On the final trading day of the second quarter, US stock index futures held steady, with the S&P 500 poised to record its best quarterly performance in six years, while global equities are on track for their strongest second quarter in the same period. Concurrently, the US dollar regained strength, while the Japanese yen weakened to its lowest level since 1986.
As of the latest update, Dow futures were up 0.02%, S&P 500 futures gained 0.10%, and Nasdaq futures rose 0.23%. Since early April, the S&P 500 has climbed 14%, and it traded flat on Tuesday, marking a relatively calm end to the quarter.
Over the past three months, as hostilities between the US and Iran de-escalated into a fragile ceasefire and the Strait of Hormuz reopened in a gradual and unstable manner, oil prices fell by 20%. Meanwhile, expectations for the US interest rate path underwent a dramatic shift against the backdrop of an apparently unstoppable boom in artificial intelligence stocks.
The MSCI All-Country World Index has risen nearly 14% over the past three months, reaching a record high and achieving its best second-quarter performance since 2020.
The majority of these gains were driven by the blistering rally in AI-related assets, particularly in Asian markets. Stock indices in Japan, South Korea, and Taiwan all recorded double-digit percentage gains. The S&P 500 also rose 14%, while the Nasdaq Composite advanced 20%. In June, SpaceX, with a market capitalization of $2 trillion, was added to the Nasdaq index.
Global Equities Set for Strong Finish
European stocks rose on Tuesday, with the STOXX 600 index gaining 0.65%, led higher by Abivax SA as the latest progress in its clinical trials eased investor concerns. The index was on track for a 10% quarterly gain and has risen every month since March. It contains fewer AI beneficiaries compared to many indices in Asia or the US.
Asian stocks climbed, propelled by chipmakers. Japan's Nikkei 225 index rose 0.9%, supported by strength in technology shares. South Korea's KOSPI index, dominated by memory chip stocks, gained 1%, pushing its quarterly advance to over 66%. China's Shanghai Composite Index increased by 0.5%. However, Hong Kong's Hang Seng Index fell 0.4%, weighed down by declines in the consumer staples sector.
"A theme that has largely disappeared is monetary policy support," said Guy Miller, Chief Market Strategist at Zurich Insurance Group. "At the start of the year, futures markets were pricing in further rate cuts. That has now changed. And this is largely due to the Iran situation and rising commodity prices."
He added, "However, for us, the conclusion is that while we don't expect central banks to cut rates further, we also don't think a rate-hiking cycle is about to begin."
Markets Brace for Another Earnings Season
Global equities are consolidating their gains as investors prepare for another robust earnings season. Analysts believe the AI investment boom will be a significant driver of corporate profits. Meanwhile, a strong macroeconomic backdrop is expected to provide additional support, as falling oil prices help alleviate concerns about inflationary pressures.
"US index futures are supported by a recovery in demand for tech stocks, with investors again believing the information technology sector offers one of the few strong and reliable earnings growth stories," said Marija Veitmane, Head of Equity Research at State Street Global Markets.
She added, "This makes any nervousness in tech stocks look like a buying opportunity. I think that's what we're seeing now after last week's volatility."
Bond Markets Await Sintra Forum
US Treasury yields edged lower, moving in line with oil prices. The yield on the 10-year US Treasury note fell 0.4 basis points to 4.370%. Meanwhile, the market is increasingly focusing on factors beyond geopolitical tensions.
Eurozone government bond yields declined, mirroring the move in US Treasuries. The yield on the 10-year German Bund fell 0.9 basis points to 2.846%.
Christoph Rieger of Commerzbank suggested the scope for further significant declines in German Bund yields might be limited.
"To keep the 10-year Bund yield near 2.85%, we would likely need lower inflation data and no rebound in oil prices," he said.
There were no eurozone government bond auctions scheduled for Tuesday. Meanwhile, the European Central Bank's forum in Sintra, Portugal, could offer further policy clues following opening remarks by President Christine Lagarde on Monday.
Dollar Emerges as Quarter's Standout Winner
The US dollar was the standout winner in the foreign exchange market this quarter, rising 1.4% against a basket of major currencies.
The US Supreme Court on Monday blocked an attempt by former President Trump to fire Federal Reserve Governor Lisa Cook, reducing risks surrounding Fed independence. The justices stated the Trump administration had not provided Cook with sufficient due process to challenge her removal under mortgage fraud allegations. However, the court also allowed Trump to fire other independent agency officials for any reason.
"This points to a more uncertain institutional backdrop," analysts at Deutsche Bank said in a note. "Within the broader policy framework, independence can no longer be taken for granted, even if the Fed is currently protected."
As the market has significantly repriced US rate expectations, shifting from bets on cuts to bets on hikes, investors are building bullish dollar positions at an unprecedented pace. This shift stems from surprising US economic strength and persistent inflationary pressures beyond energy prices.
Yen Breaches 162, Intervention Alerts Heightened
The dollar's strength contributed to gold posting its largest quarterly decline in over a decade and also pushed the yen to its weakest level in 40 years. On Tuesday, the yen traded around 162.23 per dollar. This key level will cause unease in Japan and keep traders alert for potential market intervention by authorities. Japanese Finance Minister Shunichi Suzuki stated Japan would respond to forex developments as needed.
