Stocks fall, dollar gains await earnings litmus test

By Amanda Cooper

LONDON (Reuters) – Stocks fell on Tuesday, while the dollar got a lift as investors prepared for corporate earnings and macro data this week to paint a clearer picture of the health of the global economy.

Last week’s U.S. bank earnings came in stronger than expected, and this week brings results for Big Tech and a number of big consumer brands in the United States.

But overall, year-on-year earnings growth for components is expected to come in at -4.7% in the first quarter, according to data from Refinitiv.

Microsoft (NASDAQ:) and Alphabet (NASDAQ:), two major drivers of strength in the S&P this year, report after Tuesday’s closing bell. U.S. stock futures fell 0.5%.

“There’s a lot of uncertainty. People still don’t know how much bank lending has been impacted by recent developments … (or) when inflation will durably peak,” said Prashant Bhayani, chief investment officer Asia, BNP Paribas (OTC:) Wealth Management.

Bhayani also pointed to anxiety about other weak spots that might be exposed by the recent turmoil in U.S. and Swiss banks.

Mid-tier lender First Republic Bank (NYSE:) shares sank more than 20% after the closing bell on Monday after it reported deposits plunged by more than $100 billion in the first quarter and it was exploring options such as restructuring its balance sheet.

Meanwhile, Swiss bank UBS reported a 52% slide in quarterly profit, as it prepares to integrate fallen rival Credit Suisse. The drop in profit was largely due to UBS setting aside a further $665 million to cover the costs of toxic mortgages that played a central role in the global financial crisis some 15 years ago.

UBS shares fell 4%, which in turn weighed on the broader index, which lost 0.5% on the day.

HOPING FOR RESPITE

One of the key questions about March’s banking sector turmoil was how it might affect central banks’ plans to raise interest rates.

The impact of a high-inflation, high-rate environment became clear last month, as more vulnerable lenders came under fire and concern about another credit crunch flared.

Investors are hoping corporate earnings and data will give some insight into how the underlying economy is really faring, especially given the risk of a U.S. recession.

Eric Stein, chief investment officer, fixed income at Morgan Stanley (NYSE:) Asset Management, said a tug of war over the direction of U.S. interest rates has been playing out in recent months.

“Has the Fed essentially done its job on inflation and we’re now just waiting for the results to come in and the market direction takes care of itself? Or does the Fed have to do more?” he said.

“Maybe they (raise) one more time in May, then I think the Fed is done after that. And then the real question is are we heading for a recession? And at some point, I do think there will be some rate cuts,” he said.

In the U.S. government bond market, short-dated Treasury yields were already trading well above longer-dated ones – a sign that investors think recession is possible.

But this week has seen a huge rise in yields on three-month bills – which mature roughly around the time of the deadline for lawmakers to agree on the debt ceiling.

The House of Representatives is expected to vote on a Republican-led debt and spending bill this week. The premium of three-month T-bill yields over 10-year yields has shot to 173 basis points, its largest in about 40 years, reflecting the risk investors believe is building for a damaging standoff.

The yield on benchmark 10-year notes eased 6 bps to 3.4485%.

The rose 0.2%, largely thanks to declines in the euro and sterling, which both lost 0.1%.

In a sign that concern about the stability of the financial system has receded, several of the world’s largest central banks said on Tuesday they no longer need to conduct daily operations to keep the flow of dollars running smoothly, but instead, would conduct weekly ones.

Oil recovered from Monday’s sell-off. rose 0.2% to $82.88 a barrel, while U.S. futures rose 0.15% to $78.89 a barrel.