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Morning bid: Calm markets hover near highs, metals step back

[May 21, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

Partly due to the absence of top-tier economic news this week, world markets have found a relatively calm plateau with stocks near their latest records - and even fizzing metals prices cooling a touch.

Wednesday's release of both Nvidia's quarterly earnings and the Federal Reserve's latest meeting minutes loom largest as potential game changers - but the broad constellation of influences remains bullish.

After recording its lowest close since just before the pandemic on Friday, Wall St's VIX volatility gauge is comfortably subdued and even Treasury market volatility has subsided to seven-week lows.

U.S. financial conditions, as measured by the Chicago Fed's index, are at their easiest since January 2022 - just before the Fed kicked off its credit tightening campaign. And even though futures markets retain expectations of about 41 basis points of Fed easing over the remainder of this year, Fed officials themselves seem in no rush.

U.S. economic surprises are indeed at their most negative since January 2023, but that's reflecting a welcome cooling of growth that the Atlanta Fed still estimates to be running close to 3.5% this quarter. Excluding the energy sector, annual U.S. earnings growth is running north of 10% and rising.

And even some of the more doggedly bearish Wall St strategists are throwing in the towel on year-end targets. Morgan Stanley's Mike Wilson on Monday lifted his base-case 12-month forecast for the S&P500 to 5400 points - only 2% from Friday's close but 20% higher than his previous forecast of 4500.

Moving into Tuesday's session, a packed diary of Fed speakers dominates. S&P 500 futures are flat, with the Nasdaq having eked out another record on Monday. Treasury yields edged down a touch and the dollar has stalled broadly.

Canada's April inflation release might feed the voracious appetite for price clues - with headline annual consumer price gains there expected to ease to 2.7% from 2.9%.

But much of the speculation now spins on the artificial intelligence theme and Nvidia's latest update tomorrow.

Traders are pricing in a big move for Nvidia’s shares after the chipmaker reports, though expectations for volatility are more muted than in the past.

Nvidia's options are primed for an 8.7% swing in either direction by Friday, according to data from options analytics firm Trade Alert. That would translate to a market cap swing of $200 billion - larger than the market capitalization for about 90% of S&P 500 companies.

While massive by most measures, that implied move would fall far short of the 16.4% jump Nvidia’s shares notched after the company’s most recent quarterly earnings report.

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People visit the Charging Bull at the Financial District by the New York Stock Exchange (NYSE) in New York, U.S., December 29, 2023. REUTERS/Eduardo Munoz/File Photo

Commodities too have been pumped up of late, mostly in metals where a mix of China's latest property market rescue plans and considerable speculative activity sent copper and gold to new records on Monday.

But even these have calmed down a bit today, with both stepping back from new milestones overnight.

Oil prices too fell back from Monday's three-week highs - helping take some of the heat out of Treasury yields.

Asian and European bourses slipped back earlier. Hong Kong's Hang Seng was the big underperformer with losses of more than 2% as doubts linger about the effectiveness of China's latest attempts to backstop its housing bust and geopolitical rhetoric around Taiwan appearing to have risen several notches in recent days.

G7 finance ministers, meantime, head to Italy this week for a meeting in Stresa on Thursday.

U.S. Treasury Secretary Janet Yellen is pushing for them to agree on a plan to use the income stream from some $300 billion worth of frozen Russian sovereign assets to back a larger loan to Ukraine.

Proponents of the plan say this could provide up to $50 billion up front for Ukraine, without confiscating the assets, as opposed to just using about $3.5 billion a year in interest earnings.

Speaking in Frankfurt on Tuesday, Yellen also said the United States and Europe need to respond to China's industrial policies in a "strategic and united way" to keep manufacturers viable on both sides of the Atlantic.

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

* Canada April consumer price inflation

* US corporate earnings: Autozone, Lowe's, American Resources, Trip.com, Urban Outfitters, XP, Viasat, Alvotech etc

* Federal Reserve Board Governor Christopher Waller, New York Fed President John Williams, Fed Vice Chair for Supervision Michael Barr, Atlanta Fed President Raphael Bostic, Cleveland Fed chief Loretta Mester, Boston Fed chief Susan Collins and Richmond Fed boss Thomas Barkin all speak. Bank of England Governor Andrew Bailey speaks

(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com)

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