Market Volatility: Stocks Reverse Course Amid Disinflation Concerns and Dollar Weakness

Disinflation, rotation and a bruised dollar

July 12 (Reuters) - A look at the day ahead in U.S. and global markets from Mike Dolan A violent rotation from Big Tech into small cap stocks followed the surprisingly benign June U.S. inflation report, while U.S. borrowing rates and the dollar plunged and Japan's yen stole the currency show. What's now become almost traditional market volatility on U.S. CPI day didn't disappoint on Thursday. Although there's been some steadying of the ship early on Friday as major U.S. banks prepare to kick off the second-quarter earnings season in earnest, confirmation of a resumption of disinflation has left its mark. Seeded by a withering recoil in AI and EV giants Nvidia and Tesla, the Nasdaq turned tail from record highs and plunged almost 2% after the CPI report, even as small caps in the Russell 2000 surged more than 3% to three-month highs on their best day of the year so far. Less extreme but also dragged down by the heavyweights, the S&P 500 lost almost 1%, though futures have held the line overnight. At least Tesla, which tumbled 8.4% for its biggest drop since January, had some excuse after a Bloomberg report claimed the firm is delaying the launch of robotaxi by about two months. But the wild rotation of stock sectors seemed more like a spontaneous reaction to the positive inflation news, where headline prices actually fell during the month for the first time in four years and annual inflation dipped below 3% for the first time in 12 months. The runes of the report were similarly impressive, with core inflation below forecast at 3.3% - its lowest in three years - and irksome services and shelter components also moderating. A big drop in weekly jobless claims in the background provided a pleasing mix, despite the confusing stock market volatility. And producer price updates on Friday will hold the picture up to the light again. Federal Reserve officials were quick to applaud the piece. St Louis Fed President Alberto Musalem called the June report "encouraging," San Francisco Fed boss Mary Daly talked of "relief" and the Chicago Fed's Austan Goolsbee called it "excellent" news that puts inflation back on track to its 2% target. The International Monetary Fund said it continues to believe the Fed can start cutting interest rates later this year. Rate futures agreed, with a first Fed cut now fully priced for September and as much as 60 basis points seen over the remainder of the year. Ten-year Treasury yields plunged to their lowest in four months, though they popped back above 4.2% early on Friday. The dollar, predictably, was a casualty. And there was almost consternation in the dollar/yen pair, which plunged almost 2% amid some suspicion and various reports the Japanese authorities used the opportunity to intervene to buy yen and maximize the move. No official confirmation was forthcoming overnight, with the dollar regaining a foothold back above 159 yen, still almost three yen below the recent 38-year high. The follow-through from all the upheaval in world markets through early Friday has been messy. Hit by the tech swoon and the yen spike, Japan's Nikkei skidded 2.5% and other tech-heavy Asia bourses in South Korea and Taiwan fell sharply. While Hong Kong shares surged, Chinese mainland stocks were more mixed as the June trade report from China threw up conflicting signals. While Chinese exports beat forecasts for the month, imports fell again raising more concerns about domestic demand in the world's second-largest economy. In Europe, the stock reaction was mostly positive on Friday, with only Britain's midcap FTSE250 taking a small step back from its best level in more than two years after the CPI report. But the dollar retreat provided a boon to both the euro and sterling, with the post-election buzz in the latter sending it to its highest in a year. Elsewhere, attention remained on politics. Pressure on U.S. President Joe Biden to step aside from November's White House race continued after a series of verbal gaffes during his latest appearance at the NATO summit in Washington. Key developments that should provide more direction to U.S. markets later on Friday: * US June producer price index, July University of Michigan consumer survey * US corporate earnings: JPMorgan, Citi, Wells Fargo, Bank of New York Mellon, Fastenal (By Mike Dolan, editing by Sharon Singleton mike.dolan@thomsonreuters.com)

Stocks Stage Big Reversal To End Day Lower

On Thursday, stocks rallied modestly in the wake of the most recent Consumer Price Index (CPI) report which showed inflation is continuing to cool. But by mid-morning, a Mel Torme-like velvet fog had rolled in, turning the tide and sharply reversing stocks. For the day, the S&P 500 fell by 0.88% to close just over 5584, after getting as high as 5642. The lower close ended a streak of six consecutive record high closes. Tech stocks performed even worse, reversing by nearly 400 points and closing down 1.95%. By contrast, the Russell 2000 posted its best day since November, gaining over 3.6% in what might be the beginning of a sector rotation. Bonds also staged a strong rally with yields on the 10-year dropping to 4.192%. We also saw gold and silver stage strong rallies with gold gaining 1.8% while silver added 2%. Artificial Intelligence (AI) stocks were some of the biggest losers for the day. Nvidia fell over 5.5%. Arm Holdings dropped 7% and Dell Technologies dropped 3.45%. Meantime, shares of Tesla plummeted almost 8.5% on reports the company is postponing the release of its robotaxi. That drop halted an 11-day win streak that saw the stock surge 40%. Earnings season also kicked off on Thursday with PepsiCo and Delta Air Lines reporting. Shares of PepsiCo closed relatively unchanged on the day; however, the company did report disappointing sales numbers. Global sales fell by 2% as customers cut back on spending. Delta Airlines sounded a similar tune. Summer travel projections came in weaker than expected despite what has been a strong summer travel season. This could be an interesting development if we see a continuation of weakening consumer spending, despite inflation coming down. This morning, Citibank, JP Morgan and Wells Fargo are all scheduled to release. JP Morgan saw investment banking fees jump 50%, helping the company to top expectations. Wells Fargo also posted a beat; however, expenses came in higher than expected. Shares of JP Morgan are indicated lower by 1.5% and Wells Fargo is down over 6%, both in premarket. Turning to economic news, Thursday's CPI report showed core prices increasing just 0.1% month-over-month. That news buoyed hopes for interest rate cuts this fall. Heading into Thursday's report, there was a 75% chance of an interest rate cut in September according to the CME Fed Watch Tool. Following the report, those probabilities increased to 93%. Hopes for a cut increased further this morning following the Producer Price Index. Despite coming in stronger than expected, chances of a rate cut in September now stand at 96%. For today, I'm keeping a close eye on volatility. Despite the size of yesterday's reversal, VIX only increased 0.5%. That is somewhat surprising and suggestive that the market didn't take yesterday's selloff seriously. If we are going to see continued selling, we'll need to see volatility increase. As always, I would stick with your investing plan and long-term objectives.