Opening Bell: U.S. Futures Drop, Yields Jump Ahead Of Powell Verdict; WTI Leaps

Key Events

Futures on the S&P 500, Dow and NASDAQ 100 continued to drop with global stocks while yields on 10-year Treasurys headed to the highest level in a month this morning, as investors steered clear of shares and bonds alike ahead of a key speech by Fed Chairman Jerome Powell later on Wednesday.

The STOXX 600 dropped for a fourth consecutive day, with Spanish shares exposed to Mexico taking a hit from the unexpected resignation of Mexican Finance Minister Carlos Urzua, which sparked concerns around President Andrés Manuel López Obrador's ability to safeguard the country's financial stability.

In the earlier Asian session, regional stocks ended mixed as traders shied away from making a bold guess on the Fed's monetary policy easing, after Friday’s upbeat U.S. job report prompted fears the central bank may backtrack on its dovish tilt.

Australia’s S&P/ASX 200 outperformed, notching 0.36% higher. South Korea’s KOSPI followed with a 0.33% climb, helped by gains in Samsung Electronics (KS:005930) and SK Hynix (KS:000660) on news the two companies intend to reduce NAND chips production due to an oversupply as well as to new exports curbs from Japan. The South Korean benchmark took a beating after Japan announced restrictions last week on exports of semiconductors materials, vital to the neighboring country's tech industry.

The South Korean won weakened—finding resistance by the short-term downtrend line since May—also contributing to equity gains—with foreign investors' IT stocks purchases now standing at 181.7 billion won ($153.8M).

Global Financial Affairs

Treasury yields extended an advance to a fourth session—in a mirror image to global stocks' fourth day slide.

However, in yet another example of market anomalies, yields climbed on Tuesday even as U.S. stocks made a surprise comeback in the final hour of trading, to close in the green. Sudden demand for technology stocks, pulled up by FAANG shares including Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB), offset a selloff in materials and consumer staples.

Technically, 10-year yields are rising on a correction within a downtrend.

Fundamentally, they keep climbing after they sealed their biggest jump since Jan. 3 on Friday, when strong labor data flipped the outlook on interest rates upside down. The new potential for a slower path to lower rates than anticipated, or—in a more extreme scenario—a return to Powell’s original tilt towards higher rates, would be bearish for equities.

As to bonds, it is important to bear in mind that, at present, investors are not necessarily moving overweight on Treasurys as a risk-off defensive move, but are rather trying to position themselves based on a forward-looking rate outlook.

They might be trying to figure out right now whether there is any upside for both bonds and equities if Powell reiterates the central bank's pre-NFP dovishness, given that the market may have already discounted an interest rate cycle. Also, they may monitor minutes from the June monetary policy meeting as a more reliable source to gauge the Fed's future rates moves.

We expect both Powell’s Congress testimony and FOMC minutes to strike a neutral tone that would avert prompting a market meltdown but also avoid reinforcing the forgone conclusion of policy easing.

Meanwhile, a catalyst for another equity rally may come from a separate front: U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke with Chinese Vice Premier Liu He and Commerce Minister Zhong Shan on Tuesday, marking the first high-level contact after Presidents Donald Trump and Xi Jinping agreed to resume trade negotiations last month.

In commodities markets, oil jumped after the American Petroleum Institute reported a large inventory draw, reigniting worries of a supply glut due to the downward effects of a global trade war. Technically, the price is retesting yesterday’s bearish shooting star, which found resistance by the 100 DMA—though it did so after an open that cleared the downtrend line since April 23. However, the real test for an upside reversal is a consolidation above the July 1 high of $60.28.

Up Ahead

• The front-runners for U.K. Prime Minister Theresa May's succession, Boris Johnson and Jeremy Hunt, will go head to head in a televised debate tonight, ahead of the final vote on July 23 .
• Federal Reserve Chairman Jerome Powell testifies before Congress on monetary policy and the state of the U.S. economy on Wednesday and Thursday.
• Fed minutes are due on Wednesday, ECB minutes on Thursday.
• The core consumer price index, a key measure of U.S. inflation coming out on Thursday, is expected to have increased 0.2% in June from the prior month, while the broader CPI is forecast to remain unchanged.
• U.S. producer prices come out on Friday.

Market Moves

Stocks

• The U.K.’s FTSE 100 slipped 0.1%, its fifth consecutive decline.
• Germany’s DAX fell 0.2%, the lowest in more than a week.
• The MSCI Asia Pacific Index advanced less than 0.05%.
• The MSCI Emerging Market Index climbed 0.2%.

Currencies

• The Dollar Index was little changed.
• The euro advanced less than 0.05% to $1.1212.
• The British pound decreased 0.1% to $1.2455, the weakest in more than two years.
• The Japanese yen slid 0.1% to 108.97 per dollar, the weakest in almost six weeks.

Bonds

• The yield on 10-year Treasurys advanced three basis points to 2.09%, hitting the highest in almost four weeks with its fifth straight advance.
• Germany’s 10-year yield gained four basis points to -0.31%, the highest in two weeks on the biggest rise in almost three months.
• Britain’s 10-year yield climbed four basis points to 0.76%, the highest in more than a week.

Commodities

• Gold fell 0.4% to $1,391.86 an ounce, the weakest in more than a week.
• West Texas Intermediate crude advanced 1.7% to $58.79 a barrel, hitting the highest in more than a week.
• Iron ore dropped 1% to $115.60 per metric ton.