Oil Price Drop Focuses on Qatar Talks
In other markets, Brent crude fell 0.4% to $72.85 a barrel as shipping traffic through the Strait of Hormuz accelerated. Analysts at Morgan Stanley cut their oil price forecast for the second time in about two weeks, citing a faster-than-expected recovery in Middle Eastern supply; concurrently, strong US supply and weak Chinese demand have increased the risk of a market surplus.
"We think the market has overshot to the downside," said Warren Patterson of ING. "Our assumption is that shipping flows won't approach pre-war levels until the end of the third quarter, while current price levels suggest a return to normal by the end of July."
However, investors will closely watch peace talks in Qatar on Tuesday. Although former US President Trump stated the US and Iran would hold a new round of talks in Doha on Tuesday, an Iranian deputy foreign minister said Tehran had not yet decided on a time for negotiations. Previously, Iran reiterated its determination to control maritime traffic in the Strait of Hormuz. Oil prices remain a key component of the inflation outlook, with markets anticipating the Fed could raise rates as soon as September.
"The fall in oil prices suggests that concerns about energy-driven inflation are largely in the past," said Paisley Nardini of Simplify Asset Management. "But it would be very significant if, in the next two to three months, AI-driven inflation stemming from memory costs starts to appear."
She added, "Another risk is whether cracks are starting to appear in the consumer."
Gold Faces Potential 12% Monthly Plunge
Despite persistent geopolitical uncertainty, gold prices were on track for a 12% decline this month as traders priced in Fed rate hikes this year. According to the CME FedWatch Tool, traders expect the Fed to raise rates three times this year, with pricing currently indicating a more than 60% probability of a hike in September.
"In the short term, gold may continue to face pressure, as falling energy prices, a resilient dollar, and expectations for higher-for-longer interest rates continue to dampen demand for the non-yielding safe-haven asset," analysts at MUFG said.
Sintra Central Bank Forum in Focus
For the trading day, market focus is on US May JOLTS job openings data. The figures may show a decline in openings for May, with the quit rate remaining low. While hiring is supporting personal income growth, wage pressures are likely to remain moderate.
Additionally, the world's most influential central bank officials are gathering in Sintra, Portugal, this week for the ECB's annual forum. The most watched figure is undoubtedly new Fed Chair Kevin Warsh, who is scheduled to speak at the forum on Wednesday.
When Warsh chaired his first meeting as Fed Chair earlier this month, he focused on inflation, prompting traders to almost fully price in the possibility of a Fed rate hike before October. However, some economists believe the US economy is strong enough and inflation evident enough for the Fed to raise rates as soon as July.
"Among all major central banks, Fed policymakers are likely the only ones with a plausible case to act in July," said Isabelle Mateos y Lago, Group Chief Economist at BNP Paribas. "They might choose to hike, getting it out of the way."
She added, "This is not our base case, but there is a significant probability they might want to do it, really get it out of the way, and then move on."
However, before Warsh speaks, the market will also receive a series of European inflation reports on Tuesday, along with US June consumer confidence data and the monthly JOLTS job openings report. Meanwhile, the release of the US monthly employment report on Thursday draws closer.
An OMFIF survey indicates a global turning point for central banks, with a shift away from the US dollar towards gold for the first time, as $10 trillion in public capital accelerates towards a multipolar world.
A survey of public investors released Tuesday by the Official Monetary and Financial Institutions Forum (OMFIF) showed that over the next decade, more central banks globally plan to reduce their dollar allocations than to increase them, as political risks associated with the US currency rise.
This is the first time this survey by OMFIF has detected such a shift away from the dollar. About 79% of central banks and 60% of public funds believe the global monetary system is moving towards a "multipolar" world.
The survey found that gold, which has hit a series of record highs and is held by 82% of central banks, has "moved to the core of reserve management strategy."
In the short term, gold is the asset central banks most plan to increase holdings of, with a net 30% of respondents intending to boost their allocation over the next one to two years.
Citigroup warns that the Nasdaq's decline may not be over, with nearly 80% of long positions already underwater.
Citigroup stated that the technology sector faces the risk of further declines as investors' overall exposure to US tech stocks remains elevated.
A team of strategists led by David Chew noted that the pullback in the tech-heavy Nasdaq 100 index this month was not accompanied by a proportional reduction in positioning.
"Relative to short positions, the size of long positions in the Nasdaq remains significantly larger," David Chew wrote in a report. "With nearly 80% of long positions currently underwater, the risk skews towards those losing longs, which could exacerbate further downside pressure."
Notable Stock Movements
Drone manufacturer AeroVironment reported earnings per share and revenue that exceeded market expectations, sending its shares soaring 30%. The company reported quarterly EPS of $1.84 on total revenue of $642 million. Analysts surveyed by Refinitiv had expected EPS of $1.46 on revenue of $559 million.
Digital Realty Trust announced a $7.8 billion deal to acquire partial stakes in three fully leased data centers from Blackstone, causing its shares to fall 4.5%.
Strategy fell more than 3%, giving back some of Monday's substantial gains. The stock surged 22.6% the previous session, ending an eight-day losing streak and marking its best single-day performance since a 49.6% jump on February 6.
Sellas Life Sciences rose over 3%, building on a 24.7% surge the previous day. The stock rallied sharply on Monday after the company disclosed amendments to employment agreements for several executives, primarily related to severance terms. The amendments, potentially routine updates, were also seen by the market as a potential signal of an impending acquisition.
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