U.S. stock futures grind lower after more weak China data

What’s driving markets?

For Wednesday, the U.S. international trade deficit is due at 8:30 a.m. Eastern and April consumer credit is coming at 3 p.m.

And there was more gloom from China, where data showed exports fell 7.5% from a year ago in May, dropping from 8.5% growth seen in April, and much worse than the 1.0% decline seen from economists polled by The Wall Street Journal. A string of recent weak updates have heightened expectations that officials will soon make moves to stimulate the economy.

While U.S. stocks haven’t seen huge reaction to China data, investors have little to go on right now, so Wall Street may struggle to keep pushing equities higher. “It feels like the Chinese post-COVID recovery is falling a bit flat and this has negative implications for global growth,” said AJ Bell investment director Russ Mould.

Investors must wait until next Tuesday for an update on U.S. consumer prices, which comes one day ahead of a Federal Reserve policy decision. Markets are pricing in a 73.6% probability that the Fed will leave its policy interest rate unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.

As U.S. stocks have ground toward new highs in recent weeks, propelled by technology stocks and a clamoring for AI-related companies, such as Nvidia
NVDA,
-1.32%,
some say investors may need to start bracing for slow economic growth ahead.

“It feels like the dog days of summer have already arrived,” said Neil Wilson, chief market analyst at Finalto, in a note to clients. “After last Friday’s monster jobs report, the VIX
VIX,
+1.22%
fell to its lowest level since February 2020 — the calm before the Covid storm -– as the S&P 500 finally made a concerted break above 4,200 to hit its highest in nine months.”

He noted that Bank of America’s MOVE index, a measure of Treasury market volatility, is at a March low and FX volatility has also seen a notable decline recently, hovering around a 1-year low.

While that could be down to complacency about what’s coming — the Fed possibly nearing the end of its hiking cycle, with perhaps one more increase this month or a delay until July — it’s likely a technical reason behind the volatility squeeze, said Wilson.

“We have a seen a volatility crush that has mechanically driven stocks higher – funds buying when vol [volatility] is low. This gamma trap is neatly described as a market dominated by options sellers, which encourages mean reversion, spurring mechanical buying by low vol strategy funds,” he said, adding that dealers are going with the path of least resistance and letting markets drift higher.

“Long gamma means that option market-makers buy S&P 500 on dips and sell on rallies – low vol. Short gamma means they sell when it falls and buy when it spikes. So, the market is more volatile when gamma goes negative. Right now it’s long and is allowing SPX to drift up,” he said.

Overall, Wilson said the stock rally probably can’t last, given that overbought stocks and an expected liquidity drain in the wake of the lifting of the U.S. debt ceiling by Congress could trigger higher yields and a volatility spike. “Plus, this is still a bear market rally, albeit a heck of a long one,” he said.

Elsewhere, the dollar
USDTRY,
+7.24%
was sharply higher against the Turkish lira on reports that state lenders will no longer sell dollars to defend the currency, as markets weigh up a new finance minister.