U.S. stocks are seeing pressure in early action following the long holiday weekend, with global recession concerns weighing on sentiment. The U.S. dollar is rallying to 20-year highs amid the uneasiness in the markets to exacerbate the situation, while Treasuries are gaining ground to apply some downside pressure on yields and flatten the curve. In equity news, Tesla reported softer-than-expected Q2 deliveries, though Exxon Mobil offered an upbeat earnings forecast for Q2. The economic calendar is set to deliver a read on factory orders after the opening bell. Crude oil prices are dipping, and gold is also trading lower. Asia finished mixed despite some upbeat Chinese economic data, and Europe is dropping broadly as the euro and British pound fall versus the U.S. dollar.
As of 9:00 a.m. ET, the September S&P 500 Index future is 50 points below fair value, the DJIA future is 426 points below fair value, and the Nasdaq Index future is 172 points south of fair value. WTI crude oil is decreasing $1.36 to $107.07 per barrel and Brent crude oil is declining $1.67 to $111.83 per barrel. The gold spot price is dipping $2.50 to $1,799.00 per ounce. Elsewhere, the Dollar Index is rallying 1.2% to 106.34.
Tesla Inc. (TSLA $682) reported that it delivered 254,695 vehicles in Q2, below the 256,520 FactSet estimate, with the disruption from the COVID-induced lockdowns in China having an impact.
Exxon Mobil Corporation (XOM $88) announced late-Friday that its Q2 earnings could reach $18.0 billion, a solid gain quarter-over-quarter, with the company benefitting from higher oil and natural gas prices, as well as increased refining margins.
The equity markets look set to remain choppy in the first full week of Q3, as they wrestle with an aggressive Fed, which has signaled that restoring price stability is its number one goal and conceding that the path to a soft landing has become "more challenging."
Amid this market backdrop, Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Panic Is Not a Strategy—Nor Is Greed, how disciplined investing helps investors navigate through volatile environments.
Treasury yield curve flattens ahead of factory orders report
Treasuries are rising with yields choppy as the markets grapple with the Fed's aggressive tightening of monetary policy and rising concerns regarding a recession.
Schwab's Chief Fixed Income Strategist Kathy Jones notes in our latest Schwab Market Perspective: Price Shock, that with no relief on inflation in sight, central banks around the world are ratcheting up their plans to hike interest rates. The result has been a rapid resetting of expectations about the degree of monetary policy tightening it will take to bring inflation lower, and a sharp selloff in the bond market and risk assets.
Kathy addresses the question of is it enough? She says it's too soon to know, but the market is implying it may be too much. Treasury yields typically converge at the peak fed funds rate during an interest rate hiking cycle. If the implied peak in the fed funds rate proves to be accurate, then intermediate- to long-term yields still have room to rise moderately. However, the yield spread between 10-year and two-year Treasuries recently inverted (with two-year yields above 10-year yields)—historically an early warning signal of recession. It suggests the market thinks the Fed may risk hiking rates too high. You can follow Kathy on Twitter: @KathyJones.
The yield on the 2-year Treasury note is down 3 basis points (bps) to 2.80%, the yield on the 10-year note is decreasing 7 bps to 2.82%, and the 30-year bond is declining 4 bps to 3.07%.
Later this morning, the economic calendar will bring factory orders for May, with the headline figure expected to increase by 0.5% month-over-month (m/m) after April's 0.3% rise, while ex-transportation, orders are expected to be flat m/m after the prior month's 0.3% increase.
Europe seeing solid pressure as recession concerns continue
European equities are falling broadly in afternoon trading, with the markets continuing to contend with headwinds in terms of tightening monetary policies on both sides of the pond that has caused global recession concerns to flare up. Surging inflation pressures have forced monetary policies to tighten, and the Bank of England said today that the global economic outlook has deteriorated materially due to the rise in commodity prices that have been exacerbated by the ongoing war in Ukraine. Amid this backdrop, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Recession: The Risk Is in the Reversal, where he discusses how investors often notice the overall direction of markets and how missed changes in asset classes under the surface could see a shark attack take a big bite out of unprepared portfolios.
Economic data showed Eurozone services sector growth was revised higher for June but slowed from May, while U.K. services sector activity was revised slightly lower but was a modest acceleration from May. The U.S. dollar is surging amid a flight to safety amid the global recession concerns, amplifying the uneasiness in the markets, with the euro and British pound falling. Bond yields across Europe and in the U.K. are dropping.
The U.K. FTSE 100 Index is down 1.9%, France's CAC-40 Index is dropping 2.5%, Germany's DAX Index is falling 2.4%, Italy's FTSE MIB Index is decreasing 2.0%, Spain's IBEX 35 Index is declining 1.6%, and Switzerland's Swiss Market Index is trading 1.5% lower.
Asia mixed following data and Australia's rate hike
Stocks in Asia finished mixed even as China reported a sharp jump in services sector output for June with the Caixin Services PMI increasing to 54.5 from May's 41.4 reading, with a level above 50 denoting expansion. The markets continued to be skittish as several global central banks tighten monetary policies to try to cool off festering inflation pressures, with the Reserve Bank of Australia hiking its benchmark interest rate by 50 bps, as expected. However, China and Japan have maintained accommodative policies, with the former adding more stimulus measures to try to meet its economic growth goals, and the latter holding onto its ultra-loose stance. The Chinese economic data comes as the country's economy has been impacted by the COVID-induced lockdowns and Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output.
Japan's Nikkei 225 Index was one of the best performers, rising 1.0%, with the yen weakening versus the U.S. dollar after a decisive drop seen in the past few months to lows not seen in 24 years as the Bank of Japan abstains from tightening monetary policy. China's Shanghai Composite Index finished little changed, and the Hong Kong Hang Seng Index ticked 0.1% higher. Australia's S&P/ASX 200 Index advanced 0.3%, India's S&P BSE Sensex 30 Index dipped 0.2%, and South Korea's Kospi Index led the way, trading 1.8% to the upside.
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