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05.07.2023 02:02 PM
US premarket on July 5: US stock market faces challenges

Futures on US stock indexes declined following Asian and European indexes. The bond market grew after weak service sector data from China raised new concerns about the prospects for global economic growth.

S&P 500 and Nasdaq 100 futures fell by over 0.5%, indicating that pressure will gradually increase ahead of the release of the Federal Reserve's minutes from the June meeting, which may turn out to be more aggressive than previously expected. The yield on two-year Treasury bonds, sensitive to policy changes, decreased by approximately five basis points to 4.89%.

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The European index Stoxx Europe 600 dropped by 0.6%, with mining companies leading the decline due to concerns about reduced demand for commodities from China. Weak PMI data for the eurozone countries also put pressure on the stock market. European bonds rose, and the yield on 10-year German bonds fell by four basis points to 2.41%.

Recent evidence of economic slowdown worldwide undermines the demand for risk assets after a stellar rally in the first half of the year. The growth, mainly driven by large-cap technology stocks, is gradually slowing down, especially in anticipation of the corporate earnings season. At the same time, central banks, including the Federal Reserve and the European Central Bank, continue to tighten, exerting significant pressure on the pace of economic growth. The question is not whether a recession will occur but rather how deep it will be.

Yes, it is still too early to abandon risky assets, but at the same time, it is crucial to closely monitor the situation. In July, further interest rate hikes are expected from the Federal Reserve and the European Central Bank. The peak interest rate of the Federal Reserve is projected to reach 6.25% this quarter compared to the expected 6% three months ago. As mentioned earlier, today the Fed minutes will be released, which has confused investors as officials paused the rate hike cycle after 10 consecutive steps, predicting several more tightenings this year. It is difficult to predict how traders will react to it.

The fading optimism regarding China's prospects has also led investors to lower their expectations for Asian stocks' growth this year. A survey of 17 fund managers by Bloomberg shows that the MSCI Inc. Asia-Pacific index may only grow by 5% by the end of the year compared to Tuesday's closing level.

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In other countries, oil remained stable after Tuesday's rise due to production cuts in Saudi Arabia and Russia. Traders are now awaiting potentially critical comments from the Saudi Arabian Energy Minister. Gold remained unchanged.

As for the S&P 500 index, the demand has slightly decreased. Bulls may continue the uptrend, but they need to make every effort to defend $4,447. From this level, a jump to $4,469 may occur. An equally important task for bulls will be to maintain control over $4,488, which will strengthen the bull market. In the event of a downward movement due to decreased risk appetite, bulls should protect $4,427. A breakthrough of this level will quickly push the trading instrument back to $4,405 and $4,382.

Jakub Novak,
Analytical expert of InstaForex
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