Tuesday's euphoric market mood has U-turned into sheer despair with most of yesterday's gains gone overnight as attention turns to the coming US recession (now made official by Bill "The Fed Should Crush Donald Trump" Dudley who just published an Op-Ed "The US Economy Is Headed for a Hard Landing") and as traders await Jerome Powell before Senate testimony. S&P 500 futures declined 1.2%, down 45 points to 3,722 while Nasdaq 100 futures were down 1.5% by 715 a.m. in New York, indicating more declines for heavyweight technology stocks, which have already been hammered by rising rates.  Treasury yields and oil both slumped while the broader commodity sector tipped back toward pre-war levels, as traders increasingly price in a recession.

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Optimism evaporated that policy makers can achieve a soft landing as they navigate a course of aggressive monetary tightening to tame inflation. Fed Chair Jerome Powell is expected to reinforce the commitment to fighting price pressures when he speaks in front of US lawmakers Wednesday even as a growing number of banks warn that the Fed chair is pushing Biden's economy into a recession. Previewing Powell's appearance before the Senate Banking Committee as part of the Fed’s semiannual Monetary Policy Report, DB economists write that they expect him to reiterate the same themes he gave at his post-meeting press conference last week, where he signaled that they’d likely be deciding between 50bps and 75bps at the July meeting. Fed funds futures are currently implying that another 75bps move is more likely, with +71.8bps currently priced in, but don’t forget that there’s still plenty yet to happen ahead of that meeting in just over a month, including the subsequent CPI release and jobs report for June, and as we found out at the last meeting, it’s not implausible that unexpected data releases throw the previous guidance off course.

“Overall, we have a very cautious outlook for equity markets and we would be sellers of all rallies,” said Marija Veitmane, senior strategist at State Street Global Markets. “We continue to see strong inflation and central banks determined to crush it, even if the price for that is economic slowdown.”

Meanwhile, fears about the economy spread to commodities, putting oil in line for a monthly loss: “Markets are flip-flopping between recession fears and inflation fears,” UBS Wealth Mgmt chief economist Paul Donovan said in a note. “Today it is recession fears.”

In premarket trading, major US technology and internet stocks were lower in premarket trading, poised to snap the two-session rising streak amid mounting concerns of a global recession. Stocks related to cryptocurrencies fell as the price of Bitcoin briefly slipped below $20,000 after rebounding strongly on Tuesday. Alibaba and other US-listed Chinese stocks pare losses in premarket trading after a Bloomberg News report that Jack Ma’s Ant may apply to become a financial holding company as soon as this month. Other notable premarket movers:

• La-Z-Boy’s (LZB US) shares jumped as much as 8.9% with KeyBanc saying that the furniture maker’s sales and EPS remain strong. The company reported adjusted earnings per share for the fourth quarter that beat the average analyst estimate.
• Precision BioSciences (DTIL US) shares jump as much as 40% in US premarket trading amid a collaboration and license agreement with Novartis effective June 15.
• Ormat Technologies (ORA US) shares fell 4.6% in postmarket trading on Tuesday after the company said it will offer $350 million aggregate principal amount of Green Convertible Senior Notes due 2027 in a private offering to institutional buyers.
• Equity Residential (EQR US) stock may be in focus as it was raised to outperform from sector perform at RBC on the view that the apartment owner is well placed to weather a downturn.
• Keep an eye on Cigna (CI US) shares as Morgan Stanley upgraded the stock to overweight from equal-weight. The brokerage also downgraded Anthem to equal-weight from overweight.
• Watch Scotts Miracle-Gro (SMG US) shares as they were downgraded to equal-weight from overweight at Wells Fargo, which said there’s “just not much to get excited about” for the stock in the second half of the year.

US equities have been roiled in the past few months amid worries that aggressive monetary tightening by the Fed would spark an economic recession. The S&P 500 is in a bear market after a rout that erased almost $2 trillion from the benchmark last week, and is tracking declines of nearly 9% in June alone. Fed Bank of Richmond President Thomas Barkin said the central bank should raise rates as fast as it can without causing undue harm to financial markets or the economy. 

