A Day Ahead View in US and Global Markets by Mike Dolan
After a shocking Monday that spurred a flurry of U.S. election trading, world markets have written off hopes of Federal Reserve easing, China’s economic stumble and the unfolding earnings season.
Former President Donald Trump’s appearance at the Republican Party convention following the failed attempt on his life on Saturday underscored speculation that the assassination attempt now boosts his chances of re-election in November.
And for long-term investors, Trump’s choice of like-minded Sen. JD Vance of Ohio as his running mate also focuses minds on the political landscape through 2028.
“The decision is crucial because a third of US presidents throughout American history have held the role of vice president,” said Tom McLoughlin of UBS Global Wealth Management, adding that this “effectively anoints” Trump’s successor.
With betting markets putting the odds of Trump returning to the White House at more than 70%, Monday’s reaction sent the 2-30 year Treasury yield curve into positive territory for the first time since January, sharply raising the Bitcoin and Trump-related stocks underscored a rotation into small-cap stocks and drove Mexico’s peso down.
Some of these moves cooled a bit before Tuesday’s bell, Bitcoin fell below $63,000 and the 2-30 year yield curve fell back into negative territory as attention turns to rising hopes of Fed easing.
With last week’s renewed disinflation hopes as a backdrop, Fed Chairman Jerome Powell’s latest comments in Washington on Monday only encouraged that thinking.
“We didn’t gain any additional confidence in the first quarter, but the three (inflation) readings in the second quarter, including last week’s, add some confidence,” he told the Economic Club of Washington.
Futures markets are now fully priced in for a first Fed rate cut in September and have raised full-year easing bets to 68 basis points and 110 basis points by March. Two-year Treasury yields have fallen to their lowest level in more than four months at 4.41% on Tuesday morning, ahead of the June retail sales update, while 10-year yields also fell below 4.2%.
With big bank earnings coming in, S&P500 futures held steady early on – although the stock market’s attention on Monday was once again focused on the outperformance of small caps.
While the S&P500 made another small gain, the Russell 2000 gained nearly 2% and is now up more than 7% in just five sessions.
However, stock market volatility is starting to increase, with the VIX “fear index” reaching its highest level in three weeks.
Asian stocks mostly rose overnight, with the exception of another sharp drop in Hong Kong, as the Chinese Communist Party’s “Third Plenum” is closely watched for major economic reforms. Details will likely be released on Thursday.
China’s latest series of economic failures and Trump’s speculation – notably his sweeping promises of trade tariffs – have created a more mixed picture elsewhere.
China’s yuan and Japan’s yen weakened again against the dollar despite Fed easing bets.
And European stock markets also underperformed – hit by a range of concerns, from Chinese demand for luxury goods to tariff concerns. The European Central Bank meets on Thursday but is not expected to cut rates again until September and the euro is firmer.
Germany’s July ZEW sentiment indicator came in below forecast.
Hugo Boss shares plunged nearly 9% on Tuesday after the German fashion brand cut its annual sales forecast due to weakening global consumer demand, especially in markets such as China.
Sales at Cartier owner Richemont remained roughly flat in the three months to June, with a drop in Chinese demand pushing the overall result slightly below expectations.
Back on Wall Street, Goldman Sachs’ second-quarter profit more than doubled, beating analysts’ estimates of solid debt underwriting and fixed-income trading, and the brokerage’s shares rose nearly 3% on Monday.
Bank of America and Morgan Stanley are among the big financial names in the earnings diary today.
Key developments expected to provide further guidance to US markets later on Tuesday:
* June US retail sales, June import/export prices, July NAHB housing index, May commercial/retail inventories; Canadian June Consumer Price Index, June Housing Starts
* US Corporate Profits: Bank of America, Morgan Stanley, State Street, PNC, Progressive, Unitedhealth, Omnicom, JB Hunt
* Federal Reserve Governor Adriana Kugler speaks
* European Union ECOFIN finance ministers meet in Brussels to analyze the excessive deficits of seven member states: Belgium, France, Italy, Hungary, Malta, Poland and Slovakia; Participation of the advisor of the European Central Bank, Luis de Guindos
* US Republican Party Convention
* US Treasury auctions 3-month and 6-month notes
(Reporting by Mike Dolan, Editing by Ros Russell mike.dolan@thomsonreuters.com)
