A Day Ahead View in US and Global Markets by Mike Dolan
World markets wobbled on Tuesday, with benchmark bond yields and volatility gauges jumping to their highest level in nearly four weeks as more evidence of the stoic U.S. consumer alongside technology stocks in escape leaves the Federal Reserve with a dilemma.
Also roiled by Tuesday’s colossal $297 billion sale of Treasury notes and bonds and tepid investor response, benchmark 10-year yields rose to their highest level since May 3. The VIX also jumped to near four-week highs and the dollar firmed, especially against the yuan and euro.
However, the rates market angst began with the latest reading on resilient US households. Contrary to expectations of a slowdown this month, the Conference Board’s monthly survey showed that consumer confidence rose again in May.
Although the survey revealed some anxiety about a possible future recession, the surprising optimism centered on two main factors. The first is the abundance of jobs, as the unemployment rate has remained below 4% for 26 consecutive months, and the rise in stock markets.
The survey’s net reading among those who expect stock prices to continue rising over the next 12 months, compared to those who see them falling, is at its highest level since 2018 – and may well be favoring the view of stocks. family finances and spending plans.
And that coincides with the Chicago Fed’s national index of financial conditions at its loosest setting since late 2021 — four months before the Fed begins tightening policy in March 2022.
Although futures are down about half a percent ahead of Wednesday’s open, the S&P500 is about 10% above pre-Fed tightening peaks.
And led by another 6% rise on Tuesday in artificial intelligence leader Nvidia, the Nasdaq surpassed 17,000 for the first time.
Nvidia’s latest leap puts the AI chipmaker’s market value at $2.8 trillion – leaving the world’s third-largest company just $100 billion behind Apple.
The question for the Fed in all of this is whether the rising stock market is undermining the tightness of the credit market, even though benchmark long-term lending and mortgage rates have reached their highest levels in a decade.
If consumers feel that their finances are rising in any way, they may have difficulty getting inflation back into the 2% box.
Higher oil prices ahead of the OPEC meeting over the weekend won’t help.
Sticky inflation was also evident overseas, with Australian consumer price gains unexpectedly rising to a five-month high of 3.6% in April.
There was better news for the European Central Bank, now widely expected to cut its interest rates as early as June.
Although annual inflation rates in German states rose in May, monthly rates virtually stagnated and banks increased their loans to businesses by just 0.3% year on year in April, more slowly than in the previous month.
In Asia, Japan warned of possible rate hikes to support China’s yen and yuan and stocks underperformed.
China’s economy is expected to grow 5% this year and in line with Beijing’s target, after a “strong” first quarter, the International Monetary Fund said on Wednesday. But he added that he expects slower growth in the coming years.
A busy summer of elections around the world began with South Africans voting on Wednesday in a vote that could see the ruling African National Congress lose its majority after 30 years in power. The rand rose in the vote.
Amid intense negotiations, BHP asked for more time to try to win over acquisition target Anglo American, hours before the deadline for the world’s largest mining company to firm its US$49 billion offer. Anglo rejected three proposals from BHP, but last week agreed to a one-week extension of the UK procurement watchdog’s deadline for BHP to take formal action or walk away.
Energy markets were also choppy. ConocoPhillips is in advanced talks to buy Marathon Oil in an all-stock deal that could value the Houston-based company at just over its $15 billion market value, the Financial Times reported Wednesday.
Hess shareholders on Tuesday approved a proposed $53 billion merger with Chevron, which paves the way for the second-largest U.S. oil company to gain a valuable asset and a foothold in rival Exxon Mobil’s huge discoveries in Guyana.
And shares in the UK’s Royal Mail parent company, International Distributions Services, jumped 3.4% as it agreed to a formal £3.57 billion takeover bid by Czech billionaire Daniel Kretinsky.
Main daily items that could guide US markets later this Wednesday:
*Dallas Fed services sector survey in May, Richmond Fed business survey in May
* Federal Reserve releases Beige Book of economic conditions; New York Fed President John Williams and Atlanta Fed Chief Raphael Bostic Speak
* US Treasury sells 7-year notes and 2-year floating rate notes
* US Corporate Profits: Salesforce, HP, Agilent Technologies
* South African National Assembly Elections
(Reporting by Mike Dolan; Editing by Toby Chopra)
