Futures Rise As Fed Stress Test Reassures Banks Are Fine

S&P 500 futures are higher, rising above Wednesday highs despite hawkish commentary from Powell at Sintra who left open the option for consecutive hikes while trying to keep soft landing hopes alive and the big 4 central banks reiterated their view that more tightening is needed to cure inflation. Risk appetite was stoked by Wednesday’s Federal Reserve’s stress tests which saw all banks pass as usual (no surprise there), but calculated that they would suffer losses of over $500 billion in a bad recession. Nasdaq futures outperform, boosted by Micron which gained more than 3% in pre-market trading after it reported third-quarter results that came ahead of expectations, and provided an upbeat fiscal fourth-quarter forecast.

As of 7:45am, S&P futures are higher by 0.3% to 4,431 while Nasdaq 100 futures rose 0.4%. KRE +1.4%, XLF +64bps pre-market. AAPL market cap reaches $2.977T, just 78bps away from hitting ~$3trn mkt cap. For context, $3trn is larger than the market cap of 5 entire GICS sectors - not combined - REITs, Mats, Utes, Energy, Cons Staples. Treasury yields have ticked higher across the curve, while the Bloomberg dollar index strengthens slightly. Gold prices are flat while oil reverses earlier losses. Iron ore meanwhile is continuing its winning streak for a third day. Today’s macro data is the latest revision to Q1 GDP, Consumption, and PCE as well as the latest Jobless/Continuing Claims and Pending Home Sales.

In premarket trading, Micron gained more than 3% and the SMH was up 0.85% after it delivered an upbeat sales forecast late on Wednesday. Bank of America and Wells Fargo led gains in financial companies as the lenders passed the Federal Reserve’s stress test, clearing the way for shareholder payouts. Here are some of the other most notable European movers:

• BioXcel Therapeutics falls 38% after the company said it’s investigating data integrity at one of the clinical trial sites of its study for the treatment of Alzheimer’s disease- related agitation, after it found a principal investigator fabricated email correspondence.
• Blackberry jumps as much as 26%, set to build on this year’s 54% rally, as RBC noted a boost to the cybersecurity firm’s earnings from the sale of its patent portfolio, which tempered otherwise weak results. Investor focus also remains on results awaited from its strategic review.
• ContextLogic which does business as Wish, was cut to sell from hold at Loop Capital Markets based on topline concerns for the e-commerce company. The stock drops 3.2%.
• Freyr Battery shares gain as much as 9.3% after the lithium-ion battery maker was upgraded to overweight from equal-weight at Morgan Stanley on the potential for the company to reach commercial milestones including battery production.
• JPMorgan and Bank of America rose while BNP and UniCredit were among European lenders outperforming on Thursday, after Wall Street’s biggest banks and US units of European lenders passed the Fed’s annual stress test.
• Joby Aviation rises 8.9% after saying that South Korean telecommunications company SK Telecom is investing $100 million in its business as part of an expanded partnership between the two companies.
• Netflix rises 1.6% after Citi raised its price target on the stock, saying the streaming service has performed well since announcing the ad-supported subscription plan and the introduction of paid sharing.
• Overstock jumps as much as 9.6% after the online household products retailer said it plans to relaunch Bed Bath & Beyond online in the US and Canada.
• Pfizer slides 0.6% after Credit Suisse downgraded it to neutral, saying the pharmaceutical company is entering a phase of uncertainty.
• Virgin Galactic shares gain as much as 5.5% as the space exploration company is set to begin commercial operations today, taking paying passengers to the edge of space and back.

On Wednesday, Fed Chair Jerome Powell said at least two interest-rate increases are likely necessary this year to bring the inflation rate down to the central bank’s 2% target. ECB President Christine Lagarde and BOE Governor Andrew Bailey also said at this week’s conference in Portugal that they have a ways to go in reining in price increases. While their comments lifted bond yields across the board, BBG notes that equities have clunged to recent gains (the S&P 500 is up 5% this month) with investors focusing on the (politically) resilient economic backdrop that should support company earnings, especially in the technology sector.

“We are seeing a tug of war. Markets are not buying into what all the major central banks are saying,” said Peter Garnry, head of equity and quantitative strategy at Saxo Bank AS. “Even Powell’s comments have not been enough to really dent sentiment in equity markets.” He warned that unless the earnings outlook worsens dramatically, especially in technology and artificial intelligence-linked companies, “it will be hard to see markets’ animal spirits disappear."

