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Futures Flat On Last Day Of Dismal Quarter, Oil Tumbles As Biden Preps Massive SPR Release

Futures Flat On Last Day Of Dismal Quarter, Oil Tumbles As Biden Preps Massive SPR Release

US equity futures were muted and flat on the last…

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Futures Flat On Last Day Of Dismal Quarter, Oil Tumbles As Biden Preps Massive SPR Release

US equity futures were muted and flat on the last trading day of the month and quarter, fading a modest overnight gain as the underlying index headed for its first quarterly decline in two years on worries about surging inflation, hawkish monetary policy and an economic slowdown. Contracts on the S&P 500 were down 0.1% at 730 a.m. ET while Dow futures were little changed and Nasdaq 100 futures rose 0.2%, while European stocks fell, heading for the first quarterly decline since 2020. Asian equities retreated on lackluster Chinese PMI data and regulatory concerns. Treasuries held gains with the 10Y yield dropping to 2.31% (from 2.50% earlier this week when the 2s10s inverted) and the dollar ticked up against almost all G-10 peers. Fed watchers will be focused on the PCE deflator, which may have sped up in February.

The big overnight action was in oil, which plunged following the news late on Wednesday that the White House was (again) mulling a plan to release roughly a million barrels a day from reserves to combat crashing Democrat approval rating ahead of the midterms as a result of soaring gasoline prices coupled with supply shortages in response to US sanctions of Russia. The proposal, which includes 180 million barrels being freed over several months, may help the market rebalance this year but won't solve a structural deficit, Goldman said.

The reserve release news came just hours ahead of an OPEC+ supply meeting, where the cartel is expected to stick with its strategy of a modest output boost in May.

Equities globally are poised for their worst quarter since the early days of the pandemic on concerns about tightening monetary policy, red-hot inflation and a looming recession. While stocks remained resilient to the historic rout in bond markets this month, some strategists see little room for them to rally this year, partly as high costs threaten corporate profits. French inflation accelerated more than expected to reach another record, following unexpectedly high readings on Wednesday from Germany and Spain.

“Our base case now is for only modest upside for stocks,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, adding that he expects the S&P 500 to end the year at 4,700, about 2% higher than current levels. He also trimmed his estimate for global earnings growth to 8% from 10% for 2022.

“Aside from quarter-end considerations, oil is very much the center of attention,” Simon Ballard, chief economist at First Abu Dhabi Bank, wrote in a note to investors. Still, “all the usual suspects are still in play, keeping the market in check, including the specter of the Fed pursuing an aggressive path of monetary policy normalization over the coming months.”

Elsewhere, officials from Ukraine and Russia are set to resume talks via video conference on Friday, according to a Ukrainian negotiator, though there was no immediate confirmation from Moscow. Friday’s video discussions between Ukraine and Russia would follow in-person talks this week in Turkey that didn’t produce a short-term cease-fire or major progress toward a broader peace deal. Ukraine’s negotiator said the hope was to have enough agreed on paper in another week to be able to move toward a meeting between President Vladimir Putin and President Volodymyr Zelenskiy.

Going back to the US market, shares in big U.S. energy companies slumped in premarket trading along with crude prices drop (Exxon Mobil -1.9% and Chevron -1.5% premarket, Occidental Petroleum -2.6%, Gran Tierra Energy -3.1%, Imperial Petroleum -3.8%, Camber Energy -4.3%). Bank stocks are also lower putting them on track to fall for a second straight day as the U.S. 10-year yield falls to 2.31%. Goldman Sachs warned that stagflation could make bank stocks less profitable. U.S.-listed Chinese stocks slipped in premarket trading as Securities and Exchange Commission Chair Gary Gensler dialed down prospects of an imminent deal to allow Chinese firms to keep trading on American exchanges. Russian equities advanced as the nation partly lifted the short-selling ban on local stocks on Thursday, removing one of the measures that helped limit the declines in the market after a record long shutdown. Other notable premarket movers include:

  • Vipshop ADRs (VIPS US) rise 8.4% in premarket trading after the Chinese online retailer announces a $1b share buyback plan.
  • Robinhood Markets (HOOD US) shares rise 1.4% in U.S. premarket trading, set to extend the previous day’s 24% gains after the online brokerage announced plans to expand the trading day by four hours, while Morgan Stanley begins coverage of the stock with an equal-weight rating.
  • Energy companies decline in premarket trading as crude prices drop. The U.S. is considering tapping its reserves again in a potentially massive release aimed at managing inflation and supply shortages. Exxon Mobil (XOM US) -1.9%, Chevron -1.5% (CVX US).
  • U.S.-listed Chinese stocks are heading for a lower open after Securities and Exchange Commission Chair Gary Gensler dialed down prospects of an imminent deal to allow Chinese firms to keep trading on American exchanges. Alibaba (BABA US) fell 1.7% in premarket, while its e-commerce rival JD.com (JD US) lost 2.8%.
  • Advanced Micro Devices (AMD US) shares fall 1.3% in U.S. premarket trading, after the semiconductor maker is downgraded to equal- weight from overweight at Barclays, which says that the growth story “needs a pause.”.
  • IZEA Worldwide (IZEA US) shares surge 27% in U.S. premarket trading after the influencer marketing company reported fourth-quarter earnings and saw total revenue increase 62% to a record of $10.3m.

