US stocks may not be ready for hawkish Powell at Jackson Hole, options data show

WASHINGTON, Aug 24 – Investors may be underestimating the degree of potential market turbulence stemming from the Federal Reserve’s economic symposium at Jackson Hole, Wyoming, potentially leaving them more vulnerable to a hawkish surprise, options strategists said.

Pricing in the options market – where investors often hedge against stock swings – shows expectations of a 0.9% move in the S&P 500 Index between now and the end of trading Friday, the day Fed Chair Jerome Powell is expected to give his address on monetary policy at 10:05 a.m. ET (1405 GMT).

Some strategists believe that outlook may not be cautious enough, especially if last year is any guide.

A more hawkish-than-expected message from Powell at Jackson Hole last August sank the S&P 500 by 3.4% on the day of his address – the biggest reaction to a Fed chair’s speech at the annual symposium in at least 11 years, a Reuters analysis showed. At that time, options markets were primed for a move of around 1.4%.

With many investors sitting on big year-to-date gains in stocks and bond yields pushing higher, investors may be caught flat-footed if a hawkish Powell spurs a run out of risky assets, Steve Sosnick, chief strategist at Interactive Brokers, said

Markets “have shaken off some of the outright complacency that existed about a month or two ago but (they) are hardly risk averse,” Sosnick said.

Analysts at Bank of America also believe markets may be ill-prepared for a hawkish message from Powell, writing earlier this week that recent strength in US economic data would probably increase policymakers’ concerns about a reacceleration in inflation.

“Fading expectations of recession have brought the focus back to inflation and a potential tight Fed … and risk assets have started showing more signs of weakness than at any other point this year,” they said. “We therefore think equities are more at risk of a macro-driven shock than the market is pricing in.”

Barring the market drop last year and a 2019 tumble, Fed chairs’ Jackson Hole speeches have not been big market movers in recent years, with the S&P 500 logging an average swing of 0.9% on the day of the address over the last decade.

Still, there may be greater scope for market gyrations this time around, analysts said. The S&P 500 has gained more than 15% year-to-date but the rally has stumbled this month as soaring yields on Treasuries threaten to dull the allure of stocks.

Though the Fed has made significant progress in cooling consumer prices, the pressure may be on Powell to reinforce his “higher for longer” mantra on rates to avoid giving the impression that the battle against inflation was already won, BofA’s analysts wrote.

This year’s symposium also comes at a time when various asset classes have become more vulnerable to outsized moves following the Jackson Hole event, according to an analysis by derivatives strategists at Barclays.

Across asset classes, the average volatility-adjusted move around Jackson Hole has almost doubled in the 2017-2022 period, compared with 2010-2016, the bank’s strategists wrote in a note on Tuesday.

To be sure, there’s little guarantee that Powell’s message will be a starkly hawkish one. Treasury yields soaring to their highest levels in more than a decade suggests the Fed’s “higher for longer” message may be getting through to some investors.

At the same time, there are signs that investors may not be totally unprepared for fireworks. The Cboe Volatility Index, which measures demand for protection from market swings, stands at 16.15, well off the recent low of 12.74 touched in late July.

“I think if anything this event has been hyped up and Powell will have much less of an ax to grind compared to last year,” said Chris Murphy, Susquehanna Financial Group co-head of derivative strategy.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Andrea Ricci)

Asian bonds see foreign inflows for fifth straight month in July

Aug 24 – Asian bonds recorded net foreign inflows for a fifth straight month in July, helped by expectations that the US Federal Reserve’s monetary tightening cycle is nearing the end as price pressures show signs of easing.

Foreigners were net buyers of bonds worth USD 4.5 billion in Malaysia, Indonesia, South Korea, India, and Thailand, compared with about USD 4.2 billion worth of purchases in June, data from regulatory authorities and bond market associations showed.

“Easing inflationary pressures and expectations that Asian central banks are now on hold were supportive of bond inflows into the region,” said Khoon Goh, head of Asia research at ANZ.

Malaysian bonds received about USD 2.5 billion worth of foreign capital during the month, the biggest amount since June 2020.

