US equity futures and global markets slumped for a 4th day as policy tightening fears from the US to Norway to Switzerland to the UK hobbled the recent bull run which sent US stocks to a 52-week high last Friday. At 7:45am, S&P 500 and Nasdaq futures were down 0.3% following a selloff on Wall Street on hawkish warnings by Fed Chair Jerome Powell in testimony to Congress. The Bloomberg dollar index was higher with the Norwegian krone outperforming among Group-of-10 currencies. Treasury yields edged higher across the curve, mirroring mild increases in the UK and Europe. Brent crude slid nearly 1%, gold fell and Bitcoin topped $30k amid optimism over ETFs related to the token but has since reversed back under after today’s tightening barrage. Today’s macro data focus includes Jobless data, Home Sales, regional mfg activity, and the leading index. Powell speaks at 10am and there are 4x other Fedspeakers.
In premarket trading, Tesla shares dropped more than 2%, set to extend losses to a second session, after Morgan Stanley joined Barclays in downgrading the stock to equal-weight from overweight.
Here are some other notable premarket movers:
- Alcoa Corp. shares are down 2.3% in premarket trading after Morgan Stanley downgraded the aluminum company to underweight from equal-weight.
- Boeing Co. shares are 1.9% lower as its biggest supplier suspended production after union workers voted to strike, in a surprise development that risks disrupting the planemaker’s plan to hike output of its cash-cow 737 Max jet.
- Nvidia falls as much as 1.4% in premarket trading as the biggest gainers of 2023, including Meta and Tesla, take a breather, set to extend losses to a second consecutive session.
- Root shares jump 60% in premarket trading after the Wall Street Journal reported on Wednesday that Embedded Insurance has offered to acquire the car-insurance startup for $19.34 a share, citing unidentified people.
All industry subsectors fell into the red in Europe, where the region’s key Stoxx 600 index slumped about 1%, extending declines to a fourth day. UK stocks stayed lower after the Bank of England raised its benchmark rate by more than economists’ expectations, stepping up its fight against the worst bout of inflation since the 1980s and warning it may have to hike again. Here are the most notable European movers:
- Ocado shares jump as much as 22% following a story in the Times published late Wednesday that mentions “speculation of bid interest,” without saying where it got the information
- Anheuser- Busch InBev shares advance as much as 1.1% after Deutsche Bank upgrades its recommendation on the stock to buy, seeing an “attractive entry point for a quality company”
- MTG gains as much as 9.9% after Handelsbanken reiterated its short-term buy recommendation for the Swedish gaming media group, saying the company is on a “fast track to recovery”
- SES shares gain as much as 5.9% after ending talks with Intelsat, with analysts saying the outcome is positive as the satellite company can now focus on returning cash to shareholders instead
- Valmet drops as much as 6.1%, its sixth straight decline and to lowest in six months, after Danske Bank downgrades the industrial equipment and service provider to hold and notes increased risks
- Electrolux shares fall as much as 6.8% after Bloomberg News reported that Midea had dropped its pursuit of the Swedish home appliance maker after discussions with the firm and its top shareholder
- Novo Nordisk shares fall as much as 3.2% after Danish newspaper BT reported the EMA is investigating a possible link between the firm’s Wegovy and Ozempic drugs, and thyroid cancer
- Idorsia falls as much as 5.4% after Morgan Stanley resumes coverage at underweight. The broker says it prefers caution until there are signs of accelerating sales for lead insomnia drug Quviviq
Central banks’ battle with inflation far from over as inflation proves to be far stickier than they predicted just two years ago, and thwarting bets that tightening cycles were set to wind down. That’s prompted investors to rethink animal spirits unleashed by last week’s Fed rate pause. “Recession risks are arguably higher if rates are higher for longer, but risk assets are not reflecting that,” said Janet Mui, head of market analysis at RBC Brewin Dolphin. “Markets are re-assessing whether further risk taking is justified after the year-to-date-rally.”
In the US, hard-landing fears re-established themselves amid the prospect of tighter policy, pushing the inversion of a key segment of the Treasury yield curve to a full percentage point for the first time since March.
As noted earlier, the BOE lifted its policy rate by 50 basis points to 5% as it struggles to contain inflation that rose by 8.7%, higher than expected for a fourth month. Money market pricing now implies the BOE’s benchmark will reach 6% by the end of the year, which would be the highest since the turn of the century.