Elsewhere, Joe Biden plans call on Congress to enact a gasoline tax holiday to cool soaring pump prices and alleviate the pressure on consumers. The move is expected to do nothing at all for gas prices.

In Europe, the Stoxx 600 Index was down 1.6% after rallying for three days in a row; the Euro Stoxx 50 dropped as much as 2.3%, Italy’s FTSE MIB underperforms.  The FTSE 100 outperformed as the pound weakened after UK inflation rose to a fresh four-decade high in May after broad increases in the cost of everything from fuel and electricity to food and beverages. Risk assets slumped with most European cash equity indexes erasing the week’s gains as recession fears, hot inflation data and energy concerns weigh on sentiment. Miners, energy and autos lead broad losses across all Stoxx 600 sectors. Here are the biggest European movers:

• European mining stocks sink as a selloff in iron ore worsened amid signs of weakening global demand, while steel shares were pressured by downgrades from JPMorgan. Rio Tinto dropped as much as 3.6%, Glencore -6.1%, Salzgitter -15%, ArcelorMittal -8.2%, Voestalpine -11%
• Umicore shares plunged as much as 17% after the materials technology company announced plans to spend EU5b by 2026, “meaningfully” higher capital expenditure than Jefferies had expected.
• Saipem shares tumble as much as 19% after the company set terms for a EU2b capital hike, offering about 2 billion new shares at EU1.013. The subscription period will run from June 27 through July 11, with the final results to be announced on July 15, according to terms seen by Bloomberg.
• Samhallsbyggnadsbolaget i Norden and Swedish real estate peers added to months of declines as European equities resumed their selloff, with fresh concerns about the possibility of recession. SBB falls as much as 13%, Sagax -6%, Fabege -4%, Castellum -3.7%
• Kone shares drop as much as 7.5% after the Finnish elevator manufacturer was downgraded at Goldman Sachs and Berenberg, which both cited headwinds from China and the impact of slowing economic growth.
• Energy stocks are among the worst-performing sectors as oil slumps amid concerns about the US economy, while the Biden administration is set to step up its fight against higher gasoline prices. Shell declines as much as 4.6%, TotalEnergies -4.6%, Repsol -5.1%
• Accor shares drop as much as 3.8% after the hospitality company said it entered into exclusive negotiations to sell a 10.8% stake in Ennismore for EU185m.
• JD Sports shares gain as much as 5.2%. The company reported FY results that are in line overall with consensus expectations, and the market should be reassured that the sneaker seller’s recent performance is still on track, according to RBC.
• NatWest shares gain as much as 4% after the stock was raised to buy from hold at Jefferies, which said its re-rating potential is now more obvious. The UK government also extended its plan to sell more of its stake in the group by a year.

Earlier in the session, Asian stocks resumed their slide Wednesday as renewed fears of a crackdown hit Chinese technology shares. The MSCI Asia Pacific Index slipped as much as 1.7%, cutting short a rebound in the previous session. TSMC, Alibaba and Tencent were the biggest drags, with a gauge of Chinese tech firms in Hong Kong falling more than 4%. Shares of online drug sellers slumped on a report that Beijing may ban third-party platforms from offering medicines over the internet.

Elsewhere, a sub-gauge on the region’s information tech companies headed for the lowest close since September 2020 amid growing worries over a global recession. South Korea’s benchmark slumped 2.7% as the tech-heavy market continued to face selling pressure amid foreign outflows. The Asian stock benchmark is hovering near a two-year low as the prospect of a slowdown in the US driven by aggressive interest-rate hikes unsettle investors. Tesla Inc. Chief Executive Officer Elon Musk said Tuesday that a recession in the US looks likely in the near future, adding to the growing drumbeat of warnings. “Markets are still looking for the catalyst for a more sustained rebound as headwinds surrounding tightening financial conditions,” said Jun Rong Yeap, a market strategist at IG Asia Pte, adding that gains from any technical rebound may be capped by some wait-and-see sentiments. After falling more than 18% this year, a technical indicator is suggesting the MSCI’s Asian benchmark has reached oversold levels and may be poised for a reprieve. Investors will now shift their focus to Federal Reserve Chair Jerome Powell’s testimony on monetary policy to Congress later Wednesday, which may provide further clues on inflation and rates outlook. 

