US stock futures dropped amid a risk-off tone as Monday's tech-fueled bounce fizzled and investors turned their attention to this week's inflation print as well as the start of corporate earnings season. As of 7:40am ET, S&P futures were down 0.3%, and Nasdaq futures dropped 0.5% following European bourses lower. The tech rally in US stocks on Monday came as Nvidia surged after announcing new AI products for personal computers. The Nasdaq 100 jumped the most since November on Monday and the S&P 500 traded near a record high while Japan’s Nikkei 225 index closed up 1.2% — a level unseen since March 1990. Bonds are lower pushing the 10Y yield as high as 4.05% as oil bounced back from the largest drop in about a month on signs of a weaker physical market, including a deep pricing cut by OPEC+ leader Saudi Arabia; Brent traded near session highs around $78. The USD was flat while the yen reversed earlier gains. Bitcoin dipped after surging past $47,000 on bets that the US is set to approve the first spot ETF.

In premarket trading, Juniper Networks jumped 23% after the Wall Street Journal reported the company was in advanced talks to be sold to Hewlett Packard Enterprise. Tinder-parent Match Group gained 14% after the Wall Street Journal reported that Elliott Investment Management had built a stake of about $1 billion in the dating-app company. Here are some other notable premarket movers:

• CrowdStrike rises 2% after being upgraded at Morgan Stanley, which sees a better demand outlook for the software firm’s services.
• Eversource Energy slips 3% after saying it’s in advanced talks to unload its share in three offshore wind projects that it planned to build with Orsted A/S.
• GoDaddy advances 1.5% after Piper upgrades the web-platform firm, saying a re-acceleration in growth with 30%+ normalized Ebitda margin in 2024 could reverse a five-year trend of multiple compression.
• MaxCyte climbs 5% after posting preliminary 4Q revenue that’s higher than the year-ago period.
• Microchip Technology slips 3% after the chipmaker said its preliminary 3Q revenue is down sequentially about 22%, compared to its previous guidance of 15% to 20%.
• Netflix drops 2% as Citi cuts its rating on the streaming-video company to neutral, citing “lofty” expectations.
• PayPal dips 2% after the payments firm was cut to equal-weight by Morgan Stanley, which highlighted “slower-than-expected progress.”

The 10-year Treasury yield held above 4%, a level Bill Gross called “overvalued” even after it surged 17 basis points last week as robust labor-market data spurred traders to pare bets on rapid Fed easing. Long-dated Gilts were among the biggest decliners in Europe after the government sold 2.25 billion pounds ($2.9 billion) of 20-year debt. And speaking of bonds, BlackRock issued a warning about the dangers of debt-fueled government spending in an election year as government bonds slumped under supply from countries including the UK, Italy and Belgium. This echoed what we published last night in "Citadel Trader: "Fed Wants To Avoid Pain AT ALL COSTS Ahead Of Elections; This Will Lead To Epic Fiscal Irresponsibility."

"The new year is already putting the 2023 Santa rally to the test," said Evelyne Gomez-Liechti, a strategist at Mizuho International, citing pressures including unexpected US labor strength, an overextended rally and heavy supply of new government and corporate debt.  

In other news, Investigators probing the fuselage blowout on a Boeing 737 Max 9 plane on Jan. 5 determined that the door plug moved upward before ejecting. In other news, a Chinese agency claims it has devised a way to identify users who send messages via Apple’s AirDrop feature as part of China’s broader efforts to root out undesirable content.

With CPI due Thursday, earning kicking off later this week and JPM's influential Healthcare conference, this is the calm ahead of the proverbial storm. The major macro data points are CPI and PPI on Thurs and Fri, and prints may be market-moving as the bond market tries to determine the timing of the first rate cut among March, May, and June. Goldman claims the first cut will be in March while JPM maintains a call for cuts kicking off in June.

European stocks and US futures are on the back foot as oil prices bounce back from Monday’s steep fall. The Stoxx 600 is down 0.2% with miners and tech stocks among the worst-performing stocks, while energy and health care advance. Shares and bonds of Spanish blood plasma firm Grifols SA tumbled after short seller Gotham City Research LLC published a report criticizing the company’s financial reporting.