Indonesian bonds gained USD 600 million, while Thai, South Korean, and Indian bonds also secured about USD 500 million each last month.

However, US bond yields have risen this month after a steady stream of stronger-than-expected economic data, and minutes from the Federal Reserve’s July rate-setting meeting showed officials are still focusing on containing inflation.

Chris Wong, investor director, Asia fixed income at Schroders, said he was still optimistic about Asian local currency bonds doing better in the second half of 2023, as central banks in Asia who have hiked interest rates earlier are likely to ease ahead of the Fed.

“That should be a tailwind to Asian local rates relative to the US and potentially generate capital appreciation that (US dollar) cash cannot offer,” he said.

“Asian currencies will likely be on a better footing given their attractive valuations, resilient growth, as well as stabilization of interest rate differentials against the developed markets.”

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Rashmi Aich)

Japan’s Nikkei rises for fourth straight day as Nvidia lifts chip shares

TOKYO, Aug 24 (Reuters) – Japan’s Nikkei share average rose for a fourth straight session on Thursday, its longest winning streak since mid-June, as US chip designer Nvidia’s record earnings lifted Japanese tech shares.

The Nikkei finished up 0.87% at 32,287.21, near the day’s high, taking its gains for the week to 2.66%.

Chip-making equipment firm Tokyo Electron and chip-testing machine manufacturer Advantest powered the Nikkei, contributing a combined 104 index points. AI-focused startup investor SoftBank Group contributed another 36 points.

Nvidia – the centre of global AI fervour – surged nearly 10% following the Wall Street close after it forecast fiscal third-quarter revenue well above analysts’ estimate.

Of the Nikkei’s 225 components, 156 rose versus 67 that fell, with two flat.

The broader Topix added 0.42%.

The gains come ahead of the US Federal Reserve’s annual symposium in Jackson Hole, Wyoming, later in the day, which could offer hints on the monetary policy trajectory. Bank of Japan governor Kazuo Ueda will also attend.

Tokyo Electron advanced 3.25% and Advantest rose 1.6%. SoftBank Group added 2.68%.

The Nikkei’s biggest gainer, though, was Pacific Metals, which jumped 5.1% after announcing a deal to develop nickel refining technology using microwaves, which will reduce greenhouse gas emissions.

Meanwhile, the banking sector climbed 0.71%, resuming its march towards the eight-year peak hit at July end, when the BOJ unexpectedly doubled the effective cap on 10-year yields to 1%, boosting the outlook for revenue from lending.

The 10-year yield touched a 9-1/2-year high of 0.675% on Wednesday, although it pulled back as far as 0.645% in the current session.

“Chances are that the BOJ will be reducing (bond) buying, as it’s already doing, allowing the yield to drift up towards 100 basis points,” which will keep banks outperforming the broader market, said Nicholas Smith, a strategist at CLSA.

“I wouldn’t be surprised if we were there within this year.”

(Reporting by Kevin Buckland; Editing by Sonia Cheema and Dhanya Ann Thoppil)

Gold hits 2-week highs as retreating US yields renews appeal

Aug 24 (Reuters) – Gold prices climbed to two-week highs on Thursday as a retreat in the US dollar and Treasury yields revived investors’ appetite for bullion as they wait to see what interest rate signals central bankers offer at the Jackson Hole meeting.

Spot gold was up 0.3% at USD 1,920.79 per ounce by 0629 GMT, hitting its highest level since Aug. 10. US gold futures GCcv1 were flat at USD 1,948.70.

The Federal Reserve is holding its annual symposium in Jackson Hole, Wyoming, from Aug. 24-26, with investors’ looking towards Chair Jerome Powell’s speech on Friday for confirmation on whether interest rates are going to stay higher for longer.

Higher US rates raise the opportunity cost of holding gold, which yields no interest.

The dollar and US yields were pulled back after softer-than-expected global economic data.

“The weaker (PMI survey) result pares the risk of further rate hikes in the US and Europe in our view, which is broadly positive for gold prices and applies downward pressure to US Treasury yields,” said Baden Moore, head of carbon and commodity strategy at National Australia Bank.

