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Another Day Of Gains As Futures Trade Within 1% Of All Time Highs

Another Day Of Gains As Futures Trade Within 1% Of All Time Highs

US futures, European bourses and Asian markets extended on recent sharp gains on Thursday, the 10Y yields rose above 1.30% after hitting 1.13% just two days earlier and oil…



Another Day Of Gains As Futures Trade Within 1% Of All Time Highs

US futures, European bourses and Asian markets extended on recent sharp gains on Thursday, the 10Y yields rose above 1.30% after hitting 1.13% just two days earlier and oil held onto sharp gains as investors seemed to set aside virus jitters for now and looked ahead to the European Central Bank for reassurance that policy support will continue; the dollar was steady. Japanese markets were closed for a holiday. At 7:15 a.m. ET, Dow e-minis were up 71 points, or 0.20%, S&P 500 e-minis were up 8 points, or 0.19%, and Nasdaq 100 e-minis were up 24.50 points, or 0.16%. Futures traded less than 1% from their record highs, completing a definitive V-shaped recovery from the recent slide.

The turnaround from the Monday selloff shows “corporations have been very resilient through all this,” David Mazza, Direxion head of product, said on Bloomberg Television. “Earnings estimates are quite remarkable, probably some of the best on record. Even through all this, we have central-bank liquidity remaining very abundant, economic growth being robust.”

Energy and mega-cap tech stocks gained ahead of a new batch of earnings reports, the latest initial claims data and the first ECB meeting to incorporate the bank's new strategic review. Energy stocks Chevron Corp, Exxon Mobil, Schlumberger NV, Occidental Petroleum and Marathon Petroleum Corp climbed between 0.1% and 1%, tracking crude prices. Some other notable pre-market movers:

  • Didi Global (DIDI) drops 3% in premarket trading after people familiar with the matter said Chinese regulators are considering serious, perhaps unprecedented, penalties for for the ride-hailing giant after its controversial initial public offering last month.
  • Texas Instruments (TXN) drops 4.8% after third-quarter sales and profit forecasts left analysts disappointed, with Barclays saying the “flat outlook leaves little to live for this late in the cycle.”
  • AT&T (T) added 0.9% as the telecom operator beat analysts’ estimates for monthly phone bill paying subscriber additions in the second quarter, fueled by more Americans converting to 5G phones.
  • Dow (DOW) rose 1.3% after its second-quarter profit doubled from the first, as prices for its chemicals used in plastics and packaging rose on the back of strong consumer and industrial demand as well as lower inventories.
  • Chembio Diagnostics (CEMI) gains 9.9% and NeuroMetrix (NURO) surges 33% amid discussions on message boards at Reddit and StockTwits.

There was no obvious catalyst for the recent rebound in stocks, or the drawdown on Friday and Monday, though a study on Wednesday showed both Pfizer and AstraZeneca vaccines were effective against the Delta coronavirus variant. "Every now and then investors look for reasons to take some profits off and that's what we saw," said Jun Bei Liu, portfolio manager at Tribeca Investment Partners in Sydney. "The market suddenly became worried about the delta variant and how it might affect the path to recovery," she said. "But what we have compared with 12 months ago is quite a few viable vaccines...eventually we will be coming out of this and we are much closer to the end than we were 12 months ago."

In Europe, investors awaited the European Central Bank’s policy decision and guidance as the Stoxx 600 index turned positive for the week only three days after Monday’s selloff. Travel and leisure stocks led the advance, with 19 of the 20 industry sectors in the green. Unilever Plc was an exception, tumbling the most since Feb. 4 in London after the company lowered its guidance for profitability, citing cost inflation. Here are some of the biggest European movers today:

  • EQT shares gain as much as 16% in the stock’s steepest intraday advance since Jan. 26 after the Swedish investment firm reported better-than-expected numbers for the first six months of the year.
  • Aalberts climbs as much as 5.3% to a record high, after the company reported half-year results ahead of expectations.
  • Flutter rises as much as 4.3% in London after RBC upgraded to outperform, saying concerns on the stock are overdone.
  • Huhtamaki jumps as much as 5.6% in Helsinki after the Finnish food- packaging maker reported 2Q results that beat analysts’ profit and revenue estimates.
  • Publicis climbs as much as 4.6% with analysts positive on the advertising firm’s growth in the second quarter.
  • Temenos drops as much as 8.5%. Jefferies says the software firm’s 2Q revenue looks in line, but expectations on the buyside for beat-and-raise may mean the results fall slightly short.

Earlier in the session, the MSCI index of Asia-Pacific shares rose for a second day, climbing as much as 0.9%, led by Hong Kong, as investors became more confident about economic growth after U.S. companies reported solid corporate earnings overnight despite persistent concerns about burgeoning outbreaks in unvaccinated populations and as nerves persist around China's regulatory crackdown on technology firms. Shares in heavily-indebted Chinese property developer Evergrande (3333.HK) rebounded about 11% in Hong Kong after it said it had resolved legal disputes with a lender.

