Futures Flat As Q2 Earnings Seasons Kicks Off

The week's powerful rally which sent US stocks to a new 52-week high has faded, with futs down small after a quiet overnight session on the day JPM officially ushers in Q2 earnings season as the post-CPI market rally pauses for breath as investors contemplate how recent US inflation data will impact upcoming Fed policy decisions. As of 6:45am ET S&P futures are flat at 4,542 while Nasdaq futures are down 0.1%. Bond yields are 3-5bp higher, and the USD has reversed higher after dropping the lowest level in more than a year. Commodities are mixed with energy lagging and base metals such as iron ore extending gains from yesterday. Yesterday’s dovish PPI and lower-than-expected initial claims supports the soft-landing narrative. Key focus today will be banks earnings; JPM, C and WFC report pre-market. Keep an eye on banks’ commentary on consumer health, credit trends and loan growth. We will also get the latest UMichsentiment data (consensus sees 65.5 vs. 64.4 prior); 1yr inflation expectation is estimated to fell to its lowest in two years

In premarket trading, mega-cap tech stocks are mixed; Banks are mostly higher. Microsoft rose 1.6% in premarket trading as UBS raised the recommendation on the software giant’s stock to buy from neutral, saying cloud infrastructure spending is starting to stabilize after a significant deceleration over the past year. UnitedHealth Group Inc. gained after an earnings beat. Nikola soared as much as 25% set to extend Thursday’s 61% rally, after BayoTech agreed to buy up to 50 of its hydrogen-fuel-cell EVs over the next five years. If the gains hold until close, it will be the biggest weekly gain on record for the stock. Here are some other notable premarket movers:

Acadia Pharmaceuticals (ACAD US) shares surged 20% in premarket trading after the biotech firm said it had expanded its licensing agreement with Neuren Pharmaceuticals to acquire the ex-North American rights for Daybue (trofinetide), which is used to treat Rett syndrome.
Leslie’s (LESL US) shares drop 30% in premarket trading after the pool-supplies retailer cut its full-year adjusted earnings per share guidance. Analysts highlighted the sales weakness in the third quarter, with Piper Sandler downgrading their recommendation on the stock to neutral from overweight.
Roivant Sciences (ROIV US) rose as much as 12% in premarket trading after a Wall Street Journal report the company is in talks to sell its treatment for inflammatory bowel disease to Roche Holding.
Intuitive Machines (LUNR US) climbed as much as 32% in premarket trading, after the company said it successfully completed a spacecraft test run of its Nova-C lunar lander at the Houston Spaceport.

As Bloomberg notes, it’s been a week when almost everything rallied — from emerging markets to global bonds and the S&P 500 — all buoyed by faith that the Federal Reserve is finally winning the fight against inflation. While trading was subdued on Friday, investors are finishing the week with blockbuster gains across asset classes. MSCI’s global stock benchmark has leapt 3.5% in the past five days, the biggest advance since November.

“The market has been partying like it’s 1999 this week,” said DB's Jim Reid. “It’s hard to stand in the way of that narrative at the moment regardless of what eventually happens.”

Bonds climbed too over the week with the US two-year rate, the most sensitive to short-term policy moves, dropping as much as 30 basis points.

The bullish trades reflect hope that the US is heading toward a “Goldilocks scenario” with inflation quickly easing while the economy avoids a recession. To be sure, the Fed is still likely to lift its benchmark rate later this month and central bankers continue to warn that more than one rate increase may still be necessary after that. The earnings season also kicks off in the US today with lenders JPMorgan Chase, Wells Fargo and Citigroup reporting.

“The Fed has already won the battle against inflation,” Raffaele Bertoni, head of debt capital markets at Gulf Investment Corp., said on Bloomberg Television. “If they want to be serious in maintaining inflation under control, the focus should be more on the reduction of the balance sheet or the quantitative tightening rather than increasing rates further.”

Fed Bank of San Francisco President Mary Daly, however, told CNBC Thursday that it’s too soon for policymakers to say they have done enough to return US inflation to their target. Fed Governor Christopher Waller also said he expects the US central bank will need to raise rates twice more this year to bring inflation down to its target.

