A look at the day ahead at Vidya Ranganathan’s European and Global markets
It’s all happening at once again in the markets. A powerful rally has lifted Japan’s Nikkei and Asian stock markets, and European and US stock futures indicate they will follow suit.
Surprisingly, given the confluence of factors driving the sell-off – Japan’s interest rate hike, the collapse of yen-funded global trade, US job weakness and tensions in the Middle East – there was only a reassuring message from central bank officials is needed to turn things around.
As Europe wakes up, the Nikkei is up 9%, nearly erasing Monday’s 12.4% decline that pushed it into bear market territory.
Wall Street is looking steadier, with S&P 500 futures rebounding 1.5%. The three-day rout cost the S&P 500 8% of its value.
Europe’s STOXX 600 index looks set to rise after posting its steepest three-day decline since June 2022 on Monday, closing below the key 500-point mark for a second day.
Skeptics are quick to remind us that Japan is not the proverbial canary, as the country has always bounced back quickly from a sell-off. Given ongoing concerns about inflated tech revenues and the view that the Fed has kept rates too high for too long, the carnage may not be over yet.
Add to this the still large surplus of yen-funded investments worldwide, not only in US equities, but also in high-yield emerging markets such as the Indian rupee, the Mexican peso and the South African rand.
Currencies are reversing some of Monday’s sharp moves, with the dollar rising to 145.50 yen from 141.675 and also rising against the safe-haven Swiss franc.
As the fear gauges indicate, junk bond spreads have blown out and are something to keep an eye on. Another recession indicator – the gap between two-year and 10-year government bonds – turned positive on Monday for the first time since July 2022.
The Nikkei volatility index is still at double last week’s levels. The STOXX volatility index ended Monday not far from its highest level since March 2022, while S&P volatility is also still high.
As fears subside, German two-year government bond yields should recover further. The lowest level since March 2023 was reached on Monday.
Key developments that could impact the markets on Tuesday:
* Economic data: German industrial orders for June; UK S&Pglobal Construction PMI for July; Eurozone retail sales in June; Federal Reserve Bank of New York Q2 Household Debt and Credit Report; US trading data * European gains: abrdn PLC, Adecco Group AG, Bayer AG, Galenica AG, InterContinental Hotels Group PLC * Debt auctions: Reopening of Germany’s five-year sovereign debt auction; reopening of the auction of British government bonds with a term of 19 years
(By Vidya Ranganathan; Editing by Christopher Cushing)