And while consensus still expects the US economy to slide into a recession over the next year, many now expect the downturn will be less severe than feared. Strength in consumer confidence and a bizarre surge in home sales buoyed stocks earlier in the week, and data later on Wednesday is expected to show first-quarter GDP expanded at 1.4% at an annualized rate.

Daniel Lam, head of equity strategy for Standard Chartered Wealth Management, said on Bloomberg Television that positive economic surprises help explain the gains across equities. But “if the hurdle gets higher and higher, becomes harder to beat, investors may be rotating into other regions such as Japan and Asia,” Lam warned.

European stocks are ahead with the Stoxx 600 up 0.1%, rising for the third day, with auto, retail and banks the best performing sectors. Renault SA jumped after raising its full-year earnings guidance, thanks to strong sales momentum from new models. Hennes & Mauritz AB surged more than 15% after the Swedish retailer reported a smaller-than-expected decline in earnings as it cut costs and made progress reducing its inventory build-up. Here are the other notable premarket movers:

• Serco gains as much as 12% and is best performer in the Stoxx 600 industrials index after the UK outsourcing company raised its guidance, boosted by strong demand for its immigration services
• Renault advances as much as 7.7% after it upgraded its 2023 earnings guidance. Morgan Stanley says the midpoint of the new operating margin guidance implies a ~16% upgrade to full-year operating profit
• Ipsen gains as much as 6.3%, the most since February, after the French drugmaker’s rare bone disease drug palovarotene got a positive recommendation from an FDA advisory panel
• Aixtron gains as much as 4.1% after Citi initiated the chip-tool maker at buy. Soitec also jumps as much as 2.6% after Citi gave the shares a buy rating, while BE Semiconductor was rated as neutral
• Moonpig gains as much as 7.3%, among the top performers in the UK, after the online gifting company reported FY23 results that beat expectations. Citi calls the firm’s performance “resilient”
• GN Store Nord shares gain as much as 2.7% after the Danish audio technology firm agreed to sell BelAudição. Morgan Stanley says the announcement is a sign that GN’s divestment plan is on track
• Engie rises as much as 3.7% after the French utility reached a deal with Belgium to extend the life of two nuclear reactors beyond 2025, a move that’s positive for the stock, according to Morgan Stanley
• Kering falls as much as 2% after HSBC cuts rating to hold, citing uncertain timing of Gucci recovery and lack of near-term catalyst, adding that signs of improvement are not visible yet
• Baloise drops as much as 4.4% after the insurance company said it’s moving to new accounting standards. Analysts noted a potential Ebit impact for the company’s life and non-life segments
• Casino shares fall as much as 38%, to a record low, after it warned its shareholders will be “massively diluted” as part of a restructuring plan

Earlier in the session, Asian stocks traded mixed amid some indecision heading closer towards month/quarter/ half-year end and after the choppy performance stateside as global markets digested the slew of central bank rhetoric from the Sintra Forum.

• Hang Seng and Shanghai Comp were subdued amid ongoing frictions and the potential for additional US tech export restrictions on China but with losses in the mainland cushioned by the PBoC’s liquidity efforts.
• ASX 200 was kept afloat as strength in the tech and telecom sectors offset the losses in utilities, real estate and miners, with some encouragement also from better-than-expected Australian Retail Sales.
• Nikkei 225 extended on gains and briefly climbed back above 33,500 as it coat-tailed on the recent advances in USD/JPY and after Japanese Retail Sales topped forecasts.

In FX, the Bloomberg Dollar Spot Index was little changed as markets weigh further tightening from global central banks. The euro pared an earlier drop to trade little changed versus the dollar. The Swedish krona is also little changed after a choppy reaction to the Riskbank raising rates. The yen touched a fresh seven-month low against the dollar before recovering.

