Stocks are cautiously higher Tuesday, but rising bond yields belie concerns over global growth prospects as the surging dollar adds to the ongoing energy market malaise.
U.S. equity futures nudged higher Tuesday, following on from the worst single-day decline on Wall Street in two months, as investors continue to favor defensive stocks and risk-free assets amid increasing concerns for a global recession.
With economic activity slowing in Europe as the cost of living crisis escalates, and China struggling to rekindle growth amid its desire to completely erase Covid infections from the world’s biggest economy, investors are starting to worry that a second half recovery is likely to remain elusive.
PMI data from Europe underscored that worry, with a key reading of economic activity in August falling to 49.2 points and firmly below the 50-point mark that separates growth from contraction for the second consecutive month.
It was a similar story in Britain, where warnings of hyper-inflation heading into the winter months were compounded by a slump in August activity that threatens recession in the world’s fifth-largest economy.
The readings, as well as surging energy prices linked to Russia’s ongoing war in Ukraine have pushed investors into the safe-haven U.S. dollar, lifting the greenback to fresh 20-year highs against the euro and a basket of the dollar’s global currency peers.
The dollar index, which tracks the greenback against a basket of six global currency peers, traded at a two-decade high of 109.064 in early New York trading as the euro slipped below parity with the buck for only the second time since 2002.
The dollar strength looks to add another layer of cost onto struggling European and Asian economies heading into the cooler months as the cost of purchasing energy supplies — which are priced in U.S. dollars — continues to escalate.
At the same time, the greenback’s 2022 surge has added a significant headwind to U.S. corporate earnings growth, as the repatriation of overseas profits — crucial for the tech sector — gets more expensive. Morgan Stanley analysts, in fact, recently calculated that a percentage point gain for the greenback shaves around 0.5 percentage points from S&P 500 earnings.
Curiously, the relative outperformance of the U.S. economy has investors at home more concerned over the pace of inflation, and the Fed’s near-term response, than the chances of and 2022 recession.
Benchmark 10-year Treasury note yields hit a five-week high of 3.04% yesterday, before easing to 3.004% in overnight trading, as investors continue to tinker with bets on a 75 basis point rate hike from the Fed next month in Washington.
The CME Group’s FedWatch tool pegs that chance at 54.5%, up from around 49.5% yesterday, but much will be made clear when Fed Chairman Jerome Powell speaks at the Jackson Hole symposium later this week.
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In the meantime, however, the market’s key volatility gauge, the VIX index, is rising sharply and trading at a multi-week high of 23.6 points heading into the Tuesday session.
In overseas markets, Europe’s Stoxx 600 was marked 0.32% lower in mid-day Frankfurt trading, with investors betting the grim reading on economic activity may tame some of the European Central Bank’s recent hawkish tone. Overnight in Asia, the region-wide MSCI fell 0.63% heading into the close of trading following last night’s sell-off on Wall Street.
Here at home, futures tied to the S&P 500 are indicating a 3 point opening bell bump while those liked to the Dow Jones Industrial Average are priced for a 20 point gain. Futures linked to the tech-focused Nasdaq are indicating an 18 point advance.
Zoom Video Communications (ZM) – Get Zoom Video Communications Inc. Report shares moved sharply lower in pre-market trading after the video conferencing specialists cut their full-year sales and profit guidance following softer-than-expected second quarter sales.
Palo Alto Networks (PANW) – Get Palo Alto Networks Inc. Report shares surged in pre-market trading after the cloud-focused cybersecurity group’s stronger-than-expected fourth quarter earnings and a robust near-term outlook on security spending.
Macy’s (M) – Get Macy’s, Inc. Report shares were also higher after the retailer posted better-than-expected second quarter earnings while trimming its full-year profit forecast amid the extended impact of inflation on domestic discretionary spending.