Benchmarks in Hong Kong and Indonesia each added 1.8% as several sectors including materials and technology advanced in the region. “Strong U.S. earnings confirm the strength of global economic recovery and therefore demand for Asian exports, which is good for the region,” said Olivier d’Assier, head of applied research for Asia Pacific at Qontigo. Better-than-expected results for companies such as Verizon Communications Inc. and Coca-Cola Co. lifted sentiment and eased concerns over peak economic growth, while shifting investor focus away from the rapid spread of the delta variant that might dent the recovery. U.S. 10-year Treasury yields hovered close to 1.3%. Shares in Indonesia climbed after the central bank decided to hold its benchmark rate at 3.5%. The Jakarta Composite Index gained 1.8%, the biggest rise in three months. Japan’s stock market is closed Thursday and Friday for holidays.

Australia's S&P/ASX 200 index rose 1.1% to close at 7,386.40, a fresh record high, led by gains in miners and banks. Australia’s iron ore shipments climbed to a record last month, cushioning against the impacts of nationwide lockdowns. Orocobre was among the biggest gainers after reporting 4Q sales results. Zip was the biggest laggard after posting 4Q revenue of A$129.9m. In New Zealand, the S&P/NZX 50 index rose 0.1% to 12,720.84

Here are the latest coronavirus news:

  • Texas Tribune: 99.5% of the 8,787 people who died from Covid from 8th Feb to 14 July were unvaccinated (citing prelim numbers from Texas Dept of State Health Services)
  • China pushes back against WHO calls for another probe in to the virus’s origins, including whether leaked from a lab, saying no evidence and defies common sense
  • Thailand (13,655) and S Korea (1842) post record new cases
  • Queensland to close New South Wales border from 1am Friday
  • Biden urges more people to get vaccinated saying the pandemic is only among the unvaccinated
  • Texas reports 3,261 cases in past 24hrs, highest since 13 Apr, but no new fatalities in 4 of last 5 days

Elsewhere, the Labor Department’s report, due at 8:30 a.m. ET, is expected to show the number of Americans filing new claims for unemployment benefits fell to 350K (from 360K) for the week ended July 17, amid rampant worker shortages. Investors have been closely following the health of the jobs market on which monetary policy hinges, especially after a series of higher inflation reading recently sparked fears about a sooner-than expected paring of policy support as the economy reopens.

A shift in attention to corporate earnings and the so-called value stocks have helped Wall Street recoup most of its declines from earlier in the week that were triggered by concerns about the fast-spreading Delta variant of the coronavirus. Q2 earnings are expected to grow 75% for S&P 500 companies, according to Refinitiv IBES estimates, with 88% of the 73 reported companies in the benchmark index beating consensus expectations. Abbott Laboratories, Domino’s Pizza Inc, Biogen Inc, Snap Inc and Intel Corp are among the major companies reporting results later in the day.

Investors also have one eye on a brewing partisan showdown in Washington over the U.S. debt ceiling, as the U.S. Treasury is projected to exhaust its borrowing authority in October, which put upward pressure on short-end rates overnight.

With a mostly bare data calendar on Thursday the European Central Bank's policy-setting decision, due at 745am ET, and the subsequent press conference from President Christine Lagarde are the main focus for markets (see preview here). Lagarde infused traders with a sense of anticipation after flagging an adjustment to the bank's rates guidance to reflect a new and more flexible inflation-targeting strategy. read more. "To really enforce their credibility, the ECB could tie their rate path to an explicit calendar date - i.e. no rate hike until late 2024," said Luke Suddards, a strategist at brokerage Pepperstone. "That would be a dovish surprise for FX markets and put pressure on euro crosses."

In rates, the 10Y Treasury yield edged above 1.3% as rates markets idled in Asia, with trade thinned by Tokyo's holiday, following a sell-off in Treasuries overnight. Losses were led by intermediates with 5- to 7-year yields cheaper by ~1bp on the day; 10-year around 1.30% lags bunds by ~1bp while gilts slightly underperform. Futures activity has been light with cash markets closed in Asia for Japanese holidays and resuming at 7am London time.

In FX, the dollar index sat at 92.812, off a three-month peak of 93.194 and the euro was steady just above recent lows at $1.1791. The Bloomberg dollar index edged lower with Treasuries as earnings optimism tempered concerns about the delta variant and its threat to economic growth. "The dollar has been trading on the front foot regardless of the risk sentiment swings in recent days," Westpac analysts said in a note, supported by the view that high inflation could drive U.S. rate rises. A shift to a more structurally dovish European Central Bank should cement the dollar index at higher levels, the analysts said, with a test of the year's highs likely this quarter. The risk-sensitive Norwegian krone and pound led G-10 gains while the Swiss franc underperformed

Bitcoin briefly rose above $32,000 after getting a boost from Elon Musk, who said his space exploration company SpaceX owns the digital token.

In commodities oil hung on to most of Wednesday's sharp price rise, its biggest one-day gain in three months. Brent crude futures were last 0.4% softer at $71.94 a barrel, but had gained more than 4% on Wednesday. Gold was steady at $1,801 an ounce and cryptocurrencies were firm after bouncing from lows when Tesla boss Elon Musk said the carmaker would likely restart accepting bitcoin payments after due diligence on its energy use.

