U.S. Opening Bell: Dollar Heads Higher; Global Stocks, U.S. Futures Sink

Key Events

Global stocks and US futures—including for the S&P 500, NASDAQ 100 and Dow—continued yesterday's US selloff this morning, led by disappointing earnings results from industrial and technology stocks. The Stoxx Europe 600 Index has moved lower after Asian stocks fell in all major exchanges across the region: China's Shanghai Composite, South Korea's KOSPI and Japan's Nikkei among them. Only Australian investors were spared, since local markets were closed for the ANZAC Day holiday.

The Dollar Index retested Tuesday's 91.07 high during this morning's trade, resuming its previous 5-day advance. This after the reserve currency yesterday posted its first decline after hitting a 3-month high, as it reached the top of an Ascending Channel. After penetrating the 91.00 level, the dollar closed lower.

A decisive upside breakout of the triangle top for the Dollar Index would put the ball back into the bulls' court, since the February bottom. It would also imply the first break out of the descending channel that began to form since US President Donald Trump's famous words "too strong a dollar is killing us" spurred a USD selloff.

The first 'domino' that triggered the current equity market slide and rising USD were 10-year Treasury yields, which finally managed to pierce the 3 percent milestone yesterday, the first time in four years.

Though it closed back below, it's rising above 3 percent today.

Global Financial Affairs

We have written extensively that the equity rally seen since the February 2016 bottom has been fueled by traditional bond investors switching to stocks for a more meaningful yield in a near-zero rate environment. Since recovering from the 2008 financial crash, equities have provided an unprecedented, low volatility backdrop, which lulled investors into a similar sense of security to that derived fromTreasurys.

As well, the same near-zero rate environment allowed companies to enjoy unprecedented growth, in turn enabling them to pass on robust yields to investors. Since bond investors are typically long-term asset holders, the record high stock price levels didn’t put them off. The one thing that might scare them? Rising rates. Which is what investors are now fearful the 3-percent yield portends.

This morning's futures selloff is a result of leading companies such as Caterpillar (NYSE:CAT), 3M (NYSE:MMM) and United Technologies (NYSE:UTX)—which should be the engines of US economic growth—all warning during their earnings calls that rising costs and declining demand threaten to squeeze profits. Investors may have interpreted these warnings as a leading indicator that economic expansion has reached a top.

The S&P 500 slid 1.34 percent, led by losses in Industrials) (-2.79), Materials) (-2.65) and Technology) (-1.74), as a total of 30 stocks from these sectors saw more than 5 percent of their value erased from their higher, opening price.

Technically, the SPX decline extended a triangle pattern. There is a debate among technicians, whether it should be viewed as a Descending or a Symmetrical Triangle. While the first is bearish in nature, as it demonstrates the bears advantage over the bulls, the second is neutral, as bulls would be advancing, as well, from the February lows to the April lows.

In our view, the pattern should be considered a Descending triangle for three reasons:

1. Closing prices leave a deeper imprint on investors and therefore represent a more meaningful indicator for drawing a trend line,
2. The upper boundary is much steeper than the lower boundary, demonstrating overall bearish dominance, and
3. Symmetrical triangles are generally continuation patterns, while we have been bearish on the market, which would be more in line with a Descending triangle.

FAANG stocks such as Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) also joined yesterday's selloff. With no obvious fundamental driver, investors seem to have grabbed the opportunity to take profits in the sector which hit a record high in January.

Though earnings were supposed to provide a reprieve for equity bulls and overshadow geopolitical risk, with almost a quarter of companies having already reported financial results and almost 80 percent of those reports beating expectations, still there's been no saving grace for investors.

In fact, analysts have cut their earnings estimates for the coming year, fueling speculation that Q1 2018 may mark the height of profit growth.

Despite rising fear of renewed sanctions against Iran and with US shale producers not showing profits (suggesting they might lower production) oil has fallen back below $68. Technically, the price of oil is in an uptrend, and the recent upside breakout of an Ascending Triangle implies prices will rise toward $75, in the coming months, even if price volatility for the commodity will likely continue.

UK-based rare disease specialist Shire PLC (LON:SHP) announced it had accepted a preliminary takeover offer of £46bn from Japanese pharmaceutical firm Takeda (T:4502). Shares in Shire were down 0.5 percent following the news. Takeda now values the Irish drug firm at £49 per share, an increase of £5 from its initial valuation.

Whitbread (LON:WTB) shares were initially boosted after the firm unveiled long-awaited plans to spin off Costa Coffee, however shares in the Premier Inn and Costa Coffee owner were down 1.5 percent on the day.

Lloyds Banking Group (LON:LLOY) was down 0.7 percent after the bank’s Q1 trading update missed expectations. The UK bank reported pre-tax profits of £1.6bn, narrowly missing the forecast £1.82bn.

Shares in UK entertainment firm SKY (LON:SKYB) increased 4.1 percent following a £22bn bid from U.S. cable firm Comcast (NASDAQ:CMCSA).

Up Ahead

• U.S. GDP data is due Friday, the UK will also report GDP on Friday.

• Facebook (NASDAQ:FB) reports Q1 results after the market closes today; expectations are for $11.41B in revenue with EPS of $1.36. In the aftermath of company's data breach scandal, it's a highly anticipated event.

• Amazon (NASDAQ:AMZN) is scheduled to release results tomorrow, after the market close. Consensus is expecting $1.22 EPS versus $1.48 for the same quarter last year.

• The European Central Bank announces a rate decision on Thursday. Investors will watch for signs that officials are preparing a shift in stimulus plans for their June meeting.

• The Bank of Japan announces its latest policy decision Friday and releases a quarterly outlook report.

• The leaders of North and South Korea meet Friday.

• UK bank Barclays (LON:BARC) is set to release its Q1 trading update on Thursday, followed by the Royal Bank of Scotland (LON:RBS) on Friday.

Market Moves

Stocks

• The Stoxx Europe 600 Index decreased 0.6 percent, the lowest in more than a week.

• The U.K.’s FTSE 100 declined 0.6 percent.

• Germany’s DAX fell 0.2 percent.

• France’s CAC 40 dipped 0.5 percent.

• Futures on the S&P 500 Index decreased 0.3 percent.

• The MSCI Asia Pacific Index fell 0.6 percent.

• Japan’s TOPIX fell 0.1 percent; Hong Kong’s Hang Seng Index declined 1.1 percent; South Korea’s Kospi sank 0.6 percent.

Currencies

• The Dollar Index increased 0.3 percent to the highest since January 16.

• The euro decreased 0.2 percent to $1.2208, the weakest in eight weeks.

• The British pound fell 0.2 percent to $1.3951.

• The Japanese yen declined 0.3 percent to 109.17 per dollar, hitting the weakest in 11 weeks with its sixth straight decline.

Bonds

• The yield on 10-year Treasuries climbed two basis points to 3.01 percent, reaching the highest in more than four years on its eighth straight advance.

• Germany’s 10-year yield gained two basis points to 0.65 percent, the highest in seven weeks.

• Britain’s 10-year yield increased two basis points to 1.539 percent, the highest in eight weeks.

• Japan’s 10-year yield rose one basis point to 0.069 percent, the highest in 10 weeks.

Commodities

• West Texas Intermediate crude decreased 0.2 percent to $67.55 a barrel, the lowest in more than a week.

• Gold decreased 0.5 percent to $1,323.96 an ounce, the weakest in five weeks.

• LME copper declined 0.7 percent to $6,961.50 per metric ton, the biggest drop in almost two weeks.