• Nexans rises as much as 6.1% after Berenberg starts coverage of the French cable manufacturer with a buy rating, saying the stock sits at an interesting entry point and the long-term outlook remains positive.
• DWS rises as much as 2.8% after Goldman Sachs upgraded the German asset management firm to buy, citing continued momentum and undervaluation.
• Pirelli gains as much as 3.5%, rising to the highest level in almost two years, after Italian investors in the Italian tiremaker agreed to boost their holding to more than 20%.
• Grifols plummets as much as 43%, a record drop since listing in 2006, after short seller Gotham City Research published a negative report on the blood plasma firm.
• Infineon and STMicro lead a drop in European chipmakers on Tuesday after US peer Microchip said its preliminary revenue for the quarter ending December fell by 22% q/q, worse than its guidance.
• Hays sinks as much as 19%, pulling peers PageGroup and Randstad down with it, after the company’s net fees fell sharply. The firm warns of challenging market conditions going forward.
• U-blox falls as much as 8% after Baader downgraded the Swiss wireless communications technologies provider to add from buy, saying it has lower short-term expectations.
• United Internet falls as much as 2.4% as UBS downgrades the stock, noting that shares are close to fair value after a rapid re-rating.
• Tecan slumps as much as 5.6% after the Swiss lab equipment maker released FY23 sales figures below expectations due to lower Covid-related sales and lower pass-through of material costs.
• Meyer Burger drops as much as 12% after Baader downgraded the Swiss solar-equipment manufacturer to reduce from buy, citing lack of visibility on the resilience bonus in Germany.
• Games Workshop shares drop as much as 3.5% after analysts had mixed reactions to the company’s first-half results, despite reported growth in both revenue and profits.
• SCA falls as much as 2.4% after Handelsbanken cut its short-term recommendation for the Swedish forestry and paper firm to hold from buy ahead of its 4Q report, due on Jan. 26.

Earlier in the session, stock gains across Asia faded after tech shares surrendered opening strength. The Hang Seng Tech index turned negative after wiping out 1.6% rally, and the Kospi erases advance following a Samsung earnings miss. Japanese markets remain in the green following Monday’s holiday. Chinese shares eked out modest gains amid steadily growing expectations for a near-term policy easing.

In FX, the Bloomberg Dollar Spot Index firmed while the Treasury 10-year yield rose as much as two basis points to 4.05%. Bloomberg Economics expects core US CPI Thursday to show disinflation continues to be very slow in supercore categories, while PPI data on Friday to reflect renewed supply-chain bottlenecks. The yen tops G-10 leaderboard with a 0.4% gain while Aussie reverses early uptick. Onshore yuan is marginally softer.

Treasuries slightly lower across the curve with losses led by long-end, steepening 2s10s, 5s30s spreads by 1.5bp and 1bp on the day. US yields cheaper by up to 2bp across long-end of the curve with 10-year sector trading around 4.05%. Bunds and gilts trade cheaper by 4.5bp and 4bp in the sector, as European supply skewed toward longer-end sales weighs. Swap spreads remain near top of Monday’s range, following surge wider on the back of weekend comments from Fed Dallas President Lorie Logan. JGB futures turned  positive after BOJ kept long-end bond buying amount unchanged. Core European rates underperform, weighing on Treasuries as market participants brace for the first of this week’s auctions. Meanwhile, Treasury auctions resume at 1pm with $52b 3-year notes, followed by $37b 10- and $21b 30-year sales Wednesday and Thursday. The When Issued 3-year is at ~4.125% is 36.5bp richer than December’s stop-out, which tailed the WI by 1.7bp, and below auction stops since May

In commodities WTI crude oil futures higher by more than 2% on the day, paring a portion of Monday’s 4.1% drop and adding to cheapening pressure on Treasury yields; gold rises ~$5 to $2,033.

Bitcoin dipped after surging past $47,000 on bets that the US is poised to approve the launch of the nation’s first exchange-traded funds investing directly in the world’s largest digital asset.

