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Futures Dead Cat Bounced As BTFDers Emerge On Turnaround Tuesday

Futures Dead Cat Bounced As BTFDers Emerge On Turnaround Tuesday

The relentless rout that erased $3.4 trillion from the Nasdaq 100 in the…

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Futures Dead Cat Bounced As BTFDers Emerge On Turnaround Tuesday

The relentless rout that erased $3.4 trillion from the Nasdaq 100 in the past month paused on Turnaround Tuesday as battered tech valuations attracted scattered dip buyers, but nothing like the full-throttled BTFD buying parade observed in months gone by. Futures on the tech-heavy gauge advanced as much 1.4% as bargain hunters returned after the Nasdaq 100 slumped to the lowest since November 2020 on Monday, capping three days of major losses. S&P 500 futures were 0.7% higher to 4,016 after rising as much as 1.2% earlier but also after plunging to as low as 3,961.

After rising as high as 3.20% on Monday, 10-year Treasury yields dropped for a second day, sliding below 3.0% and providing further relief to technology shares. The dollar erased a loss and Treasuries edged higher, signaling the return of some haven demand amid nervousness over the path of Federal Reserve policy. European bonds rallied.

The Nasdaq’s 14-day relative-strength index (RSI) closed at 33 on Monday, getting closer to the level of 30, which to some analysts indicates a security is oversold and is poised to rise. Another sharp selloff “seems unlikely without an external trigger,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “Nevertheless, as long as the problems persist, we do not expect a big recovery and have used the relief rally to move our equity exposure to neutral.”

Indeed, traders have been caught between stubbornly high inflation that erodes asset values and central-bank tightening that threatens to slow economic growth, or even push some nations into recession. Recent U.S. data suggesting the Federal Reserve will stay on an aggressive rate-hike path have sparked the latest bout of risk-off trades. Fresh outbreaks of Covid in China, and the nation’s stringent measures to control them, have worsened sentiment.

“For now, investors need to be prepared for continued volatility,” UBS Global Wealth CIO Solita Marcelli wrote in a note. She added “sentiment is bearish” but not capitulating.

In premarket trading, electric vehicle makers are up, with Tesla, Rivian and Lucid set to rebound after losing $188 billion in three days. AMC Entertainment is 6.4% higher after reporting better-than-expected quarterly results as hits like “Spider-Man: No Way Home” lured people back to movie theaters. Bank stocks edge higher in premarket trading amid a broader rebound for equity markets after Monday’s rout. S&P 500 futures are up about 0.8% this morning, while the U.S. 10-year yield retreats for a second day to sit at roughly 3%. In corporate news, BlackRock said it won’t support efforts by shareholders who try to micromanage companies on climate change. Meanwhile, Bitcoin rebounded back above $30,000 after briefly sinking below the closely watched level.

Here are some of the biggest U.S. movers today:

  • Most large cap U.S. technology and internet stocks rose in premarket trading, on course to recoup some of the heavy losses they suffered in a steep selloff over the last three sessions. Apple (AAPL US) is up 1.2%, Microsoft (MSFT US) +1.2% and Meta (FB US) +2.8%.
  • AMC Entertainment (AMC US) is up 3.8% in premarket trading after reporting better-than-expected quarterly results as hits like “Spider-Man: No Way Home” lured people back to movie theaters.
  • Electric vehicle makers Tesla (TSLA US), Rivian (RIVN US) and Lucid (LCID US) are rebounding after losing $188 billion in three days of heavy selling in technology and growth stocks.
  • Shockwave Medical (SWAV US) may move after it raised its revenue guidance for the full year, with analysts saying that the company’s performance was boosted by its coronary business. Shares rose 11% in extended trading on Monday.
  • Upstart Holdings (UPST US) shares plunge 48% in premarket trading after the cloud-based artificial intelligence lending platform cut full- year revenue guidance on macro uncertainties. Piper Sandler cut the stock to neutral.
  • Novavax (NVAX US) is down 21% premarket, with analysts saying that the biotech firm’s revenue for the first quarter missed expectations.
  • Plug Power (PLUG US) shares are 5.6% lower premarket after the fuel cell company reported net revenue for the first quarter that missed the average analyst estimate, with KeyBanc noting pressure on margins and higher costs.
  • Video game stocks may move after Sony’s earnings fell short of estimates amid supply constraints and component shortages. Watch shares in Activision Blizzard (ATVI US), Electronic Arts (EA US) and Take-Two Interactive (TTWO US).

U.S. stocks and particularly the Nasdaq 100 have been crushed this year (amid a tireless tirade from JPM's Marko Kolanovic to buy each and every dip) as investors fret over recession risks from the Federal Reserve embarking on aggressive monetary tightening amid surging inflation. In the latest policy comments, Atlanta Fed President Raphael Bostic said he favors continuing to raise rates by half-point moves rather than anything larger. He said the odds for a 75-basis-point hike are low but added he’s taking nothing off the table.

European stocks trade well, with most cash indexes gaining over 1% to recover roughly half of Monday’s losses when the index slumped to its lowest level in two months. Euro Stoxx 50 rose as much as 1.75%, FTSE MIB outperforms slightly, FTSE 100 lags but still adds 1%. Construction, banks and autos lead broad-based Stoxx 600 sectoral gains. The Stoxx 600 energy sub-index edges lower, being one of the worst-performing sectors in a rising broader market for European stocks, as oil keeps falling. Shell declines as much as 1.5%, TotalEnergies SE -1.6%, Equinor -4.5%. Here are some of the biggest European movers today:

  • Luxury stocks such as Kering (+0.5%) and Watches of Switzerland (+4.2%) rebounded after the declines of the previous sessions, with investors hopeful that the Covid-19 situation in the key market of China may be slightly improving.
  • Hermes rises as much as +1.6%, LVMH +2.4%
  • Airbus gains as much as 3.7% in Paris trading after being raised to buy from hold at Societe Generale, with the broker highlighting the planned production ramp-up of the “highly profitable” A320 family.
  • Swedish Match rises as much as 28% after Philip Morris International said it’s in talks to buy the company. While a deal would make strategic sense, a counter-bid can’t be ruled out, analysts said.
  • Centrica climbs as much as 6.5%, the most since Feb. 25, after the company guided adjusted earnings per share to be at the top end of the consensus range.
  • Euroapi soars as much as 9.5% after the Sanofi spinoff is initiated with a buy recommendation and EU20 price target at Deutsche Bank, which sees “good value” and an attractive business.
  • E-commerce stocks rise in Europe, with many outperforming the benchmark Stoxx 600 Index, buoyed by dip buyers returning to growth and technology shares that have been battered this year.
  • Zalando up as much as 4.9%, Home24 +12%, Moonpig +3.6%

Earlier in the session, Asian stocks extended their decline to a seventh day as the specter of rapid credit tightening in the U.S. and protracted lockdowns in Chinese cities prompted some investors around the region to reduce holdings of riskier assets.  The MSCI Asia Pacific Index fell as much as 2.1% to its lowest level since July 2020, weighed down tech shares after a three-day selloff in the Nasdaq 100. Hong Kong’s Hang Seng Index ended 1.8% lower as the market reopened after a holiday, though benchmarks in mainland China rebounded from early-trading lows on hopes for easier monetary conditions.

