MARKET WRAPS
Watch For:
Manufacturing PMI data for eurozone, Germany, France, Italy, UK; trading update from Ryanair
Opening Call:
European shares look poised to extend gains at Monday's open, extending a global rally as concerns about the economic outlook eased. In Asia, stock benchmarks advanced; Treasurys steadied; the dollar rose slightly; oil futures were little changed; and gold futures fell.
Equities:
Stock futures point to gains for European equities at the start of the week, tracking advances in Asia and last week in the U.S., fueled by investors' optimism that inflation is easing while the U.S. economy continues to hum.
In the first half of the year, the latest leg of the Federal Reserve's aggressive interest-rate increases sometimes shaded trading with fear that tighter financial conditions could stoke a recession. But so far in 2023, markets and the broader economy have dodged a bevy of potential hazards mostly unscathed.
"Coming into the year, markets overestimated the transmission mechanism of monetary policy in different sectors of the economy, not just the labor market but also in more interest-rate sensitive sectors," said Amar Reganti, a fixed-income strategist at Hartford Funds.
More recently, the year's stock rally-at first concentrated among a small handful of huge technology companies-has shown signs of broadening.
Solid stock performance has been a welcome surprise this year, but has also shifted investors' focus to the risk that further Fed rate hikes may yet tamp down economic growth, said Anders Persson, chief investment officer for fixed income at Nuveen.
"In the second half, I think we're concerned that there's going to be more scrutiny from investors around what the recession probabilities look like," Persson said. His team believes that bonds are now offering a better tradeoff between risk and reward than stocks are.
The U.S. stock market will close early Monday ahead of Independence Day and remain closed on Tuesday. Investors will return from the long weekend to a busy few days of economic releases in the U.S.
Read: Recession canceled? U.S. stock market 'pretty frothy' after S&P 500's strongest first half since 2019
Forex:
The dollar strengthened slightly while JPY weakened amid risk-on sentiment spurred by Wall Street's gains Friday. Risky assets continue to climb the "wall of worry," said Chris Weston, head of research at Pepperstone.
U.S. economic data continue to frustrate those who positioned their portfolios for a recession, Weston said. However, Pepperstone stays on foreign-exchange intervention watch in Japan, given the trade-weighted JPY's fall last week, Weston added.
Bonds:
Treasury yields were little changed in Asia, after the Fed's favorite U.S. inflation gauge on Friday included some signs of easing along with stubborn core readings for May.
"There were no fireworks within the Fed's favorite inflation report [Friday]. This marks the first-time headline PCE has dipped below 4% since the pandemic began, with numbers coming in as expected," said George Mateyo, chief investment officer at Key Private Bank.
"[Friday's] data shows economic resilience, and the disinflationary narrative are becoming more evident, but additional proof is needed. Right now, the Fed's job is not clear cut. While they may not be done with rate hikes, perhaps they don't have much more work to do," Mateyo said.
"[This] week's June employment report will be the next major data point to assess and likely the key indicator in determining the Fed's next move."
Energy:
Oil futures extended last week's muted trading pattern early Monday.
The U.S. economy is in the "midst of the most anticipated recession that has yet to come, and yet the oil price reflects such discount," said Manish Raj, managing director at Velandera Energy Partners.
As the U.S. GDP print continues to be robust, oil's monthly gain shows a "toning down [of] the pessimist recession scenario in favor of a possible soft landing," he said.
Looking ahead, "the next six weeks will dictate the next six months" for the oil market, said RBC Capital Markets.
The physical market has been "sloppy all year," but July should, in theory, be tight, RBC said. "Saudi production cuts, the seasonal return of [more than 2 million barrels a day] of refinery capacity, and leading indicators of strong Chinese crude imports should all bode well for a tighter physical market in July."
Metals:
Gold futures fell in Asia, as the yellow metal remained in a rangebound trading pattern.
Analysts expect gold prices to fall further as the Fed is likely to announce more rate hikes, which typically hurts non-yielding assets such as gold.
"Positive economic data and strong labor markets are likely to see the central bank tighten monetary policy further," ANZ said.