To the day ahead now, and data releases include German industrial production for November and the Euro Area unemployment rate for November, whilst in the US there’s the NFIB’s small business optimism index for December, and the trade balance for November. From central banks, we’ll hear from Fed Vice Chair for Supervision Barr, and the ECB’s Villeroy.

Market Snapshot

• S&P 500 futures down 0.3% to 4,787.25
• MXAP up 0.2% to 165.53
• MXAPJ little changed at 511.29
• Nikkei up 1.2% to 33,763.18
• Topix up 0.8% to 2,413.09
• Hang Seng Index down 0.2% to 16,190.02
• Shanghai Composite up 0.2% to 2,893.25
• Sensex up 0.1% to 71,459.92
• Australia S&P/ASX 200 up 0.9% to 7,520.52
• Kospi down 0.3% to 2,561.24
• STOXX Europe 600 down 0.1% to 477.48
• German 10Y yield little changed at 2.18%
• Euro little changed at $1.0943
• Brent Futures up 1.6% to $77.36/bbl
• Gold spot up 0.4% to $2,036.05
• U.S. Dollar Index up 0.10% to 102.31

Top Overnight News

• Japan’s Tokyo CPI for December cooled more than anticipated on a headline basis (+2.4% vs. +2.7% in Nov and vs. the Street’s +2.5% forecast) while core was inline (+3.5% ex-food/energy vs. +3.6% in Nov and vs. the Street’s +3.5% forecast). BBG   
• Saudi Arabia raised $12 billion in its biggest borrowing abroad since 2017. It’s been a record start to the year for emerging markets as issuers seek to lock in lower funding costs. BBG
• Microsoft’s $13 billion investment into OpenAI faces the potential of a full-blown EU merger probe, after a mutiny at the ChatGPT creator laid bare deep ties between the two companies. BBG
• Grifols tumbled after short seller Gotham City said the Spanish blood plasma firm artificially reduced leverage by consolidating earnings of units it doesn’t control and overstated profit. Grifols denied the allegations. BBG
• Israel is shifting away from major ground/air operations toward a more targeted phase of the war against Hamas and hopes to have the transition complete by the end of January. NYT
• Investors are warning governments around the world over “unmoored” levels of public debt, saying excessive pre-election borrowing promises risk sparking a bond market backlash. Government debt issuance in the US and the UK is expected to soar to the highest level on record in the coming year, with the exception of the early stages of the Covid pandemic. FT
• Congress on Monday began an uphill push to pass a new bipartisan spending agreement into law in time to avoid a partial government shutdown next week, with Speaker Mike Johnson encountering stiff resistance from his far-right flank to the deal he struck with Democrats. NYT
• Boeing slipped again premarket after United found loose bolts in some of its 737 Max 9 jetliners. Alaska Air said loose hardware was visible on some planes during inspections. The NTSB said it might widen its Max 9 probe beyond the model on which the accident occurred. BBG
• HPE is in advanced talks to buy JNPR for about $13 billion, in a bid to better position the nearly 100-year-old technology company in the era of artificial intelligence. WSJ
• The combination of low current valuations and a healthy economic outlook indicates that the Russell 2000 small-cap index should return roughly 9% in the next 6 months and 15% in the next 12 months. This compares with Goldman's forecast that the large-cap S&P 500 will rise by 7% to 5100 at the end of 2024 (total return of 9% including dividends). In recent decades, nearly two thirds of the variation in Russell 2000 12-month returns has been explained by valuations at the start of each period and real US economic growth during the period. If Goldman's 2024 US GDP growth forecast of 2% is realized, these historical relationships suggest small-caps should generate solid returns in coming months. GIR

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded higher as the region took impetus from the gains on Wall Street where tech outperformed as risk appetite was fuelled by a lower yield environment and a drop in oil prices. ASX 200 climbed above 7,500 with the index led by tech and consumer-related sectors owing to softer yields. Nikkei 225 printed its highest since March 1990 and rallied to just shy of 34,000 where it hit resistance. KOSPI was clouded after disappointing preliminary quarterly earnings from Samsung Electronics. Hang Seng and Shanghai Comp initially benefitted amid the broad constructive mood and recent PBoC hints at tools to boost credit including RRR although the upside was reversed after the PBoC drained liquidity and with Chinese oil majors pressured by the recent fall in oil prices.