Indian markets snapped a two-day advance as growing concerns of slowing global growth potentially leading to a recession dragged down world equity markets.  The S&P BSE Sensex dropped 1.4% to 51,822.53 in Mumbai, while NSE Nifty 50 Index fell by an equal measure. Reliance Industries, a major drag on both the key gauges, declined 3%, its biggest plunge since May 9.  All of the 19 sectoral indexes compiled by BSE Ltd. slipped, led by a measure of metal companies. All but four of 30 companies in the Sensex declined.  All major stock markets, including Asia, traded lower as investors fear that aggressive monetary tightening moves by global central banks could lead to an economic downturn. “Traders are advised to keep a hedge position, while investors should focus on stock selection,” according to Religare Broking analyst Ajit Mishra. The monsoon’s progress, a correction in oil prices and currency movements will be important factors to watch for the Indian stock market’s outlook, he said. 

In rates, havens were re underpinned with major yield curves bull-steepening. A Treasury rally was led by the front-end of the curve, following wider gains across gilts after UK May inflation matches median estimates, trimming expectations for more aggressive BOE rate hikes. US yields richer by 10bp-6bp across the curve with front-end-led advance steepening 2s10s by ~2bp, 5s30s by ~4bp; 10-year yields around 3.20%, richer by nearly 8bp on the day, while gilts outperform by additional 6bp in the sector. Short-dated gilts outperform, richening ~13bps in 2s after another hot inflation print. Gilts lead bunds, Treasuries higher, with traders pulling back from wagers on three 50 basis-points hikes by year end after UK inflation accelerated in line with estimates in May. MPC-dated OIS rates pare back some of the more aggressive pricing seen in recent days. German 10y yields fall 10bps to near 1.67%, Treasury 10-year yield eases ~6bps to near 3.22% ahead of Fed Chair Powell’s semi-annual testimony on monetary policy. Peripheral spreads widen, with long-dated BTPs underperforming. 

In FX, early in the session we saw a push toward the dollar, which subsequently was partly faded, but in any case it snapped two days of losses to rise by around 0.2% and the greenback advanced versus all of its Group-of-10 peers apart from the yen. JPY and CHF were the strongest performers in G-10 FX, NZD and AUD underperform. Antipodean currencies and the Norwegian krone were the worst performers and each of them fell by more than 1% against the greenback. The euro traded near $1.05 after dropping to a day low of 1.0469 in early European trading. The yen rebounded after making a fresh multi-decade low versus the greenback. The yen not only held the lead in short-term realized volatility, but traders also bet that it won’t lose its crown any time soon. Demand for low-delta exposure in the Japanese currency is by far the highest among the Group-of-10 peers, with Antipodean and Scandinavian currencies trailing.

In commodities, West Texas Intermediate tumbled to $104 a barrel, with prices falling alongside other raw materials including copper. WTI sunk as much as 5.7% before recovering back above $104. Base metals trade poorly; LME tin falls 4.9%, underperforming peers. Spot gold falls roughly $8 to trade near $1,825/oz. Concerns about a broad economic slowdown are eclipsing the fallout from the war in Ukraine and signs of still-tight supply. 

Bitcoin is pressured and briefly dipped again below the USD 20k mark, to a trough of USD 19.95k. Though, it remains someway from last week's USD 17.5k low.

Looking at the day ahead now, and the main highlight will be Fed Chair Powell’s testimony before the Senate Banking Committee. Other central bank speakers include the Fed’s Barkin, Evans and Harker, as well as BoE Deputy Governor Cunliffe. Otherwise, data releases include UK and Canadian CPI for May, as well as the European Commission’s preliminary consumer confidence indicator for the Euro Area in June.
 

