Futures Slide As Rising Yields Spook Markets

US futures extended losses as markets finally noticed the recent surge in Treasury yields across the globe, sparking fears of stagflation and following recent remarks from the Federal Reserve that were more hawkish than anticipated. Sentiment was also cautious ahead of fresh employment data. Stocks have struggled as a result, with the Stoxx 600 down 1.2% and on course for its largest fall in six weeks. As of 8:00am, ET, S&P 500 and Nasdaq 100 futures lose 0.6%. Treasury yields rose across the curve, adding to gains on Wednesday spurred by the Fed minutes. The policy sensitive two-year rate inched up to 4.96%. The dollar initially dropped but then spiked after a blow out ADP report.

Exxon Mobil fell in premarket trading after forecasting a $4 billion hit to earnings, while Meta Platforms Inc. rose after Instagram officially launched an app designed as a rival to Twitter. Freight transportation companies are likely to see “challenging” results in the second quarter, according to Morgan Stanley, though companies may be more upbeat about the outlook for future periods. Here are some other notable premarket movers:

• Genius Sports Limited rises 13% after the sports data provider and the National Football League (NFL) agreed to a multi-year extension of their strategic partnership.
• Microsoft’s artificial intelligence-driven gains can propel it to join Apple Inc. in the elite category of stocks with a market capitalization of more than $3 trillion, according to Morgan Stanley analysts. Shares are up 0.8%.
• Sweetgreen Inc. climbs 5.1% after BofA raises the salad chain to buy from neutral, citing increasing foot traffic, the prospect that same-store sales growth will see continued momentum, and plans to automate operations.
• Affirm Holdings Inc. shares declined 4.8% in premarket trading Thursday after Piper Sandler cut its recommendation on the buy-now-pay- later firm to underweight from neutral as higher rates and competition put pressure on margins.
• Perion shares gain 9.4% in US premarket trading after the digital media company reported preliminary second-quarter revenue that beat estimates.
• Nkarta rose 2.3% in after-hours trading Wednesday after the biotechnology company announces Alyssa Levin will be its new chief financial and business officer.
• JetBlue shares fell 0.5% in postmarket trading after the company said it’s decided not to appeal a court ruling against the carrier’s Northeast Alliance (NEA) with American Airlines, and that it has initiated the termination of the alliance.

In other news, Treasury Secretary Janet Yellen lands in Beijing in a visit aimed at repairing ties between the world’s two largest economies. That’s as Tesla and Chinese rivals signaled truce in a brutal price war that rattled the EV industry this year. And Elon Musk’s Twitter now faces a direct threat from Instagram’s text app Threads, which lured more than 10 million sign-ups in its first seven hours.

US employment reports this week may provide clues on the path for policy. Ahead of the closely watched nonfarm payrolls release on Friday, the so-called JOLTS report of job openings is expected to show a tapering of available positions, and a separate measure of jobless claims is anticipated to tick higher.

Stocks have lost some ground after a strong first half of the year as continued hawkishness from central banks damps hopes of a soft landing for the global economy. Minutes from the Fed’s June meeting showed division among policymakers over the decision to pause rate hikes, with the voting members on track to take rates higher this month.

“The fact that the FOMC has now officially adopted the staff forecasts for a recession in the US is bad for risk assets,” said James Athey, investment director at Abrdn. “What we get now is that the Fed expects to cause a recession but that won’t stop them hiking at least twice more this year. If that’s not bad for risk assets priced at 20 times earnings, I don’t know what is.”

