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Futures Melt Up To New Record High Ahead Of Payrolls

Futures Melt Up To New Record High Ahead Of Payrolls

US index futures continued their relentless meltup on the last day of the week, before today’s jobs report which is expected to bounce strongly from last month’s disappointing print (exp…

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Futures Melt Up To New Record High Ahead Of Payrolls

US index futures continued their relentless meltup on the last day of the week, before today's jobs report which is expected to bounce strongly from last month's disappointing print (exp. 450K, up from 194K), and could set the pace for the Fed's taper into 2022 if it is too much of an outlier in either direction. At 730am, e-mini S&P futures were up 8.25 or 0.18% to 4,681.5, a new all time high; Nasdaq futures rose 48 points or 0.29% and Dow futures were up 35 or 0.1%. 10Y yields were flat at 1.53% and the dollar index jumped, while Brent traded just above $80 after yesterday's rout.

“Investors took comfort from the Federal Reserve’s slow and steady approach when announcing the time-line for its taper program,” said Michael Hewson, chief market analyst at CMC Markets in London. “Today’s payrolls report should confirm that the U.S. labor market is still improving.”

After one of the busiest earnings days this season, it has been a furious session with Expedia to News jumping in premarket trading on better-than-expected results.  Airbnb jumped 7.7% after the travel website reported record sales and earnings that exceeded analyst estimates. Meanwhile, Peloton crashed 33% after the fitness company cut its annual revenue forecast by as much as $1 billion because of declining demand in the post-pandemic economy.  Here are some of the biggest U.S. movers today:

  • Peloton (PTON US) shares tanked 32% in U.S. premarket trading after analysts said its results and reduced guidance implied weaker demand than expected, and that the home-fitness company’s business model may need a rethink
  • Square (SQ US) shares drop 4.5% in U.S. premarket trading after its 3Q results fell short of the consensus estimate, but its outlook remains strong, analysts say. The weakness in its Cash App and Bitcoin revenue could have been predicted, they added.
  • Airbnb (ABNB US) shares rose 8% in U.S. premarket after the vacation-rental giant reported record sales and earnings that beat analysts’ estimates. RBC and Barclays hiked their price targets, citing improving earnings and supply-demand dynamics in 2022
  • NRX Pharmaceuticals (NRXP US) and Relief Therapeutics (RLF SW), which are partners on a drug to treat Covid-19, tumbled after the U.S. Food and Drug Administration declined to issue an emergency use authorization for the medication.
  • GoPro (GPRO US) shares soar 17.2% premarket Tuesday after the maker of mountable and wearable cameras reported third-quarter results that exceeded analyst estimates
  • Expedia (EXPE US) shares rally in premarket trading, as the online travel agency reports third-quarter revenue and adjusted earnings that beat expectations. The company’s CEO also gave positive commentary about a recovery in the travel industry
  • Novavax (NVAX US) climbs as much as 6% after the biotech company said it filed with the World Health Organization for emergency use listing for its Covid vaccine
  • Pinterest (PINS US) rises 5% in premarket trading after the company reported stronger-than-expected profit and revenue that met analysts’ estimates
  • Microchip (MCHP US) gains 2.5% in premarket trading after projecting revenue and adjusted EPS that exceeded the average analyst estimates
  • Ontrak (OTRK US) jumped 24% postmarket after the tele-health company boosted its full-year guidance
  • Grid Dynamics (GDYN US) jumped 18% in postmarket trading after the information-technology services company forecasts full-year revenue that beat the average analyst estimate
  • Pfizer (PFE) surged more than 10% after the company announced it would seek approval for a new covid pill after strong trial data.