In Europe, the Stoxx 600 reversed initial gains and dropped 0.3%, the Euro Stoxx 50 fell 0.2%, and other major indexes trade flat to slightly lower with retailers, telecoms and energy the worst performing sectors. Retail and telecom stocks led declines while utilities and insurance sectors outperformed. Some notable premarket movers:

  • Brewin Dolphin shares rise as much as 62% and trade slightly below the agreed bid for the firm from RBC Wealth Management. The transaction, being carried out at a high premium, highlights the attractiveness of the U.K. wealth sector, analysts say.
  • Orpea shares climb to their highest level in almost 2 months after Societe Generale says that allegations of mistreatment at its facilities are likely to have “limited” financial impact.
  • Fresenius SE shares rise as much as 3.3% on news that the company’s Kabi intravenous drug unit has bought a majority stake in mAbxience SL and acquired Ivenix.
  • Pernod Ricard shares rise as much as 2.6% as Citi says 3Q sales are likely to beat expectations, also lifting its which lifts EPS estimates and PT, as well as opening a positive catalyst watch.
  • Tate & Lyle shares gain as much as 3.7% after saying it would buy Quantum Hi-Tech, a prebiotic dietary fiber business in China. The deal enhances Tate & Lyle’s portfolio, Goodbody says.
  • Pearson shares rise as much as 3.5%, rebounding from Wednesday’s losses after private equity firm Apollo Global Management said it won’t make an offer for the education publisher.

Earlier in the session, Chinese data and regulatory concerns weighed on Asia stocks. China's NBS manufacturing PMI declined to 49.5 in March from 50.2 in February, missing estimates, likely due to Covid-related restrictions and geopolitical tensions. The output sub-index in the NBS manufacturing PMI survey fell by 0.9 points in March, and the new orders sub-index fell by 1.9 points. The NBS non-manufacturing PMI fell to 48.4 in March from 51.6 in February, also missing expectations, and entirely driven by the decline of services sector due to recent Covid outbreaks in multiple provinces. Separately, Bloomberg reported that Chinese authorities are considering a plan to raise several hundred billion yuan for a new fund to backstop troubled financial firms.

Asian stocks retreated after a two-day advance, as the U.S. securities regulator’s tough stance on a potential delisting of Chinese firms and weak China manufacturing data worried investors.  The MSCI Asia Pacific Index declined as much as 0.8%, and was poised to finish its worst quarterly performance in two years, with Taiwan Semiconductor Manufacturing and Tencent among the biggest drags. Benchmarks in Hong Kong and China underperformed regional peers. Japanese equities headed for a second day of declines while Australia stocks retreated after seven straight day of gains in response to a stimulatory federal budget.  The U.S. Securities and Exchange Commission’s chief said Chinese firms need to fully comply with audit requirements in order to stay on American exchanges. Meantime, China’s manufacturing contracted in March, underscoring the growing toll of lockdowns. Investors are also watching how a tumble in oil prices can alleviate inflation risks and affect corporate earnings. 

“If you look at the PMIs there’s an obvious explanation for why PMIs are weak, which is China pursuing zero-Covid strategy,” Kieran Calder, head of Asia Equity Research at Union Bancaire Privee, said in an interview with Bloomberg Television. “The reality of Covid-19 versus the response in China, the mismatch is too strong right now and I think that’s the biggest worry for us.”  For the quarter, Asian stocks were poised for nearly a 7% loss, the worst performance since early 2020 when the emergence of the pandemic shocked investors. Investors had to grapple with a U.S. rate hike, a war in Ukraine and continued regulatory risks out of China, which caused huge volatility

Japanese equities fell for a second day following a rally in the yen. Electronics makers and banks were the biggest drags on the Topix, which fell 1.1%. Recruit and SoftBank were the largest contributors to a 0.7% loss in the Nikkei 225. The yen was little changed after gaining 1.6% against the dollar over the previous two sessions. Both key gauges still capped their first monthly gains of the year. The Nikkei 225 rose 4.9% in March, the most since November 2020, while the Topix climbed 3.2% on the month.

India’s benchmark equity index clocked its best monthly advance since August, as buying by local funds amid war-induced volatility supported sentiment. The S&P BSE Sensex fell 0.2% to 58,568.51 in Mumbai, trimming its gain for March to 4.1%. The NSE Nifty 50 Index also slipped 0.2% on Thursday. Stocks swung between gains and losses several times during the day ahead of the expiry of monthly derivative contracts Thursday. Institutional investors in India have bought $5 billion worth of shares this month, while foreign investors are set to extend their selling to a sixth consecutive month. Reliance Industries Ltd. was the biggest drag on the 30-share Sensex, which saw an equal number of shares closing up and down. Twelve of the 19 sectoral indexes compiled by BSE Ltd. gained, led by a gauge of telecom stocks. S&P BSE Healthcare Index was the worst performing sub-index.   “Markets took a breather on a monthly expiry day and ended the last day of the financial year on a flat note,” said Ajit Mishra, vice president of research at Religare Broking Ltd. “We reiterate our positive yet cautious stance citing lingering geopolitical tension between Russia-Ukraine and its impact on the global markets.”

In rates, Treasuries extended this week’s rally with yields richer by up to 5bp across belly of the curve, which continues to outperform vs wings. Wider bull-steepening move grips bunds and gilts, as central-bank rate-hike premium is pared. Oil futures are sharply lower, weighing on energy stocks, following reports that Biden is considering a massive release of crude from U.S. reserves to fight inflation. The 10-year yield was around 2.31%, richer by ~4bp vs Wednesday’s close, underperforming bunds in the sector by ~4bp while keeping pace with gilts. Long-end swap spreads are sharply tighter, with 30- year dropping as low as -19.5bp.

Euro-area, bonds extended their advance as money markets pare central bank tightening wagers. French bonds underperformed bunds as EU-harmonized CPI rose 5.1% from a year ago in March -- the most since the data series began in 1997 -- and above the 4.9% median estimate in a Bloomberg survey of economists.  The belly of the German curve richened 6-7bps, leading gains. Peripheral spreads are mixed: Italy tightens, Portugal and Spain widen to core. Money markets trim rate hike pricing.