• EUR/USD steadied at 1.09 after Spanish inflation slowed to below the ECB’s 2% target.
• SEK/EUR slumped to a record low after the Riksbank raised rates by 25 basis points and signaled at least one more increase this year
• AUD/USD and NZD/USD rose on better- than-expected retail sales data and improved business confidence respectively

In rates, treasuries eased across the curve with two-year yields climbing five basis points to 4.76% and yields on the 10- year rising four basis points to 3.75%; money-markets continue to price one more 25 basis points hike by July. Bund futures are lower after Spanish inflation topped estimates and initial German state data suggested national CPI will accelerate. German 10-year yields are up 4bps

In commodities, crude futures are flat with WTI trading near $69.50. Spot gold drops 0.1% to $1,905. Bitcoin rises 1.1%.

Looking at today's calendar, we get Initial Jobless Claims and first quarter GDP data at 8:30 a.m. and then May Pending Home Sales at 10 a.m. The US will sell $70 billion 4-week and $60 billion 8-week bills at 11:30 a.m.  Earnings today include Nike, McCormick & Co., and Paychex.

Market Snapshot

• S&P 500 futures little changed at 4,421.00
• MXAP down 0.3% to 163.30
• MXAPJ down 0.5% to 512.91
• Nikkei up 0.1% to 33,234.14
• Topix down 0.1% to 2,296.25
• Hang Seng Index down 1.2% to 18,934.36
• Shanghai Composite down 0.2% to 3,182.38
• Sensex up 0.8% to 63,915.42
• Australia S&P/ASX 200 little changed at 7,194.91
• Kospi down 0.6% to 2,550.02
• STOXX Europe 600 little changed at 456.41
• German 10Y yield little changed at 2.34%
• Euro little changed at $1.0914
• Brent Futures down 0.4% to $73.72/bbl
• Gold spot down 0.0% to $1,906.60
• U.S. Dollar Index little changed at 102.98

Top Overnight News from Bloomberg

• China will likely disappoint those hoping the government will roll out massive stimulus to shore up the weakening economic recovery, said Zhu Min, a former deputy managing director of the International Monetary Fund. BBG
• US Treasury Secretary Janet Yellen said one of the reasons she hopes to travel to China is to establish contact with “a new group of leaders” as she reiterated calls for the world’s two largest economies to work together on crucial global challenges. BBG
• German regional CPIs tick higher in June vs. May: Baden Wuerttemberg +6.9% (vs. +6.6% in May), Brandenburg +6.7% (vs. +6.3% in May), Bravaria +6.2% (vs. +6.1% in May), Hesse +6.1% (up from +5.9% in May), North Rhine Westphalia +6.2% (vs. +5.7% in May), and Saxony +6.8% (vs. +6.5% in May). BBG
• Spain’s June headline inflation drops below the ECB’s 2% target (it came in at +1.9%, down from +3.2% in May), but core continues to run hot (the core CPI came in at +5.9%, down from +6.1% in May but ahead of the Street’s +5.5% forecast). RTRS
• Top Russian army general Sergei Surovikin has been detained as the Kremlin cracks down on Wagner sympathisers following the militia’s failed mutiny last week. Surovikin, a senior Russian general known to have a good relationship with Wagner’s leader Yevgeny Prigozhin, has not been heard from for several days and has been detained, according to three people familiar with the matter. FT
• The Federal Reserve said the biggest U.S. lenders remain healthy, a vote of confidence for the financial system after a series of midsize bank failures earlier this year. All 23 firms that participated in the latest stress tests performed well, the Fed said, meaning they would stay above minimum capital levels and keep lending to businesses and households in a severe recession. WSJ
• Jerome Powell doubled down on his view that at least two more interest-rate increases are probably necessary this year to bring inflation down. "The process of getting inflation back down to 2% has a long way to go," he told a conference in Madrid. He also said regulators are committed to learning lessons from the failure of Silicon Valley Bank and more oversight may be needed. BBG
• Lina Khan’s Federal Trade Commission has already filed three cases against Amazon.com Inc. Now she’s gearing up for the Big One. In the coming weeks, the agency plans to file a far-reaching antitrust suit focused on Amazon’s core online marketplace. BBG
• Bank of America is bearing the cost of decisions made three years ago to pump the majority of $670bn in pandemic-era deposit inflows into debt markets at a time when bonds traded at historically high prices and low yields. The moves left BofA, the second-largest US bank by assets, with more than $100bn in paper losses at the end of the first quarter, according to data from the Federal Deposit Insurance Corporation. The sum far exceeds unrealized bond market losses reported by its largest peers. FT

