as the attack added a risk premium to an already tight market.
European stocks rose but erased much of their earlier gains, with energy and mining stocks keading gains among sectors as US crude futures hit $85 a barrel for the first time since October, while real estate and media stocks laggedThe Stoxx 600 adds 0.1%, but well of earlier highs, while the FTSE 100 earlier topped 8,000 for the first time since February 2023. Here are the most notable European movers:
Earlier in the session, Asian stocks gained rebounding after Monday’s slump, with technology stocks climbing and Hong Kong posting strong gains as the market reopened following holidays.The MSCI Asia Pacific Index climbed as much as 0.6%, with chipmakers TSMC and Samsung among the biggest contributors. Hong Kong benchmarks gained more than 2%, leading the region higher, while mainland China stocks drifted lower after a three-day gain on improving economic data. Japanese stocks were mixed. Key gauges advanced in Taiwan, Singapore, South Korea and the Philippines.
“China is one of the most under-owned equity markets globally, so there is definitely some catch-up,” Stephanie Leung, chief investment officer at StashAway, told Bloomberg TV. “Leading indicators are telling us that China has already seen its worst in terms of cyclical downturn,” she said.
In FX, the Bloomberg Dollar Spot Index erased earlier gains, while Treasury yields extended yesterday’s sharp selloff and European bonds fell, catching up with Monday’s drop in USTs
In emerging markets, the Turkish lira surged against the dollar after President Recep Tayyip Erdogan indicated his economic team will be allowed to stay the course with orthodox monetary policies, despite a rout for the ruling party in local elections over the weekend.
In rates, treasuries extended Monday’s aggressive selloff, sending 10-year yields to four-month highs over 4.36%. Yields are near cheapest levels of the day in early US session amid latest rise in oil futures, up nearly 2% at highest level since October. Yields are cheaper by 2bp-6bp across the curve with front-end outperformance steepening 2s10s spread by 4bp; 10-year yields around 4.36% are more than 5bp higher on the day, while core European government bonds drop, echoing the sharp decline in Treasuries on Monday. Bunds did pare losses after German state CPI numbers suggested a slightly lower-than-forecast national reading. German 10-year yields rise 7bps to 2.37%. WTI crude oil futures over $85/bbl are a source of upward pressure on Treasury yields, along with technical factors as 10-year tests 4.35%. Fed-dated OIS rates are little changed, pricing in around 14bp of rate cuts for June meeting; further out, around 63bp of cuts remain priced in for December FOMC.
Pressure continues to build on Bitcoin, which shed 5% to trade below $67,000, having fallen about 10% from its mid-March peaks. Crypto-related stocks fell in US premarket trading, with Coinbase Global down 2.5%.
In commodities, crude futures pierced $85 for the first time since October, the latest milestone in a market that has rallied against a backdrop of OPEC+ cuts, strong demand and heightened geopolitical risk. WTI added as much as 1.8% in New York, while the global Brent benchmark neared $89 a barrel, after Iran vowed revenge on Israel after blaming it for a deadly air strike on its embassy in Syria — a rare direct confrontation in the adversaries’ escalating proxy conflict over the war in Gaza. Israel “will be punished. We will make them regret their crime,” Iran’s Supreme Leader, Ayatollah Ali Khamenei, said on Tuesday, according to the state-run Islamic Republic News Agency. Spot gold rises 0.5% to a new record high.
Looking at today's calendar, the US economic data slate includes February JOLTS job openings and factory orders (10am) along with four scheduled Fed speakers: Bowman (10:10am), Williams (12pm), Mester (12:05pm) and Daly (1:30pm)
Market Snapshot
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mixed with price action mostly rangebound after the weak performance on Wall St where hot ISM Manufacturing PMI data saw markets trim Fed rate cut bets. ASX 200 initially printed a fresh record high but then pared its gains as strength in the commodity-related industries was offset by losses in the consumer-related sectors, while RBA Minutes did little to spur price action. Nikkei 225 was choppy and failed to sustain a brief foray back above the 40,000 status. Hang Seng and Shanghai Comp. were mixed in which the Hong Kong benchmark outperformed as it played catch up on return from the Easter holiday closures, while the mainland was indecisive after a tepid PBoC liquidity operation.
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European bourses, Stoxx600 (+0.1%) began the session on a firm footing and rose further at the open before the upside eventually petered out. A modest dovish reaction was seen following the German State CPIs, though this faded as indices succumbed to broader but equally as modest pressure. European sectors hold a slight negative tilt; Basic Resources and Energy are the clear outperformers, propped up by broader strength in underlying commodity prices. Real Estate lags, hampered by the higher yield environment. US Equity Futures (ES -0.1%, NQ -0.1%, RTY U/C) are slightly lower continuing the losses seen in the prior session (sparked by the hot US ISM Manufacturing data). Crypto-exposed stocks are lower in the pre-market after an over 5% drop in Bitcoin.
