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Futures Grind Higher After Biden-Xi Summit

Futures Grind Higher After Biden-Xi Summit

US equity futures reversed earlier losses, trading slightly in the green, while bonds were lifted as traders awaited a decision from the White House on who the next Federal Reserve head will be…



Futures Grind Higher After Biden-Xi Summit

US equity futures reversed earlier losses, trading slightly in the green, while bonds were lifted as traders awaited a decision from the White House on who the next Federal Reserve head will be amid speculation Fed policy tightening could be slowed down under Elizabeth Warren's favorite progressive, Lael Brainard. At 730am, S&P futures were up 1.75 of 0.04%, Nasdaq futures were up 2.75 or 0.02% and Dow Jones futures traded 58 points higher or 0.161%. 10-year Treasury yield retreats back toward the 1.6% level after climbing for three days in a row; the dollar was flat and bitcoin tumbled, briefly sliding below $60,000 on no news, before reversing modestly.

As a reminder, both current Chair Jerome Powell and Fed Governor Lael Brainard have been interviewed for the top job, and a decision is expected imminently, according to the Senate Banking Chairman. The news earlier this month that Brainard is in the running sent long bond yields tumbling on the assumption that she would be significantly more dovish.

Futures bounced on news Pfizer reached a licensing agreement that will allow generic-drug manufacturers to produce inexpensive versions of its Covid-19 pill for 95 low- and middle-income countries, following a similar move by Merck & Co. In a statement on Tuesday, Pfizer said it has signed an agreement with the United Nations-backed Medicines Patent Pool to license the experimental pill, once it is authorized by regulators, to generic companies that can supply it to countries that account for roughly 53% of the world population.

Sentiment was also molded by the outcome of the 3-hour long virtual summit between Biden and Xi who covered a range of topics including trade, the status of Taiwan and human rights in their first face-to- face summit, which went on longer than expected - after all it was way past Joe's bedtime - even though they announced no major breakthroughs.  The virtual summit sent a message that the two sides are open to engaging in more communication -- rather than confrontation -- to avoid escalation in areas of conflict, Bloomberg Intelligence economist Eric Zhu writes in a note.  Riskier markets have struck an optimistic tone spurred by headlines around talks between U.S. President Joe Biden and China President Xi Jinping, according to Credit Agricole analysts including Eddie Cheung.

“The key in our view is that both sides continue to engage and are sending messages for potential near-term cooperation which is still supportive at the margin of sentiment” they wrote in a note. “Outside of that, there is a dearth of significant EM data to drive markets today and tomorrow, we expect EM markets to be driven more by events elsewhere. The rise in U.S. yields should once more keep the market on its toes.”

Shares of Walmart rose 1.9% in premarket trading after the country’s largest brick-and-mortar retailer hiked its annual sales and profit forecasts, banking on soaring demand expected during the crucial holiday season. Retailer Home Depot also inched higher after beating quarterly same-store sales estimates, helped by strong demand for tools and materials from builders and handymen working on housing projects.

In the premarket, Tesla Inc. shares fell after Elon Musk exercised options to sell more of his stock. Musk exercised options and sold around another $930m in Tesla shares on Monday, adding to the $6.9b he had already sold last week. Rivian Automotive Inc. added to recent gains, doubling the $78 it sold its shares at when it listed last week.  In corporate news, JPMorgan sued Tesla seeking a $162 million payment for warrants that expired above their strike price following Elon Musk’s 2018 tweet about taking the company private. Meanwhile, crypto-exposed stocks are slumping in premarket trading as Bitcoin and other digital currencies see steep declines.  Here are some of the biggest U.S. movers today:

  • Peloton (PTON) shares plunged as much as 8.1% in premarket trading after the company said it has started an underwritten public offering of $1 billion of its Class A shares.
  • Tesla (TSLA US) shares fall as much as 1.7% in U.S. premarket trading after CEO Elon Musk sold more shares in the EV maker. Musk exercised options and sold around another $930m in Tesla shares on Monday, adding to the $6.9b he had already sold last week.
  • Cryptocurrency-exposed stocks fell in U.S. premarket trading and in Europe, with Bitcoin and Ether both declining amid a broad selloff in digital assets. Stocks moving include Riot Blockchain (RIOT US) and Marathon Digital (MARA US), the latter after it plunged in the prior session.
  • Rivian Automotive (RIVN US) shares rise as much as 5.4% in U.S. premarket trading, continuing the run of gains for the EV maker since its IPO last week. The stock touched slightly more than double its IPO price.
  • Creatd (CRTD US) jump as much as 50% in U.S. premarket trading after it reported 3Q earnings, reaffirmed its 2021 revenue view and initiated guidance for 2022.

European stocks turned green after opening in the red, with travel shares hitting session highs on new of the cheap Covid-pill. The Stoxx 600 Travel & Leisure Index hits session high on optimism about increased tourism after Pfizer reaches a licensing agreement allowing generic-drug manufacturers to produce cheap versions of its Covid-19 pill for 95 low- and middle-income countries. SXTP gains as much as 0.9%, +0.5% as of 1:02pm CET.

Earlier in the session, Asian stocks rose for a fourth day, led by gains in Hong Kong, with investors closely watching the U.S.-China summit for fresh cues. The MSCI Asia Pacific Index climbed 0.2%, on track for its longest string of gains since early September. Consumer discretionary and technology sectors gave the biggest boost to the benchmark. Hong Kong’s Hang Seng Index jumped more than 1%: shares of Macau casino operators surged on hopes of better-than-expected outcomes from Macau’s public consultation on a proposed gaming law amendment. The Asian stock benchmark is heading for its highest close in two months, buoyed by optimism over reopening economies that’s helping outweigh worries over inflation. Singapore said Monday that it will open its borders to five more countries as the city-state presses on with plans to live with Covid.  Sentiment among Asia ex-Japan and Chinese investors has remained “bullish,” Olivier d’Assier, head of APAC applied research at Qontigo, wrote in a note. “Investors in emerging markets appear less worried about market risk, and focused more on strong consumer demand abroad and low valuations at home.” The first face-to-face virtual summit between U.S. President Joe Biden and Chinese President Xi Jinping got under way, with both sides aiming to stabilize the relationship between the nations while downplaying expectations for major breakthroughs

In rates, treasuries were higher with the curve flatter after unwinding Asia-session losses during European morning. Yields are richer by ~1bp across long-end of the curve, flattening 2s10s and 5s30s spreads by less than 1bp; 10-year is around 1.606% after topping at 1.618%. Spanish and Italian bonds outperform, while bunds and gilts keep pace with Treasuries. Focal points for U.S. session include October retail sales, following last week’s hot CPI print, and two Fed purchase operations. During Asia session, Aussie bonds dropped even after RBA Governor Philip Lowe said it’s “still plausible” the central bank doesn’t hike before 2024. Bunds bull-steepen with 5y yields richer by ~2bps. Gilts and USTs bull-flatten, richer by ~2.5bps across the back end. Peripheral spreads tighten slightly. In FX, Bloomberg dollar index fades Asia’s modest weakness to trade flat

In FX, the Bloomberg Dollar Spot Index was little changed and the greenback traded mixed versus its Group-of-10 peers after U.S. President Joe Biden and Chinese leader Xi Jinping spoke of the need for cooperation in their first face-to-face summit, even though they announced no major breakthroughs. The euro fell to its lowest level since July 2020 as European data lose steam against the U.S., and options bets look for further weakness. The pound rose to a nearly one-week high after data showed the U.K. jobs market strengthened in October, bolstering the case for a Bank of England rate hike. U.K. companies added 160,000 more people to their payrolls, while vacancies surged to a record high. The figures suggest very few of the 1.1 million workers who were on furlough became unemployed when the government’s benefit program for those out of work in the pandemic finished in September. China’s yuan climbed to a five-month high as talks between U.S. President Joe Biden and his Chinese counterpart Xi Jinping fueled hopes of better ties. Australia’s yield curve bear- steepened following the Reserve Bank’s November meeting minutes and after central bank chief Philip Lowe in a speech opened the door to an interest-rate increase before 2024.

China's yuan climbed to a five-month high, approaching its strongest level since May 2018, as traders grew hopeful that a summit between the U.S. and China will ease tensions between the nations. The index for developing-nation stocks rose for a seventh day, heading for its longest winning streak in nine months. The onshore yuan gained as much as 0.3% to 6.3666 per dollar. It’s now within striking distance of a year-to-date high of 6.3565 reached on May 31. A breach of that would take the yuan to its strongest level since 2018, just before the U.S.-China trade war pummeled the currency. USD/CNH slips as much as 0.3% to 6.3616;

In commodities, Natural gas pops higher after Nord Stream 2 certification temporarily suspended in Germany. Crude futures hold in the green but drift off Asia’s best levels. WTI holds above $80, Brent trades near $83.40 after failing to breach $83 overnight

Looking at the day ahead now, and US data releases include retail sales, industrial production and capacity utilisation for October, while in Europe there’s the second estimate of Euro Area GDP in Q3 and UK unemployment for September. Central bank speakers include ECB President Lagarde, and the Fed’s Barkin, Bostic, George and Daly. Finally, earnings releases include Walmart and Home Depot.

