The Tuesday Market Minute

  • Global stocks drift lower as demand signals suggest global economy may slow into second half of the year.
  • Oil prices steady, but remain in correction territory as supply concerns ease and demand questions remain.
  • Dollar eases as investors trim bets on near-term Fed rate hikes as U.S. yield gap continues to narrow.
  • U.S. equity futures point to modest opening bell decline on Wall Street ahead of Senate testimony from Fed Chairman Jerome Powell and earnings from Goldman Sachs, Johnson & Johnson and United Health.

Market Snapshot

Global stocks drifted lower Tuesday, as oil prices remained in correction territory and investors re-set expectations for future U.S. rate hikes amid worrying signals from the bond market, as investors question the underlying strength of the world economy heading into the second half of the year.

Oil prices extended declines in early European trading, after falling 4% yesterday to a three and a half month low, as supply disruptions in Libya began to ease and reports of potential exemptions from U.S. sanctions for buyers of Iranian crude began to emerge. Crude prices have now fallen more than 10% from the $80 per barrel peak they hit in late May. Downward pressure was also evident from yesterday's disappointing economic data from China, where industrial output fell to a two year low, and second quarter GDP growth slowed to 6.7%, suggesting that the impact of tariffs on $250 billion worth of China-made goods will blunt growth prospects in the world's second-largest economy.

Longer-term prospects, however, continue to be shaken by the impact of U.S.-led tariffs on steel and aluminium products from various economic allies as well as the ongoing trade war between Washington and Beijing, which the International Monetary Fund warned yesterday could reduce global output by 0.5% -- or nearly half a trillion dollars -- over the next two years.

Brent crude futures for September delivery, the global benchmark, were seen 6 cents lower than their Monday close in New York and changing hands at $71.78 per barrel in early European trading while WTI contracts for August delivery, which are more tightly linked to U.S. gasoline prices, were seen 3 cents lower at $68.03 per barrel.

Investors are also asking questions about the depth and breadth of U.S. economic strength, as well, even as data suggests second quarter GDP will likely come in at around 4%, thanks in part to Republican-led tax cuts and impending fiscal stimulus. However, the narrow gap between 2-year and 10-year Treasury bond yields, which sits at just 26 basis points -- essentially the size of one Federal Reserve rate hike -- has added to investor caution, given the so-called yield curve's record in predicting recessions when 2-year yields rise past 10-year note yields.

The U.S. dollar index, extended its decline against a basket of six global currencies to around 0.9% overnight as investors trimmed bets for future rate hikes owing to both the shape of the yield curve and comments from Minneapolis Fed President Neel Kashkari, who argued in a blogpost that "there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession ... if inflation expectations or real growth prospects pick up, the Fed can always raise rates then."

His comments precede Fed Chairman Jerome Powell's first of his two days of testimony to lawmakers on the Joint Economic Committee of Congress on Capitol Hill, which begins at 10:00 am eastern time.

Against that backdrop, early indications from U.S. equity futures were mixed during European trading, with contracts tied to the Dow Jones Industrial Average I:DJI suggesting a 35 point dip for the 30-stock average and those linked to the S&P 500 I:GSPC indicating a 6.6 point pullback for the broader benchmark.

Nasdaq Composite I:IXIC futures were 58.4 points in the red, however, after Netflix Inc. (NFLX) - Get Report  slumped in pre-market trading Tuesday after the online streaming site posted weaker-than-expected subscriber growth numbers in its second quarter earnings last night, taking the steam out of one of Wall Street's hottest stocks. Netflix shares were indicated 11.68% lower in pre-market trading Tuesday, indicating an opening bell price of $353.70, a move that still leaves the stock 96.81% higher for the year with a market value of around $155 billion.

Today's earnings slate includes second quarter figures from Goldman Sachs (GS) - Get Report   , which included earnings of $5.98 per share on revenues of $9.4 billion, Johnson & Johnson (JNJ) - Get Report , which narrowly trimmed its full-year earnings and revenue forecasts $8.07/$8.17 and $80.5 billion/$81.3 billion respectively, United Continental Holdings (UAL) - Get Report and United Health (UNH) - Get Report  , which added 2.2 million people to its Medicare Advantage program and boosted its full-year earnings estimate to $12.50/$12.75 per share.

Action Alerts PLUS holdings include: Goldman Sachs; United Health, Microsoft; Honeywell.

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

European stocks were also weaker Tuesday, led to the downside by oil and basic resource stocks, with the region-wide Stoxx 600 index falling 0.24% to 381.13 points by mid-day in Frankfurt while benchmarks in Germany (-0.12%) and France (-0.34%) retreated modestly in the face of a stronger euro, which rose to 1.1710 against the greenback.

Asia stocks were also weaker across the board, although the weaker U.S. dollar -- and the lack of a significant energy complex -- allowed Japan's Nikkei 225 to book a 0.44% gain by the close of trading in Tokyo. That said, the MSCI Asia ex-Japan index was marked 0.35% to the downside heading into the final hour of trading while China's Shanghai Composite fell 0.55% to close at 2,798.62 points.