US business activity approached the stagnation point in August, with growth at its weakest since February, while Britain’s economy is also slowing and might be heading for a recession.

Traders also firmed up bets that the European Central Bank
would pause rate hikes in September as sharp contractions in business activity pointed to deepening economic pain.

Spot gold may extend gains into a range of USD 1,928-USD 1,934 per ounce, said Reuters technical analyst Wang Tao.

Spot silver fell 0.5% to USD 24.19 per ounce and platinum eased 0.1% to USD 926.86. Palladium ropped 0.9% to USD 1,263.03.

For silver, immediate resistance at USD 24.50 will be on watch next and moving past this level may potentially pave the way to retest its year-to-date high of around USD 26, Yeap Jun Rong, a market strategist at IG said.

(Reporting by Swati Verma in Bengaluru; Editing by Sonia Cheema and Sohini Goswami)

Spotlight falls on South Korea, Indonesia rate calls

Aug 24 – Interest rate decisions and policy guidance from South Korea and Indonesia take center stage in Asia on Thursday, as investors also navigate the strong cross currents from global equity and bond markets the day before.

World stocks and Wall Street jumped on Wednesday, lifted by optimism over Nvidia’s earnings, and bond yields tumbled after dismal purchasing managers index reports from Europe cast doubt over central banks’ willingness to raise rates any further.

The tech-led rally on Wall Street delivered the Nasdaq’s best day in a month, and the Nvidia mania appears to have been well-founded.

The artificial intelligence chip making giant after the bell reported strong second quarter revenue and said it expects third-quarter revenue of about USD 16 billion, smashing analysts’ expectations of USD 12.6 billion.

Asian stocks also enjoyed the Nvidia ride on Wednesday and are now up two days in a row for the first time this month. But no thanks to China – the blue chip Shanghai CSI 300 index tanked again as foreign investor selling extended to a 13th straight session, bringing total outflows to more than USD 10 billion.

The MSCI Asia ex-Japan index is down 8% so far in August and on track for its biggest monthly loss since January 2016, when Chinese markets were in turmoil and the central bank was running down FX reserves to counter capital flight and support the yuan.

Investors may go into Thursday in a ‘bad news is good news’ frame of mind, risk appetite strengthened by the sharp decline in bond yields after PMIs showed that service and manufacturing sector activity in Europe is shrinking rapidly.

Good news that market-based borrowing costs are falling and that the Bank of England and European Central Bank may raise rates far less than expected – if at all – but bad news that growth appears to be crumbling.

On the Asian policy front, the Bank of Korea is expected to leave its key policy rate unchanged at 3.50% for a fifth consecutive meeting on Thursday and hold it steady for the rest of this year.

With inflation down to 2.3%, the lowest in over two years and close to the BOK’s 2.0% target, markets are betting that the tightening cycle is over.

Bank Indonesia is also expected to keep its key interest rate steady, at 5.75% for the seventh consecutive meeting and for the rest of the year too.

With Indonesia’s inflation last at a 16-month low of 3.08%, well within the 2% to 4% target range, the central bank’s focus is now on keeping the currency stable. The rupiah is currently hovering around last week’s five-month low of 15,359 per dollar.

Here are key developments that could provide more direction to markets on Thursday:

– South Korea interest rate decision

– Indonesia interest rate decision

– South Korea producer price inflation (July)

(By Jamie McGeever; Editing by Josie Kao)

Indexes end sharply higher; AI chip maker Nvidia jumps again after the bell

NEW YORK, Aug 23 – US stocks ended sharply higher on Wednesday as shares of Nvidia NVDA.O gained ahead of quarterly results from the company whose chips are widely used for artificial intelligence (AI) computing.

Shares of Nvidia, which reported results after the closing bell, jumped 9%, extending a gain of 3.2% during the regular session.

It forecast third-quarter revenue above Wall Street targets. Other tech companies jumped in after-hours trading as well including Microsoft (MSFT), which was last up about 2%.

