Global markets are approaching the start of the third quarter with caution on Wednesday as investors await remarks from Federal Reserve Chair Wash. Meanwhile, traders are increasing bets on US interest rate hikes, boosting the US dollar. However, market focus remains on Thursday's release of June's non-farm payrolls data, while uncertainty over US-Iran negotiations is also weighing on sentiment. Following the yen hitting a new 40-year low, traders are also watching for potential intervention from Japanese authorities.
As of the latest data, Dow futures are down 0.39%, S&P 500 futures are down 0.37%, and Nasdaq futures are down 0.66%.
The MSCI All Country World Index is down 0.1% in early European trading. The index, driven by a rebound in chip and tech stocks, gained 13% last quarter, marking its strongest quarterly performance in about six years.
Europe's benchmark stock index has retreated 0.2% from its record high. The index gained 10% last quarter, its best performance since the end of 2020.
Falling oil prices following a ceasefire in Iran have boosted European stocks in recent weeks. However, investors are questioning whether this signals a rotation away from tech-driven US and Asian markets towards Europe.
Kevin Thozet, a member of the investment committee at Carmignac, stated: "The second-quarter GDP data won't be great. But clearly, the prospect of the Strait of Hormuz being open and the fall in oil prices is a big positive for European markets."
He added: "European stocks have also been a source of funding for AI trades, so if there is any weakness in AI trades, we would expect that to be relatively positive for European stocks as well."
Asian markets were mostly flat. Japan's Nikkei 225 rose 0.6%, following its 37% surge last quarter. Strong tech demand pushed major manufacturers' confidence to an eight-year high and led factory activity to its strongest quarterly performance since 2014.
South Korea's KOSPI index fell 2%, after skyrocketing 68% last quarter driven by AI-fueled chip demand. The semiconductor boom helped South Korea's exports hit a record $100 billion in June, achieving the fastest growth in nearly 50 years.
China's Shanghai Composite Index rose 0.45%, while the Hong Kong market was closed for a holiday.
US Stock Futures Take a Breather
In the US, S&P 500 futures and Dow Jones Industrial Average futures are both down 0.4%, while Nasdaq futures are down 0.55%.
Stocks are taking a pause after the S&P 500 just recorded its best quarterly performance in six years. Chipmakers are broadly lower in pre-market trading, having been a primary driver as investors piled into AI beneficiaries.
Nike shares are down 3.3% after the company issued a cautious outlook.
Justin Onuekwusi, Chief Investment Officer at St. James’s Place, noted that further increases in rate hike expectations could act as a catalyst for a market pullback, particularly for tech stocks whose valuations heavily rely on future earnings.
Onuekwusi said: "Rate hike pricing has moved up, but from here, it still seems like a bit of a jump to actually get a hike in July. Oil prices fell last quarter, which makes it very difficult for central banks to hit the brakes and start hiking."
Earnings Season in Focus
With Wall Street just having its best quarter since 2020, driven by an 88% surge in the Philadelphia Semiconductor Index, a temporary pause is understandable.
Chris Weston of Pepperstone stated: "History is clearly on the side of the bulls." He pointed out that since 2008, Nasdaq futures have seen a decline in only one July.
As the earnings season kicks off in mid-July, investors are betting on strong results from tech companies to justify high valuations and support continued inflows into the sector.
Goldman Sachs noted that market consensus expects earnings per share to grow 22% year-over-year, with AI infrastructure stocks contributing nearly 60% of that increase.
Sudden Jump in US Yields
However, rising US Treasury yields and the risk of further policy tightening could pose challenges for equities.
The yields on US 2-year and 10-year Treasuries touched one-week highs of 4.181% and 4.473%, respectively, during Asian trading before retreating from those levels. The rise in yields points to a robust US economy and persistent inflationary pressures, while Middle East peace talks continue to progress in fits and starts.
In Europe, bonds mostly held onto losses despite eurozone inflation slowing more than expected.
Skylar Montgomery Koning, a Bloomberg macro strategist, commented: "The focus today is on the Sintra Policy Panel at 2pm BST. I'm not convinced it will change much, especially for the Fed; but if it has an impact, it should also support the continued underperformance of US fixed income versus European fixed income."
Watching Wash's Speech and Jobs Data
Wash is set to appear alongside his European and UK central bank counterparts in Sintra, Portugal, on Wednesday, marking his first public overseas appearance as Fed Chair.
Last month, his commitment to price stability pushed the US dollar and short-term US Treasury yields higher. Traders will watch for any further clues he might offer on the path of interest rates over the coming year.
Investors are increasingly shifting their focus to rising price pressures against the backdrop of a robustly running US economy.
