Everything is tumbling!

Global stocks and US index futures fell for the third straight session, led by the Nasdaq 100, bonds and commodities dropped and crypto crashed ahead of today's release of the April Fed minutes after the ECB warned the euro-area faces elevated risks to financial stability as it emerges from the pandemic with high debt burdens and “remarkable exuberance” coupled with resurgent worries over inflation and coronavirus flareups.

The yield on 10-year Treasury notes touched a one-week high of 1.67%, driving down shares of Apple, Microsoft and Facebook by about 1% premarket. Dow e-minis were down 252 points, or 0.65%, S&P 500 e-minis were down 42.25 points, or 1.0%, and Nasdaq 100 e-minis were down 170.75 points, or 1.24%.

On Tuesday, Wall Street stocks slid late in the session to end lower, unable to sustain gains made after bumper earnings from Walmart and Home Depot. The S&P 500 lost 0.85%, with telecom shares leading the decline, while the Nasdaq Composite dropped 0.56%.

"Now that investors are pre-occupied with inflation, they are probably reluctant to make big decisions until they see a clearer picture," said Hirokazu Kabeya, chief global strategist at Daiwa Securities. "Inflation worries will keep markets uncertain for now, even though I don't expect stock prices to collapse given economic re-openings."

Cryptocurrency-exposed stocks plunge after Bitcoin sank below $40,000 and other cryptocurrencies followed suit in part after the People’s Bank of China reiterated that digital tokens can’t be used as a form of payment. Among other notable premarket movers were:

• LightPath Technologies soars 16% after saying that optical elements manufactured by its ISP Optics unit are being used in NASA’s Mars Curiosity Rover
• Salesforce.com gains 1% as Morgan Stanley upgrades to overweight from equal-weight.
• Tesla drops 2.4% in U.S. premarket trading on data showing a slowdown in sales of the company’s electric cars in China last month
• Wells Fargo slips 1.3% as UBS downgrades the bank to neutral from buy as its risk- reward profile is no longer attractive following the stock’s outperformance this year
• Take-Two Interactive Software Inc rose 2.0% after reporting a quarterly profit and sales that beat analysts’ estimates.
• Target Corp gained 2.1% after it beat estimates for quarterly same-store sales as a strong vaccination drive and stimulus checks encouraged shoppers to return to stores.

Looking at today's main event, investors will also focus on minutes from the Fed’s April policy meeting, where it stood pat on interest rates.

• “We will scan the minutes for more details on policymakers’ view, but bearing in mind that we got to hear from some of them after the more-than-expected surge in inflation last week, we will treat the minutes as outdated,” said Charalambos Pissouros, senior market analyst at JFD Group.
•  “Today’s FOMC minutes could give a sigh of relief to globally worried investors,” said Ipek Ozkardeskaya, a senior analyst at Swissquote. "Any tightening on the Fed end would be a punch in the market’s face. But we know that the Fed will do its best to prevent that from happening."

The Stoxx Europe 600 Index fell the most in a week, with commodity and leisure shares sliding the most. The Stoxx Europe 600 Basic Resources Index (SXPP) fell for a second day, down as much as 3%, as iron ore futures halt a two-day rebound, with Chinese steel prices extending declines on the back of more government curbs. Diversified miners fell: Rio Tinto -2.5%, BHP -3.4%, Glencore - -2.1%, Anglo American -3.1%. Steelmakers also drop as China’s steelmaking hub of Tangshan tightens steel output curbs on pollution: ArcelorMittal -2.9%, Evraz -2.4%, Salzgitter -1.5%

Earlier in the session, Asian stocks declined with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.3%, ending a three-day win streak, as commodities-heavy Australia paced losses. Mainland China's CSI300 slipped 0.6% while Japan's Nikkei lost 1.1%. The Australian benchmark dropped almost 2%, the most since February and leading declines across the region. Materials and energy shares paced the selloff, as oil dropped on a rise in U.S. stockpiles and hopes for progress on an Iran nuclear deal. Mining giant BHP and Commonwealth Bank of Australia were the biggest drags on Australia’s key gauge. They also contributed most to losses in the MSCI Asia Pacific Index, after tech titan Taiwan Semiconductor Manufacturing Co. U.S. index futures slipped in Asian trading hours, extending the two-day slide in the cash market amid concerns over inflationary pressure from recent rises in commodity prices. Benchmarks in Singapore, New Zealand, Malaysia and Indonesia also posted drops of about 1% or more. Hong Kong and South Korea were closed for holidays.

