US EARLY MORNING: Geopolitical tensions weigh on equity futures as US House Speaker set to arrive in Taiwan, ignoring China's warnings

SNAPSHOT: US equity futures are lower, with tensions around House Speaker Pelosi’s visit to Taiwan souring sentiment, and keeping equities cautious overnight and in early European trade. YM -0.3%, RTY -0.4%, ES -0.5%, NQ -0.6%. Treasury yields are lower by 3-6bps, with the belly outperforming, while major curve spreads are little changed, but biased towards narrowing. The Dollar Index is up. Crude benchmarks are lower.

RECESSION RISKS: JPMorgan strategist Marko Kolanovic notes that the S&P 500 has seen its second sharpest P/E de-rating of the past 30 years, which he says exceeds the typical compression seen during prior recessions. “While the current equity multiple is in-line with the historical median, we believe it is better than fairly valued given the shift in industry mix to higher quality companies,” Kolanovic, adding that “although the activity outlook remains challenging, we believe that the risk-reward for equities is looking more attractive as we move through 2H,” and “historical downgrade cycles also suggest the worst for EM equity EPS and returns is likely behind us.” Kolanovic has been more constructive on the outlook for equities than some of his peers in the strategist community. Goldman Sachs explains the recent upside as a function of a ‘friendly real regime’ as real rates reset lower; it notes that US 10yr real rates are almost back to zero, while breakevens are moving higher - an environment tends to be the best for risky assets performance, GS says, and has favoured some long-duration equities - while the beta of equities to US 10yr yields has turned positive, particularly for growth indices. However, GS warns that the market might have been too complacent too soon in fading recession risks on expectations of a more accommodative monetary policy stance. “We think markets will be vulnerable to hawkish surprises - if inflation continues to struggle to re-set - and growth surprises - if the slowdown in activity results in a more prolonged/deeper downturn.” Goldman’s strategists think that “from here sharp moves higher in US yields will likely have to rely on an improvement in growth sentiment.”

DAY AHEAD: The Fed’s dovish 2023 voter Charles Evans will host a breakfast conversation with reporters, and traders will be listening carefully for any clues where he may think that the Fed is due to pivot policy more dovishly; his fellow dovish peer Kashkari leaned back on this notion over the weekend, suggesting that the Fed had a lot more to do on inflation, and Kashkari said he was surprised by markets’ interpretation that the Fed would soon begin to back off. The hawkish voter James Bullard will also deliver remarks today. The stateside data docket is generally benign though features the weekly RedBook, JOLTs data for June, as well as the NY Fed’s household debt and credit report. Full Day Ahead here. The earnings slate for the day includes CAT, ETN, MAR, SPGI, GILD, ABNB, SBUX, AMD, PYPL, OXY. Full Daily US Earnings Estimates here. On the geopolitical front, House Speaker Pelosi’s visit to Taiwan is causing a diplomatic incident, and the Chinese have vowed retaliation, further souring relations between the world’s two largest economies, and threatening escalation at an inopportune time.













02 Aug 2022 - 09:31- Research Sheet- Source: Newsquawk

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