  • MSCI Asia Pacific Index down 0.7%
  • Japan’s Topix index down 0.9%; Nikkei 225 down 0.6%
  • Hong Kong’s Hang Seng Index down 1.8%; Hang Seng China Enterprises down 2.2%; Shanghai Composite up 1.1%; CSI 300 up 1.1%
  • Taiwan’s Taiex index up 0.1%
  • South Korea’s Kospi index down 0.5%; Kospi 200 down 0.5%
  • Australia’s S&P/ASX 200 down 1%; New Zealand’s S&P/NZX 50 down 1.3%
  • India’s S&P BSE Sensex Index down 0.2%; NSE Nifty 50 down 0.4%

“There’s nowhere to escape so it’s pretty tough,” said Yuya Fukue, a trader at Rheos Capital Works. “Economic data appears to be deteriorating of late, though that has seemed to have gone little noticed while the markets were so focused on the Fed’s policy. It feels as if the game is changing.” Among Chinese tech giants, Alibaba tumbled 4.8% in Hong Kong, while Tencent dropped 2.3%. Regional declines were broad, with investors dumping even this year’s star energy shares as oil prices eased.  Singapore’s Straits Times Index and Australia’s S&P/ASX 200 both dropped about 1%. The Philippine benchmark ended 0.6% lower, recovering after skidding more than 3%, after Ferdinand Marcos Jr. won a landslide victory in the country’s presidential election. Mainland Chinese shares closed higher after the People’s Bank of China repeated a pledge to proactively address mounting economic pressure and highlighted a drop in deposit rates, which could spur banks to lower the cost of borrowing for the first time in months. “The market was a bit oversold. In addition, PBOC is also mentioning a drop in deposit rates, raising expectations of more room for banks to increase lending,” said Aw Hsi Lien, a strategist at Tokai Tokyo Research.

India’s benchmark equity index slipped to a two-month low amid a weaker trend in Asia as surging oil prices and inflationary pressures weighed on investor sentiment. The S&P BSE Sensex fell 0.2% to 54,364.85 in Mumbai, after swinging between gains and losses several times during the session. The NSE Nifty 50 Index slipped 0.4% to 16,240.05. This is the third consecutive session of declines for the key indexes.  Sixteen of the 19 sector sub-indexes compiled by BSE Ltd. dropped, led by metal stocks. Reliance Industries Ltd. slipped 1.7% to a seven-week low and was the biggest drag on the Sensex, which saw 18 out of its 30 member-stocks trading lower.   In earnings, among the 27 Nifty 50 companies that have announced results so far, 10 have missed estimates while 17 either exceeded or met forecasts. 

In FX, the Bloomberg Dollar Spot Index fell 0.1% after climbing to a two-year high on Monday, and the greenback was steady or weaker against all of its Group-of-10 peers. The euro consolidated and the region’s yields fell as Italian bonds led an advance. The pound was steady against both the dollar and euro while gilts outperformed peers. Domestic focus is on the Queen’s speech laying out the government’s agenda for the next parliamentary session and Brexit risks after reports the U.K. is preparing to scrap parts of the Northern Ireland protocol. U.K. retail sales are falling on an annual basis for the first time since the start of last year as the cost of living crisis crushes consumer confidence and puts the brakes on spending. Scandinavian currencies led gains among G-10 pairs after both currencies fell to the weakest level in around two years versus the dollar on Monday. The Australian and New Zealand dollars also bounced off two-year lows as stock indexes trimmed an intraday decline. Aussie’s gains were tempered as iron ore fell for a third day to bring the three-day slide to about 15%. The yen edged lower as Treasury yields recovered from a sharp overnight drop. Bonds pared earlier gain after the 10-year debt sale. Bank of Japan Executive Director Shinichi Uchida says that widening the central bank’s yield target band would be equivalent to a rate hike and wouldn’t be favorable for Japan’s economy

In rates, Treasuries rose in early U.S. trading with belly leading gains and the curve flattening modestly after Monday’s bull-steepening. Yields are richer by ~4bp across in belly of the curve, steepening 5s30s spread by ~3bp as long-end yields lag; 10-year trading just around 3%, richer by ~3bp on the day, trailing gilts by ~7bp in the sector. Core European rates outperform led by gilts while stocks and U.S. futures recover a portion of Monday’s steep losses. Bunds bull-flatten, while peripheral spreads tightened to Germany with short-dated BTPs outperforming. Treasury auction cycle begins with 3-year note sale, and several Fed speakers are slated. U.S. new-issue auction cycle consists of $45b 3-year note, followed by 10- and 30-year sales Wednesday and Thursday. WI 3-year yield ~2.800% is higher than auction stops since 2018 and ~6bp cheaper than last month’s, which stopped through by 0.1bp. Three-month dollar Libor +0.13bp at 1.39986%

In commodities, crude futures are choppy, WTI dips back into the red having stalled near $104. The outlook for crude remains clouded after the European Union softened some proposed sanctions on Russia. In cryptocurrencies, Bitcoin traded near $31,300 after earlier sliding below $30,000. Spot gold rises ~$9 near $1,863/oz. Much of the base metals complex trades poorly. LME copper outperforms, holding in the green but off best levels after a test of $9,400/MT.

Bitcoin reclaimed the $31K handle, but is yet to make a concerted move higher.

Looking ahead, we get the April NFIB Small Business Optimism print (93.2, Exp. 92.9), Chinese M2, Speeches from Fed's Williams, Waller, Bostic, Barkin, Kashkari, Mester, ECB's de Guindos & BoE's Saunders, Supply from the US. Earnings from Norwegian Cruise Line & Warner Music. Biden speaks on soaring inflation at 11am EDT. Biden will also meet with Italian Prime Minister Draghi at the White House, and the UK state opening of Parliament is taking place, where the government outlines its legislative programme for the year ahead. Of course, the big event is tomorrow morning when the US CPI print comes.

Market Snapshot

  • S&P 500 futures up 1.1% to 4,031.75
  • STOXX Europe 600 up 1.2% to 422.32
  • MXAP down 0.8% to 159.98
  • MXAPJ down 0.8% to 523.71
  • Nikkei down 0.6% to 26,167.10
  • Topix down 0.9% to 1,862.38
  • Hang Seng Index down 1.8% to 19,633.69
  • Shanghai Composite up 1.1% to 3,035.84
  • Sensex up 0.4% to 54,674.30
  • Australia S&P/ASX 200 down 1.0% to 7,051.16
  • Kospi down 0.5% to 2,596.56
  • German 10Y yield little changed at 1.07%
  • Euro little changed at $1.0564
  • Brent Futures up 0.8% to $106.83/bbl
  • Gold spot up 0.5% to $1,862.69
  • U.S. Dollar Index little changed at 103.65

Top Overnight News from Bloomberg

  • The EU is considering the issuance of joint debt to finance Ukraine’s long-term reconstruction, which may end up costing hundreds of billions of euros, according to an EU official familiar with the plan
  • China’s provinces are set to sell a historic amount of new special bonds by the end of June as part of an infrastructure investment push intended to rescue an economy stymied by Covid outbreaks and lockdowns
  • Hungarian Prime Minister Viktor Orban’s talks with the head of the EU about proposed sanctions on Russian oil imports made progress, but failed to reach a breakthrough, according to both sides
  • Investor confidence in Germany’s pandemic rebound improved, but remained deeply negative as the war in Ukraine darkens the outlook for Europe’s largest economy. The ZEW institute’s gauge of expectations rose to -34.3 in May from -41 the previous month, defying expectations for a third straight deterioration. An index of current conditions worsened
  • Saudi Arabia’s oil minister warned that spare capacity is decreasing in all sectors of the energy market, as prices of products from crude to diesel and natural gas trade at or near multi-year highs in the wake of Russia’s invasion of Ukraine

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were mostly negative after the resumed sell-off on Wall St where the S&P 500 slipped beneath the 4,000 level for the first time since March 2021. ASX 200 briefly gave up the 7,000 status with notable underperformance in the energy and mining-related sectors. Nikkei 225 slumped from the open although moved off its lows as participants digested stronger than expected Household Spending data and after BoJ's Uchida dismissed the prospects of a tweak to the BoJ’s 50bps yield target band. Hang Seng and Shanghai Comp both initially joined in on the selling with heavy losses in the tech sector contributing to the underperformance in Hong Kong on return from the extended weekend, although the downside in the mainland was later reversed after the recent policy support efforts by China’s MIIT and CBIRC.