Top Asian News

• Taiwan's ruling party presidential candidate Lai said Taiwan will build up defence deterrence and economic security, while he will maintain the status quo and current President Tsai's policies.
• Japanese police are investigating a suspicious object which was discovered in front of the main gate of the national diet building, via NTV
• ByteDance is further scaling back its ambitions in the gaming industry and is in talks to sell game titles to several prospective buyers, according to WSJ
• China's CPCA (auto industry) says China sold 2.37mln passenger vehicles in December, +8.3% Y/Y. 2023 retail passenger vehicle sales +5.6% Y/Y
• China's CPCA says China's auto exports set to overtake Japan as the largest in both volume and value terms in 2023
• "China’s economic growth in 2024 is forecast to continue to gain pace, with the estimated annual GDP growth rate to reach 5.3%, said a report by the Center for Forecasting Science under Chinese Academy of Sciences on Tuesday", according to Global Times
• Chinese Commerce Ministry says China is looking to further suspend tariff cuts on products including agriculture, fishery, machinery, auto parts and textiles from Taiwan

European bourses, Stoxx600 (-0.3%), initially began the session on a firmer footing echoing APAC optimism before succumbing to selling pressure as sentiment dwindled. IBEX 35 (-1.7%) underperforms, dragged down by Grifols (-42%) following a Gotham City Research report which said "we believe shares are uninvestable, likely zero"; Grifols to hold a board meeting on Tuesday. European sectors hold a negative tilt; Energy holds at the top of the pile as it attempts to nurse the prior day's hefty losses whilst Tech lags after outperforming yesterday. Recruitment names have been hit by a profit warning from London-listed Hays (-12%).

Top European News

• Hapag Lloyd (HLAG GY) says it deems the situation in the Red Sea as "still dangerous" and will continue to sail around the Cape of Good Hope; will take next decision as of January 15th
• ECB's Centeno says the ECB will not have to wait until May to make policy decisions, via econostream.
• Barclays said UK December consumer spending rose 2.3% Y/Y (prev. 2.9%).
• French PM Borne resigned and will act as caretaker until a new government is named. It was later reported that a new French PM is to be named on Tuesday morning, according to AFP.

FX

• DXY is directionless and contained within a 102.10-41 range, with the 21DMA residing just below the trough at 102.07.
• EUR continues to oscillate around the 1.0950 mark in light of a lack of fresh catalysts; session low at 1.0934.
• Yen is the best G10 performer, looking to make up ground lost last week, but still some way from its 28th December base at 140.24.
• Australian Building Approvals and Retail Sales initially supported the AUD, though strength faded alongside weakness in Iron prices.
• PBoC set USD/CNY mid-point at 7.1010 vs exp. 7.1502 (prev. 7.1006).

Fixed Income

• USTs are within yesterday's bounds but pressured with concession ahead of a 3yr auction which is likely factoring; yield curve incrementally flatter thus far.
• Bunds are pressured but remain above the prior sessions respective 135.15 and 135.06 troughs. Overall, action appears to be influenced by concession as corporate supply remains in focus.
• Gilts were initially the relative laggard, given looming supply, though after the strong Gilt auction (record investor demand) the benchmark jumped back above 100.00, but shy of the initial 100.26 session high.
• Netherlands sells EUR 2.08bln vs. Exp. EUR 2.0-2.5bln 2.5% 2030 DSL; average yield 2.334% vs. prev. 2.950%
• UK sells GBP 2.25bln 4.75% 2043: b/c 3.62x, average yield 4.391%, 0.2bps tail.
• Italy to raise EUR 10bln from new 7yr BTP (demand was over EUR 73bln), and EUR 5bln from a tap of a 30yr, according to leads (demand was over UR 91bln).
• Saudi Arabia completes first issuance of USD international bonds worth USD 12bln, according to a statement.