To the day ahead now, and the main highlight will likely be the aforementioned ECB meeting and President Lagarde’s subsequent press conference. Otherwise, data releases from the US include the weekly initial jobless claims, June data on existing home sales and the Conference Board’s leading index. And over in Europe, there’s the EC’s advance consumer confidence reading for the Euro Area in July. Finally, earnings releases include Twitter, Intel, AT&T, Danaher, Unilever, Blackstone and Biogen, whilst BoE Deputy Governor Broadbent will be speaking.

Market Snapshot

  • S&P 500 futures up 0.2% to 4,357.50
  • STOXX Europe 600 up 0.7% to 457.11
  • MXAP up 0.9% to 202.70
  • MXAPJ up 1.3% to 680.01
  • Nikkei up 0.6% to 27,548.00
  • Topix up 0.8% to 1,904.41
  • Hang Seng Index up 1.8% to 27,723.84
  • Shanghai Composite up 0.3% to 3,574.73
  • Sensex up 1.1% to 52,783.51
  • Australia S&P/ASX 200 up 1.1% to 7,386.41
  • Kospi up 1.1% to 3,250.21
  • Brent Futures up 0.6% to $72.64/bbl
  • Gold spot down 0.5% to $1,794.06
  • U.S. Dollar Index little changed at 92.83
  • German 10Y yield rose 0.3 bps to -0.392%
  • Euro little changed at $1.1786

Top Overnight News from Bloomberg

  • Chinese regulators are considering serious, perhaps unprecedented, penalties for Didi Global Inc. after its controversial initial public offering last month
  • For credit investors, today’s ECB meeting is all about whether policymakers hint at any changes that could spell an end to the cheapest funding costs on record
  • Bank of England Deputy Governor Ben Broadbent said policy makers may be right to overlook a surge in inflation now, arguing that many of the increases are likely to be temporary
  • Britain is set to be handed a final warning from the European Union to meet its commitments under the Northern Ireland Protocol as the two sides struggle to work out their post-Brexit relationship

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded higher following the extended rebound across global counterparts including the continued cyclical outperformance stateside where the mood was also helped by several blue-chip earnings. ASX 200 (+1.1%) was led higher by strength in the commodity-related sectors as energy spearheaded the advances after oil prices gained by around 4.5% on Wednesday and with mining names also lifted by quarterly production updates which propelled Orocobre and Iluka Resources to the top performers list. The latest data releases also provided some slight encouragement including stable NAB Quarterly Business Confidence which benefitted from an upward revision to the prior and the preliminary trade data showed that Exports and Imports rose 8% M/M. Hang Seng (+1.8%) and Shanghai Comp. (+0.3%) were positive as reports that US Deputy Secretary of State Sherman is to visit China for talks between 25th-26th July, spurred some hopes for a potential de-escalation in tensions, although other commentary remained hawkish including from US Secretary of Defense Austin who vowed to counter 'unfounded' China claims in the South China Sea. Nonetheless, Hong Kong led the gains in the region as the broad strength permeated across various industries including property, energy, tech and financials, while Evergrande found some relief after resolving the dispute with Guangfa Bank, although the advances for the mainland were capped after the recent flooding catastrophe and with China’s trade-weighted currency rose to a fresh 5-year high. KOSPI (+1.1%) was also underpinned by the broad constructive mood in the region with some earnings releases helping divert attention away from another record daily increase in infections, and Japanese markets are closed for the rest of the week due to Marine Day and Sports Day holidays.

Top Asian News

  • KakaoBank to Raise $2.2 Billion as Korean IPO Boom Continues
  • As Singapore Frets Over the Elderly, Virus Rise Among Young
  • Iron Ore Futures Slump Amid Demand Fears, Improved Flows
  • Hyundai Has Biggest Profit in Seven Years, Warns About Chips

Major Euro bourses trade higher (Euro Stoxx 50 +1.1%) as the region adopted the positive performance seen across APAC. This come as earnings in the continent pick up in pace ahead of the ECB policy decision, which is expected to enforce a more dovish pursuit of its new inflation mandate. Meanwhile, the UK’s FTSE 100 (+0.3%) and Switzerland’s SMI (-0.2%) lag, with the former weighed on by a firmer Pound alongside the ill-effects of losses in both benchmarks’ heavyweight pharma sectors. US equity futures are flat with a positive bias, with the NQ (+0.2%) initially outperforming the ES (+0.2%), YM (+0.3%) and RTY (+0.2%) amid a more favourable yield environment, albeit that faded with the contracts now seeing modest broad-based upside. The yield picture is once again a cyclical. Travel & Leisure is again the winner, closely followed by Autos & Parts, Basic Resources and Tech. The other end of the spectrum consists of the defensives: Healthcare, Consumer Staples and Telecoms, albeit with some possible idiosyncratic influences. The former is weighed on by pharma-giant Roche (-1.1%) post-earnings, who in-spite of beating on main metrics, underwhelmed investors who expected upgraded guidance. Consumer Staples sees hefty losses in Unilever (-4.5%) as earnings were largely in-line with analyst expectations but the group expects FY margins to remain flat as a result of rising costs. Meanwhile, Telecoms have clambered off the lows seen at the cash open in the aftermath of Spain’s 5G auction, whereby Orange (+0.1%), Telefonica (+0.4%) and Vodafone (+1%) have together paid over EUR 1bln. In terms of other moves, NatWest (-1.5%) is pressured amid reports that the UK government is looking to offload NatWest shares, with the earliest sale to occur on August 12%. ABB (+1.9%) is bolstered by earnings beats alongside plans for its EV charging spin-off early next year.