“The UK has the unenviable title of highest core inflation rate in the G7, and by quite some margin,” said Seema Shah, chief global strategist at Principal Asset Management. “It requires the central bank to adopt a clearly hawkish attitude that signals further sizeable moves over the coming months.n. A sharper slowdown of the UK economy will be an unfortunate, but necessary, fallout from monetary policy.”
Earlier, Norway’s central bank lifted its key deposit rate by 50 basis points to 3.75%, the 11th hike in its benchmark since September 2021. Officials said the rate will “most likely be raised further in August” and forecast a peak rate of 4.25% later this year. By contrast, the Swiss National Bank delivered the smallest interest-rate hike since it began monetary tightening a year ago, lifting its key rate by a quarter-point to 1.75%. Swiss inflation is the slowest of any advanced economy. Turkey’s central bank hiked significantly less than most economists expected, a sign that policymakers will favor a gradual transition from an era of ultra-cheap money.
Earlier in the session, Asian stocks stopped a three-day losing streak, as investors assessed remarks from Federal Reserve officials on the trajectory for US interest rates. The MSCI Asia Pacific Index climbed as much as 0.3% as Japanese benchmarks advanced, with the Topix rising to a fresh 33-year high. Markets in Greater China, which have been a drag on sentiment in the region this week as the stimulus trade faded, were closed for a holiday.
- China is closed for holiday
- ASX 200 was pressured with weakness across all sectors and as tech conformed to the underperformance stateside.
- Nikkei 225 traded negatively but with the downside limited by recent currency weakness and after BoJ Board Member Noguchi echoed the central bank’s dovish tone in which he noted that the central bank’s new guidance is showing a strong commitment to patiently keeping easy policy and what’s most important is to ensure momentum for wage growth becomes trend by maintaining easy policy.
- KOSPI was positive with the index underpinned by investment-related headlines including reports that European companies pledged investments in South Korea related to batteries, future cars and other cutting-edge industries.
“Fed Chair Powell continued to make a case for two more rate hikes but other Fed member commentaries leaned dovish,” Charu Chanana, market strategist at Saxo Markets, wrote in a note. Stocks in the Philippines headed for correction territory amid a government tax plan on snacks and sweetened beverages. The Thai equity benchmark was poised for its lowest close in 27 months, amid a selloff by foreign funds as political concerns following the nation’s May election continued to sour sentiment for the country’s stocks. Optimism on impending Chinese stimulus, which had supported domestic and regional shares earlier in June, has faded after a series of disappointing announcements over the past week. However, the MSCI Asia gauge is still up more than 5% this month
In FX, the dollar is marginally softer against most FX majors; Aussie at the bottom of G-10 scoreboard. Treasury 10-year yield broadly steady near 3.72%. JGB futures pare opening gains to trade little changed after solid 5-year auction. Aussie curve inverts again with 10-year yield about 3.5bps lower.
In commodities, WTI crude muted around $72.30; gold similarly quiet near $1,933. Bitcoin remains above $30k following Wednesday’s strong rally.
To the day ahead now, and the main highlight is the Bank of England’s latest policy decision which as noted earlier was a surprising 50 bps rate hike. In addition, we’ll hear Fed Chair Powell’s testimony to the Senate Banking Committee, along with the Fed’s Waller, Bowman, Mester and Barkin, ECB Vice President de Guindos and the ECB’s Panetta. Otherwise, US data releases include the weekly initial jobless claims, existing home sales for May, the Conference Board’s leading index for May, and the Kansas City Fed’s manufacturing activity index for June. In addition, there’s the European Commission’s preliminary consumer confidence for the Euro Area in June.
