Summer’s over

A look at the day ahead in U.S. and global markets from Mike Dolan

If the mid-year bounce in U.S. and world markets was all about peak inflation, policy pivots and soft landings, then the summer appears to be well and truly over.

Monday was the worst day for Wall St stock indices since the gloom of mid-June, 10-year Treasury yields are back above 3% for the first time in a month and a resurgent dollar exchange rate is largely down to fresh anxiety about global recession and a dash for dollar cash away from euros, pounds and yuan.

The question for many investors is whether there’s now an inexorable retreat of risk assets back to the mid-year lows. It’s a long way back down. The S&P500 (.SPX) is still 13% above the June trough.

With Europe’s Ukraine-related natural gas price shock at the epicenter of the worries, driving the euro’s slide back through parity this week to its lowest levels in almost 20 years , there was some modest market relief on Tuesday as flash August business surveys for the region were less awful than feared.

But the surveys still showed the second consecutive month of contracting activity that points to overall euro zone output shrinking for the third quarter as a whole. Britain’s equivalent reading missed forecasts, just a whisker above the expansion threshold in August and a day after Citi forecast UK inflation could hit 18% early next year.

While there’s some argument for U.S. outperformance given its distance from the specific pipeline shocks in natural gas and better behaved world oil markets, crude prices didn’t help much on Tuesday as they ticked higher again on reports OPEC may be minded to clip supply to prevent any further slide.

All of which sets the scene for a relatively stern Federal Reserve message at its annual Jackson Hole conference later this week. Fed chief Jerome Powell is widely expected to disavow any notion in markets that the central bank will pivot to an easier monetary setting any time soon.

Futures markets are now seeing peak Fed rates for the cycle – the so-called terminal rate – as high as 3.8%.

The summer is over.

Key developments that should provide more direction to U.S. markets later on Tuesday:

  • Early August business surveys from United States, Germany, France, euro zone, UK, Japan. Euro zone Aug consumer confidence
  • Richmond Fed Aug manufacturing index; Philadelphia Fed Aug non-manufacturing index
  • U.S. July new home sales
  • Minneapolis Fed President Neel Kashkari speaks in Minneapolis
  • European Central Bank board’s Fabio Panetta speaks in Milan
  • U.S. Corp Earnings: JD.com, Macy’s
  • U.S. Treasury auctions 2-year notes; UK index-linked auction