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Futures, Global Markets Rebound On Booster Shot Of Hope Santa Rally May Arrive Yet

Futures, Global Markets Rebound On Booster Shot Of Hope Santa Rally May Arrive Yet

Perhaps catalyzed by Goldman’s persistent bullishness (see "As Markets Slide, Here Is Goldman’s Bull Case: $125 Billion In January Inflows"), or perhaps it…

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Futures, Global Markets Rebound On Booster Shot Of Hope Santa Rally May Arrive Yet

Perhaps catalyzed by Goldman's persistent bullishness (see "As Markets Slide, Here Is Goldman's Bull Case: $125 Billion In January Inflows"), or perhaps it was just a booster shot of optimism that vaccines will keep the omicron outbreak in check coupled with hope for a revival of Joe Biden’s $2 trillion economic package (see "Here Is The "Fallback Plan" Manchin Would Support... And Why Goldman Thinks It Wouldn't Move The Needle"), or maybe the Santa rally decided to make a scheduled appearance (it usually begins on Dec 21) but on Tuesday US futures, Asian markets and European bourses all rebounded after three days of steep selling. Emini S&P futures were up 1% or 44.50 points, Nasdaq futures were up 170 points ot 1.09% and Dow futures were up 314 points or 0.9% as the recent bout of turbulent moves continues. Europe's Estoxx50 was higher by 1.3% as the mining sector climbed 2.4%. Asia stocks closed higher bolstered by a rebound in Japan (+2.1%) and a rally in Chinese property developers. 10Y yields rose above 1.45%, the dollar was flat and cryptos jumped, with bitcoin trading close to $50,000 again and ether above $4000.

Markets have been whipsawed going into the holiday season as investors assess economic risks from the spread of the omicron virus variant and a hawkish central-bank pivot. While sentiment took a hit after Democratic Senator Joe Manchin rejected President Joe Biden’s tax-and-spending package on Sunday, a call between the two has stoked optimism the deal isn’t dead, prompting speculation that the Fed may have no choice but to delay its tightening campaign as $1.75 trillion in fiscal stimulus won't be coming. 

Reversing a dismal trend, China’s developer stocks jumped the most in a month and traders are not certain of the catalyst. In Europe, electricity prices leaped to a record as a shortage of natural gas put pressure on power grids already struggling with nuclear outages and freezing temperatures.

In the latest Omicron news, Biden will send 500 million free coronavirus tests to homes starting in January and send the military to help overwhelmed hospitals amid a resurgence of omicron cases. In a speech later today, Biden will encourage schools to remain open and is not expected to call for lockdowns.

Looking at the premarket, Micron climbed 7.6% after the largest U.S. maker of memory chips forecast second-quarter sales that beat analyst estimates. Wells Fargo says the guidance and commentary “could provide confidence in fundamental bottom” for fiscal year 2022. Nike rose 3.2% before the bell after the company’s sales beat analysts expectations, despite its business in China plummeting last quarter. Analysts said the company can overcome Covid-related hurdles. Here are some of the other big movers today:

  • Crypto-exposed stocks rebound in U.S. premarket trading on Tuesday as Bitcoin rises amid a volatile period for the digital currency. Marathon Digital (MARA US) and Riot Blockchain (RIOT US) rise 5.2% and 4.6%, respectively.
  • Renewable stocks and EV makers rise in premarket trading, set to rebound from the previous session’s losses, amid hopes that talks will revive President Joe Biden’s economic package. Tesla (TSLA US) gains 1.1%, Nikola (NKLA US) adds 1.5%.
  • DBV Technologies ADRs (DBVT US) fall 16% premarket after the company informed the U.S. FDA it plans to start a pivotal Phase 3 clinical study for a modified Viaskin Peanut patch in children. Kempen says the development is “far from favorable” as it means increased clinical risks and investment.
  • Aldeyra Therapeutics (ALDX US) shares fell 36% in after-market trading after the biotech company said it did not meet its primary goal for treating ocular redness in the Phase 3 trial of its Tranquility drug.
  • Braze (BRZE US) climbed 13% in extended trading after giving a revenue forecast for fiscal 2022 that exceeded the average analyst estimate. The software company also provided a narrower-than-projected outlook for full-year adjusted loss.