China’s equities fell for the first time in four days, driven by declines in energy shares as crude price headed for a back-to-back loss amid climbing U.S. stockpile and Iranian nuclear talks. The CSI 300 Index closed 0.3% lower. China Oilfield Services sank 4.9% to be one of the worst performers, while PetroChina and China Petroleum & Chemical Corp were some of the biggest drags on the gauge. Financial stocks were also a key driver for Wednesday’s loss, with China Merchants Bank sliding 2.1% after a three-day gain. Information technology was one of the rare bright spots in the market, as shares of Apple suppliers rallied after the U.S. company was reported to be preparing to release several new Mac laptops and desktops. Chinese authorities fired a warning shot about a recent surge in speculation on virtual currency, with a notice posted on the central bank’s official Wechat account banning financial and payment institutions from pricing products or services with the asset.

While investors are concerned about rising inflation, the Fed has stuck to the narrative that a recent rise in inflation would be transient and that it therefore should keep its easy monetary policy settings. The minutes from the Fed's April meeting, to be published late on Wednesday, are expected to repeat that message.

"Inflation remains the biggest theme, whether it is real and whether the Fed may need to change its policy because of that," said Kazushige Kaida, head of forex sales at State Street Bank's Tokyo branch. "At the moment, markets are putting faith, after a fashion, in the Fed's narrative."

In rates, as stocks sold off so did bonds, with Treasury futures near lows of the day into early U.S. session, leaving yields cheaper by almost 3bp across belly of the curve despite weakness in equity index futures. Supply is a factor with $27b 20-year new-issue auction at 1pm ET.  Treasury 10-year yields cheaper by ~2.6bp at 1.663%, wider by ~1bp vs bunds, 0.5bp vs gilts; 2s10s spread steeper by ~2.7bp with front-end yields relatively anchored. In Europe, Italian bonds fell as traders unwound long positions and as bets mounted the ECB will taper its pandemic bond-buying program in the summer. Germany’s 2-year yield rose to the highest since August and the 10-year yield climbed to peaks last seen in May 2019. Another soft German auction weighed on bunds during European morning.

In FX, the Bloomberg Dollar Spot Index rebounded after approaching a three-year low on Tuesday, and the dollar rose against all of its Group-of-10 peers. The euro erased gains after earlier climbing to $1.2245, the highest level since January. The pound was a tad lower, with data showing Britain’s inflation rate doubled in April, in line with expectations. Risk-sensitive Scandinavian and Antipodean currencies fell, led by Norway’s krone which traded on the back-foot as oil headed for a back-to- back loss after an industry report showed a rise in U.S. crude stockpiles and traders tracked talks between world powers on a revival of the Iran nuclear deal

In cryptos, Bitcoin dropped as much as 15% to hit its lowest level since early February and last stood at $38,250 , having lost almost half of its value from a peak of $64,895 hit just over a month ago. Ether, the second largest cryptocurrency, changed hands at $2,677, down more than 25% from its record peak hit last Wednesday.

While cryptocurrencies were bruised by China's fresh ban on their transactions, they were not alone in facing pressure. Some commodities that have benefited from reflation trade have also lost steam, with U.S. lumber futures losing almost 25% in the last three sessions.

Oil prices pulled back also after media reports the United States and Iran have made progress on reviving a deal restricting the OPEC country's nuclear weapons development, a development that could lead to increased supply from Iran. U.S. crude futures dropped 0.9% to $64.9 per barrel while Brent futures lost 0.9% to $68.12 per barrel.