Top Asian News

  • China Tech Stocks Slide as Growth Woes, Global Rout Grip Traders
  • Investor’s Guide to the 2022 Philippine Presidential Election
  • ArcelorMittal Evaluating Bidding for ACC, Ambuja: ET Now
  • Philippine Stocks Fall as Traders Weigh Marcos Win, Global Rout

European equities feel some reprieve following the prior session’s selloff; Euro Stoxx 50 +1.2%. Relatively broad-based gains are seen across the majors with some mild underperformance in the FTSE 100. Sectors show some of the more defensive sectors at the bottom of the bunch – alongside energy – whilst Construction, Autos, Banks, and Industrial Goods reside as the current winners. US equity futures are firmer across the board, ES +1.0%, with the NQ narrowly outpacing peers after underperforming yesterday.

Top European News

  • Russian Gas Flows to Europe Remain Steady on Key Links
  • Highest Inflation in Three Decades Boosts Czech Rate Hike Case
  • BPER Banca Soars After Earnings Beat, With Fees as Highlight
  • Russia’s Economy Facing Worst Contraction Since 1994

FX

  • The Dollar retains a firm underlying bid ahead of another slew of Fed speakers; risk sentiment remains fluid and fragile.
  • The Swiss Franc has hit a fresh 2022 peak vs the Greenback; USD/JPY is consolidating around 130.00.
  • EUR/USD was unfazed by mixed German ZEW data but later lost ground under 1.0550.
  • Cable rotates either side of 1.2350 awaiting Brexit/N. Ireland news, further political fallout and more comments from BoE hawk Saunders.
  • Crude and commodity FX have gleaned a degree of traction from partial recoveries or stabilisation in underlying prices.
  • CBRT and regulator have asked banks to undertake FX transactions with corporate clients between 10:00-16:00, when the market is liquid, via Reuters citing bankers.

Fixed Income

  • Core benchmarks bounce further after a brief breather early on, with little in way of fresh fundamentals behind the upside.
  • Initial highs were faded pre-UK/German issuance; once this cleared, Bunds and Gilts lifted to 152.50+ and 119.00+ peaks.
  • Stateside, USTs are bolstered but far from best, with the curve re-flattening into today's 3yr sale and yet more Fed speak.

Commodities

  • Crude futures have come under renewed pressure in recent trade after seeing some gains in the European morning.
  •  
  • The initial downside coincided with the mixed Germany ZEW reports alongside the downbeat commentary from Hungary regarding an imminent oil ban; albeit, benchmarks are off overnight USD 100.44/bbl and USD 103.19/bbl respective lows.
  • Saudi Energy Minister says it is "mind-boggling" why focus is on high oil prices and not on gasoline, diesel or others. World needs to wake up to an existing reality that it is running out of energy capacity at all levels, via Reuters.
  • UAE Energy Minister says oil prices could double or triple in "chaotic" market.
  • US officials reportedly asked Brazil's Petrobras in March to boost output, but it the oil Co. said it could not, according to Reuters sources.
  • China's Shenghong Petrochemical has started a trial operation at its (320k BPD) greenfield refining complex in east China, according to Reuters sources.
  • Germany is said to be shifting away from plans for a strategic national coal reserve, according sources cited by Reuters.
  • Spot gold holds onto mild gains as DXY pulled back from the fresh YTD highs set yesterday.
  • LME futures post mild gains following yesterday’s downside with the market still looking somewhat fragile.

DB's Jim Reid concludes the overnight wrap

It's school photo day today. After discussing it with my kids last night I said to them that I'd dig out my old school photos so they could see me at school. Without hesitation and with a straight face Maisie said, "Are they in black and white Daddy?". I was half amused and half depressed.

Markets are pretty black at the moment with little white on show. Actually the only bright colour is a sea of red. Indeed after a rocky few weeks in markets, there’s been a further rout over the last 24 hours as investor jitters about the global growth outlook have continued to escalate. There has been some respite in Asia but markets remain very shaky. There wasn’t really a single catalyst to yesterday’s steep declines, but ultimately there’s been a growing scepticism in markets as to whether the Fed and other central banks will actually be able to achieve a soft landing without a recession as they seek to bring down inflation. One interesting development though was that rates rallied as the equity slump intensified, rather than both selling off as has been the norm in recent weeks.

Although the day lacked a single catalyst, the bond market moves seem to turn around the same time as Atlanta Fed President Bostic spoke. He picked up where Chair Powell left things after last week’s press conference. Bostic signaled that +50bp hikes were part of his core view, placing low odds on anything larger, stating +50bp hikes were “already a pretty aggressive move.” Like other Fed speakers, he signaled a desire to get policy to neutral and then assess. While he isn’t a voter this year, his voice does carry weight at the hawkish end of the committee so the price action likely reflected the market believing that a consensus continues to build for 50bps, and not 75bps, even among the hawks.

Sovereign bonds were actually seeing a strong sell-off before his comments but rallied fairly fiercely from around the same time. 10yr Treasury yields hit an intraday high of 3.20% during the European morning (+7.5bps on the day) but ended up closing -9.3bps lower at 3.03%, showing that wide intraday ranges and volatility continue to grip the market. With the Fed continuing to put a perceived ceiling on the near-term pace of hikes, 2yr yields rallied -13.7bps on the day with the curve steepening another +5.3bps. The amount of Fed hikes priced in by the December meeting down by -15.5bps. As I type, 10yr US yields are fairly flat in Asia.

The move echoed in Europe, where 10yr bunds rallied -3.5bps to 1.09%. The broader risk-off move meant that there was a further widening in spreads yesterday, with the gap between Italian 10yr BTPs over bunds widening by +4.9bps to 205bps, which is the widest they’ve been since May 2020. And that widening was seen on the credit side as well, where iTraxx Main moved above 100bps for the first time since April 2020 in trading, before falling back somewhat to settle at 98bps (+1.4bps).

Against this backdrop, the S&P 500 fell by a sizeable -3.20% that takes the index to its lowest level in over a year. That comes on the backs of 5 consecutive weekly losses, which is already the longest run in over a decade, and given the performance yesterday it would take a strong comeback over the remaining four days this week to avoid that run extending to 6 weeks. See my Chart of the Day yesterday (link here) for more on how rare it has been to see an 11 year run without a 5 successive weekly decline.

Energy was the worst performing US sector, falling an astonishing -8.30%, in its worst one-day performance since June 2020, after the fall in oil (more below). The sector is still by far the best performing S&P sector YTD, up +36.79%, with every other sector in the red. Despite the rate rally, it was a bad day for mega-cap and other growth tech stocks. Indeed, the NASDAQ fell a further -4.29% to its lowest level since November 2020, whilst the FANG+ index of 10 megacap tech stocks fell an even larger -5.48%. For reference, that now takes the FANG+ index’s decline since its all-time high in November to a massive -38.22%. Even a high quality component like Amazon is now down -35.75% since March 29th and is pretty much back to pre-covid levels. Over the other side of the pond, Europe saw some sizeable declines as well, with the STOXX 600 down -2.90% to leave the index not far away from its recent lows in early March.

With the Fed set to continue their hiking cycle, just as the ECB are still pondering on when to even start hikes and China’s growth prospects are fading, the US dollar has continued to benefit. Yesterday, the Japanese Yen (+0.21% vs USD) was the top-performing G10 currency, in line with its traditional status as a safe haven, but Bitcoin continued to lose ground, falling to its lowest level since July last year, after falling to $31,562. It briefly fell below 30k this morning. It's been interesting that Bitcoin is not getting much mention with all the inflationary issues seen in recent months. It seems to be suffering from a higher dollar, higher real yields and a tech related sell-off.

Markets continue to fall in Asia but US futures are up. Hang Seng (-3.06%) is the largest underperformer, but is paring its losses after falling more than -4% as the market returned after a holiday with the Chinese listed tech firms among the worst hit. Elsewhere, the Nikkei (-0.93%) and Kospi (-0.95%) are down. Meanwhile, mainland Chinese stocks are trading in positive territory with the Shanghai Composite (+0.17%) and CSI (+0.15%) somewhat recovering from opening losses. Looking ahead, S&P 500 (+0.56%), NASDAQ 100 (+0.92%) and DAX (+0.25%) futures are moving higher.