A more detailed look at global markets courtesy of Newsquawk

Asia stocks traded mixed amid some indecision heading closer towards month/quarter/ half-year end and after the choppy performance stateside as global markets digested the slew of central bank rhetoric from the Sintra Forum. ASX 200 was kept afloat as strength in the tech and telecom sectors offset the losses in utilities, real estate and miners, with some encouragement also from better-than-expected Australian Retail Sales. Nikkei 225 extended on gains and briefly climbed back above 33,500 as it coat-tailed on the recent advances in USD/JPY and after Japanese Retail Sales topped forecasts. Hang Seng and Shanghai Comp were subdued amid ongoing frictions and the potential for additional US tech export restrictions on China but with losses in the mainland cushioned by the PBoC’s liquidity efforts.

Top Asian News

• Chinese state banks spotted selling USD in onshore currency markets at around the 7.25 mark, according to sources cited by Reuters.
• Chinese Regulators are stepping up Yuan surveys "as currency slump worsens", according to Bloomberg; stepping up scrutiny of currency trading and cross-border capital flows.
• US Treasury Secretary Yellen said the US will continue to take actions to protect national security interests with regards to China even if that imposes some economic cost, while she hopes to travel to China and wants to re-establish contact, as well as discuss disagreements, according to an interview with MSNBC.
• Top US diplomat for East Asia Kritenbrink said they have seen a clear and upward trend of Chinese coercion in the South China Sea and China's provocative behaviour poses risks for businesses, while Kritenbrink also said the US and China discussed ways to increase commercial flights in a phased manner.
• Chinese Embassy Spokesman Liu Pengyu said US and China working groups will discuss the journalist issue and said China has not seen positive US initiatives on semiconductors, while Liu added that the US must remove sanctions before military talks with China.
• Chinese balloon that flew over the US earlier this year reportedly used American-made equipment to spy on Americans, while preliminary US findings showed the craft collected photos and videos but didn't appear to transmit them, according to WSJ.
• US officials reportedly consider tightening the export of AI chips to China based on computing power in which an update to the rules may come by late July, according to Reuters sources, although one source cautioned that such US actions involving China often get delayed.
• Nvidia (NVDA) CFO said they are aware of reports on new China export restrictions but expect no material change to earnings from rules, while the CFO added that China accounts for 20%-25% of Data Centre sales and the China export ban will result in a loss of opportunities.
• Japan Finance Minister does not comment on FX levels; one-sided and unstable moves are undesirable; will not rule out any options if FX moves are excessive. Japan and South Korea agreed to resume a bilateral currency swap deal worth USD 10bln, according to Reuters.
• China issued measures to promote opening in some free trade zones and ports on a pilot basis to meet high international standards, according to Reuters.

European bourses trade with little in the way of firm direction following a similarly indecisive close on Wall Street yesterday. US equity futures are around flat with the ES holding above the 4400 mark. In terms of newsflow, markets were treated to another set of remarks from Fed Chair Powell, where he revealed his expectations for Friday’s PCE data (Core PCE likely rose 4.7% Y/Y in May, overall PCE estimated to have risen 3.9%) and remarked that a strong majority of Fed policymakers see two or more rate rises by the end of this year. Equity sectors in Europe are mixed with Autos top of the leaderboard, supported by Renault after the Co. raised its FY 23 outlook for group operating margins and automotive operational FCF. Retail is another leading sector amid gains in H&M after Q2 profits exceeded estimates and noted that Q3 has seen a “good start”. To the downside, Travel & Leisure, Chemicals and Industrials lag peers.

Top European News

• ECB's Centeno said "we are reaching the time when monetary policy may pause and that we are very close", according to Reuters.
• ECB's de Cos said ECB September meeting is absolutely open regarding interest rates, according to Reuters.
• Swedish Riksbank Rate 3.75% vs. Exp. 3.75% (Prev. 3.5%); forecast expects at least one more hike this year and increased the pace of bond sales

FX

• DXY lost a bit of momentum after its firm midweek bounce as several rivals recovered some poise on the back of supportive macro fundamentals, while the Yuan benefited from reports of more Chinese state bank buying and the Yen got a boost from another verbal riposte by Japanese Finance Minister Suzuki.
• Yen saw some sudden strength at one point with no notable headlines to drive price action at the time but with participants cognizant of Japanese MoF presence.
• Aussie outperforms following an overnight boost from the much firmer-than-expected Aussie Retail Sales.
• EUR/SEK was extremely volatile within 11.8175-11.7140 extremes in wake of the Riksbank opting to stick with guidance for a 25 bp hike, as the repo rate path was ratcheted higher and the two dovish dissenters refrained from objecting this time.

