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Futures Flat As Traders Brace For Op-Ex Volatility, More Ukraine Headlines

Futures Flat As Traders Brace For Op-Ex Volatility, More Ukraine Headlines

U.S. stock index futures staged a modest bounce on Friday, recovering…



Futures Flat As Traders Brace For Op-Ex Volatility, More Ukraine Headlines

U.S. stock index futures staged a modest bounce on Friday, recovering a portion of losses from Thursday's rout after late news of a planned meeting between U.S. and Russian officials "late next week" spurred hopes of a diplomatic solution to the Ukraine standoff, signaling an upbeat end to a week in which investors shunned risky assets on geopolitical and tightening monetary policy concerns. Nasdaq 100 futures were up 0.7%, while S&P 500 futures rose 0.5% by 7:15 a.m. in New York with traders bracing for a potentially volatile session due to option expirations. Both indexes are headed for a second straight week of declines with investors nervous about Moscow’s military buildup near Ukraine and prospects of sharp Federal Reserve rate hikes. Treasury yields were unchanged at 1.97%, gold and the dollar were flat and bitcoin traded just above 40,000 after plunging about 10% on Thursday.

In the latest geopolitical developments, Russian Foreign Minister Sergei Lavrov agreed to meet U.S. Secretary of State Antony Blinken for talks in Europe next week; German Chancellor Olaf Scholz will host virtual talks with his Group of Seven counterparts. President Joe Biden has warned the probability of an invasion of Ukraine is still “very high,” although Russia has repeatedly denied it plans to do so.

“The market has got to grapple with the uncertainty in Ukraine and also this trade-off between the urgency to raise interest rates and the effect of that on growth,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs Group Inc. “Our feeling is that we’re still going to see economic activity continuing through the course of this year so the pullback in markets is really about an adjustment to the cost of capital; it’s not going to turn into a bear market that’s reflective of a recession,” Oppenheimer said on Bloomberg TV.

The recent geopolitical gyrations “have taught us that we are likely to remain in this off-and-on tunnel, whipped around by news, hope and surprise actions,” said Wai Ho Leong, a strategist at Modular Asset Management in Singapore. “It will be like this until there is a fundamental breakthrough in the talks.”

Bets on a sharper Federal Reserve interest-rate liftoff in March have eased somewhat in light of Ukraine tension. But investors continue to be vexed by the question of how markets will cope as stimulus ebbs.

“Despite the recent volatility, it’s important to remember that we are still in an environment of robust economic and earnings growth, and in our base case we expect upside for equity markets over the balance of the year,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note.

In notable pre-market moves, shares of streaming-video platform Roku slumped 23% after its sales forecast fell short of estimates due to supply chain disruptions and weak advertising trends. Although the U.S. quarterly earnings season has been broadly better than expected, results from technology-related firms have underwhelmed, and any companies missing even slightly have been greatly punished. Here are some other notable premarket movers:

  • Inspirato (ISPO US) eases 6.1% in premarket trading a day after speculative investors drove the stock up 648%.
  • Redfin Corp. (RDFN US) shares drop 25% in premarket trading after the real estate technology company forecast a net loss for the first quarter of $115m to $122m. At least three analysts cut their price targets and don’t expect performance improvement in 1H.
  • Avita Medical Inc. (RCEL US) shares climbed 4% postmarket Thursday after the U.S. and Australian medical company said the U.S. Food and Drug Administration granted its premarket approval application for a cell-harvesting device used for burn victims.
  • Doma Holdings (DOMA US) shares dropped 22% in extended trading after the real estate technology company projected a wider-than-expected Ebitda loss for 2022.
  • Cognex (CGNX US) shares jumped 10% in postmarket trading after the maker of machine vision products forecast first-quarter revenue above the average analyst estimate.
  • Exelixis (EXEL US) shares rose 1.7% in postmarket trading after the company reported earnings per share for the fourth quarter that beat the average analyst estimate.
  • Shockwave Medical (SWAV US) gained 9% in postmarket trading after the devicemaker forecast 2022 revenue that beat the highest analyst estimate. Fourth-quarter earnings and sales also topped consensus forecasts.
  • Shake Shack (SHAK US) shares dropped 11% in extended trading after the company gave a quarterly revenue forecast that missed analysts’ estimates.
  • Appian (APPN US) shares gained 13% in extended trading on Thursday, after the application software company reported fourth-quarter results that beat expectations and gave a full- year forecast that is ahead of the consensus view.

In Europe, the Stoxx 600 Index was up 0.2% though energy shares fell with oil. Personal-care, and food & beverage stocks outperformed, while travel & leisure and technology led declines. CAC 40 outperforms, adding 0.3%, DAX lags, dropping 0.1%. Personal care, food & beverages and real estate are the strongest performing sectors. Orion Oyj and Teleperformance shares rallied, while Allianz SE slumped and Hermes International dropped the most since 2016. The French state will inject about 2.1 billion euros ($2.4 billion) into Electricite de France SA as the combination of reactor shutdowns and a government power-price cap batters the utility’s finances. Here are some of the biggest European movers today:

  • Orion Oyj shares soar as much as 26%, most ever intraday, after the Finnish company’s collaboration partner Bayer estimated that peak global sales of the Nubeqa prostate-cancer drug could exceed EU3b, up from the previous estimate of EU1b. Bayer shares also gain, rising as much as 3.1% in Frankfurt.
  • Teleperformance jumps as much as 8.5%, the most since April 2020, after it reported adjusted Ebita ahead of analyst estimates, in what Morgan Stanley called a “solid beat,” while SocGen upgraded the stock to buy from hold.
  • Ubisoft rises as much as 6.3% with analysts noting potential for uplift potential M&A approach were to materialize, while downside for stock looks limited after recent weakness.
  • Gerresheimer gains as much as 4.6%, rebounding from Thursday’s initial losses following 4Q earnings report, with some analysts seeing a promising outlook despite “mixed” results.
  • Hermes falls as much as 8.4%, the most since Sept. 2016, after the French luxury-goods company reported a bigger-than- expected decline in sales at its crucial leather-goods division.
  • EDF declines as much as 5.2% after the French utility posted FY earnings, disclosed details on its outlook and action plan. Analysts flag that guidance for FY22 Ebitda implies further downside risk to current consensus, while visibility remains low.
  • Allianz drops as much as 1.8% as the insurer said it will take a 3.7 billion-euro charge tied to its hedge funds that collapsed at the start of the pandemic, and said more expenses are coming from the multiple lawsuits and regulatory probes spurred by the implosions.
  • Storytel falls as much as 23% to the lowest level since January 2019 after the Swedish audio book streaming company’s founder and CEO said he was leaving and following what DNB said was disappointing guidance.

Asian stocks fell as sentiment was eroded by renewed worries over China’s regulatory crackdown on industries, amid lingering tensions surrounding Russia and the Ukraine. The MSCI Asia Pacific Index slid as much as 0.9%, dragged down by a slump in consumer-discretionary shares. Meituan led declines for the sector, plunging 15% after China issued new guidelines asking food-delivery platforms to cut fees for restaurants. Hong Kong was the region’s worst performer.  “The government is trying to lower the burden of rising living costs and break monopolies via all of its regulatory actions so far,” said Justin Tang, the head of Asian Research at United First Partner. “Such initiatives will put investors on the alert once again, even as a peak in regulation has been achieved.” Russia, Ukraine-Exposed Stocks Pare Losses as U.S. Accepts Talks Asia’s benchmark is extending this year’s losses to about 2% following a 3.4% drop in 2021. The market’s mood has recently been dominated by uncertainty surrounding Ukraine and the prospective pace of U.S. monetary policy tightening.  “Market folks don’t want to take on risk,”said Kazuhiro Miyake, a strategist at Rheos Capital Works in Tokyo. Still, if geopolitical tensions ease and inflation is contained, stocks may stage a turnaround in mid-March, he added.