Commodities

• Crude futures are largely retracing some of yesterday’s hefty losses coupled with added tailwinds from geopolitics – with recent reports suggesting three Hezbollah members were killed in an Israeli strike.
• Spot gold is trading within recent ranges and trimming some of the prior day’s losses despite a relatively rangebound Dollar and quiet newsflow; Base metals show a mixed picture with the breadth of the market narrow.
• Motiva's Port Arthur, Texas refinery (636k BPD) large crude unit and coker were shut on Monday.
• Hezbollah is reportedly attempting to target to target Israel's offshore gas infrastructure “Karish” with drones, Saudi Al-Hadath reports citing sources via journalist Oseran; Aurora Intel clarifies a FPSO was targeted and not a gas rig.

Geopolitics

• Israeli officials said they will tell US Secretary of State Blinken that Palestinians will not return to northern Gaza unless Hamas releases more hostages, according to Al Jazeera.
• US Secretary of State Blinken said he found leaders in the Middle East determined to prevent a wider conflict but added they all recognised hurdles and nobody thinks anything will happen overnight.
• Three Hezbollah members were reportedly killed in a targeted strike on a vehicle in Ghandouriyeh in southern Lebanon, according to Reuters sources.
• Hezbollah says it attacked the Northern Command base with drones in retaliation for the killing of Arouri and the commander of the Radwan force, according to Walla News' Elster.

US Event Calendar

• 06:00: Dec. SMALL BUSINESS OPTIMISM 91.9, est. 91.0, prior 90.6
• 08:30: Nov. Trade Balance, est. -$64.9b, prior -$64.3b

Central Bank speakers

• 12:00: Fed’s Barr Speaks on Bank Regulation

DB's Jim Reid concludes the overnight wrap

Morning from what promises to be a nice day here in Helsinki which has warmed up significantly to around -2C as I type. Markets also warmed up considerable yesterday to start a new week with the S&P 500 (+1.41%) posting its biggest advance since mid-November and taking it back to 'only' -0.13% YTD. Yields on 10yr Treasuries (-1.6bps) gave up most of their initial rally but still saw their biggest decline of 2024 so far. The equity move was buoyed by renewed tech optimism but otherwise it was a fairly quiet day, with sentiment supported by falling commodity prices along with some decent data releases, which collectively added to hopes that a soft landing could still be achieved.

The good data news came primarily from the New York Fed’s latest Survey of Consumer Expectations. This showed another decline in inflation expectations across several horizons, and 1yr expectations were down to 3.0%, which is the lowest since January 2021. In addition, 3yr expectations were down to 2.6%, which was the lowest since June 2020, and 5yr expectations came down to 2.5%, which is the lowest since March 2023. So plenty of good news from the Fed’s perspective ahead of US CPI on Thursday.

At the same time, yesterday brought some significant declines for oil and gas prices, with Brent crude down -3.35% to $76.12/bbl, whilst WTI fell by -4.12% to $70.77/bbl. So another positive tailwind on the inflation side, which followed Saudi Arabia’s decision to cut their oil prices for buyers in all regions. That decline was echoed among several other commodities too, with European natural gas (-7.89%) falling back, whilst soybean (-0.82%) prices fell to their lowest in over two years.

This backdrop proved supportive for equities, especially in the US, as the S&P 500 (+1.41%) had its best day since mid-November, while Europe’s STOXX 600 (+0.38%) posted a more modest gain. T ech stocks led the advance, and the NASDAQ (+2.20%) and the FANG+ Index (+2.75%) saw even larger gains. The tech rally was led by chipmaker Nvidia, which gained +6.43% after announcing new products aimed at making better use of AI on personal computers. The main exception from the equity rally were those companies affected by last week’s incident on an Alaska Airlines flight, when part of the fuselage came off the plane. The result was that Boeing (-8.03%) was the worst performer in the entire S&P 500, and there was also a big slump for Spirit AeroSystems (-11.13%), a supplier for Boeing. Boeing’s decline led to a notable underperformance for the industrial Dow Jones index of just 30 companies (+0.58%).