Early morning data showed that Japan’s household spending declined -2.3% y/y in March, its first drop in three months albeit the fall was less than -3.3% estimated by Bloomberg and followed +1.1% growth in February.

Back to inflation and one potentially problematic indicator came from the New York Fed’s latest consumer survey, which found that median inflation expectations for 3 years ahead rose to +3.9%, which is the highest since December, and up from +3.5% back in January. It’s still not as high as the +4.2% readings back in September and October, but will obviously be unwelcome news to the Fed whose path to a soft landing is in part reliant on inflation expectations remaining well anchored around target.

Turning to the situation in Ukraine, a key risk event yesterday had been Russia’s Victory Day parade, where it was speculated that President Putin would move towards a general mobilisation. However, in reality it finished with surprisingly little news, and whilst not showing a path towards de-escalation, didn’t move to escalate things further. Separately, it was reported by Bloomberg that the EU would soften its proposed sanctions package on Russian oil exports, with an article saying that they would drop the proposal to ban EU-owned vessels transporting Russian oil to third countries. The sanctions package has already come under criticism from some member states, and the article said that Hungary and Slovakia had been offered a longer time period lasting until end-2024 to comply with the proposals to ban Russian oil imports, with Hungary in particular saying more talks were needed to support oil-related sanctions. So with no further escalation and a softening in sanctions, oil prices fell back significantly amidst weak risk appetite more generally. Brent crude was down -5.74%, whilst WTI fell -6.09%, which follows 2 consecutive weekly gains for both. This morning oil prices are again lower with Brent and WTI futures -1.74% and -1.68% lower respectively.

To the day ahead now, and central bank speakers include the Fed’s Williams, Barkin, Waller, Kashkari and Mester, along with ECB Vice President de Guindos and Bundesbank President Nagel. Data releases include Italy’s industrial production for March and Germany’s ZEW survey for May. Finally on the political side, President Biden will meet with Italian Prime Minister Draghi at the White House, and the UK state opening of Parliament is taking place, where the government outlines its legislative programme for the year ahead.

Tyler Durden Tue, 05/10/2022 - 07:57

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Economics

What Is Quantitative Tightening? How Does It Work?

What Is Quantitative Tightening?The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and…

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Quantitative tightening is not the opposite of quantitative easing—they are distinctly different activities.

Ballun from Getty Images Signature; Canva

What Is Quantitative Tightening?

The main job of a central bank, like the Federal Reserve, is to keep the economy strong through maximum employment and stable prices. It does this by managing the Fed Funds Rate, which it sets at its Federal Open Market Committee meetings. This effectively raises or lowers the interest rates that banks offer companies and consumers for things like mortgages, student loans, and credit cards.

But when the economy needs help and interest rates are already low, the Fed must turn to other tools in its arsenal. This includes practices like quantitative easing and quantitative tightening; the former expands the shares of Treasury bonds, mortgage-backed securities, and even stocks on the government’s balance sheets, while the latter tightens the monetary supply. Both have a profound effect on liquidity in the financial markets.

The Fed came to the rescue with trillions of dollar’s worth of quantitative easing at the end of the 2007–2008 Financial Crisis, and again during the global Coronavirus pandemic.

But the Fed can’t go on printing money forever. Whenever it employs quantitative easing, the Fed must eventually turn to its counterpart, which is known as quantitative tightening, in order to limit some of the negative outcomes of the former, such as inflation.

How Does Quantitative Tightening Work? What Is an Example of Quantitative Tightening?

Through quantitative tightening, the Federal Reserve reduces its supply of monetary reserves in order to tighten its balance sheet—and it does so simply by letting the bonds and other securities it has purchased reach maturity. When this happens, the Treasury department removes them from its cash balances, and thus the money it has “created” effectively disappears.

Does the Fed know exactly when to ease the gas pedal on quantitative easing? According to the Fed, timing is everything. Remember how the Fed’s main job is to create a strong economy through stable prices and high employment? As it carefully monitors the effects interest rates are having on the economy, it also keeps a close eye on the overall measure of inflation. It’s both a constant battle and a juggle. 

Take the period following the Financial Crisis as an example. The 2007–2008 crisis stemmed in large part from the implosion of collateralized debt obligations, and so the Fed kept the Fed Funds Rate at virtually 0% for almost a decade in order to spur growth and maintain stable rates of employment.

During this period, it also undertook a series of quantitative easing measures, watching its balance sheet balloon from $870 billion in August 2007 to $4.5 trillion in September 2017.

The FRED graph below illustrates how the Fed Funds rate, in blue, remained at nearly zero for the period while the total size of the Fed’s balance sheet, in red, grew. The shaded areas indicate recession.

Federal Reserve Bank of New York, Effective Federal Funds Rate [EFFR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EFFR, May 16, 2022.

The Fed believed that as soon as employment became stable, it needed to turn its attention to meeting its 2% inflation target, which it accomplished by raising interest rates. And so, in October 2015, it began gradually increasing the Fed Funds Rate in 25 basis point increments. Over the next several years, rates went up from 0.0%–0.25% levels to 2.25%–2.5% in 2018. This course of action, in the Fed’s words, was known as liftoff.

After raising rates a few times with no disastrous consequences, in 2017 the Fed next embarked on an effort to reduce its balance sheet through quantitative tightening. This was also known as unwinding its balance sheet, because it was taking action in a slow and gradual way.

Between 2017 and 2019, the Fed let about $6 billion of Treasury securities mature and $4 billion of mortgage-backed securities “run off” per month, increasing that amount every quarter until it hit a maximum of $30 billion Treasuries and $20 billion mortgage-backed securities per month. By July 2019, the Fed announced that its unwinding was complete.

The Fed published a blog post detailing these efforts, categorizing them as its “balance sheet normalization program,” since it sought to “return the policy rate to more neutral levels.”

What Effect Does Quantitative Tightening Have on the Economy?

While the goal of quantitative easing is to spur growth, quantitative tightening doesn’t hinder it; in fact, many Governors of the Federal Reserve believe quantitative tightening doesn’t have much effect on the economy at all.

“Quantitative tightening does not have equal and opposite effects from quantitative easing,” said St. Louis Fed President Jim Bullard, “Indeed, one may view the effects of unwinding the balance sheet as relatively minor.”

Former Fed Chair Janet Yellen famously described quantitative tightening as “something that will just run quietly in the background over a number of years,” and that “it’ll be like watching paint dry.”

St. Louis Fed Research Director Chris Waller compared quantitative tightening with “slowly opening the stopper in a drain and letting the water run out,” and by doing so, they were “letting the supply of U.S. Treasuries in the hands of the private sector grow.”

But critics have argued that the excess reserves the Fed creates by “printing money” through quantitative easing have negative consequences on the overall economy. For example, these reserves can lead to currency devaluation and higher inflation, which is defined as when prices rise faster than wages. Inflation can have disastrous effects on an economy, resulting in asset bubbles and even recessions.

Even the Fed admitted as much when St. Louis Vice President Chris Neely noted that between 2008–13, the Fed’s asset purchases led to a decrease in 10-Year Treasury yields by 100–200 basis points. He said, “this reduction modestly raised prices and real activity.”

Just remember that the Fed’s principal aims are to generate stable prices and high employment. So while the Fed hasn’t explicitly said so, reducing its balance sheet might be one of its methods to combat inflation.

Why Is Quantitative Tightening on the Fed’s Agenda Again?

In 2022, inflation reached decades’ high, stemming from a number of factors, including fallout from the global Coronavirus pandemic, which increased labor prices, and Russia’s invasion of Ukraine, which affected energy and commodities. In March, 2020, the Fed slashed the Fed Funds rate to 0.00%–0.25% in response to the pandemic. In May, 2022 it raised rates again by 0.5%.

