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Futures Dip On Last Trading Day Of Blockbuster Year For Markets

Futures Dip On Last Trading Day Of Blockbuster Year For Markets

US stock futures edged lower and global markets – at least those that were open – dipped in thin trading on the final session of 2021 as concerns about the fast-spreading omicron

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Futures Dip On Last Trading Day Of Blockbuster Year For Markets

US stock futures edged lower and global markets - at least those that were open - dipped in thin trading on the final session of 2021 as concerns about the fast-spreading omicron variant let some air out of what has been a solid Santa rally to end a year of strong gains: after a 27% gain for the S&P 500 Index this year, fueled by a recovery from the coronavirus-induced slump, investors are assessing the impact of covid with new cases globally exceeding a record 2 million for the first time since the pandemic began. Also in focus is easing concern about a standoff between the U.S. and Russia after the latter expressed satisfaction with the outcome of a phone call between the countries’ presidents about Ukraine. Oil prices retreated from $80 a barrel following their biggest annual gain since 2009, the 10-year Treasury yield dropped to 1.5% and the dollar, which had its best year since 2015 with a 6.7% rise , was steady against most major currencies.

With several markets in Asia and Europe closed on Friday, trading volumes were thin and most markets directionless. At 730am, S&P emini futures were down 8 points or -0.17%, Nasdaq futures were down 40 points or 0.25% and Dow futures were also down 94 points, or 0.26%.

While activity was thin, there were some notable US pre-market movers today:

  • Fathom Digital (FATH) soared 45% after bullish posts on Reddit about the maker of on-demand digital manufacturing platforms.
  • Some cryptocurrency-exposed stocks rise in U.S. premarket trading on Friday as Bitcoin advances for a second day, paring its biggest monthly drop since May. Marathon Digital (MARA) +2.9%, Riot Blockchain (RIOT) +1.9%, Bit Digital (BTBT) +3.5%.
  • Xeris Biopharma (XERS) shares gain 18% after the company said the U.S FDA approved Recorlev for treating endogenous hypercortisolemia in some patients. The risk-reward is attractive, according to Piper Sandler.
  • Tesla (TSLA) dropped again in pre-market trading after a 475,000 vehicle recall.

In the latest Omicron news, a growing number of countries are reporting record daily cases of COVID-19 because of the Omicron variant, and New Year celebrations were being scaled back by uncertainty about the spread of the virus. But after initially tumbling in December, stocks have recovered over the holiday period as investors became reassured economies could handle the surge in Omicron cases, and are heading back towards record highs.

"As far as COVID is concerned, for now, market participants may stay willing to add to their risk exposures, and perhaps push equity indices to new highs, as several nations around the globe held off from imposing fresh lockdowns, despite record infections around the globe the last few days," said Charalambos Pissouros, head of research at Cyprus-based brokerage JFD Group.

Investors have held on to the resilience of the global recovery into 2022 and the prospect of further gains if money remains cheap and corporate profitability so high. This year's "everything rally" has seen a wall of cheap central bank cash, government stimulus and strong economic rebounds out of the pandemic make it hard not to profit from soaring asset prices.

“As we look forward to 2022 the gains are probably going to be more modest than they’ve been in the past year or so” partly given where valuations are now, Jason Pride, chief investment officer for private wealth at Glenmede, said on Bloomberg Television. But there’s reason for optimism too since “we’re still in the recovery from the pandemic,” he said.

The spotlight was also on talks by telephone between U.S. President Joe Biden and Russian President Vladimir Putin. The Kremlin said Putin was satisfied with the outcome of the discussions. The U.S. and its allies have raised alarm over a potential Russian invasion of Ukraine.

The MSCI World Index was marginally higher and remains just 0.5% off record levels. The index has surged 17% in 2021, its third consecutive year of double-digit gains.

With most European markets closed or shutting down early on Friday, trading was thin as investors drew a line under a strong year for global equities as economies recovered from the pandemic. Emerging markets and Asian benchmarks lagged, partly due to China’s ongoing regulatory pressures and slowing economy. Bond investors are nursing losses as many central banks move toward tighter monetary settings to fight inflation. How the coronavirus and those policy shifts shape economic reopening are key for the outlook.

