A look at the day ahead in US and global markets from Naomi Rovnick
Risk appetite has risen in global markets thanks to optimism that US Democrats and Republicans are nearing a deal to raise the debt ceiling and avoid a catastrophic financial default.
European and Asian shares rose on Thursday, the dollar held near a seven-week high against a basket of major currencies and Wall Street stock futures suggested a steady open after the S&P 500 index (.SPX) rose about 1.2% on Wednesday .
But while an installment on the debt ceiling could boost markets in the coming days, the backdrop of a weak global economy remains unchanged, with its twin engines China and the US sputtering.
A dose of growth from China would help long-term risk appetite, but predictions of the world’s second-largest economy springing from the straitjacket of COVID-19 restrictions are proving far off the mark.
The Chinese renminbi has crossed 7 per dollar, down 1.4% this year, after underwhelming industrial production and retail sales reports and slowing house price gains, all despite property stimulus policies and the release of pent-up demand.
Citi’s China Economic Surprise Index is at its lowest since January (.CESICNY), a further sign that growth prospects have weakened.
US corporate earnings, meanwhile, paint a bleak picture of consumer caution as the lagged effect of rate hikes meets above-target inflation.
Big box retailer Target ( TGT.N ) signaled a dismal second quarter on Wednesday as shoppers steer clear of spending on non-essential electronics and home goods due to high prices, a day after Home Depot ( HD.N ) cut annual sales estimates.
Walmart ( WMT.N ), which may be on a stronger footing because of its focus on low-price bases, will post its own update later in the day.
The S&P 500 trades at a rich 18 times expected earnings, buoyed by the tech mega-stocks that dominate the index. Apple’s ( AAPL.O ) market capitalization exceeds that of the small-cap Russell 2000 Index ( .RUT ), and the tech-heavy Nasdaq 100 ( .NDX ) is up 24% this year.
Tech has boomed on predictions that the U.S. Federal Reserve will begin cutting interest rates from July, boosting the appetite for rate-sensitive growth companies whose valuations are flattered when money gets cheaper. Further outperformance depends on the markets being right about the Fed’s willingness to cut interest rates starting in July.
However, a host of Fed speakers this week argued for keeping monetary policy tight while inflation remains high.
Developments that may affect the markets on Thursday:
* Economic Events: Initial US Jobless Claims, US Existing Home Sales, Philly Fed Business Index.
* Central bank speakers: Fed Governor Philip Jefferson, Fed Vice Chairman for Supervision Michael Barr.
* Earnings: Walmart, Alibaba, materials used.
Reporting by Naomi Rovnick; Editing by Emelia Sithole-Matarise
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