Futures Slide In Risk-Off End To Volatile Week

US equity futures extended their recent weakness and traded near the week’s lows in early Friday trading as investors digested the latest corporate updates. Investors now await PMI data later today for further direction on the path for monetary policy. Contracts on the S&P 500 and the Nasdaq 100 drifted -0.2% lower as of 7:15 a.m. ET, as both indexes were set to end the week in negative territory, the Nasdaq underperforming slightly. Treasury yields edged higher, while the dollar advanced against other major currencies with a measure of its strength set for its first weekly gain in six weeks. Iron ore, gold and oil all decline, as the gains from the latest OPEC+ output cut are now all gone: so will OPEC cut again to reverse the slide in the one asset class that unlike stocks, everyone loves to short as a hedge for the coming recession?

In premarket trading, Tesla edged higher after the electric-vehicle maker increased prices of its Model S and X vehicles in the United States just two days after cutting prices. Wish soared more than 20% in premarket trading after the company announced a buyback plan that represents 30% of its current market value, data compiled by Bloomberg show..

• Mullen Automotive surges as much as 53% before paring gains to 30%, set to rebound from three days of losses and joining in broader gains across electric vehicle stocks.
• Big Lots shares decline 5.4% after Piper Sandler downgrades the retailer to underweight from neutral, citing weakening demand for home furnishings and mattresses.
• Invitae rises 5% after Cathie Wood, whose Ark Investment funds are among leading holders in the genetic testing company, spoke to CNBC yesterday about holding the stock, which has been trading near a record low in recent weeks.
• Overstock.com drops as much as 3.4% after the online home goods retailer was downgraded to neutral from overweight at Piper Sandler, with the broker citing demand for home furnishings weakening further.

Despite growing recession fears – yesterday’s Philadelphia Fed index confirming as much – Federal Reserve Bank of Cleveland President Loretta Mester signaled support for another rate hike to quell inflation while flagging the need to watch recent bank stress that may crimp credit and damp the economy. Her Dallas counterpart Lorie Logan said inflation has been “much too high,” while outlining measures to watch.

“We are in the camp of US recession in the second half, and expect data to weaken going forward,” said Mohit Kumar, a strategist at Jefferies International Ltd.. “Once the last Fed hike is done in May, the market will start to focus on the weak economic data and bad data will become bad news; seasonality starts to turn in May, with May and June poor months for risky-asset performance.”

“Continuation of data disappointment and subsequent recessionary fears weigh on both stock prices and bond yields,” said James Athey, investment director at abdrn investments. “In the end, that’s where the trap for equity bulls lay — whichever way you look, it was hard to justify the lofty prices, EPS forecasts and valuations which have been prevailing.”

US stocks have traded in a very narrow range in April after recovering most losses induced by the regional banks turmoil, as the earnings season kicked off. Still, mixed economic data, sticky inflation and the path of the Federal Reserve’s monetary policy continue to stay at the forefront of worries. Several Fed officials warned inflation was still too high and measures were needed to contain it, including more hikes.

Meanwhile, geopolitical tensions showed no sign of abating, with reports signalling senile figurehead Joe Biden aims to sign an executive order in the coming weeks that will limit investment in key parts of China’s economy by US businesses. “It’s just the next step in a long line of such restrictions that adds to underlying tension between the US and China, raises the cost of trade, and moves the world further away from peak globalization,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney.

Resilient US earnings have helped equities to hold their year-to-date gains, but US positive surprises are still trending below average, Barclays strategists wrote in a note on Friday. “Okay early first quarter results and rangebound yields maintain the status quo for toppish equities,” Barclays’ Emmanuel Cau said in the note. “But while markets have pared rate cut expectations, history shows a quick Fed pivot from hikes to cuts can only be triggered by much weaker data.”