Looking ahead now, we’ll cap off a very busy macro week today with the US jobs report for October As previewed earlier, consensus expects +450k increase in nonfarm payrolls, which in turn would send the unemployment rate down a tenth to a post-pandemic low of 4.7%. The last couple of jobs reports have seen some downside surprises, but if realized, that +450k number would be the strongest jobs growth in 3 months. We’ve had some fairly positive labor market data in advance of the jobs report too, with the ADP’s report of private payrolls exceeding expectations on Wednesday at 571k (vs. 400k expected), and yesterday the weekly initial jobless claims for the week through October 30 fell to a fresh post-pandemic low of 269k (vs. 275k expected). The Fed made it clear this week that labor market evolution after the delta variant will be a key determinant in the future path of monetary policy.

In any case, risk euphoria was strong with Europe as well, where stocks scaled another record peak as consumer and tech companies led the Stoxx Europe 600 Index up 0.2% to an all-time high poised for the longest winning streak since mid-June. FTSE MIB and FTSE 100 outperformed at the margin. Technology stocks outperformed, while energy and travel and leisure stocks declined. Among the biggest movers, Allegro.eu SA soared 7.8% after Poland’s largest e-commerce bought a Czech peer in a $1 billion deal. Euronext NV fell 4.4% after the exchange operator’s third-quarter results undershot expectations. However, most travel stocks dropped as a fourth wave of the pandemic hits the continent, with Germany reporting record infections. European stocks extended October’s recovery to return to their all-time highs, as investors scooped up the region’s stocks thanks to a reassuring earnings season and as central banks signal they are in no hurry to raise interest rates just yet.

“We’ve seen a fairly benign reaction to the earnings season, in some respects. Perhaps people were a little bit nervous going into it,” Alastair George, chief investment strategist at Edison Group, said by phone. “The market troughed in the early part of October and has bounced back since then, and if we look at earnings revisions, they’re not as robust as they were earlier on in the Covid recovery cycle, but we’re not seeing downgrades,” George added.

Asian equities fell, as a slide in bond yields globally and a decline in Hong Kong-listed tech shares weighed on sentiment. The MSCI Asia Pacific Index slid as much as 0.5%, led lower by consumer discretionary and utility shares. Alibaba and Tencent were the biggest drags with analysts accessing earnings outlooks ahead of the companies’ quarterly results announcements. Hong Kong’s Hang Seng Tech Index fell 1.6%, while the benchmark Hang Seng Index dropped 1.4%. Traders are now awaiting the U.S. jobs report later Friday for further cues on monetary policy tightening. “Markets will be seeking confirmation on whether the job market recovery warrants a mid to late-2022 lift-off in rates as reflected in the Fed funds futures,” Jun Rong Yeap, market strategist at IG Asia, wrote in a note. The Asian stock benchmark is set for a weekly rise of less than 1% as the earnings season progresses. Supply-chain constraints and inflation worries are being cited as concerns by many of the largest companies in the region, with several seeing their shares tumble as the chip shortage prompts them to slash their annual profit forecasts. India’s stock market was closed for a holiday Friday.

Japanese stocks fell as the yen held its strength against the dollar and investors assessed the potential supply response from the U.S. to a gradual hike in production from OPEC+. The Topix index dropped 0.7% to close at 2,041.42 in Tokyo, while the Nikkei 225 declined 0.6% to 29,611.57. Toyota Motor contributed the most to the Topix’s loss, decreasing 1.4%. Out of 2,181 shares in the index, 540 rose and 1,589 fell, while 52 were unchanged. Japan’s currency was little changed at 113.64 yen per dollar, after gaining 0.2% on Thursday

Australia's S&P/ASX 200 index rose 0.4% to 7,456.90, its highest close since Sept. 16. The benchmark gained 1.8% for the week.  Eight of the 11 subgauges finished Friday trade higher, with miners and healthcare stocks driving the gains.  The Reserve Bank of Australia struck an upbeat note on the economy, while maintaining that faster wages growth and inflation will take some time and the first interest-rate increase is unlikely before 2024. Administration soared after receiving a conditional, non-binding indicative takeover proposal from investment fund Carlyle Asia Partners V. Clinuvel tumbled after it was cut to hold at Jefferies.  In New Zealand, the S&P/NZX 50 index rose 1% to 13,074.61.