European equities fell in thin trading, with many major markets on the continent closed. The Stoxx Europe 600 Index dropped 0.2%, hovering close to a record close after advancing more than 22% this year, with trading volume about 86% lower than of the 30-day average as markets including Germany, Spain and Italy were closed. In the U.K., the FTSE Index fell 0.5%, while France’s CAC 40 Index also declined 0.5%.

The Stoxx 600 advanced more than 22% in 2021, on track for a seventh consecutive quarters of gains, the longest winning streak since 1998. European equities are hovering near a record, up about 75% from a pandemic low in March 2020, on the back of an unprecedented stimulus and a successful vaccination campaign against the coronavirus, which allowed economic activity to resume despite periodic flare ups in infections. Looking at the year ahead, Christophe Barraud, chief economist at Market Securities LLP in Paris, sees headwinds building up for European stocks, as the spread of omicron brings back restrictions, the economy slows and monetary policy support wanes.

“On the positive side, earnings could hit fresh record highs as nominal growth will remain strong, real rates are expected to remain low (TINA effect) and companies will still focus on buybacks and dividends,” he said.

Earlier in the session, Asian stocks gains as low liquidity and short-covering coupled up to boost Chinese technology shares that dragged the regional benchmark down this year. A rally in Hong Kong tech names followed a surge in U.S.-listed Chinese shares. The Hang Seng Tech Index rose 3.6%, while Chinese shares overall advanced. Those moves came in the wake of the Nasdaq Golden Dragon China Index’s biggest one-day jump Thursday since 2008, though it’s still down more than 40% for 2021.

The MSCI Asia Pacific Index advanced as much as 0.5% in 2021’s last trading session, with Alibaba and Tencent the biggest contributors to gains as investors snapped up China’s battered internet giants. The Hang Seng Tech Index rose 3.6%, while Hong Kong’s benchmark gauges led advances around the region in a shortened trading day.

“The fundamentals and regulatory environment haven’t changed,” said He Qi, a portfolio manager at Huatai Pinebridge Fund Management. “We need to monitor any news on the regulations and China-U.S. tensions in the new year” to decide whether China tech’s gains can continue, he added. MSCI’s Asian index is still set to clock an annual loss of more than 3%, underperforming the MSCI AC World Index by about 20 percentage points, the biggest gap since 1997. While measures in Vietnam and India surged the most this year, up about 36% and 24%, respectively, Chinese stocks dragged the regional gauge lower. The Philippine stock index was the biggest decliner in the region Friday, sliding nearly 3% as the Southeast Asian nation held back from further easing of mobility curbs amid rising Covid-19 cases. Japan, South Korea and Taiwan were among markets that were closed for year-end holidays.

The latest data showed China’s manufacturing sector continued to expand in December, providing some relief to Beijing as the world’s second-largest economy continues to struggle with a property market slump. Less positively, Hong Kong may be facing an omicron virus-strain cluster. The city’s stock market shut early and Japan is among those closed ahead of the New Year.

Traders are continuing to monitor China’s struggling property developers. A Chinese state-owned enterprise will take a 29% stake in China South City Holdings Ltd., in the latest sign of the authorities stepping up support for ailing real-estate firms.

In rates, Treasuries are little changed on light volume, edging higher amid weakness in U.S. equity futures on year’s last day. Yields are lower by less than 1bp across the curve, with the 10-year little changed at ~1.50%, below the 50-DMA that was breached to the upside Wednesday for first time this month. Except in auction sectors (2-, 5- and 7-year) yields are little changed on the week, higher on the month in which Fed announced a faster pace of asset-purchase tapering beginning in January and revised dot- plot of forecasts for fed funds target pointing to three hikes in 2022 and 2023

Despite heading for first annual loss since 2013, U.S. government debt has benefited as a hedge for stocks at record highs. SIFMA recommends a 2pm ET close for fixed income markets, and month-end Treasury index rebalancing at 1pm is estimated to extend its duration by 0.07yr, which may support the market.  

