US equity futures are weaker, led by tumbling chipmakers after the WSJ reported that the US may move to further restrict exports of even less powerful AI-related chips, which could stoke further tensions between the two countries. At 7:45am ET, S&P futures were down 0.2% while Nasdaq 100 Index futures dropped 0.5% as Nvidia - which generates 20% of its sales from China - and AMD sank more than 3%. The dollar continued to gain against its Group-of-10 peers, while Treasuries remained little changed, after economic data released Tuesday showed surprising strength in several corners of the US economy. The USD is higher as bonds have caught a bid pushing the 10Y yield below 3.73%; commodities are once again mostly lower with some strength in the Energy complex' bitcoin slides. Focus turns to whether Fed chair Jerome Powell maintains his hawkish stance when speaking on a panel with other major central bankers at the ECB’s forum in Sintra at 930am today.
In premarket trading, Nvidia and Advanced Micro Devices were the most notable movers, dropping after the Wall Street Journal reported late Tuesday that lawmakers have discussed stopping some sales of artificial intelligence chips to China, which could stoke further tensions between the two countries. Here are some other notable premarket movers.
- Stocks exposed to cryptocurrencies fell in US premarket trading, as the price of Bitcoin slipped further from a one-year high following a strong session on Tuesday. CleanSpark -3.6%, Coinbase Global -3.3%.
- Veeva Systems drops 3.8% in thin premarket trading after Morgan Stanley downgrades to underweight on risks to its core customer relationship management business within life sciences. It is the cloud- based software provider’s only negative analyst rating.
- AST SpaceMobile plunges 24% in US premarket trading after an offering of 12.5m Class A shares to raise gross proceeds of ~$59.4m.
While tougher action from Washington would be a setback for chipmakers, like Nvidia, it’s unlikely to significantly dent appetite for the stocks, which have soared on the back of the AI frenzy, said Timothy Graf, head of EMEA Macro strategy at State Street Bank. “It’s a minuscule pullback in what’s been a 3-figure-type move for some shares,” he said.
Investors are also awaiting news from a central banking forum in Portugal, where Christine Lagarde, Jerome Powell, BOJ's Kazuo Ueda and BOE's Andrew Bailey are due to speak later in the day. While treasury yields were broadly lower, resilient US economic data has underscored the likelihood that the Fed has further to go in tightening monetary policy. Lagarde and several other policymakers have also stressed the ECB will continue raising interest rates.
“Will they stop or won’t they stop? Will we have a recession and when? All these types of questions going through investors minds causes a lot of vol in thin markets,” said Luke Hickmore, investment director at Abrdn.
The Fed is also expected today to release the results of its annual stress test of the banking industry. Analysts largely expect banks to sail through, even as regulators explore more stringent requirements in the aftermath of a few collapses in the financial industry.
Elsewhere, equity markets were broadly higher, catching up with yesterday’s tech-led rally in the US. Europe’s Stoxx 600 Index added 0.5% led by outperformance in the construction, industrial and auto sectors. Among individual movers, UBS advanced as the company prepared to cut more than half of Credit Suisse Group AG’s workforce. Near bankrupt Swedish landlord SBB AB surged after Goldman analysts upgraded their recommendation on the stock. Here are the most notable European movers:
- DSM-Firmenich rises as much as 5.9% after declining about 20% since May 18, as management is seen to be tackling difficulties in its vitamin business. Jefferies said that management acknowledging a headwind is a positive step for the company
- Vodafone rises as much as 2.4% after BNP Paribas Exane raised its recommendation to neutral following an analysis of whether the telco group’s UK merger with CK Hutchison’s UK arm will be approved by regulators
- SBB shares surge as much as 14% after Goldman Sachs upgraded its rating to neutral from sell. The Swedish landlord, which slumped last week to its lowest since 2015, now has rallied for three days
- Carrefour rises as much as 3.5% after Morgan Stanley reinstated coverage with an overweight rating, highlighting the French supermarket group’s buyback plans, earnings growth and attractive valuation
- Elmos rises as much as 4.5% after the German maker of automotive chips announced the sale of its wafer fab in Dortmund to US-based Littelfuse for about €93m. A previous sale was blocked last year by the German government
- Sage Group rises as much as 4.4% after JPMorgan raises the software developer to overweight, saying the company can achieve 10% organic revenue growth through fiscal 2025, with scope to accelerate further in longer term
- UBS rises as much as 1.5% after Bloomberg reported the Swiss giant is planning to cut more than half of Credit Suisse’s 45,000-strong workforce starting next month as a result of the bank’s emergency takeover
- GVS shares fall as much as 11% after Goldman Sachs downgraded the Italian maker of masks and filter components for ventilators to sell from neutral, noting headwinds to organic growth this year and higher-than-average leverage
- AIB Group falls as much as 3.2% after the Irish government offloaded a stake in the bank at a discount to take the state’s ownership below 50%. The government’s ownership will be reduced by around 5%
- Popolare di Sondrio falls as much as 3.5% as Jefferies shifts its preferences within Italian banks, naming Banco BPM as top pick, upgrading Credito Emiliano to buy and downgrading Popolare di Sondrio to hold
Earlier in the session, Asian stocks traded mixed and only partially sustained the momentum from Wall St where risk appetite, following news of a possible US escalation in AI chip exports to China.