Market Snapshot

  • S&P 500 futures little changed at 4,674.50
  • STOXX Europe 600 up 0.2% to 489.21
  • MXAP up 0.2% to 201.28
  • MXAPJ up 0.3% to 658.32
  • Nikkei up 0.1% to 29,808.12
  • Topix up 0.1% to 2,050.83
  • Hang Seng Index up 1.3% to 25,713.78
  • Shanghai Composite down 0.3% to 3,521.79
  • Sensex down 0.4% to 60,445.89
  • Australia S&P/ASX 200 down 0.7% to 7,420.44
  • Kospi little changed at 2,997.21
  • German 10Y yield little changed at -0.23%
  • Euro little changed at $1.1363
  • Brent Futures up 0.4% to $82.41/bbl
  • Brent Futures up 0.4% to $82.41/bbl
  • Gold spot up 0.6% to $1,874.23
  • U.S. Dollar Index up 0.11% to 95.51

Top Overnight News from Bloomberg

  • Senate Banking Chairman Sherrod Brown said he was told by White House officials to expect an “imminent” announcement about President Joe Biden’s pick to chair the Federal Reserve
  • A gauge of implied volatility suggests the action in Treasuries is far from over. The ICE BofA MOVE Index, which measures one-month swings in U.S. sovereign debt, climbed to 81.59 on Monday, the highest since April 2020. The U.S. Government Securities Liquidity Index closed at a 20-month peak last week, indicating worsening conditions for trading the securities
  • The tightness in global oil markets that propelled prices to a seven-year high is starting to ease as production recovers in the U.S. and elsewhere, the International Energy Agency said
  • OPEC+ would face challenges to quickly pump more oil if a decision was taken to do so, according to the head of Nigeria’s state energy company

Asia-Pac stocks traded mixed in a slight improvement on the inconclusive handover from Wall Street where the major indices ended a choppy session flat as yields grinded higher led by inflation breakevens, while focus shifted to the Biden-Xi virtual meeting in which the opening remarks set a friendly tone although the expectations had been lowered beforehand as tariffs were unlikely to be on the agenda and with the meeting not expected to yield further deliverables or dialogues. ASX 200 (-0.7%) and Nikkei 225 (+0.1%) were mixed with the Australian benchmark pressured by broad weakness across most its sectors and with the declines led by the mining and materials industries, while Tokyo stocks were just about kept afloat amid a choppy currency and after the recent draft details of the incoming stimulus plan but with upside capped by resistance on approach to the 30k level. Hang Seng (+1.3%) and Shanghai Comp. (-0.3%) were both initially encouraged after the warm start to the Biden-Xi meeting in which President Biden stated that he hopes the leaders meet face to face next time and that their responsibility as leaders is to ensure ties do not veer into open conflict, while Chinese President Xi said that he was happy to see his 'old friend’ and suggested that they must increase communication and cooperation. The advances in Hong Kong were led by gambling names and tech, although gains were capped for the mainland as the tempered expectations for the meeting came to fruition and with the PBoC draining liquidity, as well as lingering default concerns with Kaisa Group so far failing to make payments to its dollar bond investors due last week, but still has a grace period. Finally, 10yr JGBs declined as Japanese stocks remained afloat and with spillover selling from the bear steepening stateside which was led by inflation breakevens and amid corporate supply in the long-end, while the latest 5yr JGB auction did little to spur prices despite a higher b/c as all other metrics printed relatively inline with the previous.

Top Asian News

  • China Party Reiterates Complete Reunification to Be Achieved
  • Asia Stocks Advance, Hong Kong Leads Gains With Casino Names
  • Singapore Air Bringing 737 Max Back Into Service in Coming Weeks
  • Chairman’s Aide Pledges Luxury Homes For Loan: Evergrande Update

Stocks in Europe are predominantly trading with marginal gains (Stoxx 600 +0.2%) as the Stoxx 600, CAC 40 and DAX have all made incremental new ATHs. The handover from the APAC session was a mixed one with focus on the Xi-Biden virtual meeting which struck a conciliatory tone although, expectations were pared back ahead of the event with tariffs not an item on the agenda. Stateside, futures trade with minor losses ahead of US Retail Sales at 13:30GMT/08:30EST with expectations looking for a 1.2% M/M increase for October. The corporate slate has seen earnings from Home Depot (HD) who are firmer by 0.5% in the pre-market after above forecasts earnings, ahead of Walmart's update due at 12:00GMT/07:00EST. In bank commentary, Goldman Sachs forecasts the S&P 500 climbing by 9% to 5,100 at year-end 2022; sees S&P 500 EPS +8% to USD 226 in 2022, and +4% to USD 236 in 2023. Elsewhere, the latest BofA Fund Manager Survey revealed that investors are ending the year "risk-on" with the largest overweight of US stocks since August 2013. Back to Europe, sectors are mostly firmer with Telecoms the best performer as Vodafone (+5.8%) sits at the top of the FTSE 100 after the Co. upgraded FCF guidance for the year following a solid H1. Auto names have been supported by Renault (+1.6%) announcing two new hydrogen-powered vehicles, whilst the CFO of Daimler’s (+0.8%) Truck unit cautioned that there will need to be significant price increases. Elsewhere, Oil & Gas names have been led higher by advances in the crude complex, whilst a broker upgrade for Kering (+2.7%) at HSBC has supported the retail sector. Diageo (+2.4%) lifts the Food & Beverage sector after noting that it anticipates the strong momentum in H1 to continue through the remainder of FY22. To the downside, Imperial Brands (-0.2%) and Bouygues (-1.5%) are both lower post-earnings.

Top European News

  • German Covid Deaths Spike as Lockdown for Unvaccinated Nears
  • Romania GDP Growth Slows as Virus, Supply Chains Hit Rebound
  • Total’s South Africa Gas Discovery Could Fast-Track Output
  • Credit Suisse Downgraded Again as JPMorgan Doubts Strategy Shift

In FX, hot on the heels of generally hawkish testimony from members of the BoE’s MPC to a TSC, UK labour data has cemented market expectations for a December hike and boosted Sterling in the process, as Cable probes the semi-psychological 1.3450 mark and the Eur/Gbp cross tests 0.8450 having already fallen through the 50 DMA and 0.8500 yesterday. However, the Turkish Lira continues to slide on prospects of further easing from the CBRT (among other things) this Thursday in stark contrast to the orthodox monetary policy approach when faced with rising inflation pressures. Indeed, Usd/Try has now been as high as circa 10.2240 and is extending a bull run that has seen the Lira plunge to successive daily all time lows for five sessions in the most recent phase, even when the Dollar paused for breath again more generally. Looking at the index as a proxy, 95.500 is now acting as a pivot after Monday’s rebound through the post-US CPI high to set a fresh 2021 peak, at 95.595 and minor subsequent breach to top 95.600 before attention turns to the demand side with retail sales on the agenda ahead of ip and more from the Fed via Barkin, Bostic, George and Daly.

  • NZD/CHF/CAD/AUD - All softer vs the Greenback, but the Kiwi also losing further ground closer to home as Aud/Nzd advances towards 1.0450 regardless of the fact that RBA minutes and Governor Lowe remained relatively dovish on the timing of a first rate hike overnight. Nzd/Usd has retreated through 0.7050 and Aud/Usd from above 0.7050 again in advance of NZ ppi and Aussie wages for Q3 that are expected to pick up pace, though still fall short of the 3% level required to boost overall inflation. Elsewhere, the Franc is under 0.9050, but still firmer against the Euro beyond 1.0550 and the Loonie has handed back some of its gains after briefly climbing over 1.2500 in the run up to Canadian housing starts and BoC’s Schembri on uncertainties in the jobs market and monetary policy, irrespective of a bounce in WTI.
  • JPY/EUR - The Yen has relinquished 114.00+ status again, but may derive some underlying support from hefty 1.6 bn option expiry interest at the 114.30 strike, while the Euro will be hoping for more dip-buyers into 1.1350 after losing grip of 1.1400 and no real or key technical prop until the next Fib retracement of the major reversal from 1.2349 to 1.0636 that comes in at 1.1290 and represents 61.8% of the move.
  • SCANDI/EM - Firmer Brent and perhaps an improvement in Q4 Norwegian consumer sentiment is keeping the Nok’s nose above 9.9000 vs the Eur, but the Sek has not derived sufficient impetus from higher Swedish money market expectations or comments from Riksbank’s Bremen in favour of a higher repo rate path to stay afloat of 10.0000. Conversely, early pleasantries between Chinese and US Presidents are underpinning the Cnh and Cny, while the Pln has taken on board hawkish guidance from NBP’s Gatnar who said two more rate hikes are needed and he will vote for back-to-back 50bp moves at both the December and January policy meetings.

