U.S. Opening Bell: Yields Cross 3.1%; Oil Moves Past $72; U.S. Futures Mixed

Key Events

Shares in Europe advanced for a second day—albeit with some whipsawing—on the tails of a weak session in Asia earlier this morning. US futures are currently mixed. S&P 500 and NASDAQ 100 futures are pointing lower as of this writing while Dow and Russell 2000 futures are in the green.

The STOXX 600 has been edging higher, helped by the recovery of Italian shares on the FTSE MIB, after Italian political fears, which turned out to be unfounded, roiled local markets on Wednesday.

The UK's FTSE benefited from the 4-year high in London-listed Brent oil. Brent crude rose above $80 per barrel for the first time since 2014, lifting the FTSE's oil-related stocks. Both BP (LON:BP) and Shell (LON:RDSa) were up 0.71% and 1.04% respectively on Thursday.

Global equities took a downturn in the Asian session as the 10-year Treasury yield moved past 3.1 percent, after closing above that level yesterday, for the first time since mid-2011. This multi-year high signals the market expectation for rates to rise more quickly than expected—namely another three times this year. As well, this outlook for higher rates makes risk assets such as equities less attractive.

Shares on China's Shanghai Composite declined for a second day, down 0.5 percent this morning, for a two-day total loss of 1.2 percent; Hong Kong's Hang Seng dipped 0.4 percent, for a three-day straight total loss of 1.9 percent.

South Korea's KOSPI dropped 0.45 percent, falling three days out of the past four, an cumulative decline of 1.2 percent. Australia's S&P/ASX 200 slipped 0.2 percent while the Aussie gained 0.15 percent

Japan's TOPIX, however, bucked the trend. It advanced 0.45 percent, even as the yen weakened by 0.15 percent, providing export-sensitive local firms a stronger revenue outlook.

Global Financial Affairs

Positive momentum from yesterday's US session failed to carry through to Asia morning. The S&P 500 gained 0.41 percent, bouncing off the 100 DMA, a nice recovery from Tuesday's bloodbath. The advance was led by Materials (+1.19 percent). The only two sectors that closed in the red were Utilities (-0.78 percent) and Real Estate (-0.26 percent).

The Dow Jones Industrial Average rallied, up 0.25 percent. The NASDAQ Composite added 0.65 percent.

The primary focus though is on the Russell 2000, who posted a new high, the first among major US indices since late January, save for the NASDAQ Composite's mid-March record. This singular achievement indicates that among the many complicated risks currently confronting markets, the most treacherous headwind for stocks right now is the escalating trade war between the US and China, the world's two largest economies. Small, domestic firms listed on the Russell are protected from the ongoing spat, allowing the index to soar to new highs, unimpeded.

Technically, the small cap index is the only one among the four majors that has been developing a bullish pattern, an ascending triangle, since the late January record. Although the pattern is still very small, an upside breakout implies a repeated move to the 11-percent late January-February (downward) correction on the upside.

Most interesting to us is the juxtaposition between recent Asian sessions where advancing US yields consistently weigh on stocks, even after US investors (and markets) remain steadfast in finding reasons to remain positive.

The yield on the 10-year note renewed its upward push yesterday as industrial production signaled the US economy remains robust. Factory output rose 0.5 percent in April after a flat March. Uncertainties on the outcome of steel and aluminum tariffs were offset by solid consumer spending. After last year's corporate tax cuts, it seems business, which lagged earlier this year, is finally responding.

On the other hand, housing starts provides an alternate view of the US's economic outlook. Yesterday's release showed a 3.7 percent drop in the metric, for a seasonally adjusted annual rate of 1.287 million units in April, versus the 1.310 estimated. Home building, as measured by permits took a tumble last month as well. Building permits declined, suggesting the housing market is drifting, amid shortages of land and skilled labor.

Once again, however, equity traders opted to focus on the positive economic news, bidding prices up, while ignoring the less optimistic numbers.