European stocks retreated following hawkish minutes from the Federal Reserve’s last policy meeting, with investors also weighing early corporate earnings reports. Stoxx 600 dropped down 1.2% and on course for its largest fall in six weeks.  United Utilities shares rise as much as 3.2% after Morgan Stanley upgraded the stock to overweight saying it sees a long- term, “unprecedented growth opportunity” for UK water companies, that isn’t factored into current prices. Here are some other notable European movers:

• U-blox gains as much as 4.1%, most since May 30, after Baader raised its recommendation on the Swiss semiconductor company to buy from add.
• Hunting shares surge as much as 19% after the energy services provider said it has performed ahead of expectations in the first half. Guidance is increased again for 2023, and Hunting added that the outlook for 2024 is improving.
• Suedzucker shares rise as much as 5% following its results, with Warburg describing the German food ingredients firm’s start to the year as “stellar.”
• Edmond de Rothschild Private Banking cut its exposure to luxury stocks in May given their expensive valuation, its chief investment officer said. LVMH shares fall as much as 2% Hermes as much as 2.7%.
• Currys shares sink as much as 15% after the UK electronics- and-appliances retailer noted an uncertain economic outlook in its main markets and said it isn’t paying a final dividend.
• Embracer shares fall as much as 14% after an offering of 80m class B shares priced at SEK25 apiece, representing 9.2% discount to last close.
• Ocado shares drop as much as 3.6% after Morgan Stanley lowered its price target and estimates ahead of the UK online grocer’s first-half results. The broker said that recent share-price strength has been surprising.

Earlier in the session, Asian stocks were mostly lower following the post-Independence Day hangover in the US owing to recent weak global data releases, a rising yield environment and after the FOMC Minutes provided little to deviate from the current view of future rate increases.Chinese stocks in Hong Kong fell by the most since Jan. 30 with banks among the biggest drags, amid broad weakness in the Asia Pacific region. Hang Seng China Enterprises Index falls as much as 3.7%. Banks were among the biggest drags: China Construction Bank down as much as 3.3%; Industrial and Commercial Bank -3%; Bank of China -1.8%. The selling was acute after China’s largest lenders cut rates for corporate US dollar deposits amid efforts to support the yuan and with banks said to have stopped buying bonds issued in the Shanghai free trade zone after heightened regulatory scrutiny, while losses in the mainland were stemmed ahead of US Treasury Secretary Yellen’s arrival in Beijing for meetings with senior officials. Nikkei 225 was pressured at the open with selling exacerbated after slipping beneath the 33,000 level. Australia's ASX 200 traded lower as underperformance in the mining and materials-related industries spearheaded the declines seen in nearly all sectors and with risk appetite also sapped by a rise in Aussie yields.

In FX, the Bloomberg Dollar Spot Index slipped 0.1% as the yen led gains against Group-of-10 peers as regional stock markets racked up losses, boosting haven demand. A gauge of the dollar consolidated after Wednesday’s gain. USD/JPY drops 0.8% to 143.56 while EUR/JPY weakens 0.8% to 155.85. In China, the central bank extended support for the yuan via a stronger daily reference rate. Chinese investors don’t expect policymakers to unveil aggressive stimulus or big economic reforms at a key meeting expected later this month, according to Goldman Sachs Group Inc.

In rates, Treasury yields rose as much as 5bps across the curve, adding to gains on Wednesday spurred by the Fed minutes. The policy sensitive two-year rate was 3bps higher at 4.97% after the Fed minutes signaled they are on track to raise rates again this month. In the UK, yields on 10-year government bonds climbed as much as 10bps to 4.59%, highest since October when then Prime Minister Liz Truss’s fiscal plan unnerved markets. Traders are now fully pricing a terminal Bank of England rate of 6.5% by February, sending two-year yields rise 8bps to 5.46% .

In commodities, crude futures advance, with WTI rising 0.7% to trade near $72.30. Spot gold adds 0.2% to around $1,919. Bitcoin adds 3%

Notable upside has been seen throughout the morning in key crypto's including Bitcoin and ETH, up over 2% thus far with Bitcoin surpassing and climbing further above the USD 31k mark.

Looking to the day ahead, and there’s several US data releases including the ISM services index for June, the weekly initial jobless claims, the ADP’s report of private payrolls for June, the JOLTS job openings for May and the trade balance for May. Meanwhile in Europe, there’s German factory orders and Euro Area retail sales for May, along with the German and UK construction PMIs for June.