- S&P 500 futures down 0.2% to 4,400.00
- MXAP down 0.1% to 166.06
- MXAPJ down 0.2% to 521.84
- Nikkei down 0.9% to 33,264.88
- Topix little changed at 2,296.50
- Hang Seng Index down 2.0% to 19,218.35
- Shanghai Composite down 1.3% to 3,197.90
- Sensex little changed at 63,491.22
- Australia S&P/ASX 200 down 1.6% to 7,195.49
- Kospi up 0.4% to 2,593.70
- STOXX Europe 600 down 0.9% to 452.79
- German 10Y yield little changed at 2.45%
- Euro little changed at $1.0991
- Brent Futures down 0.7% to $76.61/bbl
- Gold spot down 0.3% to $1,926.72
- U.S. Dollar Index little changed at 102.08
Top overnight news
- Washington-Beijing tensions set to ratchet up even further as the White House turns its attention toward curtailing China’s cloud giants. NYT
- India’s stock market spikes as investors increasingly embrace the narrative that the country is set to overtake China as the world’s economic growth engine (and it helps that India doesn’t have the geopolitical risks swirling around China). FT
- Norway’s central bank has raised its main interest rate by 50bps (vs 25bps expected) to 3.75 per cent and said borrowing costs are “most likely” to be lifted further in August after inflation overshot expectations. FT
- The head of Germany’s central bank has warned inflation is a “very greedy beast” and it would be a “first-order error” to stop raising interest rates even if it keeps falling in the coming months. Joachim Nagel, president of the Bundesbank, on Wednesday said some central banks in the past had given up too early in the fight against inflation and it was his “intention that we should really prevent this” from happening in the eurozone. FT
- Ukraine warns that its gas transit deal w/Russia’s Gazprom could end when the current contract expires in 2024 (this is one of the last arteries supplying gas from Russia into Europe and accounts for ~5% of the latter’s supply). FT
- Britain’s red-hot inflation is set to force the BOE to step up the pace of rate hikes again today. It’s expected to push ahead with a 25-bp rise to 4.75% — though money markets put a 40% chance on a 50-bp increase. Officials won’t lay out full new forecasts until August, but today’s minutes will be scrutinized for any signals on the outlook and what the BOE might do about it. BBG
- Deutsche Bank CEO Christian Sewing said he expects trading results to improve in the second half. Citing “momentum” in fixed income, he told Bloomberg Television that traders should see “a slight recovery” this year. He also said the bank is committed to returning €8 billion to shareholders. BBG
- India is expected to purchase state-of-the-art U.S. drones and jointly produce jet-fighter engines in a multibillion-dollar deal designed to wean New Delhi off arms purchases from Russia. WSJ
- Twitter Chief Executive Linda Yaccarino intervened to help repair the relationship between the social-media company and Alphabet’s Google after a payment issue, a person familiar with the matter said, an early example of the new CEO’s management style. Twitter is now paying Google for its cloud services after not consistently paying some of those bills, people familiar with the matter said. Those bills amounted to more than $20 million a month recently. WSJ
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly lower following the tech-led declines on Wall St and with risk appetite also constrained by key holiday closures with markets across the Greater China region shut for the Dragon Boat Festival. ASX 200 was pressured with weakness across all sectors and as tech conformed to the underperformance stateside. Nikkei 225 traded negatively but with the downside limited by recent currency weakness and after BoJ Board Member Noguchi echoed the central bank’s dovish tone in which he noted that the central bank’s new guidance is showing a strong commitment to patiently keeping easy policy and what’s most important is to ensure momentum for wage growth becomes trend by maintaining easy policy. KOSPI was positive with the index underpinned by investment-related headlines including reports that European companies pledged investments in South Korea related to batteries, future cars and other cutting-edge industries.
Top Asian news
- China’s Commerce Minister said China is willing to push forward economic and trade ties with France.
- White House economic adviser Bernstein said he expects US relations with China will improve and also commented that where the US is now looks nothing like a recession.
European bourses trade on the backfoot with selling pressure having picked up since the cash open without a clear fundamental driver. US equity futures are also softer on the session, albeit to a lesser extent than European peers with the ES just about holding around the 4400 mark. Equity sectors in Europe are lower across the board with selling pressure most prominent in Banking, Autos and Travel & leisure names. In terms of individual movers, Ocado (+42%) is by far the best performer in the Stoxx 600 amid speculation in The Times that Amazon (AMZN) could be a potential suitor – Amazon declined to comment.
Top European News
- Boeing’s Biggest Supplier Suspends Output After Strike Vote
- Ukraine Recap: Double Bridge From Crimea to Mainland Damaged
- SNB Dials Down Interest-Rate Hike But Says More Increases Likely
- China’s Chesir Said to Eye Merck KGaA’s €1 Billion Pigments Arm
- Norway Raises Rate by Half Point to Ramp up Inflation Fight
- US Welcomes EU’s Security Strategy on China, Envoy Says
- Ocado Shares Jump After Times Report Citing Bid Interest
- DXY sits in a tight range on either side of 102.00.
- GBP, NZD, CAD are all firmer against the USD, the former ahead of the BoE announcement at noon London time.
- Yen continues to track Treasuries relative to JGBs following another BoJ official reading from the dovish script.