Japanese equities fell, capping their first weekly loss since January, as investors continued to watch the developing standoff between Russia and Ukraine. Stocks pared declines to close far off their lows Friday however, and U.S. futures climbed after the State Department said Russian and American officials agreed to meet next week in Europe. Separately, growth in Japan’s consumer prices excluding fresh food slowed to 0.2% in January from a year earlier, compared with 0.5% in the previous month, according to ministry of internal affairs data. Electronics makers and banks were the biggest drags on the Topix, which fell 0.4%, paring an earlier drop of 1.3%. Tokyo Electron and Fanuc were the largest contributors to a 0.4% loss in the Nikkei 225, which had fallen as much as 1.6% earlier. The yen weakened 0.2% against the dollar after gaining 0.5% Thursday. The Topix shed 2% on the week, while the Nikkei 225 lost 2.1%. 

India’s benchmark index posted its second week of declines after tensions on the Ukraine-Russia border and the prospects of higher U.S. interest rates led to volatile trading. The S&P BSE Sensex ended the week 0.6% lower. The measure closed 0.1% down at 57,832.97, after swinging between gains and losses several times throughout the session in Mumbai on Friday. The NSE Nifty 50 Index dropped 0.2%.  Reliance Industries Ltd. declined 0.8% and was the biggest drag on key indexes. All but two of the 19 sector sub-indexes compiled by BSE Ltd. fell, led by a gauge of realty stocks.  U.S. and Russian officials agreed to meet next week to discuss Ukraine, helping ease the price of crude oil, a major import for India. Minutes of the U.S. Federal Reserve meeting showed that officials plan to start raising rates soon.   “We have observed that volatility in the market will persist till the announcement of the first rate hike by the Fed, post which it is likely to settle down and flows in equities resume,” Mitul Shah, head of research at Reliance Securities, wrote in a note

Australian stocks plunged the most in three weeks, with the S&P/ASX 200 index falling 1% to close at 7,221.70, posting its worst session since Jan. 27 amid Ukraine tensions and concerns over U.S. central bank policy. All sectors declined. QBE Insurance was the worst performer after its full-year results. Magellan was the biggest gainer after reporting an increase in 1H adjusted net and saying it’s considering a share buyback. In New Zealand, the S&P/NZX 50 index fell 0.9% to 12,141.89.

In FX, the Bloomberg dollar spot index trades flat while JPY and NOK are the weakest performers in G-10 FX, NZD and SEK outperform. Leveraged funds pared bullish bets on Japan’s currency after the U.S. State Department announced that Secretary of State Antony Blinken and Russia Foreign Minister Sergei Lavrov will hold talks over Ukraine next week. Risk- sensitive currencies such as the Australian dollar were among the biggest gainers as U.S. equity futures advanced. Still, fluctuations in currencies and bonds were limited as traders avoided taking large positions before the three-day weekend in the U.S.

In rates, treasury futures traded off the worst levels of the Asia session, although yields remain slightly cheaper across the curve. U.S. stock futures hold gains after report of planned talks between Russia and the U.S. over Ukraine. U.S. yields were cheaper by as much as 1bp across front-end of the curve, flattening 2s10s by around 0.5bp; 10-year yields around 1.96%, little changed vs Thursday’s close, reached 1.993% during Asia session. Gilts outperform by ~3bp in 10-year sector, bunds by ~1bp. In front-end swaps, expectation of 50bp Fed rate hike in March continues to erode, with around 33bp priced in, equivalent to 1.3x hikes. Bunds gain, having given up earlier declines as the curve bull-flattens. German 10-year bonds outperform Treasuries but underperform gilts.

In commodities, oil fell while stocks mostly advance along with futures as the prospect of talks between the U.S. and Russia next week lifted sentiment. WTI drifts 1.9% lower to trade around $90 level. Brent falls 1.7% to ~$91. Spot gold falls roughly $6 to trade near $1,893/oz. Most base metals trade in the green; LME zinc rises 0.8%, outperforming peers. LME aluminum lags.

Looking at the day ahead, data releases include UK retail sales for January, US existing home sales for January, and the Euro Area’s advance consumer confidence reading for February. Central bank speakers include the Fed’s Evans, Waller, Williams and Brainard, as well as the ECB’s Vasle and Panetta. Finally, earnings releases include Deere & Company.

Market Snapshot

  • S&P 500 futures were up 0.5% to 4,396.75
  • STOXX Europe 600 up 0.1% to 465.11
  • MXAP down 0.7% to 189.06
  • MXAPJ down 0.7% to 622.57
  • Nikkei down 0.4% to 27,122.07
  • Topix down 0.4% to 1,924.31
  • Hang Seng Index down 1.9% to 24,327.71
  • Shanghai Composite up 0.7% to 3,490.76
  • Sensex little changed at 57,863.63
  • Australia S&P/ASX 200 down 1.0% to 7,221.72
  • Kospi little changed at 2,744.52
  • German 10Y yield little changed at 0.22%
  • Euro little changed at $1.1369
  • Brent Futures down 1.6% to $91.52/bbl
  • Brent Futures down 1.6% to $91.52/bbl
  • Gold spot down 0.2% to $1,894.05
  • U.S. Dollar Index little changed at 95.78

Top Overnight News from Bloomberg

  • The Senate cleared a three-week funding bill on a 65 to 27 vote, averting a U.S. government shutdown that loomed after Feb. 18 and giving lawmakers more time to finish a full-year spending plan
  • Just when investors were sensing that China’s policy crackdown on its tech sector was nearly over, new guidelines were issued that ask food-delivery platforms to reduce fees to ease the burden on restaurants and shops
  • Hong Kong is working on plans to test its 7.5 million residents and get its Covid Zero strategy on track, despite spiraling cases, business closures and a backlash against its policy decisions

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded with a mild downside bias but off worst levels amid confirmation of a meeting between the US Secretary of State and Russian Foreign Minister late next week. ASX 200 continued to be pressured by its tech and healthcare sectors, albeit gold miners saw a decent outperformance. Nikkei 225 saw losses across energy names but the recent weakening in the Yen kept the index underpinned. Hang Seng was pressured by EV names and some oil giants. Shanghai Comp. narrowly outperformed as hopes of monetary policy easing supports the index.

Top Asian News

  • Japan’s Slower Inflation Offers BOJ Support For Stimulus Stance
  • China Wipes $26 Billion Off Meituan’s Value With New Fee Policy
  • Singapore Raises Wealth Taxes, GST to Recover From Covid Hit
  • Support for Japan’s Kishida Slides as Virus Deaths Hit Record

European bourses are contained around the unchanged mark, Euro Stoxx 50 +0.2%, as an initially positive open on geopolitical developments waned as we await further drivers. US futures are deriving greater upside from the reported meeting of US-Russian officials today and next week; however, focus turns to Fed's Williams & Brainard Sectors are mixed with upside performance on the back of equity specifics in the pre-market while Energy Names lag amid EDF updates and given benchmark pricing.

Top European News

  • ECB’s Kazimir Backs End of QE in August, Flexibility on Hikes
  • U.K. Retail Sales Rise 1.9% M/m in Jan.; Est. +1.2%
  • France to Inject $2.4 Billion Into EDF With Profit Set to Slump
  • Macquarie Said to Bid for Stake in National Grid’s Gas Unit

In fixed Income, core debt retains a decent underlying bid awaiting any positive news or progress from US-Russian dialogue. Gilts shrug off robust UK sales data as the next BoE hike is discounted already. Bunds respect near term resistance and support in the form or a 50% Fib retracement level at 165.61.


