Global Markets Drop, US Futures Flat In Muted Holiday Trading

Global stocks fell on Monday after the recent powerful rally lost steam at the end of last week, while US equity futures were flat in thin trading celebrating the ("exploitative") Juneteenth holiday following Wall Street’s slight decline on Friday amid concern about the economic outlook. S&P 500 futures traded between modest gains and losses and at last check were down 0.1% as of 8:00am ET while Nasdaq 100 futures were flat. Global investors were also disappointed by the ongoing lack of more stimulus from China after its State Council stopped short of releasing any specific proposals for new support measures for the economy.

The S&P 500 has rallied for the past five weeks, the longest such streak since November 2021, as investors anticipate the end of the Fed's tightening cycle and that earnings will hold up better than expected. Several Fed officials, including Chair Powell, are slated to speak this holiday-shortened week. Investors will parse these statements for clues on the path of monetary policy and the direction of growth.

Despite the pressure of an $4.2 trillion options expiry at the end of last week, the S&P 500 index capped a fifth straight week of gains and is now higher than it was the day the Federal Reserve kicked off its campaign.

“We expect the US to head into a short, two-quarter, recession later this year,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. That said, the “US recession is likely to be shallower and shorter than those in Europe and as a result, companies with a larger US revenue exposure will likely outperform companies with more exposure to Europe or the slowing Chinese consumer.”

Looking ahead, Fed Chair Jerome Powell will give his semi-annual report to Congress on Wednesday, while St. Louis Fed President James Bullard and his counterparts in New York and Chicago are among this week’s speakers.

As discussed previously, the S&P 500 index posted its mildest reaction on FOMC day in two years. Though it was the first in 11 meetings where policymakers held rates, they also lifted forecasts for higher borrowing costs of 5.6% in 2023, implying two additional quarter-point rate hikes or one half-point increase before the end of the year, although judging by the market reaction, few believed this particular forecast.

“Markets are still pricing in a lower path of interest rates compared to the Federal Reserve’s dot plot,” said Janet Mui, head of market analysis at RBC Brewin Dolphin. “While we are close to peak rates, it is uncertain how long rates will stay high. Markets have a more dovish lens on that.”

European stocks followed their Asian counterparts lower as investors were left disappointed by the lack of any fresh stimulus measures from China. Traders are also keeping an eye on details surrounding the meeting between Blinken and Xi in Beijing.

The Stoxx 600 is down 0.5% with with chemicals, construction and basic resources leading declines, while financials and insurance are the only sectors in the green. Among the biggest individual movers, Sartorius AG slumped 15% after issuing a bigger-than-expected profit warning. Here are some of the more notable movers:

• MTU Aero Engine gains as much as 4.5% after it raised its earnings forecast for the current financial year. Jefferies says the timing and magnitude of the revision so early in the year should be well received
• Granges gains as much as 7.4% after it was upgraded to buy from hold in the short term at Handelsbanken, which projected the Swedish aluminum engineering firm may post a record 2Q
• Crayon shares rise as much as 10% after Bloomberg News reported that the Norwegian IT consultancy is said to be exploring options including a sale
• Avacta shares rise as much as 12% after the life sciences-focused small-cap firm said it had a “strong” cash balance of £27 million and no fundraising is imminent
• Sartorius AG and its French-listed subsidiary Sartorius Stedim Biotech both plunge after cutting full-year forecasts, with Sartorius AG down as much as 15% and Sartorius Stedim down 16%
• Nordnet sinks as much as 12% after receiving its only negative analyst view as JPMorgan cuts the Swedish investment and savings platform to underweight, citing higher cost of deposits and weak inflows
• ALK-Abello shares fall as much as 9.4%, the most since April, after CEO Carsten Hellmann announced he will step down from his role at the Danish allergy drugmaker at the end of 2023

Earlier in the session, Chinese tech companies dropped after China disappointed hopes for further stimulus. Asian stocks were mostly negative following last Friday's US losses while risk appetite was also contained as markets digested US-China talks and with US markets closed. Nonetheless, ASX 200 (+0.6%) bucked the trend with the index buoyed as strength in the defensive, financial and tech sectors made up for the losses in mining-related stocks. Nikkei 225 (-1.1%) was subdued and eventually breached through earlier support around the 33,500 level, after a torrid rally that helped send the index to the highest level since 1990.