Top European News

  • EQT Plans to Step Up Hiring as Assets Under Management Soar 95%
  • North Sea Green Hydrogen Pilot Gains Grant from Dutch Government
  • ABB Gains; Orders the Standout of Strong 2Q, JPMorgan Says
  • Euro Can Excite Markets Only on Downside Break: ECB Cheat Sheet

In FX, the ECB has been afforded top billing in terms of this week’s main events and potential market movers following the strategy review and shift to a new inflation target, and on this occasion the 12.45BST policy announcement may well take centre stage before the spotlight shifts to President Largarde for the post-meeting press conference and Q&A. Indeed, rate guidance will change by definition to reflect symmetry around 2% rather than the old ‘close to, but below’ remit, and the wording or phrasing could be pivotal from the perspective of perception and determining whether the GC retains a dovish bias or not, just as much as the tone of the text and responses to questions 45 minutes later. Note, a full preview is available via the Research Suite and will be re-posted on the Headline Feed in due course. In the run up to the ECB, the Euro remains relatively rangy and tactically, if not necessarily well positioned pending the outcome after almost guaranteed initial knee-jerk moves, with Eur/Usd hovering below 1.1800 where 1.3 bn option expiries start and end at 1.1810, Eur/Gbp pivoting 0.8600 and the 50 DMA that comes in at 0.8590 today, Eur/Jpy straddling 130.00 and Eur/Chf rotating around 1.0825.

  • GBP/AUD/DXY - Sterling seems to have weathered a set-back amidst fairly benign views on inflation from BoE’s Broadbent (see 9.30BST post on the Headline Feed for details) allied to a broad Buck bounce that pushed the index back over 92.800 between 92.868-704 parameters, as Cable consolidates recovery gains through 1.3700 and the 200 DMA, while the Aussie is also rebounding further and has breached half round number resistance against its US peer at 0.7350 with some traction coming via preliminary trade data overnight showing a wider surplus and acceleration in both exports and imports. However, hefty 1.5 bn option expiry interest between 0.7370-75 could cap Aud/Usd in the same vein as the psychological 1.0600 level in Aud/Nzd as attention turns to flash PMIs. Back to the DXY and Greenback in general, upcoming IJC tallies and existing home sales appear more influential than the national activity or leading indices as the increasingly buoyant risk backdrop detracts from a more supportive yield landscape (outright and curve profile).
  • JPY/CHF/CAD/NZD - The Yen is holding within 110.36-07 confines absent of many Japanese participants due to Marine Day and also braced for another market holiday before the weekend given Sports Day on Friday, so pointers and direction will largely be gleaned from elsewhere. Conversely, the Franc is closer to w-t-d peaks than lows having rebounded from 0.9232 to 0.9164, like the Loonie that has derived momentum from the improving market mood and pronounced revival in WTI crude to top Usd 71/brl compared to lows only a cent above Usd 65 on Tuesday. Usd/Cad is currently circa 1.2560 vs 1.2525 at one stage and 1.2800+ at the start of the week, while Nzd/Usd is meandering from 0.6971-47 following the turn in cross tides noted above that has undermined the Kiwi to an extent.
  • SCANDI/EM - More fuel to fire the Nok’s comeback from under 10.7000 against the Eur to 10.4000+ at one stage, as Brent nears Usd 73/brl for a Usd 5.5 or so surge from worst levels, and the Rub is also gleaning some traction. Elsewhere, the Cnh and Cny remain firmer following confirmation that the meeting between Chinese and US Deputy Secretaries of States is back on and the Zar is on the front foot into the SARB.

In commodities, WTI and Brent front month futures are firmer on the day as the complex experiences tailwinds from another risk-on day. Furthermore, the supply/demand balance remains in favour of a deficit over the second half the year. Analysts at Morgan Stanley reaffirmed their view that the oil market will be in a deeper deficit in H2 vs H1 2021. The bank maintained its forecast for Brent to trade in the mid-to-high 70s for the remainder of the year. Meanwhile, Barclays raised its 2021 oil price forecast by USD 3-5/bbl due to expectations of a faster-than-forecast normalisation in OECD inventories. The British bank does warn that prices could rise to USD 100/bbl over the coming months if OPEC+ is slow to meet demand. Looking ahead, MS sees OPEC maintaining a slight deficit in 2022. Note, other desks expect demand in H1 2022 to be somewhat sluggish before seeing a pick-up in H2. Barclays downgraded its 2022 oil price forecasts by USD 3/bbl. This sentiment also been echoed by sources via Energy Intel earlier this week who “see the potential for a significant dip in oil demand in the first half of next year…. it is likely they [OPEC+] will take a pause [from production hikes] from monthly increases this December." Over to the US, Barclays sees US oil demand growing by 1.6mln BPD YY this year vs 1.4mln BPD earlier, and forecast the Brent-WTI spread to average USD 2/bbl in H2 2021, with risks to the downside on a potentially continued inventory draw-down at the Cushing hub. WTI and Brent Sept reside north of USD 70.50/bbl and USD 72.50/bbl respectively from USD 69.88/bbl and USD 71.74/bbl at worst, with the benchmarks now closer to the round numbers on the upside. Elsewhere, spot gold and silver are swayed by the Buck. Spot gold briefly dipped below its 100DMA (USD 1,795/oz) to a base at USD 1,791/oz, whilst the 21DMA also resides nearby at USD 1,796.80/oz. LME copper is on a firmer footing with traders citing lower-than-expect sales plans by China, although the constructive risk tone is also providing the red metal with tailwinds. Finally, Dalian iron ore fell some 5% as participants point to a double whammy of factors with higher imports and lower demand from China.