Fixed Income

• Sellers into upticks have dominated price bond action across bonds and the general direction.
• Eurozone inflation data has surprised to the upside, latest remarks from Fed Chair Powell had a hawkish twist and the Riksbank continued its tightening cycle with a loftier rate path for the rest of 2023.
• Bunds, Gilts and the T-note hover just above intraday lows.

Commodities

• WTI and Brent futures have tilted modestly firmer on the session after a horizontal APAC session, with the sector buoyed by this week's inventory data.
• Spot gold is subdued given the strengthening of the Dollar seen this week, with the yellow metal hovering just north of the USD 1,900/oz mark as it returned to levels seen mid-March.
• Base metals are softer across the board amid the recent hawkish central bank commentary, whilst concerns surrounding China’s economic recovery remains a grey cloud.

Geopolitics

• EU is preparing to offer 'security commitments' to Ukraine although some member states are reportedly wary of the French-led plan to offer Kyiv assurances, while it was also reported that Denmark said the EU should not lower the bar to take in Ukraine, according to FT.
• Israeli PM Netanyahu said he wants to find a middle ground on court-system changes in Israel and regarding Ukraine, while he added Israel couldn't allow the US to give Ukraine the Iron Dome air-defence system developed jointly with the US and he has conveyed his concerns to Russia about growing military ties with Iran, according to WSJ.

US Event Calendar

• 08:30: 1Q GDP Annualized QoQ, est. 1.4%, prior 1.3%
  • 1Q Personal Consumption, est. 3.8%, prior 3.8%
  • 1Q PCE Core QoQ, est. 5.0%, prior 5.0%
• 08:30: June Initial Jobless Claims, est. 265,000, prior 264,000
  • June Continuing Claims, est. 1.77m, prior 1.76m
• 08:30: 1Q GDP Price Index, est. 4.2%, prior 4.2%
• 10:00: May Pending Home Sales YoY, est. -20.5%, prior -22.6%
  • May Pending Home Sales (MoM), est. -0.5%, prior 0%

DB's Jim Reid concludes the overnight wrap

Subdued market volatility remained the dominant theme over the last 24 hours, even as central bank governors pointed to further tightening ahead. The main news came from a panel at the ECB’s conference in Sintra, which featured Fed Chair Powell, ECB President Lagarde, BoJ Governor Ueda and BoE Governor Bailey. Arguably, it was Fed Chair Powell who generated the biggest headlines, since he said that Fed policy “has not been restrictive for long enough”, and that he wouldn’t take the prospect of consecutive hikes off the table. So if the Fed do hike in July, which Powell has previously described as a “live” decision, then those remarks leave open the chance of another hike at the September meeting as well.

Those comments meant investors ratcheted up the chances of further tightening from the Fed over the months ahead. In fact, futures are now pricing in a 79% chance of a July hike as of this morning, which is the highest probability to date. And looking further out, they’re increasingly discounting the chances of rate cuts at all this year, with pricing for the policy rate in December meeting now at a post-SVB high of 5.31%. In turn, that meant Treasury yields at the very front-end of the curve hit their highest levels of this cycle so far yesterday, with the 12m yield closing at 5.32%.

Although investors became more confident in the chances of near-term rate hikes from the Fed, bonds rallied across longer maturities. For example, even as the US 12m yield hit its highest of this cycle, the 10yr yield was down -5.6bps on the day to 3.71%. And back in Europe, yields on 10yr bunds (-4.1bps), OATs (-3.5bps) and gilts (-5.9bps) all saw decent declines of their own. Despite the sizeable rally over the course of the day, the 10yr US Treasury yield traded within the second narrowest daily range of 2023 so far (Monday this week was the narrowest). Indeed, over the last 3 weeks as a whole, the 10yr yield has consistently closed between 3.71% and 3.81%.

