North American Morning Briefing: Stock Futures Tumble as BOE Intervention Bounce Fades

MARKET WRAPS

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Weekly Jobless Claims; GDP estimate for 2Q; Canada GDP for July; EIA Weekly Natural Gas Storage Report; Nike earnings

Opening Call:

Stock futures fell back on Thursday as the positive impact on bond markets from the Bank of England's intervention began to fade and yields again moved higher.

"Despite the BOE's insistence that these are targeted, temporary purchases designed to ease market dysfunction, global pricing reacted as if they were launching a new QE program to ease financial conditions," said Jim Reid, macro strategist at Deutsche Bank.

"It might not be the last time a central bank buys government bonds...given how much debt there is and how much there's likely to be going forward," he added.

Still, the underlying trend remains higher borrowing costs, as most of the world's big central banks battle to combat inflation--and this was continuing to weigh on sentiment in early Thursday trading.

Indeed, there were signs that the positive impact of the BOE's action was already starting to fade. The benchmark 10-year Treasury yield was up 12.7 basis points to 3.863% and the equivalent duration U.K. gilt rose 13.3 basis points to 4.146%. The Stoxx 600 index of European stocks fell 1.5% and the dollar resumed its advance.

"The USD still exhibits a strong, negative correlation to global equities because, in a world where monetary and fiscal policy are now at odds with each other, the value of collateral is being tested," Citi said.

"The whole reason central banks are hiking rates is to tighten financial conditions, which implicitly means that the Fed is targeting a lower equity market."

Investor anxiety could be seen in the CBOE Vix index. The Vix, whose long-term average is around 20, was hovering near 31, having stood above 30 for much of this week.

U.S. economic updates set for release on Thursday include the weekly initial jobless claims and second quarter GDP data. St. Louis Fed President James Bullard is due to speak at 9:30 a.m. and San Francisco Fed President Mary Daly will make some comments at 4:45 p.m.

Read Barrons.com: What the Bank of England's Emergency Move Means--And Doesn't--for the Fed

Forex:

Although markets have stabilized moderately since the BOE intervened in the gilt market, the dollar will remain investors' currency of choice and strong demand is likely on any dips, ING said.

"The dollar will continue to be favored--especially if it is soon to be paying 4% on deposits."

Meanwhile, a narrowing U.S. trade deficit means the dollar "does not look as vulnerable as it could," ING said.

ING also said the Bank of England's intervention to stabilize gilt markets will have only a limited positive impact on sterling, which looks vulnerable to a drop back toward Monday's record low of $1.0349.

"We doubt cable [GBP/USD] holds gains to 1.08/1.09 and the bias has got to be for a 1.0350/1.0500 retest. There is only so much the BOE can do to support cable, since we think FX intervention and emergency rate hikes are not on the table."

Energy:

Oil extended its losses in Europe, with prices recently down almost 2%, as demand concerns linked to slowing global growth continued to weigh on sentiment.

With OPEC+ set to meet next week, many analysts now expect a sizable output cut from the group that should support prices. SEB expects a cut of between 500,000 and 1 million barrels daily.

"Bearish demand concerns likely to dominate in the near term," it said. But in the longer term, "supply side issues will be worse than demand side issues unless there is a severe global recession."

Metals:

Base metals were lower in London trade as tightening monetary policy across the world continues to pose a headwind to prices, although Marex said hopes of infrastructure spending in China offered some support.

Chinese media reports that Beijing would allocate 500 billion yuan to infrastructure projects is encouraging metals demand on the Chinese mainland, Marex added.

Other News:

Lithium prices have tripled in a year, and the chemical element, which is used in batteries for electric vehicles, faces a long-term supply shortage.

The increase "is largely due to increasing demand for electric vehicles and the inelastic nature of supplies," Global X said. Bringing new production capacity online can take three to five years or more, "for studies, permitting, capital raising, and capital expenditure before any lithium is produced."

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