US Event Calendar

  • 8:30am: July Initial Jobless Claims, est. 350,000, prior 360,000; Continuing Claims, est. 3.1m, prior 3.24m
  • 8:30am: June Chicago Fed Nat Activity Index, est. 0.30, prior 0.29
  • 10am: June Existing Home Sales MoM, est. 1.7%, prior -0.9%
  • 10am: June Leading Index, est. 0.8%, prior 1.3%;
  • 11am: July Kansas City Fed Manf. Activity, est. 25, prior 27

DB's Jim Reid concludes the overnight wrap

Yesterday we launched our latest monthly survey, link here, which remains open until late morning tomorrow. We ask a number of questions about covid restrictions to judge how you feel about how life is progressing and will progress over the coming months. We also ask whether the UK has done the right or wrong thing by lifting all legal covid restrictions. In addition, we ask all the normal regular and market directional questions. All responses gratefully received. It should only take 3-4 minutes to complete and is totally anonymous.

The hot week continues here in the U.K.. This has made sleeping tough. Adding to my sleeping woes, last night my wife got woken up by our downstairs hallway light coming on at 2am and given it was on a sensor we went downstairs to investigate. Such a scare seems to happen a couple of times a year in our house. I had a golf club in our bedroom so I took that as a precaution. Just in case the intruder fancied a round. No one was there but when looking at the sensor we found two Daddy Long-Legs walking across it. I felt a bit silly wielding a golf club. It took a while to get back to sleep after that and then the wake-up alarm went off!! So I’m shattered.

There were few alarms in markets yesterday and the main story was the continued recovery after Monday’s rout, as decent corporate earnings releases outweighed investor concern about the rise in Covid casesand the more-infectious delta variant. In fact by the close of trade, it was almost as though the slump at the start of the week had never happened. The S&P 500 (+0.82%) is back into positive territory for the week and less than 1% from record highs thanks to further advances for cyclical industries. And Treasuries also continued their wild ride, moving 11bps off their London morning lows at one point and having now recovered by c.16.3bps since their intraday lows on Tuesday.

To run through the moves in more detail, equity indices rallied on both sides of the Atlantic, particularly in Europe as the STOXX 600 (+1.65%) recorded its strongest performance in over 2 months, and Spain’s IBEX 35 (+2.50%) had its best day since January. As mentioned, the rally was supported by positive corporate earnings releases, including from Johnson & Johnson, Coca-Cola and Verizon, although Netflix’s (-3.30%) relatively weak earnings the previous day meant that the FANG+ index of megacap tech stocks had a relatively subdued +0.30% gain - not helped by rising yields. On the other hand, small-cap stocks surged, with the Russell 2000 up +1.64%, which means that it’s performance over the last 2 sessions (+4.85%) is the strongest 2-day gain since we found out the results of the Georgia senate election back in January that paved the way for more fiscal stimulus.

Speaking of stimulus, Senate Republicans yesterday blocked the immediate debate on the infrastructure bill. Negotiators from both parties are continuing to work on the deal and expect the vote to pass early next week. In fact, Senate Majority Leader Schumer is reported to have received a note from 11 GOP members that they will vote to progress the legislation on Monday if a deal on spending can be reached. The legislation has stalled in recent weeks as the Senators could not agree on how to pay for the $579bn of new spending over the next 8 years.

Staying with politics, multiple outlets yesterday reported that top White House advisers broadly support giving Fed Chair Jerome Powell another term. However, no formal decision is expected on the matter until September. Chair Powell and Vice Chair Quarles’s terms currently expire in January. Former Fed Chair and current Treasury Secretary Yellen has yet to fully weigh in on the topic, telling CNBC last week she would be discussing it with President Biden soon. How the Fed maneuvers through the taper discussion into year-end may also have role to play in this as well.

The risk-on move and subsiding worries about Covid (at least for the time being) meant that sovereign bond yields rose across the board yesterday, with those on 10yr Treasuries up +6.7bps to 1.288% having been at 1.19% around London breakfast time. Both higher inflation breakevens (+3.1bps) and real rates (+3.5bps) contributed to the move, whilst the 2s10s curve steepened +6.4bps in its biggest daily move higher since March. It was a similar pattern in Europe too, where yields on 10yr bunds (+1.5bps), OATs (+1.1bps) and BTPs (+0.2bps) all moved higher, with the 2s10s curve steepening in all 3.

