(Bloomberg) — US equity-index futures fluctuated and European stocks declined, prolonging the volatility that has gripped global markets for days as the debate around central bank policy decisions continues to fuel investor anxiety.
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Contracts on the S&P 500 and Nasdaq 100 swung between small gains and losses after declines on Wall Street overnight. Europe’s Stoxx 600 index reversed much of Wednesday’s advance, dragged lower by technology and mining shares. MSCI’s Asia-Pacific Index retreated, with Japan’s Topix Index sinking back into the red after an earlier rebound. The dollar weakened against major currencies and Treasury yields dipped.
Markets have been turbulent since tepid economic data last week fueled worries that Federal Reserve policy is risking a deeper slowdown. Thursday’s US jobless claims figures are in sharper focus than ever after last week’s flimsy payrolls numbers. Investors are also bracing for the US and Japanese central banks to potentially move interest rates in opposite directions in the coming months, putting further strain on the yen-funded carry trade.
This is a “consolidation period before any new trend, given how volatile the market has been,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte. “Investors probably will stay sidelined until new data appear. The next couple of days will be crucial — either calm returns, or we see a new bout of volatility emerge.”
It’s still busy on the corporate earnings front too. Warner Bros Discovery Inc. shares plunged in premarket trading after the media firm posted a $9.1 billion charge wrie-down on the value of its traditional TV networks. Monster Beverage Corp. shares slid after the energy-drink maker missed second-quarter profit estimates.
In Europe, Siemens AG shares dropped after the manufacturer said it sees group revenue growth and returns in its key industrial unit at the lower end of forecasts. Zurich Insurance Group AG shares fell after the company reported a rise in losses atit property and casualty arm, driven in part by “higher catastrophe losses and weather events.”
Allianz SE climbed after second-quarter profit rose on stronger earnings from its life-health insurance and asset management businesses. Deliveroo Plc rallied after reporting stronger customer orders and saying earnings for the year will be on the higher end of its forecast. Entain Plc soared after the UK gambling firm got an earnings boost from this summer’s European Football Championship.
The divergence in US and Japanese central bank monetary policy is set to undermine the yen’s role as a cheap source of funding for financial assets.
A Thursday summary of opinions from last week’s Bank of Japan meeting showed that authorities didn’t see last months surprise rate hike as as policy tightening. Deputy Governor Shinichi Uchida yesterday said the BOJ won’t raise interest rates when financial markets are unstable, a reassurance that helped buoy stocks and sent the yen lower.
Three-quarters of the carry trade has been unwound as the recent slump wiped out all positive year-to-date returns, according to strategists at JPMorgan Chase & Co.
The carry strategy — which involves borrowing at low rates to fund purchases in higher-yielding assets elsewhere — has been wobbling for months. Carry trades were pummeled over the past week as global market volatility jumped amid fears of rapid Fed rate cuts and after the Bank of Japan’s larger than expected rate hike.
The unspooling of the carry trade has further room to run, according to Quincy Krosby at LPL Financial. “A softer dollar, driven by the market’s perception that the Fed will soon initiate an easing cycle, should help support a stronger yen — a negative for the trade.”
Hard or Soft?
Meanwhile, debate about the path of the US economy continues. JPMorgan Chase & Co. now sees a 35% chance that the US economy tips into a recession by the end of this year, up from 25% as of the start of last month. The bank’s new calculation for recession risks follows a similar step by Goldman Sachs Group Inc., which now sees a 25% probability of a recession in the next year.
Other investors, however, argue that the data still point to a soft landing.
“I’m not that worried for the US economy. Yes, unemployment is a concern but it’s not dramatic, it’s just a slowdown,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris. “I take the view that this was just a volatility episode like we’ve experienced in the past during the summer.”
The dollar was weaker Thursday, reversing moves from the prior session. Lackluster demand for a 10-year Treasury auction and $31.8 billion in debt offerings from blue-chip companies were headwinds.
The Treasury auction result is “consistent with our view that we’re due for a continued correction higher in yield in the near-term,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “The repricing following what was really just a moderately weak payrolls report seems way overdone.”
In commodities, oil steadied after its biggest advance in a week, with traders still glued to fluctuations in wider markets and tensions in the Middle East.
Key events this week:
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US initial jobless claims, Thursday
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Fed’s Thomas Barkin speaks, Thursday
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China PPI, CPI, Friday
Some of the main moves in markets:
Stocks
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S&P 500 futures were little changed as of 6:47 a.m. New York time
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Nasdaq 100 futures were little changed
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Futures on the Dow Jones Industrial Average fell 0.2%
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The Stoxx Europe 600 fell 0.8%
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The MSCI World Index fell 0.2%
Currencies
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The Bloomberg Dollar Spot Index fell 0.1%
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The euro was little changed at $1.0924
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The British pound was little changed at $1.2687
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The Japanese yen rose 0.3% to 146.29 per dollar
Cryptocurrencies
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Bitcoin rose 4.2% to $57,460.88
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Ether rose 4.1% to $2,446.81
Bonds
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The yield on 10-year Treasuries declined two basis points to 3.92%
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Germany’s 10-year yield declined three basis points to 2.24%
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Britain’s 10-year yield was little changed at 3.94%
Commodities
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West Texas Intermediate crude fell 0.2% to $75.08 a barrel
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Spot gold rose 0.7% to $2,400.60 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Richard Henderson, John Viljoen, Divya Patil and Julien Ponthus.
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