Meanwhile in Europe, stocks also bounced back from the worst drop in three weeks amid optimism that growth can overcome risks from the omicron variant. The Stoxx Europe 600 Index rose 1.1% as of 730am ET, with miners and energy pacing gains as commodities recovered. The technology sector got a boost from Micron Technology Inc.’s upbeat forecast. The Traditional Year-End Rally Might Be Canceled: Taking Stock Investors are monitoring virus and lockdown news as British Prime Minister Boris Johnson held off introducing stricter coronavirus rules in the country, but left open the prospect they’ll be needed soon. The number of Londoners hospitalized with the virus is rising sharply. “Omicron is seen as causing a pause in the recovery but it’s clearer that the variant is more contagious but less lethal,” said Francisco Simon, head of discretionary tactical asset allocation for global multi-asset solutions at Santander Asset Management. “Omicron and hawkishness are the main drivers of the market moves in this year end.” European shares have fallen from record highs in recent weeks amid concern about Covid-19 hurting the economic recovery and as central banks turn more hawkish in response to surging inflation. Also helping sentiment today was optimism that President Joe Biden hasn’t given up on his roughly $2 trillion Build Back Better plan after Senator Joe Manchin rejected it. Among individual moves, Bollore SA jumped after getting an approach for its African transport and logistic business, while Zur Rose Group AG slumped amid further delays in making e-prescriptions mandatory in Germany.

Asian stocks gained as dip-buyers emerged following a two-day selloff that pushed the regional benchmark to a 13-month low amid concerns on the omicron variant’s spread and U.S. monetary and fiscal policy. The MSCI Asia Pacific Index advanced as much as 1.3% Tuesday, driven by gains in the technology and consumer discretionary sectors. Asian semiconductor-related stocks rose after U.S. memory-chip maker Micron gave a strong forecast while property-developer stocks gained in Hong Kong and China amid signs of policy support. There was marked improvement in sentiment after the recent bout of risk-off trading sparked by worries about renewed mobility restrictions, higher U.S. interest rates and prospects for Joe Biden’s economic agenda. U.S. stock futures climbed during Asian trading hours, and there were reports of talks between Biden and Senator Joe Manchin that could draw the latter’s support for the president’s plan.

“With no news of note hitting the wires, it appears that short-covering in U.S. index futures has been enough to attract the fast money back into local markets in a classic follow-the-leader move,” Jeffrey Halley, senior market analyst at Oanda Asia Pacific, wrote in a note. Japan led gains around the region, with the Nikkei 225 closing up 2.1% as the government raised its monthly view of the economy for the first time since the summer of 2020. Shares also rose in Australia, where the central bank presented an upbeat view of the economy. Tencent and Meituan were among the biggest contributors to the MSCI Asia Pacific Index’s gains.

Indian stocks tracked Asian and European peers higher, recovering from a sharp selloff in previous sessions, even as concerns continue to rise over the central bank’s liquidity-withdrawal measures.  The S&P BSE Sensex rose 0.9% to 56,319.01 in Mumbai, after posting its biggest two-day plunge in eight months on Monday. The benchmark gained as much as 1.9% during the session but pared its advance, dragged by financial stocks including Axis Bank and Bajaj Finance.  The NSE Nifty 50 Index also advanced by a similar magnitude. All 19 sector sub-indexes compiled by BSE Ltd. climbed, led by a gauge of basic materials companies. Foreign investors in India have net sold $1.2b of local stocks this month through Dec. 17, ahead of the holiday season on back of rising volatility in global equities.  In a surprise move, the Reserve Bank of India removed funds worth 2 trillion rupees ($26.3 billion) using a 3-day reverse repo auction Monday, signaling efforts to take out excess liquidity from the banking system. “The market mood remains negative,” said Prashant Tapse, an analyst with Mehta Equities. Foreign investors will likely remain sellers of Indian stocks for few weeks due to lack triggers, he added. “Immediately we may not see any reversal in FII selling, may be some change in January, ahead of the federal budget presentation.”

In FX, the Bloomberg Dollar Spot Index inched lower as it continued to pare Friday’s gain and the greenback weakened against all of its Group-of-10 peers apart from the franc and the yen; the Treasury curve steepened a second day and yields rose across all tenors. The euro pared gains after rising beyond $1.13 and European bonds underperformed Treasuries. The pound rose, erasing Monday’s losses against the dollar, as risk appetite improved. Domestic focus remains on the likelihood of stricter coronavirus restrictions amid the rapid spread of omicron. Australia’s sovereign curve steepened further as minutes of the RBA’s December meeting saw an end to QE by May 2022. Aussie dollar consolidated with a bounce in iron ore and stocks. The yen eased as U.S. yields extended their climb ahead of a 20-year Treasury auction later in the day. Bonds tracked U.S. debt’s weakness.

