Asia equities cautious as Wall St futures fall | Financial Markets

Asian stock markets got off to a cautious start on Monday as a string of soft US data pointed to downside risks to this week’s June payroll report, while buzz about a potential recession continued to provide government bond relief.

The quest for safety kept the US dollar close to a 20-year high, although initial action was light with US markets on vacation.

Cash Treasuries closed, but futures extended their gains, meaning 10-year yields held about 2.88 percent after falling 61 basis points from their June peak.

MSCI’s broadest index of Asia-Pacific stocks outside of Japan rose 0.3 percent, while Japan’s Nikkei rose 0.9 percent.

However, both S&P 500 futures and Nasdaq futures fell 0.4 percent, after stabilizing only slightly on Friday.

Goldman Sachs analyst David J Kostin noted that every S&P 500 sector bar energy delivered negative returns in the first half of the year amid extreme volatility.

“The current bear market is based entirely on valuation and not lower earnings estimates,” he added.

“However, we expect consensus profit margin forecasts to decline, leading to earnings per share down [earnings per share] revisions, regardless of whether the economy enters a recession or not.”

Earnings season kicks off on July 15 and expectations are lower given high costs and weakening data.

technical recession

The Atlanta Federal Reserve’s much-watched GDP Now forecast has fallen to -2.1 percent year-on-year for the second quarter, meaning the country was already in a technical recession.

Friday’s payroll report shows job growth is slowing to 270,000 in June, while average earnings are slowing slightly to 5 percent.

Still, the minutes of the Fed’s June policy meeting on Wednesday will almost certainly sound hawkish, as the committee has elected to raise interest rates by as much as 75 basis points.

The market is counting on a roughly 85 percent chance of another 75 basis point gains this month and rates at 3.25-3.5 percent by the end of the year.

“But the market has also changed price in an increasingly aggressive rate-cutting profile for the Fed in 2023 and 2024, in line with a growing likelihood of a recession,” NAB analysts noted.

“About 60 basis points of Fed cuts are now priced in for 2023.”

In currencies, investor demand for the most liquid safe haven has favored the US dollar, which has been high against a basket of competitors at 105.04 for nearly two decades.

The euro was flat at $1.0433 and not far from the recent five-year low of $1.0349. The European Central Bank is expected to hike rates this month for the first time in a decade, and the euro could see gains if it decides to take a more aggressive half-point move.

The Japanese yen also picked up some safe-haven flows late last week, pushing the dollar back to 135.00 from a 24-year high of 137.01.

A high dollar and rising interest rates have not benefited non-performing gold, which was stuck at $1,808 an ounce after hitting a six-month low last week.

Fears of a global economic downturn also undermined industrial metals, with copper hitting a 17-month low, sinking 25 percent from its March peak.

Oil has generally outperformed as supply constraints and the conflict in Ukraine ease demand concerns. Production restrictions in Libya and a planned strike among Norwegian oil and gas workers were just the latest blows to production.

Still, sellers were out early Monday, with Brent falling 34 cents to $111.29, while US crude fell 23 cents to $108.20 a barrel.

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