The Wednesday Market Minute

  • Global stocks grind higher after upbeat testimony from Fed Chairman Powell and a solid start to earnings season.
  • U.S. dollar looks set to test one-year highs as 2-year note yields hit fresh 11-year peak following Powell testimony.
  • Trade war concerns keep Asia markets in check, but weaker currencies, solid earnings give European stocks early boost.
  • Oil extends declines following API inventory build and global supply increases.
  • U.S. equity futures point to modest opening bell gains on Wall Street ahead of House testimony from Fed Chairman Jerome Powell and earnings from IBM, Morgan Stanley and T-Mobile U.S.

Market Snapshot

Global stocks traded higher again Wednesday, with investor optimism supported by an upbeat assessment of the U.S. economy by Federal Reserve Chairman Jerome Powell and a robust start to the second quarter earnings season.

The first of two days of testimony by Powell on Capitol Hill helped boost both short-term Treasury bond yields and the U.S. dollar, as investors re-set expectations for near-term rate hikes, even as they continued to fret over the longer-term impact on global economic growth from the myriad trade wars currently being waged by Washington and its allies and competitors.

Powell chose not to go into too much detail on the impact of trade wars on economic growth, saying only that countries with fewer tariff barriers tend to expand faster. His decision to "stay in our lane", as he put it, could suggest he's not ready to add a political dimension to his relatively new chairmanship at the Fed and may also explain why interest rate futures showed only modest increases for expected rate hikes in September and December even after his guidance for at least two more moves this year.

"With appropriate monetary policy, the job market will remain strong and inflation will stay near 2% over the next several years," Powell said.

The CME Group's FedWatch tool suggests traders are pricing in an 88.3% chance of a September hike, up from 87.9% yesterday, and a 57.7% chance of a December move that would take the Fed's key lending rate to 2.25% and 2.5%. 

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, however, was marked 0.37% higher at 95.315, just a few ticks from the highest levels in more than a year, while benchmark 2-year Treasury note yields rose to a fresh 11-year high of 2.619% in overnight trading.

#usd resurgence! #DXY is approaching the highest level since summer 2017 supported by higher carry and #tradewar escalation

— Danske Bank Research (@Danske_Research) July 18, 2018

Those moves supported gains for certain export markets in Asia, particularly in Japan, where the Nikkei 225 rose 0.43% to a one-month high of 22,794.19 points as the yen retreated to 113.04 against the surging greenback.  However, the broadest measure of regional share prices, the MSCI Asia ex-Japan index, was marked 0.1% to the downside as stocks in China continued to under-perform amid concerns of slowing growth in the world's second-largest economy and the impact of a U.S.-led trade war that the IMF has estimated could cost the world more than $500 billion in lost growth potential over the next two years.

Early indications from U.S. equity futures suggest an 15 point gain for the Dow Jones Industrial Average and a 0.9 point bump for the broader S&P 500 , which looks to have comfortably cleared the 2,800 point mark following last night's 11.12 point advance.

Alphabet Inc. (GOOGL)  shares were marked 1.24% lower in pre-market trading amid reports that the parent of internet search giant Google could face a record fine from European antitrust authorities Wednesday following a lengthy investigation into contracts that tie makers of android-operated smartphones to the exclusive sale of its apps.

The second quarter earnings season have been largely better-than-expected in the opening week, with more than 85% of the 39 companies reporting so far beating Street forecasts and raising the overall expectation of bottom line growth for the S&P 500 to 21.2%, a figure which would represent the second best quarter (trailing only the first three months of this year) in nearly a decade.

Today's slate includes IBM (IBM) , American Express (AXP) , Morgan Stanley (MS) , TMobile US (TMUS) and Ebay (EBAY) . Action Alerts Plus holding Miscosoft (MSFT) , Travellers (TRV) and Philip Morris (PM) come Thursday while General Electric (GE) , another AAP stock, and Honeywell (HON) will round of the earnings calendar on Friday.

European stocks, however, started the session with a bullish tone as investors picked through a series of better-than-expected corporate earnings reports and adjusted valuations in the face of weakening regional currencies. The region-wide Stoxx 600 index gained 0.54% to trade at 386.71 in the opening two hours of trading while benchmarks in Germany and France were 0.86% and 0.60% to the upside by mid-day Frankfurt and Paris.

The euro was marked at a session low of 1.1618 against the dollar while the pound slipped to an 8-month low of 1.3021 after U.K. inflation slowed to 2.4% in June, causing investors to fade bets on a near-term rate hike from the Bank of England amid the brewing political chaos surrounding the country's exit from the European Union.

Global oil prices were softer again Wednesday, pulling Brent crude deeper into correction territory amid concerns about China demand, the unblocking of supply bottlenecks in Libya and Treasury Secretary Steve Mnuchin's suggestion that some U.S. allies could be exempted from sanctions on the purchase of Iranian oil.

Brent crude contracts for September delivery, the global benchmark, were seen 42 cents lower from their Tuesday close in New York and changing hands at $71.74 per barrel in early European trading, taking the decline from its late May peak to 10.5%. 

WTI contracts for the same month, the new benchmark for U.S. gas prices, were marked 40 cents lower at $66.76 per barrel following data from the American Petroleum Institute yesterday that showed domestic crude stocks rose by 629,000 barrels over the week ending July 13. The Energy Information Administration will publish office data at 3:30 eastern time.