LDN - Business

Marketmind: Refunding fuel, megacaps update, China ailing

[January 30, 2024] (Reuters) - A look at the day ahead in U.S. and global markets from Mike Dolan

Spurred by falling estimates of U.S. Treasury borrowing, a sweep of megacap earnings updates and this week's upcoming Federal Reserve decision, Wall St. stocks and bonds have surged anew - in stark contrast to another slide in China's ailing markets.

U.S. assets got a fresh lift late on Monday after the U.S. Treasury cut its estimate of first quarter borrowing and refunding needs by $55 billion to $760 billion - mainly due to higher revenue from surprisingly brisk growth and higher cash balances.

The Treasury also said it expects quarterly borrowing to slow sharply to $202 billion in the second quarter.

Fears over how markets would absorb the heavy government debt schedule have had a significant impact on long-term borrowing rates over the past six months and marked key turning points in the market.

The latest refunding news - which will be followed on Wednesday with details of debt auction sizes and maturity buckets - electrified the bond market late on Monday and, in turn, triggered another sharp rally in stocks near the close.

Ten-year Treasury yields fell back towards 4% in early Tuesday trade - their lowest level in two weeks.

And with two of the "Magnificent 7" of U.S. megacap stocks - Microsoft and Alphabet - reporting after the bell later today, the S&P500 took its cue from lower Treasury yields to surge 0.8% to new record highs.

It's now less than 1.5% from the 5,000 point milestone and stock futures held most of Monday's gains overnight.

Underpinned by last week's news of an extraordinary confluence of U.S. growth above 3%, sub-4% unemployment and inflation ebbing close to the Fed's 2% target, a feel good investment mood is seeping into small cap stocks as well - with the Russell 2000 index outperforming on Monday with a 1.7% gain.

The Fed starts its two-day policy meeting later, with markets comfortable the disinflation process will allow it to signal interest rate cuts ahead. Futures have a first quarter-point cut pencilled in by May but still hold out a 50-50 chance it will come as soon as March.

The latest rate decision comes before Friday's release of the latest monthly employment report, but there will be a labor market update on December job openings later on Tuesday.

A jam-packed diary also includes January consumer confidence soundings.

And the International Monetary Fund also releases its latest World Economic Outlook later on Tuesday.

However the IMF assesses mounting evidence of a U.S. soft landing, the picture in the world's second-biggest economy is very different.

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A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in New York City, New York, U.S., July 19, 2021. REUTERS/Andrew Kelly/File Photo

Contrasting with the ebullience on Wall St, Chinese market sentiment continues to deteriorate under a suffocating property market bust that may take many more months and years to resolve and threatens widening consumer and asset price deflation.

With Monday's court order to liquidate the world's most indebted property company China Evergrande posing even more questions about possible real estate fire sales and mainland legal wranglings, still-piecemeal government support measures have been overshadowed.

The blue-chip index and the Shanghai Composite both closed down 1.8% and Hong Kong's Hang Seng lost more than 2%. The CSI300 has now given back more than half its bounce on last week's monetary policy easing and is stalking five-year lows again.

Elsewhere, oil prices fell back sharply from Monday's peaks and stayed lower early today - in part as China worries offset Middle East tensions.

Norway's $1.6 trillion sovereign wealth fund, the world's largest, reported a record profit of 2.22 trillion Norwegian crowns ($213 billion) in 2023, driven by strong returns on its investments in megacap technology stocks.

And the euro zone economy narrowly avoided a technical recession in the last three months of 2023 despite shrinking output in Germany, mainly thanks to strong growth in Spain and Portugal and a modest increase in Italy.

With the Fed decision looming, however, the dollar was barely changed against the major currencies.

Key diary items that may provide direction to U.S. markets later on Tuesday:

* U.S. corporate earnings: Microsoft, Alphabet, Pfizer, GM, Marathon, Starbucks, UPS, Sysco, MSCI, HCA, Corning, Danaher, Juniper, Teradyne, Stryker, Mondelez, Chubb, Match, AMD, Equity Residential, Boston Properties, Robert Half, AO Smith etc

* International Monetary Fund releases updated World Economic Outlook in Johannesburg

* U.S. Jan consumer confidence, U.S. December JOLTS job openings data, Dallas Fed January service sector survey, U.S. November home prices

* U.S. Federal Reserve's Federal Open Market Committee starts two-day meeting (to Jan 31)

(By Mike Dolan, editing by Sharon Singleton mike.dolan@thomsonreuters.com)

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