Hang Seng (-0.8%) and Shanghai Comp. (-0.5%) were lower amid ongoing China growth concerns with the likes of Goldman Sachs, Nomura and UBS all cutting their Chinese GDP forecasts for 2023, while participants also digested the meeting between US Secretary of State Blinken and Chinese Foreign Minister Qin in Beijing which was said to be candid, substantive and constructive although lacked any major breakthroughs aside from agreeing to schedule a reciprocal visit at a suitable time.

Reports covering China’s State Council meeting on Friday, chaired by Premier Li Qiang, were light on details about any potential stimulus or timing. The lack of tangible evidence for support adds to worries over a slowing economy, unnerving investors who had bid up Chinese equities last week in the hope of a sweeping package.

Treasury futures are lower with cash markets closed for to the Juneteenth holiday in the US. Bunds and gilts are also in the red.

In Fx, the Bloomberg Dollar Spot Index is up 0.1%. The Norwegian krone is the weakest of the G10 currencies, falling 0.4% versus the greenback. The offshore yuan is down 0.4%.

In commodities crude futures decline with WTI falling 0.4% to trade near $71.50. Spot gold is little changed around $1,956

There is nothing on today's US calendar.

* * *

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were mostly negative following last Friday's losses on Wall St, while risk appetite was also contained as markets digested US-China talks and with US markets closed on Monday for Juneteenth. ASX 200 bucked the trend with the index buoyed as strength in the defensive, financial and tech sectors made up for the losses in mining-related stocks. Nikkei 225 was subdued and eventually slipped below earlier support around the 33,500 level. Hang Seng and Shanghai Comp. were lower amid ongoing China growth concerns with the likes of Goldman Sachs, Nomura and UBS all cutting their Chinese GDP forecasts, while participants also digested the meeting between US Secretary of State Blinken and Chinese Foreign Minister Qin in Beijing which was said to be candid, substantive and constructive although lacked any breakthroughs aside from agreeing to schedule a reciprocal visit at a suitable time. US equity futures were uneventful after Friday's retreat and approaching holiday lull. European equity futures are indicative of a lower open with the Euro Stoxx 50 -0.7% after the cash market closed up 0.7% on Friday.

Top Asian News

• US President Biden said he is hoping to meet with Chinese President Xi in the next several months.
• US Secretary of State Blinken held candid, substantive and constructive talks with Chinese Foreign Minister Qin in Beijing and emphasised the importance of diplomacy and maintaining open channels of communication to reduce the risk of misperception and miscalculation. Blinken raised issues of concern and opportunities to explore cooperation on shared transnational issues with China where interests align, while Blinken invited Qin to visit Washington to continue the discussions and they agreed to schedule a reciprocal visit at a suitable time, according to a State Department spokesperson cited Reuters.
• US State Department senior officials said US Secretary of State Blinken’s meeting with his Chinese counterpart was direct and it was clear there are profound differences between the two countries, while both officials were well-prepared and it was a “real conversation”. Furthermore, Blinken made it clear that the US does not want to decouple from China and the two sides expressed a desire to stabilise the relationship and prevent competition from veering into conflict, as well as agreed to work together to increase commercial flights between the US and China, according to Reuters.
• Chinese Foreign Minister Qin said during the meeting with US Secretary of State Blinken that China is committed to building a stable, predictable and constructive relationship with the US, while Qin made clear the concerns on China’s core interests with the Taiwan issue the most important issue and risk in Sino-US relations, according to state media.
• China warned of flood risks across large parts of the country and asked local authorities to closely watch for flood threats amid expectations of heavy rains in the days ahead, according to The Star.
• Goldman Sachs cut its China GDP growth target for 2023 to 5.4% from 6.0% and cut the 2024 target to 4.5% from 4.6%, while it said that China's ongoing stimulus is incapable of generating a strong growth impulse. It was separately reported that Nomura reduced its Chinese 2023 GDP growth forecast to 5.1% from 5.5% and UBS also lowered its China 2023 growth forecast to 5.2% from 5.7%.

