US index futures traded in a narrow range but eventually faded earlier gains and traded with modest losses along with European and Asian stocks, as traders took some risk off the table before today's closely-watched inflation data (full preview here). S&P 500 futures were down 0.1% on Wednesday as of 7:45 a.m. in New York, while Nasdaq 100 futures were flat. Meanwhile, short-dated Treasuries fell as worries around the debt ceiling deadline circulate, but longer-term maturities are edging higher. The dollar reversed earlier losses, and was set for a third day of gains, while oil snaps a three-day rally and gold loses momentum as traders pause for clues on monetary policy. Iron ore bounces and copper declines.
In premarket trading, Airbnb slid after the vacation home-rental company gave a cautious forecast for revenue in the second quarter. The stock was the fourth-best performer of 2023 in the Nasdaq 100 index as of Tuesday’s close. Rivian Automotive rose after the electric-vehicle maker reported a smaller-than-expected first-quarter loss and reaffirmed its annual production plans. Meanwhile, Electronic Arts reported record revenue for its fiscal fourth quarter, beating analyst estimates. Here are some other notable premarket movers:
- Occidental Petroleum falls 1.6% in US premarket trading after adjusted earnings per share from the energy company missed the average analyst estimate in the first quarter, overshadowing higher- than-expected production.
- Celsius shares rise 7.4% in US premarket trading after sales for the nutritional drinks maker comfortably topped expectations. Analysts said they see more upside to come as it expands internationally and benefits from its distribution deal with PepsiCo.
- Dutch Bros quarterly results disappointed on same-store sales and scrutiny on this is likely to persist in the near-term for the drive- through coffee chain, analysts said. Dutch Bros shares fell as much as 9.2% in after-hours trading.
- Alcon’s quarterly results topped expectations, with particularly encouraging growth for the eyecare firm’s contact lens franchise, analysts say. Alcon shares bounce as much as 6.8%.
- Exact Sciences topped expectations across the board in the first quarter and its guidance looks “very conservative” given the quantum of the beat for the maker of the Cologuard cancer test, analysts said. Exact shares rose as much as 13% in after-hours trading.
- SmileDirectClub shares jump 15% in US premarket trading after the dental equipment maker’s first-quarter sales and volumes topped expectations.
- Syneos Health shares rise as much as 17% in premarket trading with a consortium said to be in advanced talks to buy the drug-research firm.
- Upstart rose 33% in US premarket trading after the cloud- based, artificial-intelligence lending platform posted forecast- beating first-quarter results and offered an outlook that topped consensus estimates.
- Video platform Rumble fell as much as 6.7% in premarket trading on Wednesday, as Tucker Carlson’s decision to use Twitter for his new show came as a setback for conservative media platforms.
- Twilio shares drop 16% in US premarket trading after the software firm’s weaker outlook, showing a deterioration in revenue rates, offsets a relatively solid quarterly performance.
- Duolingo’s quarterly results are ahead of expectations and its key engagement metrics are still accelerating, while analysts also see the language- learning platform as a major and ongoing beneficiary of AI technology. Shares rose as much as 6.1% in after-hours trading.
- Marqeta fell 5% in postmarket trading after forecasting revenue growth in the second quarter that lagged the average analyst estimate at the midpoint.
The inflation report will be key to assessing the direction of Federal Reserve interest rate policy, just a week after the central bank hinted that a pause was in the cards. As Goldman notes, focus squarely on April's data CPI print @ 8:30am after March's data showed mixed results (core was much hotter than headline). The street is looking for headline MoM of +.4% (prior +.1%) & YoY of +5% (prior +5%). For core MoM street is at +.3% (prior +.4%) and YoY +5.5% (prior +5.6%). Here are some Wall Street expectations:
- 5.1% - Goldman Sachs
- 5.1% - Citigroup
- 5.1% - JP Morgan Chase
- 5.1% - Morgan Stanley
- 5.0% - Barclays
- 5.0% - Bank of America
- 5.0% - Credit Suisse
- 5.0% - Bloomberg Economics
- 5.0% - HSBC
- 5.0% - UBS
- 5.0% - Wells Fargo
US stocks are tipped to rally if the reading is soft enough to lay the ground for a halt to Fed tightening, teams at Goldman Sachs and JPMorgan said. The report is expected to show headline CPI rose by 5% in April on a year-on-year basis. That’s still well above the 2% level targeted by the Fed and there is some market anxiety over a higher-than-forecast print.
“It seems to me that the rate-cut pricing for this year could be pushed out if we saw a significant upside surprise,” said Kit Juckes, chief global FX strategist at Societe Generale SA.
US equities have been showing signs of weakness since the start of May, with the S&P 500 falling 1.2%, trimming this year’s advance to 7.3%. Risks of a recession, sticky inflation, as well as a rout in shares of regional banks have hit sentiment. Meanwhile, worries over the debt ceiling persist, with little progress made between the Biden administration and Congress to resolve the stalemate.
“There is so much at stake — the Fed’s trajectory, but also the stress on US banks, real estate, the debt ceiling,” Alexandre Baradez, chief market analyst at IG Markets in Paris, said by phone. He regards Wednesday’s inflation print as even more important than usual. “One can feel that markets are just waiting for a trigger to get back into it and a core inflation reading below 5.5% could provide just that,” Baradez said. “A lower-than-expected reading would likely have a strong impact on tech, growth stocks and small caps.”