Market Snapshot

• S&P 500 futures down 1.7% to 3,702.50
• STOXX Europe 600 down 1.6% to 401.86
• MXAP down 1.7% to 156.08
• MXAPJ down 2.3% to 517.35
• Nikkei down 0.4% to 26,149.55
• Topix down 0.2% to 1,852.65
• Hang Seng Index down 2.6% to 21,008.34
• Shanghai Composite down 1.2% to 3,267.20
• Sensex down 1.2% to 51,918.86
• Australia S&P/ASX 200 down 0.2% to 6,508.54
• Kospi down 2.7% to 2,342.81
• German 10Y yield little changed at 1.69%
• Euro down 0.2% to $1.0509
• Brent Futures down 3.8% to $110.24/bbl
• Brent Futures down 3.9% to $110.18/bbl
• Gold spot down 0.4% to $1,825.23
• U.S. Dollar Index up 0.23% to 104.67
   

Top Overnight News from Bloomberg

A more detailed summary of Global Markets courtesy of Newsquawk

Asia-Pac stocks were subdued after the risk-on mood from Wall Street waned overnight amid pressure in commodities and with global markets lacking any fresh macro catalysts. ASX 200 pared early gains as resilience in energy and defensives was offset by losses in tech and financials. Nikkei 225 was indecisive after the Japanese currency bounced off its weakest level since 1998. Hang Seng and Shanghai Comp. were subdued amid ongoing COVID woes as Macau closed most public services through to Friday and with the Chinese city of Zhuhai also shutting entertainment venues in some areas, while there was some encouragement for the property sector with Chinese property developers planning to meet with banks regarding relief measures in July.

Top Asian News

• Chinese property developers are planning to meet with banks regarding relief measures in July, according to Shanghai Securities News.
• Chinese Premier Li Keqiang’s struggle to revive China’s economy under the zero-Covid policy championed by President Xi Jinping has spurred rumours of rifts between the country’s top two leaders and considerable speculation over succession plans, according to SGH Macro Advisors.
• BoJ April meeting minutes stated board members agreed on no change in the BoJ's stance of taking additional easing steps as needed and a member noted that rising raw material costs would hurt the economy so they must keep powerful monetary easing. Furthermore, it was stated that Japan's monetary policy challenge is to address too-low inflation, unlike in western economies, while a member said it is inappropriate to change the monetary policy stance as Russia's invasion of Ukraine added to the downside risks for Japan's economy.

European bourses are subdued, Euro Stoxx 50 -1.9%, as Tuesday's positivity waned in the APAC session as commodities slipped in relatively limited newsflow. Unsurprisingly given this dynamic, the Basic Resources and Energy sectors are the European laggards, amid broader cyclical pressure. Stateside, futures are in-fitting with the above action, ES -1.4%, where participants are awaiting the first session of testimony from Chair Powell, newsquawk primer available here. Ant Group is reportedly to apply, as soon as this month, for a key financial license, via Bloomberg citing sources. Toyota (7203 JT) expects global vehicle production in July to be around 800k. China's CPCA says domestic car rales rose 39% in the week to June 13th Y/Y, +55% M/M, via Reuters.

Top European News

• UK PM Johnson is of the view that the government must win its battle with the rail unions and is prepared for the stand-off to last months, according to The Times.
• Italy is reportedly preparing EUR 3bln of aid to curb energy bills, according to la Repubblica
• Italian Foreign Minister Di Maio quit the 5-Star Movement (5SM) to set up a new group, according to Reuters.

