US stock futures advanced for a second day after staging a furious rally late on Friday having slumped into a bear market just hours earlier, after President Joe Biden said China tariffs imposed by the Trump administration were under consideration, although concerns about hawkish central banks and record Covid cases in Beijing continued to weigh on the sentiment. Contracts on the S&P 500 were up 1% by 7:15 a.m. in New York, trimming earlier gains of as much as 1.4% following remarks from Christine Lagarde that the European Central Bank is likely to start raising interest rates in July and exit sub-zero territory by the end of September which sent the euro sharply higher and hit the USD. Meanwhile, Beijing and Tianjin continue to ramp up Covid restrictions as cases climbed. Nasdaq futures also jumped, rising 1.1%. Europe rose 0.6% while Asian stocks closed mostly in the green, with Nikkei +1% and Hang Seng -1.2%. The dollar and Treasuries retreated, while bitcoin jumped to $30,500 as the crypto rout appears over.
Traders interpreted Biden’s comments that he’ll discuss the US tariffs on Chinese imports with Treasury Secretary Janet Yellen when he returns from his Asia trip as a signal there could be a reversal of some Trump-imposed measures, sparking a risk-on rally.
“Today’s appetite for risk has been sparked by the US President’s announcement that trade tariffs imposed on China by the previous Trump administration will be discussed,” said Pierre Veyret, a technical analyst at ActivTrades. “Investors see this as a possible de-escalation of the trade war between the two economic superpowers, and this has revived trading optimism towards riskier assets.”
Among the notable movers in premarket trading, VMware surged 19% after Bloomberg News reported that Broadcom is in talks to acquire cloud-computing company; Broadcom fell 3.5% in premarket trading. Here are some other notable premarket movers:
- Software stocks, such as Oracle (ORCL US), Splunk (SPLK US), ServiceNow (NOW US), Check Point Software Technologies (CHKP US), are in focus after the report on Broadcom and VMware setting up for a blockbuster tech deal.
- Antiviral and vaccine stocks rise in US premarket trading amid spreading cases of the monkeypox virus. SIGA Technologies (SIGA US) jumps 39%; Emergent BioSolutions (EBS US) rises 15%, Chimerix (CMRX US) gains 15%, Inovio Pharmaceuticals (INO US) +13%
- Dow (DOW US) shares fall as much as 1.3% premarket after Piper Sandler downgraded the chemicals maker to neutral from overweight, along with peer LyondellBasell (LYB US), amid industry concerns.
- TG Therapeutics (TGTX US) shares are down 3.3% premarket after falling 11% on Friday, when BofA started coverage on the biotech company with an underperform rating and $5 price target.
- Upwork (UPWK US) could be in focus as RBC Capital Markets analyst Brad Erickson initiates coverage of the stock with a sector perform recommendation, saying some near-term negatives for the online recruitment services firm are well discounted.
US stocks have been roiled in the past two months by concerns the Fed's tightening will push the economy into a recession. A late-session rebound lifted the market from the session’s lows on Friday, though the S&P 500 still capped a seventh straight week of losses – the longest since 2001 – and briefly dipped into bear market territory, while the Dow dropped for 8 consecutive weeks, the longest stretch since 1923!
“As we have seen time and time again recently, any attempted rallies appear to be short-lived with the backdrop of macroeconomic uncertainty, and any bullish breakouts have failed to endure with overall market sentiment biased toward the bears,” said Victoria Scholar, head of investment at Interactive Investor. The string of weekly losses has seen the S&P 500’s forward price-to-earnings ratio drop to 16.4, near the lowest since April 2020. This is below the average level of 17.04 times seen over the past decade, making the case for bargain hunters to step in.
Separately, Biden said the US military would intervene to defend Taiwan in any attack from China, comments that appeared to break from the longstanding US policy of “strategic ambiguity” before they were walked back by White House officials. Meanwhile, his administration announced that a dozen Indo-Pacific countries will join the US in a sweeping economic initiative designed to counter China’s influence in the region.