Meanwhile, Joe Biden and congressional Republicans made no progress toward averting a first-ever US default. They pledged further negotiations on spending that would open the door to a possible agreement. Biden and House Speaker Kevin McCarthy plan to hold another meeting on Friday. The cost of insuring America’s debt against default now eclipses that of some emerging markets and even junk-rated nations. Mounting investor anxiety about the prospect of a default has made it more expensive to insure Treasuries than the bonds of Greece, Mexico and Brazil, which have defaulted multiple times and have credit ratings many rungs below that of the US.
European stocks are slightly lower, having failed to sustain their opening gains as investors tread cautiously ahead of US inflation data due later Wednesday. The Stoxx 600 is down 0.2% with personal care and media shares the biggest drag as overall stocks edged lower, outweighing positive earnings news from some companies. Credit Agricole SA rallied following a record first-quarter for the French firm’s investment bank. Vestas Wind Systems A/S gained after the Danish wind turbine maker returned to profit. Here are the biggest European movers:
- Evotec shares surge as much as 14% after its unit entered a partnership deal with Sandoz for manufacturing multiple biosimilars, with Jefferies calling the deal an “important validation of the platform”
- Alcon gains as much as 9% after its latest quarterly results topped expectations, with particularly encouraging growth for the eyecare firm’s contact lens franchise, analysts say
- Credit Agricole gains as much as 6.1% after the French lender reported 1Q earnings that beat estimates, with investment banking revenue reaching record levels on a strong FICC performance
- Continental jumps as much as 5.4% after the German auto supplier reported first-quarter adjusted Ebit margin that beat analyst estimates and confirmed its outlook for this year
- ABN Amro rises as much as 5.4% after 1Q profit beat estimates with improved deposit margins boosting the Dutch lender’s net interest income (NII), with Morgan Stanley flagging broad strength
- Vestas shares climb as much as 4.1% after the world’s largest producer of wind turbines posts results that Jefferies said show a solid start to the year overall, with revenues 16% ahead
- Melrose shares rise as much as 7% after the company said trading this year is materially ahead of views and announced plans to refocus to become a “pure-play” aerospace company
- Siemens Healthineers shares drop as much as 7.7% as the medtech group’s second-quarter results are overshadowed by weakness in its diagnostics division and a miss on margins, analysts say
- Alstom shares drop as much as 5.2% after the train maker announced results slightly below expectations and said it would achieve targets only by March 2026, a year later than previously envisioned
- Telefonica Deutschland shares tumble as much as 7.6%, the biggest intraday decline in 11 months after the telecom operator’s wholesale partner 1&1 affirmed plans to build out its own 5G network
- TUI falls as much as 4.8% following 1H results, with analysts noting positive comments on summer bookings from the, tour operator but not expecting any material changes to FY estimates
Earlier in the session, Asian stocks headed for their steepest slide in two weeks amid reluctance to buy shares before the release of closely watched US inflation data, and as losses in state-owned enterprises dragged China’s market lower. The MSCI Asia Pacific Index dropped as much as 0.6%, with technology names TSMC and Samsung Electronics among the heaviest drags on the regional gauge. Most of the benchmark’s sub-indexes declined. Shares in China and Hong Kong fell as a rally in the nation’s state-linked companies lost momentum, with an index of central government-owned firms slipping 1.5% as it extended Tuesday’s drop. Disappointing China trade data and fresh signs of geopolitical tensions continued to weigh on the market.
“Underlying concerns of deficient industrial and investor confidence resurface on slumping imports that signal woes and worries,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank. “This is not about softer price relief but harsh demand pain points,” and there could be “spillover pessimism” in Asian emerging markets, he added. Asian stocks have fallen for the past two days in the run-up to Wednesday’s US data, which may show price pressures remained high in April. That could dash hopes for a pause in monetary tightening or even interest rate cuts by the Federal Reserve. Washington’s debt ceiling impasse also damped sentiment. CPI “is going to remind everyone that inflation is staying sticky,” said Ed Moya, a senior market analyst at Oanda. “The Fed won’t be raising rates on a hot report, but it will justify calls that rates will stay higher for longer.”
Japanese stocks fell, following US peers lower, as Washington’s debt ceiling impasse damped investor sentiment amid a continued flow of earnings reports. The Topix Index slid 0.6% to 2,085.91 as of market close Tokyo time, while the Nikkei declined 0.4% to 29,122.18. Daiichi Sankyo Co. contributed the most to the Topix Index decline, decreasing 3.3%. Out of 2,160 stocks in the index, 493 rose and 1,584 fell, while 83 were unchanged. Steelmakers fell the most among industry groups after Nippon Steel announced disappointing earnings. Meanwhile, Mitsubishi Corp and Toyota Motor helped haul up the gauge after reporting quarterly results and share buybacks. “The US debt ceiling issue is increasing concern around the risks of government bond default,” said Tomo Kinoshita, a strategist at Invesco Asset Management Japan. “In terms of Japanese earnings, the performance of domestic market-focused companies is firm due to inbound demand, but some industries are still experiencing global inventory and production adjustments.”
