North American Morning Briefing: Stock Futures Rise as Tech Gets Lift from Lower Yields
New Home Sales for May; U. Michigan Final Consumer Survey for June
Stock futures gained Friday, led by shares in the technology sector as bond yields pulled back.
Zach Stein, chief investment officer at investment advisory firm Carbon Collective, said that while markets have started to recover, concerns that led stocks into a bear market still remain, such as rising inflation, an aggressive Federal Reserve, higher oil prices and geopolitical tensions.
"While the Fed has assured investors that it remains committed to tackling inflation, it's unlikely [its] tactics will be enough to lower inflation, which isn't being driven by monetary oversupply, but instead by an undersupply of goods," Stein said.
"The central bank has little power to speed up the supply chain, which is at the root cause of the inflation we've seen."
Rate-hike expectations edged down as investors priced in a higher probability of softer Fed moves in the months ahead. Markets now expect a rate cut in the second half of next year.
"Growth is coming down, maybe even sooner than expected. That should allow the Fed to soften at some point," said Esty Dwek, chief investment officer at FlowBank.
New-home sales figures for May are due at 10 a.m. ET. Economists expect a decline, amid other signs of a slowing housing market as interest rates rise.
In premarket trading, software firm Zendesk surged 45% after The Wall Street Journal reported that it is close to a deal with a group of buyout firms.
FedEx rose 3.8% after reporting a rise in revenue driven by higher shipping rates and fuel surcharges. Biotech firm Seagen added 2.3% as talks with Merck for a potential acquisition pushed ahead.
Overseas, the pan-continental Stoxx Europe 600 added 0.3%, while most major benchmarks in Asia ended the week with gains.
Commerzbank expected the U.S. economy to contract temporarily in the first half of 2023 due to likely faster and more extensive interest rate increases by the Fed.
It said GDP is likely to decline by 0.5% on average next year in a recession that is unlikely to be as deep as the one after the 2008 financial crisis as currently there are no significant macroeconomic imbalances.
Commerzbank expects the Fed to raise its key interest rate to 4%, rather than the 3.5% previously expected, due to increased inflation risks.
The dollar is likely near its peak as its recently strong run loses steam, said UBS Global Wealth Management.
"One reason is that the greenback has already appreciated strongly and is now quite expensive. Another reason is the risk that the U.S. economy could drop into recession."
While the dollar's safe-haven status means it typically rallies during recessions, it might not respond as positively as usual given the U.S. interest rate advantage over the rest of the world would likely erode this scenario.
The rates market already implies the Fed could start cutting rates in 2023.
The euro could fall as a weak eurozone economic outlook may prompt the market to scale back its interest-rate rise expectations for the European Central Bank, said ActivTrades.
"The situation in Europe requires careful handling by the ECB, as high inflation calls for monetary tightening, at a time when economic indicators exacerbate worries over the growth prospects for the eurozone economy, especially in a scenario of rate hiking by the central bank."
ActivTrades said that against this background, "the euro could face further headwinds, as investors may reprice expectations over the timing and scope of the ECB's monetary tightening."
Oil prices wavered between mild gains and losses in choppy European trading as investors weighed supply risks against concerns about slowing global growth, after Jerome Powell said interest-rate increases may lead to a recession.
"Oil prices will continue to be whipsawed by competing demand and supply-side drivers. Recession risks continue to weigh and are currently dragging down [...] oil prices," Fitch said.
Soaring gasoline prices are one of the main reasons behind the surge in inflation. Energy Secretary Jennifer Granholm met with executives from Exxon Mobil, Chevron, Shell and other major oil companies to brainstorm ideas for how to bring prices down.
U.S. oil production has yet to return to prepandemic levels, and OPEC has so far failed to reach higher production targets. That suggests that the global supply of oil will remain tight for a while longer.
Base metals were lower in early European trading, as global growth fears continued to hit sentiment for industrial goods. Gold was lower too, with Fitch saying "commodity prices across the board seem to have peaked."
"Mainland China's zero Covid policy dampening demand, a strong dollar driven by a hawkish Fed, the first signs of input prices easing, global recession fears and weakening investor sentiment are weighing heavily on commodities," Fitch said.
TODAY'S TOP HEADLINES
Merck Pushes Forward With Potential Deal for Seagen
Merck & Co. is pushing forward with a potential deal for biotech Seagen Inc., according to people familiar with the matter, in what would be one of the largest takeovers of the year.