- Aussie one again resides as a laggard, while Chinese markets were closed overnight.
- Euro eventually reclaimed 1.10+ status against the Dollar, with hefty in-the-money OpEx for the NY cut.
- Bunds reversed through Wednesday’s low before finding some underlying support at 133.04.
- Gilts are losing more momentum as the clock ticks down to high noon at the BoE that is evenly priced to stick with 25bps or go large at 50bps.
- The T-note is nearer to its intraday trough than its peak ahead of US jobless claims, existing home sales and more Fed speak.
- Deutsche Bank CEO Sewing sees fixed income recovery in Q3/Q4, via BBG TV.
- WTI and Brent August futures have tilted negative in tandem with the broader risk appetite but, in the bigger picture, remain choppy within tight ranges as markets brace for a heavy central bank day as eyes now turn to the BoE.
- Spot gold is relatively flat under USD 1,930/oz, with the Dollar index also contained, in the run-up to the aforementioned central bank events on the docket.
- Base metals are now mostly firmer (vs mostly softer around the European cash open) despite the subdued risk appetite and relatively flat Dollar.
- IEA’s Birol said the IEA still sees tight oil market in H2 even with a sluggish China; very little new LNG coming onto market this year, according to Bloomberg.
- SNB hiked its Policy Rate by 25bps to 1.75%, in-fitting with analyst expectations but shy of market pricing which leaned towards 50bps. SNB said cannot be ruled out that additional rises in the SNB policy rate will be necessary, and added in the current environment, the focus is on selling foreign currency. Click here for the full release.
- SNB Chairman Jordan said most likely we will have to tighten monetary policy again, but we can also take a more gradual approach, according to Reuters.
- SNB Financial Stability Report: In the SNB’s view, going forward, banks should be required to prepare a minimum amount of assets that can be pledged at central banks. Inflation and interest rates should remain lower than in other advanced economies.
- Norges Bank hiked its Policy Rate by 50bps to 3.75% vs expectations for a 25bps hike to 3.50%. Norges said the current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August. Click here for the full release.
- Norges Bank Chief said significant uncertainty regarding the Crown currency development; Crown exchange rate weaker than models can explain, according to Reuters.
- US National Security Adviser Sullivan is to travel to Denmark this weekend to meet representatives from India, Brazil and other countries that have not condemned Russia’s invasion of Ukraine in an effort to boost support for Kyiv, according to FT.
- US Coast Guard ship transited Taiwan Strait following Secretary of State Blinken’s China visit, according to Reuters.
- Russian gas flows through Ukraine could stop next year as the Ukrainian energy minister stated that a renewal of the five-year transit contract to supply Europe was unlikely, according to FT.
- German Chancellor Scholz on China talks, says we warned against any changes to territorial status quo by force, particularly in Taiwan, according to Reuters.
- US and India are to sign major deals on fighter-jet engines, and drones during PM Modi’s visit, according to a US official cited by AFP
US Event Calendar
- 08:30: June Initial Jobless Claims, est. 259,000, prior 262,000
- 08:30: June Continuing Claims, est. 1.79m, prior 1.78m
- 08:30: 1Q Current Account Balance, est. -$218b, prior -$206.8b
- 10:00: May Existing Home Sales MoM, est. -0.7%, prior -3.4%
DB’s Jim Reid concludes the overnight wrap
The last 24 hours proved to be another tough session for markets, by recent standards at least, with both the S&P 500 (-0.52%) and the STOXX 600 (-0.50%) down for a 3rd consecutive day. This was the first time since the May 4th and June 9th respectively. There were several factors behind this, including some hawkish remarks from Fed Chair Powell as he reiterated the Fed’s intention to keep hiking rates. That meant investors again moved to price out the prospects for 2023 Fed cuts. But on top of that, we had several bad macro headlines from the UK, where another upside inflation surprise ramped up the pressure on gilts once again, and led to growing concerns that stagflation was on the cards.
It’s difficult to stress just how bad that UK release was yesterday, since both headline and core CPI surprised on the upside for a 4th consecutive month. That left headline CPI at +8.7% (vs. +8.4% expected), and in many respects the more worrying story was core CPI hitting a 31-year high of +7.1% (vs. +6.8% expected). This persistence for both headline and core is now making the UK a real outlier on inflation, with the highest rate in the G7 by some margin. For instance, headline Euro Area inflation “only” stood at +6.1% in May, and if you calculate US inflation on the same basis as Europe does, then the comparable headline measure is now down to just +2.7%.
