Futures, Yields Plunge Amid Global Slowdown Panic, China Tech Rout

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by Tyler Durden
Thursday, Jul 08, 2021 - 11:49 AM

After S&P futures printed at new all time highs on 8 of the past 9 days, one can almost feel sorry for the euphoric bulls (and meme stock traders) who woke up this morning to headlines such as this:


And sure enough, just one day after it appears that nothing could stop markets from exploding to recorder highs day by day by day, on Thursday morning both the reflation and growth trades were a dumpster fire, with Dow e-minis plunging 475 points, or 1.37%. S&P 500 e-minis were down 58 points, or 1.34% and Nasdaq 100 e-minis were down 190 points, or 1.3%, the VIX jumped above 20 after trading at 14 just a few days earlier and 10Y yields dropped as low as 1.25%. Bitcoin tumbled back down to $32,000.

At the same time, the collapse in yields accelerate, with 10Y yields tumbling as low as 1.25% while 30Y dropped below 1.90% for the first time since February as inflation expectations eased.

The catalyst for the rout? The same we predicted more than a month ago when we warned that the most important credit impulse in the world had collasped - China's slowdown, now confirmed by Beijing itself which is preparing to cut RRR rates in coming weeks as proof positive even China is willing to risk much higher inflation to offset an economic slowdown. Not helping is also China's widening crackdown on the tech sector in China coupled with doctored - pardon the pun - fears of pandemic resurgence via the delta covid variant.

“The message markets are sending is that the economic situation is not strong enough to pull back on stimulus and start the tapering process, as the Fed has signaled it will do,” said Ricardo Gil, head of asset allocation at Trea Asset Management in Madrid.

Virtually every sector was down, led by Chinese listed stocks such as e-commerce giant Alibaba Group dropping 2.6%, while internet search engine Baidu shed 3.8%. Didi Global, whose app takedown by the Chinese government had sparked a recent selloff, fell 6.5%, while FAANG gigacaps dropped between 0.9% to 1.7% despite the continued drop in yields as traders now use their FAANG gains to offset margin calls elsewhere. Meme stocks were hit especially hard as all upward momentum was crashed.Here are some of the biggest U.S. movers today:

  • Cryptocurrency-exposed stocks like Riot Blockchain (RIOT) and Marathon Digital (MARA) fall 7% and 6.2% respectively in premarket trading with Bitcoin sinking back below $33,000 per token.
  • Dare Bioscience (DARE) advances 12% in premarket trading after it announced Wednesday it had been awarded with a Gates Foundation grant of up to $48.95m.
  • Didi (DIDI) shares fall 6% in premarket trading, extending the losses suffered by the ride- hailing giant since its U.S. IPO. Other Asian stocks listed in New York also drop following a day of declines for tech companies in Hong Kong.
  • Retail-trader favorites mostly decline in U.S. premarket trading, with AMC Entertainment (AMC) dropping 7.7%, ContextLogic (WISH) sliding 5.3% and cannabis firm Sundial Growers (SNDL) falling 7%.
  • SeaSpine Holdings (SPNE) jumps 15% as Piper Sandler sees “great things” going forward after the medical-technology company announced Wednesday it has received FDA clearance for its 7D percutaneous spine module for minimally invasive surgery.
  • Tessco Technologies (TESS) shares soar 39% in premarket trading after the company said Wednesday evening it expects 2022 1Q total revenue of $105m, 9% higher than a year earlier.

The selloff was global, with the MSCI’s index of global stocks down 0.5%, extending early session losses and tracking a 1.7% decline in the equivalent index of Asia shares outside Japan to its lowest level since mid-May.

“We believe valuations to be frothy not just in India but in different geographies across the world,” Nikhil Kamath, Co-Founder and CIO at asset manager True Beacon, said. “We are hedged as much as 55% today, our net exposure to the market is only about 45%.”

In tandem with Beijing's tech crackdown, guidance toward rate cuts from Chinese policymakers has also spooked some investors by highlighting softness in China’s economy - weak loan growth and slow demand - which threatens the pace of the global recovery. As reported yesterday, the Chinese cabinet said on Wednesday that policymakers will use timely cuts in the bank reserve requirement ratio (RRR) to support the real economy, especially small firms. The yield on 10-year Chinese sovereign debt posted its sharpest fall in nearly a year on Thursday, dropping to 2.998%, the lowest since August.