European equity futures are indicative of a lower open with the Euro Stoxx 50 -0.7% after the cash market closed up 0.7% on Friday.

Top European News

• UK Chancellor Hunt ruled out providing direct fiscal support for households as mortgage rates soar, according to FT.
• UK Chancellor Hunt told ministers to speed up the adoption of AI to boost the economy with the UK aiming to ease the pressure on public services by focusing on opportunities provided by new tech, according to FT.
• ECB President Lagarde said on Friday that it is very likely that the ECB will continue to hike rates in July and will then follow a data-dependent approach after July, while she added inflation is projected to remain too high for too long.
• Fitch affirmed Luxembourg at AAA; Outlook Stable and affirmed Cyprus at BBB; Outlook Stable, while it affirmed Norway at AAA; Outlook Stable.

FX

• DXY was rangebound amid the US holiday weekend and ahead of Fed Chair Powell’s testimony in Congress from mid-week, while comments late on Friday from Fed’s Goolsbee did little to shift the dial in which he stated that the Fed is on a reconnaissance mission and will scope it out, as well as noted conflicting data on whether they have done enough.
• EUR/USD was little changed on a 1.09 handle following the absence of any fresh catalysts from the bloc over the weekend.
• GBP/USD lacked direction ahead of the BoE rate decision on Thursday and after UK Chancellor Hunt ruled out providing direct fiscal support for households as mortgage rates surge.
• USD/JPY marginally pulled back from last week’s peak after stalling near the 142.00 handle.
• Antipodeans were pressured owing to the risk aversion and deteriorating outlook on China.
• PBoC set USD/CNY mid-point at 7.1201 vs exp. 7.1186 (prev. 7.1289)
• US Treasury's Semi-Annual Currency Report on Friday refrained from designating any countries as currency manipulators, while China, South Korea, Germany, Malaysia, Singapore, Switzerland and Taiwan remained on the currency "monitoring list".

Fixed Income

• 10yr UST futures traded rangebound owing to the closure of US cash trade on Monday and with participants awaiting Fed Chair Powell’s testimony at the Semiannual Monetary Policy Report to Congress from Wednesday.
• Bund futures were steady with prices kept afloat after Friday’s intraday rebound and with the jury out regarding ECB rates for September after a telegraphed hike for next month.
• 10yr JGB futures kept afloat but with price action restricted due to the absence of any data releases from Japan and lack of additional BoJ purchases today.

Commodities

• Crude futures were pressured amid the risk aversion and a pullback in WTI from resistance at USD 72/bbl.
• Kuwait issued a decree forming a new Cabinet headed by its emir Sheikh Ahmed Nawaf Al-Ahmad Al-Sabah and businessman Saad Al Barrak was named as the new Oil Minister, according to state news agency KUNA.
• Kuwait Oil Company CEO said Kuwait’s output capacity is above 2.8mln bpd now and will reach 3mln bpd in 2025, while he added the Kuwait Oil Company is spending KWD 13bln on oil projects during the next 5 years and both the Kuwait Oil Company and Kuwait Gulf Oil Company are committed to reaching 4mln bpd capacity in 2035.
• Iraq launched a sixth round of gas exploration licensing in several provinces, according to Reuters.
• Spot gold traded flat alongside an uneventful dollar and with US participants away on Monday.
• Copper futures trickled lower with demand dampened by the cautious mood and China growth concerns.