Japanese government bonds extended their advance as the central bank’s aggressive bond purchases this week reassured players that an excessive rise in yields won’t be tolerated. Yen was little changed in choppy trade. Bank of Japan’s offer to buy an unlimited amount of 10-year government bonds at fixed yields recorded no takeup, the central bank said.

In FX, Bloomberg dollar spot index snapped two days of losses after rebounding in early European session; the dollar advanced versus all of its Group-of-10 peers and commodity currencies were the worst performers. The euro gave up earlier gains after earlier touching a four-week high versus the greenback. Norway’s krone slumped by as much as 1.6% versus the greenback after the central bank announced a ramp-up of FX purchases on behalf of the government. The pound declined for a third day against the euro, touching its weakest level versus the common currency since Dec. 23. A report from the British Retail Consortium gave another glimpse into the cost-of-living crisis, showing prices in U.K. shops rose in March at the fastest annual pace since September 2011. Japan’s factory output eked out its first gain in three months in February, offering only a tepid sign of resilience amid fears the economy has slipped back into reverse. Production inched up 0.1% from the previous month. The Australian dollar declined against most of its Group-of-10 peers as oil prices tumbled on news that the Biden administration is weighing a massive release of crude from U.S. reserves. Sales of Aussie back into euro have seen option-related Australian dollar bids attached to large option strikes get filled, according to Asia-based currency traders

In commodities, crude futures hold Asia’s losses triggered by reports that the White House may make an announcement on the U.S. oil reserve release as soon as Thursday. WTI drops over $6.50 near $101.10. European natural gas faded an initial drop after Germany signaled Russia is softening its demand for ruble payments. Precious metals and much of the base metals complex traded heavy.

Looking to the day ahead now, data releases include German retail sales for February and unemployment for March, French and Italian CPI for March, and the Euro Area unemployment rate for February. From the US, there’s also February’s personal income and personal spending, the weekly initial jobless claims, and the MNI Chicago PMI for March. Otherwise, central bank speakers include ECB Vice President de Guindos, Chief Economist Lane, and New York Fed President Williams.

Market Snapshot

  • S&P 500 futures up 0.1% to 4,601.75
  • STOXX Europe 600 down 0.2% to 459.49
  • MXAP down 0.7% to 180.37
  • MXAPJ down 0.6% to 591.98
  • Nikkei down 0.7% to 27,821.43
  • Topix down 1.1% to 1,946.40
  • Hang Seng Index down 1.1% to 21,996.85
  • Shanghai Composite down 0.4% to 3,252.20
  • Sensex down 0.2% to 58,590.32
  • Australia S&P/ASX 200 down 0.2% to 7,499.59
  • Kospi up 0.4% to 2,757.65
  • German 10Y yield little changed at 0.62%
  • Euro down 0.3% to $1.1130
  • Brent Futures down 3.6% to $109.40/bbl
  • Gold spot down 0.4% to $1,924.94
  • U.S. Dollar Index up 0.24% to 98.03

Top Overnight News from Bloomberg

  • The Biden administration is weighing a plan to release roughly a million barrels of oil a day from U.S. reserves, for several months, to combat rising gasoline prices and supply shortages following Russia’s invasion of Ukraine, according to people familiar with the matter
  • Bank of Japan Governor Haruhiko Kuroda is determined to stick with targeting long-term bond yields near zero, even as it leaves him increasingly at variance with global peers and propels a depreciating exchange rate
  • The yen has taken a beating in recent weeks but technicals suggest that it may be on the road to a recovery. Japan’s currency may rebound to 116 per dollar in the coming months after sliding as low as 125.09 on Monday, the weakest in almost seven years, an analysis by Bloomberg shows
  • Russian President Vladimir Putin said that European buyers could continue making gas payments in euros, according to a German readout of a call he had with Chancellor Olaf Scholz
  • Russian government bondholders would be left with no viable path to recover their money if the country defaults, according to one of the top global lawyers in sovereign debt litigation
  • Hungary kept its key interest rate unchanged after the forint staged the second-biggest emerging-market currency rally this week, relieving pressure on policy makers to deliver more monetary tightening
  • China’s cabinet vowed to stabilize the economy and called on officials to avoid measures that harm market expectations as the government struggles to control Covid outbreaks across the country including in the financial center of Shanghai
  • For the first time in more than a decade, China’s yield advantage over Treasuries may be erased. The yield spread between the benchmark bonds of the world’s two biggest debt markets has narrowed to around 40 basis points from 150 a year ago, well below the People’s Bank of China’s “comfortable” range
  • Australia will invest more to find new buyers for its exports in an effort to ease trade dependence on China, its treasurer said, in the face of “economic coercion” from Beijing that shows little sign of abating

A more detailed look at global markets courtesy of Newsquawk

Asia=Pac stocks traded cautiously at month-end following the weak lead from the US due to increased Russia-Ukraine scepticism and as the region digested disappointing Chinese PMI data. ASX 200 was kept afloat by outperformance in the mining and materials industries although upside was capped as the tech sector suffered from profit-taking and with energy hit by a drop in oil prices. Nikkei 225 traded indecisively amid a choppy currency and after Industrial Production data missed forecasts. Hang Seng and were subdued following the weak Chinese PMI data and with the mood inShanghai Comp. stocks not helped by the US SEC chief casting doubt regarding an imminent deal to avert a delisting of Chinese stocks.