Minutes of the most recent Fed rate-setting meeting will give markets insight this week into the central bank’s tightening path. St. Louis Fed President James Bullard said the Fed should front-load an aggressive series of rate hikes to push rates to 3.5% at year’s end, which if successful would push down inflation and could lead to easing in 2023 or 2024
In Europe, the Stoxx 50 rose 0.3%. The FTSE 100 outperformed, adding 0.9%, FTSE MIB lags, dropping 1.1%. Energy, miners and travel are the strongest performing sectors. European energy shares vie with the basic resources sector to be the best-performing group in the Stoxx Europe 600 benchmark on Monday as oil stocks rise with crude prices, while Siemens Gamesa rallies after Siemens Energy made a takeover offer. Shell rises 1.7%, BP +2.4%, TotalEnergies +2.1%. Elsewgere, the Stoxx Europe Basic Resources sub-index rallies to the highest level since May 5 to lead gains in the wider regional benchmark on Monday as metals rise amid better demand outlook. Aluminum, copper and iron ore extended rebound after China cut borrowing rates last week, dollar weakened and as investors weighed outlook for lockdown relief in Shanghai. The euro rose to its highest level in four weeks and most of the region’s bonds fell after European Central Bank President Christine Lagarde said the ECB is likely to start raising interest rates in July and exit sub-zero territory by the end of September. Here are the most notable European movers:
- Siemens Gamesa shares gain as much as 6.7% after Siemens Energy made an offer to acquire the shares in the wind-turbine maker it does not own.
- Kingfisher shares advance as much as 4.9% after the B&Q owner reported 1Q sales that beat estimates and announced plans for a further GBP300m share buyback.
- Deutsche EuroShop shares jump as much as 44% after Oaktree and CURA offered to acquire the German retail property company in a deal valuing it at around EU1.39b.
- Moonpig Group gains as much as 14% as Jefferies analysts say its plan to buy Smartbox Group UK is a good use of the online greeting card company’s strong cash generation.
- Kainos Group shares jump as much as 25%, as Canaccord Genuity raises the stock’s rating to buy from hold following FY results, saying cost-inflation headwinds are priced in.
- Intertek shares fall as much as 5.3%, with Stifel cutting its rating on the company to hold from buy, saying none of the key elements of its positive thesis are still intact.
- Leoni shares drop as much as 7.3% after the wiring systems manufacturer said it was in advanced talks on further financing.
Earlier in the session, Asian stocks were mixed as traders assessed Chinese authorities’ efforts to support the economy amid ongoing concerns over its Covid situation. The MSCI Asia Pacific Index was up 0.4%, supported by healthcare and industrials, after paring an early gain of as much as 0.7%. Japanese stocks outperformed and US index futures advanced. Chinese shares slid after Beijing reported a record number of coronavirus cases, reviving concerns about lockdowns. Covid concerns offset any positive impact from last Friday’s greater-than-expected reduction in a key interest rate for long-term loans in an effort to counter weak demand. Investors may be turning more upbeat on Asian stocks, with the regional benchmark beating global peers last week by the most in more the two years, snapping a streak of six weekly losses. Still, the region faces the same worries about inflation and rising US interest rates that have been rattling markets around the world this year. “The energy crisis in the EU and policy tightening in the US, combined with China’s economic soft patch” are potential headwinds for Asian equities and may lead to “weak external demand for more export-oriented economies like Taiwan and Korea,” Soo Hai Lim, head of Asia ex-China equities at Barings, wrote in a note.
Japanese equities climbed as US President Joe Biden’s comments during his visit to the country lifted market sentiment. Biden said a recession in the US isn’t inevitable, and reaffirmed close ties between the two countries. He also said China tariffs imposed by the Trump administration were under consideration, helping to lift regional stocks. The Topix Index rose 0.9% to 1,894.57 as of market close, while the Nikkei advanced 1% to 27,001.52. Tokio Marine Holdings contributed the most to the Topix Index, increasing 7.6%. Out of 2,171 shares in the index, 1,681 rose and 415 fell, while 75 were unchanged. Defense stocks also got a boost after Prime Minister Fumio Kishida said President Biden supports Japan’s plan for an increase in its defense budget
Stocks in India mostly declined after the central bank chief said the Reserve Bank is taking coordinated action with the country’s government to tackle inflation and a few interest rate hikes will be in store in coming months. His comments came soon after the government unveiled measures that will cost the exchequer $26 billion and will probably force the government to issue more debt to bridge the yawning budget deficit. The S&P BSE Sensex ended flat at 54,288.61 in Mumbai after giving up an advance of as much as 1.1%. The NSE Nifty 50 Index dropped 0.3%, its third decline in four sessions. Gauges of mid-sized and small stocks also plunged 0.3% and 0.6%, respectively. Out of the 30 stocks in the Sensex index, 20 advanced while 10 ended lower, with Tata Steel being the biggest drag. Eleven of 19 sector sub-indexes compiled by BSE Ltd. declined, led by metal stocks. Steel stocks plunged after the new rules imposed tariffs on export of some products. Auto and capital stocks were the best performers. Investors remain wary of the policy decisions the central bank could take in the near-term to tackle in rising inflation, according to Arafat Saiyed, an analyst with Reliance Securities. “Changes in oil prices and amendments to import and export duties might play a role in assessing the market’s trajectory.”