  • Greenback grinding awaiting more geopolitical developments and talks between top level Russian and US officials rather than data or Fed speakers, with the DXY hovering sub-96.00.
  • Kiwi continues to outperform on the 0.6700 handle pre-RBNZ amidst some speculation of a double consensus 50 bp OCR hike.
  • Aussie up in slipstream and acknowledging further Yuan appreciation instead of dovish RBA rhetoric and another slump in iron ore prices.
  • Sterling supported by solid UK consumption data, but confined by big option expiries alongside Euro and Yen - Eur/Gbp at 0.8350 strike, Eur/Usd either side of 1.1345-90 and Usd/Jpy from 114.70-15.
  • Rouble firm as Ukraine Defence Chief sees low risk of large scale Russian invasion.
  • Swedish Crown aloft as inflation tops expectations

In commodities, WTI and Brent have experienced a marked pullback amid the constructive geopolitical updates, causing the benchmarks to erode all of the week's upside and approach last week's troughs. Focus in Brent, for instance, now turns to the USD 90.00/bbl mark and levels just above the handle. Iron ore saw another session of pain with the futures lower by over 5% in early trade in a continuation of China’s crackdown on rising raw material prices. Spot Gold briefly eclipsed USD 1900/oz but has failed to retain the handle amid USD upside and the waning of geopolitical-premia. US officials spoke to Saudi regarding market pressures given the geopolitics with Russia, according to Reuters. China NDRC issues rules to promote steady industrial growth; will ensure supply and stabilise prices of key raw materials, including iron ore and fertilisers.

Central banks:

  • Fed's Mester (2022 voter) reiterated support for a March hike. She said it will be appropriate to hike Fed Fund at a faster pace than after the GFC and can hasten H2 tightening pace if inflation doesn't ease. She expects inflation above 2% and noted that risks tilted to the upside. She supports selling some MBS at some point during the balance sheet reduction process and suggested the pace will be data-driven.
  • ECB's Kazmir backs QE end in August; is flexible on rate hikes, but says more data is needed to determine whether a 2022 rate rise is appropriate.
  • ECB's Vasle favours a quicker adjustment of monetary policy.
  • RBA's Harper said financial markets are misguided in thinking the RBA will follow the Fed when raising interest rates, and added that the RBA has good reasons to wait, via a WSJ interview

US Event Calendar

  • 10am: Jan. Existing Home Sales MoM, est. -1.3%, prior -4.6%
  • 10am: Jan. Leading Index, est. 0.2%, prior 0.8%
  • 10am: Jan. Home Resales with Condos, est. 6.1m, prior 6.18m

Fed speakers

  • 10:45am: Fed’s Evans and Waller take Part in Policy Panel
  • 11am: Fed’s Williams Discusses Economic Outlook
  • 1:30pm: Fed’s Brainard speaks on CBDC at Booth Forum

DB's Jim Reid concludes the overnight wrap

Survival is the name of the game here in the south of England today. We could be set for the biggest storm since 1990 if the upper end of the wind speed forecasts are correct. This could be a rare weekend where I'm glad I'm not able to play golf given I'm on crutches. If you're looking for something to distract you from either the weather or from markets/newsflow you can do worse than watch the film CODA that we saw last weekend (Apple+ TV). It was one of the most enjoyable films I've seen in a while. Funny, heartwarming and nicely sentimental.

It seems it will be preferable watching a film to watching the news this weekend as geopolitics continues to be on a knife edge. This led to a sizeable risk-off in markets yesterday, with multiple asset classes reacting to the growing perception that a conflict in Ukraine could be imminent. However an olive branch has been handed out this morning as Russian Foreign Minister Lavrov and US Secretary of State Blinken have agreed to meet late next week for talks. The US have said they’ll meet as long as there is no prior invasion. This may help avoid a de-risking ahead of the weekend as without it I suspect that few traders would have wanted to go home too long. S&P 500 (+0.73%) and DAX (+0.58%) futures are both up and Treasury yields have risen 1-2bps across the curve.

Prior to this the continued tensions proved very bad news for risk assets yesterday, with equities tumbling. The S&P 500 was down -2.12% in a broad-based decline that saw 431 companies in the index move lower on the day, with the sectors with the highest concentration of mega cap names leading the declines, with the FANG+ -3.10% lower, and the NASDAQ down -2.88%. Small caps were not spared, with the Russell 2000 lower by -2.46%. Those figures make it the second worst day of the year for the S&P 500, and the third worst for both the NASDAQ and Russell 2000. Meanwhile, the Dow had its worst day of the year, falling -1.78%. That helped the VIX index of volatility to gain +3.75pts to 28.04pts following two successive declines, and Bloomberg’s index of US financial conditions closed at the third tightest levels of the year so far. Europe closed before the last leg of the sell-off, but with the STOXX 600 down -0.69% as bourses across the continent all lost ground.

Let's walk through the geopolitical developments that came before the slightly more positive news this morning. The mood was very jittery all day yesterday, with Ukraine’s military saying not long after the European open that a kindergarten in Luhansk had been hit by separatist shelling, with two civilians concussed. Then in the European afternoon, US President Biden said that the probability of an invasion was “very high”, and that “Every indication we have is that they are prepared to go into Ukraine”, adding that a “false-flag” operation that would give Russia an excuse to invade was underway. In Brussels, we then also had NATO’s Secretary General Stoltenberg and US Defence Secretary Austin both saying that they didn’t see signs of Russia withdrawing troops. On the Russian side, they moved to expel the Deputy Chief of Mission, the number 2 official, from the US Embassy, and at the United Nations they restated their claims that “war crimes” had been committed by Ukraine. Russian officials continued to deny that an invasion was planned let alone underway.

With geopolitical risk very much the dominant market theme right now, it’s worth highlighting a chart from a table from our equity strategists that I borrowed for my chart of the day earlier this week. It shows the declines in the S&P 500 around geopolitical events, and shows that typically the selloffs have been short-lived (the median selloff was -5.7%), with a duration of around 3 weeks to reach a bottom and another 3 weeks to recovery from their prior levels. Another pattern is that ultimately, the underlying economic context tends to dominate, so if you believe the template, much might depend on what you thought momentum was before the sell-off. Here’s a link to my chart of the day as well as Binky’s original piece (link here).

One of the effects of developments in Ukraine has been to make investors more cautious about the prospects of aggressive central bank action to tackle inflation. Immediately after the very strong CPI report from the US last week (+7.5% year-on-year), Fed funds futures were basically fully pricing in a 50bp move in March at the intraday peak. But since the Ukraine situation escalated last Friday, that’s almost continuously fallen back, with futures only seeing a 38% chance of a 50bp move next month. It’s a similar story for other central banks, with overnight index swaps for the next BoE meeting now “only” showing a 50% of a 50bp move, down from an intraday peak above 90% last week. It’s been a more subdued story for the ECB, who aren’t expected to hike for some months yet, but even there the amount of hikes being priced by year-end has fallen to 42bps, having been above 50bps just a week earlier.

The diminished odds of aggressive central bank action benefited sovereign bonds, and yields on 10yr Treasuries moved back beneath 2%, with a -7.5bps move to 1.96% (1.977% in Asia). The decline was almost entirely driven by lower real rates, which fell -6.2bps, and there was a flattening in the 2s10s yield curve by -2.2bps to 49.1bps, although that’s still above its recent intraday low beneath 40bps last week. As with equities, it was much the same story in Europe, and yields on 10yr bunds (-4.5bps), OATs (-4.6bps) and BTPs (-7.5bps) all declined as investors moved into safer assets.