Top Asian News

  • Thirteen-Hour Power Cuts Get Sri Lanka to Shorten Stock Trading
  • Effissimo Would Tender Toshiba Shares in Event of Bain Bid
  • BOJ Looks Ready for a Victory Lap With Yields on the Retreat
  • BOJ Boosts Bond Buying in April-to-June Quarter

European equities (Eurostoxx 50 -0.3%) kicked the final trading session of the month off on the front foot before drifting towards the unchanged mark. Sectors in Europe exhibit a mostly positive tilt with airline names cheering the declines in the energy space as the Energy sector suffers. The biggest laggard in the region is the retail section following a disappointing Q1 update from H&M (-8%). Futures in the US are modestly firmer as the NQ (+0.5%) marginally outpaces the ES (+0.1%) with inflation set to continue to remain in focus today, with the release of US PCE metrics for March; core PCE is seen rising to 5.5% Y/Y

Top European News

  • Iron Ore Futures Advance as Outlook for Demand Brightens
  • Sorrell’s S4 Capital Audit Delay No Longer Down to Covid
  • EU Commission Confirms Raids in Germany’s Natural Gas Sector
  • Pearson Shares Rebound; Barclays Sees a ‘Resilient Business’

In FX, Dollar finds its feet as month, quarter and fiscal year end approach, albeit with a helping hand from others - DXY back on the 98.000 handle, narrowly. Commodity currencies reverse course alongside underlying prices, with crude crushed on reports of US SPR and IEA opening reserve taps - Usd-Cad rebounds through 1.2500 after sliding to new y-t-d low sub-1.2450 only yesterday. Yen choppy amidst residual repatriation flows and more BoJ action to cap JGB yields - Usd/Jpy circa 122.00 within a 122.45-121.35 range. Euro fades into 1.1200 vs Buck again as option expiries and tech resistance impinge, but Aussie  may derive traction from expiry interest at 0.7500 - EURUSD now eyeing support at 1.1100 after tripping stops.

In commodities, WTI and Brent remain firmly on the backfoot in the wake of reports suggesting that the Biden administration is considering a 'massive' SPR release.

  • The news has sent May’22 WTI and Jun’22 Brent to respective lows of USD 100.53/bbl and USD 107.39/bbl to leave them a few dollars above their weekly lows of USD 98.44/bbl and USD 102.19/bbl respectively.
  • US President Biden's administration is considering a 'massive' release of oil to combat inflation and may release up to 1mln bpd for months from the strategic reserve in which the total release could be 180mln , according to Bloomberg.bbls
  • Goldman Sachs says a potentially large SPR release would ease the situation but wouldn't resolve the structural deficit in the oil market. Says adjustments for SPR release, Iran supply delays would lower H2 22 Brent forecast by USD 15, to USD 120/bbl - still above market forwards.
  • US President Biden will deliver remarks today at 13:30EDT/18:30BST regarding the administration's actions to reduce gas prices in the US, according to the White House. It was also reported that the US mulls permitting, according to Reuters sources.summertime sales of higher ethanol blends of gasoline to ease pump prices
  • IEA called an emergency ministerial meeting for Friday, according to the Australian Energy Minister's office. It was later reported that , according to New Zealand'sIEA countries are to decide on a collective oil release Energy Minister's office
  • OPEC+ JTC replaced IEA reports with Wood Mackenzie and Rystad Energy as secondary sources to assess crude oil output and conformity, according to sources cited by Reuters.

In fixed income, bonds on track to see out extremely bearish month, quarter and end to FY on a firmer note. Curves more even after wild swings between flattening, inversion and steepening.BoJ ramps efforts to maintain YCC via a mostly larger JGB buying remit for Q2.

US Event Calendar

  • 08:30: March Initial Jobless Claims, est. 196,000, prior 187,000
  • 08:30: Feb. Personal Income, est. 0.5%, prior 0%
  • 08:30: Feb. Personal Spending, est. 0.5%, prior 2.1%; Real Personal Spending, est. -0.2%, prior 1.5%
  • 08:30: Feb. PCE Deflator MoM, est. 0.6%, prior 0.6%; PCE Deflator YoY, est. 6.4%, prior 6.1%
  • 08:30: Feb. PCE Core Deflator MoM, est. 0.4%, prior 0.5%; YoY, est. 5.5%, prior 5.2%
  • 09:45: March MNI Chicago PMI, est. 57.0, prior 56.3

DB's Jim Reid concludes the overnight wrap

After a great deal of optimism in markets on Tuesday following the Russia-Ukraine negotiations in Turkey, the last 24 hours have proven to be much more negative as investor hopes for a de-escalation in Ukraine were dampened by more gloomy comments on the war from both sides. From Russia, the Kremlin spokesman Dmitry Peskov said that they hadn’t seen a breakthrough in the talks, whilst Ukrainian President Zelensky said that “Russia is deploying new forces on our terrain to try to continue destroying us”, and NATO leaders continued to strike a sceptical tone. Indeed, it was reported by Dow Jones that the European Commission was considering new sanctions against additional Russian banks, and UK Prime Minister Johnson said that the UK was “looking at going up a gear” in its support to Ukraine. President Biden expressed similar sentiments, pledging $500 million of additional aid to Ukraine in a call with President Zelensky.

Against this backdrop, oil prices rose again for the first time this week, with Brent Crude up +2.92% to $113.45/bbl, but there’s been a sharp turnaround overnight on the back of news that the US are planning a major release from their reserves, with Bloomberg reporting it would be a million barrels a day over several months. Biden is due to speak about efforts to lower prices at 1:30pm Eastern, so all eyes will be on that, and overnight we’ve seen Brent Crude prices come down by -4.54% to $108.30/bbl, more than reversing their gains from the previous session. However, European natural gas (+9.77%) rose for a third consecutive session to €118.97/MWh, which is its highest closing level in nearly 3 weeks. That occurred amidst a continued dispute about Russian gas payments, which President Putin wants paid for in rubles, but which multiple European countries have rejected as a breach of contract. In response, Germany’s economy minister Robert Habeck activated the “early warning phase” of an emergency law, which could eventually lead to gas rationing if supplies fall short.

