Mike Dolan provides an update on the day ahead in the US and global markets. With a “buy the dip” instinct still strong in stocks, US markets are having a rare bout of nervousness over the slowing economy – with Treasury yields, the dollar and oil prices all collapsing in the last 24 hours.
Wall Street’s ability to rebound thanks to technology was on display again on Monday, with the S&P500 recovering from sharp losses suffered during the day to close higher.
But the complex of rates, currencies and commodities is strongly influenced by new signs of a sharp slowdown in industrial activity in the United States.
While an economic slowdown at this point could be a double-edged sword for stocks near their all-time high – pairing the earnings implications with the increased likelihood of a Federal Reserve rate cut – the pressure could continue at least until this week’s key jobs report.
S&P500 futures are back in the red ahead of Tuesday’s trading open, with stock losses across most of Asia and Europe today as well.
On Monday, the latest ISM survey of U.S. manufacturing revealed a larger-than-expected contraction in activity in May, amplifying the equally bleak results from the equivalent survey of Chicago factories at the end of last week, as well as signs of erosion in household spending in April.
The combination of these factors was enough to push the Atlanta Fed’s real-time “GDPNow” estimate down to 1.8% from 3.5% a week ago and by more than 4% in mid-May, and reached its lowest level of the year.
The week’s main labor market surveys begin later Tuesday with job openings data for April.
Full-year Fed rate cut expectations have now risen back above 40 basis points (bps) – almost 10 bps higher than a week ago.
Yields on 10-year Treasury bonds fell to their lowest level in almost three weeks, driven by the fall in crude oil prices following the intervention of OPEC, itself a victim of concern about the manufacturing sector. Oil prices snowballed again on Tuesday, hitting their lowest level since February 6, bringing year-over-year gains below 2% for the first time in three months.
And the 25 basis point decline in 10-year yields over the past week was enough to bring the recently re-emerged “term premium” on long-term debt securities below zero.
ELECTION RESULTS
The dollar was also a victim of the crisis, with its DXY index falling to its lowest level in almost two months before stabilizing. The euro briefly rose to its highest level since mid-March ahead of the European Central Bank’s widely expected interest rate cut this week, while the dollar/yen fell to 155 for the first time since May 16.
The fall of the dollar was, however, slowed by the continued decline of the Mexican peso, the decline of the Indian rupee and the further losses of the South African rand following the results of the elections which took place this week in the three countries.
The rupee fell sharply to a three-week low as provisional results from India’s elections showed that Narendra Modi’s BJP-led alliance fell far short of the supermajority that exit polls had suggested in weekend.
But Indian stocks suffered the most, with a loss of more than 8%, the biggest in more than four years, after hopes of major reforms and spending in the event of a two-thirds parliamentary majority were dashed. wiped out on Monday and sent the market tumbling from its record levels.
The peso, for its part, has accumulated losses of up to 5% since Friday, following Claudia Sheinbaum’s victory in the presidential election and the near super majority obtained by the left-wing Morena party. The concern relates to the constitutional changes which could take place as well as the apparent freedom of maneuver in matters of public spending.
Top agenda items that could drive U.S. markets later on Tuesday: * U.S. April job openings and manufacturing orders * U.S. corporate earnings: Hewlett Packard Enterprise, Bath & Body Works