Australian stocks dipped: the S&P/ASX 200 index fell 0.1% to close at 7,255.70, weighed down by bank and mining shares. The drop came ahead of a key US inflation report and as Washington’s debt ceiling impasse damped investor sentiment. Read: Asian Stocks Tick Lower Ahead of US Inflation Data: Markets Wrap Meanwhile, consumer, health and energy shares are seen among the winners after Australia released its federal budget, which returned to a surplus for the first time since the 2008. Welfare programs have been given priority in the budget. Read: Australian Budget 2023-24: Winners and Losers In New Zealand, the S&P/NZX 50 index rose 0.8% to 11,987.30
Key stocks gauges in India closed higher on Wednesday, helped by gains in index-heavy Reliance Industries and HDFC Bank. The S&P BSE Sensex rose 0.3% to 61,940.20 as of 03:45 p.m. in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. Reliance Industries contributed the most to the Sensex’s gain, increasing 0.7%. Out of 30 shares in the Sensex index, 20 rose and 8 fell, while 2 were unchanged
In FX, the Bloomberg Dollar Spot Index rose 0.1%, erasing a modest gain earlier in the session. The Norwegian krone tops the intraday G-10 rankings, rising 0.2% versus the greenback after CPI surprised to the upside.
- EUR/USD one-month implied volatility in euro-dollar fell earlier to 7.08%, the lowest since February 2022, and now trails realized by 16 basis points, the most in a month
- USD/JPY saw dip buyers down to 134.70, with a strong bias to be long dollar heading into the US data, according to traders who noted that flows were thin
- AUD/USD is hovering between two large Wednesday options expirations; FX pair has A$408m of options expiring May 11 at strike 0.6750, with an additional A$590m at strike 0.68 rolling off the same day
In rates, the long-end of the Treasury curve outperformed with 20- and 30-year yields richer by more than 2bp on the day and 5s30s flatter by ~2bp. Supply pressure is also a factor, with 10-year note auction ahead and 30-year bond sale Thursday. Treasury 10-year yields around 3.50%, slightly richer on the day with bunds and gilts both outperforming by around 1bp in the sector. US debt ceiling impasse continues after President Joe Biden and congressional Republicans made little progress in talks Tuesday. The Treasury auction cycle continues with $35b 10-year note sale at 1pm following strong demand for Tuesday’s 3-year note sale. WI 10-year yield near 3.495% is ~4bp cheaper than April’s result, which tailed by 2bp. Unlike the busy start of the week, IG issuance slate empty so far; four issuers priced combined $4.9b Tuesday, with at four others electing to stand down; they may proceed Wednesday if CPI is supportive
In commodities, crude futures decline with WTI falling 1.7% to trade near $72.50. Spot gold drops 0.3% to around $2,030
Bitcoin is a touch softer but overall relatively contained and holding just above the USD 27.5k mark within familiar ranges as participants await US CPI.
Looking to the day ahead now, the main highlight will be the US CPI report for April. Other data releases include Italian industrial production for March. From central banks, we’ll hear from the ECB’s Muller and Centeno. Finally, today’s earnings releases include Disney.
- S&P 500 futures down 0.1% to 4,128.75
- MXAP down 0.4% to 161.63
- MXAPJ down 0.4% to 515.57
- Nikkei down 0.4% to 29,122.18
- Topix down 0.6% to 2,085.91
- Hang Seng Index down 0.5% to 19,762.20
- Shanghai Composite down 1.1% to 3,319.15
- Sensex little changed at 61,816.95
- Australia S&P/ASX 200 down 0.1% to 7,255.74
- Kospi down 0.5% to 2,496.51
- STOXX Europe 600 down 0.2% to 464.42
- German 10Y yield little changed at 2.35%
- Euro little changed at $1.0955
- Brent Futures down 1.4% to $76.33/bbl
- Gold spot down 0.4% to $2,026.73
- U.S. Dollar Index little changed at 101.69
Top Overnight News
- Joe Biden didn't rule out a short-term debt limit hike but was "absolutely certain" the US won't default after his meeting with congressional Republicans yielded little tangible progress. He was pleased Mitch McConnell said he also didn't foresee a default, though Kevin McCarthy said he saw no progress. Both sides pledged more talks before another meeting on Friday. BBG
- Bank of Japan Governor Kazuo Ueda said it’s premature to talk about specifics on what to do with holdings of exchange-traded funds since it would take more time to achieve a stable price target: BBG
- Fed Bank of New York President John Williams said he is monitoring how strains in the banking sector affect the US economy and left the door open to leaving interest rates on hold next month: BBG
- Norway’s core inflation quickened in April to 6.3% y/y, compared with the 6.1% forecast by both analysts and the central bank, adding pressure on policymakers to step up their key rate hikes: BBG
- Australia exported roughly $40 million worth of copper ore and concentrate to China early this year, Australian customs data shows, a sign of industry hope that trade in the red metal will resume as diplomatic relations improve. RTRS
- Russia, Ukraine, Turkey, and the UN will hold talks on Wed to salvage the Ukraine grain export deal that Moscow has threatened to exit. NYT
- ECB’s Lagarde says a recession is not the baseline outlook for 2023 and hinted that further rate hikes will be needed given persistent inflation pressures. Nikkei
- BOE’s “shadow monetary policy committee” votes 7-2 in favor of a 25bp rate hike on Thurs (2 members voted for a 50bp increase). London Times
- Profits in the US banking sector reached an all-time high of roughly $80bn in the first quarter, up 33% from a year ago, even as the industry contended with the aftermath of two bank failures and the most significant stress since the 2008 financial crisis. FT
- Home prices fell in more parts of the U.S. than they have in over a decade during the first quarter, when nearly a third of metro areas posted annual price declines, the National Association of Realtors said Tuesday. WSJ
- A growing number of retailers in city office districts are relocating their businesses to the suburbs, where visits to shopping centers are on the rise as fewer people commute to downtown workplaces. WSJ
- The Treasury Borrowing Advisory Committee, an external panel that's advised on borrowing since 1998, told Janet Yellen "the short-term impacts of a protracted negotiation are costly; the long-term implications of a default are unthinkable." The fix: require the limit to be raised simultaneously with appropriations or repeal the debt limit altogether. BBG
- Focus squarely on April's data CPI print @ 8:30am after March's data showed mixed results (core was much hotter than headline). The street is looking for headline MoM of +.4% (prior +.1%) & YoY of +5% (prior +5%). For core MoM street is at +.3% (prior +.4%) and YoY +5.5% (prior +5.6%).