Overnight, Asian markets have taken Wall Street’s lead with the Hang Seng (+1.77%), Shanghai Comp (+0.33%) and Kospi (+1.12%) all up. Japanese markets are closed for a holiday. Futures on the S&P 500 have edged up +0.06% and those on the Stoxx 50 are up +0.40%. US treasuries haven’t traded this morning with it being a holiday in Japan. Elsewhere, Texas Instruments’ stock fell -4.6% in after hours trading as the company gave a revenue forecast that missed expectations raising doubts that a jump in chip demand caused by the pandemic will not be sustained.

In other overnight news, US President Joe Biden said at a CNN town hall that the inflation is likely to be transitory while adding that restaurants and other businesses in the hospitality and tourism sector may remain “in a bind for a while” due to hiring challenges as workers in the sectors are seeking better wages and working conditions. He has said that the businesses facing hiring challenges should offer higher pay in response, calling rising wages “a feature” of his economic plans.

Looking ahead now, one of the main highlights today will be the latest ECB decision at 12:45 London time and President Lagarde’s subsequent press conference at 13:30. This meeting has assumed an unexpected importance following the release of their Strategy Review earlier this month, which saw the inflation target changed to a symmetric 2%, along with a commitment to forceful or persistent policy easing when the effective lower bound is nearby, as at the moment. And as a result of this, our European economists write in their preview (link here), that they’re expecting some changes to the ECB’s forward guidance, with the wording needing to be updated to capture that 2% target and the commitment to persistence around the lower bound. They’re also expecting forward guidance to continue to refer to underlying inflation needing to be consistently on target. Generally speaking however, the ECB only conducts a deep dive into their policy stance once per quarter when the new staff forecasts are available, which would be at the September meeting, so our economists’ baseline is that it won’t be until then that they confirm that PEPP net purchases won’t continue beyond March 2022.

In terms of the latest on the pandemic, cases are unfortunately continuing to rise at the global level, as well as in every G7 economy except Canada. With increasing numbers being vaccinated throughout the developed world, this clearly isn’t the trajectory that many governments hoped to see by this point. However, as we looked at in my chart of the day yesterday (link here), the UK’s ONS now estimate that 92% of the adult population in England had antibodies in the week ending July 4. So an interesting one to follow as if a country with 92% of adults with antibodies (and rising since this study) continued to struggle then we could be in for a longer winter. On the other hand, if cases plateau in August and hospitals aren’t overwhelmed, the developed world may move on quicker than the delta-focused market currently expects. In fact, we got a slither of good news yesterday in that the number of daily cases reported was at 44,104, which is just +4% higher than the number on the previous Wednesday, and the smallest week-on-week growth number for a single day we’ve seen since May 25. Has the football effect started to wane? And might that offset some of the likely impact of this week’s reopening.

Back to Europe and there were some fresh Brexit headlines yesterday as the UK government said that it wanted to make changes to the Northern Ireland Protocol, which is a part of the Brexit deal put in place to prevent a hard border on the island of Ireland after the UK left the EU. This meant that goods wouldn’t see customs checks when passing between Northern Ireland and the Republic of Ireland, but instead meant that goods coming into Northern Ireland from the rest of the UK could instead be checked when they reached Northern Ireland, meaning that there was effectively an economic border within the UK. The two sides have had a number of disputes over the Protocol already, including a notable row last year over whether the UK’s proposed Internal Market Bill would break international law, although an agreement between the two sides was subsequently reached. This time around, the UK government have said that they believed there were grounds to trigger Article 16 that would suspend parts of the Brexit deal, but that they wouldn’t do so for now and instead “seek a consensual approach with the EU”. In response, the EU Commission Vice President Maroš Šefčovič said that they were “ready to continue to seek create solutions, within the framework of the Protocol”, but that they would “not agree to a renegotiation of the Protocol”.

To the day ahead now, and the main highlight will likely be the aforementioned ECB meeting and President Lagarde’s subsequent press conference. Otherwise, data releases from the US include the weekly initial jobless claims, June data on existing home sales and the Conference Board’s leading index. And over in Europe, there’s the EC’s advance consumer confidence reading for the Euro Area in July. Finally, earnings releases include Twitter, Intel, AT&T, Danaher, Unilever, Blackstone and Biogen, whilst BoE Deputy Governor Broadbent will be speaking.

Tyler Durden Thu, 07/22/2021 - 07:41

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When We’ll Know The Bear Market Is Over

When We’ll Know The Bear Market Is Over

By Simon White, Bloomberg Markets Live reporter and analyst

It’s a Gordian Knot, but it remains the central…



When We'll Know The Bear Market Is Over

By Simon White, Bloomberg Markets Live reporter and analyst

It’s a Gordian Knot, but it remains the central question for investors: When will the bear market in US equities and other risk assets be over?

Nobody has a crystal ball, but there are three strong contenders for conditions that will first need to be met:

  • A return of “fiscal credibility”.
  • Real-yield curve inversion.
  • Positive and rising liquidity.

Today’s backdrop is all about inflation. The seismic moves in assets and currencies around the world all boil down to the world’s largest central bank locked in a “death or glory” fight with unanchored price rises. The corollary is we won’t get a green light for risk assets to climb on a sustainable basis until the Federal Reserve has done enough to return inflation to a low and stable regime
The ultimate cause of the current inflation is the large fiscal deficits funded by monetary largesse in the years leading up to the pandemic. The pandemic itself and the Ukraine war didn’t jump-start the rise in prices, they merely worsened the already-changing underlying inflation dynamics.