In FX, the Bloomberg Dollar Spot Index reached its strongest level in more than three weeks as the greenback was steady or higher versus all of its Group-of-10 peers. The euro traded near its cycle lows following strong U.S. data and renewed dovish commentary by European Central Bank officials and options now paint a similar outlook. The slowdown in inflation next year may not be as intense and quick as the European Central Bank had anticipated a few months ago, ECB Vice President Luis de Guindos says. The pound fell against all its Group-of-10 peers and gilts rallied, sending yields down by as many as 5 basis points. Money markets no longer fully price the Bank of England raising its key rate to 1% in Dec. 2022, pushing bets out to Feb. 2023. Labor market data is an important piece of the jigsaw for the BOE, Governor Andrew Bailey says in an interview with BBC Radio 4. Australia’s 10-year bonds had their first weekly gain in more than two months after the BOE joined the RBA and the Fed in pushing back against aggressive rate-hike bets; the Aussie and Kiwi weakened. The yen rose as traders unwound bearish bets on the currency before the release of key U.S. jobs data and repricing of the outlook for policy tightening.

In rates, the 10Y yield was unchanged at 1.53%. Gilts extend Thursday’s post-BO shockE rally, richening ~5bps across the curve in a modest flattening move. Short sterling futures add 2.5-3 ticks in red and green packs as expectations for higher rates are pared back. MPC-dated OIS rates factor in only 11bps of hike by the December meeting and no longer fully price the Bank’s rate at 1% by end-2022. Bunds follow, cash USTs drift ahead of today’s payrolls release.

In commodities, crude futures hold a narrow range after OPEC+ rebuffed U.S. demands for accelerated output.with WTI trading just below $80. Spot gold drifts higher, briefly testing $1,800/oz. Base metals are mixed: LME lead and tin rally, zinc drops over 1.5% with canceled warrants hitting the highest since August

To the day ahead now, and the main data highlight will be the aforementioned US jobs report, but European data will also include September figures on Euro Area retail sales and German and French industrial production. Central bank speakers will include the ECB’s Vice President de Guindos, as well as the ECB’s Holzmann, Centeno and Panetta, in addition to the BoE’s Ramsden, Pill and Tenreyro.

Market Snapshot

  • S&P 500 futures little changed at 4,674.25
  • STOXX Europe 600 up 0.1% to 483.89
  • German 10Y yield little changed at -0.24%
  • Euro little changed at $1.1558
  • MXAP down 0.4% to 198.36
  • MXAPJ down 0.3% to 645.66
  • Nikkei down 0.6% to 29,611.57
  • Topix down 0.7% to 2,041.42
  • Hang Seng Index down 1.4% to 24,870.51
  • Shanghai Composite down 1.0% to 3,491.57
  • Sensex up 0.5% to 60,067.62
  • Australia S&P/ASX 200 up 0.4% to 7,456.94
  • Kospi down 0.5% to 2,969.27
  • Brent Futures up 0.8% to $81.22/bbl
  • Gold spot up 0.4% to $1,798.55
  • U.S. Dollar Index little changed at 94.35

Top Overnight News from Bloomberg

  • Germany reported record Covid-19 infections for a second straight day, as a fourth wave of the pandemic hits Europe and threatens to overwhelm hospitals in some hot spots
  • The increasingly influential expectations gap between bond traders and central bankers faces a fresh test Friday -- U.S. jobs data that could reignite or damp out the inflation concerns policy makers tried to downplay this week
  • A shortage of homes for sale and a buoyant labor market are expected to underpin the U.K. housing market as consumers come under pressure from soaring inflation and higher interest rates, according to Halifax