With Russia’s invasion having lasted for over 5 weeks now, we’re increasingly seeing the impact reflected in the official inflation numbers, and yesterday’s releases out of Europe gave fresh life to the bond selloff. In terms of the numbers, German inflation rose to +7.6% in March on the EU-harmonised measure, which was up from +5.5% back in February and some way above the +6.8% reading expected by the consensus. It was the same story in Spain, where inflation rose to +9.8% (up from +7.6% in February), which will heighten interest in tomorrow’s flash release for the entire Euro Area. In turn, that’s led to growing expectations of ECB rate hikes this year, with a total of 63bps being priced in by the December meeting, which is the most we’ve seen to date. On top of that, more than 30bps are even being priced in by the September meeting, which surpasses their pre-invasion peak.

Given the strong inflation numbers and the prospect of a more aggressive ECB, European bonds sold off across most of the continent, with yields on 10yr bunds (+1.3bps), OATs (+2.3bps) and BTPs (+1.3bps) all hitting fresh multi-year highs. Furthermore, the 2yr German yield (+5.6bps) closed in positive territory for the first time since 2014, having briefly got there on an intraday basis during the previous session. Unsurprisingly, the latest rise in yields was driven by higher inflation breakevens rather than real rates, and the 10yr German breakeven surged another +6.0bps to 2.71%, its highest level in data available back to 2009, whilst the Italian breakeven rose +4.0bps to 2.53%, its highest level since 2008.

Even as European bonds were selling off once again, it was the reverse story in the United States, where Treasuries recovered somewhat yesterday as we come to the end of one of their worst quarterly performances in decades. Yields on 10yr Treasuries fell -4.6bps to 2.35%, whilst yield curves remained incredibly flat; the 2s10s curve steepened marginally by +1.3bps to 3.6bps, avoiding another inversion, and this morning is up another +0.3bps to 3.9bps.

In terms of other developments this morning, Asian equity markets have followed Wall Street’s lead overnight with the Nikkei (-0.18%), Hang Seng (-0.59%), Shanghai Composite (-0.14%), CSI (-0.26%) all losing ground, though the Kospi (+0.54%) is the exception to this pattern. The weakness in Asian gauges has come amidst declines in the PMI data, with China’s manufacturing PMI down to 49.5, and the non-manufacturing PMI down to 48.4. For reference, that’s the first time that both readings have been below the 50-mark that separates expansion from contraction since February 2020, and comes as multiple cities are undergoing further lockdowns in response to the current Covid outbreak. Additionally, a slide in Chinese tech stocks is weighing on sentiment after the US Securities and Exchange Commission added Hong Kong listed Baidu Inc. to its long list of companies potentially facing delisting from US exchanges. Outside of Asia, stock futures in the US and Europe are pointing to a more positive start, with contracts on the S&P 500 (+0.28%), Nasdaq (+0.56%) and DAX (+0.59%) all trading higher.

Those equity declines overnight in Asia follow a broader decline in risk appetite yesterday given the more negative geopolitical developments, and both the S&P 500 (-0.63%) and Europe’s STOXX 600 (-0.41%) unwound some of their gains from the previous day. More cyclical industries underperformed in general, whilst the German DAX (-1.45%) also put in a weaker performance relative to the other main European indices. The VIX Index of volatility (+0.43pts) also ticked up to 19.33pts, after closing at to its lowest level since Russia’s invasion of Ukraine on Tuesday.

In France, we’re now just 10 days away from the first round of the presidential election, and there are continued signs of a narrowing in the polls, albeit with President Macron still in the lead. In terms of yesterday’s polls (from Opinionway, Harris, Ipsos, Ifop and Elabe), all of them pointed to a repeat of the second-round contest from 2017, with the first-round polling putting President Macron in first place followed by Marine Le Pen in second. That said, they’re also implying a noticeably tighter result in the second round than Macron’s 66%-34% victory against Le Pen in 2017. Looking through the numbers, the second round estimates ranged from a 55%-45% Macron victory (from Opinionway and Ipsos), to a 52.5%-47.5% Macron victory (from Elabe).

Finally on yesterday’s other data, the ADP’s report of private payrolls from the US showed growth of +455k in March (vs. +450k expected). That comes ahead of tomorrow’s jobs report, where our US economists are expecting nonfarm payrolls to have grown by +400k, with the unemployment rate ticking down to a post-pandemic low of 3.7%.

To the day ahead now, and data releases include German retail sales for February and unemployment for March, French and Italian CPI for March, and the Euro Area unemployment rate for February. From the US, there’s also February’s personal income and personal spending, the weekly initial jobless claims, and the MNI Chicago PMI for March. Otherwise, central bank speakers include ECB Vice President de Guindos, Chief Economist Lane, and New York Fed President Williams.

Tyler Durden Thu, 03/31/2022 - 07:56

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Spread & Containment

COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

Protests have erupted in Beijing and the far western Xinjiang region…

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COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

Protests have erupted in Beijing and the far western Xinjiang region over COVID-19 lockdowns and a deadly fire on Thursday in a high-rise building in Urumqi that killed 10 people (with some reports putting the number as high as 40).

Crowds took to the street in Urumqi, the capitol of Xinjiang, with protesters chanting "End the lockdown!" while pumping their fists in the air, following the circulation of videos of the fire on Chinese social media on Friday night.

Protest videos show people in a plaza singing China's national anthem - particularly the line: "Rise up, those who refuse to be slaves!" Others shouted that they did not want lockdowns. In the northern Beijing district of Tiantongyuan, residents tore down signs and took to the streets.

Reuters verified that the footage was published from Urumqi, where many of its 4 million residents have been under some of the country's longest lockdowns, barred from leaving their homes for as long as 100 days.