Traders are now looking to earnings reports to reignite the rally. The focus is going to be mostly on the corporate outlooks given that beating profit expectations seems to be a low hurdle, even as some estimates have started to rise slowly. “Given that consensus expectations appear reasonable and valuations are already rich (not only in tech), only strong beats are likely to result in substantial price gains, while even small misses may lead to sharper drops,” said Wolf von Rotberg, an equity strategist at Bank J Safra Sarasin.

European stocks are also little changed with the Stoxx 600 coming off a five-session winning streak. Among individual stock movers in Europe, Nokia Oyj slumped more than 8% after the Finnish vendor of 5G equipment lowered its guidance. Ericsson dropped almost 8% as analysts pointed to a weak margin outlook for the Swedish telecom equipment maker. Swiss money manager Partners Group Holding AG gained more than 7% after assets under management rose in the first half. Here are the most notable European movers:

Partners Group shares gain as much as 7.8%, most since May, after it posted a “positive” update on its assets under management, helping offset negative expectations for the firm ahead of the results
Heineken rises as much as 2.7% after being raised to buy at Goldman Sachs as the broker expects the world’s second-largest brewer to “fully benefit” from raw material cost deflation
Axfood shares rise as much as 8.2% to a two-month high after the Swedish food retailer’s second-quarter operating profit beat estimates, with analysts pointing to strength in its discount chain
Brunello Cucinelli shares gain as much as 2.1% after the luxury clothier reported what analysts called a strong sales update, and increased full-year guidance
Vallourec shares climb as much as 7.3%, the most since May, after French tube maker sees 2Q exceeding prior expectations, with Jefferies saying deleveraging plans are working
Nokia falls as much as 10%, the most since January 2021, after an unscheduled profit warning and outlook cut, hinting an expected recovery in the sector is further away than earlier projected
Ericsson shares dropped as much as 9.2%, as analysts pointed to a weak margin outlook for the Swedish telecom equipment maker in the third quarter and worries of poor US demand
Brenntag shares dropped as much as 4.1% after the chemicals distributor was downgraded to underweight from neutral at JPMorgan, saying it struggles with “significant demand weakness”
Ashmore shares fell as much as 8.3%, the most since November, after the emerging markets-focused asset manager’s AUM disappointed, with Nubis saying investment performance remains “poor”
EMS-Chemie falls as much as 3.3%, the most since April. While the company’s first-half figures were in line with low expectations its full-year outlook was reduced further, ZKB notes
Sixt slides as much as 6.7% in Frankfurt trading after being downgraded to hold from buy at Deutsche Bank, expecting the car-rental firm’s profit to drop in 2023

Earlier in the session, Asian stocks were on course for their best week since Nov. 2022, with Chinese equities rallying and peak-rate bets on the Federal Reserve boosting risk sentiment. The MSCI Asia Pacific Index rises as much as 0.8%, with gains for the week nearing 5%. Stocks in Korea, Taiwan and New Zealand led the advance on Friday. Chinese equities have been at the center of the risk rally in Asia, as traders increasingly see an end to years of regulatory crackdowns on technology firms. Other than gains in tech bellwethers such as Alibaba Group Holding Ltd., the broader market also advanced on hopes of more policy stimulus. An index of Chinese companies in Hong Kong is set for the biggest weekly gains since the first week of 2023. Risk appetite was also boosted as the US dollar and Treasury yields fell with softer inflation data in the US. Traders are now pricing in just one more rate hike this year from the Fed. Chinese tech stocks were volatile Friday, with Xiaomi and Meituan falling, after the Hang Seng Tech Index rose for four days in its longest rising streak since mid-June. The Hang Seng Tech Index erases losses of as much as 0.9% in the morning to trade 0.1% higher. Meituan, which was among the best performing stocks on the gauge in the past four days, drops as much as 1.4% on Friday; Xiaomi -1.4%. EV makers Nio down as much as 4.7% and XPeng -7.7%. Stocks fluctuated in Japan as the yen headed for a seven-day winning streak, which would mark its best performance since 2018.