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Copper rose amid worries about a possible supply shortage. Latest data from the National Statistics Institute of Chile showed domestic copper production contracted for a second straight month in May in the wake of operational issues, ING said.
The data indicated that copper production in Chile fell 1.1% on month and 14% on year to 413 kilotons in May, the bank noted.
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Chinese iron-ore futures declined, continuing to pull back from a June rally. The steelmaking ore's price is likely facing emerging downward risk, Holly Futures said.
The brokerage said the commodity has been trading at high levels for an extended period, and market worries are rising over tighter potential policy curbs on price speculation in China. But Holly Futures also thinks the demand outlook will likely stay upbeat as steel production in China remains active.
TODAY'S TOP HEADLINES
China Factory Activity Gauge Fell Slightly in June
A private gauge of China's factory activity eased slightly in June but remained in expansionary territory, reflecting the resilience in the manufacturing sector.
The China Caixin manufacturing purchasing managers index was 50.5 for June, slightly lower than the 50.9 reading for May, according to data released Monday by Caixin Media Co. and S&P Global.
U.S., China Start Talking Again, With Global Economic Order at Stake
Washington and Beijing are talking again. The test now is whether they can settle into a new normal that avoids upending the global economy-or fall back into a cycle of acrimony and retaliation.
Treasury Secretary Janet Yellen heads to China on Thursday through Sunday to meet with senior government officials, her department said Sunday. The trip comes as tensions over trade, technology and Taiwan prompt both countries to reconsider the deep commercial and investment ties that have defined the relationship for decades. Yellen is hoping to preserve many of those links, while Chinese officials want to reverse a domestic slowdown by showing they remain open for business from the West.
Labor Market Headfake? Key Report Could Be Overestimating Job Growth
On its face, the economy looks strong. Output grew 2% annualized in the first quarter, and employers have boosted payrolls by 1.6 million so far this year, about 2.5% annualized-nearly twice the average increase in 2019.
But some economists say the job market might actually be weaker, and the economy closer to recession, than those figures imply. The reason: quirks in how the payroll data are calculated.
Investors Spurn Dividend-Paying Stocks as AI Booms
Shares of companies boasting chunky dividends were among the stock market's most popular trades last year. But the strategy of giving them preference has since fizzled out.
During 2022's bear market, dividend-paying stocks were embraced by investors looking for a steady stream of cash. Those investors now see greater promise in growth-focused tech stocks that don't typically pay dividends while betting a boom in artificial intelligence will deliver bigger profits down the road.
Recent Deals Fail to Spark Lackluster IPO Market
Shaky receptions to a trio of initial public offerings last week show that the new-issue market is still in recovery mode.
Thrift-store operator Savers Value Village priced its IPO above expectations, and its stock rose 27% on its first day of trading Thursday. Two other offerings didn't go as well, with reinsurer Fidelis Insurance Holdings and Kodiak Gas Services both pricing their offerings below their targeted ranges and experiencing drops on their first day of trading.
Market Bets on Cheaper Oil, Undermining Saudi Hopes for a Price Rebound
The oil market has sent a warning to Saudi Arabia and everyone else betting that prices are poised for a rebound: Don't count on it.
The petroleum-rich kingdom throttled back output starting this weekend, part of a high-stakes gamble unveiled last month to crimp supply. Saudi officials think that demand will outstrip production later this year, teeing up a rally that will restore a gusher of profits to oil producers. Analysts at the International Energy Agency and Wall Street banks agree that demand could return in the second half of 2023.
Putin's Corporate Takeover of Wagner Has Begun
In the wake of a mutiny that almost reached Moscow, Vladimir Putin is facing a new test-managing one of the most complex corporate takeovers in history.
Inside the Wagner Group's sealed-off glass tower headquarters in St. Petersburg, agents from the Federal Security Services, or FSB, have been scouring the offices for evidence against Yevgeny Prigozhin, the Wagner chief who led last month's insurrection. New Kremlin-backed military contractors are launching recruiting drives on Russian social-media networks with recruitment ads to poach some of Wagner's 30,000 mercenaries, hackers and moneymen, whom the longtime ally of President Putin deployed to Ukraine, the Middle East and Africa.
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07-03-23 0016ET