Turkey’s lira swung wildly after rallying nearly 50% this week, as investors weighed the sustainability of government measures to shore up the currency. Turkey’s emergency measures to bolster the volatile lira are in effect an interest rate hike in disguise, leaving the government budget more vulnerable to future currency shocks; here’s how it works. Japanese day traders’ affection for the Turkish lira is getting seriously tested, with the currency’s extreme volatility leaving the hardiest speculators hanging in there. China’s central bank fixed the yuan’s daily reference rate at a level weaker than expected by analysts, signaling that the authorities want to slow the pace of currency’s appreciation.

In rates, Treasuries continued their decline, with the 10Y yield rising to 1.45%, led by the long-end of the curve following a wider bear steepening move across bunds and gilts. Risk-on backdrop sees stocks trade higher, unwinding portion of Monday’s losses while U.S. $20b 20-year bond sale may also be weighing on long-end.  Treasury yields are cheaper by up to 2bp from 10-year out to 30-year sectors, steepening 2s10s, 5s30s spreads by 0.8bp and 0.5bp; German 10-year bonds lag by 1.5bp vs. Treasuries, while German 5s30s spread is wider by 3.2bp on the day. U.S. auctions resume with $20b 20-year bond reopening at 1pm ET; WI yield around 1.92% is 14.5bp richer than November stop-out, which tailed the WI by 1.4bp.

In commodities, crude futures hold in the green. WTI rallies over a percent, regaining a $69-handle, Brent climbs back above $72. Spot gold pops small higher, stalling just shy of $1,800/oz. Base metals are well bid with LME aluminum and zinc outperforming.

Looking at the day ahead now, data releases include the UK public finances for November, Germany’s GfK consumer confidence reading for January, the US current account balance for Q3, and the Euro Area’s advance consumer confidence reading for December. Central bank speakers include the ECB’s Kazimir, whilst President Biden is set to deliver a speech on Covid.

Market Snapshot

  • S&P 500 futures up 0.7% to 4,588.50
  • STOXX Europe 600 up 0.9% to 471.50
  • MXAP up 1.1% to 189.85
  • MXAPJ up 1.0% to 613.11
  • Nikkei up 2.1% to 28,517.59
  • Topix up 1.5% to 1,969.79
  • Hang Seng Index up 1.0% to 22,971.33
  • Shanghai Composite up 0.9% to 3,625.13
  • Sensex up 0.8% to 56,266.97
  • Australia S&P/ASX 200 up 0.9% to 7,355.05
  • Kospi up 0.4% to 2,975.03
  • German 10Y yield little changed at -0.35%
  • Euro up 0.2% to $1.1299
  • Brent Futures up 0.2% to $71.65/bbl
  • Gold spot up 0.3% to $1,796.73
  • U.S. Dollar Index down 0.20% to 96.36

Top Overnight News from Bloomberg

  • Anyone gearing up for bond yields to surge in 2022 should think again. A global glut of saved cash has the potential to restrain an increase in rates, even as central banks dial back their pandemic stimulus
  • ECB Governing Council member Peter Kazimir says there’s still a long way to go to reach monetary-policy normalization following last week’s confirmation of an exit from pandemic bond-buying
  • European electricity prices surged to a fresh record as the region scrambled to keep the lights on in France, the region’s second-biggest market
  • Boris Johnson’s government suggested there won’t be new coronavirus restrictions imposed before Christmas, as ministers stressed the need to balance public health with protecting the U.K. economy
  • U.K. debt costs are rising at the fastest pace since the aftermath of the global financial crisis, a potential headache for Chancellor Rishi Sunak as he faces pressure to spend more to help businesses weather the impact of the omicron variant
  • President Joe Biden will send 500 million free coronavirus tests to Americans’ homes beginning next month and dispatch the military to shore up overwhelmed hospitals as the U.S. confronts a resurgent pandemic
  • President Joe Biden spent time on Friday with an aide who tested positive for coronavirus infection three days later but has so far tested negative himself, White House Press Secretary Jen Psaki said in a statement
  • The omicron variant accounted for 73% of all sequenced Covid-19 cases in the U.S., surging from around 3% last week, according to the latest federal estimates
  • Some of the world’s biggest banks are paring back their Libor transition programs after collectively spending billions of dollars on the seismic shift away from the discredited rate
  • The number of crypto-tracking investment vehicles worldwide more than doubled to 80 from just 35 at the end of 2020, according to Bloomberg Intelligence data. Assets soared to $63 billion, compared to $24 billion at the start of the year