What Is the Schedule for Quantitative Tightening?

On May 4, 2022, the Fed announced it would be undertaking a “phased approach” of quantitative tightening measures beginning with a 3-month period of unwinding $30 billion of Treasuries and $17.5 billion mortgage-backed securities beginning on June 1, 2022. By September, 2022 these caps would increase to $60 billion and $35 billion, respectively.

Is Quantitative Tightening Really So Frightening?

TheStreet’s Ellen Chang says that, according to economists, inflation is on a downward trend, most likely to decline to 3% by the end of the year, and that higher interest rates as well as quantitative tightening should do what they’re supposed to, and reduce pricing pressure. 

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Economics

What is Stagflation?

Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy. Keep reading to get started.
The post What is Stagflation?…

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Stagflation seems to be a word that we’ve been hearing a lot of recently. With the CPI report showing that inflation had slowed less than expected, stagflation concerns became even louder. However, for the average person, the term probably has never been defined. So, what is stagflation? Today we’ll look at what stagflation is, as well as how it impacts you and the broader economy.

Inflation

First things first, we should probably define what inflation is. The simplest way to define inflation is as the erosion of a currency’s purchasing power. Those moments where it feels like your dollar buys less than it used to  are examples of inflation. Under economic theory, inflation primarily occurs when the growth of the money supply outpaces economic growth. For this reason, when inflation becomes an issue, central banks will attempt to limit the money supply. Essentially if more money is introduced to an economy, without an equal introduction of goods and/or services, inflation occurs. Other contributing factors include rising cost(s) of goods, wages and labor. The U.S. Federal Reserve aims for an inflation rate of 2%, and has averaged that since 2011.

Stagflation Defined

So, now that we know what inflation is, we can address what stagflation is. If inflation alone has the power to impact markets and basic economies, what impacts can stagflation have? To simply define stagflation, allow me to present it as an equation or two:

  1. Stagflation = High Inflation + Slow Economic Growth + High Unemployment
  2. Stagflation = High Inflation + Decreasing GDP

Under the first equation, we aren’t yet in a period of stagflation. While inflation is high, the official unemployment rate is 3.6%. That level reasonably mirrors the level that we were at prior to the onset of Covid back in 2020. However, the labor participation rate is still below pre-pandemic levels by a full percentage point. While that may not sound like a lot, remember that equates to hundreds of thousands of people not participating in the labor force.

With that being said, based on the second equation, we are already experiencing a period of stagflation. The U.S. GDP declined by 1.4% in Q1 of 2022, when it was expected to grow by 1%.

An example of stagflation in the U.S. would be the America of the early to mid 1970s. During this time, the United States experienced two, separate, recessions. There were also four separate years of negative GDP growth, two of which being consecutive. Inflation skyrocketed from 3.6% in 1973 to 8.3%, incidentally, where we are now, to 1974. The closest unemployment was to the 3.6% we have now was 1970 and 1973, when it was 4.9%. In 1975, unemployment was 8.5%.

Impacts and Concerns

So, how does stagflation impact you? Well, first, through the basic inflationary impacts. Let’s say your investments are down 5% this year, better than the broader markets. Tack on 8.3% in inflationary costs, and your money is actually worth 13.3% less. Inflation and bonds have a well-defined history as well. Inflationary risks and different securities have well defined relationships such as the relationship with bonds and the inflation rate. If your bond pays 3%, but inflation rises from 2% to 6%, you are losing money on the investment. Let’s look at your paycheck too. If you got a 5% raise, but inflation went up from the 2% average to 8.5%, your real earnings went down 1.5%. In sum, high inflation hits you at every angle. You effectively make less, your investments return less/negative, and things get more expensive.

Second, looking at the other variable(s) in the equation. What do all of unemployment being high, GDP decreasing, and economic growth slowing mean? Essentially, it means that the average person is at risk of losing their job. Adding the increased costs of goods and services to a loss of income can cause incredible financial strife. Now, apply that on a national level. If more people are out of work, you would also expect less spending. If the average person is unable to stimulate the economy, via spending, it is hard to reverse poor economic growth.

There is also a less direct impact, though perhaps one even more impactful. With the national debt burgeoning in the last two years, financing that debt also becomes more difficult. Discussing the national debt in its current context is an issue deserving its own space. Thankfully, others have already attempted to broach the subject.

Solutions

There is no surefire way to solve or fix stagflation. The general consensus is to first engage in the policies that address inflation. Examples of that would be printing less money and increasing interest rates, as to make borrowing more expensive. Other, less popular, examples would be cutting different government programs/expenditures. Next would be efforts to stimulate the economy, with the simplest being lowering taxes. That is also a complex suggestion to make, and agreeing to a proper execution is usually quite difficult. In addition, without the aforementioned spending cuts, the potential impact is greatly reduced.

Conclusions on Stagflation

There is no question that inflation is currently negatively impacting people. Concerns about global conflicts, and potential recessions, do nothing to assuage the average person’s concerns. Depending on how we look at it, America is already experiencing a period of stagflation. On the inflationary front, the Fed has begun increasing interest rates. Whether or not tax breaks and spending cuts follow are unclear, though admittedly a more accurate term might be unlikely.

In times like these, having a financial plan is important. While you cannot control the rate of inflation, you can control things like your spending and your investments. Even if it doesn’t eliminate it, proper financial planning should help minimize the detrimental impacts of stagflation.

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Futures Slide After China’s “Huge” Data Miss Sparks “Broad-Based Recession Talk”

Futures Slide After China’s "Huge" Data Miss Sparks "Broad-Based Recession Talk"

Friday’s bear market rally dead-cat bounce appears to be…

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Futures Slide After China's "Huge" Data Miss Sparks "Broad-Based Recession Talk"

Friday's bear market rally dead-cat bounce appears to be over, and global stocks have started the new week in the red with US equity futures lower after a "huge miss", as Bloomberg put it, in Chinese data fueled concerns over the impact of a slowdown in the world’s second-largest economy. As reported last night, China’s industrial output and consumer spending hit the worst levels since the pandemic began, hurt by Covid lockdowns.

And even though officials took another round of measured steps to help the economy by cutting the interest rate for new mortgages over the weekend to bolster an ailing housing market, even as they left the one-year policy loan rate was left unchanged Monday, few believe that any of these actions will have a tangible impact and most continue to expect much more from Beijing. 

As such, after a weekend that saw even Goldman's perpetually optimistic equity strategists slash their S&P target (again) from 4,700 to 4,300, and amid growing fears that a recession is now inevitable, Nasdaq 100 futures slid as much as 1.2%, before paring losses to 0.4% as of 730 a.m. in New York. S&P 500 futures were down 0.3%. 10Y Treasury yields were flat at 2.91% and the dollar dipped modestly while bitcoin traded just above $30,000 dropping from $31,000 earlier in the session.

Among notable moves in premarket trading, Spirit Airlines jumped as much as 21% following a report that JetBlue Airways is planning a tender offer at $30 a share in cash. Major US technology and internet stocks were down after rebounding on Friday, while Tesla shares dropped, with the electric-vehicle maker set to recall 107,293 cars in China over a potential safety risk. Twitter shares fall 3.4% in premarket trading on Monday, on course to wipe out all the gains the stock has made since billionaire Elon Musk disclosed his stake in the social media platform. Twitter fell to as low as $37.86 -- below the the April 1 close of $39.31, before Musk disclosed his stake.

US stocks have been roiled this year, with the S&P 500 on tick away from a bear market as recently as last Thursday, on worries of an aggressive pace of rate hikes by the Federal Reserve at a time when macroeconomic data showed a slowdown in growth. Data from China on Monday highlighted a massive toll on the economy from Covid-19 lockdowns, with retail sales and industrial output both contracting.