“Risk on in emerging markets, especially, in China makes sense,” David Chao, global market strategist for Asia Pacific at Invesco Asset Management told Bloomberg television in an interview. Chao sees Chinese equities emerging among the best performers in second half of 2023. Stocks in Thailand rose even as a leading candidate for the prime ministerial post failed to win endorsement from the Parliament.

In FX, the Bloomberg Dollar Spot Index is flat although still on course for its largest weekly decline since November. USD/JPY climbed 0.2% to 138 in a reversal of the yen’s longest bull streak since 2018. GBP/USD held ground above 1.31, while EUR/USD wavered around 1.12. The offshore yuan ticked higher. China has ample foreign exchange reserves and will “resolutely” prevent wild swings in the yuan exchange rate, People’s Bank of China Deputy Governor Liu Guoqiang said at a briefing Friday. The currency’s short-term movement cannot be predicted accurately, but it hasn’t deviated from its fundamentals, Liu added.

In rates, treasuries fell, trimming their biggest two-day gain since early May as two-year and 10-year yields hover around their lowest levels in one month/ Two-year yields rose four basis points to 4.67% and 10- year yields climbed three basis points to 3.79%

In commodities, oil headed for a third weekly gain as supply disruptions in Africa and a reduction in shipments from Russia tightened the market; crude futures are flat with WTI trading near $76.85. Spot gold falls 0.2%. Gold was set for the best week since April.

Bitcoin is under modest pressure despite the USD continuing to languish with drivers thin and the docket ahead relatively spares aside from crucial banking updates.

To the day ahead now, and earnings season will step up a gear as we hear from JPMorgan, Citigroup Wells Fargo and BlackRock. Otherwise, data releases include the University of Michigan’s preliminary consumer sentiment index for July.

Market Snapshot

S&P 500 futures little changed at 4,542.00
MXAP up 0.6% to 168.93
MXAPJ up 0.9% to 535.06
Nikkei little changed at 32,391.26
Topix down 0.2% to 2,239.10
Hang Seng Index up 0.3% to 19,413.78
Shanghai Composite little changed at 3,237.70
Sensex up 0.5% to 65,888.13
Australia S&P/ASX 200 up 0.8% to 7,303.08
Kospi up 1.4% to 2,628.30
STOXX Europe 600 little changed at 461.66
German 10Y yield little changed at 2.50%
Euro little changed at $1.1231
Brent Futures little changed at $81.33/bbl
Gold spot down 0.2% to $1,957.38
U.S. Dollar Index little changed at 99.76

Top Overnight News

The PBOC signaled more targeted support may be on the cards for the property market as it sought to assure investors that the risks banks face from the sector are controllable. BBG
The US has launched a round of diplomacy with China to help soften the blow from new tech export restrictions that are expected to be announced soon. SCMP
China loses its title as the top exporter of goods to the US for the first time in 15 years, falling behind Mexico and Canada. Nikkei
BOJ is having internal discussions about tweaking the YCC policy as soon as this month, although no final decision has been made (any change would likely be very minor). RTRS
Australia will promote deputy governor Michele Bullock to take over the RBA, deciding against giving Philip Lowe another term. FT
Europe asks its metals suppliers to make semiconductor materials amid worries about China restrictions, but this may require state aid. FT
Odds are growing that the Fed’s 25bp rate hike later this month will be the final one of the cycle, but officials want to see more evidence of disinflation before declaring victory. WSJ
DeSantis is considering a course correction as his campaign struggles to gain traction. ABC News
AMZN has created a new internal organization aimed at helping customers utilize generative AI tools on AWS. Insider

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mostly higher after the positive lead from Wall St where yields continued to decline as PPI data followed suit to the softer consumer inflation and supported the case for just one more Fed rate hike. ASX 200 was firmer with gains in the index led by the tech sector after similar outperformance of US counterparts amid a decline in yields, while the announcement that RBA Deputy Governor Bullock will take over from Governor Lowe in September had little effect on markets and was largely seen as policy continuation. Nikkei 225 swung between gains and losses with headwinds from JPY strength and speculation that the BoJ could raise its inflation forecast above the 2% target at its meeting this month, which could pave the way for policy normalisation, while former BoJ Director Hayakawa expects the BoJ to tweak yield curve control at the upcoming meeting by potentially raising the 10yr yield ceiling to 1.0%. Hang Seng and Shanghai Comp were positive albeit with gains capped despite the renewed support pledges by the PBoC to keep credit growth appropriate, as well as step up counter-cyclical adjustments and support for key sectors.