A more detailed look at global markets courtesy of Newsquawk

Asian equity markets traded cautiously following a somewhat mixed handover from the US where the S&P 500 and Nasdaq extended on fresh record highs with outperformance in rate-sensitive stocks alongside the rally in global bonds. However, the DJIA lagged but with only marginal losses as attention shifted to the upcoming NFP jobs data, while Chinese developer default concerns provided headwinds in Asia after reports Kaisa Group missed a payment on its wealth management product. ASX 200 (+0.4%) was underpinned by strength in the mining-related sectors as gold producers benefitted from the recent advances in the precious metal which approached just shy of the USD 1800/oz level and with sentiment also helped by the continued dovish tone by the RBA in its quarterly Statement on Monetary Policy, although advances were capped amid losses in tech and with energy names suffering due to lower oil prices. Nikkei 225 (-0.6%) weakness was a function of recent adverse currency flows but with downside stemmed as participants digest a slew of earnings releases and reports the government is considering cash handouts of JPY 100k to under-18s. Hang Seng (-1.4%) and Shanghai Comp. (-1.0%) were both subdued with Hong Kong pressured by losses in the blue chip financial, tech and energy stocks and with property names also constrained by the missed Kaisa Group payment which the Shenzhen-based developer plans to repay in instalments. It was also reported that China told certain smaller banks to limit wealth products, although the losses in the mainland were cushioned after the PBoC upped its liquidity effort despite still resulting in a net daily drain. Finally, 10yr JGBs were higher following on from the gains in global counterparts which were spurred by the surprise BoE hold on rates and with the weakness in Japanese stocks also helping keep bond prices afloat, with price action also unfazed by the lack of purchases from the BoJ which were instead seeking to buy corporate bonds with 1yr-3yr maturities for Nov. 10th.

Top Asian News

  • Japan Eases Many Covid-Era Border Restrictions as Cases Slump
  • Developer in China Misses Payment on Loan Backed by Fantasia
  • World’s Largest Pension Fund GPIF Posts $17 Billion Gain
  • HSBC Requests All of Its Hong Kong Staff to Get Vaccinated

European equities broadly trade on a marginally firmer footing (Euro Stoxx 50 +0.4%; Stoxx 600 +0.2%) with the Stoxx 600 set to close the week out with gains of around 1.6%. Macro commentary for the session has been relatively light thus far in the wake of yesterday’s BoE surprise. The handover from the APAC session was predominantly a negative one with Hang Seng (-1.4%) and Shanghai Comp. (-1%) both subdued as stocks in Hong Kong were pressured by losses in the blue-chip financial, tech and energy stocks and with property names also constrained by the missed Kaisa Group payment which the Shenzhen-based developer plans to repay in instalments. Stateside, futures have been inching higher ahead of the latest US jobs report with consensus looking for a 450k addition in nonfarm payrolls. Events in Washington are also worth keeping an eye on after CNN’s Raju reported yesterday that House Dems see Friday as the day they can finish the rule, USD 1.75tln Build Back Better bill and infrastructure bill. The Infrastructure bill would then go to Biden’s desk and the USD 1.75tln bill would go to the Senate for further negotiation with Manchin and other Senate Dems. Back to Europe, sectors are relatively mixed with Telecom names outperforming amid gains in BT (+1.8%) who sit at the top of the FTSE 100 as speculation continues to rumble on that billionaire investor Patrick Drahi could make a move for the Co. Deutsche Telekom is also providing support for the sector after confirming that IFM is to buy 50% in Co's Glasfaserplys GmbH for EUR 900mln. To the downside, Travel & Leisure names lag as opening gains for IAG (-2.1%) proved to be fleeting with the Co. warning of a potential EUR 3bln FY loss alongside Q3 earnings. Elsewhere, Oil & Gas names are trading lower alongside losses in the crude complex, with Basic Resources also near the foot of the leaderboard.