Later in the session we also had some Fedspeak from St Louis Fed President Bullard and Cleveland Fed President Mester (both of whom are voters on the FOMC this year). Bullard stuck to his hawkish pronouncements of late, repeating his view that he wanted 100bps of rate hikes by July 1, and he also said that there was too much emphasis on the idea that inflation would ease, with the risk being that it won’t. Later on, Mester hit similar notes to recent comments, signaling that the Fed should raise rates in March followed by rate hikes in subsequent months. She went on to preserve optionality for the pace of hikes during the second half of the year, outlining the pace of rate hikes can be faster if inflation stays stubbornly high, or it can slow down if inflation moderates.

Looking at yesterday’s data, the US weekly initial jobless claims for the week through February 12 came in at 248k (vs. 218k expected), unexpectedly ending a run of 3 consecutive weekly declines. In addition, housing starts underwhelmed in January at an annualised rate of 1.638m (vs. 1.695m expected), marking their first decline in 4 months, but building permits outperformed at an annualised 1.899m (vs. 1.750m expected), the highest since 2006. Finally, the Philadelphia Fed’s manufacturing business outlook survey fell to 16.0 (vs. 20.0 expected).

Early morning data has showed that Japan’s national CPI inflation for January came in at +0.5% y/y down from +0.8% in December and lower than the +0.6% y/y expected. Additionally, growth in core consumer prices slowed to +0.2% y/y in Jan from +0.5% increase in December. Today’s soft inflation numbers do suggest that the BOJ’s stance on accommodative monetary policy won’t change despite global inflationary pressures.

To the day ahead now, and data releases include UK retail sales for January, US existing home sales for January, and the Euro Area’s advance consumer confidence reading for February. Central bank speakers include the Fed’s Evans, Waller, Williams and Brainard, as well as the ECB’s Vasle and Panetta. Finally, earnings releases include Deere & Company.

Tyler Durden Fri, 02/18/2022 - 07:56

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Fed reverse repo reaches $2.3T, but what does it mean for crypto investors?

Investors avoid risk assets during a crisis, but excessive cash sitting in financial institutions could also be good for the cryptocurrencies.



Investors avoid risk assets during a crisis, but excessive cash sitting in financial institutions could also be good for the cryptocurrencies.

The U.S. Federal Reserve (FED) recently initiated an attempt to reduce its $8.9 trillion balance sheet by halting billions of dollars worth of treasuries and bond purchases. The measures were implemented in June 2022 and coincided with the total crypto market capitalization falling below $1.2 trillion, the lowest level seen since January 2021. 

A similar movement happened to the Russell 2000, which reached 1,650 points on June 16, levels unseen since November 2020. Since this drop, the index has gained 16.5%, while the total crypto market capitalization has not been able to reclaim the $1.2 trillion level.

This apparent disconnection between crypto and stock markets has caused investors to question whether the Federal Reserve’s growing balance sheet could lead to a longer than expected crypto winter.

The FED will do whatever it takes to combat inflation

To subdue the economic downturn caused by restrictive government-imposed measures during the Covid-19 pandemic, the Federal Reserve added $4.7 trillion to bonds and mortgage-backed securities from January 2020 to February 2022.

The unexpected result of these efforts was 40-year high inflation and in June, U.S. consumer prices jumped by 9.1% versus 2021. On July 13, President Joe Biden said that the June inflation data was "unacceptably high." Furthermore, Federal Reserve chair Jerome Powell stated on July 27:

“It is essential that we bring inflation down to our 2 percent goal if we are to have a sustained period of strong labor market conditions that benefit all.”

That is the core reason the central bank is withdrawing its stimulus activities at an unprecedented speed.

Financial institutions have a cash abundance issue

A "repurchase agreement," or repo, is a short-term transaction with a repurchase guarantee. Similar to a collateralized loan, a borrower sells securities in exchange for an overnight funding rate under this contractual arrangement.

In a "reverse repo," market participants lend cash to the U.S. Federal Reserve in exchange for U.S. Treasuries and agency-backed securities. The lending side comprises hedge funds, financial institutions and pension funds.

If these money managers are unwilling to allocate capital to lending products or even offer credit to their counterparties, then having so much cash at disposal is not inherently positive because they must provide returns to depositors.

Federal Reserve overnight reverse repurchase agreements, USD. Source: St. Louis FED

On July 29, the Federal Reserve's Overnight Reverse Repo Facility hit $2.3 trillion, nearing its all-time high. However, holding this much cash in short-term fixed income assets will cause investors to bleed in the long term considering the current high inflation. One thing that is possible is that this excessive liquidity will eventually move into risk markets and assets.

While the record-high demand for parking cash might signal a lack of trust in counterparty credit or even a sluggish economy, for risk assets, there is the possibility of increased inflow.

Sure, if one thinks the economy will tank, cryptocurrencies and volatile assets are the last places on earth to seek shelter. However, at some point, these investors will not take further losses by relying on short-term debt instruments that do not cover inflation.

Think of the Reverse Repo as a "safety tax," a loss someone is willing to incur for the lowest risk possible — the Federal Reserve. At some point, investors will either regain confidence in the economy, which positively impacts risk assets or they will no longer accept returns below the inflation level.

In short, all this cash is waiting on the sidelines for an entry point, whether real estate, bonds, equities, currencies, commodities or crypto. Unless runaway inflation magically goes away, a portion of this $2.3 trillion will eventually flow to other assets.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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There Is A Giant Illusion For The Majority Of Market Commentators Choosing Not To See It

There Is A Giant Illusion For The Majority Of Market Commentators Choosing Not To See It

By Michael Every of Rabobank

Holy Illusions




There Is A Giant Illusion For The Majority Of Market Commentators Choosing Not To See It

By Michael Every of Rabobank

Holy Illusions

Hands up how many of you had 528K down as your US payrolls guess? Nobody, because the Bloomberg survey low was 50K and the high 325K. While there are question marks over these data given Covid --nearly 3m people weren’t/couldn’t work due to it-- and the “birth/death” model, the household survey saw jobs +179K; backwards payroll revisions were +28K; total employment was back to pre-pandemic levels, albeit with reallocation away from sectors such as leisure and hospitality (-1,214K) towards others, such as transport (+745K); the participation rate edged down to 62.1%, so the jobless rate fell to 3.5%, but even using pre-Covid participation rates unemployment would have been 5.4%, down from 5.5%; and average hourly earnings rose much faster than expected at 0.5% m-o-m, 5.2% y-o-y (and 6.0% annualized).

If it’s an illusion, and look at full-time vs. part-time and multiple jobs as a clue...

... it still convinced Larry Summers to warn that if US CPI falls back this week, the Fed must not pivot, and Krugman to add it’d be “no justification for a pivot toward easier money.” Indeed, it now seems the Fed may go another 75bps in September, and Bowman implies afterwards as well perhaps, and the Wall Street Journal underlines, “Witness the small army of Fed officials who have fanned out to warn markets that the Chairman didn’t mean what he supposedly wasn’t saying last week.” In short, the illusion of a Fed dovish pivot is dispelled, with 2-year Treasury yields up 16bp to 3.23% Friday, and 10s up 14bp to 2.83%. More to come: or record yield curve inversion.

Add a Fed pivot to “transitory” inflation on the list of illusions fading for the same underlying reason: the global system is crumbling. They join EU energy, economic, and foreign policy, as the German regulator calls for 20% cuts in household gas usage, and the West’s ‘Great Illusion’ that war just can’t happen (to it) in the modern world.