Bullish investors have been hopeful that upbeat news from Nvidia could could further ear’s strong rally in tech stocks. Including the session move, Nvidia’s stock is up more than 220% for the year so far.

“Not just their numbers, but what they say in the conference call about what’s happening in AI is going to have a big impact on market sentiment,” said Rick Meckler, partner, Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

Nvidia is part of the so-called Magnificent Seven group of megacap stocks including Apple (AAPL) and Tesla (TSLA) that have powered the S&P 500’s sharp gains this year.

During the trading session, stock investors were encouraged as the yield on the 10-year US Treasury note eased from near 16-year highs after weak business activity data from the United States and the euro zone.

US Federal Reserve Chair Jerome Powell’s comments on Friday at the Jackson Hole conference will be scrutinized for clues on the US central bank’s interest rate path.

The Dow Jones Industrial Average rose 184.15 points, or 0.54%, to 34,472.98, the S&P 500 gained 48.46 points, or 1.10%, to 4,436.01 and the Nasdaq Composite added 215.16 points, or 1.59%, to 13,721.03.

Data showed US business activity approached the stagnation point in August, with growth at its weakest since February, as demand for new business in the vast service sector contracted, while the downturn in euro zone activity was far deeper than expected.

Before the PMI data, yields on the 10-year note had been rising this month as investors were thinking the Fed could keep rates higher for longer.

According to strategists in a Reuters poll, the S&P 500 will eke out only marginal gains between now and year end, after its strong move up already this year. The index was forecast to end the year at 4,496.

Shares of drugmaker Gilead Sciences GILD.O rose 0.9% and Merck & Co (MRK) advanced 3.8% after Swiss rival Roche (ROG) inadvertently published positive lung cancer drug trial data.

Advancing issues outnumbered declining ones on the NYSE by a 3.74-to-1 ratio; on Nasdaq, a 2.07-to-1 ratio favored advancers.

The S&P 500 posted 8 new 52-week highs and 10 new lows; the Nasdaq Composite recorded 46 new highs and 156 new lows.

(Reporting by Caroline Valetkevitch; additonal reporting by Amruta Khandekar and Shristi Achar A; Editing by Shinjini Ganguli, Anil D’Silva, and David Gregorio)

Gold scales near two-week peak as Treasury yields retreat

Aug 23 – Gold prices jumped 1% to a near two-week high on Wednesday, helped by a pullback in US bond yields and the dollar as investors looked ahead to the Jackson Hole symposium for guidance on interest rates.

Spot gold rose 1% to USD 1,916.20 per ounce by 2:17 p.m. EDT (1817 GMT), after hitting its highest since Aug. 11. It was also poised to register its biggest daily percentage rise in over a month.

US gold futures settled 1.1% higher at USD 1,948.10.

“It (gold) was a little oversold ahead of itself and we’re getting a bounce on some bargain hunting and then short covering,” said Bob Haberkorn, senior market strategist at RJO Futures, adding that a slight dip in yields is also helping.

Benchmark 10-year Treasury yields slipped from near 16-year highs hit in the previous session, while the dollar fell after weak US PMI data, making gold more attractive for other currency holders.

The S&P Global’s flash US composite PMI index showed US business activity approached the stagnation point in August, with growth at its weakest since February as demand for new business in the vast service sector contracted.

Market participants’ focus will be on a speech by Federal Reserve Chair Jerome Powell at Jackson Hole on Friday for additional clues about the path for interest rates.

According to the CME’s FedWatch Tool FEDWATCH, the probability that the Fed leaves rates unchanged at its September meeting is now at 88.5%.

Gold is highly sensitive to rising US interest rates, as they increase the opportunity cost of holding non-yielding bullion.

“People are expecting a continued hawkish tone from Chair Powell. It is too early for him to point to a loosening in policy on the horizon,” said Daniel Ghali, commodity strategist at TD Securities.

“The market’s attention is now shifting from how high will rates go to how long will rates remain high.”

Spot silver gained 4.1% to USD 24.34 an ounce and platinum added 1.4% to USD 931.65. Palladium was up 0.9% at USD 1,273.53.