On the last day of the year, Brent crude futures dropped 0.8% to $78.87 a barrel and U.S. crude oil weakened 0.94% $76.27 a barrel. Despite this weakness, commodity prices have enjoyed a strong year, with supply often falling short of a jump in demand as economies reopened and both Brent and WTI are up more than 50% in 2021, their biggest gains since 2009, spurred by the global economic recovery and producer restraint

In FX, the Bloomberg Dollar Spot Index dropped 0.1%, trimming an almost 5% advance this year, the biggest since 2015; the Australian and New Zealand dollars outperformed peers as China PMI bolstered risk appetite, rising 0.2%. The euro, which has dropped 7.4% this year as investors bet the European Central Bank would be slower to end pandemic-era stimulus than rival central banks, rose 0.1% to hold above $1.13 . Japan's yen, which has lost more than 11% to the dollar in 2021, dipped slightly again to 115.1 yen per dollar - not far from four-year lows touched earlier this month. Sterling was little changed against the dollar and the euro .The pound remains down for the year against the dollar but looks set for its best year since 2014 versus the euro. On Friday it rose to as high as 83.69 pence, its strongest since February 2020.

Elsewhere in currency markets, Turkey's lira - by far the biggest currency loser in 2021 - fell for a fifth straight day. Turkey again tweaked the price-fixing method used to measure the returns of lira-protected deposits, less than two weeks after President Recep Tayyip Erdogan announced the new instrument as part of efforts to shore up the weakening currency. Under new guidelines issued by the central bank, the so-called conversion rate will be set using foreign-exchange buying rates announced six times a day instead of once a day. The rate is used to measure the lira’s level against major currencies at the opening date of new accounts. By all accounts, it appears that Turkey is making it up as it goes along, and after the initial monster squeeze in the lira, cracks are reappearing as shorts return to what has been the worst performing currency of the year.

Crytocurrency prices rose, reversing some of their losses earlier in the week. Bitcoin added 2% to $48,091 and Ether gained a similar amount to $3,778

There is no economic data on today's calendar.

Market snapshot

  • S&P 500 futures down 0.1% to 4,767.00
  • STOXX Europe 600 down 0.1% to 488.19
  • MXAP up 0.5% to 193.28
  • MXAPJ up 0.7% to 630.38
  • Nikkei down 0.4% to 28,791.71
  • Topix down 0.3% to 1,992.33
  • Hang Seng Index up 1.2% to 23,397.67
  • Shanghai Composite up 0.6% to 3,639.78
  • Sensex up 0.8% to 58,235.68
  • Australia S&P/ASX 200 down 0.9% to 7,444.64
  • Kospi down 0.5% to 2,977.65
  • Brent futures down 0.2% to $79.14/bbl
  • Gold spot up 0.2% to $1,819.08
  • U.S. Dollar Index little changed at 95.92
  • Euro little changed at $1.1332

Top Overnight News from Bloomberg

  • China’s manufacturing sector continued to expand in December, providing some relief to Beijing as the world’s second-largest economy continues to struggle with the ongoing property market slump.
  • Russian President Vladimir Putin is satisfied with the outcome of talks with U.S. President Joe Biden, which set the stage for three sets of negotiations on European security next month, the Kremlin said after a 50-minute call between the two leaders
  • JPMorgan Chase & Co. is offering employees the option of working from home in the opening weeks of 2022, and Citigroup Inc. is encouraging staff to log on remotely
  • South Korea’s inflation topped 3% for a third straight month in December, as still-high commodity prices, ongoing supply issues and resilient domestic demand all worked to lift consumer prices
Tyler Durden Fri, 12/31/2021 - 07:54

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Economics

The retailers that should weather the coming economic storm

Conditions are about to get tougher for retailers as they face a perfect storm of falling incomes, galloping inflation, and rising interest rates.  These…

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Conditions are about to get tougher for retailers as they face a perfect storm of falling incomes, galloping inflation, and rising interest rates.  These impacts will crimp the discretionary spending power of many people. The one exception could be the under 25-year-old Gen Z demographic, who have fewer non-discretionary costs than other age groups. The retailers who sell to them could fare better than most.