In commodities, WTI and Brent are firmer to the tune of USD 0.45/bbl this morning, with price action steady throughout the European morning in-spite of a number of fresh catalysts/commentary for the complex. Firstly, the IEA OMR rounded off the monthly releases and left their forecasts for 2021 and 2022 demand growth largely unchanged while noting that US oil production will not hit pre-COVID levels until end-2022. Additionally, there has been rhetoric from multiple energy officials with Russia’s Novak remarking that it’s too early to predict the December meeting’s outcome. While the Secretary General of OPEC says an oil surplus is already beginning in December, signalling that OPEC needs to be careful; commentary which strikes a similar tone to that from the UAE yesterday, albeit the timing is more aggressive with the UAE not expecting a surplus until Q1-2022. Elsewhere, nat gas has taken centre stage given the morning’s updates around Nord Stream 2. To surmise, the German energy regulator has halted the certification process for the pipeline until the operating company arranges German company status – updates that prompted notable upside in European gas benchmarks. However, the Nord Stream 2 operator has reportedly established a subsidiary in Germany to meet these requirements, an update that has seemingly tempered the gas upside; though it remains to be seen if this will be seen as sufficient from a German perspective. Moving to metals, spot gold and silver are moderately firmer benefitting from a brief upside-flurry that took place seemingly without a fundamental driver, sending spot gold above yesterday’s best to a high of USD 1874.75/oz. Finally, base metals remain softer in-fitting with APAC performance once it became clear that, as expected, the Biden-Xi summit would not result in any breakthrough(s).

US Event Calendar

  • 8:30am: Oct. Retail Sales Ex Auto and Gas, est. 0.7%, prior 0.7%
  • 8:30am: Oct. Retail Sales Control Group, est. 0.9%, prior 0.8%
  • 8:30am: Oct. Retail Sales Ex Auto MoM, est. 1.0%, prior 0.8%
  • 8:30am: Oct. Retail Sales Advance MoM, est. 1.4%, prior 0.7%
  • 8:30am: Oct. Import Price Index YoY, est. 10.3%, prior 9.2%
  • 8:30am: Oct. Import Price Index ex Petroleu, est. 0.3%, prior 0.1%
  • 8:30am: Oct. Import Price Index MoM, est. 1.0%, prior 0.4%
  • 8:30am: Oct. Export Price Index YoY, prior 16.3%
  • 8:30am: Oct. Export Price Index MoM, est. 0.9%, prior 0.1%
  • 9:15am: Oct. Capacity Utilization, est. 75.9%, prior 75.2%
  • 9:15am: Oct. Manufacturing (SIC) Production, est. 0.8%, prior -0.7%
  • 9:15am: Oct. Industrial Production MoM, est. 0.9%, prior -1.3%
  • 10am: Sept. Business Inventories, est. 0.6%, prior 0.6%
  • 10am: Nov. NAHB Housing Market Index, est. 80, prior 80
  • 4pm: Sept. Net Foreign Security Purchases, prior $79.3b
  • 4pm: Sept. Total Net TIC Flows, prior $91b

DB's Jim Reid concludes the overnight wrap

The main event this morning has been the Biden / Xi virtual summit where both the presidents are trying to stabilise the relationship between both US & China. It’s now over with the first press statement from the White House a pretty bland reflection of topics covered at the meeting without suggesting any major announcements are likely. There has been no mentions of tariffs being discussed but we’ll likely hear more detail later on so keep your eyes peeled on the screens for that. At first glance it seems like it was a co-operative meeting but with little of substance likely to have come out of it. We will see.

This follows a familiar start to the week yesterday, with equities hovering around their all-time highs in spite of continued concerns about inflation sparking another selloff in sovereign bond markets. There wasn’t an obvious catalyst behind the moves, though the Treasury selloff began not long after a Washington Post article from former Treasury Secretary Larry Summers was released, in which he critiqued the various claims from those who still believe inflation would prove transitory. That was then followed up by remarks from BoE officials later in the session, which leant hawkish at the margins as Governor Bailey said that he was “very uneasy about the inflation situation”.

Looking at those moves in more depth, it was evident that inflation jitters were showing no sign of abating yesterday, and in fact, the 10yr US breakeven hit its highest closing level since 2005, after rising another +3.7bps to 2.76%. Those moves were echoed over different time horizons, with the 5yr breakeven up +7.5bps to a record high of 3.19%, and even the 30yr breakeven hit a post-2013 high of 2.49%. However, even as breakevens continued to rise, real rates remained relatively subdued, with the 10yr real yield (+2.2bps) hovering close to an all-time low at -1.15%, whilst the 5yr real yield actually fell -4.3bps to -1.95%. All in all, that left the Treasury yield curve steeper, with the 2yr nominal yield (+0.4bps) basically unchanged, whilst the 5yr yield (+3.4bps) hit a post-pandemic high and the 10yr yield rose +6.2bps to 1.63%. 30yr yields managed to rise back just above 2.0%, after increasing +7.7bps on the day. Overnight US yields are back down a couple of basis points.

Over in Europe there was a similar pattern, albeit to a lesser extent, with yields on 10yr bunds (+3.1bps), OATs (+3.0bps) and BTPs (+4.1bps) all moving higher. Interestingly, that meant the gap between 10yr Treasury and bund yields hit their widest level since late-April at 186bps, although that’s still less than the recent peak above 200bps at the start of April, when optimism about a potential US reflation was at its peak, less than a month after Biden had signed the American Rescue Plan Act featuring $1.9tn of stimulus.

For equities it was a much more subdued picture, with the S&P 500 (0.00%) paring back its gains from earlier in the session to end flat on the day. Defensive stocks outperformed, with Utilities (+1.31%) outpacing the rest of the index. There wasn’t a particular driver behind the declines, though Tesla (-1.94%) weighed on sentiment after more Musk induced speculation about selling more of his holdings permeated. It ended the session as the third-worst performer in the S&P 500, and its decline was also evident in the FANG+ index (-0.26%) of megacap tech stocks. European equities outperformed, with the STOXX 600 (+0.35%) reaching another record high, just as others including the CAC 40 (+0.53%) and the DAX (+0.34%) ascended to fresh all-time highs of their own.

Overnight in Asia stocks are trading in the green with the Hang Seng (+1.05%) leading the pack followed by the CSI (+0.53%), Shanghai Composite (+0.29%), the Nikkei (+0.23%) and the KOSPI (+0.01%). Stocks rose for a fourth day with investors closely watching the Biden-Xi summit. Japan’s Finance Minister Shunichi Suzuki said that the size of the economic stimulus package expected to be released over the weekend is yet to be decided. He also said that the overall size will be decided based on the requests from ministries and not the other way around. Also BoJ Governor Haruhiko Kuroda clarified that he does not intend on reducing monetary easing even if inflation were to get near 1% in Japan. Elsewhere futures are indicating a flat start to markets in the US and Europe with S&P 500 futures +0.06% and DAX futures +0.01%.

President Biden signed the bi-partisan infrastructure bill into law, codifying $550 billion of new spending over the next decade. In prepared remarks the President heralded the bill as an important, incremental achievement, “With this law, we focused on getting things done” despite not getting everything people may have wanted. He also made the case that the investments in supply chain resilience should push against inflation in the long term. The President’s social and climate spending bill is due to be scored by the Congressional Budget Office by the end of this week, a precondition some moderate Democrats had for supporting the package. While the Biden administration has asserted the bill would be paid for by revenue offsets, ameliorating any budget or inflation impact, the CBO Director declined to confirm whether or not the agency would score it that way.

On the topic of inflation, oil prices barely managed to eek out a positive day after spending most of the day in the red as speculation continued that President Biden could use the Strategic Petroleum Reserve to ease the rise in gasoline prices seen over recent weeks. Indeed, Energy Secretary Granholm told CNN earlier in the day that Biden was evaluating the SPR. WTI (+0.11%) had fallen beneath $80/bbl intraday but finished at $80.88/bbl. That said, a number of other commodities showed no signs of declining, with European natural gas futures (+5.06%), finishing just shy of €80 per megawatt-hour for the first time in nearly three weeks, whilst wheat futures (+1.69%) rose for a 6th consecutive session to a fresh 8-year high. Reports indicated that spot prices of US coal from Central Appalachia surged to their highest levels since 2009, at just below $90/ton.