In rates, Treasuries dropped as investors debate the Federal Reserve’s tightening path amid mounting worries about an economic slowdown. US bonds were cheaper by 3bp-5bp across the curve with belly leading declines, underperforming vs front- and long-end, following weakness in bunds. 10-year yield around 2.83%, higher by ~5bp on day, and keeping pace with most European bond markets; belly-led losses cheapen 2s5s30s fly by ~1.5bp on the day. US IG credit issuance slate empty so far; $20b-$25b is expected this week, concentrated on Monday and Tuesday. European fixed income faded an initial push higher after Lagarde’s comments while money markets up rate-hike bets. Bund futures briefly trade above 154 before reversing, cash curve bear-flattens with the belly cheapening ~6bps. Peripheral spreads tighten to Germany, 10y Bund/BTP spreads holds above 200bps.
In FX, the Bloomberg Dollar Spot Index fell as the greenback traded weaker against all of its Group-of-10 peers. The euro jumped to a session high of $1.0635 and bunds reversed an advance after ECB President Christine Lagarde said the central bank is likely to start raising interest rates in July and exit sub-zero territory by the end of September. The EUR was also bolstered by Germany IFO business confidence index rising to 93.0 in May vs estimate 91.4. The Aussie and kiwi were among the pest G-10 performers as they benefitted from Biden’s comments about the tariffs on China. Aussie was also supported after the Labor Party won the weekend election and is increasingly hopeful of gaining enough seats to form a majority government. The pound advanced against the dollar, touching the highest level since May 5, amid broad-based greenback weakness. While asking prices rose to a new record for the fourth-straight month, there are signs the housing market is slowing, according to Rightmove. Yen steadied after gains last week as traders sought clues on the global economy. Japanese government bonds were mostly higher. The purchasing power of the yen fell to a fresh half-century low last month.
In commodities, WTI rose 1.1% to trade just below $112. Most base metals are in the green; LME aluminum rises 1.4%, outperforming peers. LME nickel lags, dropping 4.2%. Spot gold climbs roughly $18 to trade around $1,865/oz
Looking at today's calendar, at 830am we get the April Chicago Fed Nat Activity Index (est. 0.50, prior 0.44). CB speakers include the Fed's Bostic, ECB's Holzmann, Nagel and Villeroy and BoE's Bailey.
- S&P 500 futures up 0.6% to 3,922.50
- STOXX Europe 600 up 0.6% to 433.69
- MXAP up 0.4% to 165.23
- MXAPJ little changed at 539.33
- Nikkei up 1.0% to 27,001.52
- Topix up 0.9% to 1,894.57
- Hang Seng Index down 1.2% to 20,470.06
- Shanghai Composite little changed at 3,146.86
- Sensex up 0.4% to 54,556.08
- Australia S&P/ASX 200 little changed at 7,148.89
- Kospi up 0.3% to 2,647.38
- German 10Y yield little changed at 0.97%
- Euro up 0.5% to $1.0622
- Brent Futures up 0.9% to $113.61/bbl
- Gold spot up 0.7% to $1,859.91
- U.S. Dollar Index down 0.63% to 102.50
Top Overnight News from Bloomberg
- President Joe Biden said the US military would intervene to defend Taiwan in any attack from China, some of his strongest language yet seeking to deter Beijing from an invasion
- The Biden administration announced that a dozen Indo-Pacific countries will join the US in a sweeping economic initiative designed to counter China’s influence in the region, even as questions remain about its effectiveness
- The US Treasury Department is expected to tighten sanctions this week on Russia, threatening about $1 billion owed to bondholders for the rest of this year and putting the country once again on the edge of default
- The ECB is poised to get the power to oversee so-called transition plans by 2025, in which lenders map out their path to a carbon-neutral future. Yet several national officials who sit on the ECB’s supervisory board are skeptical that climate risks merit new rules to address them, and some are wary that the initiative exceeds the central bank’s mandate
- Russia is considering a plan to ease a key control on capital flows which has helped drive the ruble to the highest levels in four years as the rally is now threatening to hurt budget revenues and exporters