- Hang Seng and Shanghai Comp were subdued after Chinese Industrial Profits remained at a steep contraction and with the US considering new curbs on AI chip exports to China amid some concerns China could use AI chips from Nvidia and others for weapons development and hacking.
- ASX 200 was positive with nearly all sectors in the green after softer-than-expected monthly CPI data from Australia added to the bets for the RBA to keep rates unchanged at next week’s meeting.
- Nikkei 225 gained amid tailwinds from recent currency weakness and with Japan leaning towards extending support measures for gas and electricity bills set to expire at the end of September as it seeks to underpin the economy.
- India’s benchmark stock indexes closed at record high levels Wednesday with the BSE-Sensex index hitting the 64,000-mark for the first time ever on continued optimism for the domestic economy and corporate earnings growth. The BSE-Sensex ended 0.8% higher at 63,915.42 in Mumbai, while the NSE Nifty 50 index advanced by same magnitude. The Nifty 50 index also climbed above the 19,000 points mark for the first time ever during the day. The MSCI Asia-Pacific Index climbed 0.6% for the day. The record highs reflect the relative earnings resilience of Indian companies in a difficult global environment and “encouraging” progress of the monsoon, Trideep Bhattacharya, chief investment officer for equities at Edelweiss Mutual Fund said in an email statement. The rally has also been supported by foreign investors, who are on course to be net buyers of local stocks for four straight months in June. The 12-month forward earnings growth forecast for MSCI India constituents have improved to 12.5% as of Friday from 11.5% a month ago, according to the data compiled by Bloomberg Intelligence. The near record low volatility in the market, as reflected in the NSE India Volatility Index, shows investor comfort on valuation and confidence on growth.
In FX, the Bloomberg Dollar Spot Index climbs 0.2% as traders anticipate further tightening from the Federal Reserve; money- markets continue to price one more 25 basis point hike. USD/JPY whipsaws after the yen hit its lowest level against the dollar in more than seven months; Japan’s top FX official says monitoring currency moves closely. AUD/USD falls as much as 1% hitting a three-week low as Australia’s inflation miss saw investors dial back hike expectations.
In rates, treasuries edge higher during London morning, led by bunds and gilts, leaving yields richer by around 2bp across the curve as US trading day begins. Treasury 10-year yields around 3.735% with bunds and gilts outperforming by 1.5bp and 2bp in the sector; parallel shift across the curve keeps spreads within 1bp of Tuesday close; bunds rose to new highs after Italian CPI slowed more than expected in June. German 10-year yields are down 2bps. The Kiwi dollar is the weakest among the G10’s, falling 1.1% versus the greenback while the Aussie drops 0.7%. US session includes comments from Fed Chair Powell at ECB forum in Sintra and last of this week’s coupon auctions.