Top Asian News

PBoC Deputy Governor Liu said China's overall liquidity is ample and its credit structure improved in H1, while he also noted that financing costs stabilised and dropped in H1. Liu said the PBoC has ample policy tools and will step up counter-cyclical adjustments, as well as improve financial services for tech companies, guide banks to boost lending for tech companies and will increase support for SMEs and the green sector, according to Reuters.
PBoC official said they will keep credit growth appropriate and step up support for key sectors, while the central bank will deepen interest rate reforms and will guide banks to increase lending to small firms and private firms. Furthermore, the official said there is ample room and various policy tools to cope with challenges, while they will use policy tools such as RRR and MLF, as well as innovate new policy tools if needed, according to Reuters.
China's top diplomat Wang Yi said US and China need to take practical actions to bring back ties onto the right track and that the US should adopt a rational and pragmatic attitude and meet China halfway. Wang also said the US must refrain from interfering in China's internal affairs and stop suppressing China's economy, trade, and technology, while the US must lift illegal and unreasonable sanctions against China, according to Xinhua.
Australia named Deputy Governor Bullock as the next RBA Governor from September 18th, while Bullock said she is committed to ensuring that the Reserve Bank delivers on its policy and operational objectives.
Chinese regulators are reportedly to meet with global investors in order to shore up economic confidence, via Reuters citing sources; focused on the current conditions of USD-denominated investment firms and the main challenges they face. Meeting will take place on Friday 21st July. Investors will be invited to provide suggestions on how to combat the challenges they are facing and to give their views on the Chinese economy.

European bourses are contained but remain on track to close the week out with marked gains, Stoxx 600 set for +3% WTD upside. Sectors are somewhat mixed with defensive names outperforming on the tentative tone while Telecom. lags after Nokia and Ericsson's respective updates. Stateside, futures are near the unchanged mark as we await the final scheduled Fed speak before blackout commences alongside the formal commencement of Q2 earnings season. UnitedHealth Group Inc (UNH) Q2 2023 (USD): EPS 6.14 (exp. 6.01), Revenue 92.9bln (exp. 91.bln); FY23 adj. Net guidance 24.70-25.00/shr (exp. 24.76). +2.1% in pre-market trade. Nokia (NOKIA FH) - Q2 (EUR): Revenue 5.7bln (exp. 6.03bln), adj. EBIT Margin 11%. Cuts FY23 sales outlook to EUR 23.2-24.6bln (exp. 25.57bln, prev. 24.6-26.2bln). Weaker demand outlook in H2 is due to both the macro-economic environment and customers inventory digestion. UK CMA considers there is insufficient time remaining within the statutory period for a full and proper consideration of Microsoft's (MSFT) submission re. the proposed Activision (ATVI) deal; revised period to end on 29th August 2023.

Top European News

Nordic Mobile Equipment Makers Fall as Nokia Cuts Guidance
Vallourec Jumps as Tube Maker Predicts Better-Than- Forecast 2
Heineken Gains as Goldman Upgrades to Buy on Margin Outlook
Sixt Drops; Deutsche Bank Downgrades on Weak Profit Momentum
London Gatwick Airport Workers to Strike Over Pay, Union Says
Nordic Banks Tested as Property Slumps: EMEA Earnings Week Ahead

DXY finds a base just above 99.500 after another heavy decline and approaching end of bleak week that started with the index peaking around 102.500.
Aussie and Kiwi make way for Buck bounce as AUD/USD fades ahead of 0.6900 and NZD/USD from 0.6400+ at best.
Yen retreats from 137.26 towards 138.50 as JGB-UST spreads re-widen.
Euro and Pound pull up shy of 1.3150 and 1.1250 vs Dollar respectively, but EUR/USD evades 1bln option expiries at 1.1200, for now.
BoJ to host the first long-term policy review workshop in December, to discuss monetary policy and financial systems. Second workshop in May 2024. To discuss analyses comprehensively until that point.
PBoC set USD/CNY mid-point at 7.1318 vs exp. 7.1453 (prev. 7.1527)