- Natural gas prices in Europe fell as much as 5.6% to the lowest level since the start of the war in Ukraine, as storage levels across the continent rise to near-normal levels
- As the biggest selloff in decades shook the world’s bond markets this year, some extraordinarily long-dated debt went into free fall, tumbling even more than Wall Street’s usual models predicted. To Jessica James, a managing director with Commerzbank AG in London, it wasn’t a surprise. In fact, it was validation
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mixed as momentum waned due to China's COVID woes and record Beijing infections. ASX 200 was just about kept afloat before ebbing lower after initial strength in mining names and the smooth change of government in Australia. Nikkei 225 advanced at the open with Tokyo said to be planning to revive its travel subsidy plan for residents. Hang Seng and Shanghai Comp were pressured by ongoing COVID concerns after Beijing extended its halt of dining in services and in-person classes for the whole city, as well as reporting a fresh record of daily COVID infections, while Shanghai restored its cross-district public transport on Sunday but ordered supermarkets and shops in the central Jingan district to shut and for residents to stay home until at least Tuesday
Top Asian News
- Beijing reported 83 new symptomatic cases and 16 new asymptomatic cases for May 22nd with the city's total new cases at a new record, according to Bloomberg. It was also reported that thousands of Beijing residents were relocated to quarantine hotels due to a handful of infections, according to the BBC.
- Beijing is mulling easing its hotel quarantine requirement to one week in a hotel and one week at home from a previous hotel requirement of ten days and one week at home for international travellers, according to SCMP.
- Shanghai reported 570 new asymptomatic cases, 52 asymptomatic cases, 3 new COVID-related deaths and zero cases outside of quarantine, according to Reuters. Shanghai’s central district of Jingan will require all supermarkets and shops to close, while residents will be required to stay at home and conduct mass testing from May 22nd-24th, according to Reuters.
- China NHC Official says the COVID situation, overall, is showing a steady declining trend.
- Japanese PM Kishida said it is very disappointing that China is unilaterally developing areas in the East China Sea when borders are not yet set which Japan cannot accept, while it has lodged a complaint against China through diplomatic channels, according to Reuters.
- Japanese PM Kishida told US President Biden that they must achieve a free and open Indo-Pacific together, while President Biden said the US is fully committed to Japan's defence and that the IPEF will increase cooperation with other nations and deliver benefits to people in the region, according to Reuters.
- US-South Korea joint statement noted they agreed to discuss widening the scope and scale of joint military exercises and the US reiterated its commitment to defending South Korea with nuclear, conventional and missile defence, as well as reaffirmed its commitment to deploy strategic military assets in a timely and coordinated manner as necessary. The sides also condemned North Korea’s missile tests as a grave threat and agreed to relaunch a high-level extended deterrence strategy and consultation group at the earliest date, while they noted the path to dialogue with North Korea remains open and called for a resumption of negotiations, according to Reuters.
- US President Biden said the US-South Korea alliance has never been stronger and more vibrant. President Biden added they are ready to strengthen the joint defence posture to counter North Korea and are ready to work toward the complete denuclearisation of North Korea, while he offered vaccines to North Korea and said he would meet with North Korean leader Kim if he is serious, according to Reuters.
- South Korean President Yoon said North Korea is advancing nuclear capabilities and that US President Biden shares grave concerns regarding North Korea’s nuclear capabilities, while Yoon said they discussed the timing of possible deployment of fighter jets and bombers, according to Reuters.
