Wall Street Poised for Rebound, But Volatility Keeps Global Markets Cautious

February 9, 2018

New York (Feb 9)  U.S. stocks could open firmly higher Friday, according to early futures prices, but with government bond yields and volatility gauges still elevated, investors in Europe and Asia remained cautious the echo from last night's 1,000 point plunge for the Dow Jones Industrial Average echoed across global markets.

Early indications from U.S. futures prices suggest a positive open on Wall Street, although with volatility levels, in the form of the VIX, trading at multi-year highs of 31.52, those indications are likely to change substantially at the opening bell. Contracts tied to the Dow Jones Industrial Average were marked 33 points to the downside after last night's 1,000-plus point slump, suggesting an implied opening bell gain of around 120 points. Contracts linked to the S&P 500 were 2 points higher than Thursday's close.

Sentiment may also be supported by a vote by U.S. lawmakers to avoid a government shutdown after the House backed a Senate-approved plan that funds the government for a further two years with a $300 billion spending boost that would swell the federal deficit.

The U.S. House of Representatives voted 240 to 186 to approve the plan which suspends the debt ceiling but creates by some measures the biggest deficit in a full-employment economy since the Second World War. The nonpartisan Committee for a Responsible Federal Budget has said the bill, along with last year's Republican-led tax reform, will add $1.4 trillion to the federal deficit over the next 10 years.

In Europe, the Stoxx Europe 600 benchmark, the region's broadest measure of share prices, fell 0.52% by mid-day as benchmarks in France and Italy Britain and Germany followed Asia and U.S. stocks into the red. Germany's DAX performance index, which opened modestly higher, was marked 1.07% lower by mid-day.

Those moves are, in part, linked to a spike in regional market volatility as measured by the VStoxx gauge, which measures implied turbulence in the Stoxx 50 index of Europe's biggest bluechips. That indicator hit a June 2016 high of 34.4 in mid-day Friday trading.

Infineon Technologies AG (IFNNY) shares were a notable mover, rising 2.86% to the top of the market in Frankfurt Friday after Goldman Sachs reiterated its "buy" rating on Europe's biggest chipmaker and investors eyed the bullish forecast issued by Nvidia Corp. (NVDA - Get Report) after its fourth quarter earnings last night.

Goldman made minor adjustments to its longer-term earnings forecast for Infineon, but said there was "no material change to our investment thesis, ratings or price target" in a note to clients published late Thursday. However, a reiteration of the €28 price target, coupled with Nvidia's blowout earnings, helped boost Infineon shares in early European trading.

Overnight in Asia, the broadest measure of regional share prices fell 2.03% to a two-month low after last night's selling on Wall Street, while Japan's Nikkei 225 ended the session 2.32% lower at 21,383.62 points. China's benchmark Shanghai Composite fell 4.1%, the most in four years into the close of trading. The Hang Seng index in Hong Kong fell 3.9% to close at 29,507.42 points.

Benchmark 10-year U.S. Treasury yields, whose rise was the trigger for the global equity market sell-off that began last Friday, pared their advance in overnight trading to 2.85% after hitting as high at 2.884% in Thursday trading in New York. That's kept a lid on gains for the dollar index, a measure of the greenback's strength against a basket of six global currencies, although it remained about the 90 marked at 90.23 in early European trading.

Global oil prices extended declines Friday, following data this week showing record high U.S. production and indication from Iran that it plans to increase output. Brent crude contracts for April delivery were marked 0.44% lower at $64.52 while WTI contracts for the same month were seen 1% lower from their Thursday close at $60.54 per barrel.


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