On which, Ukraine just got another $1bn in US arms as a new phase of the war looms around Kherson: a counter-attack appears imminent. However, don’t be under the illusion that the US can keep up that pace of arms supply - and its stocks can’t be replaced quickly once depleted. The same is true for Russia, and in terms of men, but their media says North Korea might strike a deal to send 100,000 soldiers to fight in Ukraine in exchange for food and energy(!) If so, the war escalates further, and the EU energy outlook darkens further. NATO member Turkey on Friday also struck a deal with Russia to deepen economic ties: that is a terribly muddied picture for the EU and US as they try to isolate Moscow. However, illusions abound on all sides: Russia just released a video aimed at attracting people to move there due to its ‘hospitality, vodka, and an economy that can withstand thousands of sanctions’.

Elsewhere, Reuters warns Chinese military exercises around Taiwan could disrupt key shipping lanes, and Taipei states they “simulate an attack” on its main island, drawing condemnation from the G7, but Russian support. China has now halted: communication with US military theatre leaders; defence meetings; maritime security dialogue; and co-operation over illegal migration, criminal justice, transnational crime, narcotics, and the climate - the US says this “punishes the world." The White House is now leaning on Congress to delay the bipartisan Taiwan Policy Act of 2022, which designates it a major non-NATO ally, provides $4.5bn in military aid, upgrades its international status, and allows the imposition of sanctions, including SWIFT bans, on major Chinese financial institutions. As the Carnegie Endowment think-tank notes, “The US and China are seriously talking past each other…That disconnect will lead to a very unstable new baseline.”

Linking back to today’s title, Friday saw the release of ‘Holy Illusions’, a report from a key think-tank backing UK PM candidate Truss. It argues, “Just as in the 1970s, the country faces many interconnected, serious but superficially very different problems.” True.

Controversially, it diagnoses that “The most significant underlying economic problem… is the malign consequences of low to negative interest rates over a prolonged period.”  Artificially low rates, it says, have “gradually prevented the normal mechanisms of a market economy from working properly… there has been a greater and greater search for yield on riskier and riskier assets, with everything that follows upon that, notably, market instability, huge asset price inflation, and inequality. The lack of rewards to enterprise and the ease with which fundamentally unproductive “zombie” companies can be maintained have made it difficult to generate those normal improvement mechanisms of a market economy which drive productivity and growth.” It’s hard to disagree with that Austrian and Marxist assessment.

The report then says other UK problems are manifold: “Implausible energy policies”; over-regulation, antipathy to risk; “Unsustainable” welfare; a shrinking labour force; a declining birth-rate (an issue in all major economies, except one); “Education systems that don’t educate”; and, it claims, high immigration. It warns that if current UK growth rates continue --and this was presumably before the BOE’s latest awful assessment-- then by 2035 the likes of Poland will “overtake” the UK: will they then import British plumbers?

It unsurprisingly argues Brexit is not an issue, even if it means short-term costs (and clearly more immigration is not on the cards). It says the UK isn’t willing or able to do anything with the “full democracy” Brexit grants it, as “Our governing class seems to have forgotten how to govern, how to guide a state, and how to set a goal and direction of travel.”

Then --perhaps contradicting itself for some readers-- it argues, “Given this set of daunting problems… there really ought to be strong political movements… to analyse and begin to deal with them. That is not the case. Instead we see the reverse - a refusal to get to grips with the problems or even to acknowledge them. It is easier to ignore the most pressing economic and societal issues of the day, pretend they don’t exist, or claim they will be solved automatically as normal conditions return. We are, it seems, studiously pretending to be asleep.” Again, no arguments here. To show it is not like the others, it dares to ask,What is to be done? - and it tells us government must:

Convince the public that change is needed. The public must come to feel that we have taken a wrong path and to react against it.” They are already there! Just as we have mortgage strikes in China, we may see energy strikes in the UK; and some warn of a looming ‘winter of discontent. (And don’t think Putin doesn’t see this too, and won’t act accordingly.)

Show the electorate an alternative,” which is “to increase the productive capacity of our economy (because without that other problems simply cannot be solved)”. They are with you! But here comes the rub. What does that mean on energy? Silence. Moreover, the government must “persuade the public… that collectivist, socialist solutions are incapable of achieving that.”

But how do you get the private sector to invest productively when other governments will? See ‘how the US gave away a breakthrough battery technology to China’, because the inventor “talked to almost all major investment banks; none of them [wanted to] invest in batteries," as they “wanted a return on their investments faster than the batteries would turn a profit.” Will higher rates, lower taxes, and deregulation force banks to make loans to productive rather than “fictitious capital”? Austrians say yes: Marxists say not, and with the better track record; and they add that even productive loans will just be made abroad, where it is cheaper to invest.

That gaping theoretical/policy hole is more evident when we are then told the government must “persuade the public that this alternative route is actually possible; that [it] has a plan to get the country onto it; that continuing on the current path will simply make the inevitable correction measures more painful; and that failure to take such measures will mean a materially worse outcome. [It must] make this alternative politically feasible and hence potentially attractive.”

--But what alternative?!--

Its conclusion avoids the answer in saying that: “A successful nation state needs market economics to create prosperity, and requires solidarity and a clear sense of identity to sustain itself. A reform programme must be similarly broad-based. It should reject the artificial polarity between the “market”  --“right wing” economics and economic globalisation-- and “society” --“left wing” statism and solidarity-- but recognise instead that running a successful country involves elements of both.”

It just doesn’t say how beyond rates, taxes, and fostering ‘national unity’: yet the latter alone was *wrongly* presumed by Smith and Ricardo to stop capitalists investing abroad at all, which we just edit out of our textbooks! If only we could edit it out of our financial flows so easily.

Ironically, the report also says, ”the political difficulty is that governments and politicians have not for many years set out the reality of how economies work and how prosperity is created. Levels of understanding are low.” Yes, they are: if it was as simple as ‘getting the state out of the way’, China would not be an economic superpower and Afghanistan might be.

Yet the underlying message that we been ‘getting GDP wrong’, and we can’t get it right by only focusing on GDP is arguably very valid, as is the criticism of relying on low rates policy. We *do* need a higher common purpose, and higher rates, and others are saying similar things: here is an example arguing, “Without that, any aspiring state is just a gated community for the working wealthy, much like the ones for old retirees in South Florida.” It’s just that we need *more* than that structurally to boot, and ‘Holy Illusions’ still seems to cling to its own in avoiding that conclusion.

It *could* be seen as backing a neo-Hamiltonian free market behind high tariff barriers, with industrial policy, which was how the US (and China) developed. Yet that mercantilist model is also an illusion for the UK and others not large enough for economies of scale and a modern army, especially as large rivals *are* state-backed and have one; and as high debt levels logically require MMT and higher interest rates, if just to pay for that military. The flurry of legislation coming out of the US is not a million miles away from some of those ideas and developments.

But if we need ‘Hamilton’ in blocs, the UK still just rejected being a member of one. Does that mean it will end up in a new Holy Anglosphere? Some say that’s no illusion, other that it is. Regardless, the above still implies global national-security/commodity/supply-chain/tech/values fragmentation ahead; and higher interest rates; and lower asset prices; and more productive, higher-wage investment - as we had already projected as a 2030 scenario. Unless that’s just my own holy illusion.

What isn’t is that if you don’t keep track of these seemingly-esoteric developments, you won’t be in a position to call where rates are going - which is why nobody in markets called three (or four?) back-to-back 75bps Fed hikes this year. That was “not how the political economy works”. But the political economy had changed. To paraphrase Keynes, “When the facts change, I change my forecast. What do you do?”

