US Futures Slide As European Relief Rally Reverses, Oil Hits 2 Month High

US equity futures are sliding, reversing all of Monday's gains and then some, with tech and small-caps stocks underperforming even though bond yields are lower by 2bps ahead of the latest JOLTS data that will give clues on the outlook for US interest rates while French stocks give up all of the post-vote gains as the relief rally reversed. As of 8:00am ET, S&P futures are down 0.5% and Nasdaq futures lose 0.6%. Treasury yields held most of Monday’s rise, which was fueled by speculation that a Donald Trump presidency would lead to greater US fiscal deficits and higher inflation. The US Dollar is stronger for a second day and commodities continue to find a bid, led by oil and energy. Today’s macro focus will be on JOLTS and Powell (9.30a) as the world adjusts to the new political outlook, one where Trump replaces Biden in November, and which appears to be the near-term driver of bond yields and commodity prices; the hurricane in the Atlantic is also supporting energy prices. These moves may be exacerbated by the low volume associated with the holiday week.

In premarket trading, Mag7 and Semis are lower with Energy names higher. Tesla fell more than 1% surrendering some of yesterday’s 6% gain. Nvidia, Meta and Apple also declined. Paramount Gobal gained 3% on a NYT report Barry Diller is considering making a bid. Here are some of the other notable premarket movers:

CS Disco (LAW) falls 6% after JPMorgan cut its rating, saying the setup for the legal software company looks challenging.
Incyte (INCY) slips 3% after BMO downgraded the stock to underperform, giving the drugmaker its only negative analyst rating.
Lennar (LEN) slips 2% as Raymond James and Citi downgrade the homebuilder to hold-equivalent ratings, due partly to concerns around a softening Florida housing market.
Polestar Automotive Holding (PSNY) drops 5% as the company cuts costs further after losses deepened in the first quarter.
R1 RCM (RCM) tumbles 9% as New Mountain Capital and TCP-ASC failed to reach an agreement on a joint takeover of the health-care technology firm.
WideOpenWest (WOW) declines 4% after Raymond James downgraded the cable and internet provider to underperform, citing a lack of upside for the stock.

Recent data has showed inflation in the US moderating, which is supportive of stocks in the short term, according to UBS chief strategist Bhanu Baweja. But signs of slowing economic growth will weigh on shares more broadly in the medium term, calling for defensive positioning, he said on Bloomberg TV.

"The central pillar of how markets are likely to trade over the next six months is lower inflation first in the US, followed by lower growth in the US.” Baweja said. “We are risk-off in equities, broadly.”

European stocks dropped, wiping out the prior day’s gains as French political uncertainty lingers ahead of the final round of voting on Sunday. The Stoxx 600 was down 0.6%, as insurance and auto sectors underperform while France's CAC40 erased Monday's post-vote gains, sliding 1.1%. Here are the biggest European movers:

Teleperformance gains as much as 4.5% after Morgan Stanley upgrades the French call-center operator to overweight from equal-weight, saying the stock is pricing in too much risk from potential impact of artificial intelligence
HelloFresh shares jump as much as 18% after JPMorgan removed a negative catalyst watch on the stock, saying recent data indicate stabilization in the key North America meal-kit business
Chemometec shares gain as much as 13%, the most since February, after the Danish lab-equipment firm reported preliminary full-year results for the 2023/2024 financial year, with fourth-quarter revenues growing 13.5% year-on-year
Tritax EuroBox shares rise as much as 3.2% after the firm, which owns large warehouses in Europe, said its board has engaged “extensively” with Brookfield including through the provision of due diligence information and has received a series of indicative proposals from the asset manager
Michelin shares fall as much as 4.8% in early Paris trading, with analysts citing a pre-close call with the company after markets closed on Monday
Sodexo shares fall as much as 6.8%, the biggest drop since May 2022, after the food services and facilities management company reported third-quarter results
Stabilus slips as much as 0.5% as Berenberg analysts cut their price target on the stock, noting concerns that the German engineering company’s profit warning last month could impact the acquisition of automation equipment maker DESTACO

Earlier, Asian equities were little changed, with a rally in Hong Kong and Japanese shares countered by selling in South Korea.
The MSCI Asia Pacific Index rose as much as 0.4% to the highest level since May 28 before paring most of the gains. Shares of Japanese firms including Mitsubishi UFJ Financial Group, Daiichi Sankyo and Toyota contributed the most to the index’s gain as the Topix gauge closed close to a record high. Stocks declined in Taiwan and Australia. Chinese shares in Hong Kong advanced, boosted by a catch up rally in property shares after better-than-expected June home sales lifted investors’ enthusiasm for the embattled sector. Mainland China stocks closed lower after seesawing through the day.