In commodities, crude futures advance with WTI rising 0.9% to trade near $68.30. Spot gold falls 0.2% to around $1,910. Bitcoin falls 1.1%
Bitcoin is on a slightly softer footing intraday but holds onto the USD 30k handle. Speculation is mounting that the BlackRock Bitcoin ETF will get the green light, according to FT. Meanwhile, FTX is moving ahead with efforts to revive its flagship international cryptocurrency exchange, according to WSJ.
To the day ahead now, and the main highlight will be the panel of central bank speakers, including Fed Chair Powell, ECB President Lagarde, BoJ Governor Ueda and BoE Governor Bailey. We’ll also hear from the ECB’s Villeroy and BoE Chief Economist Pill. Otherwise, data releases include the flash CPI release from Italy for June, as well as the Euro Area M3 money supply for May. In the US, we’ll also get the advance goods trade balance for May.
Market Snapshot
- S&P 500 futures down 0.2% to 4,409.50
- STOXX Europe 600 up 0.5% to 455.35
- MXAP up 0.5% to 163.96
- MXAPJ little changed at 515.86
- Nikkei up 2.0% to 33,193.99
- Topix up 2.0% to 2,298.60
- Hang Seng Index up 0.1% to 19,172.05
- Shanghai Composite little changed at 3,189.38
- Sensex up 0.9% to 63,986.51
- Australia S&P/ASX 200 up 1.1% to 7,196.54
- Kospi down 0.7% to 2,564.19
- German 10Y yield little changed at 2.36%
- Euro down 0.1% to $1.0949
- Brent Futures down 0.4% to $72.00/bbl
- Gold spot down 0.2% to $1,909.17
- U.S. Dollar Index up 0.14% to 102.64
Top Overnight News
- Australia’s CPI for May undershoots the Street significantly, coming in at +5.6% Y/Y (down from +6.8% in April and below the Street’s +6.1% forecast). BBG
- The Biden administration is considering new restrictions on exports of artificial intelligence chips to China, as concerns rise over the power of the technology in the hands of U.S. rivals, according to people familiar with the situation. WSJ
- AI investments in the US dwarf those in China, totaling $26.6 billion in the year to mid-June versus China's $4 billion, according to consultancy Preqin. Yet China is closing the gap with the number of AI venture deals comprising more than two-thirds of the US total in the year to mid-June, versus about 50% over the previous two years. BBG
- A senior Russian general had advance knowledge of Yevgeny Prigozhin’s plans to rebel against Russia’s military leadership, according to U.S. officials briefed on American intelligence on the matter, which has prompted questions about what support the mercenary leader had inside the top ranks. NYT
- European Central Bank policymakers don't generally expect evidence that stubborn inflation is easing to be clear enough for them to pause the longest streak of interest rate hikes in the ECB's history this summer. RTRS
- Italy’s CPI for June undershoots the Street, coming in at +6.7% Y/Y (down from +8% in May and below the Street’s +6.8% forecast). BBG
- UBS Group AG is planning to cut more than half of Credit Suisse Group AG’s 45,000-strong workforce starting next month as a result of the bank’s emergency takeover. BBG
- Regional and midsized US banks have stepped up efforts to sell off their loan portfolios, looking to raise cash and cut their capital requirements after the failures of Silicon Valley Bank and First Republic this spring. FT
- US money supply is shrinking fast, a trend that has powerful disinflationary implications for the economy (M2 money supply shrank by 4% Y/Y in May, the 6th consecutive month of contraction). Barron's
- A model based just on valuation and economic growth has explained two-thirds of the variation in 12-month Russell 2000 returns in recent decades and currently forecasts a 14% gain during the next 12 months. Our framework regresses 12-month Russell 2000 total returns as a function of two variables: Average realized economic growth, as captured by the GS US Current Activity Indicator, during the return period, and LTM P/B valuation at the start of the return period
A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mixed and only partially sustained the momentum from Wall St where risk appetite was lifted and the NDX outperformed amid strong data and a tech rebound. ASX 200 was positive with nearly all sectors in the green after softer-than-expected monthly CPI data from Australia added to the bets for the RBA to keep rates unchanged at next week’s meeting. Nikkei 225 gained amid tailwinds from recent currency weakness and with Japan leaning towards extending support measures for gas and electricity bills set to expire at the end of September as it seeks to underpin the economy. Hang Seng and Shanghai Comp were subdued after Chinese Industrial Profits remained at a steep contraction and with the US considering new curbs on AI chip exports to China amid some concerns China could use AI chips from Nvidia and others for weapons development and hacking.