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FX
Fixed Income
Commodities
Geopolitics: Middle East
Geopolitics: Other
US Event Calendar
Central Bank Speakers
DB's Jim Reid concludes the overnight wrap
Welcome back to all those in Europe that enjoyed the long Easter weekend. With Jim off skiing in the Alps, and trying to avoid adding to his injuries in the process, Henry and I are filling in on the EMR duties for a couple of weeks. Markets will be hoping to avoid any accidents of their own after a strong Q1 for risk assets. While most European markets were closed yesterday, the first session of Q2 was a challenging one for US markets.Treasuries saw their weakest session in several weeks, with 10yr yields up by +11.0bps, as stronger manufacturing ISM data reignited doubts over the extent of Fed rate cuts this year.
Before reviewing these latest moves and previewing the rest of the week ahead, let us recap the notable milestones we saw for risk assets in Q1. With the start of a new month, Henry just published our usual performance review of how different assets fared over March and Q1 (see here). Several equity indices posted record highs, with the S&P 500 up more than +10% in Q1, marking the first time in over a decade that it’s seen back-to-back quarterly gains in double digits. Meanwhile in Japan, the Nikkei saw its strongest performance since Q2 2009, and surpassed its previous record high from 1989. But even as risk assets did well, bonds saw a weaker performance, as more persistent inflation and the strength of the economy led investors to price in fewer rate cuts.
Since the start of the year we’ve regularly highlighted the challenge faced by central banks, especially the Fed, in calibrating their expected easing cycles. My report last week noted how credit conditions suggested higher risks of a delay to the start of rates easing in the US than in Europe (see here for more), while Henry has previously noted how market expectations of a dovish shift have already been delayed several times in this cycle. Prospects for delayed Fed cuts were again a key theme yesterday after an upside surprise in the March manufacturing ISM. The headline reading rose to 50.3 (vs. 48.3 expected), its first above-50 print since September 2022, while the employment recovered to 47.4 (vs. 47.5 expected) from a seven-month low of 45.9. Most concerning from the inflation perspective, ISM prices paid jumped to 55.8 (vs. 53.0 expected), their highest level since July 2022.
This came in some contrast to the core PCE inflation print out while markets were closed on Friday. The February core PCE deflator (+0.26% vs. +0.3% expected) remained somewhat elevated but eased considerably after the +0.45% January print, with the annual print slowing by a tenth to 2.8%. Following the PCE print, Fed Chair Powell commented on Friday that the data were “pretty much in line with our expectations", while also noting that “we don't need to be in a hurry to cut”. Our US economists note that 20bps prints for March and April would lower annual core PCE inflation to 2.5%, which they would see as just enough progress for the Fed to begin rate cuts at the June meeting.
Fed funds pricing of a June cut neared fifty-fifty intra-day yesterday after the ISM print before closing at 62%. That’s down from just over 70% this time yesterday and 77% last Wednesday, prior to hawkish comments from Fed Governor Waller.The amount of Fed cuts priced by year-end fell to 67bps, its lowest since the end of October, pricing out half of a 25 bps cut since last Wednesday.
Treasuries sold off across the curve yesterday, with 10yr yields rising +11.0bps to 4.31%, their sharpest rise since mid-February. 2yr yields were +8.5bps higher at 4.71%. While the stronger ISM reading was the key trigger, the sell-off was probably exacerbated by technical factors, given thinner liquidity amid the holiday in Europe and a jump in corporate bond issues on Monday. 10yr Treasury yields are trading -0.5bps lower overnight as I type.
The rise in yields weighed on US equities. The S&P 500 was down a modest -0.20% but this was a broad decline with 73% of constituents down on the day and the equal weighed version of the index falling by -0.61%. The Dow Jones (-0.60%) and the small-cap Russell 2000 (-1.02%) underperformed. By contrast, tech stocks were resilient, as the NASDAQ (+0.11%) and the Magnificent 7 (+0.63%) posted gains, the latter boosted by a +3.02% rise for Alphabet. US equity futures are trading marginally lower overnight.
On the other hand, t he US dollar benefitted, with the broad dollar index (+0.51%) rising to its highest level since November. In commodities, Gold posted a new all-time high at $2,238/oz (+0.37% yesterday following on a +2.98% gain last week), while WTI crude oil closed at its highest level since October (+0.65% to $83.71/bbl), in part amid renewed concerns over the conflict in the Middle East after an Israeli strike against an Iranian consulate in Syria. WTI crude futures are trading half a percent higher at above $84/bbl overnight.