“Some exposure to China still makes sense,” Vasu Menon, managing director for investment strategy at OCBC Bank Singapore told Bloomberg TV. With the third plenum coming up, “investors are hopeful that the Chinese government will unleash more measures to boost the economy,” he said.

In rates, Treasuries are marginally richer across the curve following an aggressive, two-day bear-steepening move. Treasury yields richer by as much as 1.5bp in belly of the curve which outperforms slightly, steepening 5s30s by almost 1bp on the day. The 10-year yield is around 4.44%, down 2bps vs Monday’s close with gilts outperforming by 2bp in the sector

European bonds outperform, led by gilts after June inflation in UK stores fell close to zero for the first time since October 2021. French government bonds fall, lagging their German peers and widening the 10-year yield spread by 2bps to 76bps as Eurozone inflation prints 2.5% though Core printed 2.9%, 10bps hotter than surveyed.

In FX, the Bloomberg Dollar Spot Index rises 0.1% while the euro dips, falling 0.2% against the greenback. ECB policymakers reiterated that there is no convincing evidence yet that inflation threat is over, biding their time for more data while at their annual retreat. Meanwhile, traders looked past euro area CPI, which slowed as expected in June.

In commodities, oil prices advance, with WTI rising 0.7% to trade near $84 a barrel with Brent trading above $87 and a fresh 2 month high. Spot gold is steady around $2,330/oz. Under modest pressure as the USD remains bid and BTC takes a breather from Monday's upside around this time.

Looking at today's calendar, US economic data slate includes May JOLTS job openings at 10am ET. Fed’s Powell is on a panel with ECB President Lagarde and Brazil’s Campos Neto beginning at 9:30am

Market Snapshot

S&P 500 futures down 0.4% to 5,510.50
STOXX Europe 600 down 0.6% to 510.12
MXAP little changed at 180.61
MXAPJ down 0.6% to 563.60
Nikkei up 1.1% to 40,074.69
Topix up 1.1% to 2,856.62
Hang Seng Index up 0.3% to 17,769.14
Shanghai Composite little changed at 2,997.01
Sensex little changed at 79,420.05
Australia S&P/ASX 200 down 0.4% to 7,718.17
Kospi down 0.8% to 2,780.86
German 10Y yield little changed at 2.59%
Euro down 0.2% to $1.0717
Brent Futures up 0.5% to $87.03/bbl
Gold spot down 0.1% to $2,329.88
US Dollar Index up 0.10% to 106.01

Top Overnight News

European stocks declined ahead of data on euro-region inflation, after policy makers signaled they need more evidence that price pressures are easing before considering another interest rate cut.
Federal Reserve Bank of Chicago President Austan Goolsbee said policymakers should cut interest rates if US inflation continues to fall back to the 2% target.
Financial giants from Goldman Sachs & Co. to Morgan Stanley and Barclays Plc. are taking a fresh look at how a Donald Trump victory in November could play out in the bond market.
Three weeks after recommending investors sell five-year Treasuries, strategists at JPMorgan Chase & Co. say it’s time to pocket profits from the trade.
The European Central Bank doesn’t yet have sufficient evidence that inflation threats have passed, President Christine Lagarde and her top economist said — feeding expectations that officials will take a break from cutting interest rates this month.
Oil traded near a two-month high after breaking out of its recent trading range on an escalation in tensions in the Middle East and concerns over the rapid start to the Atlantic hurricane season. SFZGNSDWX2PS
As the UK prepares to head to the polls on Thursday, the country’s financial markets appear to be shedding their recent reputation for volatility.
President Emmanuel Macron’s centrist alliance and the left-wing New Popular Front have until this evening to strategically pull candidates from France’s final round of voting Sunday in a last-ditch effort to keep a dominant far-right out of power.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were ultimately mixed amid the backdrop of rising global yields and recent soft US data. ASX 200 was subdued by weakness in real estate and miners, while RBA Minutes did little to shift the dial. Nikkei 225 recouped early losses and eventually reclaimed the 40,000 level for the first time since early April. KOSPI retreated after North Korea claimed it successfully test-fired a new tactical ballistic missile on Monday capable of carrying a super large warhead, while index heavyweight Samsung Electronics traded indecisively after its workers' union announced a 3-day strike. Hang Seng and Shanghai Comp. were marginally positive as the former gained on return from the long weekend in which property stocks briefly lifted the index to just shy of 18,000, while the mainland index was rangebound and attempted to reclaim the 3,000 status.