“Worries about variant strains have hurt investor confidence that the pandemic’s effects on the global economy are truly past us,” Nicholas Colasand Jessica Rabe of DataTrek Research wrote in a note. “Our working theory is that we’re in the middle of a modest global growth scare.”

European stocks tumbled, with the Stoxx 600 dropping 1.8%, led by the Stoxx Europe 600 Basic Resources Index which dropped as much as 2.8%, as broad risk-off mood prevails following the Fed Minutes. Metals fell on a stronger dollar, while China signaled more efforts to help firms deal with soaring commodities prices. Here are some of the biggest European movers today:

  • Knorr-Bremse shares climb as much as 10%, the most of record, after the company dropped its pursuit of a stake in Hella.
  • Betsson rises as much as 10% in the steepest intraday gain since October last year, making the stock the second-best performer in Stockholm’s all-share index on Thursday.
  • Danske Bank gains as much as 4.7% after the company raised its full-year profit outlook as Scandinavian countries emerge from Covid lockdowns with their economies in better shape than initially feared.
  • Deliveroo rises as much as 5.4% after the food delivery company increased its transaction growth forecast for the year. JPMorgan sees “small upgrades” to consensus estimates.
  • TeamViewer slumps as much as 14%, the most in more than 2 months, after the company reported what Morgan Stanley called a “softer-than- expected” 2Q, with trends that underscored 1Q’s weaker performance being intensified.
  • Chr Hansen falls as much as 7.5%, the most since January 2020, after net profit and organic growth missed estimates.
  • Carrefour drops as much as 4.2% after Bernstein called the French grocer a “dying behemoth” and rated the shares underperform as it initiates coverage of the sector.
  • Oncopeptides falls as much as 22%,the most since December 2018, following an updated study for its melflufen drug. While the trial now meets a previously missed primary endpoint, a higher risk of death is concerning, Jefferies said.
  • Electrocomponents falls as much as 4%, despite what analysts said was a robust trading update, with Shore Capital saying higher costs will push margins lower.

Asian equities dropped amid continued losses in Hong Kong-listed Chinese tech stocks and concern over rising coronavirus cases in various countries. Tencent and Alibaba were once again the biggest drags on the MSCI Asia Pacific Index, which headed for its seventh loss in eight sessions. Hong Kong led declines around the region, with the Hang Seng Index falling 3% on its way to eight straight losses and its longest losing streak since 2015. Stocks in China also fell amid the broad regional selloff. China’s State Council signaled the central bank could make more liquidity available for banks to boost lending to businesses, including by cutting the reserve requirement ratio. The country’s rising private-sector debt amid credit expansion coupled with accelerating inflation “may conspire to decelerate economic growth,” CICC analysts wrote in a note. Tech Stocks Drag Key China Index in Hong Kong Toward Bear Market Japanese stocks slid as the government planned to declare a new state of emergency in Tokyo, and as some stock positions were expected to be liquidated to pay dividends on exchange-traded funds. South Korean stocks fell as daily virus cases hit a new high and Thai stocks dropped as the government is mulling a partial lockdown. Malaysia’s benchmark was on track to enter a correction as the biggest party in the ruling coalition withdrew from the government. Stocks extended losses as the country’s central bank kept interest rates on hold

Indian stocks declined in line with Asian peers as concerns over the spread of Covid-19 variants hurting economic recovery and business activities sapped risk sentiment. The S&P BSE Sensex fell by 1% to 52,531.62 as of 3:09 p.m. in Mumbai after surging to a fresh record on Wednesday. The NSE Nifty 50 Index also plunges by a similar magnitude. All but one of the 19 sector sub-indexes compiled by BSE Ltd. fell, led by a gauge of metal companies. Tata Steel was the worst performer on the Sensex, falling 2.8%, followed by 2.6% decline in Bajaj Auto. Of the 30 stocks in benchmark Sensex, 28 traded lower. ICICI Bank and HDFC Bank contributed the most to the index’s decline. Tata Consultancy, which will kickoff corporate earnings season for June quarter later Thursday, also traded lower, easing 0.5%. “The earnings season would provide some direction to the market and offer cues about the economic revival,” Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services, wrote in a note. “Consistent earnings delivery versus expectations are critical for further outperformance in our view.”