Although lower valuations sparked a rally in stocks on Friday, strategists including Morgan Stanley’s Michael Wilson warned of more losses ahead as equity markets also price in slower corporate earnings growth. Goldman Sachs strategists led by David Kostin cut their year-end target for the S&P 500 on Friday to 4,300 points from 4,700. 

"The broad-based recession talk is the major catalyzer this Monday,” Ipek Ozkardeskaya, a senior analyst at Swissquote, wrote in a note. “Activity in US futures hint that Friday’s rebound was certainly nothing more than a dead cat bounce” just as we said at the time

The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets. Goldman Sachs Group Senior Chairman Lloyd Blankfein urged companies and consumers to gird for a US recession, saying it’s a “very, very high risk.” Traders remain wary of calling a bottom for equities despite a 17% drop in global shares this year, with Morgan Stanley warning that any bounce in US stocks would be a bear-market rally and more declines lie ahead.

In Europe, the Stoxx Europe 600 index fell as much as 0.8% before paring losses, with declines for tech and travel stocks offsetting gains for basic resources as industrial metals rallied. The Euro Stoxx 50 falls 0.4%. IBEX outperforms, adding 0.3%. Tech, personal care and consumer products are the worst performing sectors. Here are some of the biggest European movers today:

  • Basic Resources stocks outperformed with broad gains among mining and steel companies; ArcelorMittal +3.5%; SSAB +2.6%; Glencore +2.1%; Voestalpine +3.1%.
  • Sartorius AG and Sartorius Stedim shares gain as UBS upgrades both stocks to buy following a “significant de-rating” for the lab-equipment companies, seeing supportive global trends.
  • Carl Zeiss Meditec gains as much as 4.9% after HSBC raised its recommendation to buy from hold, saying the medical optical manufacturer is “well-equipped to deal with supply chain challenges.”
  • Interpump rises as much as 7.6%, extending winning streak to five days, as Banca Akros upgrades the stock to buy from accumulate following Friday’s 1Q results.
  • Casino shares jump as much 5.8% after the French grocer said it’s started a process to sell its GreenYellow renewable energy arm, confirming a Bloomberg News report from Friday.
  • Ryanair shares decline as much as 4.3% on FY results, with analysts focusing on the low-budget carrier’s recovery outlook. They note management is cautiously optimistic about summer travel.
  • Vantage Towers shares decline after the company posted FY23 adjusted Ebitda after leases and recurring free cash flow forecasts that missed analyst estimates at mid- points.
  • Unilever falls after a 13-F filing from Nelson Peltz’s Trian shows no position in the company, according to Jefferies, damping speculation after press reports earlier this year that the fund had built a stake.
  • Michelin shares fall as much as 3.7% after being downgraded to neutral from overweight at JPMorgan, which says it writes off any chance of seeing a recovery in volume production growth in FY22.

Earlier in the session, Asian stocks eked out modest gains as surprisingly weak Chinese economic data spurred volatility and caused traders to reassess their outlook on the region. The MSCI Asia-Pacific Index was up 0.1%, paring an earlier advance of as much as 0.9%  on stimulus hopes. The region’s information technology index rose as much as 1.5%, with TMSC giving the biggest boost. A sub-gauge on materials shares fell the most.

Equities in China led losses, as Beijing’s moves to cut the mortgage rate for first-time home buyers and ease lockdown restrictions in Shanghai failed to reverse the downbeat mood. Asian stocks were trading higher early Monday, building on Friday’s rally, only to trim or reverse gains as data showed a sharper-than-expected contraction in Chinese activity in April. Signs of an earnings recovery in China are needed for investors to come back, Arnout van Rijn, chief investment officer for APAC at Robeco Hong Kong Ltd., said on Bloomberg Television.

“It looks like China is not going to meet the 15% earnings growth that people were looking for just a couple of months ago. So now we’re looking for five, 10, maybe it’s even going to fall to zero.”   Meanwhile, JPMorgan analysts, who had called China tech “uninvestable” in March, upgraded some tech heavyweights including Alibaba in a Monday report, citing less regulatory uncertainties. Benchmarks in Japan, Australia, India and Taiwan maintained gains while Hong Kong also recovered some ground later in the day. Markets in Singapore, Thailand, Malaysia and Indonesia were closed for holidays.     

Japanese equities were mixed, with the Topix closing slightly lower after worse-than-expected Chinese economic data amid the impact from virus-related lockdowns. The Topix fell 0.1% to close at 1,863.26, with Honda Motor contributing the most to the decline after its forecast for the current year missed analyst expectations. The Nikkei advanced 0.5% to 26,547.05, with KDDI among the biggest boosts after announcing its results and a 200 billion yen buyback. “Though the lockdowns in China are pushing down the economy and causing supply chain difficulties, there’s a positive outlook since the weekend that there could be a gradual easing of the lockdowns as it seems that virus cases have peaked out,” said Masashi Akutsu, chief strategist at SMBC Nikko Securities.

In Australia, the S&P/ASX 200 index rose 0.3% to 7,093.00, trimming an earlier advance of as much as 1.1% after soft Chinese economic data stoked concerns about global growth. Read: Aussie, Kiwi Slump After Weak China Data: Inside Australia/NZ Brambles was the top performer after confirming it’s in talks with private equity firm CVC Capital Partners on a takeover proposal. Qube also climbed after completing a A$400 million share buyback.  In New Zealand, the S&P/NZX 50 index fell 0.1% to 11,157.66.

In rates, Treasuries were steady with yields within 1bp of Friday’s close. US 10-year yield near flat ~2.91% with bunds cheaper by ~5bp, gilts ~3.5bp amid heavy. German 10-year yield up 5 bps, trading narrowly below 1%. Italian 10-year bonds underperform, with the 10-year yield up 8 bps to 2.93%. Peripheral spreads are mixed to Germany; Italy and Spain widen and Portugal tightens. The Italy 10-year was cheaper by more than 6bp on the day amid renewed ECB jawboning. Core European rates are higher, pricing in ECB policy tightening. During Asia session, Chinese data showed industrial output and consumer spending at worst levels since the pandemic began. The dollar issuance slate includes CBA 3T covered SOFR; $30b expected for this week as syndicate desks seek opportunities for pent-up supply. Three-month dollar Libor +1.13bp at 1.45500%.

In FX, the Bloomberg Dollar Spot Index was little changed while the greenback advanced against most of its Group-of-10 peers. Treasuries inched lower, led by the front end, and outperformed European bonds. The euro inched up against the dollar. Italian bonds dropped, leading peripheral underperformance against euro- area peers, while money markets showed increased ECB tightening wagers after policy maker Francois Villeroy de Galhau said a consensus is “clearly emerging” at the central bank on normalizing monetary policy and that June’s meeting will be “decisive.” He also signaled that the weakness of the euro is focusing the minds of ECB policy makers at a time when the currency is heading toward parity with the dollar. The euro may resume its rally versus the pound in the spot market as options traders pile up bullish wagers. The pound fell against both the dollar and euro, staying under selling pressure on concerns that high UK inflation will weigh on the economy. Markets await testimony from Bank of England Governor Andrew Bailey and other central bank officials later in the day, ahead of a reading of April inflation later in the week. Australian and New Zealand dollars fell after Chinese industrial and consumer data fanned concerns of a further slowdown in the world’s second-largest economy.

In commodities, WTI drifts 0.4% lower to trade above $110. Spot gold pares some declines, down some $6, but still around $1,800/oz. Most base metals trade in the green; LME tin rises 3.4%, outperforming peers. Bitcoin falls 4.6% to trade below $30,000

Looking ahead, we get the US May Empire manufacturing index, Canada April housing starts, March manufacturing, wholesale trade sales. Central bank speakers include the Fed's Williams, ECB's Lane, Villeroy and Panetta, BOE's Bailey, Ramsden, Haskel and Saunders. We get earnings from Ryanair, Take-Two Interactive.