Crypto

• Bitcoin eked a slight gain overnight with price action rangebound beneath the USD 26,500 level.
• US SEC secured emergency relief to protect Binance.US customers’ assets with an order that ensures Binance.US customers can continue to withdraw their assets. Binance said it maintains that the SEC’s request for emergency relief was entirely unwarranted and it is pleased that the disagreement was resolved on mutually acceptable terms, while it added that user funds have been and always will be safe and secure on all Binance-affiliated platforms, according to Reuters. There were also separate reports that the Binance CEO said they issued a cease-and-desist order to the scammer entity Binance Nigeria Limited.

Geopolitics

• US President Biden said it is totally irresponsible of Russia to deploy tactical nuclear weapons to Belarus and noted that Ukraine has to meet the same standards to be a part of NATO as all other nations, according to Reuters.
• Russian President Putin told the delegation of African leaders in St Petersburg that Russia welcomes the leaders’ balanced stance on the conflict regarding Ukraine and that Russia is open to dialogue with all those that want peace based on principles of justice and consideration of the legitimate interests of the parties, according to Reuters.
• Russia’s defence ministry said Russia repelled eight Ukrainian attacks on the Donetsk front and that the most active Ukrainian attacks are on the Zaporizhzhia front, according to TASS. In relevant news, Ukrainian forces took control of the Piatykhatky settlement on the Zaporizhzhia front, while the Governor of Russia’s Bryansk region said air defences repelled an attack by Ukrainian drones on an oil pumping station on the Druzhba oil pipeline, according to Reuters.
• UN said Russia has so far declined the request to access areas under its temporary military control following the Ukrainian dam burst, while the UN said aid cannot be denied to people who need it and it urged Russia to act in accordance with obligations under international humanitarian law.
• North Korea said its failed satellite launch was the gravest mistake and it ordered workers to analyse the failed military satellite launch and prepare for another in the near future. Furthermore, North Korea will consistently adhere to the orientation of developing nuclear weapons and the line of bolstering up the nuclear force set by the party, as well as strengthen solidarity with countries that oppose the US strategy of world supremacy, according to KCNA.
• Saudi Arabia’s Foreign Minister arrived in Tehran on Saturday amid a rapprochement between the two Middle Eastern nations, according to Iranian state television.

US Event Calendar

• Nothing on the calendar

DB's Jim Ried concludes the overnight wrap

It's not easy to find the main highlight this week with a number of events that could be meaningful but could also pass without incident. Powell's semi-annual testimony to the House and the Senate on Wednesday and Thursday, respectively, should be the key event but coming so soon after the FOMC it's hard to know what he can say that will be particularly new. Around this there is plenty of Fed and ECB speak as you can see in the day-by-day calendar at the end. They will I'm sure give their nuances to the policy meetings last week.

Given an increasing global focus on rising UK rates of late, then UK CPI (Wednesday) and the expected 25bps hike on Thursday, and associated commentary, could have a big impact on Gilts and with it global bonds. There was lots in the weekend papers about the upcoming mortgage refi wave over the next couple of years if rates stay close to current levels. So this is becoming a big topic.

Staying with rates and yields, given how much US yields rallied for a period last week after jobless claims stayed surprisingly high, this Thursday's release could be one of the data highlights of the week. The recent rise has an element of the fraudulent filings the market discovered a few weeks back, but it’s got slightly more broad-based since so this could be the first area where we see any genuine cracks in the labour markets. So all eyes on this.

Elsewhere, Global flash PMIs on Friday are always a big focus. Back in the US we have a slew of housing data including the NAHB housing market index today, housing starts and building permits tomorrow and existing home sales on Thursday. Housing is still very weak but many are seeing green shoots starting to emerge. The other key highlights are Japanese inflation on Friday and UK retail sales the same day and PPI in Germany tomorrow. In China, markets will focus on domestic banks' loan prime rates fixings tomorrow following last week's PBoC reverse repo and MLF rate cuts as well as a round of disappointing economic data amid the broader talk about the need for stimulus to support the waning recovery. The rest of the day-by-day week ahead is at the end as usual.