In rates, global bonds rallied, with the U.S. 10-year yield down around 7 basis points and the German 10-year yield down 3 basis points, extending price moves seen earlier in the week and leading to a “serious debate” about their cause, said Deutsche Bank analyst Jim Reid. Treasury yields were lower by nearly 8bps across long-end of the curve, flattening 2s10s by ~5bp, 5s30s by ~3bp; 10-year yields drop as low as 1.248%, below 200-DMA for the first time since November, while 30-year yields reach 1.855%; 2s10s spread touched 104.4bp, flattest since Feb. 12.

Some consider the move a sign the market is re-pricing the potential for the economy to be hit by secular stagnation after the pandemic, while others point to technical drivers including reduced supply from the Fed and higher demand to buy.

Mark Haefele, Chief Investment Officer, UBS Global Wealth Management, said despite the dip in U.S. yields, the Swiss adviser to many of the world’s super-rich expected the benchmark to bounce back. “With the expectation of a taper announcement from the Fed over the next few months, robust economic growth driving continued strength of nonfarm payrolls, and further [post-pandemic economic] reopening, we expect the 10-year yield to reach 2% by the end of the year.”

In currency markets, the Bloomberg Dollar Spot Index hovered near a three-month high and the dollar traded mixed versus its Group-of-10 peers and Treasuries rallied as soon as London trading got underway. A wave of long-end buying appeared after a calm Asia session, with a spike of activity in long bond futures driving the move. Haven currencies the yen and the Swiss franc led an advance while commodity currencies were the worst performers; the euro inched higher to trade above $1.18 as it recovered after touching a three-month low Wednesday and European bonds rallied, yet underperformed Treasuries. The pound fell, trading near the middle of the G-10 pack, with analysts focused on the nature of Britain’s economic recovery amid few short-term U.K.-specific catalysts; British travelers who have received both doses of a coronavirus vaccine will no longer need to isolate when they return home from moderate-risk countries, under a plan officials expect to come into force this month. The Australian dollar hit a new low for the year after RBA Governor Philip Lowe highlighted the importance of achieving full employment for driving inflation. The yen advanced to the strongest in over two weeks with investors liquidating stale long dollar positions through technical support and amid losses in key Asian stock indexes; Japanese bond futures rose to an 11-month high as U.S. Treasury yields fell.

Cryptocurrencies were sold on yet another round of negative comments from Chinese policymakers and bitcoin fell to a more than one-week low.

Oil was under pressure as investors awaited further signals from the OPEC+ alliance on production plans after a breakdown in talks. Brent futures were last down 1.1% at $72.65 a barrel while U.S. crude fell 1.3%. Iron ore futures dropped after China signaled more efforts to help firms deal with soaring commodities prices and the nation pushed ahead with its pledge to clean up the emissions-heavy steel industry.

Looking at the day ahead now, and the main highlight will be the release of the ECB’s strategy review and President Lagarde’s press conference. Otherwise, there’s also the release of the ECB’s minutes from their June meeting, whilst the ECB’s Hernandez de Cos is speaking as well. On the data side, releases include the German trade balance for May and the weekly initial jobless claims from the US.

Market Snapshot

  • S&P 500 futures down 1.0% to 4,304.75
  • STOXX Europe 600 down 1.3% to 453.54
  • MXAP down 1.1% to 202.60
  • MXAPJ down 1.6% to 674.67
  • Nikkei down 0.9% to 28,118.03
  • Topix down 0.9% to 1,920.32
  • Hang Seng Index down 2.9% to 27,153.13
  • Shanghai Composite down 0.8% to 3,525.50
  • Sensex down 1.0% to 52,524.53
  • Australia S&P/ASX 200 up 0.2% to 7,341.43
  • Kospi down 1.0% to 3,252.68
  • Brent Futures down 1.5% to $72.35/bbl
  • Gold spot up 0.5% to $1,812.12
  • U.S. Dollar Index little changed at 92.59
  • German 10Y yield fell 4.3 bps to -0.341%
  • Euro up 0.2% to $1.1811

Top Overnight News from Bloomberg

  • European Central Bank policy makers have agreed to raise their inflation goal to 2% and allow room to overshoot it when needed, according to officials familiar with the matter. The decision marks a significant change from the previous target of “below, but close to, 2%,” which some policy makers felt was too vague
  • British companies are raising wages more rapidly to overcome difficulties in attracting staff, adding to upward pressures on inflation as pandemic restrictions ease. Starting salary increases approached a seven-year high, with all regions of the U.K. experiencing rapid rises, according to data from the Recruitment and Employment Confederation, KPMG and IHS Markit
  • The global death toll from Covid-19 has reached 4 million, as a growing disparity in vaccine access leaves poorer nations exposed to outbreaks of more infectious strains
  • Pacific Investment Management Co. has raised about $7 billion for two credit strategies from investors hunting for yield, according to a person familiar with the matter.