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded with gains across the board following the downbeat lead from Wall Street which saw all the majors post relatively broad-based losses, with some mild underperformance in the Russell 2000. Reopening plays were among the biggest losers, although Micron shares rose over 7% at one point amid blockbuster earnings. US equity futures resumed trade firmer and held onto mild gains overnight, but the upward momentum briefly paused after the US reported its first death attributed to the Omicron variant. Back to APAC, the ASX 200 (+0.9%) was supported by gains in some large-cap miners, although Pilbara Minerals shares slumped over 7% after cutting FY22 production and shipment guidance while announcing average sales price is expected at the higher end of prior guidance. The Nikkei 225 (+2.1%) outperformed as it nursed some of yesterday’s losses and reclaimed the 28k level to the upside. The KOSPI (+0.4%) initially traded between gains and losses before conforming to the mild positive tone. The Hang Seng (+1.0%) and Shanghai Comp (+0.9%) were also firmer in holiday-thinned trade, with major macro newsflow from the region light, although large Chinese tech names were spooked by further crackdown concerns after a Chinese social media influencer was hit with a USD 210mln for tax evasion. In fixed income, US 10yr Futures traded with a mild downside bias as stocks remained in the green, with 10yr JGB futures following suit from its US counterpart.

Top Asia News

  • China Influencer Crackdown Exposes Loophole Used to Hide Wealth
  • Thailand Halts Quarantine-Free Entry as Omicron Tops Tourism
  • Chinese Developer Stocks Jump Most in a Month: Evergrande Update
  • Pakistan’s Imran Khan Concedes Election Loss in Stronghold Area

European bourses kicked the session off with gains of around 1.0% across the board, in-fitting with the lead from futures and APAC trade. News flow has been exceptionally quiet, and the economic releases docket is thin. Catalysts are also thin, but traders are predominantly keeping an eye on COVID updates and geopolitics. Sectors are all in the green and the breakdown initially had some of yesterday’s laggards – including Travel & Leisure – trading towards the top of the pack; however, since then, the best performing sectors are now Basic Resources as metals prices pick up, and Technology after US chipmaker Micron’s update afterhours on Monday; Micron (+6.6% premarket) beat on top- and bottom-lines, and expects that the chip shortage will moderate throughout 2022. Elsewhere on the earnings front, Nike (+3.4% premarket) also reported after the US close, and its decent report is buoying other industry retailers like JD Sports (+4.5%). Finally, while the majority of European movers are dictated by the above macro action/US earnings, Zur Rose (-9.5%) is the notable laggard after reports that Germany has postponed digital prescriptions.

Top European News

  • Kazimir: Last Week Started Long Path to ECB Policy Normalization
  • Kitron Surges 10% After Buying EMS Provider for DKK600m
  • U.K. Holds Off Pre-Christmas Virus Curbs With Eye on Economy
  • Turkey to Announce Details of Lira Deposit Support on Tuesday

In FX, the Greenback looks a bit more vulnerable as the broad risk tone improves to set up a turnaround Tuesday of sorts, but US Treasuries trade largely flat in contrast to their EU equivalents, irrespective of looming 20 year issuance that might need a decent concession to ensure a warm reception in restrained pre-Xmas/New Year holiday trade. Moreover, the index appears to be losing momentum around the 96.500 mark after a less pronounced bounce between 96.543-337 parameters, while crude oil, precious metals and even the friendless Turkish Lira have reclaimed lost ground against the Buck. In fact, the TRY staged a very impressive comeback to circa 11.7170 at best from 18.3600+ at one stage yesterday as President Erdogan backed up words with action when he announced multiple measures aimed at curbing volatility (depreciation) in the currency, details of which will be divulged by the Finance Minister from 11.00GMT.