Turning to the Fed, markets are still eagerly awaiting to find out who’s going to be chosen as the next Chair, but we did hear from a Wall Street Journal report that President Biden is expected to make a decision “as soon as this week”. After the New York close, Senate Banking Chair Sherrod Brown reportedly said that a pick was imminent. Senator Brown didn’t know who the pick would be but noted he was pretty sure it was one of the two front runners, Powell or Brainard. That said, previous deadlines that have been reported in the press have come and gone, and it’s two weeks’ ago today that Biden himself said we’d get an announcement “fairly quickly”, so we’ll bring it to you as get anything concrete. One potential line of interest in the WSJ story was that Biden’s interview with Governor Brainard, who’s also considered to be in contention, “went better than expected”. News that Roger Ferguson, former TIAA head and Fed Vice Chair, would not be taking the helm of Apollo Global Management, as was previously reported, drove speculation that he was now a contender for one of the Fed vacancies, as well.

Looking at the pandemic, cases are continuing to rise at the global level and a number of countries in Europe are moving to toughen up restrictions in response. In Ireland, the Irish Times reported that the government was set to return to advice to work from home, and in Austria yesterday marked the start of their lockdown for the unvaccinated. Separately, there were moves to extend the rollout of booster jabs as countries look to avoid further restrictions, and the UK extended their programme yesterday to individuals in their 40s. I’ll therefore be doing my bit by booking mine as soon as my 6 months gap between doses is up.

There wasn’t much to report on the data front yesterday, though the New York Fed’s Empire State manufacturing survey saw the headline general business conditions index rise to 30.9 (vs. 22.0 expected). Nevertheless, price pressures continued to remain elevated, with the prices received index up to a record high of 50.8, whilst prices paid rose to 83.0.

To the day ahead now, and US data releases include retail sales, industrial production and capacity utilisation for October, while in Europe there’s the second estimate of Euro Area GDP in Q3 and UK unemployment for September. Central bank speakers include ECB President Lagarde, and the Fed’s Barkin, Bostic, George and Daly. Finally, earnings releases include Walmart and Home Depot.

Tyler Durden Tue, 11/16/2021 - 07:53

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Recession On Deck? BofA Slashes GDP Forecast, Sees “Significant Risk Of Negative Growth Quarter”

Recession On Deck? BofA Slashes GDP Forecast, Sees "Significant Risk Of Negative Growth Quarter"

With a panicking Biden likely to continue freaking out over soaring inflation, and calling Powell every day ordering the Fed chair to do somethin



Recession On Deck? BofA Slashes GDP Forecast, Sees "Significant Risk Of Negative Growth Quarter"

With a panicking Biden likely to continue freaking out over soaring inflation, and calling Powell every day ordering the Fed chair to do something about those approval rate-crushing surging prices...

... which in turn has cornered Powell to keep jawboning markets lower, with threats of even more rate hikes and even more price drops until inflation somehow cracks (how that happens when it is the supply-driven inflation that remains sticky, and which the Fed has no control over, nobody knows yet) we recently joked that the market crash will continue until Biden's approval rating raises.

Sarcasm aside, we are dead serious that at this point only the risk - or reality - of a recession can offset the fear of even higher prices. After all, no matter how many death threats Powell gets from the White House, he will not hike into a recession just because Biden's approval rating has hit rock bottom. It's also why we said, far less joingkly, that "every market bull is praying for a recession: Biden can't crash markets fast enough"

Which brings us to the current Wall Street landscape where some banks, most notably the likes of Goldman, continue to predict even more rate hikes while ignoring the risk of a slowdown, it's entire bullish economic outlook for 2022 predicated on households spending "excess savings" which they have spent a long time ago (expect a huge downgrade to GDP in 2022 from Goldman in the next few weeks as the bank realizes this), while on the other hand we have banks like JPMorgan, which recently pivoted to the new narrative, and as we reported last weekend, now sees a sharp slowdown in the US economy following a series of disappointing data recently...

... and as a result, JPM now "forecast growth decelerated from a 7.0% q/q saar in 4Q21 to a trend like 1.5% in 1Q22."

And while not yet a recession, today Bank of America stunned market when it chief economist joined JPM in slashing his GDP for 2022, and especially for Q1 where his forecast has collapsed from 4.0% previously to just 1.0%, a number which we are confident will drop to zero and soon negative if the slide in stocks accelerates due to the impact financial conditions and the (lack of) wealth effect have on the broader economy.

Harris lists 3 clear reasons for his gloomy revision, which are all in line with what we have been warning for quite some time now, to wit:

1. Omicron: The Omicron wave has exacerbated labor-supply constraints and slowed services consumption. All else equal, we estimate that services spending could slice 0.6pp off January real consumer spending, although a pickup in stay-at-home durable goods demand could offset some of the shock. This is consistent with the aggregated BAC card data: Anna Zhou has flagged a significant slowdown in spending on leisure services, and a pickup in durables spending. Meanwhile Jeseo Park finds that our BofA US Consumer Confidence Indicator has slipped further from already weak levels. All of this points to a slowdown in economic activity in January. With cases already down around 25% from their mid-January peak, however, we expect the Omicron shock to be short-lived. The data should improve meaningfully starting in February. This creates downside to 1Q GDP growth and upside to 2Q, given favorable base effects.

2. Inventories. Earlier this week we learned that inventories surged in December and contributed 4.9pp to 4Q GDP growth. Inventories remain depressed relative to pre-pandemic levels because of continued supply bottlenecks. And with demand surging, there is room for even more of an increase. However, it is important to remember that GDP depends on the change in inventories (not the level), and GDP growth depends on the change in the change in inventories. Therefore the $173.5bn increase in inventories in 4Q limits the scope for inventories to drive growth again in 1Q. So inventories create more downside for 1Q growth.

3. Less fiscal easing.  We now expect a fiscal package about half the size of the Build Back Better Act, with less front-loaded fiscal stimulus. We think it will boost 2022 growth by just 15-20bp, compared to our earlier estimate of 50bp. Our base case is that outlays will start in April: the delay in passage means that the growth impact relative to our earlier forecast will again be largest in 1Q. Given the deadlock between moderate and progressive Democrats, the risk is that nothing gets passed. We think that the retirement of Justice Breyer increases this risk because appointing his replacement will be a policy priority for Democrats, eating into the limited time they have before the midterm elections. If there is no further fiscal stimulus, we would expect modest downside to 2Q-4Q growth.

Putting together the Omicron shock, the expected path of inventories and our base case fiscal outlook, BofA has cut its 1Q growth forecast to 1.0% from 4.0% and ominously adds that "risks of a negative growth quarter are significant, in our view." To offset the risk of a full-blown technical recession (where we get 2 quarters of negative GDP prints) however, BofA has increased 2Q slightly to 5.0% from 4.0%: this would amount to only partial payback for various 1Q shocks. Growth remains unchanged for 2H 2022, but it would now be coming off a lower base. As a result, BofA's annual growth forecast for 2022 drops to 3.6% from 4.0%. But what about 2023?

The wildcard of course, is the fourth reason for a potential slowdown, namely monetary tightening. As a reminder, with Dems guaranteed to lose control of Congress, any further fiscal stimulus becomes a non-factor until at least the Nov 2024 presidential elections, meaning the fate of the US economy is now entirely in the hands of the Fed, especially if Biden's BBB fails to pass, even in truncated form.

Here the core tension emerges: while the US economy is slowing, BofA still sees inflation remaining quite sticky for a long, long time.

As such, and following the continued hawkish pivot at the January FOMC meeting, BofA now expects the Fed to start tightening at the March 2022 meeting, raising rates by 25bp at every remaining meeting this year for a total of seven hikes, and in every quarter of 2023 for a total of four hikes. This means that BofA's target for a terminal rate of 2.75-3.00% will be reached in December 2023. Harris explains the logic behind this upward revision to the bank's tightening forecast:

... the Fed is behind the curve and will be playing catch-up this year and next. We think the economy will have to pay some price for 175bp of rate hikes in 2022, 100bp in 2023, and quantitative tightening. Given the lags with which monetary policy affects the real economy, we think growth will slow to around trend in 1Q 2023, before falling below trend in 2Q-4Q. This compares to our previous forecast of slightly
above-trend growth throughout 2023.

As the chief economist also notes, at of this moment, the markets are now pricing in 30bp of hikes at the March meeting, 118bp for the year and a terminal rate of around 1.75%. In his view, "that is not enough. Markets underpriced Fed hikes at the start of the last two hiking cycles and we think that will be the case again (Exhibit 2). We now expect the Fed to hike rates by 25bp at all seven remaining meetings this year, and also announce QT (i.e., balance sheet shrinkage) in May. When you are behind in a race you don’t take water breaks."

But how does the Fed hike up a storm at a time when BofA admits the risks are growing for a negative GDP quarter in Q1? Well, as Harris admits, "the new call raises a number of questions."

