LDN - Business

Tesla miss, debt ceiling jitters dampen stocks' upbeat mood

[April 20, 2023] By Dhara Ranasinghe and Naomi Rovnick

LONDON (Reuters) - World stocks pulled further away from multi-week highs touched earlier this week, with sentiment dampened by disappointing Tesla earnings and worries about the U.S. debt ceiling.

The pan-European STOXX 600 index, which hit 14-month highs on Tuesday, was down a third of a percent in morning trade. U.S. stock futures were broadly weaker in a bearish sign for the Wall Street open, with contracts that track the tech-heavy Nasdaq 100 1.1% lower.

All this left the MSCI World index a touch softer on the day and down from Tuesday's 2-1/2 week peaks.

Electric vehicle maker Tesla missed gross margin forecasts and pledged further price cuts, sending its shares 7% lower pre-market and weighing on tech stocks that investors were counting on to prove resilient to a widely predicted U.S. recession.

Apple fell 1% in pre-market trade and Google parent Alphabet lost 0.7%.

Meanwhile, analysts at JPMorgan said they expected the U.S. debt ceiling to become an issue as early as next month. They also cited a "non-trivial risk" of a technical default on Treasuries as the government reaches maximum borrowing limits and is therefore unable to issue more bills, bonds or notes.

Treasury Secretary Janet Yellen is expected to soon revise the so-called X-date - the date by which the federal government is deemed unable to meet its obligations in full, currently early June.

On Thursday, the cost of five-year U.S. credit default swaps, which are contracts that insure against exposure to U.S. sovereign debt, rose to the highest since 2011, S&P Global Market Intelligence data showed.

"The weak earnings growth, which is expected, is bringing to the forefront that not only are central banks still tightening but economic growth is disappointing and now weighing on company profits," said Seema Shah, chief strategist at asset manager Principal Global Investors.

A Reuters poll of economists showed the Federal Reserve is likely to continue its most aggressive rate hiking cycle in decades next month, with a 25-basis-point rate increase, but then hold rates steady for the rest of the year.

World stock markets have bounced back from sharp falls in March as banking sector strain roiled sentiment, before the turmoil generated bets that central banks would soon end their campaigns of raising rates to tackle high inflation.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, March 21, 2023. REUTERS/Staff

"Global central banks' narrow focus on combating inflation has gotten more complicated as they are now faced with the added task of maintaining financial stability," said Thomas Poullaouec, head of multi-asset solutions APAC at T. Rowe Price.

Goldman Sachs analysts still see the European Central Bank lifting its main deposit rate from a current level of 3% to 3.7% by July, however, with the next batch of euro zone GDP data expected to show the economy has been resilient.

In the UK, data on Wednesday revealed inflation remained at double digit levels in March, with the annual rate edging down to 10.1%, above economists' expectations.

UP, THEN DOWN

Government bond yields, which rose sharply on Wednesday as rate hikes expectations moved higher again, pulled back.

Benchmark 10-year Treasury yields were down 5 basis points (bps) at 3.55% after scaling a four-week peak of 3.639% on Wednesday.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 7 bps to 4.19%, having hit almost 4.29% on Wednesday, the highest since March 15.

Shah at Principal Global Investors said she expected two-year yields to move higher but not as high as the 5% levels reached in March just before the banking turmoil.

In currency markets, the U.S. dollar index drifted lower, with the euro up 0.13% to $1.097.

The yen weakened 0.1% to 134.57 per dollar, while sterling was last trading at $1.2442, little changed on the day.

In oil markets, Brent crude was at $81.70 a barrel, down 1.49%.

(Reporting by Dhara Ranasinghe and Naomi Rovnick in London. Additional reporting by Ankur Banerjee in Singapore; Editing by Sharon Singleton and Alex Richardson)

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