Quick look at global markets courtesy of Newsquawk

Asian equity markets were mostly subdued as tailwinds from the modest gains in the US following the slightly dovish perceived FOMC Minutes, were offset by the virus concerns which threatens additional restrictions for the region and amid lingering China-related frictions. ASX 200 (+0.2%) was just about kept afloat by resilience in cyclicals but with upside capped after a fresh YTD high in COVID-19 infections for New South Wales and after Beijing warned that smearing China will backfire on trade partners. Nikkei 225 (-0.9%) was subdued by the recent currency strength and with Japanese Bank Lending at its slowest pace of growth in more than eight years. In addition, the latest securities flows data showed foreign investors more than doubled their net selling of Japanese stocks last week and virus concerns persisted with the government considering re-imposing a state of emergency in Tokyo. KOSPI (-1.0%) failed to maintain its initial gains after South Korea extended social distancing rules in greater Seoul for an additional week and warned of stricter measures if cases don’t decline, while the latest number of daily infections printed a new domestic record high. Hang Seng (-2.9%) and Shanghai Comp. (-0.8%) were pressured amid ongoing tensions as the US State Department called out China again for its atrocities in Xinjiang and with the House Foreign Affairs Committee said to be looking at legislation to respond to China's crackdown on Didi which was removed from WeChat and Alipay apps for new users. China was also reportedly considering closing the loophole used by tech giants for US IPOs and FTSE Russell announced it will remove more Chinese stocks from indices following user feedback regarding the updated US Executive Order. However, some losses in the mainland were stemmed on future easing speculation after China's Cabinet said it is to use RRR cuts in a timely manner to support the real economy but will not resort to flood-like stimulus and press reports also suggested China may reduce its RRR in September to support the economy. Finally, 10yr JGBs were higher as they took impetus from global peers and with the risk averse tone spurring haven demand although retraced some of the gains following a soft 5yr JGB auction, while bonds in China were lifted which dragged the Chinese 10yr yield to its lowest since August 2020 amid speculation of a RRR cut later this year.

Top Asian News

  • Tech Stocks Drag Key China Index in Hong Kong Toward Bear Market
  • India Supercharged Its Economy 30 Years Ago. Covid Unraveled It
  • MANDATE: Uzbekistan 144A/Reg S 10Y $ Eurobond, 3/5Y SDG Eurobond
  • Didi Global Sinks Again, Extending Losses Amid China Crackdown

Yesterday’s recovery in European equities has turned out to be somewhat fleeting at this stage of the session with stocks in the region firmly in the red (Stoxx 600 -1.7%). In terms of the macro narrative, not a great deal has changed since yesterday’s close as participants continue to digest several ongoing potential headwinds for the market such as the spread of the delta variant, ongoing tensions between US and China, a slowing down of certain macro datapoints, tensions within OPEC+, global labour shortages and China’s tech crackdown. That said, developments on the central bank front over the past 24 hours such as the FOMC minutes, touted ECB strategic review and potential China RRR cut have leant on the dovish side. On the ECB review, reports suggest that policymakers will tweak their current inflation goal to target a more symmetrical approach around 2%; albeit rate hikes are seen as some way off regardless of the adjustment. Stateside, stocks are also being sold this morning with the ES and RTY continuing to lag with losses of 1.5% and 1.8% respectively. In terms of performance within Europe, all sectors have fallen victim to the selling pressure with heavy losses observed in cyclicals such as Basic Resources, Autos and Banks. The latter has been dealt a blow by the increasingly unfavourable yield environment for the banking sector as the German 10yr yield has slipped below -30bps with some desks suggesting that a test of -35bps is likely on the cards. In terms of stocks specifics, Deliveroo (+4.4%) have avoided the broad selling pressure in the market after reporting an 88% Y/Y increase in Q2, which subsequently prompted the Co. to raise guidance for 2021. Knorr-Bremse (+6.3%) is another gainer in the region after stopping its pursuit for a 60% stake in Hella (-1.9%). Danske Bank (+2.4%) is an outlier in the financial sector after upgrading its FY21 net income guidance on account of a ‘faster than anticipated macroeconomic recovery’. To the downside, laggards are mainly comprised of those companies within the aforementioned underperforming sectors, however, of note, Swatch (-4.3%) sits at the foot of the SMI after news that Logitech will replace the Co. in the index as of September 20th.