That is what you should be focused on: not the illusion of the relevance/positivity of Chinese July trade data released Sunday, which showed exports up 18% y-o-y and imports only 2.3%, for a staggering trade surplus of $101.3bn. Does anyone think this $1.2 trillion annualised figure is good news for anyone: not China (where it means no demand); not globally (where it means no local supply). There is a giant illusion for the majority of market commentators choosing not to see it.

Tyler Durden Mon, 08/08/2022 - 09:04

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Futures Storm Higher To Start The Week As “Most Hated Rally” Steamrolls Bears

Futures Storm Higher To Start The Week As "Most Hated Rally" Steamrolls Bears

US equity futures rose to start the week as the "most hated…



Futures Storm Higher To Start The Week As "Most Hated Rally" Steamrolls Bears

US equity futures rose to start the week as the "most hated meltup" continued just as we said it would over the weekend as stubborn bears are forced to cover and start chasing higher out of FOMO, while Treasury yields fell while investors assessed the path of monetary policy ahead of this week's critical CPI data. Nasdaq 100 futures rose 0.7% while S&P 500 futures gained 0.5% by 7:30 a.m. in New York after the underlying benchmarks dropped on Friday following news that US job growth soared beyond expectations. Meanwhile, the yield on the 10-year Treasury dropped to 2.79% after soaring at the end of last week, while the dollar dipped and bitcoin jumped above $24K.

In premarket trading, stocks tied to renewable energy, such as Tesla, rose after the Senate passed a key bill that Democrats called the largest investment in fighting climate change ever made in the country. Meanwhile, cryptocurrency-exposed companies like Coinbase Global Inc. and Riot Blockchain Inc. climbed as Bitcoin breached $24,000. Bank stocks are also higher in premarket trading as the broader equity market rises. In corporate news, Avalara is being acquired by Vista Equity Partners for $93.50 a share in a deal that values the tax software maker at roughly $8.4 billion. Meanwhile, Robinhood is set to pay $9.9 million to resolve lawsuits over crashes on its trading platform in 2020.

“The sentiment will mostly depend on this week’s inflation data,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “If US inflation starts easing, the Fed could rethink about smaller rate hikes, which could give another positive swing to the stocks.”

Friday's "stellar" jobs data eased fears of a recession while increasing the chances that the Federal Reserve will be more aggressive in its fight to tame inflation. Over the weekend, San Fran Fed President Mary Daly said the central bank is “far from done yet” in bringing down prices and suggested a 50 basis-point rate increase isn’t the only option on the table for the next meeting.

The Friday payrolls data surprise “was large enough to re-ignite the inflation debate and renew focus on US CPI prints,” said Peter McCallum, a strategist at Mizuho. “Indeed, a very unexpected move lower in US CPI is needed for the market to stop thinking about the Fed having to do more. And with more tightening, the probability of a hard landing rises.”

Meanwhile, as Bloomberg notes, the S&P 500 climbed more than 6% over the past four weeks, approaching the level of two standard deviations for data going back 30 years.

That’s unusual in the absence of a clearly event-driven market such as during the global financial crisis or the start of the Covid-19 pandemic. However, The advance in equities could face another test from a likely contraction in corporate margins next year as costs remain high, according to strategists at Morgan Stanley and Goldman Sachs.

"We think it’s premature to sound the all-clear simply because inflation has peaked,” Morgan Stanley strategists led by Michael Wilson said. “The next leg lower may have to wait until September” as the negative effects of falling inflation on company profits become more reflected in earnings.

Looking at the week's key data, the closely watched CPI is seen rising 0.2% in July from a month earlier, which would be the smallest advance since the start of 2021. However, the so-called core measure, which strips out energy and food, probably climbed a concerning 0.5%, based on the median estimate in a Bloomberg survey of economists.

European stocks tracked US futures higher, with the Euro Stoxx 50 is up 0.5%. IBEX outperforms peers, adding 0.6%, FTSE MIB is flat but underperforms peers. Real estate, tech and financial services are the strongest-performing sectors.

Earlier in the session, Asian stocks edged lower as concerns about more aggressive interest-rate hikes by the Federal Reserve and fresh Covid lockdowns on the Chinese resort island of Hainan weighed on sentiment. The MSCI Asia Pacific Index dropped as much as 0.5% before paring, with losses in technology and consumer discretionary shares offsetting gains in materials firms. Hong Kong stocks led declines around the region, even as the government cut the hotel quarantine for inbound travelers to three days from seven. A better-than-expected July jobs report in the US fueled expectations of faster Fed monetary tightening, with investors monitoring this week’s inflation data for further clues. Meanwhile, the lockdowns in China’s Hainan province have stranded tens of thousands of tourists, dealing a blow to its duty-free retail industry.

Asian equities capped their third-straight weekly gain last Friday as the region shrugged off rising geopolitical risks in the Taiwan Strait. Investors also continue to assess the ongoing corporate-earnings season. “We believe markets have discounted a fair bit of the earnings cuts to come, partly driven by the tech inventory de-stocking cycle in the coming months,” said Soo Hai Lim, head of Asia ex-China equities, at Barings. “Improving fundamentals, more attractive valuations and relatively looser monetary conditions in Asia can help deliver relative equity outperformance for the region in the coming months.”

Japanese stocks reversed earlier losses with the Nikkei 225 Index closing at its highest since March 29, as investors assessed a slew of earnings reports from local firms. The Topix Index rose 0.2% to 1,951.41 as of market close Tokyo time, while the Nikkei advanced 0.3% to 28,249.24. Suzuki Motor Corp. was among the top performers on the Nikkei, jumping more than 10% after an earnings beat. Bandai Namco also advanced after its outlook was raised.   Daiichi Sankyo Co. contributed the most to the Topix Index gain, increasing 5.2%. Out of 2,170 shares in the index, 1,033 rose and 1,030 fell, while 107 were unchanged. “Today’s Japan stocks are moving over micro factors such as the earnings results,” said Hiroshi Matsumoto, a senior client portfolio manager at Pictet Asset Management. “Some Japanese companies are reporting good results.”

India’s equity index climbed to its highest level in nearly four months, boosted by gains in HDFC Bank and Reliance Industries.   The S&P BSE Sensex rose 0.8% to close at 58,853.07 in Mumbai, after falling by as much as 0.2% at the start of the session. The NSE Nifty 50 Index gained 0.7%. Of the 30 members on the Sensex, 20 rose and 10 fell. All but one of 19 sectoral indexes compiled by BSE Ltd. advanced, led by a gauge of capital goods companies. The market is shut on Tuesday for a local holiday.  HDFC Bank advanced to its highest level since April 13 as the Economic Times newspaper reported that the private sector lender raised $300 million in deposits from expat Indians, quoting unnamed people familiar with the matter.  Reliance Industries climbed most in a week as the oil-to-retail conglomerate said it will begin investing across the green-energy value chain. State Bank of India dropped after its quarterly report showed net income below analysts’ estimates.

Bloomberg dollar spot index flat after paring earlier decline. JPY and EUR are the weakest performers in G-10 FX, AUD and NZD outperform.

In rates, Treasuries held gains amassed during European session, led by bigger gains across core European bonds and unwinding a portion of Friday’s jobs-report selloff. US long-end yields richer by ~4bp, flattening 2s10s by ~2bp, 5s30s by less than 1bp; 10-year around 2.79% trails comparable bunds and gilts by 2bp-3bp. Treasuries 2s10s curve inversion deepens to as much as 42.3bps, the lowest since 2000. No US data or Fed speakers are slated for Monday; refunding auctions begin Tuesday, July CPI scheduled for Wednesday.short-end yields underperform bunds by about 4 bps. Peripheral spreads widen to Germany with 10y BTP/Bund adding ~7bps to 212.8bps after Italy’s outlook was cut to negative by Moody’s on political risk.