Market Snapshot

  • S&P 500 futures down 0.3% to 4,008.75
  • STOXX Europe 600 little changed at 433.33
  • MXAP up 0.2% to 160.34
  • MXAPJ up 0.2% to 523.32
  • Nikkei up 0.5% to 26,547.05
  • Topix little changed at 1,863.26
  • Hang Seng Index up 0.3% to 19,950.21
  • Shanghai Composite down 0.3% to 3,073.75
  • Sensex up 0.6% to 53,119.79
  • Australia S&P/ASX 200 up 0.3% to 7,093.03
  • Kospi down 0.3% to 2,596.58
  • German 10Y yield little changed at 0.98%
  • Euro up 0.1% to $1.0424
  • Brent Futures down 1.4% to $109.98/bbl
  • Gold spot down 0.8% to $1,797.30
  • US Dollar Index little changed at 104.46

Top Overnight News from Bloomberg

  • NATO members rallied around Finland and Sweden on Sunday after they announced plans to join the alliance, marking another dramatic change in Europe’s security architecture triggered by Russia’s war in Ukraine
  • The euro area’s pandemic recovery would almost grind to a halt, while prices would surge even more quickly if there are serious disruptions to natural-gas supplies from Russia, according to new projections from the European Commission
  • UK energy regulator Ofgem plans to adjust its price cap every three months instead of every six. Changing the level more often would help consumers to take advantage of falling wholesale prices more quickly, it said in a statement Monday. This would also mean higher prices filter through bills quicker
  • Boris Johnson has warned Brussels that the UK government will press ahead with unilateral changes to parts of the Brexit agreement if it does not engage in “genuine dialogue”
  • While debt bulls on Wall Street have been crushed all year, market sentiment has shifted markedly over the past week from inflation fears to growth. That theme gathered more strength Monday, when data showing China’s economy contracted sharply in April set off fresh gains for Treasuries
  • China’s economy is paying the price for the government’s Covid Zero policy, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop
  • Japanese manufacturers are increasingly looking to move offshore operations to their home market, according to a Tokyo Steel Manufacturing Co. executive. The rapidly weakening yen, global supply-chain constraints, geopolitical risks and shifting wages patterns are prompting the switch, Kiyoshi Imamura, a managing director of the steelmaker, said in an interview in Tokyo last week

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mixed after disappointing Chinese activity data clouded over the early momentum from Friday’s rally on Wall St. ASX 200 was higher as tech stocks were inspired by US counterparts and amid M&A related newsflow with Brambles enjoying a double-digit percentage gain after it confirmed it had talks with CVC regarding a potential takeover by the latter. Nikkei 225 kept afloat as earnings releases provided the catalysts for individual stocks but with gains capped by a choppy currency. Hang Seng and Shanghai Comp initially gained with property names underpinned after China permitted a further reduction in mortgage loan interest rates for first-time home purchases and with casino stocks also firmer in the hope of a tax reduction on gaming revenue. However, the mood was then spoiled by weak Chinese data and after the PBoC maintained its 1-year MLF rate.

Top Asian News

  • PBoC conducted a CNY 100bln in 1-year MLF with the rate kept unchanged at 2.85% and stated the MLF and Reverse Repo aim to keep liquidity reasonably ample, according to Bloomberg.
  • Beijing extended work from home guidance in several districts and announced three additional rounds of mass COVID-19 testing in most districts including its largest district Chaoyang, according to Reuters.
  • Shanghai will gradually start reopening businesses including shopping malls and hair salons in China's financial and manufacturing hub beginning on Monday following weeks of a strict lockdown, according to Reuters.
  • Shanghai city official said 15 out of the 16 districts achieved zero-COVID outside quarantine areas and the city's epidemic is under control but added that risks of a rebound remain and they will need to continue to stick to controls. The official said the focus until May 21st will be to prevent risks of a rebound and many movement restrictions are to remain, while they will look to allow normal life to resume in Shanghai from June 1st and will begin to reopen supermarkets, convenience stores and pharmacies from today, according to Reuters.
  • Chinese financial authorities permitted a further reduction in mortgage loan interest rates for some home buyers whereby commercial banks can lower the lower limit of interest rates on home loans by 20bps based on the corresponding tenor of benchmark Loan Prime Rates for purchases of first homes, according to Reuters.
  • China's stats bureau spokesman said economic operations are expected to improve in May and that China is steadily pushing forward production resumption in COVID-hit areas, while they expect China's economic recovery and rebound in consumption to quicken but noted that exports face some pressure as the global economy slows, according to Reuters.
  • Macau is reportedly considering a tax cut for casinos amid a decline in gaming revenue in which a cut could be as much as 5% off the current 40% levied on casino gaming revenue, according to Bloomberg.

European bourses are mixed, Euro Stoxx 50 -0.6%, following a similar APAC session with impetus from Shanghai's reopening offset by activity data and geopolitics. Stateside, futures are lower across the board, ES -0.4%, with the NQ marginally lagging as yields lift; Fed's Williams due later before Powell on Tuesday. US players are focused on whether the end-week bounce is a turnaround from technical bear-market levels or not. China's market regulator says Tesla (TSLA) has recalled 107.3k Model 3 & Y vehicles, which were made in China. JetBlue (JBLU) is to launch a tender offer for Spirit Airlines (SAVE); JetBlue is to offer USD 30/shr, but prepared to pay USD 33/shr if Spirit provides JetBlue with requested data, WSJ sources say. Elon Musk tweeted that Twitter’s (TWTR) legal team called to complain that he violated their NDA by revealing the bot check sample size and he also tweeted there is some chance that over 90% of Twitter’s daily active users might be bots.

Top European News

  • UK PM Johnson is reportedly set to give the green light for a bill on the Northern Ireland protocol, according to the Guardian.
  • UK PM Johnson said he hopes the EU changes its position on the Northern Ireland protocol and if not, he must act, while he sees a sensible landing spot for a protocol deal and will set out the next steps on the protocol in the coming days, according to Reuters.
  • UK PM Johnson is expected to visit Northern Ireland on Monday for talks with party leaders in an effort to break the political deadlock at Stormont, according to Sky News.
  • Irish Foreign Minister Coveney says the EU is prepared to move on reducing checks on goods coming into the region from Britain, via Politico.
  • UK Cabinet ministers have turned on the BoE regarding rising inflation, whereby one minister warned that the Bank was failing to "get things right" and another suggested that it had failed a "big test", according to The Telegraph.
  • Group of over 50 economists warned that the UK's post-Brexit plans to boost the competitiveness of its finance industry risk creating the sort of problems that resulted in the GFC, according to Reuters.
  • European Commission Spring Economic Forecasts: cuts 2022 GDP forecast to 2.7% from the 4.0% projected in February. Click here for more detail.

Central Banks

  • ECB's Villeroy expects a decisive June meeting and an active summer meeting, pace of further steps will account for actual activity/inflation data with some optionality and gradualism; but, should at least move towards the neutral rate. Will carefully monitor developments in the effective FX rate, as a significant driver of imported inflation; EUR that is too weak would go against the objective of price stability.
  •  
  • ECB’s de Cos said the central bank will likely decide at the next meeting to end its stimulus program in July and raise rates very soon after that, while he added that they are not seeing second-round effects and are monitoring it, according to Reuters.

FX

  • Euro firmer following verbal intervention from ECB’s Villeroy and spike in EGB yields EUR/USD rebounds from sub-1.0400 to 1.0435 at best.
  • Dollar up elsewhere as DXY pivots 104.500, but Yen resilient on risk grounds as Chinese data misses consensus by some distance; USD/JPY capped into 129.50.
  • Franc falls across the board after IMM specs raise short bets and Swiss sight deposits show SNB remaining on the sidelines; USD/CHF above 1.0050 at one stage.
  • However, HKMA continues to defend HKD peg amidst CNY, CNH weakness in wake of disappointing Chinese industrial production and retail sales releases.
  • Norwegian Crown undermined by pullback in Brent and narrower trade surplus, EUR/NOK over 10.2100.
  • SA Rand soft as Gold retreats to test support around and under Usd 1800/oz.
  • Loonie slips with WTI ahead of Canadian housing starts, manufacturing sales and wholesale trade, Sterling dips before BoE testimony; USD/CAD 1.2900+, Cable sub-1.2250.