With inflation expectations falling back, it was a favourable day for bond investors, though we did see a substantial reversal of the bond rally in the latter half of the US session. This reversal was helped by comments from Atlanta Fed President Bostic (an FOMC voter this year) shortly after the European close who, while noting that inflation had come down by more than he expected, reiterated that he expected rate cuts to come only in Q3. Near the end of the session we also heard from Fed Governor Bowman, one of the most hawkish FOMC voices, who said that policy appeared sufficiently restrictive to hit the 2% inflation target but that “we are not yet” at the point of rate cuts becoming appropriate, and noted “the risk that the recent easing in financial conditions” could stall the progress on inflation.

On the back of this, fed funds futures slightly downgraded the prospects of imminent cuts. The chances of a Fed cut by March were down to 63% at the close, their lowest since the December FOMC, from 73% the day before (and an intra-day high of 76% shortly after the NY Fed’s consumer survey). Treasuries still rallied modestly on the day – with the 2yr yield down -0.5bps to 4.38%, whilst the 10yr yield fell -1.6bps to 4.03% – but these closing levels were 7-8bps above their intra-day lows. Overnight in Asia, yields on the 10yr USTs (-2.1bps) are slightly lower again, trading at 4.01% as we go to print.

Looking back at Europe, there was some data optimism as the European Commission’s survey offered a fresh signal that activity was bottoming out in December, with economic sentiment up for a 3rd consecutive month to 96.4. That takes it up to its highest level since May, whilst the final consumer confidence reading was revised up a tenth from the flash print to -15.0, which is the highest since February 2022. We did get some more mixed data out of Germany, with factory orders seeing a smaller than anticipated rebound in November (+0.3% vs +1.1% expected), but this subdued signal was offset by more encouraging export data for the same month (+3.7% vs +0.5% expected).

Otherwise in Europe, there was also a rally for sovereign bonds. That came even as the ECB’s Vujcic said that they were “not talking about cutting interest rates now, and probably won’t before summer”. So some fresh pushback on the idea of imminent rate cuts coming from one of the more hawkish ECB voices. Nevertheless, sovereign bond yields still fell on the day, with those on 10yr bunds (-2.1bps), OATs (-3.0bps) and BTPs (-3.0bps) all moving lower.

Asian equity markets are mostly advancing this morning after the tech led rally on Wall Street overnight. In terms of specific moves, the Nikkei (+1.1%) has reopened firmly after a public holiday while the Hang Seng (+0.16%), and the Shanghai Composite (+0.05%) are losing some momentum after a decent open on fresh hopes of PBOC easing (more below). Elsewhere, the KOSPI (-0.25%) is also reversing after index heavyweight Samsung Electronics slashed its earnings forecast for 4Q23. In overnight trading, US futures are seeing small losses with those on the S&P 500 (-0.10%) and NASDAQ 100 (-0.12%) slightly lower

On the topic of China policy, yesterday we heard from Zou Lan, the head of the PBOC’s monetary policy department, that the PBOC may use its monetary policy tools to provide support for the growth in credit. So a potential hint at more easing coming before too long.

Elsewhere, early morning data showed that Tokyo’s inflation rate slowed more than expected to +2.4% y/y in December (v/s +2.5% expected) from an upwardly revised gain of +2.7% in the previous month. Meanwhile, core inflation came in at +2.1% y/y in December, slowing for the second-straight month in line with expectations and down from November’s +2.3% increase, thus taking some pressure off the BoJ to rush into exiting its ultra-loose monetary policy. Other data showed that household spending fell -2.9% y/y in November (-2.5% in October), declining for a ninth consecutive months and worse than the market forecast for a -2.3% decline. The Japanese yen (+0.45%) is gaining for the second straight day and trading at 143.58 versus the dollar.

To the day ahead now, and data releases include German industrial production for November and the Euro Area unemployment rate for November, whilst in the US there’s the NFIB’s small business optimism index for December, and the trade balance for November. From central banks, we’ll hear from Fed Vice Chair for Supervision Barr, and the ECB’s Villeroy.