  • NZD/GBP - Far from zeros to heroes, but the Kiwi and Pound are faring much better than they were at various times during Monday’s bouts of aversion, as Nzd/Usd hover just under 0.6750 and Cable crests 1.3250 near a Fib retracement, regardless of ongoing pandemic issues that are plaguing both nations. On that note, New Zealand has been forced to delay its staged border reopening to February from January, while the UK awaits more data before deciding whether to impose a circuit breaker after Boxing Day.
  • AUD/EUR - The next best majors, or beneficiaries of their US peer’s pullback as the Aussie regains a firmer footing above 0.7100 and the Euro mounts another attempt to breach 1.1300 convincingly. However, Eur/Usd faces further option expiry-related resistance to augment any psychological reluctance to break beyond the round number as 1.3 bn rolls off from 1.1295 to 1.1300, while Aud/Usd may be hampered by RBA minutes underlining its dovish-leaning stance.
  • CAD/JPY/CHF - All narrowly mixed vs their US counterpart as the Loonie wanes alongside WTI in the run up to Canadian retail sales and new house prices, while the Yen is back below 113.50 even though media reports suggest that the Japanese Government is mulling an upgrade to its fiscal 2022 real GDP growth forecast to 3.0% or more vs 2.2% previously. Elsewhere, the Franc is eyeing 0.9200 again in wake of Swiss trade data showing a record surplus.
  • SCANDI/EM/PM - No real reaction to rather conflicting Swedish sentiment indicators or stagflationary NIER forecasts for 2022 CPIF and GDP as Eur/Sek straddles 10.3100, but the Nok is deriving some traction from the aforementioned stabilisation in Brent to test 10.17000 vs lows approaching 10.2200 against the Eur. Meanwhile, the Cnh and Cny have gleaned impetus from a firmer PBoC midpoint fix and the Rub via Brent plus the RIA asserting a possibility of Russia and the US striking an understanding on security guarantees. Conversely, the Zar has not received a fillip from Gold holding at the 100 DMA and inching towards Usd 1800/oz.

In commodities, WTI and Brent are conforming to the broader risk themes, and are directionally in-tune with European equities, though magnitudes are somewhat more contained. Currently, WTI and Brent reside around USD 69.00/bbl and USD 72.00/bbl respectively - note, the complex has become increasingly choppy as the session progresses. News flow for the complex has been limited; US/Russia geopolitics has gained some attention this morning though essentially echoes the constructive sentiment from the US on Monday. Elsewhere, natgas prices are bid on supply-side dynamics: Gascade data initially showed that flows to Germany via the Yamal-Europe pipeline had stopped. Subsequently, the Polish operator confirmed that the pipeline had recommenced activity but in reverse mode from Germany to Poland, which the Kremlin described as ‘commercial’ and unrelated to Nord Stream 2. In metals, spot gold and silver are supported given USD’s (limited) downside, though the yellow metal remains capped by USD 1800/oz at the time of writing. Elsewhere, base metals are bolstered on the firmer risk tone that has continued from APAC hours while Iron Ore prices were bid in China, action that was attributed to demand from the property sector.

US Event Calendar

  • 8:30am: 3Q Current Account Balance, est. -$205b, prior -$190.3b

DB's Jim Reid concludes the overnight wrap

I’m going on my Christmas leave tomorrow so this will be the last edition of the EMR until early January. To echo what Jim said on Friday, thanks for reading over the last 12 months, as well as for all your support and interactions. If you’re looking for some further macro strategy reading over Christmas, feel free to check out the selection of DB Research outlooks for 2022, and you can find all the links for these in a note we put out yesterday (link here).

As we wrap up on 2021, it’s fair to say that it’s been quite the year in financial markets, particularly with inflation proving a much more persistent force than many had expected at the start. But in many ways it’s finishing not too dissimilarly from how it began, with Covid once again dominating the agenda as the Omicron variant continues to spread. Coupled with the news over the weekend that Senator Manchin is now a no vote on the Build Back Better Bill, risk assets sold off across the board yesterday. Indeed, the S&P 500 shed a further -1.14% to bring its losses over the last 3 sessions to more than -3%, marking the first time that’s happened since September.

In terms of the latest on the virus, the indications are pretty much all continuing to point towards tougher restrictions in Europe, while the CDC noted that Omicron now makes up the majority of new cases in the US, which dampened risk appetite. German Chancellor Scholz said yesterday that “We need new restrictions on personal contacts so that we’re well prepared when the new variant of the virus spreads everywhere in Europe”, and he’s set to hold talks with regional leaders today to discuss further measures. Bloomberg reported that a draft seen by them included measures such as closing nightclubs and limiting the number of people at indoor gatherings to 10 from December 28. Here in the UK, there had been speculation earlier in the day that the government were considering imposing further restrictions, but after a cabinet meeting, Prime Minister Johnson didn’t announce any new measures for the time being, but instead said that the data should be kept under review. That comes as the UK’s weekly case average now stands at its highest of the entire pandemic, whilst in London (which is the epicentre of the UK’s outbreak right now) the numbers in hospital have risen by a third over the last week.