The Stoxx Europe 600 index edged lower after PMIs for the euro area showed resilient service-sector activity, but a further decline in manufacturing orders. Mining stocks lagged as iron ore fell to the lowest since December, with Rio Tinto Plc and Anglo American Plc both down more than 4%. SAP AG, Europe’s biggest software company, advanced after forecasting profit ahead of analyst’s estimates. EssilorLuxottica SA, the French-Italian owner of Ray-Ban, soared as much as 7.3% to the highest since January 2022, after the French-Italian owner of the Ray- Ban brands reported first-quarter revenue that beat analysts’ expectations. Here are some of the biggest movers in Europe:

• Dowlais rises as much as 5.4% after JPMorgan and Investec began coverage with buy-equivalent ratings on the automotive technology business spun off from industrial buyout firm Melrose.
• Mercedes-Benz advances as much as 2.9%, the most since March, after a strong 1Q pre-release that shows the German carmaker is “clearly executing very well,” according to Morgan Stanley.
• Bureau Veritas gains as much as 1.7% after the testing and inspection firm’s organic revenue growth beat estimates in the first-quarter. Peers including Intertek, SGS and Eurofins rise too.
• Alfen and Fastned climb after Deutsche Bank initiated coverage on them with recommendations of buy, saying that the increasing share of electric vehicles in total fleets is boosting demand.
• Munters jumps as much as 14%, the most in two years, after the Swedish ventilation group reported a “very strong” 1Q, with analysts noting significant outperformance for its data center division.
• European mining stocks are the main underperformers across European equities with iron ore trading at its lowest since December on lukewarm demand in top consumer China.
• Tele2 falls as much as 5.1% after the Swedish telecommunications group slightly missed expectations on 1Q adjusted Ebitda due to higher-than-expected costs in its key Swedish market.
• Salvatore Ferragamo drops as much as 7.5% as analysts said the Italian luxury firm’s first-quarter sales missed estimates, which had been expected, but which is still “uninspiring.”

European Central Bank Vice President Luis de Guindos said Friday that underlying inflation in the euro area remains “very sticky.” The ECB is widely expected to increase its deposit rate at its next policy meeting on May 4, with the choice likely to be either a quarter- or half-point step.

Earlier in the session, Asian stocks fell, heading for their worst week since early March, as the latest news flow on geopolitics sapped risk appetite across the region and as investors took profit in Chinese shares. The MSCI Asia Pacific Index dropped as much as 1% on Friday, led by material shares. China’s CSI 300 Index dropped as much as 1.1%, led by technology stocks, after geopolitical concerns resurfaced following news that US President Joe Biden aims to unveil curbs on China investment, dealing another blow to worsening ties between the two superpowers. Hong Kong stocks also drop. Separately, China’s military plans to conduct at least five drills in various areas that include waters off its coast and in the South China Sea, while fresh worries emerged about South Korea’s diplomatic ties with China.

Most Asian markets were down, led by Hong Kong and China. A gauge of Chinese technology shares fell more than 3%, led by artificial intelligence and chip names after their recent rally. “The investment ban news may be an excuse, but it looks to me more a case of pocketing gains,” said Huang Huiming, a fund manager at Nanjing Jing Heng Investment Management. “There is a growing discrepancy on valuations, especially amid the earnings season, as most of these AI firms are unlikely to deliver profits in the near term.”  South Korean stocks continued to retreat following strong gains earlier in the month. Electric-vehicle battery stocks slid after Tesla sank on further price-cut worries. The Biden administration “can’t be seen to be too conciliatory or too concerned to try to calm tensions, because they’ll expose themselves to criticism for being soft on China,” Teneo managing director Gabriel Wildau told Bloomberg TV. “So despite the best intentions of the Taiwanese and the Biden administration, I think we have a recipe for escalating tensions.” The Asian stock measure was on track for a 1.2% decline this week, its worst performance since concerns about bank stability gripped markets around early March. Meanwhile, a softening in US manufacturing and its labor market is adding to signs of a slowdown in US economy and reigniting recession fears. Traders have once again pared back their expectations for Federal Reserve rate hikes, even though some Fed officials supported more tightening to curb inflation.