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly lower as the region digested a slew of earnings updates and following the weak handover from Wall St where the major indices were cautious after hawkish central bank rhetoric and ahead of US inflation data, while there was also very little progress from US debt ceiling talks. ASX 200 was subdued amid underperformance in financials, energy and telecoms but with losses stemmed by the defensives and as participants mulled over the details of the recent federal budget. Nikkei 225 weakened with the focus in Japan centred on a deluge of earnings releases. Hang Seng and Shanghai Comp. conformed to the global downbeat mood amid weakness in China’s largest banks and with several property names also pressured, while a report that Chinese GDP growth is likely to pick up in Q2 due to policy support, did little to spur risk appetite.
Top Asian News
- China's GDP will likely pick up in Q2 amid policy support, according to China Securities Journal.
- A fresh COVID-19 wave is spreading through China as people return from public holiday travel which has reached trading floors and spurred concerns of an impact on trading volume, but is unlikely to be as pronounced as prior COVID disruptions, according to Reuters.
- USTR Tai will meet China's Commerce Minister in Detroit later this month, according to Bloomberg.
- China reportedly seeks to resume and expand Taiwan communications, according to Xinhua.
European bourses are slightly softer, Euro Stoxx 50 -0.3%, in-fitting with the APAC handover and despite an initial firmer start to the European morning pre- US CPI. Stateside, ES -0.2%, futures are similarly lower though relatively rangebound in European hours ahead of US price data with focus also on Tuesday's Fed speak and the lack of debt ceiling progress. In Europe, sectors have a negative tilt in-fitting with the above; individual movers include Credit Agricole and ABN AMRO as the best performing banks after strong earnings while Continental supports auto names.
US DoJ is reportedly looking at short selling activity in regional bank shares, according to Reuters sources. China Airlines converts purchase rights for 8 Boeing (BA) aircraft into confirmed orders, to pay up to USD 2.30bln for the 8 planes.
Top European News
- The Times' BoE Shadow MPC voted 7-2 in favour of a 25bps hike in the Bank Rate to 4.5% with the two dissenters in favour of a larger 50bps move.
- ECB President Lagarde says "There are factors that can induce significant upside risks to the inflation outlook.", via Nikkei; "Lagarde gave no indication of a September interest rate hike". Adding, "Nothing further has been discussed by the Governing Council, neither a proposal to sell assets under the APP, nor a change to the forward guidance that we have given in relation to the PEPP."
- ECB's Stournaras says as things stand can say that interest rate rises will be over in 2023, via Reuters citing Greek press.
- ECB's Nagel says he is optimistic that monetary policy is having an impact, via Deutschlandfunk; might be moving into the final stretch on hikes though we are not yet done, is satisfied with ECB policy.
- Norges Bank Financial Stability Report (H1): CCyB maintained at 2.5%. Problems at some banks abroad have led to large movements in financial markets, but Norwegian banks are well-positioned to deal with market stress and higher losses.
- Dollar firm, but just shy of Tuesday's highs approaching US CPI, DXY retains 101.500+ status within a 101.750-510 range.
- Euro dips on less hawkish ECB undertones from Nagel and President Lagarde and back below key 1.0959 Fib retracement level.
- Pound retains 1.2600 handle on the eve of BoE as markets fully price another 25bp hike
- Yen tests 135.00 after selling in Asia and test of 200 HMA at 135.47.
- PBoC set USD/CNY mid-point at 6.9299 vs exp. 6.9301 (prev. 6.9255)
- Debt stages decent revival pre-US inflation data after relatively well received UK and German auctions and less-hawkish ECB rhetoric via Lagarde on APP/PEPP specifically.
- Bunds, Gilts and T-notes also find support near round numbers before rebounding to 135.69, 100.50 and 115-09+ respectively.
- Treasuries still have supply to digest via USD 35bln 10 year refunding.
- Overall, the complex is under pressure as the USD firms ahead of US CPI and as broader sentiment slips; action which follows Tuesday's firmer settlement though advances were capped by the surprise private inventory headline build.
