Raytheon Technologies Share News (RTX.US)

S&P 500 ends down ~0.5%, Nasdaq off ~1.2%, DJI ends just below flat

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Comm svcs weakest S&P 500 sector; real estate leads gainers

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Dollar ~flat; gold edges up, crude up; bitcoin off >2%

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U.S. 10-Year Treasury yield edges down to ~3.72%

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U.S. STOCKS CLIPPED AS CAUTION PREVAILS (1601 EDT/2001 GMT)

Wall Street's three main indexes ended in negative territory on Monday as investors digested the implications of the rebellion by Russian mercenaries that raised questions about President Vladimir Putin's future.

Indeed, the final week of the quarter kicked off with a cautious tone. Though, the S&P 500 index, which is up more than 5% so far in Q2, is on pace to post its third-straight quarterly rise.

On Monday, however, the FANG index lost about 3%. Indeed, communication services, consumer discretionary and tech were among weaker S&P 500 sectors.

Real estate and energy led SPX sector gainers.

Under the surface, transports and regional banks were outperformers.

With this, growth suffered its fourth-weakest session relative to value so far this year.

Here is a snapshot of where markets stood shortly after the 4 p.m. EDT close:

(Terence Gabriel)

GLOBAL DEBT SERVICE RATIOS LAG RATE HIKES IN DEVELOPED MARKETS (1333 EDT/1733 GMT)

The rise in interest rates around the world over the last year is sure to raise debt servicing costs for households and institutions, but this will take time.

As of the first quarter of this year, debt servicing has yet to increase as a share of income, "held back by a decade of deleveraging", writes JP Morgan in a research note led by analysts Joseph Lupton and Maia G Crooks.

While the developed markets aggregated debt service ratio, or the share of disposable income allocated to servicing debt, is expected to rise in the coming months, JP Morgan expects this metric to remain below the lows posted in the 2000s expansion until the end of the year.

Based on the bank's models, the estimated debt service ratio as a percentage of income for developed markets will rise by 1 percentage point to 9.7%, down 0.2% of what JPM expected in April.

That said, interest-sensitive countries such as Canada, Australia, and the Scandinavian nations, may already be feeling the pinch of higher interest rates.

Australia, Canada, and Norway are each expected to end the year with debt service ratios of between 15% and 17%, with all three countries projected to have the largest increases since the end of 2021, the JPM note says.

In the United States, the debt ratio at the end of 2023 is estimated to be 10% of income, the highest among the four major economies, including the euro zone, UK, and Japan.

The impact of these increases, however, will be offset by the "healthy state of household balance sheets", JPM writes, with debt as a percentage of disposable income drifting lower in recent quarters across much of the developed world.

(Gertrude Chavez-Dreyfuss)

DOLLAR'S FALLING SHARE OF GLOBAL RESERVES NOT INDICATIVE OF CURRENCY DIRECTION (1215 EDT/1615 GMT)

James Lord, global head of FX and EM strategy at Morgan Stanley, writes in a research note that the U.S. dollar's declining share of global FX reserves has not been relevant in determining the greenback's overall direction.

"FX reserve managers are less influential in currency markets today, but more importantly because other investors have been enamored with U.S. assets," Lord says.

The dollar remains the world's dominant reserve currency, but its share has declined by about 20 percentage points over the last 20 years, falling more rapidly in the last 10. As of the fourth quarter last year, the dollar's share was 58.4%, down from 59.7% in the previous quarter. Over the last decade, though, Lord notes that it has been the strongest currency, with the Federal Reserve's broad dollar index hitting a near 20-year high in October last year.

He also points out that global FX reserve growth overall has slowed over the last 10 years even though the world's largest economies have substantial current account surpluses. While in the past, part of these surpluses was used to grow FX reserves at central banks, recently other institutions have been accumulating foreign assets, specifically dollar-denominated ones.

For dollar skeptics to be proven right, foreign investor demand for U.S. assets has to decline, but it hasn't. In fact, demand for dollar-denominated assets has never been more strong, Lord says.

"As the recent boom in U.S. tech stocks and rising optimism about the productivity-enhancing implications of AI (artificial intelligence) show, U.S. assets retain unique appeal for global capital," Lord writes.

In addition, the dollar provides one of the highest yields among the major currencies amid the Fed's aggressive rate hiking cycle. In a world of weak global growth, this high yield will also likely help the dollar to appreciate, Lord says.

(Gertrude Chavez-Dreyfuss)

TIME FOR TURKEY? NOT YET. (1118 EDT/1518 GMT)

The Turkish lira slid to a fresh record low against the dollar, after the central bank took steps to simplify policy, while an official and bankers said the bank had stopped using its reserves to support the lira.

This comes after the central bank's 650 basis point hike to 15% on Thursday, a substantial tightening even though it fell short of market expectations.

"The danger of a gradual adjustment in our view lies in the difficulty of aligning the possibly contradictory and somewhat destabilizing effects of unwinding the measures while attempting to tighten policy and lower inflation without the ability to utilize the policy rate as the main instrument," said economists at Goldman Sachs in a note.

The lira has weakened 28% so far this year, even after President Tayyip Erdogan moved to backtrack on his years of unorthodox economic policy after his re-election in late May.

"Should Turkey get back to orthodox policies, Turkish stocks, bonds and the lira will all sell off in the coming months," Rajeeb Pramanik, senior EM strategist at BCA Research in a note.

