U.S. equity futures edged modestly lower Tuesday as investors looked to snap a four-day losing streak on Wall Street amid persistent concerns over a near-term recession and an overnight jump in Treasury bond yields.
With just eight trading days left in what is shaping up to be the worst year for U.S. stocks since 2008, investors are having to navigate both a weakening economy and muted earnings projections alongside the Federal Reserve‘s determination to continue raising benchmark interest rates to fight the fastest inflation in decades.
Morgan Stanley analysts noted yesterday that S&P 500 earnings could come in sharply below the Street consensus of $231 per share next year, with the resultant weakness pulling the benchmark some 20% lower from its current levels.
Fourth quarter earnings are expected to fall 1.1% from last year, to a collective tally of $452.1 billion, with analysts keenly focused on near-term outlooks from the world’s biggest companies.
A big overnight move in the bond market will add to today’s complications, as well, after the Bank of Japan made notable changes to its policy of controlling longer-term interest rates. The BoJ widened the band for 10-year government bonds yields to 50 basis points — on either side of current levels — from 25 basis points, sending the yen to a multi-month high of 132.72 against the U.S. dollar while benchmark 10-years bonds traded at the highest yield levels in more than eight years.
“The run higher in Japanese yields is likely to create further volatility in global equity and bond markets, especially because it comes at a time of thin liquidity and lack of other catalysts,” said Saxo Bank market strategist Charu Chanana. “This is not just yen positive, but also negative for foreign assets especially US Treasuries that have been the bulk of the assets held by Japanese investors. In terms of equities, this could mean a favourable stance towards Japanese financials vs. exporters and technology companies.”
Benchmark 10-year Treasury note yields reacted in kind, rising 7 basis point from yesterday’s close to trade at 3.658% overnight, while 2-year notes jumped to 4.281%.
The U.S. dollar index, which tracks the greenback against a basket of its global peers, fell 0.53% to 104.174.
Heading into the start of the trading day on Wall Street, futures contracts tied to the S&P 500 are indicating an 11 point opening bell dip while those linked to the Dow Jones Industrial Average are priced for a 10 point slide The tech-focused Nasdaq Composite is looking at a 65 point decline.
The surge in the yen pushed Japan’s Nikkei 225 2.46% lower on the session, to a two-month low of falling 1.05% to close at a six week low of 26,568.03 points while the region-wide MSCI ex-Japan index fell 1% heading into the final hours of trading.
In Europe the Stoxx 600 was marked 0.423% lower in mid-day Frankfurt trading while the FTSE 100 was down 0.02% in London.
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