  • Will the Fed hike by 50bp in March? We think this is unlikely. If the Fed wanted to get going quickly they would have hiked this week and ended QE. Moreover, we see the Fed continuing to gradually concede ground rather than suddenly lurching in a hawkish direction. Hence we think it is more likely that the Fed will quickly shift to 25bp hikes at every meeting.
  • Could the markets force them to do more? On the margin more aggressive pricing in the markets could nudge the Fed along. For example, if the markets start to price in a high likelihood of a 50bp move in March, the Fed could see that as a “free option” to start faster. However, the Fed is still in charge of the narrative. The sell-off in the bond market in recent weeks has been driven by more hawkish commentary out of the Fed. Powell is quite adept at dodging questions at his press conferences, but this week he left no ambiguity about the hawkish shift at the Fed, driving the repricing.
  • How will the economy and markets handle hikes? Clearly risk assets are vulnerable. One way to view the recent stock market correction is that with the Fed no longer in deep denial, markets have caught on to the idea that inflation is a problem and the Fed is going to do something about it. As the Fed pivot continues—and the bond market prices in more hikes—we could see more volatility. However, the stock market is not the economy. The fundamental backdrop for growth remains solid regardless of whether stocks are flat or down 20%. Even the hikes we are forecasting only bring the real funds rate slightly above zero at the end of next year

Then there is the question whether we worry about an inverted yield curve (spoiler alert: yes)?

As BofA notes, historically the yield curve slope — for example, the spread between the funds rate and 10-year Treasuries — has been the best standalone financial indicator of recession risk. However, as now everyone seems to admit (this used to be another "conspiracy theory" not that long ago), "the yield curve is heavily distorted by huge central bank balance sheets and US bond yields are being held down by remarkably low yields overseas, "according to Harris. As such, in an attempt to spin the collapse in the yield curve, the chief economist notes that if Fed hikes lead to smaller-than-normal pressure on long-end yields that is good news for the economy, not bad news (actually this is wrong, but we give it 2-3 months before consensus grasps this).

And while Harris caveats that the Fed could hike even more, going so far as throwing a 50bps rate increase in March "if the drop in the unemployment rate remains fast or if inflation cools much less than expected", we think risks are tilted much more in the opposite direction, namely Harris' downside scenario, where he writes that "our old forecast could prove correct if we have misjudged the fragility of the economy or if there is a serious shock to confidence from events abroad." Actually not just abroad, but internally, and if stocks continue to sink, the direct linkage between financial conditions and the broader economy will express themselves quickly and very painfully.

Bottom line: yes, inflation is a big problem for Biden, but a far bigger problem for the president and the Democrats ahead of the midterms is the US enters a recession with a market crash to boot. While this particular scenario remains relatively remote on Wall Street's radar, we are confident that as Q1 progresses and as data points continue to deteriorate and disappoint, there will finally be a shift in both institutional and Fed thinking, that protecting the economy from an all out recession (if not worse) will be even more important than containing inflation, which as we noted previously is driven by supply-bottlenecks, not demand, which the Fed doesn't control anyway.

Meanwhile, as David Rosenberg points out today, stocks are already in a bear market...

... and absent some assurances from the Fed, we could be looking at another Lehman-style crash in the coming months, especially if BofA's forecast of seven hikes in 2022 is confirmed.

In short, for all the posturing and rhetoric, we always go back to square one - when all it said and done, "it's not different this time", especially once inflation either fades away or its "adjusted" lower, and it will be up to Fed to keep the wealth effect buoyant, the dynamic observed without fail since 2009, and best summarized in the following tweet:

The full BofA report is available to professional subs.

Tyler Durden Fri, 01/28/2022 - 11:10

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Neurotic Futures Tumble Despite Record Apple Quarter

Neurotic Futures Tumble Despite Record Apple Quarter

If you thought that yesterday’s blowout, record earnings from Apple would be enough to put in at least a brief bottom to stocks and stop the ongoing collapse in risk assets, we have some…



Neurotic Futures Tumble Despite Record Apple Quarter

If you thought that yesterday's blowout, record earnings from Apple would be enough to put in at least a brief bottom to stocks and stop the ongoing collapse in risk assets, we have some bad news for you: after staging a feeble bounce overnight, S&P futures erased earlier gains as traders ignored the solid results from Apple and instead focused on the risk of higher interest rates hurting economic growth.  Contracts in S&P 500 dropped as negative sentiment continued to prevail, while Nasdaq 100 futures erased earlier gains after strong Apple earnings. As of 730am, Emini futures were down 48 points or 1.12% to 4,269, Dow futures were down 335 points or 0.99% and Nasdaq futs were down 77 or 0.6%. The dollar was set for a fifth straight day of gains, the longest streak since November, 19Y TSY yields were up 3bps to 1.83%, gold and bitcoin both dropped.

Markets have been whiplashed by volatility this week as the Federal Reserve signaled aggressive tightening, adding to investor concerns about geopolitical tensions and an uneven earnings season. Also sapping sentiment on Friday were weak data on the German economy and euro-area confidence. Meanwhile, geopolitical tensions were still on the agenda with a potential conflict in Ukraine not yet defused.

“Market expectations for four to five rate hikes this year will not derail growth or the equity rally,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “We expect an eventual relaxation of tensions between Russia and Ukraine,” he added. Expected data on Friday include personal income and spending data, as well as University of Michigan Sentiment, while Caterpillar, Chevron, Colgate-Palmolive, VF Corp and Weyerhaeuser are among companies reporting earnings.

Money markets are now pricing in nearly five Fed hikes this year after a hawkish stance from Chair Jerome Powell. That’s up from three expected as recently as December.

“Tighter liquidity and weaker growth mean higher volatility,” Barclays Plc strategists led by Emmanuel Cau wrote in a note. The “current growth scare looks like a classic mid-cycle phase to us, while a lot of hawkishness is priced in.”

In premarket trading, Apple shares rose 4.5% as analysts rose their targets to some of the most bullish on the Street, after the iPhone maker reported EPS and revenue for the fiscal first quarter that beat the average analyst estimates. Watch Apple’s U.S. suppliers after the iPhone maker posted record quarterly sales that beat analyst estimates, a sign it was able to work through the supply-chain crunch. Peers in Asia rose, while European suppliers are active in early trading. Tesla shares also rise as much as 2% in premarket, set to rebound from yesterday’s 12% slump following a disappointing set of earnings and outlook. Other notable premarket movers:

  • Visa (V US) shares gain 5% premarket after company reported adjusted earnings per share for the first quarter that beat the average analyst estimate.
  • Cryptocurrency-exposed stocks gain as Bitcoin and other digital tokens rise. Riot Blockchain (RIOT US) +3.7%, Marathon Digital (MARA US) +3.3%, Bit Digital (BTBT US) +1.6%, Coinbase (COIN US) +0.5%.
  • Robinhood (HOOD US) shares tumbled 14% in premarket after the online brokerage’s fourth-quarter revenue and first-quarter outlook missed estimates. Some analysts cut their price targets.
  • Atlassian (TEAM US) shares jump 10% in extended trading on Thursday, after the software company reported second-quarter results that beat expectations and gave a third-quarter revenue forecast that was ahead of the analyst consensus.
  • U.S. Steel (X US) shares fall as much as 2.4% aftermarket following the steelmaker’s earnings release, which showed adjusted earnings per share results missed the average analyst estimate.

The U.S. stock market is priced “quite aggressively” versus other developed nations as well as emerging markets, and valuations in the latter can be a tailwind rather than a headwind as in the U.S., Feifei Li, partner and CIO of equity strategies at Research Affiliates, said on Bloomberg Television.

European equity indexes are again under pressure, rounding off a miserable week, and set for the worst monthly decline since October 2020 as corporate earnings failed to lift the mood except in the retail sector. The Euro Stoxx 50 dropped over 1.5%, DAX underperforming at the margin. Autos, tech and banks are the weakest Stoxx 600 sectors; only retailers are in the green. Hennes & Mauritz shares climbed on a profit beat, while technology stocks continued to underperform. Here are some of the biggest European movers today:

  • LVMH shares rise as much as 5.8% after analysts praised the French conglomerate’s full-year results, with several noting improved performance at even minor brands such as Celine.
  • Signify gains as much as 15% after saying it expects to grow in 2022 even as the supply chain problems that caused its “worst ever” quarter continue.
  • H&M climbs as much as 7.4% after posting a strong margin in 4Q which impressed analysts. Analysts also lauded the Swedish retailer’s buyback announcement and target to double sales by 2030.
  • Stora Enso rises as much as 6.2% on 4Q earnings with the CEO noting paper capacity closures have helped boost its pricing power, contributing to a turnaround in the unprofitable business.
  • SCA gains as much as 5.5% in Stockholm, the most since May 2020, after reporting better-than-expected Ebitda earnings and announcing a SEK3.25/share dividend -- higher than analysts had estimated.
  • AutoStore rises as much as 18% after a German court halts Ocado’s case against the company. Ocado drops as much as 8.1%.
  • Henkel slides as much as 10% after the company’s forecast for organic revenue growth of 2% to 4% in 2022 was seen as cautious.
  • Wartsila falls as much as 9% after posting 4Q earnings that analysts say showed strong order intake overshadowed by lagging margins.
  • Alstom drops as much as 7.3% after Exane BNP Paribas downgrades to neutral, citing risk that the company might resort to raising equity financing to forestall a possible credit-rating cut.

