A Look at the Day Ahead in US and Global Markets by Mike Dolan
August is already looking exciting, as stock markets are spooked by Big Tech earnings and start thinking about a “hard landing” for the global economy, while central banks are easing policy and government bond yields are plummeting.
It’s been a hectic week of trading across all corners of the financial world. Regardless of the recent vaunted rotation of equity sectors, the biggest rotation emerging is from equities to bonds as ‘recession’ returns to the jargon.
Yields on five-, seven- and 10-year U.S. Treasuries have all fallen below 4% since the Federal Reserve said Wednesday that the first rate hike would be implemented in seven weeks, just as global manufacturing data is contracting and the U.S. labor market is cooling further.
The stakes are higher than ever ahead of the July jobs report due Friday, as markets closely watch for a possible activation of the so-called “Sahm rule,” which compares the speed of the rise in the U.S. unemployment rate to the onset of a recession.
While it may seem far-fetched to speak of a broad recession, given that real-time estimates of US GDP still indicate growth of 2.5%, fears of a negative impact on the industrial world from the faltering Chinese economy have been growing for weeks.
With the Bank of England joining its G7 peers in also starting its rate-cutting cycle on Thursday, markets are starting to price in the possibility of a Fed rate cut in September of as much as 50 basis points. There are now 32 bps of cuts priced in for that month and 85 bps for the rest of the year.
But the surge in market volatility, which saw the VIX “fear index” breach the 20-mark on Friday for the first time since April, was driven by another shakeup in Big Tech as mega-caps and a host of successful chipmakers reported disappointing earnings.
The core concern is whether the massive investments in artificial intelligence are justified and whether AI will ultimately deliver on its promises in the broader economy.
While Apple held steady overnight after after-hours results beat expectations, Amazon fell more than 8% following the update.
And while Meta rose on Thursday, poor results from Qualcomm and Arm sent their shares and many of the major chipmakers crashing again.
Intel fell about 20% overnight on its miss, dividend suspension and job cuts in what would be its worst day since the dot.com bubble burst in 2000. Taiwanese chip giant TSMC lost nearly 6%.
After a 7% loss on Thursday and a highly volatile week, AI darling Nvidia fell another 2% after hours on Friday, following media reports that the US government has launched an anti-monopoly investigation into the company following complaints from rival chipmakers.
Thursday was another tough day for the small caps of the S&P500, Nasdaq and Russell 2000. They went into turmoil overnight all over the world.
The Nikkei, also irritated by the Bank of Japan’s rate hike this week and the yen’s sharp rise, fell nearly 6% in its worst day since the pandemic struck in 2020.
China, at the heart of a simmering global industrial slowdown following news that its factory sector shrank again in July, saw its shares fall more than 1%. European shares also fell about 1%.
With bond yields racing toward their lowest point since the fevered Fed easing speculation of early 2024, even Japan’s 10-year yields fell below 1% for the first time in more than a month, despite this week’s BOJ move. The yen held steady at just under 150 to the dollar.
But for all the stock and bond swings, currency markets were generally much more stable. The dollar index was only slightly lower, with the Swiss franc doing better amid the fears, posting its strongest performance since February.
The political backdrop is another important consideration for US markets this month.
Whatever the trading patterns are, it is no longer the so-called “Trump trade.”
After a wave of opinion polls showed enthusiasm for Vice President Kamala Harris’ bid for the White House, betting markets are now rating her chances of winning higher than those of Republican challenger Donald Trump for the first time.
Key developments that should provide more direction for US markets later on Friday:
* US July employment report, June factory orders
* Thomas Barkin, governor of the Federal Reserve in Richmond, speaks; Huw Pill, chief economist of the Bank of England, speaks
* Profits of US companies: Exxon Mobil, Chevron, Cboe Global Markets, Coinbase Global, PPL, Linde, Perella Weinberg, Church & Dwight, LyondellBassell Industries etc.
(By Mike Dolan, editing by Gareth Jones; mike.dolan@thomsonreuters.com)