- WTI June has fallen back under USD 73/bbl (vs high USD 73.64/bbl) while its Brent counterpart hovers around USD 76.50/bbl (vs high USD 77.39/bbl).
- US Energy Inventory Data (bbls): Crude +3.62mln (exp. -0.9mln), Gasoline +0.4mln (exp. -1.2mln), Distillate -3.9mln (exp. -0.8mln), Cushing -1.3mln.
- UK's Unite union announced 1,200 offshore workers will conduct a 2-day strike in a dispute over jobs, pay and conditions with the strike action to hit various operators including BP, Shell, Repsol and others.
- Peru's copper production rose 20.4% Y/Y in March, according to the energy and mining ministry.
- The grain deal is expected to be extended at the talks that started on Wednesday in Istanbul, taking into account Russia’s objections, a source in Ankara close to the talks told TASS. Subsequently, Kremlin declines comment on black see grain deal talks and adds we need to wait and see what the negotiation process yields.
- As mentioned, both precious and base metals are lower with the yellow metal within Tuesday's parameters while base metals were initially contained but have since slipped in-fitting with broader action.
- Chinese buyers are reportedly eyeing a resumption of copper trade with Australia as relations between the two nations improves ahead of an expected visit by Australia's Trade Minister Farrell to Beijing, China, via Reuters.
- Chevron (CVX) plans to boost Venezuela output, and optimise exports to accelerate debt recovery.
- France told the EU that the Russian Wagner Group should be labelled as a terrorist group, according to The Guardian.
- Russian President Putin has formally signed a decree withdrawing from the Treaty on Conventional Armed Forces in Europe, according to Russian press.
- Russia's Transneft says Druzhba pipeline was attacked, according to Tass; details light; Unconfirmed reports suggest that this was in the Russian Bryansk region.
US Event Calendar
- 07:00: May MBA Mortgage Applications +6.3%, prior -1.2%
- 08:30: April CPI YoY, est. 5.0%, prior 5.0%
- April CPI MoM, est. 0.4%, prior 0.1%
- April CPI Ex Food and Energy YoY, est. 5.5%, prior 5.6%
- April CPI Ex Food and Energy MoM, est. 0.4%, prior 0.4%
- April Real Avg Hourly Earning YoY, prior -0.7%, revised -0.6%
- April Real Avg Weekly Earnings YoY, prior -1.6%, revised -1.5%
- 14:00: April Monthly Budget Statement, est. $235b, prior $308.2b
DB's Jim Reid concludes the overnight wrap
Morning from Madrid where after several months without rain my arrival from London might have done the trick. There's a bit of rain now forecast by the end of the week. By contrast the last couple of months in the UK have been amongst the wettest in decades. My wife has organised an outdoor cinema social event at our kids school in 10 days time with several hundred tickets sold so every time I see her she's surreptitiously checking weather apps and shaking her head and every time she sees me I'm doing the same for a big golf tournament the next day. I judge how wet it is by how far I can drive a golf ball. This year must be incredibly wet or else all my injuries are finally creeping up with me.
So as the sun rises in a very dry Madrid, welcome to another US CPI day which of course will be the main highlight today. This will have a big part to play in whether the Fed will hike in June. Given the market prices in an 36% probability of a cut in July (from a 69% probability at the intra-day lows on Thursday) this is a fascinating release. Recent inflation releases have seen a steady decline in the headline CPI rate, which is now down to “only” +5.0%. However, the problem is that core CPI has been much more stubborn, and overtook the headline rate last month by ticking up to +5.6%, which is clearly still too fast for the Fed to be comfortable. In terms of what to expect today, our US economists are looking for headline CPI to have risen by +0.37% on a monthly basis, which would keep the annual rate at +5.0%. And they see core up by +0.32% on the month, taking the annual rate down two-tenths to 5.4%. Markets have been a bit more open to the prospect of another hike since Friday’s jobs report, with a 16% chance of a June hike now priced in, up from a 30% chance of cut intra-day last Thursday.
Another factor that will influence the Fed is the debt ceiling and last night President Biden met with congressional leaders from both parties in the White House. Ahead of that meeting both sides had already told reporters that they were not looking to put a short-term deal in place that would move the potential default date to September 30. Following the meeting, it was reported that President Biden and House Speaker McCarthy would sit down again on Friday. Before that follow-up, White House and Congressional staffers are expected to conduct budget discussions as soon as last night. Speaker McCarthy announced that there was not “new movement”, but House Minority Leader Jefferies pointed to some progress. Senate leadership was more aligned with Minority Leader McConnell and Senate Majority Leader predicting that there would be no default, but the latter still pointed to “large difference between the parties. President Biden also noted to reporters that he could invoke the 14th amendment to avoid a default, but noted that “the problem is it would have to be litigated.”
When it came to markets, the main asset classes have struggled over the last 24 hours as debt ceiling and US regional bank uncertainty has weighed. On the former there is growing concern about how long the uncertainty would last for. The effects were most obvious at the very front of the Treasury curve, with the 1-month T-bill yield shooting up +10.6bps to 5.428%. Bear in mind that as recently as April 21, the 1m yield closed at 3.26%, since investors were pouring into 1m bills as a way of avoiding any default risk. But given the plausible X-date is now within a 1m horizon, we’ve seen the reverse effect take place as investors seek to offload securities with any default risk. At a slightly further out horizon, 3m bill yields finished slightly lower, down -1.9bps yesterday to 5.18%.