Earlier in the session, Asian stocks rose after slumping to their lowest since November 2020, with Japan and Australia leading the rebound as turbulence over the highly anticipated U.S. monetary tightening eased.  The MSCI Asia Pacific Index climbed as much as 1% on Friday following a 2.7% slide the day before. Industrials and consumer-discretionary names provided the biggest boosts to the measure. Japan’s Nikkei 225 Stock Average was among the best performers in the region after enduring its worst daily drop in seven months.  “It’s undeniable that stock markets last year -- as well as the real economy -- were supported by continued monetary easing, considering which, more share-price correction could be anticipated,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management in Tokyo. Even so, “stocks fell too much yesterday.” The Asian benchmark is down almost 5% this week, and set to cap its biggest such drop since February last year. Federal Reserve Chair Jerome Powell said the central bank was ready to raise interest rates in March and didn’t rule out moving at every meeting to tackle inflation, triggering a broad selloff in global equities Thursday.  Japan’s Topix and Australia’s S&P/ASX 200 gained after slipping into technical correction earlier this week. South Korea’s Kospi also added almost 2% after sliding into a bear market Thursday. Meanwhile, Chinese shares extended a rout of nearly $1.2 trillion this month.

Japanese equities rose, trimming their worst weekly loss in two months, as some observers saw the selloff on concerns over higher U.S. interest rates as having gone too far. Electronics and auto makers were the biggest boosts to the Topix, which rose 1.9%, paring its weekly decline to 2.6%. Fast Retailing and Shin-Etsu Chemical were the largest contributors to a 2.1% rise in the Nikkei 225. The yen was little changed after weakening 1.3% against the dollar over the previous two sessions. “Looking at the technical indicators like RSI, you can see that Japanese equities have been oversold,” said Nobuhiko Kuramochi, a market strategist at Mizuho Securities. “Shares have fallen too much considering the not-bad corporate earnings and also when compared with U.S. equities.” U.S. futures rallied in Asian trading hours, after a volatile cash session that ended in losses as investors continued to reprice assets on the Fed’s pivot to tighter policy. Apple provided a post-market lift with record quarterly sales that sailed past Wall Street estimates.

In Australia, the S&P/ASX 200 index rose 2.2% to 6,988.10 at the close in Sydney, bouncing back after slipping into a technical correction on Thursday. The benchmark gained for its first session in five as miners and banks rallied, trimming its weekly slide to 2.6%. Champion Iron was a top performer after its 3Q results. Newcrest was one of the worst performers after its 2Q production report, and as gold extended declines. In New Zealand, the S&P/NZX 50 index fell 1.6% to 11,852.15.

India’s benchmark index edged lower on Friday to extend its decline to a second consecutive week as investors grapple with volatility created by the U.S. Federal Reserve’s rate-hike plan. The S&P BSE Sensex fell 0.1% to 57,200.23 in Mumbai on Friday, erasing gains of as much as 1.4% earlier in the session. The NSE Nifty 50 Index ended flat. For the week, the key gauges ended with declines of 3.1% and 2.9%, respectively.  All but five of the 19 sector sub-indexes compiled by BSE Ltd. climbed on Friday, led by a measure of health-care companies. BSE’s mid- and small-sized companies’ indexes outperformed the benchmark by rising 1% and 1.1%. “Selling pressure has now cooled off, markets will now focus on local triggers such as expectations from the budget,” said Prashant Tapse, an analyst with Mumbai-based Mehta Equities.  Investors will also monitor corporate-earnings reports for the December quarter to gauge demand and inflation outlook. Of the 21 Nifty 50 companies that have announced results so far, 12 either met or exceeded expectations, eight missed, while one can’t be compared.  Kotak Mahindra Bank continued the strong earnings run by lenders, reporting fiscal third-quarter profit ahead of the consensus view, while Dr. Reddy’s Laboratories missed the consensus estimate.  ICICI Bank contributed the most to the Sensex’s decline, falling 1.6%. Out of 30 shares in the Sensex index, 14 rose and 16 fell.

In rates, bonds trade poorly again with gilts and USTs bear steepening, cheapening 3-3.5bps across the back end. Treasuries are weaker, same as most European bond markets, with stock markets under pressure globally and S&P 500 futures lower but inside weekly range. Treasury yields are cheaper by 4bp-5bp from intermediate to long-end sectors, 10-year around 1.84%, inside weekly range; though front-end outperforms, 2-year yield reaches YTD high 1.22%, steepening 2s10s by ~1bp. Gilts underperformed as traders price in a more aggressive path of rate hikes from the BOE. Treasury curve is steeper for first day in four, lifting spreads from multimonth lows. Globally in 10-year sector, gilts lag Treasuries by 0.5bp while bunds outperform slightly. Bunds bear flatten with 5s30s near 52bps after two block trades but subsequently recover above 54bps. IG dollar issuance slate empty so far; Procter & Gamble priced a $1.85b two-tranche offering Thursday, the first since Wednesday’s Fed meeting.

In FX, Bloomberg Dollar Spot pushes to best levels for the week. Scandies and commodity currencies suffer the most. The Bloomberg Dollar Spot Index was set for a fifth straight day of gains, the longest streak since November, and near its strongest level in 17 months as the greenback was steady or higher against all of its Group-of-10 peers. The euro steadied near a European session low of $1.1121 while risk-sensitive Australian and Scandinavian currencies led the decline. Sweden’s krona sank, despite data showing the Nordic nation’s economy grew more than expected in the final quarter of 2021, fueling speculation that the central bank could soon start to take its foot off the stimulus pedal. Australia’s dollar dropped to the lowest level in 18 months as the Reserve Bank of Australia lags behind many of its peers in signaling monetary tightening. Treasuries sold off, led by the belly; Bunds also traded lower, yet outperformed Treasuries, and Germany’s 5s30s curve flattened to 52bps after two futures blocks traded. Italian government bonds underperformed with the nation’s parliament voting twice on Friday to elect a new president, as the lack of progress after four days of inconclusive ballots adds to pressure to end a process that’s left the country in limbo.

In commodities, Crude futures hold a narrow range, just shy of Asia’s best levels. WTI trades either side of $87, Brent just shy of a $90-handle. Spot gold drops near Thursday’s lows, close to $1,791/oz. Base metals are under pressure; LME copper underperforms peers, dropping over 1.5%.

Crypto markets were rangebound in which Bitcoin traded both sides of the 37,000 level. Russia's government drafted a roadmap for cryptocurrency regulation, according to RBC.

To the day ahead now, and data releases include Germany’s Q4 GDP, US personal income and personal spending for December, as well as the Q4 employment cost index and the University of Michigan’s final consumer sentiment index for January. Earnings releases include Chevron and Caterpillar.

Market Snapshot

  • S&P 500 futures up 0.1% to 4,323.75
  • STOXX Europe 600 down 1.0% to 465.51
  • MXAP up 0.5% to 182.48
  • MXAPJ little changed at 597.31
  • Nikkei up 2.1% to 26,717.34
  • Topix up 1.9% to 1,876.89
  • Hang Seng Index down 1.1% to 23,550.08
  • Shanghai Composite down 1.0% to 3,361.44
  • Sensex down 0.1% to 57,197.94
  • Australia S&P/ASX 200 up 2.2% to 6,988.14
  • Kospi up 1.9% to 2,663.34
  • Brent Futures up 0.4% to $89.71/bbl
  • Gold spot down 0.3% to $1,792.52
  • U.S. Dollar Index up 0.13% to 97.38
  • German 10Y yield little changed at -0.05%
  • Euro down 0.1% to $1.1132

Top Overnight News from Bloomberg

  • The euro-area economy kicked off 2022 on a weak footing, with pandemic restrictions taking a toll on confidence and growing fears that Germany may be on the brink of a recession for the second time since the crisis began. A sentiment gauge by the European Commission fell to 112.7 in January, the lowest in nine months, driven by declines in most sectors and among consumers. Employment expectations dropped for a second month
  • Germany’s economy shrank 0.7% in the fourth quarter with consumers spooked by another wave of Covid-19 infections and factories reeling from supply-chain problems.
  • Russian Foreign Minister Sergei Lavrov said on Friday that the American proposal to defuse tensions with Ukraine contained “rational elements,” even though some key points were ignored
  • A U.K. government probe into alleged rule-breaking parties in Boris Johnson’s office during the pandemic could be stripped of key details at the request of police, potentially handing the prime minister a boost as he tries to persuade his Conservatives not to mount a leadership challenge
  • Governor Haruhiko Kuroda said the Bank of Japan won’t be switching its bond yield target until inflation rises high enough to warrant exit talks
  • Seven straight jumps in the so- called “fear gauge” for the S&P 500 is a signal that it may be time to wager against volatility, if history is any guide. Only 10 times in the past two decades has the Cboe Volatility Index - - better known as the VIX -- risen for that many trading sessions in a row

