A look at the day ahead in the US and global markets by Mike Dolan
August is already looking worrisome as stock markets become fearful of Big Tech’s profits and begin to reconsider ‘hard landing’ scenarios for the global economy just as central banks ease and bond yields plummet.
It was a hectic trading week in all corners of the financial world. Regardless of the recently vaunted rotation of equity sectors, the biggest rotation emerging is from stocks to bonds as “recession” creeps back into the language.
Yields on five-, seven- and 10-year Treasuries have all fallen below 4% since the Federal Reserve announced Wednesday that the first rate would come in seven weeks – just as surveys around the world and the U.S. labor market contracted. cools down further.
The stakes are higher than ever for Friday’s July employment report, with markets keeping a close eye on the trigger of the so-called ‘Sahm rule’, which charts the pace of rising unemployment in the US versus the start of the recession.
While it still seems far-fetched to talk of a broad recession, with real-time US GDP estimates still tracking 2.5% growth, fears of a negative push from the industrial world due to a faltering Chinese economy are growing for weeks.
With the Bank of England joining its G7 counterparts in kicking off the rate-cutting cycle on Thursday, markets are starting to price in the possibility that a Fed rate cut in September could be as much as 50 basis points. About 32 basis points of cuts are now priced for that month and 85 basis points for the rest of the year.
But the surge in market volatility, which saw the VIX fear index rise above the 20 level on Friday for the first time since April, focused on another shakeout in Big Tech as the megacaps and a slew of high-flying chipmakers reported disappointing numbers . income.
At the heart of the concern is whether massive spending on artificial intelligence investments is justified and whether AI will ultimately deliver on its promise in the broader economy.
While Apple held the line overnight after post-bell results beat expectations, Amazon fell more than 8% after the update.
And while Meta recovered on Thursday, poor results from Qualcomm and Arm saw their shares hit and many of the big chipmakers swooned again.
Intel fell about 20% overnight as it missed dividends, suspended dividends and cut jobs on what would be its worst day since the dot.com bubble burst in 2000. Taiwanese chip giant TSMC lost almost 6%.
After losing 7% on Thursday and a wildly volatile week, AI darling Nvidia lost another 2% after hours on Friday after media reports that the US government is launching an antitrust investigation into the company after complaints from rival chipmakers.
Another tough day for the S&P500 on Thursday, Nasdaq and Russell 2000 small caps fell overnight across the world.
Moreover, irritated by the Bank of Japan’s rate hike last week and the yen’s rise, the Nikkei fell nearly 6% on its worst day since the pandemic hit in 2020.
China, which has been at the center of the looming global industrial slowdown following news that the factory sector shrank again in July, saw its shares fall more than 1%. European shares also fell about 1%.
As bond yields hurtled to their lowest levels since the Fed’s feverish dovish speculation in early 2024, even Japan’s 10-year yield fell below 1% for the first time in more than a month, despite this week’s BOJ move. The yen remained stable at just under 150 per dollar.
But despite all the stock and bond turmoil, currency markets have generally been much more stable. The dollar index was only slightly lower, with the Swiss franc outperforming despite all the turmoil, reaching its strongest point since February.
The political backdrop this month is another important consideration for US markets.
Whatever is driving the trading patterns, it is no longer the so-called “Trump trade.”
After a flurry of polls showing enthusiasm for Vice President Kamala Harris’ bid for the White House, betting markets now rate her chances of winning higher than those of Republican challenger Donald Trump for the first time.
Key developments that should give more direction to US markets later on Friday:
* July U.S. employment report, June factory orders
* Richmond Federal Reserve President Thomas Barkin speaks; Huw Pill, chief economist of the Bank of England, speaks
* US corporate profits: Exxon Mobil, Chevron, Cboe Global Markets, Coinbase Global, PPL, Linde, Perella Weinberg, Church & Dwight, LyondellBassell Industries etc.
(By Mike Dolan, Editing by Gareth Jones; mike.dolan@thomsonreuters.com)