Top European News

  • U.K.’s Johnson Didn’t Break Rules Over Luxury Trip to Mustique
  • Sunak Hints U.K. Government May Drop Pensions Triple Lock
  • Putin’s ‘Asymmetric’ Arsenal Presages More Hacking Attacks
  • Danske Raises Guidance as Nordic Economies Exit Lockdowns

In FX, there is little doubt that the Greenback failed to receive a further fillip from last night’s FOMC minutes that were more balanced than the policy meeting itself given price action since the release, but the Dollar is also losing momentum amidst renewed risk aversion that is boosting the Yen, Franc and Gold to a greater extent. Indeed, the index has retreated from its lofty midweek perch (92.844) and into a tighter 92.792-463 band, albeit retaining an underlying bid just above yesterday’s 92.421 low ahead of US jobless claims data that represents the first new snapshot of the labour market following a somewhat mixed BLS report. Meanwhile, the Yen is on a tear and triggered stops in double quick time through 110.00 after breaching 110.50 earlier to expose June highs at 109.72 and 109.60 (from the 21st and 14th respectively), the Franc has snapped back above 0.9200 and Gold has reclaimed Usd 1800/0z+ status. On the flip-side, the so called activity, high beta and commodity currencies are in a tailspin, with the Loonie towards the base of a 1.2574-1.2471 range alongside an even sharper relapse in crude prices, the Aussie nearer 0.7425 than 0.7489 following dovish-leaning rhetoric from RBA Governor Lowe overnight and the Kiwi hovering above 0.6950 after losing grip of the 0.7000 handle.

  • EUR/GBP - The Euro has taken advantage of the Buck’s decline and relative weakness in the Pound on various grounds (beyond Wembley where only Sterling took a tumble), as it bounces firmly from sub-1.1800 and under 0.8550 respectively, while Cable remains shy of 1.3800 in the absence of anything UK specific bar another hot house price survey from RICS. Conversely, Eur/Usd and other Euro crosses have a host of ECB events and potential market-movers to look forward to including the Strategy Review, minutes of the June convene and press conference from President Lagarde.
  • SCANDI/EM - Another big Brent-related blow for the Nok that is trying to stop the rot below 10.4000 vs the Eur, while the Rub is also ruing the latest oil spill beneath 75.0000 against the Usd and Mxn heads into Banxico minutes below 20.0000 yet again. Elsewhere, the Cnh and Cny are closer to 6.5000 than 6.4500 in wake of remarks from China’s Cabinet alluding to more RRR easing and the Brl looks primed for more depreciation through 5.2000 after Brazilian President Bolsonaro said he may not accept the 2022 election result if the current voting system is maintained.

As mentioned above, while the overall narrative has not changed significantly there are plenty of focus points for participants to be concerned over; as such, WTI and Brent are pressured on the session dropping below yesterday’s trough and USD 71.00/bbl for WTI August’21 at worst (vs high USD 72.36/bbl). Updates explicitly for the complex since last nights private inventory report have been sparse; to recap, the headline crude printed a larger than expected draw of -8.0mln vs exp. -4.0mln while the broader products were somewhat mixed though the report had little effect on price action. In terms of OPEC+, the Saudi Oil Minister has reportedly given up on the prospect of a rescheduled OPEC+ meeting prior to August given their disagreement with the UAE. As a reminder, the current deal will expire at month-end at which point all producers would theoretically be able to set their quotas as they see fit, likely resulting in significant price pressure. Elsewhere, geopolitical updates saw the US State Department say they expect a seventh round of nuclear discussions with Iran; however, this is perhaps not imminent as the Russian representative to Vienna says the resumption date for JCPOA talks on Iran has not been set as Iran needs more time post-elections. Adding that this is normal but the sooner talks resume the better. Moving to metals, spot gold and silver are bid this morning as headlines centre on the reflation trade fizzling out and yields are pressured across the curve with pronounced bull-flattening occurring stateside and similar action in EGBs as well. Currently, the metals are holding above USD 1800/oz and USD 26/oz respectively, near session highs. Elsewhere, base metals have pulled back given the broader risk tone in a continuation of APAC performance, with copper for instance now below overnight support at USD 4.30/Ib.