Japanese stocks declined as investors weighed US economic data that showed some softening in the labor market, housing and a gauge of business outlook.   The Topix Index fell 0.2% to 2,035.06 as of market close Tokyo time, while the Nikkei declined 0.3% to 28,564.37. Mitsubishi UFJ Financial Group Inc. contributed the most to the Topix Index decline, decreasing 2.2%. Out of 2,158 stocks in the index, 930 rose and 1,096 fell, while 132 were unchanged. “The US economic slowdown is the worst news for Japanese stocks,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management. “Recently, stocks are cheap even if interest rates are falling, and it seems that the market is moving in the direction of concerns about the economic downturn.” In a bright spot, shares in Rakuten Bank Ltd. jumped by a third in its debut in Tokyo in the biggest initial public offering in Japan since 2018. 

India stocks posted their first weekly drop in nearly a month as corporate earnings for the latest quarter started with lackluster performance from software makers. The S&P BSE Sensex was ended flat at 59,655.06 in Mumbai, while the NSE Nifty 50 Index was also little changed. The gauges fell more than 1% each for the week, the first decline since March 24. Shares of small and mid-sized companies, which have rallied in recent sessions as investors rotated exposure from larger peers for value buying, also ended lower. S&P BSE Smallcap gauge fell 0.3%, snapping its 13-day long rally, which was also the guage’s longest run of advances since Jan. 2012. The initial results from HDFC Bank and IT firms “have been on the disappointing side, both with respect to the margins and the business outlook,” Systematix Shares analysts led by Dhananjay Sinha wrote in a note. “This could be a precursor to an overall disappointing performance for 4Q.”   

In FX, the Bloomberg Dollar Spot Index was up 0.1% and poised for a 0.4% gain this week, its first weekly advance since March 10 as rising tensions between the US and China dampen risk sentiment. The yen was the biggest gainer among its Group-of-10 peers on Friday, rising 0.3%  as leveraged funds bought the currency taking a risk-off view into the weekend, according to Asia-based FX traders; the Aussie dollar is the weakest.

“It’s just the next step in a long line of such restrictions that adds to underlying tension between US and China, raises the cost of trade and moves the world further away from peak globalization,” says Sean Callow, senior currency strategist at Westpac Banking Corp.

In rates, treasury futures are near the highs of the day and the curve is a little steeper heading into the early US session. US 10-year yields around 3.53% with bunds slightly underperforming in the sector while gilts are lower by 4.5bp on weak UK retail sales data rather than the uptick in composite PMI; front end led gains in Treasuries steepens 2s10s, 5s30s spreads by 2bp and 1.7bp on the day. Bunds diverge from Treasuries after an upside surprise in service sector PMI data. Treasury market awaits US PMIs with one Fed speaker ahead of this weekend’s blackout period. 

In commodities, oil steadied after dropping by the most in more than a month on Thursday, wiping out almost all of the gains stemming from OPEC+’s output cut on signs of a global economic slowdown. Gold dipped below $2,000 an ounce.

Bitcoin is holding around the USD 28k mark, with trading within a narrow range after BTC backed away somewhat from the USD 30k mark in recent sessions.

Looking to the day ahead now, and data releases include the April flash PMIs from Europe and the US, along with UK retail sales for March. From central banks, we’ll hear from ECB Vice President de Guindos, the ECB’s Vujcic and Elderson, and the Fed’s Cook. Finally, earnings releases include Procter & Gamble.

Market Snapshot

• S&P 500 futures little changed at 4,149.00
• MXAP down 0.8% to 161.36
• MXAPJ down 1.1% to 518.00
• Nikkei down 0.3% to 28,564.37
• Topix down 0.2% to 2,035.06
• Hang Seng Index down 1.6% to 20,075.73
• Shanghai Composite down 2.0% to 3,301.26
• Sensex little changed at 59,599.46
• Australia S&P/ASX 200 down 0.4% to 7,330.38
• Kospi down 0.7% to 2,544.40
• STOXX Europe 600 little changed at 467.07
• German 10Y yield little changed at 2.46%
• Euro down 0.1% to $1.0958
• Brent Futures up 0.1% to $81.20/bbl
• Brent Futures up 0.1% to $81.19/bbl
• Gold spot down 0.9% to $1,987.15
• U.S. Dollar Index little changed at 101.91