To the day ahead now, and the highlights include the release of the FOMC minutes from the April meeting, along with the ECB publishing their Financial Stability Review. Central bank speakers include the ECB’s Panetta, Rehn, Lane and Hernandez de Cos, along with the Fed’s Bullard and Bostic. Data highlights include the UK and Canadian CPI readings for April, along with EU new car registrations for April. Finally, earnings releases include Cisco Systems, Lowe’s, Target and TJX.

Market Snapshot

• S&P 500 futures down 0.69% to 4,094.75
• STOXX Europe 600 down 1.12% to 438.06
• MXAP down 0.6% to 203.38
• MXAPJ down 0.6% to 681.68
• Nikkei down 1.3% to 28,044.45
• Topix down 0.7% to 1,895.24
• Hang Seng Index up 1.4% to 28,593.81
• Shanghai Composite down 0.5% to 3,510.97
• Sensex down 0.4% to 49,994.19
• Australia S&P/ASX 200 down 1.9% to 6,931.66
• Kospi up 1.2% to 3,173.05
• Brent Futures down 1.21% to $67.88/bbl
• Gold spot down 0.35% to $1,862.92
• U.S. Dollar Index up 0.16% to 89.894
• German 10Y yield rose 1.5 bps to -0.088%
• Euro little changed at $1.2216

Top Overnight News

• The euro-area faces elevated risks to financial stability as it emerges from the pandemic with high debt burdens and “remarkable exuberance” in markets as bond yields rose, according to the European Central Bank
• European Union lawmakers will vote to formally halt an investment agreement with China in response to sanctions against members of the bloc, Politico reported, adding to growing tensions between Brussels and BeijingBitcoin has erased all the gains it notched following Tesla Inc.’s Feb. 8 announcement that it would use corporate cash to buy the digital asset and accept it as a form of payment for its vehicles

A quick look at global markets courtesy of Newsquawk

Asian equity markets were mostly negative and US equity futures also extended on the losses seen during the prior session where energy led the declines as oil prices wobbled on reports of progress being made in the Iranian nuclear deal talks and housing names suffered following disappointing Housing Starts and Building Permits data. ASX 200 (-1.9%) underperformed after softer Consumer Confidence data and amid weakness in the commodity-related sectors with notable losses in the energy names after expectations of returning Iranian supply were stoked by comments from the Russian envoy to JCPOA talks who suggested important news is likely to be released this Wednesday and that negotiations have had major progress. However, it was then speculated that the announcement could be an extension of the temporary IAEA nuclear activity monitoring deal which is set to expire on Friday rather than a full return to the JCPOA, while the envoy also clarified that he didn’t say there was a breakthrough at the Vienna talks and noted that significant progress has been achieved but unresolved issues still remain with negotiators needing more time to finalise an agreement. Nikkei 225 (-1.3%) was also subdued and retreated beneath the 28k level with exporter sentiment in Tokyo not helped by a choppy currency and the ongoing COVID-19 state of emergency, while news of Japan boosting its support for domestic production of advanced semiconductors and batteries did little to spur risk appetite. Shanghai Comp. (-0.5%) conformed to the downbeat tone amid the absence of Hong Kong participants as the city, along with South Korea, observed the Buddha’s Birthday holiday. Nonetheless, the losses in the mainland were moderate compared with regional peers after US President Biden’s administration delayed the revamp of former US President Trump's blacklist for China investments which gave investors an additional 2 weeks to buy or sell securities in companies tied to the Chinese military with the deadline to complete transactions pushed backed to June 11th. Finally, 10yr JGBs were flat with prices kept afloat by the weakness in stocks but with upside also capped after the recent choppy performance in T-notes and following lacklustre results at the 5yr JGB auction which showed a slump in the b/c from previous despite relatively inline accepted prices.