Fixed Income

Debt diverges towards the end of a hectic and mainly corrective bull-steepening week
Bunds and Gilts above par between 133.18-132.69 and 95.02-94.53 respective bands, but T-note underwater within 113-01+/112-21 overnight range awaiting US import/export prices
Fed's Goolsbee and UoM sentiment with inflation expectation. JGBs volatile amidst contrasting BoJ vibes

Commodities

A contained and catalyst-thin session thus far to conclude a busy week of macro developments before the Fed blackout begins and attention turns to the next round of Central Bank announcements.
WTI Aug’23 and Brent Sep’23 are on track to conclude the week with gains of circa. USD 2.50/bbl and are currently at the upper-end of the week’s USD 72.67-77.33/bbl and USD 77.36-81.75/bbl respective parameters.
Spot gold is a touch softer but holds above the USD 1950/oz handle around the USD 1954/oz 50-DMA; base metals more mixed as it stands.
Qatar set September-loading Al-Shaheen crude term prices at USD 1.68/bbl above Dubai quotes.

Geopolitics

Russian President Putin said new weapons supplies will further escalate the conflict in Ukraine and worsen the situation. It was separately reported that Putin also said he proposed to Wagner fighters at a meeting this month to continue serving in the military, while he added that Russia's government and parliament must discuss the legal framework for private armies and said without a legal framework, 'Wagner does not exist', according to Kommersant.

US Event Calendar

08:30: June Import Price Index MoM, est. -0.1%, prior -0.6%; YoY, est. -6.1%, prior -5.9%
- June Export Price Index MoM, est. -0.1%, prior -1.9%; YoY, est. -11.0%, prior -10.1%
10:00: July U. of Mich. Sentiment, est. 65.5, prior 64.4
- U. of Mich. Expectations, est. 62.0, prior 61.5
- U. of Mich. Current Conditions, est. 70.5, prior 69.0
- U. of Mich. 1 Yr Inflation, est. 3.1%, prior 3.3%
- U. of Mich. 5-10 Yr Inflation, est. 3.0%, prior 3.0%

DB's Jim Reid concludes the overnight wrap

After a hectic week, I'm playing a gig at a good friend's 50th birthday party tomorrow night. I haven't done any practise so I'm relying on a set list that worked 20 years ago. Given the nature of the event I'm assuming the audience won't have heard much new music in that period so we should all be ok. If it all goes well I'll be digging out research from 20 years ago as well to see if I can pull off the same trick.

The market has been partying like it's 1999 this week, with the rally showing no sign of letting up over the last 24 hours, with bonds and equities surging thanks to growing hopes of a soft landing. It’s hard to stand in the way of that narrative at the moment regardless of what eventually happens. Much of that was propelled by the previous day’s CPI release, but investors then got a further dose of optimism from a weaker-than-expected PPI print, as well as the weekly jobless claims that were below consensus. That supported a fresh multi-asset advance, with the S&P 500 (+0.85%) and NASDAQ (+1.58%) closing at 15-month highs, yields on 10yr Treasuries falling -9.4bps to 3.77%, and Brent Crude oil prices closing at a 2-month high of $81.36/bbl. And that’s all before we start Q2 US earnings season today.

These moves over the last week have been part of an astonishing turnaround in the market narrative. After all, it was only on Thursday of last week that the bumper ADP report sent the 2yr Treasury yield up to 5.12% intraday, which is its highest level since 2007. But since then, we’ve had the smallest monthly jobs growth (+209k) since December 2020, along with the weakest core CPI (+0.16%) since February 2021, and investors are pricing in a growing chance of multiple rate cuts next year.

When it came to those developments yesterday, the main story was that monthly PPI came in at just +0.1%, and the previous month was revised down a tenth to -0.4%. So more positive news on the inflation side. In turn, that took the year-on-year PPI close to deflationary territory at +0.1% (vs. +0.4% expected), which is the lowest it’s been since August 2020. In addition, the core PPI measure excluding food and energy was at a monthly +0.1% (vs. +0.2% expected), with the year-on-year measure down to +2.4% (vs. +2.6% expected).