Top Overnight News

• President Joe Biden aims to sign an executive order in the coming weeks that will limit investment in key parts of China’s economy by American businesses, people familiar with the internal deliberations said.
• The euro area’s economic rebound gained further momentum in April thanks to resurgent service- sector activity, while the business outlook remains resilient to recent banking-sector stress.
• Tesla Inc. increased prices of its Model S and X vehicles in the US after steep markdowns early this year took a toll on profitability and the carmaker’s shares.
• Simon Sadler’s Segantii Capital Management Ltd. has reopened its equities-focused hedge fund and added staff in a bid to boost assets to $7 billion, said people with knowledge of the matter.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly lower as the region tracked the losses on Wall St where risk sentiment was subdued after mixed earnings releases and disappointing US data. ASX 200 was pressured by weakness in financials and underperformance in the mining sector as Australia’s  largest company BHP suffered after a decline in quarterly iron ore output. Nikkei 225 traded indecisively following mixed PMIs and the latest inflation data which printed mostly in line with estimates but remained above 3% and showed an acceleration in nationwide Ex. Fresh Food & Energy CPI. Hang Seng and Shanghai Comp underperformed amid ongoing US-China frictions with President Biden to unveil China investment curbs, while there was also fierce rhetoric from China’s Foreign Minister who said both sides of the Taiwan Strait belong to China and warned that those who play with fire on Taiwan will get burned.

Asian News

• China’s FX regulator said the valuation of Chinese A shares is low and investment prospects are good, while the regulator added that US-China yield differentials are shrinking and the external impact on China is decreasing.
• BoJ semi-annual financial system report: domestic financial system has been maintaining stability on the whole.
• BoJ is likely to maintain ultra-loose monetary policy and make no change to interest rate targets and yield allowance band at its meeting next week, according to Reuters sources.

European bourses are mixed/flat overall, Euro Stoxx 50 +0.1%, as the complex reverted back to opening parameters after a hawkish move lower on the regions Flash PMIs. Sectors are mixed, in-fitting with the above, with marked underperformance in Basic Resources after updates from BHP and Glencore alongside broader commodity action. US futures are in-fitting with the above and are little changed with parameters even narrower than European peers ahead of PMIs and the final Fed speakers ahead of blackout. SAP (SAP GY) – Q1 (EUR): Revenue 7.44bln (exp. 7.34bln), Cloud Revenue 3.18bln (exp. 3.22bln), adj. EPS 1.08 (exp. 1.20)

European News

• BoE’s Tenreyro said the UK inflation target is flexible and intended to respond to shocks, while she added that they may have already tightened a bit too much.
• ECB’s Schnabel reiterated that headline inflation has started to decline but noted core inflation proves sticky, while she added that energy contributions to inflation are falling quickly although many other components to inflation are still on the rise.
• ECB’s Makhlouf says it is too early to plan a pause in policy tightening.
• Chinese Commerce Ministry says it will extend anti-dumping tariffs on some optical fibre imports from the US and EU for five years from April 25th.

FX

• DXY mostly firmer within 102.070-101.750 range as the index recovers from post-US claims and Philly Fed retreat awaiting prelim. PMIs.
• Yen bucks trend after acceleration in Japan’s ex-food and energy CPI amidst pre-weekend short squeeze, as USD/JPY reverses through 134.00.
• Euro propped by strength in EZ services and comp PMIs, but EUR/USD capped by 1.0970-80 option expiries.
• Sterling loses tech support(s) as UK retail sales miss consensus, Cable sub-1.2400 and EUR/GBP eyeing 0.8850.
• Aussie underperforms below 0.6700 vs Buck as iron ore prices tumble.
• PBoC set USD/CNY mid-point at 6.8752 vs exp. 6.8758 (prev. 6.8987)

Fixed Income

• Bunds undermined by better than expected EZ services and composite PMI plus more ECB concerns about core inflation.
• Gilts underpinned by weak UK consumption data and US Treasuries sit tight ahead of flash PMIs.
• 10-year benchmarks diverge between 134.41-133.65, 101.19-100.71 and 114-26+/18 parameters for Bunds, Gilts and USTs respectively.