Market Snapshot

• S&P 500 futures down 0.5% to 4,463.25
• MXAP down 1.4% to 162.61
• MXAPJ down 1.6% to 511.35
• Nikkei down 1.7% to 32,773.02
• Topix down 1.3% to 2,277.08
• Hang Seng Index down 3.0% to 18,533.05
• Shanghai Composite down 0.5% to 3,205.58
• Sensex up 0.3% to 65,615.34
• Australia S&P/ASX 200 down 1.2% to 7,163.45
• Kospi down 0.9% to 2,556.29
• STOXX Europe 600 down 1.2% to 452.54
• German 10Y yield little changed at 2.51%
• Euro little changed at $1.0849
• Brent Futures up 0.3% to $76.90/bbl
• Gold spot up 0.1% to $1,916.85
• U.S. Dollar Index little changed at 103.35

Top Overnight News from Bloomberg

• Bets on the trajectory of the Bank of England’s key interest rate surged to the highest level in a quarter century as traders questioned officials’ ability to tame inflation without hobbling the UK economy.
• German factory orders rebounded in May, a sign the manufacturing slump may be easing as Europe’s biggest economy shakes off a recession.
• Federal Reserve officials were less united at their June meeting than their unanimous decision suggested, as some favored interest-rate increases but went along with the move to leave policy unchanged.
• After months of central banks dominating foreign-exchange markets, commodities may be starting to bear more influence over currencies.
• China’s central bank extended support for the yuan via a stronger daily reference rate, a day after its flagship newspaper reassured investors that authorities have sufficient ammunition to stabilize the weakening currency.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly lower following the post-Independence Day hangover in the US owing to recent weak global data releases, a rising yield environment and after the FOMC Minutes provided little to deviate from the current view of future rate increases. ASX 200 traded lower as underperformance in the mining and materials-related industries spearheaded the declines seen in nearly all sectors and with risk appetite also sapped by a rise in Aussie yields.Nikkei 225 was pressured at the open with selling exacerbated after slipping beneath the 33,000 level. Hang Seng and Shanghai Comp declined with acute selling in Hong Kong-listed Chinese banks after China’s largest lenders cut rates for corporate US dollar deposits amid efforts to support the yuan and with banks said to have stopped buying bonds issued in the Shanghai free trade zone after heightened regulatory scrutiny, while losses in the mainland were stemmed ahead of US Treasury Secretary Yellen’s arrival in Beijing for meetings with senior officials.

Top Asian News

• Chinese banks stopped buying bonds issued in the Shanghai free trade zone after heightened regulatory scrutiny.
• US Commerce Department firmly opposes export controls announced by China on gallium and germanium, while the US will engage with allies and partners to address the export controls announced by China.
• China Stocks Sink in Hong Kong on Growth Woes, Fed Concerns
• China Sees Suicide Rise Among Young People
• Mining Sector Raised to Hold at Liberum on Balanced Price Risks
• Malaysia Keeps Key Rate Steady to Support Slowing Economy
• Dalian Wanda Commercial Rating Cut to B1 From Ba2 at Moody’s
• ETFs Dominate Emerging-Market Flows as Money Managers Lose Share
• US Warned Hong Kong Banks on Tech Exports to Russia, Nikkei Says
• SoftBank Takes Advantage of BOJ’s Dovish Stance to Sell Bond
• Tesla and Chinese Rivals Signal Truce in Brutal EV Price War
• Japan in Talks to Buy Gas From Qatar Amid Diversification Shift

European bourses are in the red with cyclicals in particular lagging on ongoing growth concerns, Euro Stoxx 50 -1.5%. Sectors are all in the red with the negative price action extending shortly after the cash open given Construction PMIs, Cyclicals lag while Defensive names are the relative outperformers but remain firmly negative. Stateside, futures slip ahead of a busy data docket with the RTY -0.7% lagging given the above while the NQ -0.4% fares slightly better given META +1.7% pre-market action as Threads launches. Meta (META) CEO Zuckerberg says Threads passed 10mln signups in seven hours. ASML "told the Global Times on Thursday that it did not roll out a special-edition lithography machine for the Chinese market, responding to the market rumour of a special ASML DUV system for Chinese market."

