(Bloomberg) — A relative sense of calm returned to global financial markets, with bonds rebounding after a selloff driven by bets the Federal Reserve will keep interest rates higher for longer.
Treasury volatility eased, with two-year yields dropped to 4.96% — after briefly topping 5% this week. Traders will also keep an eye on the market’s ability to absorb a $13 billion sale of 20-year Treasuries ahead of the Fed’s Beige Book survey of regional business contacts. The dollar weakened. Equities wavered.
“While we have recently lowered our expectations on the timing and magnitude of Fed rate cuts, we believe the US central bank remains on track to cut rates twice this year, most likely starting at its September meeting,” said Solita Marcelli at UBS Global Wealth Management. “This means the return outlook for quality bonds remains positive and attractive, and that recent losses in fixed income are likely to be temporary.”
The S&P 500 hovered near 5,050. The Nasdaq 100 underperformed, with Nvidia Corp. weighing on big tech. United Airlines Holdings Inc. soared on a solid outlook. Morgan Stanley joined rivals JPMorgan Chase & Co. and Wells Fargo & Co. in tapping the US investment-grade market after posting earnings.
While global equities are facing tactical headwinds, this is just a consolidation phase and stocks are expected to keep rising this year, according to UBS strategists led by Andrew Garthwaite.
They noted positive developments including artificial intelligence pushing productivity and earnings higher, lower warranted equity risk premium, likely falling labor costs and less worries on margin pressures.
The equity risk premium for US equities — a measure of the differential between stocks and bonds’ expected returns — is now deep in negative territory, something that hasn’t happened since early 2000s.
While this is not necessarily a negative indicator for the stock market, it all depends on the economic cycle. The lower ERP can be seen as a promise of a future boost in corporate profits, but also that a bubble is in the making.
Fundamentals and technical trends for equity markets still appear supportive, suggesting the recent pullback should prove temporary, according to HSBC strategists led by Max Kettner, who are using the decline to add to their bullish stance.
“Sentiment and positioning are not flashing a warning signal, though real money investors have started to extend their constructive stance on equities lately, they wrote.
US corporate earnings are set for a “healthier runway” through 2024 and investors are growing more confident that companies can meet expectations, according to Morgan Stanley strategists.
The market is watching for profits to bottom in the first quarter before sequentially recovering in the second quarter and eventually expanding in the back half of the year, a team including Michelle Weaver and Michael Wilson wrote.
Corporate Highlights:
- President Joe Biden is calling for higher tariffs on Chinese steel and aluminum, part of a series of steps to shore up the American steel sector and woo its workers in this year’s election.
- ASML Holding NV posted orders that fell short of analysts’ expectations, as Taiwanese and South Korean chipmakers held off buying the Dutch firm’s most advanced machines.
- U.S. Bancorp reduced the outlook for a key driver of its profit for the year as lenders face pressure to pay more for deposits.
- America’s appetite for imported goods has kept its economy hot but has yet to “translate into any meaningful pick up in demand” for JB Hunt Transport Services Inc., a top executive for the logistics company said on its quarterly earnings call Tuesday.
- US antitrust enforcers are preparing a lawsuit seeking to block fashion company Tapestry Inc.’s $8.5 billion planned takeover of Capri Holdings Ltd., according to a person with knowledge of the matter.
- Abbott Laboratories raised the lower end of its annual profit forecast as strong sales in medical devices drove first-quarter earnings and revenue above expectations.
Key events this week:
- Taiwan Semiconductor earnings, Thursday
- US Conf. Board leading index, existing home sales, initial jobless claims, Thursday
- Fed Governor Michelle Bowman speaks, Thursday
- New York Fed President John Williams speaks, Thursday
- Atlanta Fed President Raphael Bostic speaks, Thursday
- BOE Deputy Governor Dave Ramsden and ECB Governing Council member Joachim Nagel speak, Friday
- Chicago Fed President Austan Goolsbee speaks, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 10:16 a.m. New York time
- The Nasdaq 100 fell 0.2%
- The Dow Jones Industrial Average rose 0.1%
- The Stoxx Europe 600 rose 0.3%
- The MSCI World index was little changed
Currencies
- The Bloomberg Dollar Spot Index fell 0.2%
- The euro rose 0.2% to $1.0640
- The British pound rose 0.3% to $1.2459
- The Japanese yen was little changed at 154.66 per dollar
Cryptocurrencies
- Bitcoin fell 1.7% to $61,987.26
- Ether fell 2.2% to $3,002.55
Bonds
- The yield on 10-year Treasuries declined four basis points to 4.63%
- Germany’s 10-year yield declined one basis point to 2.47%
- Britain’s 10-year yield declined two basis points to 4.28%
Commodities
- West Texas Intermediate crude fell 0.8% to $84.65 a barrel
- Spot gold rose 0.3% to $2,389.21 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Jessica Menton, Michael Msika, Sagarika Jaisinghani and Farah Elbahrawy.
https://finance.yahoo.com/news/asia-open-looks-mixed-treasuries-223159706.html