US Event Calendar

  • 8:30am: June Continuing Claims, est. 3.35m, prior 3.47m
  • 8:30am: July Initial Jobless Claims, est. 350,000, prior 364,000
  • 3pm: May Consumer Credit, est. $18b, prior $18.6b

DB's Jim Reid concludes the overnight wrap

The screens look a bit blurry this morning after a late night watching the football. England managed to reach their first major football final in 55 years albeit via a tense match, extra-time, a fortunate penalty, players that I dislike passionately when they play against Liverpool, and a home crowd the size of which might lead the casual observer to wonder whether covid was actually just a Pam Ewing style bad dream. The final is on Sunday night and my family are ALL going to Scotland for a couple of days to see a friend of my wife. So I’m playing 18 holes in the morning at one course, 18 in the afternoon at another and then will cook myself a steak, open (half) a bottle of wine and watch the football. As the old advert used to say… “If Carlsberg did …..”

Although England’s hope are slowly inflating, for markets, the main story was once again the continued retreat of the reflation trade, which has had serious implications across multiple asset classes and led to another big rally for sovereign bonds. By the close, yields on US Treasuries were down a further -3.2bps to 1.316%, which is their lowest closing level since late February, and also marks their biggest 2-day decline since the aftermath of the Fed hawkish pivot back in mid-June. This proved good news for the dollar as well, which advanced +0.11% yesterday to hit a 3-month high, while gold (+0.36%) also rose for a 6th successive session to move back above $1800/oz. For equities it was a more mixed picture, but in keeping with concerns about the recovery from the pandemic, some of the most Covid-sensitive assets were among the worst hit.

As I mentioned yesterday, there’s a serious debate (including here at DB) about what’s driving these rates moves. On the one hand, there’s a case that this is driven by fundamentals, with our head of FX Research George Saravelos supporting the view that this rally is coming about because markets are increasingly re-pricing secular stagnation themes again after the pandemic. That would certainly fit with the further -2.8bps flattening in the 2s10s yield curve yesterday (which historically has been fairly reliable as a recessionary indicator), as it joined the 10yr yield in reaching its lowest level since mid-February. You can read more on George’s ideas in a piece out yesterday (link here).

But on the other hand, there’s absolutely no doubt that the technical factors are also strong, which is something I covered in my latest chart of the day (link here). We looked at the supply and demand for treasuries and found that on a rolling 3-month basis the entire net supply of treasuries had recently been taken down by the Fed on a net basis. This is extremely rare even in a QE world and also remarkable given it's coincided with the biggest fiscal giveaway in history. And to compound those technicals, this has occurred in a period of exceptionally strong demand from banks and foreigners.

To add to our perspectives on this, we started a flash poll (click here to answer) yesterday which will remain open for a few more hours after this email goes out, where we want to find out your opinion. Do you think the rally is thanks to secular stagnation, technicals, the delta variant/Covid, or the FOMC? There’s a sliding scale for each variable so you can choose a combination if you want. It should take seconds to complete, and we’ll be releasing the answers we have later today.

In terms of yesterday’s other moves, global equities recovered their losses from the previous day, with the S&P 500 (+0.34%) and the NASDAQ (+0.01%) both at fresh all-time highs, as the STOXX 600 (+0.78%) closed less than 0.1% shy of its own record. Within this, the sectoral moves were quite revealing, with the S&P 500 Airlines index down -2.12% as it remained on track for a 6th successive weekly decline, whilst in Europe, the STOXX Travel & Leisure index fell a further -1.46% yesterday. So evidence that some of the market dislocation of late has been a response to the latest Covid-19 situation and the more infectious delta variant. Technology shares have also benefited as the drop in yields has aided high-growth valuations and tech hardware (+1.53%) was the best performing industry in the S&P. Otherwise, small-cap stocks continued to struggle, with the Russell 2000 down -0.95%, as did US energy stocks (-1.73%) against the backdrop of lower oil prices, which continued to struggle as uncertainty over the OPEC+ meeting went on, leading to a further decline in both Brent crude (-1.48%) and WTI (-1.59%).