Top European News

  • Adler Pressure Builds With Idle Cranes and Angry Berlin Buyers
  • Axa Jumps to More Than 3-Year High After Share Buyback Plan
  • Europe Gas Prices Rebound as Traders Eye Russia’s Next Move
  • ECB’s Guindos Says Inflation Will Slow in 2022 ‘Without a Doubt’

In FX, the Dollar index has gained some traction and has broken out of the 94.273-417 APAC range in the run-up to the US labour market report – with the headline NFP print forecast at 450k (full preview available in the Newsquawk Research Suite), although anything short of an extreme jobs reports this month will likely not sway the Fed's dials following the taper announcement earlier this week - which will commence later this month. On the fiscal front, the US House is to meet at 12:00GMT/08:00EDT to debate the procedural rule to put the social spending bill on the floor. Democrats hope to debate and vote on the social spending and infrastructure bills today, according to Fox. From a technical perspective, DXY eyes yesterday 94.475 high ahead of the YTD peak at 94.563.

  • GBP, EUR - Sterling is the marked laggard thus far in what is seemingly a hangover on the day after the BoE coupled with Brexit risk, as the UK and EU's Brexit negotiators are set to meet in a bid to temper down cross-channel frictions. Governor Bailey made an appearance on UK radio this morning but failed to provide much in the way of additional colour regarding yesterday's policy decision – with markets currently assigning a 2/3 chance of a 15bps hike in December. On that note, BoE's new Chief Economist Pill, alongside MPC members Tenreyro and Ramsden, are all slated to speak throughout the session. Over to Brexit developments, RTE's Connelly recently reported that there is a "growing expectation" that the UK will trigger Article 16 - suggesting that "the view is that the EU's response could be much swifter and more 'radical' than expected.", although a special meeting of the bloc's leaders will likely be needed before any move. From a technical standpoint, EUR/GBP breached overnight resistance at 0.8565 before briefly topping the 200 DMA at 0.8584. In turn, GBP/USD declined from its 1.3508 high to a base sub-1.3450, with some traders suggesting the pair ran into sellers just ahead of a Fib level at 1.3511. EUR is supported by the EUR/GBP cross, with EUR/USD relatively flat on the day and still above yesterday's 1.1527 low. EUR/USD also looks ahead to some OpEx – with EUR 1.4bln between 1.5555-60 alongside some EUR 725mln at strike 1.1575.
  • AUD, NZD, CAD - The high-beta non-US dollars all post modest intraday losses. The Aussie sits at the bottom of this bunch after the RBA's SoMP overnight reiterated a patient approach, with headwinds also felt by a decline in iron ore prices overnight whilst copper trades lacklustre. NZD is softer in sympathy whilst the Loonie bears the brunt of lower post-OPEC crude prices. AUD/USD has declined from a 0.7408 peak and dips under its 200 DMA (0.7379) ahead of the 50 DMA (0.7364). NZD/USD meanwhile loses ground under the 0.7100 mark – which also coincides with its 21 and 200 DMAs. USD/CAD eyes its 200 DMA at 1.2479 from a 1.2450 base in the run-up to the Canadian jobs report – with the pair also cognizant of USD 1.3bln in OpEx between 1.2500-05.

In commodities, WTI and Brent front-month futures consolidate following yesterday's post-OPEC+ declines and heading into today's main event – the US labour market report. To recap the OPEC+ confab, ministers opted to continue the current plan to hike monthly output by 400k BPD (despite calls from the US to up output by 600-800k BPD), whilst reports also suggested that there will be no compensation for the underproduction seen from some nations. Traders are now on the lookout for a US response, with Washington yesterday reiterating the use of tools against oil prices. As a reminder, US Energy Secretary Granholm in an FT interview in October raised the prospect of an SPR release, whilst also refusing to rule out a ban on oil crude oil exports, suggesting “it is also a tool”. From the demand side, China’s economic slowdown has prompted JPM to downgrade the nation’s GDP growth forecast by 1ppt to 4.0%, citing the lingering impact of the power crunch and resurgence in COVID. It’s also worth noting that next week will see the Chinese inflation metrics, with oil prices expected to contribute to another Y/Y rise in PPI. WTI Dec trades just under USD 80/bbl (vs 78.96/bbl low) whilst Brent Jan trades on either side of USD 81/bbl (vs low 80.26/bbl). Turning to metals, spot gold and silver are uninteresting heading into the US jobs report whilst LME copper remains under USD 9,500/t. Overnight, Dalian iron ore futures fell once again to log a fourth consecutive week of losses amid China’s crackdown on the raw material.