In the capital of Beijing 2,700 km (1,678 miles) away, some residents under lockdown staged small-scale protests or confronted their local officials over movement restrictions placed on them, with some successfully pressuring them into lifting them ahead of a schedule. -Reuters

According to an early Saturday news conference by Urumqi officials, COVID measures did not hamper escape and rescue during the fire, but Chinese social media wasn't buying it.

"The Urumqi fire got everyone in the country upset," said Beijing resident Sean Li.

According to Reuters

A planned lockdown for his compound "Berlin Aiyue" was called off on Friday after residents protested to their local leader and convinced him to cancel it, negotiations that were captured by a video posted on social media.

The residents had caught wind of the plan after seeing workers putting barriers on their gates. "That tragedy could have happened to any of us," he said.

By Saturday evening, at least ten other compounds lifted lockdown before the announced end-date after residents complained, according to a Reuters tally of social media posts by residents.

Tyler Durden Sat, 11/26/2022 - 12:00

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US Jobs and Eurozone CPI Highlight the Week Ahead

Two high-frequency economic reports stand out in the week ahead:  The US November employment report and the preliminary eurozone CPI. The Federal Reserve…

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Two high-frequency economic reports stand out in the week ahead:  The US November employment report and the preliminary eurozone CPI. The Federal Reserve has deftly distanced itself from any one employment report. As a result, it would take a significant miss of the median forecast (Bloomberg survey) to alter market expectations for a 50 bp hike when the FOMC meeting concludes on December 14.

Economists are looking for around a 200k increase in US non-farm payrolls after 261k in October. In the first ten months of the year, the US has created 4.07 mln jobs. This is down from 5.51 mln in the Jan-Oct period last week but a strong performance by nearly any other comparison. In the same period before the pandemic, the US created about 1.52 mln jobs. Non-farm payrolls rose by an average of 150k in 2018 and 2019. It is averaging more than twice that now.

Average hourly earnings have increased in importance now with greater sensitivity to inflation and fears among policymakers that it could get embedded into wage expectations. The year-over-year increase in average hourly earnings peaked in March (when the Fed began hiking rates) at 5.6%. It has fallen or been unchanged since and fell to 4.7% in October. Economists expect the pace to have slowed to 4.6%. The 4% rate, seen as more consistent with the Fed's goals, assumes 2% productivity, which has been difficult to sustain outside crises (around the Great Financial Crisis and Covid) since the middle of 2004.

The ECB is a different kettle of fish. Nearly all the voting members at the Fed that have spoken, including the leading hawks, seem to accept a downshifting from 75 bp to 50 bp. However, at the ECB, there appears to be a genuine debate. It hiked rates by 75 bp at the last two meetings after starting the normalization process with a half-point move in July. As a result, the month-over-month headline inflation surged by 1.2% in September and 1.5% in October. The year-over-year rate stood at 10.7% in October, 300 bp above the US. On the other hand, core inflation was 5% above a year ago in the eurozone compared with 6.3% in the US. The median forecast in Bloomberg's survey sees the headline rate easing to 10.4%, with the core rate unchanged.

This is leading some, like the Austrian central bank governor Holzmann to suggest that unless there is a sharp fall in the November report, he would be inclined to support another 75 bp hike when the ECB meets on December 15. The preliminary estimate of November CPI will be released on November 30, but the final reading will not be available until the day after the ECB's meeting. That said, revisions tend to be minor. While Holzmann is perceived to be one of the more hawkish members of the ECB, the more dovish contingent seems to be pushing for a slowing the pace to 50 bp. It is a bit too simple to make it into a North-South dispute. The ECB's chief economist, Lane, from Ireland, is in the 50-bp camp. The swaps market sees a little more than a 30% chance of a 75 bp hike next month. Countering the elevated price pressures is recognizing that the eurozone is slipping into a recession. Still, officials say it will likely be short and shallow, arguably giving them more latitude to adjust rates.

To be sure, the US also reports inflation. The Fed's targeted measure, the PCE deflator for October, will be released the day before the employment report. But, in this cycle, in terms of the Fed's reaction function, it seems to have been downgraded, and the thunder stolen by the CPI. Indeed, when Fed Chair Powell explained why the Fed hiked by 75 bp instead of 50 bp in June as it had led the market to believe, he cited CPI and the preliminary University of Michigan consumer inflation expectation survey (which was later revised lower). While the methodologies and basket of the PCE deflator are different than CPI, the former is expected to confirm the broad developments of the latter. A 0.3% rising in the headline PCE deflator will see the year-over-year pace slip below 6% for the first time since last November. It peaked at 7.0% in the middle of the year. The core rate is stickier and may have eased to 5% after edging up in both August and September.

The US economic calendar is packed in the days ahead. The S&P CoreLogic Case-Shiller house prices 20-city index are expected to have fallen for the third consecutive month (September). That has not happened for a decade. The FHFA house price index is broadly similar. It fell by 0.6% in July and 0.7% in August. The median forecast (Bloomberg survey) is for a 1.3% decline in September. If accurate, it would be the largest monthly decline since November 2008. The October goods trade balance and inventory are inputs into GDP forecasts. There continues to be a significant gap between the Atlanta Fed's GDPNow tracker (4.3%) and the median estimates in Bloomberg's survey (0.5%).

The JOLTS (Job Opening and Labor Turnover Survey) has become a popular metric in this cycle and has often been cited by Fed officials. It peaked in March at nearly 11.86 mln. It has erratically trended lower and stood slightly below 10.72 mln in September. It is forecast to have softened in October. The low for the year was set in August at 10.28 mln. In the three downturns since 2000, the peak in JOLTS has come well before a recession, and the bottom after the recession has ended.