Top Asian News
- US considers new curbs on AI chip exports to China amid some concerns China could use AI chips from Nvidia (NVDA) and others for weapon development and hacking, according to WSJ.
- Japanese Finance Minister Suzuki said they will respond appropriately to excessive FX moves if necessary. He offered no comment on FX levels but says FX should move stably, and said one-sided moves seen in current FX market., according to Reuters.
European bourses trade on the front-foot as the region plays catch up to the afternoon gains on Wall Street. US equity futures are flat/lower after the upside seen Tuesday, which was underpinned by solid economic data that pushed back against recession narratives, showing an economy that is resilient in the face of Fed rate hikes. Equity sectors in Europe are firmer with the exception of Basic Resource names which are being hampered by softness in underlying metals prices. To the upside, Tech is among the top of the leaderboard following yesterday’s solid showing on Wall Street with other gainers including Construction, Industrial Goods and Autos.
Top European News
- Two-fifths of UK sellers are accepting discounts of more than 5% on property asking prices as rising mortgage costs spook buyers, according to property website Zoopla cited by FT.
- Some ECB officials are reportedly mulling a faster reduction of bond portfolio, according to Bloomberg sources.
- ECB's de Guindos said there is still more ground to be covered on rates; the September move will depend on data and the July rate hike is set, according to Bloomberg.
- ECB's Centeno said rates will remain in restrictive territory, not seeing clear second round effects, according to CNBC.
- ECB's Muller said must get inflation down to much lower levels; too early to say where rates will end up; need to look at data for rate hikes beyond July, according to CNBC.
- ECB's Vujcic said there is no reason to say now what we are going to do in September, though there is a good chance of a hike in September, according to CNBC.
- ECB's Scicluna said we will see on rates after July meeting; must be mindful of impact of rate hikes, according to Bloomberg.
- ECB's Vasle said he needs convincing that rate hike beyond July is not needed, not that it is needed, according to Reuters.
FX
- DXY defies gravity given negative rebalancing signals on spot month, Q1 and H1-end, as the index continued to pivot 102.500.
- Yen largely ignored commentary from Japanese Finance Minister Suzuki with USD/JPY bulls encouraged by the ongoing lack of actual action to stem the currency weakness.
- NZD underperforms for no obvious reason other than consolidation, retracement and corrective price action having fared better of late, whilst AUD is hit by softer-than-expected monthly CPI.
- EUR remains underpinned amidst more hawkish-sounding ECB vibes from Sintra and beyond, plus mega option expiry interest at 1.0900-10 (3.2 bn) on top of RHS demand in EUR/GBP.
- CNH is on the backfoot following more downbeat Chinese data overnight, with USD/CNH topping 7.2500 during the European morning.
Fixed Income
- Debt futures overcame several wobbles before establishing a more solid base to mount a firmer recovery from sub-par lows, and soft Italian inflation data gave them another push.
- Bunds, Gilts and US Treasuries extend gains on positional grounds approaching the end of the month, quarter and half one of the year.
Commodities
- WTI and Brent whipsawed between gains and losses this morning despite a lack of newsflow, but in the grander scheme, prices are choppy within tight ranges
- Spot gold looks heavy as DXY recovers some of its recent losses while participants look ahead to more central bank commentary from the ECB Sintra Forum.
- Base metals are mostly lower – in part due to the dollar, but also as Chinese markets lagged overnight after reports suggested the US is to impose more chip restrictions on China.
- US Private Inventory Report: Crude -2.4mln (exp. -1.8mln), Distillates +0.8mln (exp. +0.8mln), Gasoline -2.9mln (exp. -0.1mln), Cushing +1.5mln.
- Russian Energy Ministry said Russia's gasoline exports fell 30% in June from May and Russian refineries' gasoline production was up 3.1% Y/Y as of the last week of June, while diesel production rose 2% Y/Y with reserves at a historical high, according to Reuters.