(Reporting by Harshit Verma and Brijesh Patel in Bengaluru; editing by David Evans, Ed Osmond, and Krishna Chandra Eluri)

S&P 500 to end 2023 up 17% but little gains seen between now and year end

NEW YORK, Aug 23 – US stocks will eke out only marginal gains between now and year-end, according to strategists in a Reuters poll on Wednesday, who said inflation and higher interest rates were among the biggest risks for the market.

The benchmark S&P 500 index was forecast to end the year at 4,496, about 2.2% above Monday’s close of 4,399.77 and up about 17% from the end of 2022, according to the median forecast of 41 strategists in an Aug. 9-22 Reuters poll.

The latest prediction was higher than the 4,150 year-end target in a May poll.

Some expect optimism over artificial intelligence which has driven a sharp rally in technology stocks this year to support further market gains, while they said a cooldown in the US economy may not be as bad as feared.

The S&P 500 is up over 14% so far in 2023 after falling 19% in 2022, and the Nasdaq is up 29% year-to-date.

Eight of 13 strategists who answered an additional question said a correction in the US stock market was likely by the end of this year, and two said it was highly likely.

Confidence that the Federal Reserve has reined in inflation enough to end its rate hikes has fueled stock market gains this year. However, concerns that the US central bank will keep interest rates higher for longer have recently pushed up US Treasury yields, and fanned worries about the impact of higher borrowing costs on businesses and consumers.

The benchmark 10-year Treasury yield hit near 16-year highs this week.

“The S&P 500 may currently be in correction mode,” said Terry Sandven, chief equity strategist at US Bank Wealth Management. His year-end target on the S&P 500 is 4,600.

“Persistent inflation is kryptonite to valuation as it implies a higher-for-longer Fed hawkish stance. Elevated interest rates, due to continued inflationary pressures, result in lower present values and lower stock prices,” he said.

Earnings growth for S&P 500 companies for 2023 is estimated at just 1.8%, and the index’s forward 12-month price-to-earnings ratio is close to 19, up from 17 at the end of 2022 and above its long-term average of about 16, according to Refinitiv data.

“When a lot of the AI euphoria was in full swing a couple of months ago, the multiples that people were willing to pay for broader indices, for individual stocks, were kind of silly,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute in Charlotte, North Carolina.

“The environment we’re headed into is going to be marked by volatile and high sticky inflation, higher rates … and you’re probably going to see some shift in market leadership.”

Wells Fargo, which expects the S&P 500 to end this year between 4,000 and 4,200, says a US recession as still likely.

The poll’s median forecast for end-2024 for the S&P 500 was 4,800.

The survey also showed the Dow Jones industrial average is expected to finish the year at 36,000, up over 4% from Monday’s close. That forecast is also higher than the previous poll’s median target.

(Reporting by Caroline Valetkevitch; additional reporting by Noel Randewich in San Francisco, and Chuck Mikolajczak, Stephen Culp, and Sinead Carew in New York; Polling by Prerana Bhat and Rahul Trivedi; Editing by Kim Coghill)

US bond yields surge despite muted inflation as investors look beyond Fed

NEW YORK, Aug 23 (Reuters) – A recent spike in US bond yields has come alongside muted expectations for inflation, a sign to some bond fund managers that economic resilience and high bond supply are now playing a larger role than second-guessing the Federal Reserve.

Benchmark 10-year nominal yields on Tuesday hit near 16-year peaks on concerns about US Federal Reserve Chair Jerome Powell sending a hawkish message about keeping rates high at the annual Jackson Hole symposium on Friday.

Bond yields, which move inversely to prices, tend to rise in an inflationary environment because inflation erodes the value of a future bond payout.

But while higher moves in bond yields in the last several months were often driven by investors pricing in higher interest rates as the Fed sought to tame rising inflation, expectations on the pace of price rises have moved lower in recent weeks.

“The narrative has very much changed over the last few months,” said Calvin Norris, Portfolio Manager & US Rates Strategist at Aegon Asset Management.