Top Asian News

China's Vice Premier He said China is willing to work with Switzerland to deepen and expand cooperation in economic and trade fields, while he added that China welcomes Japanese firms to further expand investment and cooperation in the country, according to Xinhua.
RBA Minutes from the June meeting stated the Board judged the case for holding rates steady was stronger than for hiking, while they needed to be vigilant to upside risks in inflation and data suggested upside risk for May CPI. RBA stated that economic uncertainty meant it was difficult to rule in or out future changes in policy and recent data was not sufficient to change the outlook for inflation returning to target by 2026, as well as noted that inflation expectations are still anchored, but market premia had drifted higher. Furthermore, the RBA judged it is still possible to bring inflation to target while keeping employment gains but stated a hike might be needed if the Board judged policy was not "sufficiently restrictive" and that a material rise in inflation expectations could require significantly higher rates.
Outgoing Japanese top currency diplomat Kanda says recent FX moves are showing signs of speculative activity.

European bourses are softer across the board to varying degrees with losses deepening since the cash open despite a lack of fresh fundamentals, Stoxx 600 -0.5% & Euro Stoxx 50 -0.9%. Energy bucks the trend and is the only sector in the green given ongoing crude upside; other sectors lower but choppy. Insurance names in focus as Hurricane Beryl continues to intensify and has made landfall. US futures are lower across the board (ES -0.4%, NQ -0.5%, RTY -0.6%) with price action generally in-fitting with European peers ahead of Fed's Powell & JOLTS; Tesla (-1.2%) in focus ahead of their Q2 delivery report.

Top European News

ECB's Lane says they will have to see what the French gov't decides, via Bloomberg TV; do not currently have the conditions for disorder regarding the French election (when asked on TPI). June inflation data appears to be in-line with the ECB's assessment. Going forward will need more information around services, information that will not be provided in June, a comment which was made pre-data. Adds, July is a live meeting.
ECB's Wunsch says that barring any major negative surprises, the ECB has space for a second rate reduction. Adds, subsequent moves should only follow when the ECB has confidence that inflation is falling to target.
ECB's Kazaks says if inflation moves sideways and the outlook does not change then a September cut is a possibility, via Econostream; if the economy & lending growth remain weak, then this opens "more possibilities" for cutting. Do not have to move at only projection meetings. Re. strategic review: no need for a massive overhaul. Would like a balance sheet discussion next year, though there is no rush to attain a conclusion.
ECB's de Guindos says the ECB does not have a predetermined path, inflation to hover around current levels but with some ups and downs this year. Evolution of the French market has been quite orderly.
ECB's Muller says they can probably cut more if the baseline holds, need to be patient with further rate cuts; risk of underestimating price stickiness.
ECB's Centeno says we must be prudent on rates, but we are confident, via CNBC. Expects a few more cuts in 2024.
ECB's Vasle says rates can be lowered further if things go as planned. Tightness of the labour market is causing pressure in wages. Need additional data to confirm the inflation trajectory.

DXY broadly firmer against peers and holding above the 106.00 mark in proximity to the current 106.05 peak, ahead of Powell and data.
EUR continues to fade Monday's French-driven relief rally, down to a 1.0710 low and not finding any real support from sticky super-core EZ HICP; Friday's trough at 1.0685.
Sterling softer but against the USD is towards the mid-point of 1.2616-1.2653 parameters. Cable is currently back below its 100 and 50DMAs @ 1.2641 and 1.2654 respectively; last week's base at 1.2612 before the figure.
USD/JPY at a fresh multi-decade peak of 161.75 overnight, has pulled back incrementally from this in relatively contained trade since but remains in close proximity. Largely unreactive to comments from outgoing FX head Kanda.
Antipodeans pressured alongside the general risk tone; RBA minutes overnight said a hike might be needed if the Board judged policy was not "sufficiently restrictive".
PBoC set USD/CNY mid-point at 7.1291 vs exp. 7.2774 (prev. 7.1265)