- Chile's Codelco said it is still evaluating the impact on operations from stoppages caused by rains in the central-south region, while it also noted that some operations were still halted at the El Teniente mine after rains, according to Reuters.
- Probability of Russia's withdrawal from Black Sea Grain Deal in July remains higher, according to Ria citing sources.
Geopolitics
- Ukraine said the main event in its counteroffensive is still to come and its main troop reserves have yet to be used in the operation, while Defence Minister Reznikov said their forces made gains that were not made public to avoid exposing troops, according to FT.
- NATO Secretary General Stoltenberg said NATO is ready to defend itself against Russia or Belarus, according to Sky News Arabia.
- US officials said a senior Russian general had advanced knowledge of the Wagner Group chief's plans to rebel against Russia’s military leadership and they are trying to learn if former top Russian commander in Ukraine General Surovikin helped plan Prigozhin's actions. Furthermore, there are signs that other Russian generals may also have supported Prigozhin’s attempt to change the leadership of the Defense Ministry by force, according to the New York Times.
- South Korea designated new sanctions on 2 individuals and 2 entities over North Korea's weapons programme.
US Event Calendar
- 07:00: June MBA Mortgage Applications, prior 0.5%
- 08:30: May Advance Goods Trade Balance, est. -$93.7b, prior -$96.8b, revised -$97.1b
- 08:30: May Retail Inventories MoM, est. 0.2%, prior 0.2%
- 08:30: May Wholesale Inventories MoM, est. -0.1%, prior -0.1%
DB's Jim Reid concludes the overnight wrap
Risk appetite has returned to markets over the last 24 hours, aided by a strong set of US data releases that dampened fears about an imminent recession after weaker data over the last week. The rebound has been clipped a bit overnight though as the WSJ has reported that the Biden administration is considering further tightening the exports of AI chips to China. Nvidia, which makes 20% of its revenues in China, has produced lower-end chips that don't require an external export licence. However, the article suggests that even these may be included going forward. Nvidia and AMD are both down over -3% after hours, with China AI-related stocks slumping more.
The main focus today, will be the panel at 14:30 London time, at the ECB’s Sintra conference, that will feature all of Fed Chair Powell, ECB President Lagarde, BoJ Governor Ueda and BoE Governor Bailey. A finance power panel to end all! However, since we’ve heard from most of the participants pretty recently, it might be difficult for this event to generate too many headlines about near-term policy but I'm sure it won't stop headline writers.
Let's now go through things chronologically from the positive data and market reaction yesterday to the slight pull-back overnight. During the day yesterday there were multiple releases to chew over, but all pointed in the same positive direction. In particular, we had the Conference Board’s consumer confidence indicator for June, which hit a 17-month high at 109.7 (vs. 104.0 expected). And the present situation component rose to a 23-month high of 155.3, which suggests that consumers are feeling increasingly good about their current circumstances. The moves also echo what we’ve seen in Europe, where the European Commission’s consumer confidence indicator for the Euro Area hit a 16-month high last week. Similarly in the UK, GfK’s indicator hit a 17-month high, so there are growing signs that this isn’t just a blip.
That theme was cemented by the various other releases yesterday. One was US new home sales in May, which rebounded to an annualised rate of 763k (vs. 675k expected), marking its highest level in 15 months. DB's Brett Ryan did point out that the surge was purely due to "houses not started" which might hint at a block transaction by a developer or institution. However, even if that proves correct, yesterday wasn't the day to dampen the market mood.
On that theme we also had the preliminary durable goods orders for May, which rose by +1.7% (vs. -0.9% expected), whilst the Richmond Fed’s manufacturing index also came in above expectations at -7 (vs. -12 expected). Clearly there’ve been indicators pointing in the other direction, and it’ll be interesting to see if tomorrow’s jobless claims also paint such a positive picture, but for now those numbers offer a positive contrast to the more downbeat prints of the last week.