Top Asian News

• Thailand Said to Plan $22 Billion Borrowing for Covid Relief
• Bank Employees Among New Covid-19 Cases Found in Singapore
• Adani Green to Buy SoftBank’s $3.5 Billion Renewables Unit
• QIA Is Said to Mull Injecting HSBC Headquarters Into REIT

Stocks in Europe have continued drifting lower since the cash open (Euro Stoxx 50 -1.5%) in what has thus far been a continuation of the price action seen across equity futures overnight, and as APAC also traded with losses. The soured risk tone comes amid elevated yields, with the German 10yr topping -10bps for the first time in two years and its US counterpart steady above 1.65% ahead of FOMC Minutes. This sentiment has also reverberated into the US, with equity futures lower across the board and the NQ underperforming its peers, alluding to focus on the yield narrative. Back to Europe, broad-based losses are seen across the majors, but the periphery fares slightly better as the FTSE MIB (-1.0%) and the IBEX 35 (-0.5%) are somewhat cushioned by their significant exposure to the banking sector against the backdrop of higher yields. As such, banks reside as a top performer among European sectors that are in the red across the board. Meanwhile, some of the more defensive sectors have also made their way to the top of the pile since the cash open - with Food & Beverages, Health Care, Telecoms and Personal Household goods among the better performers. The other end of the spectrum is largely comprised of cyclical sectors, with Basic Resources, Travel, Oil & Gas, Autos and Tech among the straddlers. Individual movers are relatively scarce today, given the overarching macro theme and the simmering down of earnings. In terms of commentary on European equities, analysts at Barclays believe that the rally has faltered, although EPS upgrades and robust Q1 results point to equities having cheapened. The bank acknowledges that rising inflation expectations and policy jitters are taking their told on valuations, but “So long as EPS momentum is positive, equities can withstand higher rates, although future risk-adjusted returns may be lower”, the bank says as it forecasts above-trend GDP and EPS growth to persist in 2022.

Top European News

• EU Lawmakers to Freeze China Investment Deal, Politico Says
• Deutsche Taps Barclays’s Ross to Run U.K. Investment Banking
• Inflation Rekindles Niche Market for Duration-Proof Credit (1)
• London Tops Hong Kong For World’s Priciest Warehouse Space

In FX, the Greenback appears to have repelled the latest bout of selling pressure and clawed back some losses vs most major and EM rivals with the aid of a firmer rebound in US Treasury yields and curve re-steepening ahead of Usd 27 bn 20 year note supply. However, the concession for issuance has been more pronounced in EGBs, and the DXY has fallen into a lower range having edged a smidge closer to nearest support ahead of 89.500, at 89.686 before regaining composure to register an 89.959 recovery high thus far. Hence, the Dollar could well require more impetus and incentive to mount a meaningful rebound, like strong data in the ilk of last Wednesday’s inflation metrics, or severe risk aversion amidst the debt rout as today’s agenda is bare aside from further Fed commentary and the official account of April’s FOMC policy meeting.

• AUD/NZD - No surprise to see the high beta, activity and commodity based currencies bear the brunt of the Buck revival, while the Aussie also has a downturn in Westpac consumer sentiment to consider before the spotlight shifts to jobs on Thursday. Aud/Usd is now testing support around 0.7750 after fading just shy of 0.7800 and topping the round number yesterday, with Nzd/Usd hovering around 0.7200 compared to almost 0.7250 and a fraction over 0.7270 on Tuesday ahead of NZ budget balance and net debt forecasts.
• CHF/CAD/JPY - All unwinding recent gains vs their US counterpart, as the Franc retreats through 0.9000 and Loonie backtracks towards 1.2100 following a test of the big figure below against the backdrop of recoiling crude prices and awaiting Canadian CPI to see whether expectations for a pronounced acceleration in headline y/y inflation pans out. Elsewhere, the Yen is back under 109.00, though contained within a narrow range and still in an upward trend while holding well off recent lows.
• GBP/EUR - Relative G10 outperformers, or rather displaying a decent resilient streak in the face of the Dollar comeback, and yield differentials are playing a key role as noted above given the heavy declines in Eurozone bonds and Gilts before, but not necessarily for German and UK auctions. Sterling may have gleaned some traction from firmer than forecast inflation prints, on balance, but Cable is looking toppy circa 1.4200 in contrast to Eur/Usd and Eur/Gbp appearing more underpinned above 1.2200 and 0.8600 respectively.