While bonds rallied, equities had a mixed but also low vol day, with the S&P 500 down -0.04% by the close. In fact for 14 of the past 17 trading sessions (82%), the S&P 500 has traded within a 1% range, which contrasts with last year when it traded within a 1% range for only 10% of trading days. Within equities, a significant underperformer was the Philadelphia Semiconductor Index (-0.90%), which lost ground following the news we mentioned yesterday that the Biden administration were planning to tighten export controls that would restrict the sale of AI chips to China. That was first reported in the WSJ, but has since been reported in several media outlets, and Nvidia shed -1.81% yesterday. Otherwise though, there was quite a bit of divergence between sectors, with utilities (-1.48%) leading the declines, whereas energy (+1.02%) outperformed against the backdrop of higher oil prices. Meanwhile in Europe there was also a decent rally, with the STOXX 600 (+0.70%) posting its biggest advance in 3 weeks.

When it comes to the ECB, yesterday’s panel saw President Lagarde stick to her existing language on the next hike in July, saying that the baseline was to proceed with a further move. However, beyond that she said they’d decide meeting-by-meeting, which was in line with other ECB speakers yesterday. For instance, Vice President de Guindos said that a September move would depend on the data, and that “I think it’s open”. The vast majority of ECB speakers have not ruled out a September hike either, with Croatia’s central bank governor Vujcic saying that “Given the persistence of inflation, we do realise that there might not be a pause in September”, and the usually dovish Bank of Greece Governor Stournaras noted that “we cannot say if in July it’s going to be the last hike”. Market pricing for the ECB remains pretty consistent with that messaging, with a 82% chance of a July hike priced in, but only a 43% chance that we’d have two hikes by the time of the September meeting. The other focus among ECB speakers has been on a longer period of elevated rates, with Banque de France governor Villeroy commenting that the ECB are close to terminal but that they must be patient on keeping rates at the terminal rate.

In terms of the ECB’s decision, an important component for that will be the Euro Area flash CPI print for June tomorrow, where our economists are looking for a decline in headline inflation to +5.8%. Ahead of that, we’re now starting to get some of the country releases, and yesterday saw Italian CPI fall a bit more than expected to +6.7% on the EU-harmonised measure (vs. +6.8% expected). That’s the lowest inflation has been in 14 months, but clearly that’s still some way above the ECB’s 2% target. Later today, we’ll get the numbers from Germany and Spain as well, which should help shape expectations for the Euro Area print tomorrow. In other Euro Area data, yesterday we received the latest evidence of the impact of central bank tightening on money supply, with the May release seeing growth in the liquid M1 component falling to a new historic low of -6.4% year-on-year.

Overnight in Asia, equities have struggled on the whole, with losses for the Hang Seng (-1.57%), the CSI 300 (-0.42%), the Shanghai Comp (-0.17%) and the KOSPI (-0.18%). The exception to that pattern has been the Nikkei (+0.42%), which followed dovish comments from BoJ Governor Ueda yesterday at the Sintra panel. He said that they needed more confidence about inflation in 2024 for a policy shift, and this morning the Japanese Yen is trading at 144.55 per US Dollar, the weakest since last November. Elsewhere overnight, equity futures in other regions are pointing to modest gains, with those on the S&P 500 up +0.08%.

Looking ahead, today will see EU leaders gather in Brussels for a summit that will extend into tomorrow. The meeting will be preceded by a working lunch with NATO’s Secretary-General Jens Stoltenberg, which comes less than a couple of weeks away from the summit of NATO leaders on July 11-12 as well. For this EU leaders’ summit, the items on the agenda include Ukraine and economic security, with the latter being an important topic as countries around the world are moving towards more active industrial policies.

Finally, there wasn’t much in the way of US data yesterday, but we did get the advance goods trade balance for May, which showed a trade deficit of $91.1bn (vs. $93.7bn expected).

To the day ahead now, and central bank speakers will include Fed Chair Powell, the Fed’s Bostic, the ECB’s De Cos, and the BoE’s Tenreyro. The ECB will also publish their Economic Bulletin. Data releases include the German flash CPI reading for June, UK mortgage approvals for May, the US weekly initial jobless claims, pending home sales for May, and the third estimate of Q1 GDP. Finally, a summit of EU leaders is taking place in Brussels.