A more detailed look at global markets courtesy of Newsquawk

Asian stocks eventually traded mixed although China lagged ahead of holiday closures next week. ASX 200 (+2.2%) was lifted back up from correction territory. Nikkei 225 (+2.1%) gained on a weaker currency and with corporate results driving the biggest movers. KOSPI (+1.9%) was boosted by earnings including from the world's second-largest memory chipmaker SK Hynix. Hang Seng (-1.1%%) and Shanghai Comp. (-0.9%) lagged with a non-committal tone in the mainland ahead of the Lunar New Year holiday closures and with Hong Kong pressured by losses in blue chip tech and health care

Top Asian News

  • Asia Stocks Rise, Still Head for Worst Week Since February
  • Kuroda Hints No Chance of Switching Yield Target Until Exit
  • China Fintech PingPong Said to Mull $1 Billion Hong Kong IPO
  • Biogen Sells Bioepis Stake for $2.3 Billion to Samsung Biologics

European bourses have conformed to the downbeat APAC handover with losses in the region extending following the cash open, Euro Stoxx 50 -1.7%. Sectors were mixed with Tech and Banking names the laggards while Personal/Household Goods and Retail outperformer following LVMH and H&M respectively; since then, performance has deteriorated though the above skew remains intact. US futures are moving in tandem with European-peers; however, magnitudes are more contained as the ES is only modestly negative and NQ continues to cling onto positive territory following Apple earnings. Apple Inc (AAPL) Q1 2022 (USD): EPS 2.10 (exp. 1.89), Revenue 123.95bln (exp. 118.66bln), iPhone: 71.63 bln (exp. 68.34bln), iPad: 7.25bln (exp. 8.18bln), Mac: 10.85bln (exp. 9.51bln), Services:  19.52bln (exp. 18.61 bln), according to Businesswire. +3.5% in the pre-market, trimming from gains in excess of 5.0% earlier

Top European News

  • German Economy Contracted Amid Tighter Virus Curbs, Supply Snags
  • H&M CEO Sets Target to Double Retailer’s Sales by 2030
  • Telia Sells Tower Stake for $582 Million, Cuts Costs
  • U.K. ‘Partygate’ Probe May Be Watered Down at Police Request

In FX, buck bull run continues as DXY takes out another July 2020 high to leave just 97.500 in front of key Fib resistance. Aussie feels the heat of Greenback strength more than others amidst risk-off positioning and caution ahead of next week’s RBA policy meeting. Kiwi also lagging and Loonie losing crude support after the BoC’s hawkish hold midweek. Euro and Yen reliant on some hefty option expiry interest to provide protection from Dollar domination. BoJ Governor Kurdoa if times come to debate the exit of policy, then targeting  shorter maturity JGBs could become an option; at this stage its premature to raise yield target or take steps to steepen yield curve.

In commodities, WTI and Brent are consolidating somewhat after yesterday's choppy price action, but remain towards the lowend
of a circa. USD 1.00/bbl range. Focus remains firmly on geopols as Russia is set to speak with French and German officials on Friday, though rhetoric, remains relatively familiar. Spot gold and silver are pressured as the yellow metal loses the 100-DMA, and drops to circa. USD 1780/oz as the USD rallies, and ahead of inflation data while LME copper follows the equity downside.

In Geopolitics:

  • US President Biden reaffirmed in call with Ukraine's President the readiness of US to respond decisively if Russia further invades Ukraine, according to Reuters.
  • Russian Foreign Minister Lavrov says Russia is analysing NATO and US proposals and will decide on how to respond to them, via Reuters; additionally, Lavrov will speaking with German Foreign Minister Baerbock on Friday, via Ifx.
  • Russia's Kremlin says President Putin's talks with Chinese President Xi will give attention to security in Europe and Russia-US dialoged, according to Reuters; Kremlin does not rule out that Putin will provide some assessments on response to Russian proposals.
  • US requested a public UN Security Council meeting for Monday to discuss the build up of Russian forces on Ukraine border, according to Reuters citing diplomats.
  • US bipartisan group of Senators have reportedly been meeting to create legislation that would dramatically increase presence of US military aid for Ukraine, according to Reuters sources.
  • Lithuania and Germany are in discussions to increase the presence of the German military, given current events, according to Reuters

US Event Calendar

  • 8:30am: 4Q Employment Cost Index, est. 1.2%, prior 1.3%
  • 8:30am: Dec. Personal Income, est. 0.5%, prior 0.4%
    • Dec. PCE Core Deflator YoY, est. 4.8%, prior 4.7%; PCE Core Deflator MoM, est. 0.5%, prior 0.5%
    • Dec. PCE Deflator YoY, est. 5.8%, prior 5.7%; PCE Deflator MoM, est. 0.4%, prior 0.6%
  • 8:30am: Dec. Personal Spending, est. -0.6%, prior 0.6%; Real Personal Spending, est. -1.1%, prior 0%
  • 10am: Jan. U. of Mich. Sentiment, est. 68.8, prior 68.8
    • Current Conditions, est. 73.2, prior 73.2; Expectations, est. 65.9, prior 65.9
    • 1 Yr Inflation, est. 4.9%, prior 4.9%; U. of Mich. 5-10 Yr Inflation, prior 3.1%

DB's Jim Reid concludes the overnight wrap

What a week we’ve had. Yesterday saw another market whipsaw as markets continued to try to digest the aftermath of Chair Powell’s press conference. In particular, there was growing speculation that the Fed would embark on back-to-back hikes in order to get inflation under control, with Fed funds futures now pricing 2 full hikes over the next two meetings in March and May, in line with our US econ team’s updated call. Assuming this is realised, then this would be a much faster pace of hikes than anything seen over the last cycle, when the initial hike in December 2015 wasn’t followed by another for an entire year, and the fastest things got was a consistent quarterly pace when the Fed hiked 4 times in 2018. This time, we almost have 4 hikes priced between March and September alone. Of course however, it’s worth noting that today they face a very different set of circumstances, since the last hiking cycle actually began with inflation beneath the Fed’s target, and was a pre-emptive one given their belief that inflation would rise from that point. By contrast, this cycle of rate hikes is set to begin with inflation at levels not seen since the early 1980s, with the Fed seeking to regain credibility after consistently underestimating inflation over the last year. As we’ve highlighted in our work over the last 6-9 months this is a very, very, very different cycle to the last one and we should therefore expect different inflation and Fed outcomes. We repeat a few slides on this in the chart book so feel free to dip in.

These growing expectations of near-term hikes supported the more policy-sensitive 2yr Treasury yield, which rose a further +3.8bps to a fresh post-pandemic high after the previous day’s massive +13.3bps advance. And the number of hikes priced for 2022 as a whole actually rose to a new high of its own at 4.8 hikes. However, a -6.4bps decline in the 10yr yield to 1.80% meant that there was a further flattening of the yield curve, with the 2s10s down to its flattest level in over a year, at just 60.9bps. This is only adding to the late-cycle signals we’ve been discussing of late, particularly when you consider that the yield curve historically tends to flatten in the year after the Fed begins hiking rates, so an inversion over the next 12 months would be no surprise on a historic basis followed perhaps by a 2024 recession? See the chart book for more on this. Indeed, some parts of the curve are even closer to inverting than the 2s10s, with the 5s10s slope at just 14.1bps yesterday, which is the flattest it’s been since the initial market panic about Covid back in March 2020.

The implications of this hawkish push could also be seen in FX markets, where the dollar index strengthened +0.81% to levels not seen in over 18 months. Conversely though, the Fed’s more aggressive posture on inflation significantly hurt precious metals, with gold (-1.22%) falling by more than -1% for a second consecutive session.

Transatlantic equity performance was a mixed bag yesterday. The STOXX 600 fell -1.47% immediately after the European open, just as US futures were pointing to additional losses on top of the previous day’s. However, sentiment turned into the European afternoon, with the major indices on both sides of the Atlantic moving into positive territory, leaving the STOXX 600 +0.65% higher. True to recent form though, the S&P 500 reversed course after the European optimists called it a day, drifting lower to end the day at -0.54%. Sector performance was fairly split, with five sectors in the red: discretionary (-2.27%) and real estate (-1.75%), industrials (-0.93%), financials (-0.92%), and tech (-0.69%). Energy (+1.24%) was again the outperformer, but didn’t do enough to drag the entire index into the green. Tesla was a big driver of the discretionary drawdown. After bouncing around following its earnings release the evening before, Tesla declined -11.55% yesterday on the back of potential supply chain issues, and to a 3-month low. The NASDAQ underperformed the S&P, declining -1.40%, bringing it -16.84% below its all-time high. The Russell 2000 of small caps (-2.29%) fell into “bear market” territory and is now down -20.94% from its highs in early November. The Vix index of volatility closed modestly lower (-1.37ppts) for the first time in almost two weeks, but remained elevated at 30.59.