European bourses are mixed/modestly-firmer, Euro Stoxx 50 +0.3%, as the initial upside momentum waned amid fresh China COVID updates and hawkish ECB commentary. Note, the FTSE MIB is the noted underperformer this morning, -1.0%, amid multiple large-cap names trading ex-divided. Stateside, futures are firmer but similarly off best levels, ES +0.5%, with recent/familiar themes very much in focus ahead of a thin US-specific docket. XPeng (XPEV) Q1 2022 (USD): EPS -0.32 (exp. -0.30), Revenue 1.176bln (exp. 1.16bln); Vehicle Deliveries 34.56k, +159% YY. -2.8% in pre-market JPMorgan (JPM) has reaffirmed its adjusted expenses guidance; credit outlook remains positive; sees FY22 NII USD 56bln (prev. USD 53bln)
Top European News
- EU’s infectious-disease agency is to recommend member states prepare strategies for possible vaccination programmes to counter increasing monkeypox cases, according to FT. It was also reported that Austria confirmed its first case of monkeypox and that Switzerland also confirmed its first case of monkeypox in the canton of Bern, according to Reuters.
- EU policymakers are reportedly renewing efforts to push for real-time databases of stock and bond trading information as they believe that a 'consolidated tape' will make EU exchanges more attractive for investors, according to FT.
- EU Commission has proposed maintaining EU borrowing limits suspension next year amid the war in Ukraine; expects to reinstate limits in 2024; Germany supports the suspension.
- Bunds and Eurozone peers underperform as ECB President Lagarde signals end of negative rates by September.
- 10 year German bond nearer 153.00 having topped 154.00, Gilts around 1/4 point below par after trading flat at best and T-note shy of 120-00 within 120-03+/119-21+ range.
- EU NG issuance covered 1.38 times and Austria announces leads for 2049 Green syndication.
- Euro joins Kiwi at the top of G10 ranks as President Lagarde chimes with end of NIRP by Q3 guidance, EUR/USD sets fresh May peak near 1.0690.
- Bulk of NZIER shadow board believe RBNZ will deliver another 50bp hike on Wednesday, NZD/USD hovers comfortably above 0.6450 in the run up to NZ Q1 retail sales.
- DXY in danger of losing 102.000+ status as Euro revival boosts other index components.
- Aussie up with price of iron ore and extended Yuan recovery gains with change of PM and Government regime taken in stride; AUD/USD probes 0.7100, USD/CNH not far from Fib support sub-6.6500, USD/CNY a tad lower.
- Sterling eyes 1.2600 awaiting BoE Governor Bailey at a PM panel discussion, Loonie and Nokkie glean traction via firm WTI and Brent, USD/CAD under 1.2800, EUR/NOK beneath 10.3000.
- Lira languishing after CBRT survey showing higher end 2022 forecasts for Turkish CPI, current account deficit and USD/TRY circa 17.5690 vs just shy of 16.0000 at present.
- WTI and Brent are firmer and in-proximity to session highs amid USD action offsetting the earlier drift with risk sentiment/China's mixed COVID stance.
- Currently, the benchmarks are just off highs of USD 111.96/bbl and USD 114.34/bbl respectively, vs lows of 109.50 and 111.97 respectively.
- Saudi Arabia signalled it will stand by Russia as a member of OPEC+ amid mounting pressure from sanctions, according to FT.
- Iraq’s government aims to set up a new oil company in the Kurdistan region and expects to enter service contracts with local oil firms, according to Reuters.
- Iran’s Oil Minister agreed to revive the pipeline laying project to pump Iranian gas to Oman which was stalled for nearly two decades, according to IRNA.
- Qatari Foreign Minister Sheikh Mohammed bin Abdulrahman Al Thani said Iran’s leadership has matters under review regarding “the Iranian nuclear file” and said that pumping additional quantities of Iranian oil to the market will help stabilise crude prices and lower inflation, according to Al Jazeera TV.
- India cut its excise duty on petrol by INR 8/litre and diesel by INR 6/litre which will result in a revenue loss of about INR 1tln for the government, while Indian Finance Minister Sitharaman announced subsidies on cooking gas cylinders, as well as cuts to custom duties on raw materials and intermediaries for plastic products, according to Reuters.
- Indian oil minister says oil remaining at USD 110/bbl could lead to bigger threats than inflation, via CNBC TV18.
- ECB's Lagarde says based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter; against the backdrop of the evidence I presented above, I expect net purchases under the APP to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. The next stage of normalisation would need to be guided by the evolution of the medium-term inflation outlook. If we see inflation stabilising at 2% over the medium term, a progressive further normalisation of interest rates towards the neutral rate will be appropriate.