That downside surprise helped cement the message from the previous day’s CPI report. In particular, it meant investors became increasingly confident that the next meeting would mark the final rate hike of the current cycle, despite the Fed’s signal in their recent dot plot for two more. For example, the terminal rate priced in for November came down -1.5bps to 5.37%. And looking further out into 2024, the year-end rate came down a further -18.7bps to 3.725%. Bear in mind that after the ADP report, futures were briefly pricing in a 4.51% rate for December 2024, so the recent newsflow has led markets to price around three more 25bp rate cuts compared to a week ago.

The prospect of more rate cuts meant that sovereign bonds got a lift on both sides of the Atlantic. Yields on 10yr Treasuries were down -9.4bps to 3.77%, and those on 2yr Treasuries fell -11.2bps to 4.64%. In Europe it was a similar story, with yields on 10yr bunds (-8.9bps), OATs (-8.8bps) and BTPs (-12.1bps) all coming down as well.

The US rates move came in spite of comments from San Francisco Fed President Daly, who said it was “really too early to say that we’ve declared victory on inflation”. Later in the day, the generally hawkish Federal Reserve Governor Waller noted that he still saw two more hikes this year as necessary, though he added that if the next two inflation prints “look like the last two, the data would suggest maybe stopping” by September. So it seems that many FOMC members are still sceptical of the slowing inflation data but keeping an open mind. We won’t hear from many more Fed speakers now, since today is the last day before their blackout period ahead of the next meeting. In other Fed news yesterday, we heard that St Louis Fed President Bullard, another of the most hawkish FOMC members, was stepping down from this role. He wasn’t a voter this year, but his views held sway.

For equities, these hopes of a soft landing meant that the US indices hit fresh landmarks, with both the S&P 500 (+0.85%) and the NASDAQ (+1.58%) at a 15-month high. Tech stocks led the advance, with the FANG+ index (+2.70%) reaching a new all-time high, passing its previous peak from November 2021, having now risen by +80.86% on a YTD basis. Meanwhile in Europe, the STOXX 600 (+0.61%) advanced for a 5th consecutive session for the first time since April. There were some positive earnings releases as well, with PepsiCo (+2.38%) raising its outlook. Today will see further reports from the major US financials as well, including JPMorgan, Citigroup, Wells Fargo and BlackRock.

All this optimism over the economic outlook was bolstered again by the weekly jobless claims. They showed the initial claims down to 237k in the week ending July 8 (vs. 250k expected), which took the 4-week moving average down to a one-month low of 246.75k. Continuing claims did edge up from 1720k to 1729k but was largely brushed aside. There was also some better-than-expected data out of the UK, since monthly GDP in May only contracted by -0.1% (vs. -0.3% expected), despite the impact from the coronation bank holiday.

Asian equity markets are largely extending the global rally and are on course for their best week this year. The KOSPI (+1.14%) is leading gains with the Hang Seng (+0.44%), the Nikkei (+0.23%), the Shanghai Composite (+0.016%) and the CSI (+0.07%) also trading higher. Outside of Asia, US stock futures are pausing for breath with those on the S&P 500 (-0.06%) just below flat while those on the NASDAQ 100 (+0.08%) slightly higher ahead of the big bank earnings today. US treasuries are back up around a basis point across the curve after the huge rally this week.

In FX, the dollar index (which measures it against six major peers) is hovering around at a 15-month low of 99.59. Meanwhile, the Japanese yen is rallying for the seventh day, trading below 138 per dollar, its strongest level since May as we go to print.

On commodities, there was some interesting news as Bloomberg reported that India were considering banning exports of all non-Basmati rice, citing “people familiar with the matter.” That comes against the backdrop of significant rises in rice prices, following concerns that El Nino conditions will lead to a drought. Speaking of the El Nino, we also had the latest monthly update from the US’ Climate Prediction Center yesterday. Their forecasts are broadly similar to before, but they slightly downgraded the chances that the current El Nino would develop into a strong one, with the probability down to 52% at the peak (vs. 56% last month).

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