Apple reported fourth quarter earnings after the close. Like other goods manufactures, they continued to be besot by supply chain issues, but that did not stop them from beating sales and earnings estimates, posting their best quarter of revenues ever. The stock was more than +5% higher in after-hours trading following the release. Prior to this they were down around -10% YTD. This has helped the S&P 500 (+0.7%) and Nasdaq (+1.1%) futures rebound as we hit the last day of a tough and very volatile week.

Overnight in Asia, equity markets are also recovering some of their recent losses with the Nikkei rebounding (+2.17%), after falling nearly -3% in the previous session, followed by the Kospi (+1.44%). Meanwhile, the Shanghai Composite (+0.05%) and CSI (0.08%) are trading flattish as we type. On the other hand, the Hang Seng (-0.94%) is extending its recent losses this morning ahead of the release of Hong Kong’s Q4 GDP report scheduled in a few hours.

Early morning data showed consumer prices in Tokyo fell to +0.5% y/y in January from +0.8% in December while the core CPI inflation (+0.2% y/y) in January failed to exceed market expectations (+0.3%) after increasing +0.5% last month. Elsewhere, South Korea’s industrial output surprisingly advanced +4.3% m/m in December against economist expectations of -0.3%. It follows November’s upwardly revised +5.3% increase.

Back in Europe, sovereign bond yields rose for the most part, having been closed at the time of Chair Powell’s press conference the previous day. Those on 10yr bunds (+1.6bps), OATs (+0.7bps) and gilts (+3.1bps) all moved higher, and that rise in gilt yields comes ahead of next week’s Bank of England decision, where overnight index swaps are now pricing in a 94% chance of another rate hike, which is also our UK economist’s expectation.

One factor supporting sentiment yesterday was a decent set of economic data, with the US economy growing by an annualised rate of +6.9% in Q4 2021 (vs. +5.5% expected). That’s the fastest quarterly pace since Q3 2020 when the economy rebounded sharply from the various lockdowns, and left growth for the full year 2021 at +5.7%, the fastest since 1984. Meanwhile, the weekly initial jobless claims for the week through January 22 subsided to 260k (vs. 265k expected), ending a run of 3 consecutive weekly increases.

To the day ahead now, and data releases include Germany’s Q4 GDP, US personal income and personal spending for December, as well as the Q4 employment cost index and the University of Michigan’s final consumer sentiment index for January. Earnings releases include Chevron and Caterpillar.


Tyler Durden Fri, 01/28/2022 - 08:07

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What Is Volatility in Finance? Definition, Calculation & Examples

What Is Volatility in Simple Terms? Volatility is the degree to which a security (or an index, or the market at large) varies in price or value over the course of a particular period of time. Volatility refers to the frequency with which a security change



More volatile securities come with more risk, but they may also produce more substantial returns. 

Jerry Zhang via Unsplash; Canva

What Is Volatility in Simple Terms?

Volatility is the degree to which a security (or an index, or the market at large) varies in price or value over the course of a particular period of time. Volatility refers to the frequency with which a security changes in price and the severity with which it changes in price. Typically, the more volatile a security is, the riskier of an investment it is. That being said, more volatile securities may also offer more substantial potential returns.

Risk-tolerant investors interested in growth tend to like volatile securities and markets because of their higher potential upside, whereas risk-averse investors who prefer modest-but-stable returns and lower risk tend to steer clear of highly volatile investments.

What Causes Volatility in the Market?

When it comes to the market as a whole, volatility is often related to macroeconomic factors rather than industry or company-specific issues. These can include things like abnormally high or low inflation, interest rate hikes, geopolitical events like international conflict, economic recessions, supply-chain issues, and even so-called forces majeures like environmental catastrophes or viral outbreaks like the COVID-19 pandemic. In many cases, a combination of these types of factors may be the catalyst for market-wide volatility.

During periods of market-wide volatility, risk-averse investors tend to move their money toward safer, more stable securities like precious metals, government bonds, or shares of preferred stock, depending on individual risk tolerance.

What Causes Volatility in Particular Stocks?

Individual stocks can experience volatility independent of the market at large. Some stocks are known to be more volatile than others, and generally, the higher a stock’s trading volume is, the more volatile it is likely to be. Well-known companies that are constantly in the public eye (think Tesla, Amazon, Meta, etc.), have a large market cap, and experience huge daily trading volume are naturally more volatile than lesser-known stocks that don’t have as public a persona and aren’t as often discussed in the media.

Individual stocks can also experience short-term volatility around certain events. The release of a new product, the hiring, firing, or retirement of an executive, or the buzz surrounding an upcoming earnings call can all send a stock’s price for a tailspin until things have settled down.

How Can Investors Benefit From Volatility?

There are many ways investors can incorporate volatility into their trading strategies, but all involve risk. An average, buy-and-hold value investor could identify a few stocks they like, keep an eye on price movements and volatility, then buy into each stock when its price seems relatively low (i.e., when it approaches an established support level) so they stand to gain more when the stock’s price goes back up in the longer term.

More active, shorter-term investors (like day traders and swing traders) use volatility to make buy and sell decisions much more frequently. Day traders aim to buy low and sell high multiple times over the course of a single day, and swing traders do the same over the course of days or weeks.

Options traders who simply want to bet on volatility but aren’t sure if the price of a stock will go up or down may buy straddles (at-the-money put and call options for the same stock that expire at the same time) so that they can profit off of price movement in any direction.

How Is Volatility Measured?

There are a number of ways to measure and interpret volatility, but most commonly, investors use standard deviation to determine how much a stock’s price is likely to change on any given day.

What Is Standard Deviation?

Standard deviation tells us how much a stock’s price was likely to change on any given day (in either direction—positive or negative) over a particular period.

How Do You Calculate the Standard Deviation of a Stock’s Price?

  1. To calculate standard deviation, first choose a time period (e.g., 10 days).
  2. Take an average of a stock’s closing prices for that period.
  3. Calculate the difference between each day’s closing price and the stock’s average closing price for that time period.
  4. Square each of these differences.
  5. Add the squared differences up.
  6. Divide this sum by the number of data points in the set (e.g., if the time period is 10 days, divide the sum by 10).
  7. Take the square root of the result to find the stock’s standard deviation for the period in question.

The resulting number will be in dollars and cents, so comparing standard deviation between two stocks can’t tell you how volatile they are in comparison to one another because different stocks have different average prices. For instance, if stock A has an average price of $200, and stock B has an average price of $100, a standard deviation of $5 would be a lot more significant in stock B than stock A.

To compare standard deviations between stocks, use the same time time period to calculate a standard deviation for each stock, then divide that stock’s standard deviation by its average price over the period in question. The resulting figures are percentages and can thus be compared to one another more meaningfully.

Standard Deviation Calculation Example: Acme Adhesives

Let’s say we want to find the standard deviation of the stock price of a fictional company called Acme Adhesives over the course of a particular five-day trading week. Let’s assume the stock closed at $19, $22, $21.50, $23, and $24 that week.

First, let’s find the average closing price for the week.

Average = (19 + 22 +21.50 + 23 + 24) / 5
Average = 109.5 / 5
Average = 21.9

Next, we need to find the difference between each closing price and the average closing price for the five-day period in question.

19 – 21.9 = -2.9
22 – 21.9 = 0.1
21.5 – 21.9 = -0.4
23 – 21.9 = 1.1
24 – 21.9 = 2.1

Next, we need to square each of these differences.

(-2.9) * (-2.9) = 8.41
0.1 * 0.1 = 0.01
(-0.4) * (-0.4) = 0.16
1.1 * 1.1 = 1.21
2.1 * 2.1 = 4.41

Next, we need to add these squared differences up.

8.41 + 0.01 + 0.16 + 1.21 + 4.41 = 14.2

Next, we need to divide this sum by the number of data points in the set (i.e., the number of days we’re looking at)

14.2 / 5 = 2.84

Finally, we need to take the square root of this result.

Square Root of 2.84 = 1.69

So, the standard deviation of Acme Adhesives’ stock price for the five-day period in question is $1.69. If we divide this by the stock’s average price for the time period ($21.90), we get 0.077, which tells us that the stock’s price was likely to deviate from its mean by about 8% each day during that period.

What Is the Volatility Index (VIX)?

The volatility index, or VIX, is an index created by the Chicago Board Options Exchange designed to track implied market volatility based on price changes in S&P 500 index options with upcoming expiration dates.

Analysts look to the VIX as a measure of fear and uncertainty in the investment community because it represents the market’s volatility expectations for the next month or so. Because the S&P 500 tracks 500 of the biggest U.S. stocks by float-adjusted market capitalization, it is thought to be a good representation of the American stock market, and subsequently, the VIX is thought to be a good representation of the American stock market’s short-term volatility expectations. 

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