Top European News

• SNB's Maechler said the SNB still sees inflation as being very high and doesn't rule out further rate increases, according to Le Temps.
• BoE's Bailey says moves by regulators on retail prices, particularly in the fuel market, will help to lower inflation, via BBC; evidence that some retailers are overcharging customers. Expects quite a marked fall in inflation but it will be hard for borrowers, cannot provide a date for when interest rates will begin to come down.
• BoE Decision Maker Panel: One-year ahead CPI inflation expectations decreased to 5.7% in June, down from 5.9% in May. Expected year-ahead wage growth slightly increased to 5.3% on the month in June (up from 5.2% in May) although the three-month moving average decreased by 0.1 percentage points to 5.3%.
• UK PM Sunak has reportedly tapped German Chancellor Scholz to help delay the EU EV tariff, according to Bloomberg News.

FX

• Yen turns the tide in choppy risk waters, with USD/JPY reversing through 144.00 where hefty option expiries reside and JPY crosses also retracing a chunk of their recent upside.
• DXY slips from post-FOMC minutes peak within 103.460-100 range as focus shifts to ADP, IJC, ISM services and JOLTS.
• Aussie and Kiwi resist aversion with the former underpinned by encouraging trade data and both relieved to see Yuan propped by PBoC; AUD/USD and NZD/USD towards upper end of 0.6686-34 and 0.6214-0.6164 bands.
• Euro is losing sight of 1.0900, but holding above key support and Pound propped around 1.2700 as BoE rate expectations continue to rocket.
• PBoC set USD/CNY mid-point at 7.2098 vs exp. 7.2510 (prev. 7.1968)

Fixed Income

• No respite for debt and hawkish Central Bank vibes compound bearish technical impulses.
• Bunds probe support zone between 132.09-65 bounds, Gilts towards base of 93.14-94.03 range and T-note nearer 11-01+ than 111-15 overnight high.
• OATs and Bonos weak after lacklustre demand for French and Spanish supply irrespective of marked concessions.

Commodities

• WTI and Brent are firmer by around USD 0.30/bbl a piece with specific drivers limited and despite broader growth concerns impacting elsewhere.
• Reminder, the OPEC summit has entered its second day though remarks thus far have been less impactful than Saudi's commentary on Wednesday.
• Spot gold is benefitting from the softer USD and downbeat sentiment with the yellow metal attempting to move above USD 1920/oz.
• Base metals are, in contrast, lower and in-fitting with broader sentiment with LME Copper slipping below USD 8250/T, despite Codelco warning its copper production will end 2023 at the low-end of its forecast range.
• US Energy Inventory Data (bbls): Crude -4.4mln (exp. -1.8mln), Cushing +0.3mln, Gasoline +1.6mln (exp. -1.1mln), Distillate +0.6mln (exp. +0.5mln)
• Caspian Pipeline Consortium says all pumping stations are working as usual.