- ECB President Lagarde indicated that July is likely for a rate increase as she noted that they will follow the path of stopping net asset purchases and then hike interest rates sometime after that which could be a few weeks, according to Bloomberg.
- Bundesbank Monthly Report: German GDP is likely to increase modestly in Q2 from current standpoint. Click here for more detail.
- RBI Governor Das says, broadly, they want to increase rates in the next few meetings, at least at the next one; cannot give a number on inflation at present, the next MPC may be the time to do so.
- CBRT Survey (May), end-2022 Forecasts: CPI 57.92% (prev. 46.44%), GDP Growth 3.3% (prev. 3.2%), USD/TRY 17.5682 (prev. 16.8481), Current Account Balance USD -34.34bln (prev. USD -27.5bln).
US Event Calendar
- 08:30: April Chicago Fed Nat Activity Index, est. 0.50, prior 0.44
- 12:00: Fed’s Bostic Discusses the Economic Outlook
- 19:30: Fed’s George Gives Speech at Agricultural Symposium
DB's Jim Reid concludes the overnight wrap
After a stressful couple of hours in front of the football yesterday afternoon, there's not too much the market can throw at me this week to raise the heart rate any higher than it was for the brief moments that I thought Liverpool were going to win the Premier League from a very unlikely set of final day circumstances. However it is the hope that kills you and at least we have the Champions League final on Saturday to look forward to now.
There will be a lot of market water to flow under the bridge before that. This all follows a fascinating end to last week with the S&P 500 in bear market territory as Europe went home for the weekend after the index had fallen -20.6% from its peak going into the last couple of hours of another brutal week. However a sharp late rally sent the index from c.-2.3% on the day to close +0.01%. There was no catalyst but traders clearly didn’t want to go home for the weekend as lightly positioned as they were. Regardless, this was the first time we’ve seen seven successive weekly declines in the index since the fallout from the dotcom bubble bursting in 2001. Watch out for my CoTD on this later. If you’re not on my daily CoTD and want to be, please send an email to firstname.lastname@example.org to get added. For what it's worth the Dow saw the first successive 8 weekly decline since 1923 which really brings home the state of the current sell-off.
After having a high conviction recession call all year for 2023, I can't say I have high conviction in the near-term. I don't expect that we will fall into recession imminently in the US or Europe and if that's the case then markets are likely to eventually stabilise and rally back. However if we do see a H2 2022 recession then this sell-off will likely end up at the more severe end of the historical recessionary sell-offs given the very high starting valuations (see Binky Chadha's excellent strategy piece here for more on this). However if I'm right that a 2023 recession is unavoidable then however much we rally back this year we'll be below current levels for equities in 12-18 months' time in my view. Given that my H2 2023 HY credit spread forecast is +850bp then that backs this point up. Longer-term if we do get a recession and inflation proves sticky over that period then equities are going to have a long period of mean reversion of valuations and it will be a difficult few years ahead. So the path of equities in my opinion depends on the recession timing and what inflation does when we hit that recession.
Moving from pontificating about the next few years to now looking at what's coming up this week. The global preliminary PMIs for May tomorrow will be front and centre for investors following the growth concerns that have roiled markets of late. Central banks will also remain in focus as we will get the latest FOMC meeting minutes (Wednesday) and the US April PCE, the Fed's preferred inflation proxy, on Friday. An array of global industrial activity data will be another theme to watch.
Consumer sentiment will be in focus too, with a number of confidence measures from Europe and personal income and spending data from the US (Friday). Corporates reporting results will include spending bellwethers Macy's and Costco. After last week’s retail earnings bloodbath (e.g. Walmart and Target) these will get added attention.
On the Fed, the minutes may be a bit stale now but it’ll still be interesting to see the insight around the biases of 50bps vs 25/75bps hikes after the next couple of meetings. Thoughts on QT will also be devoured.
Staying with the US, for the personal income and spending numbers on Friday, our US economists expect the two indicators to slow to +0.2% and +0.6% in April, respectively. The Fed’s preferred inflation gauge, the PCE, will be another important metric released the same day and DB’s economics team expects the April core reading to stay at +0.3%. Other US data will include April new home sales tomorrow and April durable goods orders on Wednesday.
