U.S. equities reversed initial losses to finish higher on Tuesday, boosted by a drop in Treasury yields over recession concerns, while oil slumped.
The S&P500 reversed initial losses of as much as -2.18% to finish +0.16% higher for the session lifted by technology +1.24%, consumer discretionary +2.28%, and communications +2.66% while all other sectors were negative with energy lagged -4.01% on weaker oil prices. The Nasdaq Composite rose +1.75% along with the Russell 2000 +0.79% while the Dow Jones declined -0.42% and the VIX was little changed at 27.54. Talks of easing tariffs on China imposed by the former Trump administration helped boost sentiment that inflationary pressures may ease, with U.S. Secretary of State Antony Blinken set to meet China’s foreign minister Wang Yi at a meeting of G20 ministers in Bali this week. According to Bloomberg Economics, there is now a 38% chance of a U.S. recession next year, with the deteriorating outlook spurring traders to price in cuts to interest rates from the middle of 2023. Elsewhere, analysts at Goldman Sachs in a note said they see the risk of a U.S. recession next year at 30%, 40% in the Eurozone, and 45% in the U.K.
Treasury yields were lower across the curve with the 2-year rate down -1.4 basis points along with both the 10 and 30-year rates by -7.3 and -6.8 basis points respectively. Key spreads have also inverted, highlighting concerns of the deteriorating economic outlook, with the 2-10 spread and 5-10 spread modestly inverted. Breakeven expectations tumbled on hopes of easing Chinese tariffs and lower oil prices, with the 1-year rate down -39 basis points to 3.98% and the 2-year rate down -17 basis points to 3.19%. Elsewhere, the U.S. dollar index strengthened +1.28% to 106.48. In economic data, both factory orders and durable goods for May rose more than forecast, with factory orders rising +1.6% compared to +0.5% forecast, and durable goods rising +0.8% versus +0.7%. Meanwhile, investors will be focused for clues on the outlook for monetary policy with the release of the latest FOMC minutes overnight.
European equities slumped on Tuesday over concerns of a recession ahead of earnings season which will show whether corporate profit growth has been able to withstand high levels of inflation and supply constraints. Also weighing on European equities was a decline in commodity prices, falling over the potential for removing Chinese tariffs as well as expected dismissed demand as economic growth stutters. The Euro Stoxx 600 fell -2.11% along with the DAX -2.91%, CAC -2.68% and FTSE100 -2.86% with benchmark indices lower across the region. In economic data, the final reading of Eurozone manufacturing PMI for June was slightly better than forecast at 53 compared to estimates of 52.8 as well as in the U.K. where the final reading rose to 54.3 against expectations of 53.4. In focus on Wednesday are Eurozone retail sales year-on-year to May, forecasted to decline -0.4% from +3.9% previously.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a weaker open this morning with ASX200 futures down -60 points or -0.92% to 6,481 although had traded as low as -1.99%. The index posted a modest rise of +0.25% on Tuesday lifted by energy +2.16% and health care +1.17% while real estate underperformed -1.25%. The Reserve Bank of Australia lifted interest rates by +0.5% on Tuesday as widely forecast to +1.35% with the bank’s statement having a slightly dovish tone that soothed concerns of more aggressive tightening that will trigger an economic slowdown. While the statement reiterated the bank’s stance that it is “committed to doing what is necessary to ensure inflation in Australia returns to target over time”, the statement pointed to inflation expectations which it does not yet see as becoming unanchored. That leaves flexibility for the bank to proceed at a slower pace should data show signs of weaker inflation or a softer labour market. Based on futures pricing, the RBA cash rate is expected to peak at +3.5% in mid-2023 before modestly easing off, although well above economist forecasts of +2.7% by the end of 2023. The Australian dollar is -0.92% weaker overnight at 0.6802 weighed by a drop in commodity prices while the 10-year government bond yield edged -1.3 basis points lower to 3.547%.
Oil slumped as the Norwegian government intervened to end a strike in the petroleum sector that had cut oil and gas output with both WTI and Brent crude down -8.24% and -9.36% a barrel to US$99.50 and US$102.88 a barrel. Iron ore futures in Singapore rose +3.48% on Tuesday although have reversed those gains weakening -3.39% in early trade this morning to US$108.70 while copper declined to a 19-month low down by -5.1% to US$7,597. Gold also declined -2.40% overnight to US$1,764 an oz, along with silver -3.86% to US$19.21 while Bitcoin rose +3.47% to US$20,441.
Economic data:
- Eurozone Retail Sales (YoY May) 19:00
- Fed Williams Speec 23:00
- U.S. PMI Final (MoM Jun) 23:45
- U.S. ISM Non-manufacturing PMI (MoM Jun) 00:00
- FOMC Minutes 04:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