In commodities, WTI and Brent July contracts remain suppressed amid the positive omens emanating from JCPOA talks and against the backdrop of a firmer Dollar and soured market sentiment. Elaborating on the former, there has been no breakthrough on core sanction issues and nuclear issues – which are the key pillars for this deal. Negotiations will be taking a short break after today. However, according to WSJ's Norman, this is not a negative sign, and the “next stop likely IAEA-Iran extension", speculated to be announced today (timing TBC). ING maintains its view that the market should be able to absorb both Iranian oil and OPEC+ supply. The Dutch bank expects the return of 3mln BPD of Iranian supply by Q4 2021, whilst the National Iranian Oil Co.’s most optimistic scenario points to pre-sanction production of almost 4mln BPD in as little as three months. The morning also saw commentary from Russian Deputy PM Novak, who suggested that global oil prices being broadly stable remarked that the market is balanced, and demand is slightly exceeding supply. Over in the West, the smaller-than-expected build in the Private inventory report last night was largely overlooked ahead of today's EIA numbers (crude forecast +1.62mln bbls) which are expected to be distorted by the Colonial Pipeline outage. As a reminder, a significant draw is expected in East Coast product stocks alongside builds in crude and products from US Gulf Coast and a decline in refining activity. WTI resides near USD 64.00/bbl (vs high 65.35/bbl) while its counterpart has dipped below USD 67.50/bbl (vs high 67.46/bbl). Elsewhere, spot gold and silver have been on a downward path as the earlier countering yield/Dollar dynamics shifted as the Buck saw a rebound, thus providing a bearish environment for precious metals in terms of higher yields and a firmer Dollar. Precious metals are also on the backfoot, with LME copper pulling back after topping USD 10,500/t yesterday, with some also attributing Glencore’s plans for a new copper mine next year as a near-term headwind.

US Event Calendar

• 7am: May MBA Mortgage Applications, prior 2.1%
• 10am: Fed’s Bullard Discusses Economic Outlook
• 10am: Fed’s Quarles Testifies Before House Financial Services Panel
• 11:35am: Fed’s Bostic Interviewed at Businessweek/Bloomberg Event
• 2pm: April FOMC Meeting Minutes

DB's Jim Reid concludes the overnight wrap

After a quiet day a late session US sell-off was the main theme yesterday. The S&P 500 fell back in the last couple of hours of trading, most of it in the last 15 minutes, and closed -0.85% lower. The S&P earlier traded in a tight 16pt range (0.4%) for much of the day before the move lower. The catalyst seemed to be partly due to news filtering through that the Biden administration have delayed updating the Trump-era ban on China investments. This at the same time as headlines came through that Speaker Pelosi has proposed a diplomatic boycott of the 2022 Olympic games, citing human rights concerns.

Tech stocks “outperformed”, with the NASDAQ (-0.56%) and the FANG+ (-0.55%) both beating the S&P, though that’s in the context of a relatively poor month for them on the back of fears over higher interest rates. Europe’s STOXX 600 (+0.17%) earlier experienced modest gains and missed the late sell-off.

On the earnings side, Walmart rose +2.11% after the company announced another strong performance in Q1, with comparable sales ex fuel up +6.0% year-on-year, whilst they raised their Q2 and full-year outlook. Staying with corporates Bank of America became the latest company to raise its minimum wage (from $20 to $25/hr). It seems this is partly to attract talent and partly for social reasons. ESG has been a part of minimum wage increases in recent times and maybe we’re seeing a perfect storm of this plus labour supply shortages. The thing is once you raise your minimum wage you are not going to then reduce it.

For sovereign bonds there weren’t too many headlines either, though 10yr bund yields were up +1.2bps to -0.10%, marking their highest level in almost 2 years. Elsewhere however, yields ended the day lower, with those on 10yr Treasuries (-1.2bps), gilts (-0.3bps) and BTPs (-0.3bps) all falling back. A reminder that my CoTD looked at the AA government bond that has lost 40% of its value since December and would take nearly half a century to make up those loses from coupons alone. See here for the full details.