Over the last six months, discretionary retail stocks have been among the worst performers on the ASX, with the S&P/ASX 300 Retailers Accumulation Index underperforming the broader market index by 13 per cent over that period. Admittedly, this recent under performance merely unwinds the 20 per cent out performance of this index in the preceding 18 month period which coincided with the recovery in the market from the pandemic lows.

Over the last six months, only 1 of the 17 stocks in this index has managed to perform better than the broader market, JB HiFi, while four generated losses of over 50 per cent. Notably these stocks, Red Bubble, Kogan, City Chic and Temple & Webster, are all online retailers, and performed very strongly over the first year of the pandemic as they were perceived to be COVID winners.

Figure 1: Total return of retailing stocks between 16 Nov 2021 and 16 May 2022

Source: Bloomberg

The market is concerned that the combination of falling incomes – as households face rising inflation on a broad basis eating into real spending power, and rising interest rates – will reduce discretionary spending power. However, it is not as simple as this. 

While these factors are likely to lead to pressure on overall discretionary consumption, these factors do not affect all segments of the economy equally.

CBA’s economic team has released data for household income and spending growth for the March quarter of 2022. This data is broken down by age demographic.

In looking at the potential impact of spending from cycling the impact of large stimulus payments that were received by households in the prior year, CBA’s data suggests that the percentage of Millennials receiving some sort of government payment has fallen the most relative to the December quarter of 2021 followed by Generation X. Gen Z and Baby Boomers have experienced less of a reduction.

Offsetting the reduction in government benefits is an increase in the percentage of people receiving a salary. This is likely as a result of people returning to work post the pandemic and the current strong labour market.

Figure 2: Share of households receiving government benefits or salaries
(change between 4Q21 and 1Q22)
Source: CBA

This then feeds into the impact on each demographic’s growth in overall income over the last 12 months. This shows that Gen Z has benefited the most from the current strong employment market with increased employment and strong wage growth while the percentage receiving government benefits remains higher than other demographics and above pre-pandemic levels. 

Figure 3: Household income and spending – annual average % change in 1Q22
Source: CBA


Not surprisingly, it is also Gen Z that has shown the strongest spending growth in the March quarter. For the other generations, spending growth has exceeded income growth, implying that their savings rates have declined to fund that growth in spending.

But savings are still well above 2019 levels for all generations and still rising. This will provide a buffer against cost increases and slowing growth in the medium term as inflation and higher interest rates bite. Gen Z has the biggest savings buffer.

Figure 4: Household savings – average deposit and offset balancesSource: CBA

Not surprisingly, overall household wealth is considerably higher than at the end of 2019, primarily as a result of rocketing residential property prices on the back of emergency monetary policy settings. The wealth effect of housing prices is an important driver of discretionary spending in Australia and has benefited retailers over the last two years.

Figure 5: Household wealth – average per household

Source: CBA

Of course, what interest rates can give, they can also take away. With variable mortgage rates likely to increase 1-2 percentage points over the next year, residential property prices are expected to fall, reversing some of this wealth effect.

There is no doubt that conditions are set to tighten for retailers over the coming year. However, reversing wealth effects from falling property prices and falling discretionary income levels will primarily impact those generations that own most of the housing stock, namely the Baby Boomers, Gen X and to a lesser extent the Millennials. Baby Boomers are more likely to be impacted by falls in house prices while Millennials will be more impacted by the need to allocate more of their income toward mortgage repayments.

For those that rent rather than own their home, rents are also likely to rise, as property owners try to pass on rising mortgage, utility and maintenance costs to tenants.

Those with families will be more impacted by rising prices of non-discretionary goods and services like food and utilities. This impact will be concentrated on Millennials and Gen X.

While not immune, the younger Gen Z demographic is likely to fare better than other generations given it faces fewer non-discretionary costs, and is not as exposed to property and wealth effects. At the same time, it is experiencing the strongest income growth and has had the most significant increase in its savings over the last two years.

Hence, we prefer retailers that cater to this younger demographic in the discretionary segment such and Universal Store and Accent Group.

The Montgomery Funds owns shares in City Chic, Universal Store and Accent Group. This article was prepared 18 May 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Goodman Group you should seek financial advice.

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Economics

What Is the VIX Volatility Index? Why Is It Important?