Still, we remain steadfast in our view that the focus should remain on bonds. Most European sovereigns followed the lead of US Treasurys, which rose last week after stronger than expected retail sales figures were released. While this clearly indicates the economic outlook is looking stronger, we're also betting investors will sell off when it becomes apparent that Fed accommodation will be tightening further.

The pound briefly rose this morning on a report that Britain might have reached an agreement on its approach toward the European customs union, but Cable tumbled after a source dismissed the news. Technically, the pound has been consolidating for an eleventh session after completing a double-top.

Shares in Ocado (LON:OCDO) rocketed by more than 70% on Thursday to an all time high of 965p per share. The UK online supermarket announced an exclusive deal with the US retailer Kroger (NYSE:KR), which will give Ocado a foot into the world's largest grocery market. It will also allow Kroger to utilise Ocado's software to compete with Amazon (NASDAQ:AMZN) following its purchase of Whole Foods.

Royal Mail (LON:RMG) posted earnings on Thursday showing a 2% jump in revenue, however a 2.5% decrease in annual adjusted operating profits disappointed investors and saw shares in the postage company drop by more than 5.99%. The company also said it expected the volume of letters to decrease in the UK thanks to the new EU data rules.

Thomas Cook (LON:TCG) shares were down 2.60% on Thursday following a mixed set of results. The travel company announced it was on track to meet its annual forecasts thanks to shifting demand for holidays in the eastern Mediterranean, The drop in sterling's value was affecting the firm's market in Britain.

Both WTI crude and Brent are extending their more than 3-year highs.

In the wake of the US renewing economic sanctions against Iran and threatening to levy secondary sanctions on European companies doing business with the Middle Eastern country, France's Total (NYSE:TOT), one of the energy sector's seven 'supermajor' oil companies, has announced it's pulling out of its deal with Iran. Other European businesses are ending agreements as well, while some are still weighing their options.

Up Ahead

• US initial jobless claims are due later this morning.
• Cleveland Fed President Loretta Mester speaks on monetary policy at an ECB conference in Frankfurt on Friday.
• Chinese Vice Premier Liu He is expected in Washington for more trade talks.
• Walmart (NYSE:WMT) is set to release its results on Thursday, before market open, for the quarter ending April The EPS estimate is $1.13, after last year’s $1.00 for the same quarter. There's one key metric to focus on when the global retail giant reports.
• Campbell Soup Company (NYSE:CPB) will release earnings Friday before market open, for the fiscal quarter ending April, with an EPS forecast of $0.61 after posting 40.59 for the same quarter last year.

Market Moves

Stocks

• The U.K.’s FTSE 100 increased 0.1 percent.

• The Stoxx Europe 600 Index declined less than 0.05 percent before pushing higher, +0.14%.
• Futures on the S&P 500 Index sank 0.2 percent.
• Germany’s DAX fell 0.1 percent.
• The MSCI Emerging Markets Index sank 0.2 percent.
• The MSCI Asia Pacific Index increased less than 0.05 percent.

Currencies

• The British pound was flat at $1.3487, following making its largest rise in a month in earlier trading on Thursday.

• The Dollar Index is up 0.05 percent, after fluctuating 0.15 percent in either direction.
• The euro dipped 0.1 percent to $1.1802, the weakest in five months.
• The Japanese yen fell 0.1 percent to 110.50 per dollar, the weakest in more than 16 weeks.
• The Turkish lira sank 0.7 percent to 4.4473 per dollar, the weakest on record.

Bonds

• Britain’s 10-year yield climbed four basis points to 1.503 percent, the highest in more than 11 weeks.

  The yield on 10-year Treasuries increased one basis point to 3.11 percent, reaching the highest in about seven years on its fifth straight advance.
• Germany’s 10-year yield rose three basis points to 0.64 percent.
• Italy’s 10-year yield declined two basis points to 2.101 percent.

Commodities

• West Texas Intermediate crude rose 0.2 percent to $71.66 a barrel and Brent crude increased 0.1 percent to $79.34 a barrel - the highest in more than three years, for both.
• Gold slid 0.1 percent to $1,288.86 an ounce, the weakest in 20 weeks.