Geopolitics

• Ukrainian President Zelensky said he wanted the counteroffensive to happen much earlier and he told US and European leaders that Ukraine needed the weapons for that, while he also noted that difficulties on the battlefield slowed the pace of the counteroffensive, according to a CNN interview.
• US Air Force said 3 Russian fighter jets harassed drones during a mission against ISIS which forced the US to perform evasive manoeuvres, according to AJA Breaking.
• Swedish PM Kristersson said after meeting with US President Biden that Biden expressed very strong support for Sweden's NATO accession and they both agreed the NATO Summit in Vilnius is a natural time for Swedish NATO accession, according to Reuters.
• US Secretary of State Blinken stressed the importance of NATO unity in a call with the Turkish Foreign Minister and encouraged Turkey's support for Sweden to join the NATO alliance now.
• Two shells fired by Israel towards southern Lebanon fell after a missile was fired from Kafr Shuba, according to Al Arabiya. Additionally, at least one rocket has been fired from Southern Lebanon towards Israel, via Reuters citing three security sources. Subsequently, "There was no rocket from Lebanon into Israel this morning, there is controlled mine explosions being conducted along the border.", according to AuroraIntel. Most recently, Israel's Kan Radio saying Israeli forces shelling Lebanon is in response to rocket launch.
• Belarusian President Lukashenko says Russia will consult with Belarus in case nuclear weapons are used, according to Tass; says we are not going to attack anyone with nuclear weapons, but if aggression is shown, the response will be immediate. Adding that targets have been determined.
• Belarusian President Lukashenko says talks on Ukraine hit dead end; nuclear weapons will not be used during special military operation, it's only possible in case of NATO aggression, according to Tass.

US Event Calendar

• 08:15: June ADP Employment Change 497,000, est. 225,000, prior 278,000
• 08:30: July Initial Jobless Claims, est. 245,000, prior 239,000
• 08:30: June Continuing Claims, est. 1.73m, prior 1.74m
• 08:30: May Trade Balance, est. - $69b, prior -$74.6b
• 09:45: June S&P Global US Composite PMI, prior 53.0
• 09:45: June S&P Global US Services PMI, est. 54.1, prior 54.1
• 10:00: May JOLTs Job Openings, est. 9.89m, prior 10.1m
• 10:00: June ISM Services Index, est. 51.2, prior 50.3

DB's Jim Reid concludes the overnight wrap

With the US back from their holiday, it wasn't a great day for 60/40 portfolios as bonds and equities mostly declined in unison. The most notable sell-offs were in US Treasuries (10yr UST +7.7bps) and with a 6.6bps steepening of the US curve, Gilts (10yr +7.8bps), and a -0.73% decline in the Stoxx 600.

The sell-off in 10yr Treasuries (+7.7bps) helped them hit a post-SVB high of 3.93%. Yields edged higher all day until the Fed minutes were released towards the latter part of the trading session. At that point the sell-off seemed to stall. Real yields led the move, with the 5yr real yield (+7.0bps) closing above 2% for the first time since 2008, highlighting that policy and yields are getting more restrictive. The front-end was more resilient with the 2yr yield only +0.9bps higher. Fed futures are indicating 33bps of hikes through the November meeting with an 85% likelihood of a hike in 3 weeks’ time at the July meeting. Meanwhile in early Asian trading, yields on the 10yr USTs (+2.18bps) continue to move upwards, trading at 3.95% as we go to print.

The Fed minutes portrayed a divided committee to some degree, highlighting that while “almost all participants judged it appropriate or acceptable to maintain the target range for the federal funds rate at 5% to 5.25%, some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal.” There were also discussions of how much of the top-line economic data may not be capturing the full picture of a slowing economy, specifically the discrepancies between GDP and GDI, as well as nonfarm payrolls and the aggregate hours worked. These were two factors that led the Fed staff to maintain their forecast for a recession. Lastly, the minutes gave further evidence that the Fed is still concerned about sticky inflationary forces, with the minutes citing a resilient labour market and higher shelter inflation.

That US bond sell-off was matched in the UK, with 10yr Gilt yields (+7.8bps) closing at their highest level since the mini-budget turmoil last September at 4.49%. And for both the 2yr and 5yr yields, they hit levels that haven’t been seen since 2008, at 5.38% and 4.78%, respectively. That followed a government bond auction, in which some 2025 notes went for 5.668%, which is the highest average rate since an auction in June 2007. Bear in mind as well that investors’ expectations for future BoE hikes have only become more aggressive in recent days. Indeed, overnight index swaps are now pricing in a 50%-plus likelihood that the terminal rate will go as far as 6.5% over the months ahead.