What Is the VIX and How Does It Measure Volatility?In finance, the term VIX is short for the Chicago Board of Exchange’s Volatility Index. This index…

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The VIX strives to predict market volatility through the lens of options trades.

Wavebreakmedia from Getty Images; Canva

What Is the VIX and How Does It Measure Volatility?

In finance, the term VIX is short for the Chicago Board of Exchange’s Volatility Index. This index measures S&P 500 index options and is used as an overall benchmark for volatility in the stock market. The higher the index level, the choppier the trading environment, which makes its other nickname pretty apt: the fear index.

It’s important to point out that the VIX measures implied, or theoretical, volatility. It measures the expectation of future volatility based on a snapshot of the previous 30 days’ worth of trading activity.

What Do the VIX Numbers Mean?

  • A VIX level above 20 is typically considered “high.”
  • A VIX below 12 is typically considered “low.”
  • Anything in between 12 and 20 is considered “normal.”

When there is increased activity on put options, which means that investors are selling more puts, the VIX registers a high number. Investing in a put option is like betting that the price of a stock will go down before the put contract expires because puts give investors the right to sell shares of a stock on a specific date at a specific price.

These are bearish investments, ones that can take advantage of emotions like fear. There is a saying on Wall Street that does “When the VIX is high, it’s time to buy” because the general belief is that volatility may have reached a peak, or a turning point.

When the VIX falls, that means that investors are buying more call options. Investing in a call is like betting that the price of a stock will go up before the call contract expires. In other words, a falling reading on the VIX indicates that the overall sentiment in the stock market is more optimistic, or bullish.Although the VIX isn't expressed as a percentage, it should be understood as one. A VIX of 22 translates to implied volatility of 22% on the SPX. This means that the index has a 66.7% probability (that being one standard deviation, statistically speaking) of trading within a range 22% higher than—or lower than—its current level within the next 12 months.

How Is the VIX Calculated? What Is the VIX Formula?

In a nutshell, the VIX is calculated by the Chicago Board of Options Exchange using market prices of S&P 500 put and call options with an average expiration of 30 days. It uses standard weekly SPX options and those with Friday expirations, but unlike the S&P 500 index, which contains specific stocks, the VIX is made up of a constantly changing portfolio of SPX options. The Chicago Board of Options website goes into more detail about its methodology and selection criteria.

How Do I Interpret the VIX?

There are many ways to interpret the VIX, but it’s important to note that it’s a theoretical measure and not a crystal ball. Even the sentiment it tracks, fear, is not itself measured by hard data, such as the latest Consumer Price Index. Rather, the VIX uses options prices to estimate how the market will act over a future timeframe.

It's also important to understand how much emotion can drive the stock market. For example, during earnings season, a company’s stock may report solid growth yet see shares plummet, because the company did not meet analyst expectations. So much of what goes on in the market can be summed up by feelings, like greed, as investors spot appreciation potential and place buy orders, which drive prices higher overall. Fear is evidenced when investors try to protect their investments by selling their shares, driving prices lower.

At its worst, fear-driven selling can send the market into a tailspin and lead to emotions like panic, which can result in capitulation.

But the VIX is not designed to cause panic. It is simply a gauge of volatility. In fact, some investors, especially traders, view the increased turbulence as a signal to buy, so that they make a profit either through speculation or hedging and thus capitalize on the situation.

Can the VIX Go Above 100?

Theoretically speaking, the VIX can top 100, although it has never reached that point since data collection began in 1990.

The two highest points the VIX has ever reached were the following:

  1. On October 24, 2008, at the height of the Financial Crisis, which stemmed from the global implosion of mortgage-backed securities, the VIX reached 89.53.
  2. On March 16, 2020, during the beginning of the COVID-19 pandemic, the VIX recorded a high of 82.69.

Analysts also believe that had data collection begun in the 1980s, the VIX would have topped 100 during the Black Stock Market Crash, on Monday, October 19, 1987.

This chart from FRED, the Federal Reserve’s data center, details the VIX from 1990 to 2022. Shaded areas illustrate periods of recession:

Chicago Board Options Exchange, CBOE Volatility Index: VIX [VIXCLS]

FRED

How Do I Trade the VIX? Can You Buy Options on the VIX?