The Wall Street Journal reported last week that Merck was in talks to buy Seagen, which would beef up the pharmaceutical giant's cancer-drug portfolio, but that no agreement was imminent. The talks have picked up pace and the two companies are scheduled to meet this week, some of the people said Thursday.
Vista Exits Datto Investment With $6.2 Billion Sale to Kaseya
Vista Equity Partners appears to have scored big on its investment in enterprise technology provider Datto Holding Corp., which the software-focused firm sold to private-equity-backed Kaseya Ltd. in a $6.2 billion deal.
Austin, Texas-based Vista bought Datto in 2017 in a deal that press reports at the time pegged at around $1.5 billion and merged the company with portfolio company Autotask Corp., betting that small and midsize companies would increasingly outsource their information technology needs to managed service providers. Under Vista's ownership, Datto went on to acquire a series of other businesses, including cybersecurity-focused Infocyte Inc. this year.
Zendesk Close to Striking Buyout Deal, Sources Say
Zendesk Inc. is close to a deal with a group of buyout firms, according to people familiar with the matter, resurrecting a failed attempt to sell itself in what would be one of the biggest private-equity takeovers of the year.
A deal with a group that includes Hellman & Friedman LLC and Permira could be struck in the coming days assuming the talks don't fall apart, the people said. The price couldn't be learned.
FedEx Benefits From Higher Shipping Rates, Fuel Surcharges
FedEx Corp.'s revenue rose 8% in its fourth quarter as higher shipping rates and fuel surcharges offset a smaller volume of packages shipped.
The delivery giant's operating income rose 6.7% from a year earlier to $1.9 billion, led by its Freight and Express units, where operating income rose 67% and 20%, respectively.
Alibaba-Backed Delivery Startup GogoX Navigates a Tough IPO Market
The go-go days are over for Hong Kong's IPO market.
GogoX Holdings Ltd. is the kind of startup that might once have received a warm reception from investors in the city as a tech-enabled logistics platform backed by Alibaba Group Holding Ltd.
Jerome Powell Pressed Over How Fed Would Respond to Economic Slowdown
Lawmakers pressed Federal Reserve Chairman Jerome Powell over how the central bank would manage trade-offs it could confront if its interest-rate increases slow the economy sharply but don't reduce inflation quickly.
Mr. Powell on Thursday said that in such a scenario, the central bank would be reluctant to shift from raising rates to cutting them until it saw clear evidence that inflation was coming down in a convincing fashion.
Fed Stress Test Finds Big Banks Can Weather Severe Recession
The Federal Reserve gave the biggest U.S. banks a clean bill of health in its annual stress test, saying they would be able to continue lending to households and businesses even in a severe recession.
This year's stress test measured the 34 biggest banks' ability to maintain strong capital levels in a hypothetical recession marked by sharply higher unemployment and a steep decline in stock prices.
Inflation in Japan Raises Pressure on Central Bank to Reconsider Low Rates
TOKYO-Inflation in Japan stayed above the Bank of Japan's target for a second successive month, adding to pressure on the bank as it bucks the global trend and keeps interest rates low.
Overall consumer prices rose 2.5% from a year earlier in May, government data showed Friday. That matched the pace in April, which was the fastest rise since 1991, excluding periods immediately following sales-tax increases.
MSCI Keeps Emerging-Market Rating on South Korea, Despite Push for Upgrade
MSCI Inc. is sticking with its longstanding assessment of South Korea as an emerging market, despite the country's renewed efforts to be upgraded to a developed one.
The index provider's reluctance to reclassify South Korea, with no changes proposed in its latest annual review, could deprive local markets of tens of billions of dollars of inflows from global investors and is likely to disappoint politicians and regulators in Seoul.
German Business Sentiment Deteriorated Slightly in June
Business confidence in Germany worsened in June as firms in the manufacturing and retail sectors turned more pessimistic due to rising costs and the threat of gas shortages.
The Ifo business-climate index declined to 92.3 points in June from 93.0 points in May, data from the Ifo Institute showed Friday. Economists polled by The Wall Street Journal expected the index to come in at 92.5.
Ukraine Orders Withdrawal From Severodonetsk to Avoid Encirclement
(MORE TO FOLLOW) Dow Jones Newswires
June 24, 2022 05:07 ET (09:07 GMT)Copyright (c) 2022 Dow Jones & Company, Inc.