U.S. equity futures retreated Monday, pulling global stocks firmly into the red, as investors around the world pared bets on aggressive near-term rate cuts from the Federal Reserve and questioned the strength of the recent market rally that's taken Wall Street to all-time highs.
Friday's June jobs report, which showed American employers added a much-larger-than-expected 224,000 jobs to the domestic economy last month, has triggered a broad re-pricing of Fed rate expectations in markets around the world, with traders now looking for a smaller July rate cut of 25 basis points, and perhaps only one more after that, amid a resilient economy with a booming employment market.
The fresh assessment on rates, however, has rippled through global stock markets Monday as trader worry that one of the key underpinnings of the recent rally, which helped all three Wall Street benchmarks touch record highs last week, will no longer provide support for both expensive U.S. equities and stocks in other major economies.
That concern was also reflected in a weekend note from Morgan Stanley, which lowered its view on global equities to 'underweight', the lowest in five years, from a previous assessment of 'neutral', citing high valuations, falling government bond yields and weakening economic data.
Investors will, however, get an early chance to challenge the new hawkish rate thesis later this week when Federal Reserve Chairman Jerome Powell faces questions from Congress in his semi-annual testimony to both House and Senate financial committees on Wednesday and Thursday.
Wall Street futures reacted in kind Monday, extending losses from Friday's liquidity-thinned session as contracts tied to the Dow Jones Industrial Average indicated a 115 point pullback at the opening bell while those linked to the S&P 500 are suggesting an 11.5 point dip for the broader benchmark.
Apple Inc. (AAPL - Get Report) shares were a notable early market mover, falling 1.7% after analysts at Rosenblatt Securities downgraded the stock amid concern for weakening iPhone demand and slower service revenue growth over the second half of the year.
Boeing Co. (BA - Get Report) shares were also indicated lower in pre-market trading after the world's biggest planemaker lost a $5.9 billion order to its European rival Airbus SE (EADSY) amid concern for the near-term fate of its flagship 737 MAX aircraft.
European stocks were also on the back foot Monday, with stocks around the region following the lead of U.S. futures are slipping into negative territory by mid-day as the Stoxx 600 drifted 0.06% lower and Britain's FTSE 100 fell 0.12%.
Deutsche Bank (DB - Get Report) shares were easily the session's most active, rising 4.4% to the top of the European market before giving back all of those gains and sliding 0.5% lower as investors parsed through plans from Germany's biggest lender to retreat from its global equity trading business, slash more than 18,000 jobs around the world and create a so-called 'bad bank' with more than $80 billion in assets as part of a long-await restructuring plan that was formally unveiled on Sunday.
Overnight in Asia, the region-wide MSCI ex-Japan index slid 1.43%, led by steep declines for stocks in Shanghai amid talks of a near-term rate cut from the People's Bank of China, while Japan's Nikkei 225 fell 0.98% to close at 21,534.35 points.
Away from equities, the U.S dollar index, which tracks the greenback against a basket of six global currencies, traded at a three-week high of 97.26 in overnight dealing as bets on a 50 basis point rate cut at the Fed's July meeting fell to less 6% after Friday's payroll surprise. Benchmark 10-year U.S. Treasury bond yields, which had traded at a November 2016 low of 1.945% prior to the Friday jobs report, were marked just over the 2% threshold at 2.015%
Global oil prices were little-changed at the start of the Monday session, with a stronger U.S. dollar holding down any potential gains linked to concerns over supply disruptions in the Gulf as tensions between Iran, the U.S. and its European nuclear weapons treaty partners intensity. At the same time, weak manufacturing data, as well as concerns for the near-term fate of the world economy, have been pressuring prices for much of the past week.
Brent crude contracts for August delivery, the global benchmark, were seen 5 cents higher from their Friday close and changing hands at $64.25 per barrel in early European trading. WTI contracts for the same month, which are more tightly linked to U.S. gas prices, were marked 6 cents lower at $57.45 per barrel.