LiveWire

Amid a sharp fall in US stock markets for much of the past month, a fundamental shift in investors' thinking appears to be taking place, one which analysts describe as a "growth scare". A growth scare is characterized by a correction in anticipation of slowing economic growth. For a good portion of this year, bonds displayed a positive correlation with equities: that is, a selloff in bonds was accompanied by a selloff in equities. However, now, we're seeing bonds rally while equities continue to drop. The subtle shift is that bonds are starting to act as a safe haven as markets are expecting that aggressive tightening is rising risks of demand destruction which is likely to lead to lower growth.

Stocks in Europe and US equity futures are advancing after China’s latest measure to bolster its economy. US futures just broke above a major resistance level, signaling improving sentiment.

The producer price index increased at an annual rate of 11.0% in April, signaling persistent inflationary pressures. Despite the high level, the increase rate is slower than the 11.2% annual rise in the prior month, fueling hopes that we might be seeing the peak. Now the question that everybody in the market is asking is how quickly will price increases come down back to more normal levels, giving room for the Fed to reconsider its tightening policy.

The ECB vowed to maintain its stimulus exit, but not faster than it had said before, leading to the EURUSD selling off 0.2% to 1.0870. Net bond buying is set to end in the third quarter and main financing rate is kept unchanged. Money markets are now pricing in 64 basis points of rate hikes by year-end, around 7 bps lower than prior to the policy decision. More colors are expected later today at the ECB meeting.

Earnings season kicked off this morning, with banks reporting the first. JPMorgan reported revenue better than forecast and the bank authorised a new USD30 billion buyback plan. CEO Jamie Dimon expressed optimism about the economy, though highlighted geopolitical and economic challenges ahead. Shares are slightly lower in the premarket. Of the 23 companies that have reported so far, 61% are beating estimates. Nevertheless, the US benchmark is lacking momentum as traders have been selling on recent rallies. If the current 4'380 support level breaks, bears are likely to push the index to retest the previous support line.