There is apparently nothing that can stop this relentless tech momentum juggernaut: after the S&P 500 hit another record high on Monday, US equity futures rose again on Tuesday on pace for a fresh all time high as investors awaited fresh dovish hints from Powell on when the Fed's first cut would come (and follows Nikileaks Timiraos' weekend report in the WSJ that September easing is largely assured). As of 8:00am S&P futures were up 0.2%, hitting their 36th record high of the year, with Nasdaq futures rising 0.4% as AI/semi stocks continued their endless meltup. Treasury yields rose 2bps while traders held on to bets for two rate cuts this year. That outlook helped fuel expectations for higher longer-term yields and a steeper curve, even as two-year notes continued to exceed their 10-year counterparts. However, for the curve to materially steepen, the US economy needs to deteriorate decisively enough to push the Fed to lower borrowing costs, Bloomberg argues. The USD is modestly higher while commodities are once again selling off with precious the primary area of safety. Fedspeak is today’s macro focus; Powell speaks at 10am EST.
In premarket trading, all the usual suspects were again up: NVDA +1.25%; MU +1%; INTC +3.6% on the continued AI Chip rally despite Goldman's head of equity research openly unleashing a firestorm of criticism on the "AI bubble"; BAC is up +1% on an upgrade while BP slides 4% as it warned of weaker refining margins/write-downs. Here are some notable premarket movers:
Investors will be closely watching for any hints from the Fed chair about how soon the Fed will be in a position to cut interest rates. A long-awaited pivot to easier policy would provide investors sitting on a record $6 trillion of money-market with an incentive to buy bonds and other assets; validation for a rate cut would come from Thursday's CPI if it prints at or below expectations. Markets are pricing the chance of two rate cuts this year, with a roughly 70% chance of the first in September, according to swaps data compiled by Bloomberg. Powell is also likely to face questions over US plans to force Wall Street lenders to set aside significantly more capital. Reuters reported that regulators are considering a change to its calculations that could save the country’s eight largest banks combined billions of dollars.
“Until they see the Fed truly cutting, there is a level of show-me,” said Anders Persson, chief investment officer at Nuveen. “There’s some skepticism about getting off the cash or money market investments that pay 5% and many retail investors are sitting on and enjoying.”
“With the recent signs of softer growth and labor market, markets will closely watch if Powell gives any hints on the timing of rate cuts,” said Carol Kong, a strategist at Commonwealth Bank of Australia in Sydney. “Market pricing for a September cut can increase and the US dollar can fall further if Powell’s comments are perceived as dovish.”
European stocks reversed Monday gains and dropped 0.4% but were off the lows, as wariness grew over French government spending following the left’s resurgence in the weekend election. France’s CAC 40 underperforms regional peers with a 0.5% fall. Among individual movers, BP fell more than 3% after saying it will take a hit of as much as $2 billion from impairments in second-quarter results. Dassault Systemes SE fell after cutting its full-year earnings forecast. Here are some other notable premarket movers:
Earlier, Asian stocks rebounded as tech shares in Japan tracked their US peers higher. Chinese equities were volatile moving closer to an upcoming key political meeting. The MSCI Asia Pacific Index rose as much as 0.7% on Tuesday, boosted by Japanese names including Sony Group, Hitachi and Tokyo Electron. The Nikkei 225 hit a new record high as the prospects of lower US interest rates helped prop up semiconductor-related stocks. Benchmarks in Australia, Singapore and Indonesia also advanced. Mainland Chinese and Hong Kong shares gained, paring losses from the morning, as investors try to gauge Beijing’s policy direction at next week’s Third Plenum. Fiscal stimulus announced so far has failed to arrest concerns over China’s ailing property market and sluggish macro picture.
In rates, treasuries dip, pushing US 10-year yields up 2bps to 4.30% as investors await Federal Reserve Chair Jerome Powell’s testimony to Congress for further clues on the central bank’s interest-rate outlook. Treasury 10-year yields cheaper by around 2bp on the day with bunds and gilts lagging by additional 2bp and 3bp in the sector; US 2s10s, 5s30s spreads are steeper by 1.5bp and 1bp on the day. European bonds underperform Treasuries, with bunds snapping two days of gains. French bonds lead a sell off in European government debt. US session also includes 3-year note sale, first of this week’s cycle, which also includes 10- and 30-year auctions.