While the cost-of-living squeeze is impacting consumption, the supply chains are normalizing, which is a powerful tailwind. This is at least partly the story in the auto sector. US auto sales reached 14.9 mln (SAAR) in October, the best since January and almost 15% from October 2021. In fact, in the three months through October, US auto sales are running 8.8% above the same three-month period a year ago. Still, US auto sales have averaged 13.73 mln through October, nearly 11% lower, at an annualized pace in the first ten months of 2021. Still, S&P Global Mobility analysis warns of softer November figures (14.1 mln). However, if the projection is accurate, it would be about 9.6% more than in November 2021.

There was some optimism that after the 20th Party Congress, China's Xi would have the authority and inclination to pivot on Covid, property, and foreign relations. Yet, Chinese and international medical experts have warned that China is woefully unprepared to relax its Covid policy regarding inoculation rates and medical infrastructure. The surge in cases has seen restrictions imposed on an area responsible for more than a fifth of the country's GDP. China's composite PMI has been falling since the year's peak at 54.1 in June. It fell below the 50 boom/bust level in October for the first time since May, and Q4 GDP appears to be slowing from the 3.9% quarter-over-quarter jump in Q3 after the 2.7% contraction in Q2. The world's second-largest economy may be growing around a third of the pace in Q4, with risks to the downside. The median forecast (in Bloomberg's survey) is for Q1 23 growth of 0.9%.

Aid to the property market may help stabilize the sector in the short term. Iron ore prices surged by more than 27% at the end of October through November 18 amid the optimism. However, this seemed anticipatory in nature as many of the new measures are slowly rolling out. Many observers share our doubts that the excesses of a couple of decades have been absorbed or alleviated. News that separate from the list of 16 measures to support the property market announced earlier this month, the PBOC is considering a CNY200 bln (~$28 bln) of interest-free loans to commercial banks through the end of Q1 to induce them to provide matching funds for stalled property markets, seems to be a subtle recognition that more efforts are needed. While new supply has stalled, we are concerned that the more significant issue is effective demand.  

Japan, the world's third-largest economy, unexpectedly contracted (-1.2% annualized rate) in Q3 but appears to be rebounding, likely aided by the new support measures (JPY39 trillion or ~$275 bln). Japan reports October employment figures. The unemployment rate has been 2.5%-2.6% since March. Japan has been successful in boosting the labor force participation rate. It was at 61.8% in early 2020 before Covid and has been at 62.9%-63.0% for four months through September. This is the highest since at least 2001. Retail sales, reported in terms of value (nominal prices), rose 1.3% and 1.5% in August and September, respectively. Another strong report would not be surprising. Government travel subsidies were widened in October. 

Japanese businesses were pessimistic about the outlook for industrial output in October. They anticipate a 0.4% decline after production fell 1.6% in September. The auto sector is a source of pessimism. Supply chain disruptions were cited for the dour outlooks of Toyota and Honda. Foreign demand is weakening, and Japanese exports are slowing. Japan's preliminary November manufacturing PMI slipped below the 50 boom/bust level to 49.4, its lowest in two years. 

Australia reported October retail sales and some housing data, but the newly introduced monthly CPI may have the most significance. The market is not sure that the Reserve Bank of Australia will hike rates at the December 6 meeting. The futures market has a little better than a 60% chance of a quarter-point hike. The cash rate is at 2.85%. In September, CPI made a new cyclical high of 7.3%. The trimmed mean measure stood at 5.4%, which was also a new high. We would subjectively put the odds higher than the market for a quarter-point hike. The next RBA meeting is on February 9, which seems too long for Governor Lowe to make good on his anti-inflation commitment.

Canada reports Q3 GDP and the November jobs. The Canadian economy is downshifting after enjoying 3.1% and 3.3% annual growth rates in Q1 and Q2, respectively. The pace is likely to be a little less than half in Q3 and appears to be slowing down more here in Q4. The median forecast (Bloomberg's survey) is for the Canadian economy contract in the first two quarters of next year. Canada created an impressive 119k full-time positions in October. Adjusted for the size of the economy, this would be as if the US created 1.3 mln jobs. In four of the past five quarters, Canadian job growth has been concentrated in one month. As one would expect, the following month has been a marked slowdown, and twice there were outright declines in full-time positions. After hiking by 100 bp in July, the Bank of Canada slowed its pace to 75 bp in September and 50 bp in October. The central bank meets on December 7, and the swaps market seems comfortable with a quarter-point hike.

Lastly, we turn to the Taiwanese local elections on November 26. The key is the mayoral contest in Taipei. It is seen as the most likely path of the presidency when Tsai-Ing's term ends in 2024. The great-grandson of Chiang Kai-shek is the candidate for the KMT, which wants closer ties to Beijing but rejects claims it is "pro-China." The DPP candidate is the health minister and architect of the country's Covid policy. The Deputy Mayor of Taipei is running as an independent candidate, but it looks like a two-person contest. Despite the US and Chinese defense officials agreeing to improve their practically non-existent dialogue, there is unlikely to be a meeting of the minds about Taiwan. Changes in the constellation of domestic political forces within Taiwan seem to be the most likely component that may change what appears to be an inexorable deteriorating situation. Both Beijing and Washington have good reason to believe the other is trying to change the status quo. 




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China’s Housing Crisis: What Investors Need to Know

China’s economy has grown from near irrelevance to the second largest in the world in less than half a century. Perhaps more incredible than its meteoric…

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China’s economy has grown from near irrelevance to the second largest in the world in less than half a century. Perhaps more incredible than its meteoric rise is the fact that it’s done so without any kind of significant economic contraction. Nearly fifty years of consistently positive GDP growth is practically sorcery in the eyes of the west, as our more democratized and less managed economies seldom manage to go a single decade without at least some kind of bust, let alone five.

The assumed impossibility of eternally uninterrupted economic growth has raised more and more eyebrows and elicited more and more dire predictions about China’s economy as time has passed. Surely the ruling Chinese Communist Party can’t stave off the fundamental economic forces indefinitely. Surely the other shoe is going to drop soon, and all will be right with the world.

