Morning bid: Cooler US takes edginess off markets, UBS jumps

[May 07, 2024]  A look at the day ahead in U.S. and global markets from Mike Dolan

World markets have returned to levels of almost month ago as fears of an overheated U.S. economy abate even as corporate profit growth remains brisk.

The April miss on new payrolls and the sight of annual wage growth ebbing below 4% have been enough to switch the narrative back to a Federal Reserve which is on hold for now, rather than one that may even consider further interest rate hikes.

That may seem like scant consolation to investors who at the start of the year had expected more than 100 basis points of cuts in 2024 - but it's taken the edge off restive bond markets that see another $125 billion of new Treasury coupons hit the Street again this week, starting with $58 billion of 3-year notes on Tuesday.

A standback look at incoming U.S. economic reports shows data surprises now running at their most negative since February last year.

What's more, the Fed's latest loan officers survey shows renewed weakening in demand for industrial loans and a decline in household demand for credit in the first quarter of the year.

And another New York Fed survey released on Monday showed Americans are bracing for another round of higher housing costs.

New York Fed boss John Williams said that at some undefined point the U.S. central bank will lower its interest rate target.

"Eventually we'll have rate cuts" but for now monetary policy is in a "very good place," he said on Monday.

That's seen interest rate futures move back out to price almost 50bps of Fed easing for the year, albeit only from September on. Two-year Treasury yields hovered at 4.80% on Tuesday, well off highs above 5% seen before the payrolls report last week.

Another strong gain in Wall Street stocks on Monday show sentiment buoyed again as first quarter corporate earnings have on aggregate come in well above expectations at the start of last month. Walt Disney tops the earnings diary later on Tuesday.

The dollar held firm on Tuesday, pushing higher again against Japan's yen to as high as 154.65 despite the two suspected bouts of Japanese intervention last week to support the yen.

Japan's top currency diplomat Masato Kanda once again on Tuesday said Japan may have to take action against any disorderly, speculative-driven foreign exchange moves.

A logo is seen on the headquarters of Swiss bank UBS on Paradeplatz in Zurich, Switzerland March 16, 2023. REUTERS/Denis Balibouse/File Photo

In overseas stocks, most Asian and European bourses were higher - with only Hong Kong's Hang Seng breaking its stellar recent run to end in the red. Still, the Hong Kong benchmark is still up 8.35% for the year to date in dollar terms - just shy of the S&P500's 8.6% gain.

UBS TROUNCES EXPECTATIONS

In Europe, Switzerland's UBS stole the show on Tuesday as its stock surged 8% on first-quarter profits that trounced forecasts and as the bank said it was sticking with plans for share buybacks over three years despite Swiss government proposals that would hike its capital requirements.

The bank's shares have soared nearly 50% since its merger with Credit Suisse last year, with investors upbeat about UBS prospects given the low acquisition costs, its huge increase in assets and - so far - its relatively smooth progress in integrating its stricken rival.

Elsewhere, UniCredit, Italy's second-largest bank, gained nearly 3% as it raised investor reward guidance for the year after posting a much higher-than-expected net income and further boosting capital levels.

But BP slipped after the oil giant reported first-quarter earnings down 40% from a year earlier and missed forecasts due to lower energy prices and a U.S. refinery outage, even as oil and gas production increased.

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

* US March consumer credit

* Minneapolis Federal Reserve President Neel Kashkari speaks

* US corporate earnings: Walt Disney, Duke Energy, Mckesson, Occidental Petroleum, Sempra, Assurant, Wynn Resorts, Rockwell Automation, Reddit, Arista Networks, Lyft, Match, Henry Schein, Electronic Arts, Jack Henry, Bio Rad, TransDigm, NRG, Kenvue etc

* Chinese President Xi Jinping in France and Serbia as part of week-long visit to Europe

* UK finance minister Jeremy Hunt answers questions in parliament

* US Treasury auctions $58 billion of 3-year notes

(Editing by Bernadette Baum)

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