On the data front, the market awaits Thursday's June jobs report to confirm whether the labor market remains strong, although some cooling is anticipated.
Chris Turner, an FX strategist at ING, wrote: "Given the Fed now has no forward guidance, the market will be highly sensitive to any comments from Wash. A focus on price stability could keep the dollar supported."
Yen Intervention Alert
The US dollar rose 0.2%, extending gains after its best monthly performance since March. Money market pricing suggests about a one-third probability of a US rate hike as early as this month.
Rising yields pushed the dollar to a high of 162.84 against the yen, a fresh 40-year peak.
The move has triggered the usual warnings of intervention from Tokyo, though Japanese authorities appear reluctant to act. Previous interventions in April and May, totaling nearly 12 trillion yen (approximately $74 billion), had little lasting effect.
The euro fell 0.2% against the dollar to 1.1398. The market awaits eurozone inflation data expected to show further cooling, reinforcing expectations that the European Central Bank is nearing the end of its tightening cycle.
The yield on Germany's 10-year Bund, the eurozone benchmark, rose 2 basis points to 2.934%.
Bitcoin remained under pressure from US rate hike expectations, trading weak after hitting a 21-month low overnight. It fell 0.2% to $58,591, having earlier dropped to a low of $57,775.
Oil Extends Losses
Brent crude extended its decline, falling 1.4% to below $72 per barrel. WTI crude futures edged up 0.1% to $69.58 per barrel.
On Tuesday, both major oil benchmarks recorded their largest quarterly declines since early 2020.
A senior US administration official said US negotiators held positive talks in Qatar, and technical negotiations with Iran are also progressing. The two countries are seeking to turn a provisional peace deal into a permanent agreement to end the war.
While US President Trump had considered restarting a full-scale war against Iran, he has decided to stick with diplomatic negotiations for now. He also told aides he could accept it if talks with Tehran go beyond the August 18 deadline.
Analysts at Mitsubishi UFJ Financial Group said: "Improved prospects for a lasting US-Iran deal continue to ease supply concerns."
However, they also noted: "Key uncertainties remain, including over Iran's nuclear program and the future governance of the Strait of Hormuz, which could complicate talks during the current ceasefire."
Gold Lacks Sufficient Buying
Gold fell 0.9% to $3,970 after a tough quarter.
Analysts at Saxo Bank said: "The market hasn't attracted enough buying to confirm support at this level ($4000)."
They added: "Gold fell 14% in the second quarter, its worst quarterly performance since 2013. Despite the recent pullback in energy prices, investors continue to price in a risk that the Fed may tighten further if inflation heats up again."
Notable Stock Moves
Nike shares fell over 3% after its earnings report showed a 12% sales decline in the Greater China market. Despite the significant drop in revenue from this key region, Nike's fourth-quarter net profit and overall revenue both exceeded market expectations.
Constellation Brands shares rose about 1.5% after its first-quarter earnings results beat market forecasts. The company reported earnings per share of $3.43, surpassing the Refinitiv analyst consensus estimate of $3.20; revenue also exceeded expectations, and its full-year profit guidance was largely in line with market estimates.
Getty Images announced it was terminating its merger plan with Shutterstock following a request from UK regulators, causing both companies' shares to plummet. Shutterstock shares plunged over 30%, while Getty Images fell 4%.
Alcoa announced it has signed a definitive agreement to acquire part of mining and metals group South32's assets in a deal worth $4.1 billion. The acquisition targets cover South32's entire bauxite, alumina, and aluminum value chain assets. Shares of Alcoa fell 4% on the news.
Guggenheim upgraded its stock ratings for software firms Salesforce and ServiceNow to "Buy." The institution believes artificial intelligence will not lead to the decline of these companies and finds their current valuations attractive. Benefiting from the rating upgrades, both stocks moved higher. ServiceNow shares rose over 5%, while Salesforce gained nearly 4%.
Bloom Energy announced an expanded partnership with investment firm Brookfield to provide power financing for AI infrastructure projects, sending its shares soaring over 7.5%. Bloom Energy stated in its announcement that this upgraded collaboration underscores the strong and sustained market demand from AI infrastructure developers.
Retailer Kroger announced the acquisition of food and drug retailer Giant Eagle for $1.65 billion, causing its shares to fall 2%. Kroger CEO Greg Foran stated in the announcement that this acquisition will help the company expand into promising adjacent market segments.
Storage chip companies SanDisk and Micron Technology saw their shares decline on the first trading day of the third quarter; both companies' shares had more than doubled in the second quarter, which ended on Tuesday. SanDisk shares fell 3.5%, while Micron Technology shares dropped about 2.5%.
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