FX

• Dollar regains bullish momentum on risk dynamics ahead of Fed testimony; DXY on a firmer footing, but capped ahead of 105.000 within 104.950-430 range.
• Yen also in demand as a safe haven as sentiment sours, USD/JPY reverses course from around 136.71 to sub-136.00 at one stage.
• Kiwi and Aussie undermined by risk-off mood, with latter also hampered by heavy decline in iron ore; NZD/USD hovers above 0.6250 and well below 1bln option expiries at 0.6300, AUD/USD capped around 0.6900.
• Loonie, Nokkie and Peso ruffled by collapse in WTI and Brent crude, USD/CAD rebounds towards 1.3000, EUR/NOK tests 10.5000 and USD/MXN straddles 20.1800.
• Euro holds around 1.0500 and 10 DMA close by amidst hawkish ECB vibe, Pound pivots 1.2200 after somewhat mixed UK inflation data.

Central Banks

• ECB's de Guindos says he expects inflation to ease after the summer but stay near current levels in the coming months; Governing Council is yet to discuss details of the anti-fragmentation tool. New tool should be different from the prior OMT tool as the circumstances are different, will also differ from APP and PEPP.
• Norwegian Gov't names Paal Longva as Deputy Norges Bank chief.

Fixed Income

• Bonds bounce firmly as risk sentiment turns bearish again on global inflation and recession concerns.
• Bunds up to 144.87 before fading after a reasonable 2038 German auction.
• Gilts top out at 111.89 and largely ignored mixed UK inflation metrics vs consensus.
• 10 year T-note hovers closer to 116-19 overnight peak than 115-28+ trough pre-Fed chair Powell and 20 year supply plus other Fed speakers.

Commodities

• WTI and Brent are, alongside broader commodities, pressured with fresh catalysts somewhat thin and focused on known themes.
• Currently, they are lower by over 4% on the session and ahead of Biden's announcement on gas prices; though, if implemented, such measures could serve to push demand and ultimately prices higher.
• US President Biden will deliver remarks on gas prices at around 14:00EDT/19:00BST on Wednesday and will call on Congress to implement a suspension to the federal fuel tax.
• Subsequently, multiple Democratic sources said that the effort to to suspend the federal gas tax for three months stands almost no chance of passing, according to Politico.
• IEA warns Europe to prepare for a complete shutdown of Russian gas exports and that governments should keep ageing nuclear plants open and take other contingency measures, according to FT.
• World Steel says global steel output -3.5% Y/Y in May at 162.7mln tonnes (prev. -5.1% Y/Y in April); China crude steel output -3.5% Y/Y to 96.6mln tonnes (prev. -5.2% Y/Y in April).
• Spot gold is softer in-line with other metals, though the magnitude is more contained given its haven allure; broader action that sees LME Copper clipped despite the expected commencement of Chile strike action.

US Event Calendar

• 07:00: June MBA Mortgage Applications, prior 6.6%

Central Bank Speakers

• 09:00: Fed’s Barkin Speaks to West Virginia Chamber of Commerce
• 09:30: Powell Delivers Semi-Annual Testimony Before Senate Panel
• 12:00: Fed’s Barkin Speaks to the Federal City Council
• 12:50: Fed’s Evans Discusses Economic Outlook
• 13:30: Fed’s Harker and Barkin Discuss the Economic Outlook

DB's Jim Reid concludes the overnight wrap

Whilst the question of whether we’re about to face a recession is still dominating markets, risk assets posted a sharp rebound yesterday as the US got back from holiday. In fact by the close of trade, the S&P 500 (+2.45%) had put in its strongest daily performance in nearly a month, with every sector higher on the day and energy (+5.13%) doing most of the legwork. Even though the chart book showed that before yesterday the S&P was on course for the worst H1 since 1932 we did show in the CoTD (link here) that the top 5 H1 declines over the last 90 years were all followed by strong H2 performance. Before you think it's safe to come out from behind the sofa, S&P futures are around -1% lower this morning as the recession narrative makes a bit of a comeback. European futures are indicating that yesterday's gains (STOXX 600 +0.35%) will be eradicated which could end a three day winning streak. Oil prices are lower overnight with Brent Crude futures weakening -3.23% to $110.95/bbl while WTI futures are down -4.69% at $105.46/bbl amid a push by US President Joe Biden to bring down soaring fuel costs by calling for a temporary suspension of the 18.4-cents a gallon federal tax on gasoline. The demand destruction narrative is making a comeback in Asia as well.