Investors can’t invest directly in the VIX, but they can invest in derivatives that track the VIX, such as VIX-based exchange-traded funds (ETFs), such as ProShares VIX Mid-Term Futures ETF (VIXM), and exchange-traded notes, like the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ).

What Is the VIX at Today?

To view the VIX’s current reading, visit the webpage maintained by the Chicago Board of Options Exchange; it is updated daily.

What Are the VIX’s Current Volatility Predictions?

The stock market has been in choppy waters for most of 2022. Tech stocks, the Nasdaq, and stocks with high P/E ratios have taken a beating as investors worry about continued inflation, the Russia/Ukraine war’s effect on energy prices, the aggressive pace of interest rate hikes from the Federal Reserve, and China’s extreme “zero-COVID” policies. All of these things are causing the storm clouds to gather around the possibility of recession.

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Economics

Over-Aggressive Fed Faces “Financial Accident” – Guggenheim Warns Recession Risk Rising

Over-Aggressive Fed Faces "Financial Accident" – Guggenheim Warns Recession Risk Rising

Via Guggenheim Partners,

Fed Aggressiveness Following…

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Over-Aggressive Fed Faces "Financial Accident" - Guggenheim Warns Recession Risk Rising

Via Guggenheim Partners,

Fed Aggressiveness Following Delayed Liftoff Sets Up 2023 Collision

The risks of tightening into a downturn.

If two trains are heading towards each other at different speeds, when will they collide?

This grade school arithmetic problem is playing out in the Federal Reserve’s (Fed) execution of monetary policy. In this case, one train is the aggressive tightening plan as telegraphed by the Fed and the other is the U.S. economy which, while still strong, is showing a few signs of cooling. Investors want to know when the collision—a recession—will occur.

The Fed’s dual mandate calls for full employment and price stability. Historically, the Fed would change the fed funds rate in response to changes in the unemployment rate and changes in inflation (i.e., the second derivative of the price level). Simply adding up these changes (flipping the sign for unemployment) has tracked well with changes in Fed policy. This relationship has held over several decades and through both tightening and loosening of monetary policy.

However, over the past year there has been a notable divergence in this relationship. The steep drop in unemployment and sharp acceleration in inflation was met by an unresponsive Fed. This breakdown in the typical reaction of the Fed can be attributed to the unique nature of the pandemic shock, the Fed’s updated policy strategy, and a misreading of the inflation surge as transitory. The result is that the Fed, as it now acknowledges, is badly behind the curve and “expeditiously” moving ahead with 50 basis point hikes to both keep inflation expectations in check and protect its reputation.

At the same time, however, inflation is now decelerating and the pace of decline in the unemployment rate is slowing. Had the Fed followed the historical pattern in the chart above, the fed funds rate would be around 2.5 percent now and the Fed would be able to start pulling back on rate hikes as the economy cooled. Instead, the Fed looks poised to hike to around 3.5 percent into next year, when inflation will have slowed further and the unemployment rate will have largely leveled off. With the passage of time as the Fed continues to hike, we will likely find ourselves experiencing the effects of increasingly restrictive monetary policy.

Well before it reaches this terminal rate the Fed will increase the risk of overshooting, causing a financial accident, and starting a recession. Such an asynchronously tight monetary stance should exacerbate the cyclical slowing of the economy and cause a recession as early as the second half of next year. Given this collision course between the Fed and the cooling economy, long term interest rates are likely near a peak.

As Scrooge asked in Charles Dickens’ A Christmas Carol, “Are these the shadows of the things that Will be, or are they shadows of the things that May be only?” Only time will tell.

And as Guggenheim's CIO, Scott Minerd, noted on CNBC earlier, don't expect The Fed to protect your downside in the market either... "we are going to be meaningfully lower in stocks by the end of the year because The Fed has made it clear that they do not have a put on the stock market."

Guggenheim's fears correspond with SocGen's previous warning that this cycle puts the peak of the Fed Funds at just below 1.0%, or less than 3 more rate hikes before the Fed is forced to reverse!

Tyler Durden Wed, 05/18/2022 - 17:00

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