Over in Asia, equity markets are mostly trading higher this morning despite a weak handover from Wall Street overnight. The Hang Seng (+2.19%) is leading gains after resuming trading from a long weekend and powered by a rally in Xiaomi (+10.71%) as the company began taking orders for its newly launched electric vehicle. Elsewhere, the Chinese stocks are mixed, at -0.25% for the CSI and +0.03% for the Shanghai Composite. China stocks had notched their biggest daily gain in a month yesterday after the latest manufacturing PMI data reinforced economic recovery hopes in the world’s second biggest economy. Meanwhile, the Nikkei is near flat (-0.03%) with a slight reversal after reclaiming the 40,000 points mark earlier in the session, while the KOSPI (+0.12%) is seeing minor gains.
Today was on the lighter on the data side in Asia, with one release of note being Australia’s manufacturing PMI, which fell from 47.8 to 47.3 in March, its lowest since May 2020. It was a busier data docket in Asia on Monday. In China, the Caixin/S&P Global manufacturing PMI rose from 50.9 to 51.1 in March, with manufacturing activity expanding at its fastest pace in 13 months and corroborating the 11-month high in the official manufacturing PMI over the weekend. China’s Caixin services PMI scheduled to release tomorrow will grab market attention. Elsewhere, the BoJ’s Tankan Survey for Q1 showed sentiment among Japan’s largest service-sector firms advance to its highest level in more than three decades at +34 (vs. +32 expected). Business confidence among major manufacturers' did weaken for the first time in four quarters following a sharp drop in the auto sector caused by production cuts, but the reading was still a touch above expectations at +11.0 (vs +10.0 expected).
In FX, t he Japanese yen is trading at 151.78 versus the dollar, within touching distance from its 34-year low of 151.975 seen last week amid possibility of intervention from the Japanese authorities. Meanwhile, remarks from Japanese Finance Minister Suzuki this morning did little to support the yen as he reiterated that officials are keeping their powder dry as they watch how currency moves play out.
In central bank news, the minutes of the Reserve Bank of Australia’s (RBA) March meeting confirmed that for the first time in the current cycle the RBA did not discuss additional interest rate increases. The minutes indicated that the board members acknowledged the need for more time to assess the inflation trajectory before considering future rate change, and emphasized that overall financial conditions remained restrictive, particularly for households.
Looking forward to the rest of the week, today and tomorrow will first see focus on European inflation data, with the flash March inflation print for Germany this morning followed by the euro area release tomorrow. Friday saw both France’s (+2.4% yoy vs +2.8% expected) and Italy’s (+1.3% vs. +1.5% expected) inflation releases come in below expectations on the EU-harmonised measure. Our European economists see the euro area inflation print tracking at +2.5% headline and +3.0% core (vs +2.6% and +3.1% previous). While only a marginal slowing in the annual rate, this would offer a degree of relief after upside core inflation surprises in the January and February prints. This morning we also get the latest colour on inflation expectations from the ECB’s February consumer expectations survey.
Over in the US, the highlight of the week will be the March jobs report on Friday. Our US economists see headline payrolls coming in at +200k (vs. +275k previously), with unemployment falling a tenth to 3.8%. Coupled with an uptick in hours worked and a +0.2% rise in average hourly earnings, their expectations would equate to the payrolls-based compensation growth proxy running at a strong pace of just above 5% annualized in Q1. So very much consistent with a solid labour market persisting at the start of 2024.
Ahead of payrolls, today’s JOLTS report for February will give other important labour market colour. Powell has often referenced the job openings to unemployed ratio when assessing labour market normalisation, while our rates strategists have highlighted the quits rate, which has now declined to near its historical average, as arguably the most reliable indicator for real wage growth. We’ll also pay extra attention to the services ISM tomorrow, including its employment and prices paid components.
Last but by no means least, central bank speakers will be in focus, most of all with Fed Chair Powell speaking tomorrow. With a speech dedicated to the economic outlook, we might expect a carefully worded message. We will also hear from a host of other Fed speakers, including trios of regional Fed presidents speaking on both Tuesday (New York Fed President Williams, Cleveland's Mester and San Francisco's Daly) and Thursday (Chicago's Goolsbee, Philadelphia's Harker and Richmond's Barkin). Over in Europe, we have the ECB’s de Cos speaking on Wednesday and the accounts of the March ECB meeting being published on Thursday.
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