Those concerns around the debt ceiling in markets went alongside ongoing jitters around regional banks. Yesterday underscored the volatility in that sector. PacWest Bancorp was down -10% in early trading, spending most of the US morning down over -5%, before a reversal in the second half of the trading day saw the bank’s share price finish +2.35%. This was seen in other beleaguered banks with Western Alliance Bancorp down over -7% initially before finishing down “just” -1.35% despite trading higher an hour before the close. In both cases, the latest moves leave them well above their lows on Thursday, but the high level of volatility speaks to the ongoing concerns. The flip in sentiment did not come on the back of any specific news flow, but did follow comments from New York Fed President Williams who said that the Fed was very focused on commercial real estate risks. The broader KBW Banks index closed just better than flat (+0.03%) after being down -1.5% shortly after the open, all whilst the S&P 500 ended the day -0.46% lower and the NASDAQ -0.63% lower.
Ahead of the CPI, there was a flattening in the Treasury curve as investors mulled over the prospect of another hike. That left yields on the 2yr Treasury up +2.1bps at 4.022%, whilst the 10yr yield saw a smaller +1.1bps rise to 3.519%. Meanwhile, 10yr yields (-1.14bps) are slightly lower in Asia as we go to print. In Europe, there was a larger selloff for sovereign bonds, with yields on 10yr bunds (+3.1bps), OATs (+3.2bps) and BTPs (+3.8bps) all building on their moves from the previous day. That followed hawkish remarks from several ECB officials that left little doubt about their intention to keep on hiking rates. For instance, Bundesbank President Nagel said in an interview with FAZ that “The important thing is that we’re not pausing”. We also heard from Latvia’s Kazaks, who said that “We still have quite some ground to cover and further rate increases will be necessary to tame inflation.”
Asian equity markets are weak this morning. As I type, Chinese stocks are leading losses in the region with the Shanghai Composite (-1.40%), CSI (-0.76%) and the Hang Seng (-0.66%) notably lower. Elsewhere, the Nikkei (-0.44%) and the KOSPI (-0.13%) are also trading lower. US stock futures are indicating a slightly more positive start though with those tied to the S&P 500 (+0.10%) and NASDAQ 100 (+0.07%) ticking up.
In geopolitical news, Bloomberg reported that Italy was intending to exit China’s Belt and Road Initiative, with the article suggesting that Italian PM Meloni had told US House Speaker McCarthy that the Italian government was in favour of an exit. That echoes a Reuters report last week, which cited a government official who said that Italy was unlikely to renew the BRI deal. Italy is the only G7 country who’ve joined the Belt and Road Initiative, but that was under former PM Conte in 2019. Subsequently, PM Mario Draghi shifted the country’s approach towards Chinese investment, vetoing multiple Chinese takeovers, and current PM Meloni has also sounded cautious on the agreement in the past, which comes amidst growing tensions between the US and China over recent years.
There wasn’t a great deal of data yesterday, but we did get the NFIB’s small business optimism index from the US. That fell to its lowest in a decade in April at just 89.0 (vs. 89.7 expected).
To the day ahead now, and the main highlight will be the US CPI report for April. Other data releases include Italian industrial production for March. From central banks, we’ll hear from the ECB’s Muller and Centeno. Finally, today’s earnings releases include Disney.
Generative AI’s growing impact on businesses
Over recent years, artificial intelligence (AI) has gained considerable traction. And on the back of the resultant excitement, price-earnings (P/E) ratios…
Over recent years, artificial intelligence (AI) has gained considerable traction. And on the back of the resultant excitement, price-earnings (P/E) ratios for stocks even remotely related have soared. Is the excitement premature?
McKinsey recently published an article titled The State of AI in 2023: Generative AI’s Breakout year, draws on the results of six years of consistent surveying and reveals some compelling findings. My takeaway is that service providers are buying the chips and working furiously to offer AI-enhanced solutions, but corporate customers are still some way off embedding those solutions in their own workflows. There exists a lack of understanding, necessitating more education.
The highest-performing organisations however, as showcased in the research, are already adopting a comprehensive approach to AI, emphasising not just its potential but also the requisite strategies to harness its full value.
Irrespective of the industry, and of whether they are service organisations or manufacturers, the most successful industry leaders strategically chart significant AI opportunities across their operational domains. McKinsey’s findings suggest that despite the buzz surrounding the innovations in generative AI (gen AI), a substantial portion of potential business value originates from AI solutions that don’t even involve gen AI. This reflects a disciplined and value-focused (cost) perspective adopted by even top-tier companies.
One of the critical takeaways from McKinsey’s research is the integration of AI in strategic planning and capability building. For instance, in areas like technology and data management, leading firms emphasise the functionalities essential for capturing the value AI promises. They are capitalising on large language models’ (LLM) prowess to analyse company and industry-specific data. Moreover, these companies are diligently assessing the merits of using prevailing AI services, termed by McKinsey as the “taker” approach. In parallel, many are working on refining their AI models, a strategy McKinsey labels the “shaper” approach, where firms train these models using proprietary data to build a competitive edge.
But the number of organisations doing so are relatively few (Figure 1.)