With that upside CPI in hand, investors started to fully price in a 6% Bank Rate over the coming months, which is the first time that’s happened since the mini-budget turmoil last September. Unsurprisingly, this prompted a sizeable selloff for gilts too, though the 2yr yield (+9.3bps) at 5.05% remained a little below its post-GFC high reached this Monday. And if that wasn’t enough, we also found out yesterday that the UK debt-to-GDP ratio surpassed 100% of GDP in May for the first time since March 1961. For a sense of how long ago that was, it was a month before Yuri Gagarin became the first man in space and was also the last time Spurs were on course to win the league title.
That backdrop sets us up for the Bank of England’s latest policy decision today at 12pm London time. There’s little doubt that they’ll deliver another hike, but since the CPI print there’s been growing questions about a potential 50bp move today, or alternatively if they might signal bigger moves at future meetings. Current market pricing is suggesting there’s a 37% chance of a 50bp move. But looking over the June and August meetings together, we’ve got 76bps of rate hikes priced, so that implies markets are fully pricing in a larger move for one of the next two decisions. Our UK economist is sticking to his 25bp call for today’s meeting, but thinks the sticky inflation raises the hawkish risks. See his latest blog here.
Central banks were in focus elsewhere yesterday, since Fed Chair Powell was testifying before the House Financial Services Committee. In many respects his remarks were similar to those from last week’s FOMC decision, and he reiterated that “the process of getting inflation back down to 2 percent has a long way to go”. Among other Fed speakers, Chicago Fed President Goolsbee noted that the decision to keep rates on hold in June “was a close call”, a hawkish-leaning comment for one of the more dovish FOMC members this year. Meanwhile, Atlanta Fed President Bostic (non-voter) said that “the bar to justify further rate hikes is higher than it was a few months ago” and that his baseline was to hold rates through year-end, implying that he was one of the just two FOMC members in the June dot plot that expected to keep rates on hold in 2023. However, Bostic added that he did not expect a rate cut for “most of 2024”.
For markets, the main takeaway was anticipating a Fed that stays higher for longer. While futures moved to price in marginally less chances of a hike in July (from 74% to 69%), there was growing scepticism that the Fed would be cutting rates at all this year, and the rate priced in by the December meeting closed at 5.23% (+1.2bps), just shy of the post-SVB’s highs reached on Monday of 5.24%. On the back of this, 2yr Treasury yields (+3.05bps to 4.715%) sold off, while the 10yr yield was just lower than unchanged on the day, -0.2bps at 3.719%. The 2s10s slope thus reached a new post-SVB low of -100.4bps. Those concerns were evident among equities too, where the S&P 500 (-0.52%) fell for a third consecutive day. Tech stocks led the decline, with the NASDAQ (-1.21%) and the FANG+ index of megacap tech stocks (-2.41%) underperforming. That said, volatility remained incredibly subdued, with the VIX index falling back to 13.2pts, which is its lowest closing level since January 2020.
Back in Europe, markets followed a similar pattern yesterday, with bonds and equities both losing ground. By the close, yields on 10yr bunds (+3.0bps), OATs (+3.5ps) and BTPs (+2.0bps) had all risen, which came as investors fully priced in two further hikes from the ECB over the months ahead. At the same time, the STOXX 600 shed -0.50%, with tech stocks leading the declines once again.
Asian equity markets are mixed this morning amid thin trading due to a holiday in Hong Kong, mainland China and Taiwan. As I type, the KOSPI (+0.35%) is seeing gains with the Nikkei fairly flat. The S&P/ASX 200 (-1.57%) is sharply down, extending its losses for a second day due to a sell-off in technology and mining stocks. Outside of Asia, US stock futures are indicating small additional losses with those on the S&P 500 (-0.09%) and NASDAQ 100 (-0.14%) slightly lower.
To the day ahead now, and the main highlight will be the Bank of England’s latest policy decision. In addition, we’ll hear Fed Chair Powell’s testimony to the Senate Banking Committee, along with the Fed’s Waller, Bowman, Mester and Barkin, ECB Vice President de Guindos and the ECB’s Panetta. Otherwise, US data releases include the weekly initial jobless claims, existing home sales for May, the Conference Board’s leading index for May, and the Kansas City Fed’s manufacturing activity index for June. In addition, there’s the European Commission’s preliminary consumer confidence for the Euro Area in June.