Investors see evidence that a fresh set of drivers has taken hold, including the Bank of Japan letting yields go higher, which may reduce foreign investors’ appetite for Treasuries, and an increase in the supply of US government bonds, with investors demanding more for holding more debt.

While the timing and size of the central bank’s monetary tightening actions have preoccupied bond investors for well over a year, the market may have reached “an inflection point in terms of the primary driver of sentiment,” BMO Capital Markets analysts said in a note last week.

“The source of uncertainty is moving away from the (Fed) and toward the derivative of monetary policy in the economic fallout from policy rates at their highest level since 2001,” they said. “The issues of longer-term growth, term premium, and issuance are accounting for an increasing share of the price action.”

SOFT LANDING

Annual consumer price growth has slowed down from a peak above 9% in June 2022 to around 3%, considerably closer to the Fed’s 2% target after policymakers delivered 525 basis points of rate hikes starting in March 2022.

Meanwhile, expectations for inflation over the next decade as measured by the Treasury Inflation-Protected Securities market have remained relatively stable in recent months. The 10-year breakeven inflation, at 2.35%, is about 5 basis points higher since the beginning of the year, while 10-year nominal yields have increased by about 50 basis points.

“We’re pricing in a soft landing, which means we’re seeing things working out in the Fed’s favor, as inflation is coming down and the probability of a recession has been reduced,” said John Madziyire, senior portfolio manager and head of US Treasuries and TIPS at Vanguard Fixed Income Group.

Long-term Treasury yields account for factors such as inflation expectations and term premiums, or what investors demand to be compensated for the risk of holding long-term paper.

“A lot of the move that we’re seeing now has to do with more long-term structural questions, be it around growth or around term premiums,” said Anthony Woodside, head of US fixed income strategy at LGIM America.

Yields are also a reflection of expectations around the so-called neutral rate – the level at which interest rates are neither stimulative nor restrictive for the economy. A recent string of strong economic data despite higher interest rates has strengthened investor beliefs that interest rates will remain higher for longer, even if inflation is tamed.

“The fact that growth has been so strong and is still very resilient, even at these restrictive rates, means that potentially the neutral rate is now higher,” said Madziyire.

While such longer-term factors have become more prominent recently, the Fed’s more immediate monetary policy actions could land right back in the driver’s seat in case of a reacceleration of inflation or a sharp deterioration in the economy.

Money markets expect the Fed to maintain rates in the current 5.25%-5.5% range until the second quarter of next year before starting to ease, but many will be looking for clues about possible additional rate hikes from Powell’s Jackson Hole speech on Friday.

“I still think there’s some risk that the Fed goes further, but the market is not giving that a whole lot of credence right now,” said Aegon’s Norris.

(Reporting by Davide Barbuscia; editing by Megan Davies and Anna Driver)

Traders have good cause to think EUR/USD will rise again

Aug 23 (Reuters) – With charts painting EUR/USD in a bullish light and those betting on a rise making money this year, traders have good cause to think the pair will rise again.

What really matters is that the big number of traders betting on a rise have already seen EUR/USD meet their expectations. Many of those gambling on a rally have made money and traders making money usually hold onto, or add to, bets – or reestablish their bets after they have taken profit.

This year, traders have consistently bet on a rally, holding between USD 18-25 billion of wagers on that eventuality.

Though the pair struggled to beat February’s 1.1034 high, it did do so in July, reaching 1.1276, and while it has taken a long time for this to happen, dips during this year were modest and little threat to those long.

Pullbacks have usually followed periods where the pair is overbought, with one of these moves currently ongoing. After reaching a key bull target at 1.1270 in July, the following drop, which has reached 1.0833, represents a step up from the range which dominated for the first half of this year.

This drop may well lay foundations for bigger gains for which the next target is 1.1447. A close over the 100-MMA at 1.1250 and the 61.8% retracement of the 2021-22 slide at 1.1271 would invigorate the uptrend.

The twist of the monthly Ichimoku cloud near 1.16 in January next year has the potential to attract.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)

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