Figure 1. Gen AI is mostly used in marketing, sales, product and service development
Nevertheless, the latest McKinsey global survey reveals the burgeoning influence of gen AI tools is unmistakably evident. A mere year after their debut, a striking one-third of respondents disclosed that their companies consistently integrate gen AI in specific business functions. The implications of AI stretch far beyond its technological aspects, capturing the strategic focus of top-tier leadership. McKinsey quotes, “Nearly one-quarter of surveyed C-suite executives say they are personally using gen AI tools for work,” signalling the mainstreaming of AI in executive deliberations.
In other words, however, a common finding is individuals are using gen AI personally, but their organisation have yet to formally incorporate it into daily processes and workflows. This, despite the “three-quarters of all respondents expect[ing] gen AI to cause significant or disruptive change in the nature of their industry’s competition in the next three years.”
As an aside, AI’s disruptive impact is expected to vary by industry.
McKinsey notes, “Industries relying most heavily on knowledge work are likely to see more disruption—and potentially reap more value. While our estimates suggest that tech companies, unsurprisingly, are poised to see the highest impact from gen AI—adding value equivalent to as much as 9 per cent of global industry revenue—knowledge-based industries such as banking (up to 5 per cent), pharmaceuticals and medical products (also up to 5 per cent), and education (up to 4 per cent) could experience significant effects as well. By contrast, manufacturing-based industries, such as aerospace, automotive, and advanced electronics, could experience less disruptive effects. This stands in contrast to the impact of previous technology waves that affected manufacturing the most and is due to gen AI’s strengths in language-based activities, as opposed to those requiring physical labour.”
Moreover, the journey with AI isn’t devoid of challenges. McKinsey’s findings highlight a significant area of concern: risk management related to gen AI. Many organisations appear unprepared to address gen AI-associated risks, with under half of the respondents indicating measures to mitigate what they perceive as the most pressing risk – inaccuracy.
Drawing from McKinsey’s comprehensive survey, it’s evident that while the realm of AI, particularly gen AI, presents immense potential, it’s a domain still in its very early stages. Many organisations are on the brink of leveraging its power, but there’s still a considerable journey ahead in terms of risk management, strategic adoption, and capability building. As the landscape continues to evolve, McKinsey’s research offers a crucial ‘Give Way’ sign in the roadmap for businesses to navigate the AI frontier.
And that means there is every possibility the boom in AI-related stocks is a bubble. Stock market investors are notoriously impatient and if the benefits (measured in dollars) aren’t coming through investors will recalibrate their expectations. There is every possibility AI is as transformative for the world as promised, but the stock market’s journey is likely to be rocky, inevitably rewinding premature expectations ahead of more sober assessments. Think, ‘fits and starts’.
As a result, investors should have ample opportunity to invest in the transformative impact of AI at reasonable prices again and shouldn’t feel compelled to pay bubble-like prices amid a fear of missing out.stocks
Lights Out for Stocks and Bonds? Not So Fast.
The stock market suddenly has the look of a wounded prize fighter. And the bond market is bordering on being dysfunctional. In a word, the market is…
The stock market suddenly has the look of a wounded prize fighter. And the bond market is bordering on being dysfunctional. In a word, the market is disoriented. Disorientation leads to mistakes.
Don't be fooled. From an investment standpoint, this is one of those periods where those who stay vigilant and pay attention to developments will be in better shape than those who remain confused by circumstances.
As I noted last week: "The relationship between interest rates and stocks is about to be tested, perhaps in a big way. Observe the tightening of the volatility bands (Bollinger Bands) around the New York Stock Exchange Advance Decline line ($NYAD) and the major indexes. This type of technical development reliably predicts big moves. The real arbiter may be the US Treasury bond market. And the place where a lot of the action may take place once bonds decide what to do next may be the large-cap tech stocks. Think QQQ."
Bond Yields Trade Outside Normal Megatrend Boundaries
Big things are happening in the bond market, which could have lasting effects on stocks and the US economy.
I've been expecting a big move in bond yields, noting recently that yields on the 10-Year US Treasury Yield Index ($TNX) were "on the verge of breaking above long-term resistance," while adding that if such a move took place, it "would likely be meaningful for all markets; stocks, commodities, and currencies."
Well, it happened; after the FOMC meeting and Powell's post-mortem (uh, press conference), TNX blew out all expectations and broke above the 4.4% yield area in a big way, marking their highest point since 2007. It was such a big move that it may be an intermediate-term top. At one point in overnight trading on September 21, 2023, TNX hit the 4.5% level. But the current selling in bonds is way overdone, which means that at least a temporary drop in yields is on the cards.
Here's what I mean. The price chart above portrays the relationship between TNX and its 200-day moving average and its corresponding Bollinger Bands. As I noted in my recent video on Bollinger Bands, this is a crucial indicator for pointing out trends that have gone too far and are ripe for a reversal.
In this case, TNX blew out above the upper Bollinger Band, which is two standard deviations above the 200-day moving average. That move is the magnitude of a Category 5 hurricane on steroids and amphetamines. It's also unlikely to remain in place for long unless the market is completely broken.
The price chart suggests we may see a similar situation to what we saw in October 2022 when TNX made a similar move before delivering a nifty fall in yields, which also marked the bottom for stocks.
