Morning Bid: Braced for Milton as oil recoils, China retreats

A look at the day ahead in U.S. and global markets from Mike Dolan

Wall St stocks roared back on Tuesday just as China doubts re-emerge – but a scattergun week now has investors navigating the impact from a potentially devastating hurricane in Florida and a recoiling oil price in the face of Middle East tensions.

Adding to this heavy and sometimes conflicting newsflow, the U.S. Justice Department late Tuesday said it may ask a judge to force Alphabet (NASDAQ:GOOGL)’s Google to divest parts of its business, such as its Chrome browser and Android operating system – claiming they sustain an illegal monopoly in online search.

Despite the breakup call, Alphabet’s stock was steady in Frankfurt on Wednesday – but the antitrust move may be serve as a shot across the bow to Big Tech megacaps that once again led Tuesday’s broader rally. Stock index futures were marginally in the red ahead of today’s open.

The moves paled in comparison to the wild swings in China’s markets, where growing doubts about the success of last month’s slightly frantic economic stimulus measures saw the biggest one-day losses in mainland indexes there since the pandemic in 2020.

Stocks in Shanghai and the blue-chip CSI300 closed down 6.6% and 7.1% respectively on Wednesday – snapping a 10-day winning streak. Hong Kong added another 2% fall to its near 10% slide on Tuesday.

Clearly jarred by the sudden about face on markets, China’s finance ministry said it will detail plans on a fiscal stimulus to boost the economy at a news conference on Saturday. But the market fizz has certainly disappeared after the original announcements.

Despite U.S. hurricane fears and trepidation about what happens next between Israel and Iran, murmurs of ceasefire between Israel and Hezbollah in Lebanon and fresh the Chinese demand doubts saw oil prices fall back sharply on Tuesday – as crude clocked its biggest one-day drop of the year.

That’s helped defuse anxiety about another energy price hit to the global disinflation process, with rates traders now focussed on Thursday’s release of the September U.S. consumer price report.

U.S. crude steadied on Wednesday just under $74 per barrel after a 4.5% slump in the previous session. Annual oil price moves continue to clock losses of about 14% year-on-year.

Goldman Sachs analysts reckon the oil market risk premia they look at had dissipated considerably, with options markets pricing in a roughly 5% probability of a $20/bbl price jump.

Goldman reckons that sort of price jump roughly corresponds to a 2 million barrels per day 6-month interruption without an OPEC offset, occurring within the next month.

With $39 billion of 10-year Treasury notes under the hammer later, 10-year yields fell back slightly today but continued to cling to a new-found 4% handle. The dollar remained pumped up and nudged higher to build on last week’s surge.

The Federal Reserve on Wednesday releases minutes of its September policy meeting – where it began cutting interest rates with an outsize half point cut. But much of the thinking since then has changed due last week’s robust employment report.

The short-term economic effects of Category 5 Hurricane Milton – which is due to make landfall on Wednesday and has already displaced more than million people from coastal areas – are harder to assess.

Disruptions to economic data over the next month from this and the most recent hurricane Helene are likely at least.

Airlines, energy firms and a Universal Studios theme park were among the companies beginning to halt their Florida operations as they braced for the huge storm.

Whatever the hit, the strength of the economy more broadly looks able to absorb it.

After the latest jobs and trade numbers, the Atlanta Fed’s real-time ‘GDPNow’ estimate was again revised up sharply to 3.2% for the current quarter.

With less than a month to go before the U.S. election, fiscal jitters are also starting to re-emerge in bond markets.

The Congressional Budget Office estimated on Tuesday a U.S. federal deficit of $1.834 trillion for fiscal 2024, the highest in the post-COVID era, as debt interest costs jumped sharply and outlays rose for Social Security, Medicare and health insurance tax credits.

Neither candidate in the election has plans to rein that deficit in and Republican Donald Trump’s plans are expected to see twice the deterioration to the budget than that of Democrat Kamala Harris.

Elsewhere, the once-hawkish New Zealand central bank announced its second interest rate cut of the year – a hefty half point reduction with promise of more to come. The kiwi dollar fell after the decision.

Key developments that should provide more direction to U.S. markets later on Wednesday:

* Mexico September inflation

* Federal Reserve releases minutes of Sept policymaking meeting

* Fed Vice Chair Philip Jefferson, San Francisco Fed President Mary Daly, Dallas Fed boss Lorie Logan, Boston Fed chief Susan Collins, Richmond Fed chief Thomas Barkin, Chicago Fed chief Austan Goolsbee and Atlanta Fed chief Raphael Bostic all speak