Commodities

• Crude benchmarks are choppy after initial pressure trimmed alongside the recovery in equity benchmarks after the initial hawkish PMI pressure, crude specifics limited.
• WTI trades on either side of USD 77.50/bbl while its Brent counterpart oscillates on either side of USD 81.00/bbl, both in relatively tight ranges.
• Spot gold was pushed back under USD 2,000/oz from a USD 2,005.62/oz overnight high as the DXY picked up, with the next level to the downside being Wednesday’s trough at USD 1,969.30/oz; base metals are generally lower, though off-lows given the above market action.

Geopolitics

• Chinese Foreign Minister Qin Gang said there has recently been absurd rhetoric accusing China of upending the status quo, as well as disrupting peace and stability across the Taiwan Strait, while Qin added that the logic is absurd and the conclusion dangerous. Qin also commented that both sides of the Strait belong to China and that those who play with fire on Taiwan will eventually get themselves burned, according to Reuters.
• G7 countries are considering a near-total ban of exports to Russia, according to Kyodo citing sources.
• North Korea said it will continue necessary action until military threats from the US are eliminated and its status of nuclear weapons state will remain an undeniable fact, while it warned it will take strong action if G7 countries attempt to violate its sovereignty and fundamental interests, according to KCNA.
• NATO Secretary General Stoltenberg says that all NATO allies have agreed that Ukraine will eventually become a member, main focus currently is to ensure Ukraine prevails against Russia.

US Event Calendar

• 09:45: April S&P Global US Composite PMI, est. 51.2, prior 52.3
• 09:45: April S&P Global US Services PMI, est. 51.5, prior 52.6
• 09:45: April S&P Global US Manufacturing PM, est. 49.0, prior 49.2
   

Central Banks

• 16:35: Fed’s Cook Discusses Economic Research

DB’s Jim Reid concludes the overnight wrap

The last 24 hours have seen a stronger risk-off move in markets, thanks to another round of weak data releases that strengthened fears of a US recession once again. The moves were evident across several asset classes, and the S&P 500 fell back -0.60%, which believe it or not was its largest decline in nearly a month. Otherwise, yields on 10yr Treasuries (-5.9bps) saw their biggest move lower in over two weeks, Brent crude oil prices (-2.71%) saw their biggest daily decline since the height of the market turmoil in mid-March, and HY credit spreads widened as well.

The main factor driving this was a batch of consistently poor data releases from the US. One of them was the Philadelphia Fed’s manufacturing business outlook survey for April, which fell to a new low for this cycle at -31.3 (vs. -19.3 expected). Importantly, the only other times the index has historically been that low since data begins in 1968 is when a recession has either been under way, or is about to begin imminently. Then an hour-and-a-half later, we got the Conference Board’s leading index for March, which also declined by a larger-than-expected -1.2% (vs. -0.7% expected). Once again, the decline in the leading index over both a 6-month and 12-month horizon is now at levels that have historically always been consistent with recessions or imminent recessions. So for those following leading indicators like yield curves, the latest data is another piece of evidence suggesting there’ll be a US recession soon, which fits with our own view at DB Research that expects one later in the year.

If those two indicators weren’t bad enough, yesterday also saw the weekly initial jobless claims surprise on the upside for a 4th week running, coming in at 245k in the week ending April 15 (vs. 240k expected). That’s the first time we’ve had 4 negative surprises since July, back when there was a similar bout of recession concerns. And the continuing claims for the previous week hit 1.865m (vs. 1.825m expected), which is the highest rate since November 2021. So this isn’t just a case of a single data release being over-interpreted.

Whilst the data was surprising on the downside yesterday, investors conviction remained that the Fed would follow through with another 25bp hike at their meeting on May 3. That view was cemented by various Fed speakers yesterday. For instance, Cleveland Fed President Mester said she anticipated that “monetary policy will need to move somewhat further into restrictive territory this year”. That was followed up by Atlanta Fed President Bostic, who reiterated that he favoured another hike, and Philadelphia Fed Preisdent Harker said he anticipated “that some additional tightening may be needed to ensure policy is restrictive enough”. Dallas Fed President Logan also said the committee continues to look at supply-demand imbalances as inflation remains “much too high”. Remember as well that today is the last chance we’ll have to hear from Fed speakers before the next meeting, since their blackout period begins tomorrow.