Fixed income

  • EGBs rattled by ECB rhetoric inferring key policy meetings kicking off in June and extending through summer.
  • Bunds down towards 153.00 and 10 year yield back up around 1%, Gilts almost 1/2 point adrift and T-note erasing gains from 12/32+ above par at best.
  • Eurozone periphery underperforming with added risk-off angst following much weaker than expected Chinese data.

In commodities

  • WTI and Brent are pressured, but well off lows, and torn between China's lockdown easing and poor activity data amid numerous other catalysts
  • Specifically, the benchmarks are around USD 110/bbl and USD 111/bbl respectively,
  • Saudi Aramco Q1 net income rose 82% Y/Y to INR 39.5bln for its highest quarterly profit since listing, according to Sky News.
  • Saudi Energy Minister says they are going to get to 13.2-13.4mln BPD, subject to what is done in the divided zone, by end-2026/start-2027; can maintain production when there, if the market demands this.
  • OPEC+ to continue with monthly output increases, according to Bahrain's oil minister via Reuters.
  • Iraqi state-run North Oil Company said Kurdish armed forces took control of some oil wells in northern Kirkuk, according to Reuters.
  • Iraq oil minister says they aim to increase oil production to 6mln BPD by end-2027, OPEC is targeting a energy market balance not a price; adding, current production capacity is 4.9mln BPD, will reach 5mln BPD before the end of 2022.
  • China is to increase fuel prices from Tuesday, according to China's NDRC; gasoline by CNY 285/t and diesel by CNY 270/t.

US Event Calendar

  • 08:30: May Empire Manufacturing, est. 15.0, prior 24.6
  • 16:00: March Total Net TIC Flows, prior $162.6b

DB's Jim Reid concludes the overnight wrap

Markets managed a big bounce on Friday but the mood has soured again in the Asian session after a weak slew of data from China as covid lockdowns had an even worse impact than expected. Industrial production (-2.9% vs +0.5% expected), retail sales (-11.1% vs -6.6% expected) and property investment (-2.7% vs -1.5% expected) all crashed through estimates by a large margin. The slump in retail sales and industrial production was the weakest since March 2020. The latter also had the lowest print on record, with the worst decline coming from auto manufacturing (-31.8%). The surveyed jobless rate (6.1% vs estimates of 6.0%) also ticked up by more than expected from 5.8% in March and is now close to the high of 6.2% in February 2020. Although the 1-year policy loan rate was left unchanged today, the PBoC did ease the rate on new mortgages this weekend. In other data releases, Japan’s April PPI (+10.0%) came in above estimates of +9.4%, the highest since 1980.

Amid this, the Shanghai Composite (-0.51%) and the Hang Seng (-0.43%) are in the red, and outperformed by the KOSPI (-0.21%) and the Nikkei (+0.46%). The sentiment has soured in American markets too, with S&P 500 futures also trading lower (-0.68%) and the US 10y yield declining by -2.2bps. Oil (-1.48%) is edging lower too on growth concerns.

After last week’s meltdown in crypto markets, Bitcoin is back at above $30k this morning – a jump since the lows of nearly $26k last Thursday but way short of the $38k it traded at in the beginning of the month and $68k early last November. The infamous TerraUSD, the stablecoin that fuelled the crypto slide, is at $0.18. It is supposed to trade at $1 at all times.

Looking forward now and there's not a standout event to focus on this week but they'll be plenty to keep us all occupied. US retail sales (tomorrow) looks like the highlight alongside Powell's speech the same day. There will also be US housing data smattered across the week and UK and Japanese inflation on Wednesday and Friday respectively.

Let's start with US retail sales as it will be a good early guide for Q2 GDP. Our US economists are anticipating a +1.7% print, up from +0.7% in March. Rebounding auto sales should help the headline number. For more on the consumer, Brett Ryan put out this chartbook last week on the US consumer (link here). US industrial production is out the same day.

We have a long list of central bank speakers this week headed by Powell and Lagarde (tomorrow) and BoE Bailey today. There are many more spread across the week and you can see the list in the day by day event list at the end. We do have the last ECB meeting minutes on Thursday but the subsequent push towards a July hike might make these quite dated.

US housing will be a big focus next week. It's probably too early for the highest mortgage rates since 2009 to kick in but with these rates around 220bps higher YTD, some damage will surely soon be done after the highest YoY price appreciation outside of an immediate post WWII bounce, in our 120 year plus housing database. On this we will see the NAHB housing market index (tomorrow), April’s US building permits and housing starts (Wednesday), and existing home sales (Thursday).

Turning to corporate earnings, it will be another quiet week after 457 of the S&P 500 companies and 368 of the STOXX 600 companies have reported earnings this season so far. Yet, it will be an important one to gauge how the US consumer is faring amid inflation at multi-decade highs, including reports such as Walmart, Home Depot (tomorrow), Target and TJX (Wednesday). Results will also be due from China's key tech and ecommerce companies like JD.com (tomorrow), Tencent (Wednesday) and Xiaomi (Thursday). Other notable corporate reporters will include Cisco (Wednesday), Applied Materials, Palo Alto Networks (Thursday) and Deere (Friday).

A quick recap of last week’s markets now. Fears that global growth would slow due to the tightening task at hand for central banks sent ripples across markets, without a clear specific catalyst. Equities declined, credit spreads widened, the dollar rallied, and sovereign yields declined.

The S&P 500 fell for the sixth consecutive week for the first time since 2011, falling -13.0% over that time. Even with a +2.39% rally on Friday, it fell -2.41% last week. Large cap technology firms underperformed, with the NASDAQ falling -2.80% (+3.82% Friday), while the FANG+ index fell -3.48% (+5.45% Friday). Volatility was elevated, with the Vix closing above 30 for 6 straight days for the first time since immediately following the invasion, narrowly avoiding a 7th straight day above 30 by closing the week at 28.8. European equities outperformed, with the STOXX 600 climbing +0.83% after a banner +2.14% gain Friday. The Itraxx crossover ended the week at 446bps, its widest level since June 2020. Crypto assets sharply declined, with Bitcoin down -12.51% and Coinbase -34.58% over the week, with a number of so-called ‘stablecoins’ breaking their pledged parity, forcing some to stop trading.

The growth fears drove a flight to quality. The dollar index increased +0.87% (-0.27% Friday) to its highest levels since 2002. Only the yen outperformed the US dollar in the G10 space. Sovereign yields rallied significantly, with 10yr Treasuries, bunds, and gilts falling -19.3bps (+8.5bps Friday), -23.0bps (+6.2bps Friday), and -28.7bps (+4.7bps Friday), respectively.

Reports that the EU was considering softening their oil-related sanctions due to member resistance combined with growth fears to send oil prices much lower at the beginning of the week, with Brent crude futures almost breaking $100/bbl. When all was said and done, a gradual rally over the back half of the week saw Brent merely -1.04% lower (+3.82% Friday). On the back of disappointing data from China it is down -1.48% this morning.

There was a lot of high-profile central bank speak to work through, as there will be this week. The main takeaways included Fed officials aligning behind a series of +50bp hikes the next few meetings, downplaying the chances of +75bp hikes until September at the earliest. Meanwhile, momentum in the ECB is growing toward a July policy rate hike, with policy rates breaching positive territory by the end of the year.

In terms of data Friday, the University of Michigan survey of inflation expectations for the next five years was unchanged at 3 percent, though inflation has weighed on consumers’ perception of the current situation.

Tyler Durden Mon, 05/16/2022 - 08:02

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