Stock futures ease back after strong run as investors eye earnings, ECB meeting

What’s driving markets

A recent resurgence of risk appetite was fading, though sentiment remained underpinned by hope that investors had already passed peak bearishness and amid a generally well-received U.S. second quarter company earnings season.

A fresh batch of results were ahead for Thursday, including AT&T
T,
Travelers
TRV,
Philip Morris
PM
and Blackstone
BX.
Tesla
TSLA
was expected to open 1.3% higher, though well off the spike seen in after hours action on Wednesday, as investors welcomed better-than-expected profits but fretted over declining margins.

Still, the rest of the market is likely to gain succour from Tesla CEO Elon Musk’s comments that supply chain problems, which have been a particular issue for automakers, are ameliorating.

Opinion: Tesla’s margins shrink despite ’embarrassing’ price increases, putting Elon Musk in a tough spot

There was mixed news on foreign factors that may impact Wall Street sentiment. Worries about a sharp deterioration in the European economy were somewhat salved after Russia resumed natural gas shipments through the Nord Stream 1 pipeline.

The International Monetary Fund had calculated that if the energy conduit was shut for a prolonged period it would push Germany into a sharp recession in 2023.

Events were less positive in Italy, where Prime Minister Mario Draghi resigned after losing support of coalition partners. Traders dumped Italian government bonds, pushing yields sharply higher
BX:TMBMKIT-10Y,
as doubts grew that Rome could fulfill conditions necessary to receive its €200 billion ($203 billion) share of the EU’s coronavirus recovery fund.

The Stoxx 600 index
XX:SXXP
of European stocks fell 0.3%, and the dollar was barely changed against the euro
EURUSD
at $1.0170.

The development comes as the European Central Bank is expected on Thursday to raise interest rates for the first time in more than 10-years as it tackles inflation of 8.6% in the eurozone. Tighter monetary policy may put further pressure on bonds of the region’s highly indebted nations.

Economic data from the U.S. includes initial jobless claims at 8:30 a.m. and leading indicators at 10 a.m., both Eastern.

The S&P 500 in June hit an 18-month on worries about how surging inflation and tighter monetary policy would crimp company profits. But it has since rallied 8.1% on a belief those fears were overdone.

The improved mood of late is particularly evident in signs of resurgent demand for some of the more speculative stocks that got badly hit over the past year or so.

Shares in the ARK Innovation ETF
ARKK
run by high-profile fund manager Cathie Wood have jumped 10.5% in the past five sessions, though the fund, which includes the likes of Zoom
ZM,
Tesla, Teladoc
TDOC
and Roku
ROKU,
is still off 61% over the past 12 months.

Some observers remain cautious, however, and worry the latest bounce is just another bear market recovery. The burden of proof is on the bulls to extend the summer rally, said markets strategists at Bank of America.

“Even if a summer recovery continues beyond 3946, there is plenty of resistance near 4157-4178 ahead of weaker seasonality into September/October,” said BoA in a note.

How are other assets faring

• Oil futures were lower with U.S. crude
  CL
  down 2.2% to $99.38 a barrel, as energy tensions eased.

• The 10-year Treasury yield
  BX:TMUBMUSD10Y
  rose 1 basis point to 3.047% and German 10-year bund yields
  BX:TMBMKDE-10Y
  added 2 basis points to 1.279%.

• Gold
  GC00
  slipped 1% to $1,683.70 an ounce, to flirt with two-year lows.

• Bitcoin
  BTCUSD
  fell 1.6% to $22,934 after Elon Musk said Tesla had sold most of its holding of the crypto currency.