Today's big event is Fed Chair Powell's appearance before the Senate Banking Committee as part of the Fed’s semiannual Monetary Policy Report that they deliver to Congress. According to our US economists, they expect him to reiterate the same themes he gave at his post-meeting press conference last week, where he signalled that they’d likely be deciding between 50bps and 75bps at the July meeting. Fed funds futures are currently implying that another 75bps move is more likely, with +71.8bps currently priced in, but don’t forget that there’s still plenty yet to happen ahead of that meeting in just over a month, including the subsequent CPI release and jobs report for June, and as we found out at the last meeting, it’s not implausible that unexpected data releases throw the previous guidance off course.

With all that to look forward to, Treasuries built on their selloff from last week, with the 10yr yield up +4.9bps to 3.27% as it echoed the higher yields we’d seen in Europe the previous day. In Asia, US 10yr yields (-1.89 bps) have dipped back down to 3.25%. They haven't had much in the way of Fedspeak to go off over the last 24 hours, although Richmond Fed President Barkin (a non-voter this year) said he “didn’t have a problem” with Powell’s guidance for the decision next month, and that he was in favour of the 75bps hike they did. Those moves in Treasuries also led to a steepening in the curve, with the 2s10s slope up +3.4bps to 7.2bps as they edged slightly further away from the inversion territory that they’ve briefly fallen into twice this year now. In Europe there was more of a divergence between core and peripheral yields however, and those on 10yr bunds (+2.2bps) closing at a post-2014 high, just as those on BTPs fell by -1.2bps.

Some of the most significant news over the last 24 hours has been on the FX front, where the Japanese Yen fell to a fresh low for the 21st century of 136.71 per US Dollar this morning before bouncing back to 136.20 as I type. You’ve got to go all the way back to 1998 for the last time the currency was trading at a weaker level though. Prime Minister Fumio Kishida did not seem too concerned about BoJ monetary policy divergence and the impact on weakening the yen, saying in a debate policy needed to remain easy, perhaps lending more political support to the BoJ’s policies.

Stocks across Asian markets are trading lower this morning, with the Kospi (-1.89%) the largest underperformer followed by the Hang Seng (-1.26%) after a two-day winning streak earlier this week. Markets in mainland China are also sliding with the Shanghai Composite (-0.33%) and CSI (-0.62%) both weak. Elsewhere, the Nikkei (+0.04%) gave up its early gains, hovering just above the flatline as I type. Bitcoin is at $20,332 in Asian trading.

Here in the UK, gilts underperformed their counterparts elsewhere in Europe following remarks from BoE Chief Economist Pill that they would act “more aggressively” if required. In response, 10yr gilt yields rose +5.0bps to reach a fresh post-2014 high of 2.65%. Overnight index swaps are continuing to price in 50bp moves by the BoE at the next 3 meetings, with a path that would leave Bank Rate above 3% by year-end.

There were also reports that former Italian Prime Minister Giuseppe Conte was considering leaving Mario Draghi’s coalition. While Draghi’s party would still likely retain a majority in both chambers of Parliament, it would leave a very narrow path to push through legislation to fix the economy or to resist dissent from coalition members – a theme all too familiar to Senate Democrats in the US.

There wasn’t much in the way of data yesterday, although US existing home sales fell broadly as expected to an annualised rate of 5.41m in May (vs. 5.40m expected), which is their lowest level since June 2020 as the numbers were recovering after the initial wave of the pandemic.

To the day ahead now, and the main highlight will be Fed Chair Powell’s testimony before the Senate Banking Committee. Other central bank speakers include the Fed’s Barkin, Evans and Harker, as well as BoE Deputy Governor Cunliffe. Otherwise, data releases include UK and Canadian CPI for May, as well as the European Commission’s preliminary consumer confidence indicator for the Euro Area in June.