Morning Bid: Agitated markets wary of June heat

After a period of apprehension in the bond market, there was a slight easing of tension on Thursday. However, investors remain cautious due to concerns over significant sovereign debt sales and uncertainties surrounding upcoming elections, setting the stage for a volatile June.

The dollar, on the other hand, is benefiting from these market conditions.

The underlying cause for this week’s unease stems from indications of robust economic growth in the U.S. and persistent global inflation, which has cast doubt on the extent of anticipated interest rate cuts by the markets. Today’s agenda includes updates on jobless claims and a revision of the GDP.

Furthermore, as the Federal Reserve and other central banks adopt a slightly more hawkish stance, they are complicating the already heavy schedule of debt auctions for many governments in the coming month.

This week has witnessed a flurry of new Treasury issuances, and there were signs of some difficulties in meeting demand. On Tuesday, the sale of nearly $300 billion in notes and bonds saw tepid interest, and yesterday’s auction of $44 billion of 7-year paper showed similar lackluster demand.
The recent combination of concerns over interest rates and increased debt sales has had a negative impact on the market. The U.S. 10-year yields reached 4.75% on Wednesday, the highest in four weeks, but have slightly retreated since then. This trend has also spread to Europe, with German 10-year yields reaching a six-month high on Thursday. The higher-than-expected German annual inflation figures for May have added to concerns, affecting the European Central Bank’s decision on rate cuts. This situation adds to the unease as June is expected to see the highest net sovereign debt issuance of the year, reaching $340 billion for the United States, euro zone, and Britain, according to BNP Paribas data.
The credit rating updates for Italy, France, Greece, and Ireland scheduled for tomorrow are being closely monitored by the European debt world.

The recent turbulence in the bond market has once again had a negative impact on equity markets, causing Wall Street stocks to retreat from their recent highs on Wednesday. This downturn has also affected stocks across Asia earlier today.

At the start of trading on Thursday, S&P500 futures remained in the negative territory, and the implied volatility for the next month has jumped back to nearly 15, a level not seen since May 2.

Adding to the uncertainty in the coming month are several significant events. These include the first televised U.S. presidential debate on June 27, the European Parliament elections taking place from June 6-9, the imminent release of India’s election results, the Mexican elections happening this weekend, and the build-up to the UK elections on July 4.
The South African rand experienced a 1% decline on Thursday, accompanied by a more than 2% drop in the country’s benchmark equity index. This was in response to early election results indicating that the African National Congress is likely to lose its parliamentary majority after a three-decade reign, leading to an uncertain period of coalition building.

In other news, Salesforce, a major player in cloud and enterprise business products, provided a second-quarter forecast for profit and revenue that fell below expectations on Wednesday. The company attributed this to weak client spending, causing its shares to plummet more than 16% after the market closed.

Furthermore, ConocoPhillips, a prominent American oil and gas producer, has agreed to acquire Marathon Oil for $22.5 billion, adding to the ongoing trend of mega-deals in the energy industry. Following the announcement, shares of Marathon Oil surged by 9%, while ConocoPhillips experienced a 4% decline.
BHP’s decision to abandon its $49 billion takeover plan for Anglo American was well-received by investors. Anglo American had rejected three offers from BHP over the past six weeks.

According to sources familiar with the matter, Saudi Arabia is expected to announce a significant secondary share offering in oil giant Aramco later today, pending final approval.

Here are some key events that could impact U.S. markets later today:

  • The second estimate of Q1 GDP and PCE, preliminary Q1 corporate profits, weekly jobless claims, April international trade balance, April wholesale/retail inventories, and April pending home sales will be released.
  • Lorie Logan, President of the Dallas Federal Reserve, and John Williams, Chief of the New York Fed, will be speaking. Andrew Bailey, Governor of the Bank of England, Gabriel Makhlouf, European Central Bank policymaker and Chief of the Irish Central Bank, and Adrian Orr, Governor of the Reserve Bank of New Zealand, will also be speaking.
  • The South Africa Reserve Bank will announce its policy decision.
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