Fixed Income

OAT-Bund 10yr yield spread around 76bps, towards the top-end of Monday's range, updates thus far somewhat limited and very much focused on the dropping out of candidates in three/four-way races ahead of tonight's deadline before Sunday's second round.
Bunds slipped to the unchanged mark ahead of Flash EZ HICP where the data which came in as expected aside from the slightly hotter-than-expected super-core Y/Y rate, a print which sent Bunds to a fresh 130.35 base.
Gilts treading water for the most part. Nothing by way of fresh specific driver for the complex as we continue to countdown to Thursday's election.
USTs incrementally firmer into Chair Powell & JOLTS, no reaction to earlier remarks from Fed's Goolsbee; support comes in at 109-00 and then 108-17+ below while any further upside brings into play Monday's 109-24 peak and thereafter 109-27+.

Commodities

Crude benchmarks have extended on yesterday's gains, after settling higher by over USD 1.50/bbl; complex remains support by several factors incl. geopols, Hurricane Beryl and summer demand.
WTI Aug and Brent Sep up to highs of USD 84.13/bbl and USD 87.34/bbl respectively.
Gas contracts relatively contained after pressure on Monday, downside some have attributed to higher inventories.
Precious metals somewhat mixed but XAU is holding around its 21-DMA at USD 2326/oz, within Monday's USD 2,318.36-2,338.52/oz parameter.
Base metals are higher across the board though with upside limited given the general risk tone.
NHC says Hurricane Beryl is expected to bring life-threatening winds and storm surge to Jamaica on Wednesday, Hurricane watch issued for Cayman Islands.

Geopolitics

North Korea said it successfully test-fired a new tactical ballistic missile on Monday that is capable of carrying a 4.5-ton super large warhead, according to KCNA.
"Security sources for Channel 12: The military achievement in Gaza now allows the cessation of fighting if Israel is forced to move the file of negotiations", according to Al Jazeera.
"Belarus defense (official): a demonstration of tactical nuclear missiles sent by Russia in Minsk tomorrow", according to Al Arabiya

US Event Calendar

June Wards Total Vehicle Sales, est. 15.8m, prior 15.9m
10:00: May JOLTs Job Openings, est. 7.95m, prior 8.06m

Central Bank Speakers

03:40: Fed’s Goolsbee on Bloomberg Television
09:30: Powell, Lagarde, Campos Neto Speak in Sintra

DB's Jim Reid concludes the overnight wrap

Markets got Q3 off to a mixed start yesterday, with a pretty divergent performance across countries and asset classes. On the positive side, there was a noticeable recovery for French assets after the election results, with the Franco-German 10yr spread (-5.8bps) seeing its biggest decline since President Macron announced the election last month. However, that came alongside more weakness in US markets after investors became increasingly focused on the fiscal outlook, with the presidential election now just four months away. That saw the 10yr Treasury yield rise a further +6.5bps to 4.461%, building on its +11.0bps move on Friday and closing +20.3bp higher than the lows that came after Friday's soft core PCE. So had you got that data print right in advance you may have got bond markets totally wrong. I thought some of it was month-end shenanigans from Friday but a narrative has built up that due to the aftermath of the Trump/Biden debate, markets should be pricing in a higher probability of a Trump victory and larger fiscal deficits.

In terms of the French situation, the main news yesterday (as we discussed 24 hours ago) was that Marine Le Pen’s National Rally slightly underperformed the opinion polls from before the election. But DB’s economist thinks that their underperformance relative to polls likely reflected stronger participation in urban areas to some degree, in seats that the National Rally were unlikely to win anyway. He writes (link here) that the probability of a National Rally government (minority or majority) is actually now marginally higher than it was before round 1, and there is also the possibility that other MPs on the right or centre-right could implicitly support a minority government. So a slightly different view to the prevailing market narrative yesterday that a far-right majority was less likely. The house view is still a hung parliament though.

The second round will take place on Sunday, but the other parties are now attempting to keep the National Rally from gaining power, and there are negotiations on candidates standing down from districts where they wish to give another party a better chance of victory. For reference, candidates who receive more than 12.5% of registered voters can go forward to the second round, but there is a deadline tonight (6pm CET) for candidates to file papers to go forward, so it’s possible that those who did pass the threshold will withdraw, particularly if they came in third place. So once we know who’s actually standing where, we should get a better idea of the likely prospects going into Sunday’s vote.

