Global markets are relatively muted after a second consecutive historic weekend for US politics, one where Joe Biden ended his reelection campaign and (reluctantly) endorsed Vice President Kamala Harris. As of 7:45am, S&P futures are up 0.5%, led by tech with small caps also positive but lagging as the rotation takes a break; Nasdaq 100 futures gained 0.9%, reversing some of last week’s painful 4% slump. European stocks rose more than 1%, snapping a five-day losing streak and their worst week this year as the Trump Trade looks a bit shaky this morning (his odds on Predictit are down from 70% to 60% in the past week): the dollar is sliding slightly, havens like the Swiss franc and Treasuries edge higher as the yield curve twists flatter. Commodities are mixed with Ags higher and Energy/Metals lower. The biggest news this weekend is Biden dropping out of the Presidential race and VP Harris is now the presumptive nominee, though others may enter the race. As JPM’s Market Intel desk writes this morning, we have seen “some unwinds of the Trump Trade, it is possible that unwinds further as the market looks to Trump with a split Congress.” Elsewhere, it is a light macro day as we enter the second busiest week of earnings season with ~20% of the SPX reporting.
In premarket trading, Mag7 and Semis are leading with small caps lagging. Nvidia shares rise 1.6% premarket amid reports the company is working on a version of its new flagship AI chips for the China market that will be compatible with current US export controls. CrowdStrike falls 4% as Guggenheim cut its rating to neutral after a faulty software update from the cybersecurity firm affected 8.5 million devices that rely on Microsoft’s Windows operating system. Bank of America dropped 1.1% after Warren Buffett’s Berkshire Hathaway sold about 34 million shares in the lender for $1.48 billion, according to a public filing. Here are some other notable movers:
After this week’s shocking news of Biden’s unexpected reversal and decision to drop out of the race (following relentless pressure from the “Democratic” party, a full account of what happened can be found here), Democrats now face the task of uniting around a new nominee just weeks before their convention, and must rapidly make up ground against Donald Trump who remains an odds-on favorite to win the presidency. Investors have been wagering on Trump’s return to the White House for weeks, trimming holdings of long-term US bonds and buying Bitcoin, among other things. Now, they’re considering whether the “Trump Trade” is still on. The uncertainty may translate into volatility for markets, though for now, much attention is on earnings and the outlook for monetary policy.
“We are more focused on the cadence of the business cycle than on the outcome of the election,” said Morgan Stanley strategist Michael Wilson. “While markets have been digesting the rising odds of a Trump win, cyclical upside from here will likely be dependent on growth” the bearish MS strategist added, noting that the rotation into small caps is almost over (which likely means it is only just starting).
Investors have their hands full dealing with major earnings this week. Tesla and Alphabet will be the first of the “Magnificent Seven” to report on Tuesday. Analysts will likely press Elon Musk’s electric-vehicle giant on the progress of its plans for robotaxis. And investors will delve into the details of Google’s parent revenue boost from artificial intelligence.
“It’s a good reporting season so far, but you have to wonder what are the catalysts for the market to keep on rising further?” said Andrew Pease, global head of investment strategy at Russell Investments Ltd. “A lot of the hope is that we get this rotation away from the Mag Seven to the S&P 493 and the equal-weighted index starts to catch up with the cap-weighted. Asymmetry is still the watchword right now.”
European stocks surge as they look to snap a five-day losing streak. Technology, construction and consumer product shares are leading gains. Strategists at Morgan Stanley said companies in Europe have made a positive start to the second-quarter reporting season, with 29% beating profit expectations. Ryanair failed to boost that track record Monday, however, falling as much as 16% after the Irish budget carrier cut its outlook for ticket prices in the crucial summer travel period and predicting “materially lower” fares. Rivals EasyJet Plc and IAG SA also fell. Here are the top European movers:
In Asia, stocks suffered a third-straight day of losses as they were dragged lower by a weak tech sector amid valuation concerns ahead of key corporate earnings. Chinese bonds were a highlight, gaining after the central bank cut a policy interest rate. The country’s stocks fell, as investors continued to express disappointment at a lack of strong stimulus measures from a recent major Communist Party meeting. The MSCI Asia Pacific Index fell as much as 1.2% Monday, with TSMC and Samsung among the biggest contributors to the decline. Taiwan’s benchmark index ended 2.7% lower, taking its 4-day plunge to more than 7%, the most since October 2022. Key gauges in Japan and South Korea shed more than 1% each. Tech stocks have suffered sharp losses over the past couple of weeks as the upcoming US election and the Federal Reserve rate cuts injected new uncertainties to the once-mighty sector. Morgan Stanley recommended investors book profits on Asian and emerging-market tech and pivot to consumer staples. Traders were also game-planning the implications of President Joe Biden’s exit from the race.