In commodities, WTI trades within Friday’s range, falling 0.3% to around $88. Base metals are mixed; LME nickel falls 2.4% while LME lead gains 1.9%. Spot gold is little changed at $1,775/oz. 

In crypto, noted upside for the space amid thin newsflow elsewhere, with Bitcoin surpassing USD 24k at best and thus marginally eclipsing last week's USD 23.9k peak.

It's a quiet start to the week in econ data with nothing scheduled on the economic slate and no Fed speakers either; refunding auctions begin Tuesday, July CPI scheduled for Wednesday.

Market Snapshot

  • S&P 500 futures up 0.3% to 4,157.75
  • STOXX Europe 600 up 0.6% to 438.13
  • MXAP down 0.1% to 160.53
  • MXAPJ down 0.4% to 524.35
  • Nikkei up 0.3% to 28,249.24
  • Topix up 0.2% to 1,951.41
  • Hang Seng Index down 0.8% to 20,045.77
  • Shanghai Composite up 0.3% to 3,236.93
  • Sensex up 0.8% to 58,862.37
  • Australia S&P/ASX 200 little changed at 7,020.62
  • Kospi little changed at 2,493.10
  • German 10Y yield little changed at 0.89%
  • Euro little changed at $1.0187
  • Gold spot down 0.1% to $1,773.21
  • U.S. Dollar Index down 0.11% to 106.50

Top Overnight News from Bloomberg

  • China Extends Military Exercises Near Taiwan With New Drill
  • Ships Resume Taiwan Routes Even as China Continues to Drill
  • Oil Endures Choppy Start to Week With Demand Concern to the Fore
  • Senate Passes Democrats’ Landmark Tax, Climate, Drugs Bill
  • Yen Shorts Crumble as 2022’s Hottest FX Trade Comes to an End
  • ‘Most Vulnerable’ Emerging Markets Now Face Euro Recession Risk
  • Jack Dorsey Tweets ‘End the CCP’ After China Covid Report
  • Carlyle CEO Resigns in Sudden Reversal of Generational Shift
  • SoftBank Reports Record $23.4 Billion Loss as Holdings Fall
  • India Seeks To Oust China Firms From Sub-$150 Phone Market
  • Five States Risk Undoing Legitimacy of 2024 Election
  • CVS Health Is Mulling a Bid for Signify Health, WSJ Reports
  • Winners and Losers in Democrats’ Signature Tax and Energy Bill
  • NYC Mayor Greets New Bus of Migrants Sent by Texas Governor
  • Daly Says Fed Is ‘Far From Done Yet’ on Bringing Inflation Down
  • Buffett’s Berkshire Pounces on Market Slump to Scoop Up Equities
  • Bitcoin Believers Are Back to Watching Stocks After Crypto Crash

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded mixed with price action choppy as participants reflected on the encouraging Chinese trade data and post-NFP hawkish pricing of Fed rate hike expectations, with sentiment also clouded by geopolitical risks related to China’s military drills near Taiwan and renewed shelling of Ukraine's Zaporizhzhia nuclear plant. ASX 200 traded indecisively around the 7,000 level as weakness in the consumer-related sectors was offset by a strong mining industry, with OZ Minerals the biggest gainer after it rejected an indicative proposal from BHP. Nikkei 225 pared opening losses although the upside was capped amid the ongoing deluge of earnings including SoftBank which is scheduled to announce its results later today and with a cabinet reshuffle set for later this week. Hang Seng and Shanghai Comp were varied with the mainland indecisive as mostly stronger than expected Chinese trade data, including a record surplus in July, was counterbalanced by COVID woes after Sanya in the Hainan province was placed on lockdown which has trapped tens of thousands of tourists.

Top Asian News

  • Chinese authorities locked down the southern coastal city of Sanya during the weekend after a highly infectious Omicron strain was detected in the Hainan province, according to FT.
  • China’s aviation regulator shortened the suspension time for inbound flights on routes found to have COVID-19 cases in which flights on a route with an identified COVID case will be suspended for a week if 4% of passengers test positive and will be suspended for two weeks if 8% of passengers test positive, according to Reuters.
  • Hong Kong Chief Executive John Lee announced that the hotel quarantine will be reduced to 3 days from 7, with arrivals to be subject to a 3 + 4 format in which the 4 days will be home monitoring.
  • Japanese PM Kishida said he will reshuffle the cabinet in the week ahead to address issues including COVID-19, inflation and Taiwan affairs, according to Reuters.

European bourses are firmer across the board after shrugging off mixed APAC trade, Euro Stoxx 50 +0.8%. Similar directional performance in US futures, though magnitudes are more contained amid limited newsflow with little scheduled ahead, ES +0.3%. Sectors are firmer with no overall theme emerging though Tech, Real Estate and Utilities are among the best performers.

Top European News

  • UK Tory party leadership frontrunner Truss is under pressure to promise more to poor households facing a cost of living crisis this autumn after she expressed her preference to reduce taxes over ‘handouts’, according to FT.
  • UK government plan to cut as many as 91k civil servant jobs over 3 years will require deep cuts to public services and cost at least GBP 1bln in redundancy payments, according to a Whitehall review cited by FT.
  • UK government is to conduct a review of the foreign takeover of the National Grid’s gas transmission business amid increased concerns regarding energy security, according to FT.
  • Italy’s centrist Azione party is to abandon the centre-left alliance with the Democratic Party just days after agreeing to an alliance to join forces in an effort to prevent a right-wing landslide, according to Bloomberg.
  • Moody’s has cut its outlook on Italy to Negative from Stable, affirms BAA3 rating; risks to credit profile have been accumulating more recently due to the economic impact of Russia/Ukraine and domestic politics. Under baseline scenario, Italian debt to continue declining in 2022.


  • The USD index has pulled back further from Friday’s post-NFP 106.93 before seeing a bounce at its 10 DMA (106.25).
  • Non-Dollar G10s are gaining momentum against peers, and vs the Buck; AUD holds the top spot.
  • EUR/USD and GBP/USD trimmed earlier upside to trade back under 1.0200 and 1.2100.
  • The Yen is the current G10 laggard amid broader risk and as the FOMC-BOJ pricing once again widens.

Fixed Income

  • Core debt modestly firmer, experiencing some respite from Friday's post-NFP pressure amid pronounced Fed repricing and yield upside.
  • Albeit, in the context of recent session the circa. 70 tick upside in Bunds is limited.
  • BTPs pressured as Moody's cuts their outlook for Italy while further political developments seemingly strengthen the chances of the right.


  • WTI and Brent front-month futures saw upside momentum fade alongside a Dollar-rebound off lows.
  • Spot gold is trading sideways around USD 1,775/oz amid a lack of drivers.
  • Overnight, Chinese base metal futures opened firmer with added impetus from the Chinese trade data, whilst LME contracts trade somewhat mixed.
  • Tesla (TSLA) has reportedly signed a contract worth circa. USD 5bln to purchase battery materials from nickel processing companies in Indonesia, via Reuters citing CNBC Indonesia.
  • Russian oil product exports from Black Sea port of Tuapse planned at 1.443mln in Aug (vs 1.388mln in July), according to traders cited by Reuters.
  • China is poised to begin another round of tax inspections on independent refiners, according to Reuters sources. Inspections are to last months, commencing later this month.

US Event Calendar

  • Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

August has been fascinating so far with US recession talk pushed back with a string of better than expected data last week. The US economy simply cannot be deemed to be in a recession in a month when +528k jobs have just been added as payrolls showed on Friday.