Last night also saw the release of the latest FOMC minutes, which showed officials did indeed discuss tapering asset purchases during the June meeting. According to the minutes, ”various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings.” On the topic of asset purchases, some members saw benefits to reducing MBS buying “more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets.” However there was some disagreement here with others seeing reducing both assets “commensurately” as more preferable. The FOMC also acknowledged that a majority of participants viewed inflation risks as now tilted to the upside, “because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.” Markets were very steady following the press release as Treasury yields and equities barely moved on the news, while the US dollar index fell sharply to flat on the day before reversing much of the move.

Staying with central banks, we found out last night that the ECB will be announcing the results of their long-awaited strategy review at 12pm London time, ahead of a press conference from President Lagarde at 13:30. According to a Bloomberg report last night, ECB policy makers have agreed to increase to their inflation goal to 2.0% and allow prices to overshoot when needed. This in some ways mirrors the Fed announcement at Jackson Hole last summer, and comes as a result of some ECB policy makers fearing that the current phrasing of “close to 2% over the medium term” was vague and led to tighter policy expectations sooner. All eyes on the details today. The news of the announcement came out after the European close, but ahead of that sovereign bonds had rallied in line with their US counterparts, with yields on 10yr bunds (-3.1bps), OATs (-2.5bps) and BTPs (-0.3bps) all moving lower.

Asian markets have taken another leg lower overnight as countries in the region struggle to bring the spread of the delta variant under control whilst also lagging on vaccinations. The Nikkei (-0.74%), Hang Seng (-2.00%), Shanghai Comp (-0.57%) and Kospi (-0.67%) are all down. Futures on the S&P 500 are also down -0.21% and those on the Stoxx 50 are -0.11%. In Fx, the New Zealand dollar and Australian dollar are down -0.36% and -0.31% respectively with part of that decline coming from the greenback’s strength (+0.11%).

Meanwhile in China, it was reported yesterday by the state broadcaster CCTV that the country could cut its reserve requirement ratio, with CCTV citing a State Council meeting chaired by Premier Li Keqiang. The potential move would come on the back of some recent data surprising on the downside, including the June PMIs, so all eyes will be on the Q2 GDP release in a week’s time to see what that shows on the state of the recovery.

Turning to the pandemic, Japan’s virus policy head Yasutoshi Nishimura said overnight that an advisory panel had approved an emergency in Tokyo from July 12 to August 22, which would cover the entire period of the Olympics. This is also likely to lead to no spectators at the games. Japan’s PM Suga is set to give a news conference on the decision at 7:00 p.m. Japan time. South Korea is also discussing raising its virus restriction to the highest level in Seoul. South Korea has reported 1,275 cases, a daily record. Meanwhile in the UK, the number of daily cases exceeded 30k for the first time since January, but there was a further slowing of the weekly growth rate that leaves cases over the last 7 days “only” up +43% on the previous week, compared to +74% last Friday. There was also some fresh antibody data from the UK’s Office for National Statistics, which found that 90% of the adult population in England were estimated to have tested positive for antibodies in the week beginning 14 June. Over in the US, the CDC estimates that the delta variant is now 52% of all new cases as of the start of this week. However the variant’s spread varies greatly by geography with the strain accounting for over 80% of cases in the Midwestern states while “just” 30% in the Pacific Northwest. Regional differences in vaccination rates are being used to suggest a difficult autumn and winter in places in the US.

On the data front, the main highlight yesterday was the release of the US job openings for May, which came in at a lower-than-expected 9.209m (vs. 9.325m expected). That said, this was still a fresh record given the downward revisions to April, so demonstrates the continued availability of positions (from May) and the difficulty employers are facing in hiring right now. One point of interest was the decline in the quits rate to 2.5% from 2.8% in June, which measures those voluntarily leaving their jobs and is often used as a gauge of how confident workers are feeling. Separately in Europe, German industrial production unexpectedly fell -0.3% in May (vs. +0.5% expected), while Italian retail sales grew by a smaller-than-expected +0.2% (vs. +3.0% expected).

To the day ahead now, and the main highlight will be the release of the ECB’s strategy review and President Lagarde’s press conference. Otherwise, there’s also the release of the ECB’s minutes from their June meeting, whilst the ECB’s Hernandez de Cos is speaking as well. On the data side, releases include the German trade balance for May and the weekly initial jobless claims from the US.