The role of government spending is critical to understanding this. In a recent Fed paper presented at Jackson Hole, the authors show that when investors do not believe large fiscal imbalances will be stabilized the job of the central bank becomes extremely difficult.

Simply put, if there is a belief public debt will not be contained, it leads to a structural rise in inflation because any monetary tightening by the central bank causes growth to slump and the debt-to-GDP ratio rise. Due to the lack of fiscal credibility, debt buyers assume the rise in the ratio will have to be inflated away, and therefore expect higher inflation.

This is termed “fiscal stagflation,” and it means that the central bank can exacerbate inflation pressures by tightening rates when fiscal credibility is in short supply. The paper shows the massive fiscal interventions in Covid led to this loss in fiscal credibility in the US (although it is arguable it predated that, when Modern Monetary Theory came into vogue).

The first condition for an end to the bear market is thus fiscal credibility. With no strong commitment to bring debt down, there is little sign of it in the US at the moment.

The second condition is an inversion in the real-yield curve (as defined in the chart below). The curve steepened consistently all through the 1970s despite periods of very large interest-rate rises. The Fed in that decade did not have the will or the mandate to raise rates aggressively and persistently enough to break the back of inflation.

It wasn’t until Paul Volcker was at the helm that real progress was made. The Volcker Fed initially had “imperfect credibility” because it wasn’t willing to raise rates come what may, and the market assumed the central bank would ease when a recession hit, rejuvenating inflation. This was reflected in longer-term yields rising even as the Fed hiked aggressively.

After a false start in early 1980, when the Fed prematurely cut rates due to the slowdown, the central bank eventually got it right when it continued hiking aggressively through the 1981-82 recession, with rates peaking at 20%.

The real-yield curve began to flatten hard in 1980 as short-term real yields started to rise faster than long-term ones, and inverted in April 1981. Still, buying at that point would have been on the early side, before the multi-year rally started in August 1982.

Therefore a final condition is needed for the end of the bear market. Liquidity is one of most important medium-term drivers of equities. Its growth was still negative when the real-yield curve inverted in 1981, but by early 1982, it was positive and rising.

Buying the S&P in February 1982 after liquidity started growing would have faced about 10%-12% downside in the shorter term, before the position enjoyed an almost uninterrupted +220% rally.

With fiscal credibility in abeyance, the real-yield curve steep and still rising, and liquidity conditions very negative, none of the conditions are currently in place. Until they are it is difficult to have much confidence this bear market hasn’t got further to run.

Tyler Durden Thu, 09/29/2022 - 15:25

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Signs Are Pointing Toward Equities Capitulation

Signs Are Pointing Toward Equities Capitulation

By Michael Msika, Bloomberg Markets Live commentator and reporter

The extreme stress showing…



Signs Are Pointing Toward Equities Capitulation

By Michael Msika, Bloomberg Markets Live commentator and reporter

The extreme stress showing in credit and currency markets has yet to be fully reflected in equities, though this moment may not be far away.

The selloff in stock markets has so far been an orderly one: volatility is nowhere near where it was in the early part of the year, while the Stoxx 600 is still well above pandemic lows.

Contrast that with the blowout in credit markets, where the Markit iTraxx Europe Index of investment-grade credit default swaps has surged to its highest level in 10 years, exceeding Covid highs.

It’s a similar story for foreign exchange and government bonds, with the Bank of England having to provide support in the face of sharp declines, a complete turn in the monetary tightening narrative. The intervention was enough to calm financial markets on Wednesday, but more could be needed in the near future.

For Barclays strategists led by Emmanuel Cau, capitulation in equities may have “a final leg” amid the twin “shock” of a recession and monetary tightening. They expect more equity selling if earnings fundamentals deteriorate and central banks don’t come to the rescue.

Signs are emerging that panic selling in many asset classes may soon spill over into stocks. The Stoxx 600 just hit its lowest level since November 2020 before bouncing yesterday, and is in oversold territory, all of that on heavy volume.

Among the wall of headwinds for equities right now is that they have almost lost their edge to bonds. Corporate investment grades are close to yielding more than stocks, with the difference between them at its lowest level since August 2011. The picture is similar when comparing shares with government 10-year bonds.

Meanwhile, European markets are falling into bear territory one after the other. Spain’s IBEX just became the latest to do so, despite outperforming this year on demand for value stocks. The FTSE 100 is now the only major European index to have dodged the bear tag thanks to the pound’s extreme weakness, though in dollar terms it’s down 30% from its peak.

Technically, things don’t look much better. The Stoxx 600 has now clearly broken major resistance between 414 and 408, and as long as it remains below those levels, further downside is likely, according to DayByDay analyst Valerie Gastaldy.

The European benchmark has “clearly broken below” a 38% retracement from its 2020 low, and could now fall to a level representing a drop of that extent from its 2009 trough “without any particular timing,” she says.

Tyler Durden Thu, 09/29/2022 - 10:54

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Spread & Containment

How bonds work and why everyone is talking about them right now: a finance expert explains

Investor confidence in the UK is at a low, and the bond market has reacted dramatically.