Meanwhile, as described below, the S&P 500 ($SPX) is reaching oversold levels not seen since the October 2022 and the March 2023 market bottoms.
Oil Holds Up Better Than QQQ For Now
A great way to regroup after a tough trading period is to first look for areas of the market that are exhibiting relative strength. Currently, the oil sector fits the bill. Second, it pays to look for beaten-up sectors where recoveries are happening the fastest. At this point, it's still early for that part of the equation to develop, as too many traders are still shell-shocked.
Starting with a look at West Texas Intermediate Crude ($WTIC), prices are holding above $90 as the supply for diesel and fuel is well below the five-year average. And yes, U.S. oil supplies continue to tighten while the weekly rig count falls.
The NYSE Oil Index ($XOI), home to the big oil companies such as Chevron Texaco (CVX), had a mild reaction to the heavy selling we saw in the rest of the market. XOI looks set to test its 50-day simple moving average in what looks to be a short-term pullback.
Chevron's shares barely budged earlier in the week despite an ongoing, albeit short-lived strike by natural gas workers at its Australian facilities. That's a strong showing of relative strength. You can see that short sellers are trying to knock the stock down (falling Accumulation/Distribution line), but buyers are not budging as the On Balance Volume (OBV) line is holding steady.
On the other hand, the very popular trading vehicle the Invesco QQQ Trust (QQQ) broke below the key support level offered by the $370 price point and its 20 and 50-day simple moving averages. This is an area that I highlighted here last week as being critical support. It now faces a test of the support area at $355. A break below that would likely take QQQ and the rest of the market lower.
An encouraging development is that the RSI for QQQ is nearing 30, which means it's oversold. Let's see what happens next. You can also see a similar pattern in the ADI/OBV indicators to what's evident in CVX above, which suggests that when the shorts get squeezed, it could be an impressive move up.
And for frequent updates on the technicals for the big stocks in QQQ, click here.
The Market's Breadth Breaks Down and Heads to Oversold Territory
The NYSE Advance Decline line ($NYAD) finally broke below its 20 and 50-day simple moving averages and is headed toward an oversold reading on the RSI, which is approaching the 30 area.
The Nasdaq 100 Index ($NDX) followed and is not testing the 14500–14750 support area. ADI is falling, but OBV is holding up, which means we will likely see a clash between short sellers and buyers at some point in the future.
The S&P 500 ($SPX) is in deeper trouble as it has broken below the key support at 4350 and its 20 and 50-day moving averages. On the other hand, SPX closed below its lower Bollinger Band on September 22, 2023, and is nearing an oversold level on RSI. Still, the selling pressure was solid as ADI and OBV broke down.
VIX Remains Below 20
The Cboe Volatility Index ($VIX) is still below the 20 area but is rising. A move above 20 would be very negative.
When VIX rises, stocks tend to fall as it signifies that traders are buying puts. Rising put volume is a sign that market makers are selling stock index futures in order to hedge their put sales to the public. A fall in VIX is bullish as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures, raising the odds of higher stock prices.
Liquidity is Tightening Some
Liquidity is tightening. The Secured Overnight Financing Rate (SOFR) is an approximate sign of the market's liquidity. It remains near its recent high in response to the Fed's move and the rise in bond yields. A move below 5 would be bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed's intentions. That would be very bearish.
To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!
In The Money Options
Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.
To receive Joe's exclusive stock, option and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.bonds sp 500 nasdaq stocks fomc fed us treasury etf currencies testing interest rates commodities oil
Bitcoin Mining Can Reduce Up To 8% Of Global Emissions: Report
Bitcoin Mining Can Reduce Up To 8% Of Global Emissions: Report
Authored by Ezra Reguerra via CoinTelegraph.com,
A paper published by the…
A paper published by the Institute of Risk Management (IRM) concluded that Bitcoin has the potential to be a catalyst for a global energy transition.
IRM Energy and Renewables Group members Dylan Campbell and Alexander Larsen published a report titled “Bitcoin and the Energy Transition: From Risk to Opportunity.”
The paper argued that while BTC was perceived as a risk because of its energy consumption, it can also catalyze energy transition and lead to new solutions for energy challenges worldwide.
Within the report, the authors also highlighted the important function of energy and the increasing need for reliable, clean and more affordable energy sources.
Despite the criticisms of Bitcoin’s energy intensity, the study provided a more balanced view of Bitcoin by showing the potential benefits BTC can bring to the energy industry.
Amount of vented methane that can be used in Bitcoin mining. Source: IRM
According to the report, Bitcoin mining can reduce global emissions by up to 8% by 2030. This can be done by converting the world’s wasted methane emissions into less harmful emissions. The report cited a theoretical case saying that using captured methane to power Bitcoin mining operations can reduce the amount of methane vented into the atmosphere.
The paper also presented other opportunities for Bitcoin to contribute to the energy sector.
“We have shown that while Bitcoin is a consumer of electricity, this does not translate to it being a high emitter of carbon dioxide and other atmospheric pollutants. Bitcoin can be the catalyst to a cleaner, more energy-abundant future for all,” the authors wrote.
According to the report, Bitcoin can contribute to energy efficiency through electricity grid management by using Bitcoin miners and transferring heat from miners to greenhouses.
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Schedule for Week of September 24, 2023
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