Despite solid expectations of another hike in May, the risk-off tone predominated yesterday and sovereign bond yields came down across the board. For instance, yields on 10yr Treasuries fell -5.9bps to 3.532%, and in Europe, those on 10yr bunds (-7.0bps), OATs (-6.0bps) and BTPs (-4.8bps) similarly fell. We also heard from ECB President Lagarde, who said that monetary policy “still has a bit of way to go” to get inflation back down, whilst Dutch central bank Governor Knot said it was “too early to talk about a pause”. Last night, the main question now is whether they go for a 25bp hike or continue with the 50bp pace from recent meetings, with markets pricing in a 20% chance of the larger move as of this morning. Finally, we also heard from the BoE’s Tenreyro, one of the most dovish members of the MPC. She only has two meetings left of her term, but said that “we have already tightened too much”.

When it came to equities, the S&P 500 shed -0.60% yesterday, having spent the entire day in negative territory. Energy stocks (-0.89%) saw the biggest losses on a sectoral basis, which came as oil and gas prices saw sharp declines for a second day running. Defensives like utilities (-0.05%) and consumer staples (+0.06%) were the best performers, which highlights how weak the day was across the board. AT&T (-10.41%) saw the largest decline of the entire index, following their earnings release that showed free cash flow came in well beneath estimates at $1bn, whilst their subscriber growth also slowed from its rate a year earlier. American Express (-1.01%) was another to lose ground after their earnings per share missed estimates, but Union Pacific (+0.30%) put in a slightly better performance as their profits beat expectations.

Back in Europe, the STOXX 600 (-0.15%) lost some modest ground for a second day running, with a relatively smaller decline than seen in the US. Sentiment was supported in Europe by better economic data, with the European Commission’s consumer confidence indicator for the Euro Area climbing to a 14-month high of -17.5 (vs. -18.5 expected). Admittedly, that still leaves it well beneath its levels prior to Russia’s invasion of Ukraine, but it’s a remarkable comeback from the second-half of last year, when fears of a recession were increasingly widespread.

Overnight in Asia, we’ve seen further losses for equities, with the Shanghai Composite (-1.11%) as the biggest underperformer followed by the CSI 300 (-1.04%), the Hang Seng (-0.74%), and the KOSPI (-0.69%). The Nikkei has been a relative outperformer however, only down -0.27%, which comes as data showed that Japan’s headline CPI fell a tenth as expected in March to +3.2%. However, the core measures continued to accelerate faster than expected, with core-core inflation that excludes fresh food and energy up to +3.8% (vs. +3.6% expected), which is its highest level since 1981. Looking forward however, there are signs that the downbeat tone in markets might be stabilising, with futures on the S&P 500 (+0.02%) posting a very marginal gain this morning.

Another story of the last 24 hours has been the significant decline in commodity prices as fears of a downturn mount. For instance, Brent crude oil prices fell -2.72% to $81.10/bbl, and WTI was also down -2.36% at $77.29/bbl. This wasn’t just seen among energy prices though, with industrial metals like copper (-0.94%) and tin (-0.52%) on the London Metal Exchange seeing noticeable declines as well, alongside key agricultural commodities like corn (-1.26%) and wheat (-2.05%). In fact, coming on the heels of the previous day’s declines, this has been the worst 2-day performance for Bloomberg’s Commodity Spot Index since the height of the market turmoil in mid-March.

Looking at yesterday’s other data, US existing home sales surprised on the downside at an annualised rate of 4.44m (vs. 4.50m expected). Otherwise, German PPI inflation in March fell back to +7.5% year-on-year (vs. +9.8% expected), which is the lowest year-on-year rate since May 2021.

To the day ahead now, and data releases include the April flash PMIs from Europe and the US, along with UK retail sales for March. From central banks, we’ll hear from ECB Vice President de Guindos, the ECB’s Vujcic and Elderson, and the Fed’s Cook. Finally, earnings releases include Procter & Gamble.