Jul 2, 2023

Asian Shares Set to Rise on the Back of US Rally: Markets Wrap

Peyton Forte and Isabelle Lee, Bloomberg News

(Bloomberg) -- US stocks shook off warnings about cooling growth and data showing a slowdown in manufacturing to edge higher in subdued trading ahead of the Independence Day holiday.

In a shorted session that ended at 1 p.m. Monday in New York, the S&P 500 Index rose 0.1%, led by Tesla Inc. The electric-car maker jumped 6.9% after it reported record quarterly sales, helping lift shares of rivals and battery suppliers. Bank stocks, including Bank of America Corp., climbed. The Nasdaq 100 Index advanced 0.2%, holding onto gains after notching its best-ever first half of a year.

Investors are tempering expectations for stocks in the second half of the year after strong gains so far. While central banks have kept up their hawkish rhetoric, signs of moderating US inflation have fueled big gains across technology shares.

Still, if an economic slump fails to materialize and political crises can be averted inflation could bottom out at 3% before resuming a climb, according to Jim Bianco, president and founder of Bianco Research. That could mean more interest rate increases.

“If the inflation rate bottoms at three and starts drifting higher, the Fed’s going to find this unacceptable, and that two rate hikes that we have priced in for the rest of the year will happen, if not three,” Bianco said on Bloomberg Television.

The manufacturing sector painted a grim picture as US factory activity fell to its weakest level in more than three years. Production and new orders data also suggested a pullback.

Traders will be looking to the upcoming earnings season and additional data, such as Friday’s nonfarm payrolls, for clues on the health of the economy.

“Whether the FOMC has one, two, or zero hikes remaining in its tightening campaign will be a function of the incoming data,” said Ian Lyngen, a strategist at BMO Capital Markets. He expects this week’s incoming data to have more impact on the Federal Reserve’s September rate decision than July’s.

“The Fed is on a glide path to another hike barring a dramatic shift lower in the realized data and/or a sharp tightening in financial conditions,” he wrote in a note.

Despite the positive start to the year for equities, there are signs of cracks beneath the surface. The US Treasury yield-curve inversion intensified, indicating investors expect Fed policy to rein in future growth. The two-year note’s yield briefly exceeded the 10-year rate by as much as 110.8 basis points, according to data compiled by Bloomberg.

“With both global and US stocks more than 20% above their October 2022 lows and a more challenging second-half outlook, we believe investors should position for more lackluster stock market performance through the remainder of the year,” Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, said.

Nikolaos Panigirtzoglou, global market strategist at JPMorgan Chase & Co. said “stocks have done well in the first half because a US recession didn’t happen.”

The tech trade, he added, has turned into “a pain trade for institutional investors, causing them to capitulate. This first-half back drop creates vulnerabilities for the second half as it means if a US recession happens, there would be a rather abrupt market repricing.”

Meanwhile, US crude prices steadied around $70 a barrel after Saudi Arabia’s state-run news agency said the country will prolong its unilateral oil production cut by one month, keeping a lid on supply even as the market is expected to tighten. Its OPEC+ ally, Russia, also announced fresh curbs on exports.

Also in focus this week will be US Treasury Secretary Janet Yellen’s trip to Beijing, which kicks off on July 6, as the world’s two largest economies look to mend ties after a spate of bilateral tensions.

Key events this week:

Australia interest rate decision, Tuesday
US Independence Day national holiday. Financial markets closed, Tuesday
China Caixin services and composite PMI, Wednesday
Eurozone S&P Global Eurozone services PMI, PPI, Wednesday
OPEC International Seminar, speakers including OPEC+ oil ministers, kicks off in Vienna, Wednesday
FOMC issues minutes on June policy meeting, Wednesday
New York Fed President John Williams in “fireside chat” at meeting of the Central Bank Research Association at the New York Fed, Wednesday
US initial jobless claims, trade, ISM services, job openings, Thursday
Dallas Fed President Lorie Logan speaks on a panel about the policy challenges for central banks at CEBRA meeting, Thursday
US unemployment rate, nonfarm payrolls, Friday
ECB’s Christine Lagarde addresses an event in France, Friday

Some of the main moves in markets today:

Stocks

S&P 500 futures were little changed as of 4:40 p.m. New York time
Futures on the Dow Jones Industrial Average were little changed
The MSCI World index rose 1%, more than any closing gain since June 2

Currencies

The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0914
The British pound was little changed at $1.2691
The Japanese yen fell 0.3% to 144.69 per dollar

Cryptocurrencies

Bitcoin surged 1.9%, more than any closing gain since June 23
Ether rose 2.2% to $1,960.58

Bonds

The yield on 10-year Treasuries advanced two basis points to the highest since March 9
Germany’s 10-year yield advanced four basis points to 2.44%
Britain’s 10-year yield advanced five basis points to 4.44%

Commodities