"Shunning orthodoxy will also entail the same market outcome."

Wide trade and current account deficits will continue to keep the lira under downward pressure, while depleted foreign reserves mean that Turkey has little resources to defend its currency, Pramanik added.

The strategist warned that contracting corporate earnings and a weakening lira suggest that Turkish stocks will fall further in absolute U.S. dollar terms, while rising bond yields and a softening lira will make local currency bonds a poor choice, particularly for foreign investors.

On the sovereign credit front, Pramanik said it wasn't clear if Turkey's tighter fiscal stance would improve Turkey’s fiscal balance. Also, Turkish sovereign spreads are not adequately compensating for the risks ahead, especially as the lira continues to plummet.

(Bansari Mayur Kamdar)

THERE MAY BE GOLD IN THEM THAR AI HILLS, BUT MAY BE BEST NOT TO JUST RUSH IN (1045 EDT/1445 GMT)

The 1848 discovery of gold at Sutter’s Mill in California triggered a stampede of prospectors rushing to strike it rich during the California Gold Rush.

As Philip Palumbo, founder, CEO and chief investment officer at Palumbo Wealth Management, recounts, for most, the dream of riches remained just that, as many prospectors came up empty handed.

However, Palumbo also notes that those that supplied the prospectors with tools, clothes and everything else they needed to prospect, flourished. The greatest wealth creation came not from gold, but from supplying the picks and shovels required to mine for it.

Now Palumbo says that "The Great Artificial Intelligence (AI) Rush" has recently begun and the primary players have already skyrocketed to extreme valuations. And while they seem destined to succeed in the AI world, he thinks the market may have already discounted a good chunk of that success.

Palumbo cites comments from David Trainer, CEO of New Constructs. According to Palumbo, Trainer said that given recent Nvidia's valuations, "that if an investor desired a 10% annual return, NVDA would need to increase its after tax operating profit margin from 27% to 45% AND grow revenue at 20% per year for the next 20 years!" Palumbo's concern is that's a long time and you’d have be quite sure that some other company won't leapfrog Nvidia's market prominence.

That may seem improbable today, but Palumbo thinks it may be no less improbable than Intel fumbling away its lead in chip development, or when Yahoo! lost its search crown, or when Facebook was an also ran to Myspace.

"In the heat of the moment and at the height of FOMO (Fear Of Missing Out), it is always wise to step back, take a deep breath, and rationally assess valuations," writes Palumbo.

Palumbo's bottom line is that FOMO can make market players do foolish things.

"We suggest that investors are much more likely to garner that 10% return by investing in more reasonably valued companies that will use AI to reduce costs and increase productivity and profits."

(Terence Gabriel)

U.S. STOCKS EDGE HIGHER, BUT OVERALL MOOD IS CAUTIOUS (1000 EDT/1400 GMT)

Shares on Wall Street are trading marginally higher early on Monday, with risk appetite down amid a short-lived revolt in Russia over the weekend.

Traders were cautious overall after an aborted revolt by Russian mercenaries raised concerns over the stability of President Vladimir Putin's government and a potential disruption to Russian oil supply.

"The insurrection in Russia (is) driving questions about the Ukraine war ending faster and leading to warnings to be careful what you wish for...and an analysis of Russia's nuclear weapons is also part of the fear," writes Bob Savage, head of markets strategy and insights at BNY Mellon.

U.S. defense companies led by Raytheon Technologies and Lockheed Martin Corp are down in early trading.

At the same time, investors are looking to a slew of U.S. economic data this week to gauge the impact of the Federal Reserve's aggressive tightening over the last 12 months.

Here is a snapshot of where financial markets stood around 1000 AM EDT:

(Gertrude Chavez-Dreyfuss)

NASDAQ COMPOSITE ON PACE FOR ITS BEST FIRST-HALF START IN 40 YEARS (0900 EDT/1300 GMT)

With just five trading days to go in June, the Nasdaq Composite is up about 29% YTD, which puts it on track for its biggest first six-month gain of a year since a 37.1% surge in 1983.

However, shorter-term, the tech-laden index is suddenly on the back foot. Indeed, since tripping at resistance on June 16, the tech laden-index has lost 2.1% and is down four out of the past five trading days.

With this, one measure of its internal strength, on a daily basis, has also stumbled. The Nasdaq New High/New Low (NH/NL) index has fallen from a more than four-month high of 67.1% on Friday June 16 to 56.5% this past Friday.

However, looking at this measure on a monthly basis still shows an intact advance:

The NH/NL index, on a monthly basis, bottomed in October of last year at 14.5%.

This measure has now risen to 34.4% and is on track to rise for an eighth-straight month. With this, the measure's eight-month rate-of-change (ROC) is currently its third strongest reading coming out of a trough since the mid-1990s. Only the upturns out of its 2003 and 2009 troughs were stronger.

This measure certainly has a lot of room to rise before reaching previous peaks. And even then, in a number of instances, including its most recent top in 2021, the Nasdaq moved still higher, while the NH/NL index, on a monthly basis, diverged.

Bulls will want to see this measure continue to rise. However, a down-tick in the ROC may signal that the period of easier gains has passed.

A down-tick in the measure itself, followed by a break below its 10-MMA, which has now risen to 24%, could coincide with a return of much more intense IXIC pressure.

(Terence Gabriel)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)