US Event Calendar

  • 8:30am: Oct. Change in Nonfarm Payrolls, est. 450,000, prior 194,000
    • Change in Private Payrolls, est. 420,000, prior 317,000
    • Unemployment Rate, est. 4.7%, prior 4.8%
    • Underemployment Rate, prior 8.5%
    • Labor Force Participation Rate, est. 61.7%, prior 61.6%
    • Average Hourly Earnings YoY, est. 4.9%, prior 4.6%
    • Average Hourly Earnings MoM, est. 0.4%, prior 0.6%
    • Average Weekly Hours All Emplo, est. 34.8, prior 34.8
  • 3pm: Sept. Consumer Credit, est. $16b, prior $14.4b

DB's Jim Reid concludes the overnight wrap

Markets had another buoyant session yesterday as they received a dovish surprise from the Bank of England, just as they were digesting the Fed’s tapering decision from the previous evening. In response, markets shifted gear and pushed back pricing of future rate hikes, which in turn led to a sharp rally across the curve in sovereign bond markets in every major economy. And with investors lowering the odds of a near-term removal in monetary policy support, that helped equities take another leg higher, with the S&P 500 (+0.42%) advancing for the 15th time in the last 17 sessions to reach a fresh all-time high.

We’ll start with the BoE as they generated the main headlines, and contrary to building expectations that a potential rate hike could be imminent, the MPC in fact voted by 7-2 to keep Bank Rate on hold at 0.1%, with only the most hawkish members favouring a 15bps increase. This came in spite of the fact that the BoE upgraded their inflation forecasts yet again, now seeing CPI peaking “at around 5% in April 2022”. The meeting summary did say that if the data was in line with their projections it would “be necessary over coming months to increase Bank Rate”, but overall it was a pretty dovish decision, with the MPC also voting by 6-3 to continue with its existing QE program. In their forecasts that were conditioned on the market-implied path for Bank Rate, they said “a margin of spare capacity is expected to emerge”, and that CPI would be beneath target at the end of the forecast period, so again pushing back against market pricing that had been looking for multiple hikes in 2022. In response, our UK economists have shifted their call for lift-off of 15bps to December, before seeing further 25bps hikes in May 2022 and February 2023. For more details, see their reaction note (link here).

Markets reacted strongly to the decision as investors were surprised by the extent of the BoE’s dovishness. Gilts rallied sharply and outperformed sovereign bonds elsewhere, with 5yr yields (-20.0bps) seeing their biggest move lower in over 5 years, back in the immediate aftermath of the 2016 Brexit referendum. The 2yr yield was also down a massive -21.1 bps, marking its own biggest move lower since the initial market panic over Covid-19 back in March 2020. And sterling (-1.37%) had its worst performance against the dollar so far this year, which therefore left it as the worst performer among the G10 currencies too.

The BoE meeting triggered a rally of global sovereign bonds, though whilst the gilt curve bull steepened, most other curves wound up flatter on the day. In the US, yields on 10yr Treasuries fell -7.7 bps to 1.53%, marking their biggest move lower since August, whilst the 2yr Treasury yield retreated -4.4bps. Real yields continue to drive the treasury curve, with the 10yr real yield down -8.6 bps to move back beneath -1% again. Elsewhere in Europe, yields on 10yr bunds (-5.6bps), OATs (-6.4bps) and BTPs (-11.4bps) all declined as well, with lower real yields the driver once again.