In FX, the Bloomberg Dollar Spot Index also gains 0.1%. The index has dropped 0.7% this month to its lowest since mid-June after successive data prints suggested the US economy is softening. Moves across G-10 FX have been muted with the euro and pound little changed. Yen trades around 161 per dollar.
Oil prices decline, with WTI falling 0.6% to near $81.85 a barrel. Spot gold rises $4 to around $2,363/oz.
Bitcoin gains 2% and climbs back over $57.5k, while Ethereum sits comfortably above USD 3k.
Looking to the day ahead now, and the main highlight will be Fed Chair Powell’s testimony to the Senate Banking Committee. We’ll also hear from the Fed’s Barr and Bowman, and the ECB’s Cipollone. Data releases include the NFIB’s small business optimism index for June from the US. Finally in the political sphere, the NATO leaders summit will get underway in Washington DC.
Market Snapshot
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mixed as the region only partially sustained the positive mood seen in the US where the S&P 500 and Nasdaq 100 extended on record highs, but with upside limited amid a lack of major catalysts ahead of upcoming risk events. ASX 200 traded higher as tech, telecoms and real estate stocks benefitted from slightly softer yields. Nikkei 225 extended on its all-time highs with the advances led by electronic and tech-related stocks. Hang Seng and Shanghai Comp. were subdued as the former continued its recent downward momentum to its lowest in more than two months, while sentiment in the mainland was clouded amid lingering trade frictions and ongoing debt-related concerns.
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European bourses, Stoxx 600 (-0.1%) are mostly lower, having initially opened entirely in the red; the FTSE 100 managed to climb into the green, whilst peers such as the DAX 40 and CAC 40 continued to trundle lower, the latter pair currently reside near lows. European sectors are mixed, and with the breadth of the market to the upside fairly narrow. Basic Resources is near the top of the pile, paring recent losses and with the metals complex also benefitting from a late pick up in sentiment in China. US Equity Futures (ES +0.2%, NQ +0.3%, RTY +0.3%) are entirely in the green, building on the gains seen in the prior session, which saw the S&P 500 and Nasdaq notch record highs. Today, markets will await Fed Chair Powell’s testimony, though he is unlikely to deviate too far away from comments he made at the Sintra conference last week.
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Fixed Income
Commodities
Geopolitics: Middle East
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US Event Calendar
Central Bank Speakers
DB's Jim Reid concludes the overnight wrap
I'm off to Cape Town later today for my first ever work trip there. It snowed there on the outskirts over the weekend so I think I picked the wrong time to go. The last time I went was 20 years ago to watch England play cricket and an ambulance had to meet the plane on the runway on arrival as I was so tired I momentarily fell asleep standing up while waiting for the bathroom. In doing so I fell over and hit a food trolley on the way down and split open my forehead. I got a police and ambulance escort to a local hospital. After getting bandaged up I was sent on my way in time for the test match to start only to then develop a stomach bug that kept me in bed for 2 days. So I missed the first three days of the holiday. Thankfully the cricket was terrible and England got annihilated so I didn't miss much. I'm hoping for a less eventful trip this time around.
You can contrast my lack of resilience 20 years ago with that of the market today as even with the newsflow becoming more negative politically and data wise of late, last night the S&P 500 (+0.10%) edged to its 35th record high this year. For once the equal weight index (+0.18%) slightly outperformed with the small-cap Russell 2000 also doing so in posting a +0.59% gain. In Asia overnight the Nikkei is flying (+2.15%) this morning to a fresh all time high and is now up nearly +24.5% YTD. For Europe there was a bit of weakness yesterday though, with the STOXX 600 (-0.03%) posting a marginal fall, alongside a larger decline for France’s CAC 40 (-0.63%). There were more positive developments on the fixed income front in Europe, as the Franco-German 10yr spread tightened a further -3.0bps after the French election results, just as Euro IG spreads also reached their tightest in over two years.