Asian equity markets are largely struggling at the start of the week, tracking Friday’s fall in US stocks. As I check my screens, the Hang Seng (-1.57%) is the biggest underperformer across the region with the CSI (-0.84%), the Shanghai Composite (-0.54%) and the KOSPI (-0.86%) also trading in the red. The Nikkei (-1.11%) is also down after 10 straight weeks of gains. Elsewhere, the S&P/ASX 200 (+0.66%) is bucking the wider sell off in the region.

On a positive note, US Secretary of State Antony Blinken met Qin Gang, China’s top foreign policy official in Beijing, to stabilise strained ties between the world’s biggest economies with a meeting with Xi Jinping potentially in the works.

Looking back at last week, in terms of data releases, on Friday we had the University of Michigan survey results, in which year-ahead inflation expectations receded for the second consecutive month, falling from 4.2% to 3.3% (vs 4.1% expected), its lowest level since March 2021. The downshift was much more modest for the 5-year period, falling from 3.1% to 3.0%, as expected by consensus. However, it was in consumer sentiment that we saw the most significant move, which rose from 59.2 in May to 63.9 in June (vs 60.0 expected). This is its highest level in four months as inflation continues to come down, though it is still below pre-SVB levels at the start of the year, and at historically low levels.

Despite the above slowing in inflation expectations, hawkish messaging from Fed governors saw the rate priced in for the July meeting move up +1.0bp on Friday to 5.258%. However, in weekly terms, this was down -3.5bps after the Fed skipped at the June meeting and also with earlier data releases hinting at rising slack in the US labour market. The largest move over the week was in the rate priced in for December, with the implied rate up +14.5bps to 5.206% (and +2.0bps on Friday), heavily influenced by the Fed dot plot showing two further hikes for this year.

With markets trimming back expectations of the timing and extent of rate cuts, US 2yr Treasury yields jumped +7.2bps on Friday, and +11.9bps week-on-week, reaching their highest level since early March. 10yr yields rose +4.5bps on Friday, and up +2.2bps on the week. The 2s10s slope thus inverted further to -95.3bps, its most negative weekly close in over 40 years, with just three lower daily values in early March 2023. Over in Europe, 10yr bunds sold off over the week, as yields climbed +9.7bps (despite a -3.0bps rally on Friday), whilst 2yr yields climbed +20.7bps in their largest up move since mid-April (-0.3bps on Friday), helped by a hawkish ECB.

Now turning to equities, the S&P 500 rally finally ran out of steam on Friday, down -0.37% after 6 consecutive days of gains. This still marked a +2.58% rise on the week to the highest weekly close since April 2022. At the sector level, the S&P reversal was led by the tech sector (-0.83%) as semiconductor manufacturer Micron Technology announced about half of its China customer revenue was at risk. This followed on from China’s bar on purchases of Micron chip products in late May amid elevated geopolitical tensions. Tech underperformance was reflected in the decline of NASDAQ (-0.68%) and the FANG+ (-1.27%) indices on Friday, though they were still up by +3.25% and +4.03%, respectively, on a weekly basis. The FANG+ Index is now 3% from its all-time highs in November 2021. With the US equities sell-off coming in the latter half of the day, in Europe the STOXX 600 climbed +0.53% on Friday before the US dip (and +1.48% week-on-week).

Lastly, in commodities, oil finished up the week strong off the back of optimism over China demand. This followed a Bloomberg report that the Chinese State Council was considering a sweep of stimulus proposals to boost consumption, as well as support for sectors including property. WTI crude gained +2.29% week-on-week bringing it to $71.78/bbl (+1.64% on Friday), and Brent crude gained +2.43% to $76.61/bbl (+1.24% on Friday). The news from China also lifted copper, which climbed +2.64% in weekly terms (but down a modest -0.31% on Friday), reaching its highest level for over a month.