This dramatic shift to price in greater monetary support for longer was good news for equities yesterday, with the major indices pressing on to fresh all-time highs. By the close of trade, the S&P 500 (+0.42%) had hit a new record, though in reality it was a fairly narrow-based advance, with fewer than half of the companies in the index actually moving higher on the day, whilst financials (-1.34%) underperformed against the backdrop of lower yields and a flatter curve. Interest-sensitive tech stocks did much better, with the NASDAQ (+0.81%) also at a record high as it achieved a 9th consecutive daily advance, its longest winning streak since 2019, whilst the FANG+ index of megacap tech stocks advanced +1.29% to reach a fresh high of its own. Over in Europe, the STOXX 600 (+0.41%) hit a record high too, even if the index was similarly hampered by financials (-0.86%), and records were also attained by Germany’s DAX (+0.44%) and France’s CAC 40 (+0.53%).

That rally in equities hasn’t carried over into Asia this morning where indices including the Nikkei (-0.72%), the KOSPI (-0.65%), the Hang Seng (-0.96%) and the Shanghai Composite (-0.25%) are all trading lower. However, the surge in sovereign bonds has been echoed elsewhere, with yields on Australian 10yr debt down -4.0bps this morning, and bonds also advanced in China after the PBOC increased their short-term cash injections yet again. Speaking of Chinese debt, Kaisa Group Holdings Ltd, a developer, and its units listed in Hong Kong were suspended from trading after the company missed payments on wealth products and raised liquidity concerns. Meanwhile, the latest Covid-19 outbreak in China continued to spread, with a further 90 new cases reported on Friday, 22 of which were asymptomatic. Otherwise, S&P 500 futures (+0.01%) are almost unchanged this morning and yields on 10y Treasuries have moved up +1.2bps.

Looking ahead now, we’ll cap off a very busy macro week today with the US jobs report for October, which is out at 12:30 London time. In terms of what to expect, our US economists are looking for a +400k increase in nonfarm payrolls, which in turn would send the unemployment rate down a tenth to a post-pandemic low of 4.7%. The last couple of jobs reports have seen some downside surprises, but if realised, that +400k number would be the strongest jobs growth in 3 months. We’ve had some fairly positive labour market data in advance of the jobs report too, with the ADP’s report of private payrolls exceeding expectations on Wednesday at 571k (vs. 400k expected), and yesterday the weekly initial jobless claims for the week through October 30 fell to a fresh post-pandemic low of 269k (vs. 275k expected). The Fed made it clear this week that labour market evolution after the delta variant will be a key determinant in the future path of monetary policy.

Speaking of the Fed, it was reported by Dow Jones that Fed Chair Powell was seen visiting the White House yesterday. It comes with just 3 months left until the end of Powell’s current 4-year term, and follows President Biden saying on Tuesday that an announcement on the Fed position would come “fairly quickly”. For reference, the decision on who would be nominated as Fed Chair had already been announced at this point 4, 8 and 12 years ago.

As well as the BoE, the other important meeting was that from the OPEC+ group, who rejected the demands from President Biden and others for a larger increase in oil production. They decided to increase output by +400k b/d in December, though afterwards oil actually gave up its surge earlier in the day to end the session lower, with WTI moving all the way from an intraday peak where it was up +3.17% to close down by -2.54%. A spokesperson for the US National Security Council said that the US would consider a range of tools to deal with oil prices, and Energy Secretary Granholm said last month that releasing crude oil from the strategic petroleum reserve was being considered.

Lastly on the data front, the Euro Area composite PMI for October was revised down a tenth from the flash reading to 54.2, whilst the services PMI was also revised down a tenth to 54.6. Separately, the Euro Area PPI reading for September came in at +16.0% year-on-year (vs. +15.4% expected). Lastly, the preliminary Q3 reading of nonfarm productivity showed an annualised decline of -5.0% (vs. -3.1% expected), which was its largest quarterly decline since 1981.

To the day ahead now, and the main data highlight will be the aforementioned US jobs report, but European data will also include September figures on Euro Area retail sales and German and French industrial production. Central bank speakers will include the ECB’s Vice President de Guindos, as well as the ECB’s Holzmann, Centeno and Panetta, in addition to the BoE’s Ramsden, Pill and Tenreyro.

Tyler Durden Fri, 11/05/2021 - 08:12

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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

Published

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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…

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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

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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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