The Bank of England is buying bonds again. Just as it was about to start selling the debt it had accumulated as part of its last effort to support the economy during the COVID-19 pandemic, the central bank has been forced to announce a new scheme to shore up investor confidence.

The bank’s £65 billion short-term spree aims to address the slump in bond prices caused by investors rushing to sell after the government’s recent mini-budget. This led to a surge in bond yields that hiked borrowing costs for the government and spread to pensions, housing and the general economy. So far, it has had a limited initial impact on the markets.

We asked an expert in finance to explain what’s going on in bond markets.

What is a bond and what is the difference between bond prices and yields?

A bond is essentially a tradeable IOU. It’s a loan that investors make to issuers such as companies or governments (UK government bonds are often called gilts). A bond has a price at which it can be sold and a yield, which is an annual amount the investor receives for holding the bond, a bit like interest on a savings account, and is expressed as a percentage of the current price.

When the price of a bond falls, it signals less demand for the bond because fewer investors want to own it. At the same time, the yield rises, which represents a higher cost of borrowing for companies or governments that issued the bond because this is what they have to pay to investors.

In the days since the government’s mini-budget, yields on 10-year Treasury bonds – which are issued by the UK government – increased from approximately 3.5% to 4.52% – the highest since the 2007-2008 global financial crisis. The expectation of continued increases prompted the recent intervention by the Bank of England.

UK government 10-year bond yields

United Kingdom 10-year bond yield. / Tradingview

What causes bond yields to move?

To understand this, it is important to bear in mind that, while people often talk about the interest rate, there are actually a number of rates. This includes the rate at which the central bank lends to commercial banks (the base rate), the rate that banks lend to each other (the interbank rate), the rate that the government borrows at (Treasury yields) and the rate at which households and firms borrow (commercial loans and mortgages).

When the Bank of England changes the base rate, this cascades through all these rates. As such, the Bank of England carefully considers the state of the economy – that is, growth and inflation – when deciding on the base rate.

When an economy is growing, interest rates and bond yields tend to rise. The occurs for several reasons. Investors sell bonds to buy riskier assets with better returns. Firms and households also look to borrow more money in a growing economy, for example, to invest in new machinery or to move home. More demand for borrowing means lenders can charge higher interest on their loans.

Higher inflation often accompanies economic growth because of the increase in demand for goods and services. This tightens supply and causes prices to rise (including wages for labour). The Bank of England, which is mandated by the government to try to keep inflation as close to 2% as possible, will respond to higher inflation by raising base rates, which, as noted, feeds through to the different rates.

Investors will often anticipate the increase in base rates and look to act before it goes up by selling Treasury bonds and buying alternative, higher return, assets. This causes bond yields to rise further. As a result, the Treasury bond yield is often seen as a predictor of future Bank of England base rate changes.

So, if yields are rising, does this mean that investors are expecting future economic growth in the UK?

No, not at the moment. When the government raises money by issuing bonds, it does so over a range of time periods (called maturities), from one day to 30 years. When an economy is expected to grow, the yield on longer-term bonds will be higher than the yield on shorter-term bonds.

This relationship between yields across different maturities is referred to as the term structure or yield curve. An upward sloping yield curve implies a growing economy. At the moment, the UK yield curve is flat, or even downward-sloping across some maturities. My research shows that a falling yield curve is a good predictor of a coming recession.

Yield curve for UK government bonds

Line graph showing downward-sloping yield curve for UK gilts
UK gilts 40-year yield curve. *The curve on the day of the previous MPC meeting is provided as reference point. Bloomberg Finance L.P., Tradeweb and Bank of England calculations

It’s important to remember that these different yields act as a benchmark for commercial lending rates of equivalent lengths. The approximate jump to 4.5% in 2-year and 5-year yields has been reflected in mortgage rates, which is why some lenders have pulled available mortgage deals recently while they reassess the lending rates charged to households.

Read more: Is the UK in a recession? How central banks decide and why it's so hard to call it

But if the UK economy is not expected to perform well, why have bond yields been rising after the chancellor’s mini-budget announcement?

The rising bond yields we are seeing relate to an additional factor: the amount of government debt. The mini-budget introduced tax cuts and increased spending and investors know the government will need to increase borrowing to meet these commitments. Some estimates put potential government borrowing at £190 billion due to this plan.

An increase in the amount a homeowner borrows versus the value of their home (called the loan-to-value) causes the mortgage rate charged to the borrower to rise. Similarly, an increase in the amount of bonds that the government will be looking to sell (the amount it wants to borrow) will push down the price of existing bonds, increasing yields. More importantly, more debt without growth raises the risk level of the UK economy.

Anticipating this, investors triggered a large-scale bond sell-off after the government’s mini-budget announcement. This contributed to the fall in the value of the pound as investors selling UK Treasury bonds bought US bonds instead, essentially swapping pounds for dollars.

So will the Bank of England’s plan work?

The intervention will have a short-term positive impact, which started as soon as it was announced. But the bank is really only buying time. Any ultimate success depends on the government restoring investor confidence in its economic plans.

Unfortunately, rising yields and borrowing costs for the UK economy is the price we are now paying for the government’s recent fiscal announcement.

David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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