In terms of some more positive Covid news, Moderna announced that a booster dose of their vaccine led to a 37-fold increase in neutralising antibodies against the Omicron variant, relative to pre-boost levels. Separately, Novavax’s vaccine was granted a conditional market authorisation by the European Commission, making it the 5th Covid vaccine now authorised in the EU. In terms of what to expect today, President Biden is due to deliver a speech on the pandemic later on, in which he’s expected to announce further steps to deal with the new variant, and it’s also been trailed that he’ll be warning about what the winter will be like for unvaccinated Americans.

Against this gloomy backdrop, the major equity indices all lost ground on both sides of the Atlantic. As mentioned at the top, the S&P 500 fell back -1.14%, with the more cyclical sectors underperforming in line with the broader risk-off moves. To be honest though, it wasn’t a great day for many, with just 78 companies in the entire index moving higher on the day, whilst the NASDAQ shed a further -1.24% to hit a 2-month low. Europe saw some reasonable losses as well, albeit after paring back some of the biggest declines shortly after the open with the STOXX 600 recovering from an intraday low of -2.56%, to “only” close down -1.38%.

The prospect of tougher restrictions and weakening economic demand sent oil prices lower again yesterday, with both Brent Crude (-2.86%) and WTI (-3.85%) seeing sharp declines. But one energy commodity that continued its inexorable rise was European natural gas, with the benchmark future up +7.31% yesterday to another record of €146.93 per megawatt-hour. It comes as temperatures have continued to decline heading into the European winter, and we also got the news that Gazprom hadn’t booked any extra capacity in January for gas flowing through Ukraine. That’s an important story heading through the winter with implications for European growth, and one that will have investors closely following the weather forecasts to work out what might happen.

Overnight in Asia equities have begun to recover, with the Nikkei (+1.89%), Hang Seng (+0.53%), KOSPI (+0.49%), Shanghai Composite (+0.41%) and the CSI (+0.17%) all rising on the back of hopes that Senator Joe Manchin of West Virginia could back a reformulated Build Back Better plan, saying on a West Virginia radio station the ways in which he would support a package. It was also reported by Bloomberg that Biden and Manchin had a further call Sunday night, some hours following Manchin’s move on Fox News Sunday where he announced his opposition. Bear in mind that the passage of the bill would have implications for 2022 growth, as the child tax credit expansion will expire as it stands, which has bolstered US consumer balance sheets. Oil prices have recovered somewhat too, with Brent crude up +0.77% this morning, whilst US and European equity futures have moved higher as well, with those on the S&P 500 (+0.58%) and the DAX (+0.92%) both advancing.

In other news yesterday, it was announced that Joachim Nagel was set to take over as the next Bundesbank President, succeeding Jens Weidmann who’s leaving after over a decade at the helm. Nagel is currently the Deputy Head of Banking at the Bank for International Settlements, but has also been on the Executive Board at the Bundesbank previously. His appointment is one of the first by the new coalition government in Germany, and Nagel will arrive at the post with German inflation at its highest in years, with annual CPI inflation having climbed to +6.0% on the EU-harmonised measure in November.

Finally in sovereign bond markets, there was a modest move higher in longer-dated European yields, with those on 10yr bunds (+1.0bps), OATs (+1.3bps) and gilts (+1.3bps) all rising. Those on 10yr Treasuries (+2.0bps) were saw a slightly bigger increase, but a decline among shorter-dated yields meant there was a steepening in the yield curve, with the 2s10s slope up +2.6bps.

To the day ahead now, and data releases include the UK public finances for November, Germany’s GfK consumer confidence reading for January, the US current account balance for Q3, and the Euro Area’s advance consumer confidence reading for December. Central bank speakers include the ECB’s Kazimir, whilst President Biden is set to deliver a speech on Covid.

Tyler Durden Tue, 12/21/2021 - 07:49

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Bonds

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.

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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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Government

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

Hands…

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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…

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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.

FX

  • 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.

Commodities

  • 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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