This still feels to me like a classic (albeit compressed), old fashioned boom bust cycle. The Fed has been aggressively behind the curve with monetary policy amazingly loose versus history. The Fed have tightened a bit but monetary policy operates with a lag and monetary policy was and is still very loose. Remember we’ve only been hiking since March and real Fed Funds are still c.-7%. I still think recession by around the middle of 2023 is a slam dunk and that risk assets will go well below their June 2022 lows when we’re in it but I'm still not convinced the official recession happens over the next few months. As a related aside, the 2s10s yield curve first inverted at the end of March. A recession always eventually follows this in the US but the shortest gap between that and a recession is c.9 months over the last 70 years of data covering 10 recessions. The fact that the yield curve is getting more inverted just cements the likely recessionary signal from the yield curve but it always takes time. Ultimately I think a recession will be a lagged response to the necessary tighter policy put in place since March and the hikes still to come.

If payrolls was a bit of a shock, next up will be US CPI on Wednesday which we will review below. Staying with US inflation we will also see PPI on Thursday and the inflation expectations in the University of Michigan consumer survey on Friday. Staying with prices China (CPI, PPI) and Japan (PPI) get in on the act on Wednesday too. A monthly dump of UK data including GDP will be out Friday and will attract attention after the BoE’s forecast of a 5 quarter upcoming recession last week. Elsewhere US earnings are 85% complete so the newsflow will slow down on this front. The full day by day week ahead is at the end but we’ll focus most attention on US CPI here today.

Our economists expect the headline YoY rate to finally dip after energy prices have fallen of late. They are looking for 8.8% (from 9.1%) with consensus a tenth lower. Core however is expected to increase two tenths to 6.1% YoY. If we see such an outcome it’ll be interesting if the market cheers what could be the start of a decline from the peak in the headline rate or remains concerned that core continues to edge up. Core should be more important to the Fed but the market has been known to take the dovish interpretation to events of late, payrolls notwithstanding.

On US PPI on Thursday, most of our economist’s attention will be on the healthcare component as this feeds directly into core PCE, the Fed preferred measure. So far the wedge between core CPI and PCE has been biased in CPI’s favour (i.e. higher) as CPI has a big bias to rents vs healthcare for PCE. Last month healthcare surged after 4 soft months. Our economists have detailed why they think it will continue to be strong in this note (Link here).

Across the Atlantic, this week's UK GDP print is expected to be -0.2% QoQ, the first quarterly contraction since Q1 of 2021. The June figure is expected to contract by -1.2% MoM. Elsewhere earnings season is winding down after 423 S&P 500 and 403 Stoxx 600 companies have now reported. Our equity strategists have reviewed global earnings so far here, noting that while beats are roughly at the historical average in the US, they're exceeding it elsewhere. Yet, bar energy stocks, consensus estimates for Q3 have been declining across regions. Looking at the line up for this week, notable reporters include Disney (Wednesday), Porsche (today), Deutsche Telekom, RWE, Orsted and Siemens (Thursday).

Asian equity markets are mostly on the softer side as we start the week. As I type, the Hang Seng (-0.73%) is lagging despite Hong Kong’s move to cut mandatory hotel quarantine from seven days to three. Additionally, the Kospi (-0.10%) is also trading lower in early trade whilst Chinese stocks are mixed with the Shanghai Composite (+0.19%) higher and the CSI (-0.33%) lower. Elsewhere, the Nikkei (+0.25%) is holding on to its gains this morning.

Moving ahead, US stock futures point to a slightly negative opening with contracts on the S&P 500 (-0.16%) and NASDAQ 100 (-0.11%) dipping in overnight trading.

Early morning data showed that Japan recorded its first current account deficit (-132.4 billion yen) in five months in June (v/s -706.2 billion yen expected) and reversing a +128.4 billion yen surplus in the preceding month as surging imports eclipsed exports.

Over the weekend, data revealed that China’s export growth unexpectedly picked up (+18.0% y/y) in July, the fastest pace this year, against a +17.9% increase in June and beating market expectations of a +14.1% gain, thereby offering an encouraging boost to the economy as its struggles to recover from a Covid-induced slump.

In overnight news, the US Senate approved a $739 billion climate and healthcare spending package ahead of crucial midterm elections in November. When signed into law, the bill, formally known as the Inflation Reduction Act, would allocate $369bn for climate action - the largest investment in US history. At the same time, it would increase corporate taxes and lower healthcare costs as part of the package.

Reviewing last week now and it was a pretty volatile start to August on the back of Pelosi’s visit to Taiwan, the better than expected ISM prints, hawkish Fed speak, and finally the monster payrolls report on Friday which finally got the message through that the narrative of a dovish Fed pivot the week before was exceptionally premature.

Quickly recapping Friday’s data, nonfarm payrolls came in at +528k – more than double the final estimate of +260k with a further boost from the upwardly revised June reading of +398k (vs +372k previously). It was also the highest reading since February’s +714k. The July payrolls gains also ensured that the US has now recovered the 22m of job losses in the aftermath of covid outbreak. Other indicators reinforced the risks to inflation - unemployment was down to 3.5% (3.6% previously) and average hourly earnings surprised to the upside at 0.5% or 5.2% YoY (vs consensus of 0.3% and 4.9%, respectively). Slight softness came from a -0.1ppt drop in the participation rate (62.1% vs 62.2% estimates) but this was mostly in the young and not the prime-age cohort which makes it less worrying. Upward beats in employment indices also came from ISM indices earlier in the week, with headline gauges for both beating economists’ estimates as well.

The payrolls beat led to the US 2yr and 10yr jumping by +18.3bps and +13.9bps on Friday bringing the total weekly yield gains to +34.1bps and +17.8bps, respectively. These gyrations also inverted the 2s10s further, with the slope touching a low of around -43bps intraday, before finishing the day at -40.3bps, a -4.0bps move, -16bps on the week and to the most inverted since 2000.

Fed futures now price in +69bps at the September meeting, so a roughly 76% probability of another +75bps hike in September (up from Thursday’s +59bps, 36%). There’s still along way to go before the next FOMC though with another set of payrolls and two CPI prints before the next meeting.

For the S&P 500 it was a week with a few ups and downs (including -1% immediately after payrolls) but ultimately the market rose +0.36% (Friday -0.16%). Higher yields on Friday also drove divergences between benchmarks, with the Nasdaq (-0.50%) struggling a bit but still +2.50% on the week amid decent earnings results. For small caps, though, better economic data than feared overpowered the effect of rates, sending the Russell 2000 up by +0.81% on Friday and +1.94% on the week.

Oil moved higher after payrolls (WTI +0.53% and Brent +0.85%), but were still down a significant -9.74% and -13.72% on the week.

In Europe, sovereign bonds were also hammered after the payrolls report although the steady march higher started early in the morning and continued until the end of the session. Unlike in the US, however, the curves mainly steepened, with 10yr bund yields +15.2bps (+21bps on the week) edging ahead of the 2yr ones +13.5bps (+19bps on week).

Friday also saw yields sell-off further in the UK, with the 2yr yield (+11.1bps) slightly less extreme than the 10yr (+16.0bps). But in part thanks to the BoE, the UK’s front end gained +25.5bps on the week relative to +28bps on the 10yr. The periphery was quiet last week with 10yr Italian spreads declining -6.5bps on Friday and -13.6bps on the week. The market has been more relaxed after the far-right populists (riding high in the polls) suggested they won't abandon EU budget rules if they win the elections.

Finally, European stocks dipped as the STOXX 600 closed -0.76% on Friday, and -0.59% for the week. Financials (+0.16%) and energy (+0.54%) were the sole outperformers sector-wise on Friday after the robust payrolls.

Tyler Durden Mon, 08/08/2022 - 08:03

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