A look at the day ahead in U.S. and global markets from Mike Dolan

Markets have recovered their poise this week on a potent mix of U.S. ‘soft landing’ hopes and interest rate cut speculation and now turn their attention back to U.S. politics ahead of Tuesday’s big TV debate.

After a week or more juggling 50-50 calls on recession ahead and the size of this month’s expected Federal Reserve interest rate cut, speculation now shifts to November’s election – which opinion polls and betting markets now also see as a 50-50 call.

Tuesday’s first televised debate between U.S. Democratic presidential candidate Kamala Harris and Republican challenger Donald Trump effectively restarts the whole campaign after the disastrous performance of President Joe Biden in the previous one eventually saw him withdraw from the race.

And for that reason primarily, it’s the performance readout that will likely matter most to markets rather than any particular manifesto pledges – and how those optics shape polling and bookmakers’ odds over the weeks ahead.

While the election stakes are high across a whole series of key domestic and foreign policy issues – most obviously for markets on trade and tariff policies that the President doesn’t need the backing of Congress for – there are some questions about how investors interpret respective fiscal proposals.

Late last month, credit ratings firm Fitch said the U.S. fiscal profile would likely remain largely unchanged regardless of who wins the election, even as it affirmed a ‘AA+’ sovereign rating on ‘structural strengths’ that include high per capita income and financial flexibility.

Fitch said it expects most of the tax cuts introduced by Trump in 2017 to be extended under either candidate, impacting revenues and contributing to wider budget deficits. Broadly, it said governments over many years had failed to meaningfully tackle large fiscal deficits, the growing debt burden and looming spending increase associated with an aging population.

And on that score on Tuesday, Treasury kicks off another heavy week of coupon sales with a $58 billion auction of 3-year paper – with 10- and 30-year debt under the hammer later in the week.

As Wall Street stocks recovered ground on Monday with more than a 1% bounceback in the S&P500, Treasury yields ticked back higher ahead of the auctions and the 2-to-10-year yield curve hovered just above zero.

Markets seem more comfortable with the idea that the Fed will now kick off its easing campaign with a quarter-point cut this month – but with two more by year-end, one of which will be 50 basis points.

Whatever the sequencing, the inflation picture continues to improve as we await Wednesday’s August consumer price report.

Most immediately a renewed oil price plunge over the past month should prove to be a significant depressant to headline inflation rates everywhere – with year-on-year U.S. crude prices now falling at a rate of 23%.

U.S. retail gas pump prices have dropped 25 cents a gallon over the past two months – off more than 15% on a year ago. While the gas price remains above pre-pandemic levels, it is, curiously, below where it was 10 years ago.

Energy markets are wary of the expected release of OPEC’s latest global demand assessment – a darkening picture that likely influenced its decision to postpone next month’s output hikes.

And China on Tuesday underlined where much of that problem lies as it reported that imports barely grew 0.5% in the year through August – far below forecasts and underscoring severe domestic demand problems.

With exports expanding almost 9% over the same period, the trade picture showed how China is once again leaning on exports to flatter economic problems at home.

China’s mainland stocks held the line on Tuesday, but remain down 7% for the year to date – underperforming the S&P500 by almost 20% in 2024.

Ahead of Tuesday’s bell, however, U.S. stock futures were off slightly and the dollar was a touch firmer in line with Treasury yields.

The euro remains on the backfoot as the European Central Bank is likely deliver its second rate cut of the year on Thursday.

Sterling was a touch higher after surprisingly positive UK jobs numbers and an expected ebbing of wage growth.

In company news, tech remained in focus.

Although Apple on Monday unveiled its long-awaited artificial intelligence-boosted iPhone 16, its shares were down 1.6% overnight as Huawei’s tri-fold smartphone was seen to upstage the new iPhone launch.

Apple also lost its fight against an order by EU competition regulators to pay 13 billion euros ($14.35 billion) in back taxes to Ireland as part of an EU crackdown against sweetheart deals between EU countries and multinationals.

Key developments that should provide more direction to U.S. markets later on Tuesday:

* US August NFIB small business survey

* Federal Reserve Vice Chair for Supervision Michael Barr speaks on “Basel III Endgame”; Bank of Canada Governor Tiff Macklem speaks in London

* German Bundestag discusses 2025 budget, Finance Minister Christian Lindner and Economy Minister Robert Habeck both speak

* U.S. Secretary of State Antony Blinken meets British Prime Minister Keir Starmer in London

* US corporate earnings: Petco Health and Wellness, Cantaloupe etc

* US Treasury sells $58 billion of 3-year notes

(By Mike Dolan, editing by Ros Russell; mike.dolan@thomsonreuters.com)

---