In terms of the French situation, the results from the second round now leave the situation pretty gridlocked in the National Assembly, with no group close to reaching a majority. The different outlets differ slightly on how they categorise some MPs, but on Bloomberg’s numbers you’ve got the left-wing New Popular Front as the largest party on 178 seats, followed by President Macron’s centrist alliance on 156 seats, and then Marine Le Pen’s National Rally and their allies on 143. But in some ways this has actually been reassuring to markets, at least on the grounds it makes it difficult for any policies to be implemented, with neither the far-left or the far-right able to implement their programme on these numbers.
The -3.0bps tightening in Franco-German 10yr spreads yesterday to 63bps was the tightest it’s been in nearly four weeks (having peaked at 82bps shortly before the first round). But it’s still above the 48bps level from before the snap election announcement, so it’s clear that investors are still pricing in more political risk than they were. Moreover, the CAC 40 (-0.63%) did underperform the other European bourses yesterday, with fresh losses for financials including BNP Paribas (-1.76%) and Société Générale (-1.27%). So a bit of a mixed reaction, although all eyes are now on what sort of government can be formed. France’s current Prime Minister Gabriel Attal offered his resignation on Monday, but this was rejected by President Macron who asked Attal to stay on "for the time being to ensure the country's stability".
Staying on the politics, yesterday saw US President Joe Biden try to prevent any further rebellion against his 2024 election candidacy. He wrote a letter to congressional Democrats, which said that “despite all the speculation in the press and elsewhere, I am firmly committed to staying in this race”. Towards the end of the letter, he also warned that “Any weakening of resolve or lack of clarity about the task ahead only helps Trump and hurts us.” That came alongside a call-in with MSNBC’s Morning Joe, where he challenged his opponents to run against him and challenge at the Democratic convention. Biden is now set to host the NATO leaders’ summit in Washington DC from today, with the convention not taking place until August 19.
When it comes to the US economy, the focus is increasingly on this Thursday’s CPI report for June, and whether that can open the door for a Fed cut as soon as September. Ahead of that, we did get the New York Fed’s Survey of Consumer Expectations, but it painted a mixed picture on inflation expectations in June. On the one hand, 1yr expectations were down to 3.0%, the joint-lowest since October 2020. But on the other, 3yr expectations ticked up to 2.9%.
Looking forward, today's focus will now be on Fed Chair Powell, who’s speaking before the Senate Banking Committee, and then the House Financial Services Committee tomorrow. That’s his usual semiannual testimony before the two committees, and it’ll be interesting to see if he has any commentary on the weaker data of late, including the highest unemployment rate (4.1%) since November 2021. Currently, investors are pricing in two full cuts by the December meeting, above the one cut that the median dot pencilled in back at the June meeting.
With that to look forward to, Treasury yields ticked slightly higher yesterday. The 10yr yield was little changed (+0.1bps) at 4.28%, while the 2yr yield was up +2.4bps to 4.63%. Meanwhile in Europe, there was also a flattening of the curve, but that came alongside a stronger overall performance, with yields on 10yr bunds (-1.6bps), OATs (-4.6bps) and BTPs (-4.6bps) all seeing a clear move lower.
In Asia, outside of the surge in the Nikkei discussed above, the S&P/ASX 200 (+0.77%) and the KOSPI (+0.19%) are also trading higher while Chinese stocks are lagging again with the Hang Seng (-0.44%), the CSI (-0.11%) and the Shanghai Composite (-0.05%) all edging lower. S&P 500 (+0.23%) and NASDAQ 100 (+0.36%) futures are healthily higher for this time of the day.
Early morning data showed that Australia’s NAB Business Confidence rose from a revised reading of -2 to 4 in June, marking its highest level since early 2023 and returning to positive territory. However, Business Conditions fell from 6 to 4.
To the day ahead now, and the main highlight will be Fed Chair Powell’s testimony to the Senate Banking Committee. We’ll also hear from the Fed’s Barr and Bowman, and the ECB’s Cipollone. Data releases include the NFIB’s small business optimism index for June from the US. Finally in the political sphere, the NATO leaders summit will get underway in Washington DC.
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