With that in mind, investors grew increasingly confident that central banks were set to keep taking rates higher over the months ahead. For instance, futures are now pricing in a 74% likelihood of a July hike from the Fed, which is the highest to date. And looking out to year-end, they now see a 5.30% rate through the December meeting, which is the highest that’s reached since SVB’s collapse in March. It was the same story for the ECB too, where investors are now fully pricing in two further rate hikes for 2023 again, which if realised would take their deposit rate up to 4%.
Those moves were given additional support by ECB President Lagarde, who gave a speech yesterday with the title “Breaking the persistence of inflation”. In it, she continued to all-but-commit to another hike in July, saying that “Barring a material change to the outlook, we will continue to increase rates in July.” There were other hawkish comments as well, and she said “it is unlikely in the near future the central bank will be able to state with full confidence that the peak rates have been reached.” Remember that from today we’ll start to get the initial country-releases for Euro Area inflation in June, with Italy reporting this morning, ahead of Germany and Spain tomorrow. So that will shape expectations for the Euro Area-wide release on Friday, which will be an important release when it comes to future ECB hikes.
This hawkish backdrop prompted a strong sell-off among sovereign bonds, with yields on 10yr Treasuries up +4.3bps on the day to 3.764%. That was echoed in Europe, where yields on 10yr bunds (+4.7bps), OATs (+3.9bps) and BTPs (+3.4bps) posted a solid increase as well. Once again, UK gilts saw one of the biggest sell-offs, with the 2yr yield (+11.3bps) hitting a post-GFC high of 5.27%. In addition, the spread of 10yr gilts over bunds widened to 202bps, which is their highest level since the mini-budget turmoil last year.
Whilst sovereign bonds were losing ground, equities put in a strong performance with the S&P 500 advancing +1.14%. The rally drove higher as the day went along with cyclicals such as autos (+3.52%), semiconductors (+3.28%), consumer durables (+2.40%), as well as transports (+2.33%) leading the way. The tech gains saw the NASDAQ (+1.65%) and the FANG+ index (+2.17%) see even larger gains. Overall 23 of 24 S&P industries ended the day higher, while 83% of index constituents saw their share prices rise yesterday. Meanwhile in Europe, the STOXX 600 (+0.05%) posted a very slight gain, which still brings to an end a run of 6 consecutive declines, with Spain’s IBEX 35 (+1.28%) seeing a significant outperformance.
However as discussed at the top, Asian equity markets are more mixed this morning. On the positive side, the Nikkei (+0.93%) is seeing gains after three straight days of losses with the Hang Seng (+0.13%) also trading slightly higher, reversing its opening losses. In contrast, stocks in Mainland China are losing ground with the Shanghai Composite (-0.52%) and the CSI (-0.36%) trading in the red on the AI-chip story and as industrial profits continue to sink (more on this below). Additionally, the KOSPI (-0.63%) is also dipping as I type. US stock futures are lower with contracts tied to the S&P 500 (-0.2%) and NASDAQ 100 (-0.36%) falling on the chip export restriction story.
Coming back to China, industrial firms recorded a -18.8% y/y tumble in YTD cumulative profits compared with a -20.6% decline in industrial profits for January to April, thus adding to evidence that the world’s second-biggest economy is losing steam. The double-digit decline indicates weakening demand but also heightening hopes of fresh stimulus from Beijing.
Elsewhere, Australia’s headline inflation rate dropped to a 13-month low of +5.6% y/y in May (v/s +6.1% expected) down from +6.8% in April, thus making the case that the Reserve Bank of Australia (RBA) will hold rates steady at next Tuesday’s board meeting. The Aussie (-0.64%) dropped sharply on the release against the US Dollar, trading at 0.6643 as we go to print.
To the day ahead now, and the main highlight will be the panel of central bank speakers, including Fed Chair Powell, ECB President Lagarde, BoJ Governor Ueda and BoE Governor Bailey. We’ll also hear from the ECB’s Villeroy and BoE Chief Economist Pill. Otherwise, data releases include the flash CPI release from Italy for June, as well as the Euro Area M3 money supply for May. In the US, we’ll also get the advance goods trade balance for May.
(Article by Tyler Durden republished from ZeroHedge.com)
