Fed composes fraught markets
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FED COMPOSES FRAUGHT MARKETS
A look at the day ahead in European and global markets from Vidya Ranganathan
It's happening all-at-once again in markets. A powerful rally has lifted Japan's Nikkei and Asian stock markets, and European and U.S. stock futures indicate they will follow too.
Given the confluence of factors that drove the selloff - Japan's rate hike, an unwind of yen-funded global trades, weakness in U.S. jobs and Middle East tensions - strangely, all it took was a soothing message from central bank officials to turn things around.
As Europe wakes up, the Nikkei .N225 is up 9%, nearly erasing the 12.4% decline on Monday that pushed it into bear market territory.
Wall Street is looking steadier, with S&P 500 futures ESc1 rebounding 1.5%. The three-day rout cost the S&P 500 .SPX 8% of its value.
The Europe-wide STOXX 600 index .STOXX, STXEc1 seems set to rise, after it logged its steepest three-day decline since June 2022 on Monday, closing below the key 500-point mark for a second day.
Sceptics are quick to remind us that Japan is not the proverbial canary, as it has always come back fast from a sell-off. Given lingering concerns over inflated tech earnings and the view the Fed may have held rates too high for too long, the carnage may not be over.
Add to that the still heavy overhang of yen-funded investments globally, not just in U.S. stocks but also in emerging market high-yielders such as India's rupee INR=, Mexico's peso MXP= and South Africa's rand ZAR=.
Currencies are reversing some of Monday's sharp moves, with the dollar edging up to 145.50 yen JPY=EBS from as deep as 141.675 and up against the safe-haven Swiss franc CHF=EBS too.
As fear gauges go, junk bond spreads have blown out and are ones to watch. Another recession indicator - the gap between two-year and 10-year Treasury notes US2US10=TWEB - turned positive for the first time since July 2022 on Monday.
The Nikkei volatility index .JNIV is still double levels it was at last week. The STOXX volatility index .V2TX ended Monday not too far from its highest level since March 2022, while S&P volatility .VIX is also still elevated.
As fear subsides, Germany's safe-haven two-year bond yield DE2YT=RR should recover further. It hit its lowest level since March 2023 on Monday.
Key developments that could influence markets on Tuesday:
Economic data: Germany industrial orders for June; UK S&P global construction PMI for July; euro zone retail sales for June; Federal Reserve Bank of New York Q2 household debt and credit report; U.S. trade data
Europe earnings: abrdn PLC ABDN.L, Adecco Group AG ADEN.S, Bayer AG BAYGn.DE, Galenica AG GALE.S, InterContinental Hotels Group PLC IHG.L
Debt auctions: Reopening of German five-year government debt auction; reopening of UK 19-year government debt auction
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Investors run for safety Investors run for safety https://reut.rs/4fLfiUD
Wall Street's 'fear index' sees biggest one-day rise in history https://reut.rs/3Yy6zP7
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