It has to. Right?

We’re supposed to be living in a post-Soviet world. A world where the question of managed versus free economies is long-settled fact. But if the CCP is able to keep China’s economy—an economy encompassing the interests of over a billion people—from experiencing so much as a recession, that settled fact starts to look more like an open question with each passing quarter.

The current situation facing China’s real estate market is the latest and perhaps most convincing sign that China has finally reached a tipping point. A generation’s worth of breakneck growth, urbanization, and unintended consequences may be coming to a head.

(Un)Real Estate

China’s housing market is currently the biggest asset class in the world, with a notional value of nearly $60 trillion, more than the entire capitalization of the stock market. About one third of China’s economic activity involves the real estate sector (compared to 15 to 18% of the American economy), a staggering figure that becomes even more so when combined with the fact that housing accounts for about 70% of Chinese household wealth.

The reasons for the outsized role that housing and real estate play in China’s economy are complex and numerous, though they all trace their roots back to the CCP.

The current real estate crisis began shortly after China relaxed its rules on private home sales back in 1998. This change in policy roughly coincided with the explosive economic growth that’s characterized much of the past decades, much of which relied on the importation of cheap labor from the Chinese countryside into rapidly growing metro areas. Over 480 million Chinese moved from the country to the city in pursuit of better economic opportunities, and real estate developers were only too happy to provide the accommodations that the newly urbanized Chinese both needed and could suddenly afford.

Real estate developers and construction firms weren’t the only ones to profit from the unprecedented mass urbanization. Regional governments—many of which relied heavily on land sales for revenue—encouraged as much development as possible, and the seemingly endless demand for housing gave yield-starved Chinese investors a place to park their capital. Developers soon found themselves unable to keep up with the pace of demand and began to take on massive amounts of debt, much of it in dollar-denominated offshore bonds, and even started selling properties in developments that hadn’t even begun construction.

China’s government took notice of all this rampant speculation and took what it saw as reasonable steps to mitigate the threat of the collapse of the real estate market. It imposed new financing restrictions for developers based on their liabilities, debt, and cash holdings, as well as imposed new rules for banks to limit the amount of mortgage lending. Some developers, including the giant China Evergrande Group, were pushed into default by these new restrictions and were forced to put ongoing projects on hold while they sorted out their balance sheets.

Quirks in China’s real estate system meant that the newly paused or canceled projects were more than just the developers’ problems. Chinese homebuyers who had gotten mortgages and purchased unbuilt properties suddenly found themselves on the hook for properties that may never be completed, and many were understandably upset. More and more people began to protest the situation by refusing to pay their mortgages until upwards of $295 billion worth of loans were affected before the CCP started interfering with data collection on the subject. So far China’s government has been unsuccessful in trying to get the situation under control, though they are stepping up support for distressed developers and providing some special loans to help ensure certain projects are completed.  

How Will China’s Housing Collapse Affect the World?

Planned demolition of unfinished building project in Kunming

The current crisis has severe implications for the wider China economy, some of which are already being felt. S&P Global Ratings has claimed that around 20% of the Chinese developers it rates are at risk of going under, and that falling land sales have impacted local governmental revenues to the point that 30% of local governments may have to cut spending by the end of the year. Nonperforming real estate loans held by state-owned banks increased by a full 1% in 2021, a figure that is sure to grow as more recent data is made available. There is every reason to believe that the real estate market will suffer in the short to medium-term.

Harvard professor Kenneth Rogoff estimates that a drop of 20% in real estate-related investments could cut 5 to 10% out of China’s GDP, and that the subsequent drops in real estate and construction employment could create significant instability in China’s job market. Or, more broadly: “On the medium term, China faces a multitude of challenges, ranging from extremely adverse demographics to slowing productivity…Until now, the housing boom has been sustained by a broad economic boom that now faces steep headwinds.”

The intentionally opaque workings of China’s government make it difficult to predict exactly how the current crisis will play out. It is, however, possible to extrapolate the kind of impact the crisis may have on the global economy if China’s real estate market continues to deteriorate. The first and most obvious consequence of a serious slowdown in China’s economy will be felt by companies with significant exposure to China. Firms like Wynn Resorts, Apple, Tesla, and Disney would all suffer from the ensuing loss of revenue from China’s market, as would firms like Qorvo, Boeing, Caterpillar, and any other firms that rely on supplies from or sales to China.

In terms of Chinese companies, the ratings agency Fitch identified three main sectors that would be most vulnerable to a slowdown in the real estate market: Asset management companies, engineering and construction firms, and steel producers. Fitch also believes that small and regional banks would be most vulnerable to continuing difficulties—particularly if the trend of homebuyers refusing to make mortgage payments on properties that may not ever be built continues—though this may have little impact on the global economy beyond the consequences of a slowdown in China’s economy at large.

Conclusion

As dire as things may seem, however, it is important to remember that China’s government is acutely aware of the risks its economy faces from the current crisis. Pundits, analysts, and observers alike have been warning about an imminent collapse in China for years now, yet the closest we’ve seen was a self-imposed downturn that resulted from the government’s draconian attempts to eradicate COVID-19 within their borders. There is little reason to assume that China’s government’s control over their economy has slipped to any significant degree. Anathema as it may seem to western sensibilities, China’s government still possesses the tools, the will, and the monopoly on violence it needs to prevent the real estate market from destroying their economy as a whole.

The best response, for now, is to maintain the course. It may be a good idea to close positions concerning firms with significant exposure to China’s economy, but treat all other investments the same way you would when facing any other kind of economic headwinds. If the economies of Europe and the United States made it through the 2008 housing crisis, chances are China’s economy will weather this storm as well.

The post China’s Housing Crisis: What Investors Need to Know appeared first on Wall Street Survivor.

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