A number of manufacturing and business activity indicators are in store, too. Regional Fed indicators throughout the week will include an April gauge of national activity from the Chicago Fed (today) and May manufacturing indices from the Richmond Fed (tomorrow) and the Kansas City Fed (Thursday). In Europe, the May IFO business climate indicator for Germany will be out today, followed by a manufacturing confidence gauge for France (tomorrow) and Italy (Thursday). China's industrial profits are due on Friday.
This week will also feature a number of important summits. Among them will be the World Economic Forum’s annual meeting in Davos that has now started and will run until next Thursday. It'll be the first in-person meeting since the pandemic began and geopolitics will likely be in focus. Meanwhile, President Biden will travel to Asia for the first time as US president and attend a Quad summit in Tokyo tomorrow. Details on the Indo-Pacific Economic Framework are expected. Finally, NATO Parliamentary Assembly’s 2022 Spring Session will be held in Vilnius from next Friday to May 30th.
In corporate earnings, investors will be closely watching Macy's, Costco and Dollar General after this week's slump in Walmart and Target. Amid the carnage in tech, several companies that were propelled by the pandemic will be in focus too, with reporters including NVIDIA, Snowflake (Wednesday) and Zoom (today). Other notable corporates releasing earnings will be Lenovo, Alibaba, Baidu (Thursday) and XPeng (Monday).
Overnight in Asia, equity markets are weak but US futures continue to bounce back. The Hang Seng (-1.75%) is the largest underperformer amid a fresh sell-off in Chinese listed tech stocks. Additionally, stocks in mainland China are also weak with the Shanghai Composite (-0.47%) and CSI (-0.99%) lower as Beijing reported record number of fresh Covid-19 cases, renewing concerns about a lockdown. Elsewhere, the Nikkei (+0.50%) is up in early trade while the Kospi (+0.02%) is flat. S&P 500 (+0.80%), NASDAQ 100 (+1.03%) and DAX (+0.96%) futures are all edging higher though and 10yr USTs are around +3.5bps higher.
A quick review of last week’s markets now. Growth fears gripped markets while global central bankers retrenched their expectations for a strong dose of monetary tightening this year to combat inflation.
The headline was the S&P 500 fell for the seventh straight week for the first time since after the tech bubble burst in 2001, tumbling -3.05% (+0.01% Friday), after back-and-forth price action which included an ignominious -4% decline on Wednesday, the worst daily performance in nearly two years. The index is now -18.68% from its YTD highs, narrowly avoiding a -20% bear market after a late rally to end the week, after dipping into intraday on Friday. Without one discreet driver, an amalgamation of worse-than-expected domestic data, fears about global growth prospects, and poor earnings from domestic retail giants that called into question the vitality of the American consumer soured sentiment. Indeed, on the latter point, consumer staples (-8.63%) and discretionary (-7.44%) were by far the largest underperformers on the week. European stocks managed to fare better, with the STOXX 600 falling -0.55% (+0.73% Friday) and the DAX losing just -0.33% (+0.72% Friday).
The growth fears drove longer-dated sovereign bond yields over the week, with 10yr Treasuries falling -13.7bps (-5.6bps Friday). Meanwhile, the front end of the curve was relatively anchored, with 2yr yields basically unchanged over the week (-2.7bps Friday), and the amount of Fed hikes priced in through 2022 edging +3bps higher over the week to 2.75%, bringing 2s10s back below 20bps for the first time since early May. Chair Powell reiterated his commitment to bring inflation back to target, suggesting that getting policy rates to neutral did not constitute a stopping point if the Fed did not have “clear and convincing” evidence that inflation was falling.
In Europe the front end was also weaker than the back end as Dutch central bank Governor Knot became the first General Council member to countenance +50bp hikes. 10yr yields didn't rally as much as in the US, closing the week at -0.4bps (-0.5bps Friday). The spectre of faster ECB tightening and slowing global growth drove 10yr BTPs to underperform, widening +15.2bps (+10.2bps Friday) to 205bps against bund equivalents.
Gilts underperformed other sovereign bonds, with 10yr benchmarks selling off +14.9bps (+2.8bps Friday) and 2yr yields increasing +25.8bps (+1.6bps Friday). This came as UK CPI hit a 40yr high of 9.0% in April even if it slightly missed forecasts for the first time in seven months.
Oil proved resilient to the growth fears rumbling through markets, with both brent crude (+0.90%, +0.46% Friday) and WTI futures (+2.48%, +0.91% Friday) posting modest gains over the week.