In terms of the market reaction, there was an initial surge for equities at the open, with the CAC 40 up by +2.79% first thing. But those gains were then pared back, and the index “only” closed +1.09% higher. Other indices also advanced in Europe, but the gains were concentrated in the south, with Italy’s FTSE MIB (+1.70%) and Spain’s IBEX 35 (+1.04%) both outperforming. Meanwhile for sovereign bonds, the gap between French and German yields tightened back to 74bps, which is its tightest level in over two weeks, whilst Italian and Spanish spreads also fell. Nevertheless, yields still moved higher across the continent, and in absolute terms, the French 10yr yield (+5.1bps) was up to 3.349%, which is its highest closing level since November, whilst those on 10yr bunds were up by +10.7bps on the day. The US bond move from Friday afternoon was a big influence.

Well after the European close, ECB President Lagarde spoke at the annual retreat in Sintra, Portugal. She struck a slightly more hawkish tone, saying that Europe’s “still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks.” She added, “ It will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed.” There is now 38.2bps of cuts priced in by year-end, down -5.0bps from Friday’s close.

As discussed earlier, US Treasuries continued their significant last 36 hour decline from Friday as investors moved to focus on the upcoming election and the fiscal implications. That led to another fairly sharp curve steepening yesterday, with the 2s10s curve up +6.1bps to -29.9bps, having been at -49.6bps just one week earlier. For what it’s worth, this week is actually the second anniversary of the 2s10s inversion in July 2022, so we’re on track for yet more records in terms of this being the longest ever 2s10s inversion. And in terms of the specific moves, the 2yr yield was largely unchanged (+0.2bps) at 4.755%, but the 10yr yield saw a larger +6.5bps move to 4.461%. With the attention on the long end, fed futures were barely changed as the amount of cuts priced in by the December meeting was up just +1.0bps to 45bps. This morning in Asia, yields on the 10yr USTs have edged back down -2bps to around 4.44% as I type.

Risk appetite in the US was dampened by some weak data prints, with the ISM manufacturing for June falling to 48.5 (vs. 49.1 expected). Moreover, the subcomponents for new orders (49.3) and employment (49.3) were in contractionary territory as well so there was little respite in the report. The bright spot came on the inflation side, with the prices paid component down to a 6-month low of 52.1. That backdrop meant that US equities were mixed with tech once again saving the day with the Magnificent 7 surging +1.76%, even as the small-cap Russell 2000 was down -0.86%. The S&P 500 split the difference and was up +0.27%, even while 76% of the index members were lower on the day. S&P 500 (-0.23%) and NASDAQ 100 (-0.38%) futures are both trading notably lower this morning.

In Asia, the Nikkei (+0.38%) is trading higher with the Hang Seng (+0.57%) also gaining after returning from a public holiday. Elsewhere, Chinese stocks are struggling to gain traction with the CSI (-0.08%) and Shanghai Composite (+0.04%) relatively flat. Meanwhile, the KOSPI (-0.82%) is losing ground after a busy morning of inflation data. Indeed, South Korea’s inflation cooled more than expected, rising +2.4% y/y in June (v/s +2.6% expected), its slowest pace since July last year. It followed a +2.7% increase in the prior month. Meanwhile, core CPI came in +2.2% higher in June than a year before, in line with May’s reading.

In FX, the Japanese yen (-0.13%) is weakening to a fresh 38-year low of 161.68 against the dollar despite some verbal intervention from the authorities. Japanese Finance Minister Shunichi Suzuki stated that he is "closely watching FX moves with vigilance" while refraining from commenting on specific levels.

Finally, minutes from the RBA’s June monetary policy meeting indicated that board members discussed raising interest rates but eventually decided to hold rates steady at 4.35%. The board emphasized the need to remain vigilant to upside risks to inflation, noting that May’s inflation data hadn’t been enough to derail its inflation outlook of returning to target in 2026. However these minutes are slightly dated as a week after the meeting we had a strong CPI print. So our economists believe an August hike is likely.

To the day ahead now, and data releases include the Euro Area flash CPI print for June, along with the unemployment rate for May. Over in the US, there’s also the JOLTS report of job openings for May. From central banks, we’ll hear from Fed Chair Powell, ECB President Lagarde, ECB Vice President de Guindos, and the ECB’s Elderson and Schnabel

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