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By Geoffrey Smith
U.S. markets are waking up with a post-Fed hangover, but solid earnings from various sectors of the economy after hours on Wednesday are set to help them hold on to most of their gains. Bond yields have risen overnight, as markets digest Jerome Powell’s guidance for a series of half-point rate increases. The Bank of England is due to hike rates too, albeit less aggressively due to the U.K. economy’s slowdown. Jobless claims are due, as are earnings from ConocoPhillips (NYSE:COP), Shopify (NYSE:SHOP) and Datadog (NASDAQ:DDOG). And oil prices rise as OPEC and its allies prepare to announce another output increase that will be hard to deliver in real life. Here’s what you need to know in financial markets on Thursday 5th May.
1. Bond yields push higher as post-Fed hangover sets in
Global stock markets followed the U.S. higher overnight, but bonds are suffering something of a hangover after the wild rally that followed the Federal Reserve’s press conference on Wednesday.
U.S. stock indices had their best Fed day in years on Wednesday after Fed Chair Jerome Powell said that 75 basis point increases in rates in the future were not being “actively discussed”. Powell had said that the Fed is confident of engineering a “soft-ish landing” for the economy with a series of half-point rate hikes over the summer.
U.S. Treasury yields have moved higher again overnight, with the 10-Year rising 4 basis points to 2.96% and the more Fed-sensitive 2-Year yield rising 7 basis points to 2.69% after the market reconsidered that the rate path signaled by Powell is still a sizeable tightening of financial conditions.
There’s a slight lull in U.S. economic data today, with only weekly jobless claims and the Challenger Job Cuts survey due before the official labor market report on Friday.
2. BoE set to hike into weakness
Interest rates continue to march higher around the world. The Central Bank of Brazil raised its key rate by another full percentage point – the second straight 1 point move – at its meeting on Wednesday after the Fed’s move. It joins Australia and India among other G-20 economies hiking rates this week.
The baton now passes to the Bank of England, which is expected to raise its repo rate by another 25 basis points at 7 AM ET (1100 GMT), to 1.0%, and talks about its plans for balance sheet run-off. The BoE is likely to hold off from more aggressive action due to the sharp loss of momentum by the U.K. economy in recent months due to higher inflation and tax increases. GBP/USD edged down to $1.1255 ahead of the news.
Local elections around the U.K. are also set to generate headlines, as the country passes judgment on the government’s handling of the cost-of-living crisis and Prime Minister Boris Johnson’s repeated violations of his own lockdown rules.
In the Eurozone, ECB board member Fabio Panetta, the bank’s most outspoken dove, acknowledged that negative rates and quantitative easing were no longer “necessary”.
3. Stocks set to correct a little at opening; Shopify, Conoco earnings eyed
U.S. stock markets are set to give up at least some of their gains in a correction of Wednesday’s rally when they open later.
By 6:15 AM ET, Dow Jones futures were down 126 points, or 0.4%, while S&P 500 futures were down 0.5% and Nasdaq 100 futures were down 0.7%.
Some support should be forthcoming from another batch of strong earnings after the bell on Wednesday, with online travel agency Booking (NASDAQ:BKNG) in particular standing out. Pioneer Natural Resources (NYSE:PXD) also beat profit estimates handily, as did MetLife (NYSE:MET) and lithium miner Albemarle (NYSE:ALB). However, Etsy (NASDAQ:ETSY) stock is set to slump after failing to dispel concerns about sellers leaving the platform due to its hiking selling fees.
Thursday’s big corporate updates start with ConocoPhillips, Shopify, Datadog, Kellogg (NYSE:K) and Becton Dickinson (NYSE:BDX), while EOG Resources (NYSE:EOG), Vertex (NASDAQ:VRTX), McKesson (NYSE:MCK), Illumina (NASDAQ:ILMN) and Monster Beverages head the late reporters.
4. SEC adds 80 to Chinese naughty list; Caixin Services PMI collapses
Three stocks likely to be in focus later are Chinese ADRs JD (NASDAQ:JD).com, Bilibili (NASDAQ:BILI), and Pinduoduo (NASDAQ:PDD), after the U.S. Securities and Exchanges Commission added them to its list of companies at risk of delisting due to their failure to file accounts that comply with U.S. regulations. JD.com ADRs were down 1.2% and Pinduoduo ADRs were down 3.4%.
China’s economic news isn’t improving yet. The Caixin Services PMI, a more accurate reflection of non-manufacturing activity than the official version, tumbled to 36.2 from 42.0 a month earlier, and now stands well below its level in another month other than February 2020.
China’s COVID-19 outbreaks also show little sign of improving, with Beijing adding to the restrictions in force and Shanghai’s reopening still dragging on.
5. Oil at 2-week high as OPEC prepares to meet
Crude oil prices hit two-week highs as the market digested the implications of the EU’s plans to wean itself off Russian oil by year-end. The plans, which still need to overcome opposition from Hungary before coming into force, are buttressed by new measures banning a raft of ancillary services such as insurance cover for ships carrying Russian oil.
The focus now turns to the day’s meeting of OPEC and its allies, which is likely to have a slightly surreal tone in promising another output increase from June despite evidence of a sharp fall in Russian output already.
By 6:20 AM ET, U.S. crude futures were up 0.6% at $108.41 a barrel, the latest move up having stopped at $108.97. Brent futures were up 0.9% at $111.08 a barrel
Last modified: May 10, 2022