Asian markets have largely taken Wall Street’s lead this morning with the Nikkei (-1.42%), Shanghai Comp (-0.41%) and Asx (-2.05%) all down. Markets in Hong Kong and South Korea are closed for a holiday. Futures on the S&P 500 are down -0.33% at this point while the Stoxx 50 is down a larger -0.97% as they try to play catch up with yesterday’s late US equities move. Elsewhere, Bitcoin is down -c.9% this morning (c.-3% yesterday) to under $40,000 after the PBoC reiterated that digital tokens can’t be used as a form of payment. It’s down around -30% over the last 10 days now. Other cryptocurrencies are also under pressure.

In other overnight news, Politico reported that the EU law makers will mostly vote yes on the motion to freeze the Comprehensive Agreement on Investment with China tomorrow. They will demand that China lift sanctions before any progress is made on the deal, which took seven years to negotiate.

In terms of the latest on the Pandemic, India’s Serum Institute has said that it will prioritise making vaccines for India and would delay deliveries to other nations and the WHO backed Covax initiative until the end of the year. Meanwhile, Singapore has decided to increase the time between two vaccine doses in an effort to administer first shots to more adults as it races to stem transmissions. The Country recorded 27 new cases in the past 24 hours of which 11 cases have not been traceable in the community.

Elsewhere in markets yesterday, there were some notable moves in FX, as the dollar index weakened a further -0.46% to its lowest level in over 4 months. The greenback now sits less than 0.4% away from its 3 year lows. Simultaneously, that saw the Euro move back above $1.22 in trading for the first time since February.

Speaking of currencies, our FX Research colleagues released their latest blueprint yesterday, which you can read here. They started the year cautious on selling the dollar ahead of American vaccine and fiscal leadership, but now see catchup as the main theme. Their view is that we’re past the peak of repricing US exceptionalism, global growth should broaden and the vaccine and growth laggards should bounce back. In turn, this should be conducive to a return of broader USD weakness and they see European currencies as the prime beneficiaries.

In the commodities sphere, Brent crude oil had been trading above $70/bbl at one point for the first time in a couple of months, though it gave up its gains later in the session to close -1.08% lower at $68.71, while WTI was also down -1.18%. This slight pullback was in line with that elsewhere in commodity market, with the Bloomberg Commodity Spot index losing -0.11%. WTI and Brent are also down a further c. -1% overnight as a report from the American Petroleum Institute showed that the US oil stockpiles increased by 620,000 barrels last week. Oil prices have also been weighed down by the likelihood of a return to the 2015 Iranian agreement which could pave the way for the removal of US sanctions and raise their crude oil exports.

From central banks, BoE Governor Bailey testified before the House of Lords yesterday. He hit on a refrain that we have mostly heard from the other side of the Atlantic in recent weeks when he said that while he and his colleagues see inflation rising in the next month or so, these effects will be “temporary.” Deputy Governor Ramsden sees inflation expectations “well anchored” but the MPC “remains vigilant”.

Running through yesterday’s data, US housing releases saw a slight miss relative to expectations, with housing starts down to an annualised rate of 1.569m in April (vs. 1.704m expected), while building permits came in at 1.760m (vs. 1.770m expected). Construction may have been held back in recent weeks due to higher material costs, especially lumber. There was also possibly some weather effects as the previous housing starts in March was much larger than expected after bad weather in February caused fewer starts. Elsewhere there was a decent labour market report from the UK, with the unemployment rate unexpectedly falling back to 4.8% in the three months through March (vs. 4.9% expected), while the number of payrolled employees in April was up +97k on the previous month according to HMRC estimates.

To the day ahead now, and the highlights include the release of the FOMC minutes from the April meeting, along with the ECB publishing their Financial Stability Review. Central bank speakers include the ECB’s Panetta, Rehn, Lane and Hernandez de Cos, along with the Fed’s Bullard and Bostic. Data highlights include the UK and Canadian CPI readings for April, along with EU new car registrations for April. Finally, earnings releases include Cisco Systems, Lowe’s, Target and TJX.