The softness in equities was more down to generally poor data releases. Firstly, the final European PMIs came in beneath expectations, thus helping to ramp up fears about a recession again. Furthermore, that came on the heels of some downside surprises out of China we mentioned in yesterday’s edition, as well as the poor ISM manufacturing print at the start of the week. So there’s a growing sense that this might be starting to form a pattern now. Today, we’ve got another batch of important releases, including the ISM services and the weekly jobless claims, so any more negative surprises will only ratchet up this sense that the data is starting to turn again.

The most important PMI yesterday was the Euro Area composite PMI, where the final reading for June was revised down to 49.9 (vs. flash 50.3). This is hardly the biggest PMI revision we’ve ever had, but it pushed the composite number beneath the 50-mark that separates expansion from contraction, which is the first time that’s happened in 6 months. As discussed at the top, this meant European equities suffered a relatively big hit yesterday, with the STOXX 600 (-0.73%) suffering its worst performance in a couple of weeks.

US equities didn’t experience falls on quite that scale, but the S&P 500 (-0.20%) still lost ground after the holiday. Those declines were spread fairly evenly, with the NASDAQ (-0.18%) and the Dow Jones (-0.38%) seeing similar-sized moves. That said, small-cap stocks did underperform, with the Russell 2000 (-1.26%) losing ground after a run of 6 consecutive gains. Cyclicals were a decent underperformer as well with materials (-2.5%), consumer durables (-1.2%), and transports (-0.8%) the worst performers.

Back to bonds and the sell-off was much smaller in Europe, with yields on 10yr bunds (+2.5ps) and OATs (+1.0bps) seeing more modest moves, but those on BTPs (-3.1bps) falling back. That was supported by more positive news on the inflation side, with the ECB’s latest Consumer Expectations Survey for May showing a further decline in inflation expectations. That showed median expectations for the next 12 months falling to 3.9%, which is their lowest level since February 2022, back when Russia’s invasion of Ukraine began.

On top of that, we got the latest PPI reading from the Euro Area in May, which came in beneath expectations again. The big headline was that producer prices were actually down relative to a year ago, with year-on-year deflation of -1.5% (vs. -1.3% expected), which marks a stunning turnaround from the +43.4% peak last August.

Asian equity markets are falling this morning extending the decline in global equities as rising odds of further policy tightening by the Fed damp sentiment. As I check my screens, the Hang Seng (-3.08%) is sharply down, emerging as the biggest underperformer across the region with declines led by technology stocks and basic materials. The Nikkei (-1.22%) and the KOSPI (-0.44%) are also seeing losses in morning trade. Meanwhile in mainland China, the Shanghai Composite (-0.45%) and the CSI (-0.30%) are also in the red. In overnight trading, US stock futures are indicating a negative start, with those tied to the S&P 500 (-0.26%) and NASDAQ 100 (-0.32%) edging lower.

Early morning data showed that Australia’s trade balance for the month of May widened to A$11.8bn (v/s A$10.9bn expected) from a downwardly revised surplus of A$10.5bn. Meanwhile, overall exports rebounded strongly by +4.0% m/m in May, after a -6.0% decline in the preceding month. Yields on 10yr Australian government bonds moved higher by +11bps, trading at 4.11%, the highest level since October.

Lastly, oil prices continued to rise yesterday following the production cuts that were announced earlier in the week. That left Brent crude up +0.52% at $76.65/bbl, which is its highest closing level in two weeks. WTI prices saw a big catch-up as well following the holiday, with a +2.87% gain to $71.79/bbl.

To the day ahead now, and there’s several US data releases including the ISM services index for June, the weekly initial jobless claims, the ADP’s report of private payrolls for June, the JOLTS job openings for May and the trade balance for May. Meanwhile in Europe, there’s German factory orders and Euro Area retail sales for May, along with the German and UK construction PMIs for June.