Markets remain unstable awaiting employment reality check

A Day Ahead View in US and Global Markets by Mike Dolan

Looking for some calm, markets remain jittery after last week’s volatility shock and traders are now looking for some reassurance that the real economy has not moved beneath them.

Volatility spikes like the one seen on Monday rarely disappear instantly, and with the VIX “fear gauge” still above historical averages of around 20, some turbulence remains. But at less than half of Monday’s peak, some recovery is underway.

Nerves on edge were evident on Wednesday when the initial rally in Wall St stocks faded at the close, with anxiety fueled by another red flag on the artificial intelligence theme due to Super Micro’s poor results and after a confusing 10-year Treasury auction.

In fact, sales of 10-year notes were priced at 3 basis points above pre-auction levels and demand at 2.32 times that of the bonds on offer was the lowest in almost two years. But that mainly reflected the week’s sudden drop in yields below 4% and the $42 billion sale occurred with Treasury funding nearly 15 basis points cheaper than it would have been a week ago.

About $25 billion in 30-year bonds are up for grabs as of Thursday and represent the latest test – with the 2- to 30-year Treasury yield curve now positive to the tune of 27 basis points, having reached its sharpest level in two years on Monday. . The curve from 2 to 10 remains slightly inverted.

Attention now turns to the question of whether the U.S. labor market is weakening at the pace suggested by Friday’s payrolls report and Thursday’s release of the weekly payroll claims report. Unemployment assumes heightened importance for markets that are still largely priced in for a Federal Reserve rate cut of up to 50 basis points. next month.

New unemployment claims have been rising and reached their highest level since August last year in the most recent week.

However, stock futures remained stable ahead of today’s open, with the VIX remaining below 30.

European and Asian benchmark indices were slightly lower – but with much less movement than at the start of the week. China’s mainland index was slightly higher.

The mood was still nervous in Japan – the epicenter of much of last week’s angst over the unraveling of short-yen carry trades that sowed wild swings of more than 10% in the Nikkei stock index. But with a loss on Thursday of less than 1%, it looked almost serene compared to Monday and Tuesday.

There were some concerns arising from the minutes of last week’s Bank of Japan meeting on rate hikes, which showed board members calling for the need to continue raising interest rates.

But this was recorded before the market turmoil that has since caused senior BOJ officials to say they would delay this if it was only to fuel further market disruption.

The story continues

And Finance Minister Shunichi Suzuki said on Thursday that authorities were closely monitoring stock market developments, even if they are not yet planning specific actions.

With estimates that most of the outstanding yen carry trades had already been settled, the dollar/yen exchange rate stabilized and maintained a position above 146. The dollar index fell more broadly as US dollar yields rose. Two-year and 10-year Treasuries declined once again in early trading. On thursday.

In earnings, there will be a more detailed analysis of pharmaceutical giant Eli Lilly’s results.

European rival Novo Nordisk on Wednesday reported weaker-than-expected quarterly sales of its popular weight-loss drug Wegovy, sparking concerns among investors about increased competition from Eli Lilly and sending its shares down 8% .

Novo is spending billions of dollars to increase production of Wegovy to meet demand and fend off Lilly, which launched its rival therapy Zepbound in the US last December. Although the two companies are now going head-to-head over obesity treatments in several markets, the most lucrative by far is the US, where more than 70% of adults are obese or overweight.

Key developments expected to provide further guidance to US markets later this Thursday:

* US weekly jobless claims, wholesale sales in June; July inflation in Mexico

* Richmond Federal Reserve President Thomas Barkin speaks

* Political decision by the Central Bank of Mexico

* US Corporate Profits: Eli Lilly, Gilead Sciences, News Corp, Paramount Global, Expedia, Insulet, Solventum, Take-Two Interactive Software, Akamai Technologies, Epam Systems, Viatris, Martin Marietta Materials, Parker-Hannifan, NRG Energy, Vistra

* US Treasury sells $25 billion in 30-year bonds and $95 billion in 4-week bonds

(Reporting by Mike Dolan; Editing by Toby Chopra; mike.dolan@thomsonreuters.com)