In FX, the Bloomberg Dollar Spot Index is off the lows but still down 0.2%, snapping a two-day advance, as investors weighed what US President Joe Biden’s exit from the presidential race would mean for markets. The yen was the strongest of the G-10 currencies, rising 0.5% against the greenback. The Australian dollar is the weakest, falling 0.3%.
In rates, treasuries are mixed as the short-end underperforms. The yield on 10-year US Treasuries was down as much as 4bps earlier. It’s now little changed 4.23%. Gilts lead a selloff in European bonds.
In commodities, oil prices are little changed, with WTI trading near $80 a barrel. Spot gold is steady around $2,402/oz.
On today’s econ calendar, the lone event is July’s Chicago Fed National Activity Index (8:30am). This week, traders will be focused on economic activity data in Europe, US second-quarter growth and a Bank of Canada rate decision. Fed members scheduled to speak before the next FOMC meeting begins July 30 — a period during which a self-imposed quiet period is customary — include only Governor Bowman and Dallas Fed President Logan on July 24, both at an event on Texas community partnerships
A more detailed look at global markets courtesy of Newsquawk
APAC stocks mostly began the week on the back foot after last Friday’s selling pressure on Wall St and despite China’s surprise cuts, while markets also reflected on President Biden’s decision to bow out of the election race. ASX 200 was led lower by the commodity-related sectors with energy the worst hit after oil prices tumbled on Friday, while miners also suffered including South32 with its shares down by a double-digit percentage following its output update where it also flagged an impairment charge of USD 554mln for its Worsley Alumina operations. Nikkei 225 extended on its recent declines after gapping beneath the key 40,000 level. Hang Seng and Shanghai Comp. were mixed in which the former bucked the trend owing to the resilience in local tech-related stocks, while the mainland was pressured after President Xi noted China’s development entered a period of coexistence of strategic opportunities, risks and challenges, as well as increasing uncertainties and unpredictable factors. Furthermore, the PBoC’s surprise announcement to cut its 7-day reverse repo rate by 10bps, which Chinese banks followed through with similar cuts to the benchmark LPRs, failed to spur risk appetite as some viewed the cut to short-term funding rates as underwhelming and not the big measures needed to revive the economy and China’s slowing property industry.
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European equities, Stoxx 600 (+0.4%) are entirely in the green, shrugging off a mostly weaker APAC session overnight. European sectors hold a strong positive bias; Tech takes the top spot, whilst Travel & Leisure lags, following poor Ryanair (-12%) earnings. US equity futures (ES +0.3%, NQ +0.5%, RTY +0.2) are modestly firmer to various degrees, with slight outperformance in the NQ, as traders digest news that US President Biden is dropping out of the election race.
Planes couldn’t take off, trains struggled to run, TV shows got pulled off the air, traders couldn’t trade, payments got delayed, hospitals had to cancel operations… oh and the EMR couldn’t get published on time. Friday was a fascinating day of learning how reliant we all are on tech companies. Although the DB IT infrastructure survived the outage exceptionally well, DB Research use a third-party provider to send out research and this was completely down for much of Friday. We ended up using a manual back up to send the EMR out late, but we couldn’t include links. Apologies for the late running. As we couldn’t include links, we’ll keep our global markets survey open until 8am (London time) this morning. So all last responses very welcome. It includes questions on the US election, US tech versus the rest of the US equity market, and a few other relevant questions that include several we now have a long-term series for. It should only take a couple of minutes and feel free to skip any questions you want.
One question that we don’t need to ask anymore is whether you think Joe Biden will be the Democratic Party nominee for President in November. On Friday speculation was rife that he would stand down as early as the weekend but bullish remarks by Biden in the early part of the weekend put some doubts to that speculation. However by Sunday afternoon US time Mr Biden had withdrawn and endorsed VC Kamala Harris. It seems difficult to see a path for someone to pip her to the nomination but we are in uncharted territory so you couldn’t completely rule it out. The Democratic convention starts on August 19th so if someone was going to challenge they’d need to be building up momentum well ahead of that. Unless there was a groundswell of support for that candidate it seems a very high hurdle to supplant Harris. The Clintons have endorsed Harris even if Obama hasn’t, although his practise is not to do so until a nomination has been secured. Overnight, potential rivals Newsom and Buttigieg have also thrown their support behind Harris. In terms of the polls, the match-up between Trump and Harris has been slightly narrower than with Biden in recent times with Trump 1.9pp ahead at the national level instead of 3pp according to Real Clear Politics poll aggregates. However with the attention now likely to be firmly on Harris this could move notably in either direction over the next few days and weeks. Perhaps for now it slightly reduces the impetus for Trump trades but there’s a long way to go.
