Stocks, Futures Drop With Focus on US Jobs Data: Markets Wrap

(Bloomberg) — European stocks dropped, prolonging the volatility that has gripped global markets for days as the debate around central bank policy decisions continues to fuel investor anxiety.

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Europe’s Stoxx 600 index reversed much of Wednesday’s advance, dragged lower by technology and mining shares. US futures contracts slipped after declines on Wall Street overnight. MSCI’s Asia-Pacific Index retreated, with Japan’s Topix Index sinking back into the read after and earlier rebound. The dollar weakened against major currencies.

Markets have been turbulent since tepid economic data last week fueled worries that Federal Reserve policy is risking a deeper slowdown. Thursday’s US jobless claims figures are in sharper focus than ever after last week’s flimsy payrolls numbers. Investors are also bracing for the US and Japanese central banks to potentially move interest rates in opposite directions in the coming months, putting further strain on the yen-funded carry trade.

This is a “consolidation period before any new trend, given how volatile the market has been,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte. “Investors probably will stay sidelined until new data appear. The next couple of days will be crucial — either calm returns, or we see a new bout of volatility emerge.”

It’s still busy on the corporate earnings front too. Siemens AG shares dropped after the manufacturer said it sees group revenue growth and returns in its key industrial unit at the lower end of forecasts. Zurich Insurance Group AG shares fell after the company reported a rise in losses atit property and casualty arm, driven in part by “higher catastrophe losses and weather events.”

Allianz SE climbed after second-quarter profit rose on stronger earnings from its life-health insurance and asset management businesses. Deliveroo Plc rallied after reporting stronger customer orders and saying earnings for the year will be on the higher end of its forecast. Entain Plc soared after the UK gambling firm got an earnings boost from this summer’s European Football Championship.

Policy Divergence

The divergence in US and Japanese central bank monetary policy is set to undermine the yen’s role as a cheap source of funding for financial assets.

A Thursday summary of opinions from last week’s Bank of Japan meeting showed that authorities didn’t see last months surprise rate hike as as policy tightening. Deputy Governor Shinichi Uchida yesterday said the BOJ won’t raise interest rates when financial markets are unstable, a reassurance that helped buoy stocks and sent the yen lower.

Three-quarters of the carry trade has been unwound as the recent slump wiped out all positive year-to-date returns, according to strategists at JPMorgan Chase & Co.

The carry strategy — which involves borrowing at low rates to fund purchases in higher-yielding assets elsewhere — has been wobbling for months. Carry trades were pummeled over the past week as global market volatility jumped amid fears of rapid Fed rate cuts and after the Bank of Japan’s larger than expected rate hike.

The unspooling of the carry trade has further room to run, according to Quincy Krosby at LPL Financial. “A softer dollar, driven by the market’s perception that the Fed will soon initiate an easing cycle, should help support a stronger yen — a negative for the trade.”

The dollar was weaker Thursday, reversing moves from the prior session. Lackluster demand for a 10-year Treasury auction and $31.8 billion in debt offerings from blue-chip companies were headwinds.

The Treasury auction result is “consistent with our view that we’re due for a continued correction higher in yield in the near-term,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. “The repricing following what was really just a moderately weak payrolls report seems way overdone.”

In commodities, oil steadied after its biggest advance in a week, with the market on edge over a possible retaliatory strike by Iran on Israel as payback for assassinations of Hamas and Hezbollah leaders.

Key events this week:

• US initial jobless claims, Thursday

• Fed’s Thomas Barkin speaks, Thursday

• China PPI, CPI, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 fell 1% as of 9:02 a.m. London time

• S&P 500 futures fell 0.3%

• Nasdaq 100 futures fell 0.2%

• Futures on the Dow Jones Industrial Average fell 0.3%

• The MSCI Asia Pacific Index fell 0.4%

• The MSCI Emerging Markets Index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%

• The euro rose 0.2% to $1.0939

• The Japanese yen rose 0.5% to 145.88 per dollar

• The offshore yuan rose 0.1% to 7.1627 per dollar

• The British pound was little changed at $1.2702

Cryptocurrencies

• Bitcoin rose 3.8% to $57,226.83

• Ether rose 2.8% to $2,416.37

Bonds

• The yield on 10-year Treasuries declined three basis points to 3.91%

• Germany’s 10-year yield declined four basis points to 2.23%

• Britain’s 10-year yield declined two basis points to 3.93%

Commodities

• Brent crude fell 0.4% to $77.99 a barrel

• Spot gold rose 0.6% to $2,397.33 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Richard Henderson, John Viljoen and Divya Patil.

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