Morning Bid: Powell boosts rate hopes, Trump trade momentum fades

Market Overview Following Political and Economic Developments

After a tumultuous Monday prompted a surge in U.S. election-related trades, global markets have shifted their focus toward the prospects of Federal Reserve easing, China's economic downturn, and the ongoing earnings season. The appearance of former President Donald Trump at the Republican party convention reignited interest, especially in light of a recent failed assassination attempt, enhancing his re-election prospects for November. The selection of Ohio Senator J.D. Vance as Trump's running mate has caught the attention of investors, considering the significant historical trend of vice presidents ascending to the presidency.

Market movements in response to these developments were notable. Trump's rising chances of re-election, speculated to be over 70%, led to the first positive shift in the 2-to-30 year Treasury yield curve since January, an increase in Bitcoin and Trump-related stock values, a pivot toward small-cap stocks, and a dip in the value of Mexico's peso.

However, these trends moderated somewhat by Tuesday morning. Bitcoin dropped below $63,000, and the 2-to-30 year yield curve turned negative again as focus shifted to increasing hopes for Federal Reserve easing. Encouraging comments from Fed Chair Jerome Powell in Washington fueled expectations of rate cuts, with futures markets pricing the first rate cut for September. Early Tuesday, two-year Treasury yields hit a four-month low at 4.41%, and ten-year yields fell below 4.2%.

Stock Earnings and Market Sentiment

As major banks reported earnings, S&P 500 futures remained stable, while small-cap stocks continued to outperform. Despite a modest gain in the S&P 500, the Russell 2000 saw a nearly 2% rise, climbing over 7% in just five sessions. Meanwhile, stock market volatility increased slightly, with the VIX index reaching a three-week high.

In Asia, stocks were mostly higher, except in Hong Kong, where a significant decline was observed amid anticipation surrounding the Chinese Communist Party's ‘Third Plenum’ and its potential economic reforms. Details are expected on Thursday. China's economic troubles and Trump's trade rhetoric contributed to a varied performance, with both the yuan and yen weakening against the dollar despite Fed easing bets. European markets also suffered from concerns about Chinese luxury goods demand and trade tariffs.

In contrast, Hugo Boss shares plummeted nearly 9% after downgrading its annual sales forecast due to waning consumer demand in markets like China. Richemont's sales were almost flat in the latest quarter, driven down by Chinese demand, resulting in overall performance missing expectations.

Key Corporate and Economic Data Ahead

On Wall Street, Goldman Sachs exceeded analyst expectations with more than doubled second-quarter profits, leading to a 3% rise in its shares. Bank of America and Morgan Stanley are among the big names reporting earnings later today.

Upcoming Economic Indicators

Important economic indicators and corporate earnings expected later today include U.S. June retail sales, import/export prices, NAHB housing index, business/retail inventories, and Canada's June consumer price index and housing starts. In the corporate arena, Bank of America, Morgan Stanley, and others are set to release their earnings.

U.S. Treasury auctions, Federal Reserve Board Governor Adriana Kugler's speech, and a meeting of European Union finance ministers to review excessive deficits in seven member states are also on the radar. The outcome of these events will likely provide further direction to U.S. markets.