It’s hard to say markets have reacted much to the news so far. 10yr US Treasury yields are -1.7bps lower which may reflect a little less risk of even more fiscal spending. The dollar is around a tenth of a percent lower but the Peso was initially +0.6% higher against the dollar but has pared that back to around a tenth of a percent gain. S&P 500 (+0.21%) and NASDAQ 100 (+0.32%) futures are higher but well within normal trading ranges.
The rest of Asia is marching to its own beat with a China rate cut doing as much to unsettle as improve sentiment. Across the region, the KOSPI (-1.35%) is the biggest underperformer closely followed by the Nikkei (-1.17%) with the CSI (- 0.65%) and the Shanghai Composite (-0.69%) also lower. The Hang Seng (+0.67%) is bucking the regional trend though.
Coming back to China, the PBOC unexpectedly trimmed the seven-day reverse repo rate for the first time in almost a year, lowering it by 10 bps to 1.7% to reinvigorate the economy. Chinese banks have lowered one and five-year loan prime rates by 10bps each to 3.35% and 3.85%, bringing the rates further into record-low territory. Following the decision, yields on 10yr Chinese government bonds fell around -2.0bps.
As for this week, most roads point to Friday’s US core PCE deflator. En route to this, the main other highlights are US Q2 GDP on Thursday, the global flash PMIs and the Bank of Canada rate decision on Wednesday, alongside a big week for earnings that includes Alphabet, Tesla and LVMH (all tomorrow). Don’t expect to hear from Fed officials as they are on their blackout period ahead of next week’s FOMC.
With the core PCE deflator, our economists expect a 0.14% MoM reading given the CPI and PPI components that feed into it. There could be some downward revisions to prior months that could edge this month up nearer to 0.2% so one to watch as a whole rather than the June number alone. The base case at DB is that the YoY rate will dip to 2.5% which is below the Fed’s YE ’24 prediction of 2.8% at their June FOMC. However our econ team point out that base effects from low H2 prints last year will make further progress much more challenging. Nevertheless the recent run, especially in rents, suggest that the Fed will be having increasing confidence that inflation is moving back closer to 2%. For Q2 US GDP, our economists expect 2.1% annualised growth (consensus 1.9%) although with durable goods out at the same time there might be a bit more uncertainty than usual.
Recapping last week, it was an incredibly eventful time for markets, with various ups and downs through the week. It began fairly positively, with the S&P 500 hitting new records on both Monday and Tuesday. But on Wednesday, the rally came to an abrupt halt, mainly driven by chipmakers at first, but spreading among equities more broadly. That meant the S&P 500 fell -1.97% last week (-0.71% Friday) in its worst weekly performance since April. But under the surface there was also a rotation taking place away from mega-caps towards small-cap stocks, as the Magnificent 7 was down -4.78% last week (-1.24% Friday), even as the Russell 2000 was up +1.68% (-0.63% Friday).
That volatility was clear in several ways. For instance, the VIX index was up +4.06pts to 16.52pts, marking its biggest weekly increase since March 2023 during the week of SVB’s collapse. In other regions the losses were even bigger, and Europe’s STOXX 600 fell every day last week to close -2.68% lower (-0.77% Friday), in its worst weekly performance since October. And with the massive IT outage on Friday, Crowdstrike ended the week down -17.87% (-11.10% Friday), marking its worst daily and weekly performance since November 2022.
For sovereign bonds however, there was a bit more divergence on either side of the Atlantic. In the US, 10yr yields ended the week up +5.6bps (+3.7bps Friday) at 4.24%. But yields fell back in Europe after the ECB’s decision, which had several dovish elements and maintained an implicit direction towards further easing, even as they left rates unchanged and hawkish sources emerged in the aftermath of the meeting. Overall, that helped yields on 10yr bunds fall by -2.8bps (+3.6bps Friday) to 2.47%.
Finally, the risk-off tone coupled with concerns over Chinese growth meant that it was a very bad week for commodities across the board. For instance, Brent crude oil fell -2.82% (-2.91% Friday) to close at $82.63/bbl, its lowest in over a month. Copper prices were also down every day last week to a 3-month low, posting their worst weekly performance since July 2022 with a -8.25% decline (-1.10% Friday). Similarly, it was a bad week for precious metals, and even though gold closed at an all-time nominal record earlier in the week of $2469/oz, it ended the week as a whole down -0.44% (-2.26% Friday) at $2401/oz.
