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Futures Rebound As Facebook Soars; Dollar Steamrolls Higher As Yen Crashes

Futures Rebound As Facebook Soars; Dollar Steamrolls Higher As Yen Crashes

U.S. index futures, European bourses and Asian markets all rose…

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Futures Rebound As Facebook Soars; Dollar Steamrolls Higher As Yen Crashes

U.S. index futures, European bourses and Asian markets all rose as "good enough (if hardly stellar)" earnings reports from Facebook parent Meta Platforms and Qualcomm boosted sentiment (just don't look at the collapse in Teladoc). As we hit the peak of earnings season, with Apple, Amazon and Twitter set to report earnings today, S&P futures jumped 1.5%, while he Nasdaq futs jumped 2.2%, fuelled by a nearly 20% surge in Meta, which would be its biggest post-earnings jump since 2013. Investors were happy after Facebook added more users than projected in the first quarter, even if revenue growth slowed to just 7%, the lowest since the IPO. The dollar continued its relentless ascent, boosted by a plunge in the yen (more here) rising to the highest level in more than five years thanks to nominal US yields which are the highest in developed markets. WTI futures traded at around $102 a barrel. The 10-year Treasury yield was down some 2 basis points to 2.8147%. Bitcoin climbed, trading just below $40,000.

U.S. chip stocks traded higher in the premarket as Qualcomm, the biggest maker of chips that run smartphones, surged on a strong sales forecast easing fears about demand and the macroeconomic environment, while PayPal shares gained after it reported better-than-expected revenue and active user figures. Here are some other notable premarket movers:

  • Airline stocks gain in premarket trading after Southwest Airlines Co. said it expects a rebound in domestic travel to carry into the summer. 
  • PayPal (PYPL US) rises 3.6% in premarket trading after the payments firm reported better-than-expected first-quarter revenue and active user figures.
  • Pinterest shares (PINS US) rise 9% in premarket trading after quarterly earnings beat estimates, though analysts cut price targets amid questions over user engagement.
  • Teladoc Health (TDOC US) plunges 40% in premarket trading after cutting its revenue and earnings guidance, with analysts saying the outlook fuels the bear argument for the health-care technology company. Cathie Wood’s ARK Investment Management holds a stake.
  • Ford’s (F US) first- quarter results that were mixed, according to analysts. A “modest” beat in 1Q was mostly driven by European operations. Shares rise 2.8% in pre-market trading.
  • Atomera (ATOM US) surges as much as 18% in premarket trading, after the semiconductor materials and technology company entered into a new joint development agreement with a leading foundry partner.
  • Statera BioPharma (STAB US) soars 81% in U.S. premarket trading, after the biotech company announced a strategic agreement with Immune Therapeutics (IMUN US).
  • Sundial Growers (SNDL US) shares jump 11% in premarket trading after the cannabis producer reported 4Q adjusted Ebitda from continuing operations and net revenue that beat the average analyst estimate.
  • Amgen (AMGN US) drops 5.9% in postmarket trading after an IRS probe of prior tax years, the biotechnology company also left its annual outlook unchanged despite a first-quarter earnings beat.

"The bullish mood is very much earnings related after some of the disappointing news earlier in the week,” said Roger Lee, head of U.K. Strategy at Investec. “Meta, Qualcomm, Paypal helped reassure following on from Microsoft’s good numbers.”

Thursday’s relief rally punctuates a week of nerves marked by China’s struggle to suppress Covid, Russia’s war in Ukraine, halts of Russian gas exports to Poland and Bulgaria, and worries that Federal Reserve monetary tightening may tip the U.S. economy into a recession. Almost 70 companies in Europe are due to publish results Thursday. About 61% of the companies that have reported so far have beaten estimates.

Despite the rebound in the past two days, US stocks have had a very rough month, with the S&P 500 set for its worst monthly return in two years, while the tech-heavy Nasdaq 100 is set for a 12% loss this month, its worst performance since October 2008. That may reverse if Amazon.com and Apple - which are among the companies set to report quarterly numbers on Thursday - report blowout earnings.

“Ironically the better the corporate earnings backdrop, the less recession risk there is, so the Fed can increase rates more aggressively and all the implications that will have on valuations,” said Roger Lee, a strategist at Investec. “Paradoxically good corporate news could ultimately be bad news for the market.”

It was an exciting session for central bank watchers with the BOJ surprising markets with an announcement that it would hold daily, unlimited fixed-rate operations to defend Yield Curve Control, in the process crushing the yen. Meanwhile, Sweden's central bank surprised most by raising its benchmark rate to send the krona soaring.

European stocks also rallied - the Stoxx 600 rose as much as 1.4% led by autos, tech and the banking sector although every industry group was in the green. Big individual contributors included TotalEnergies, Glencore and Capgemini, which all posted gains on buoyant earnings. DAX and CAC gain as much as 2%. Here are some of the biggest European movers today:

  • Standard Chartered shares rise as much as 17% in London, the most since November 2020, following a rally in Hong Kong. The lender delivered a “stunning” 44% beat versus quarterly pretax profit consensus, according to Investec.
  • Glencore gains as much as 2.7% in London after the commodity giant’s first-quarter production report; Morgan Stanley analysts say an uplift to marketing guidance overshadows weaker output.
  • Barclays climbs as much as 3.7% after reporting what Citi described as an “impressive set of results” for 1Q. The broker highlighted the investment banking segment, noting that its performance was the main driver for the pretax profit beat.
  • Smith & Nephew rises as much as 4.2% after reporting earnings that included beats in both overall revenue and all business areas. RBC notes the results were “well ahead” of both its own and consensus estimates.
  • Albioma advances as much as 16% after U.S. private equity firm KKR agreed to acquire the French solar and biomass power producer for EU50/share plus EU0.84 dividend, in a deal valued at around EU1.6b.
  • Whitbread gains as much as 4.9%, among the top performers in the Stoxx 600 Travel & Leisure Index, after the U.K. hotel operator reported results that Bernstein says show a “very strong start” to FY23.
  • J Sainsbury drops as much as 6.9% after the U.K. grocer reported FY22 results and forecast FY23 adjusted pretax profit in the range of GBP630m- GBP690m. The guidance suggests cuts to consensus, according to Morgan Stanley.
  • Delivery Hero falls as much as 12%, reversing an earlier 9% gain, with Goldman Sachs saying the company’s decision to stop reporting orders won’t be welcomed by investors. Analyst Rob Joyce notes that otherwise the company’s 1Q release was above guidance.
  • Elior falls as much as 5% after UBS lowered its price target on the French caterer to EU3.30 from EU6.60, citing the impact on business from the omicron Covid-19 variant as well as uncertainty over new management and targets. The stock is now down 54% YTD.
  • Weir Group drops as much as 6.4%, with analysts flagging the short-term hit for the mining-equipment firm related to its exit from Russia.

Asian stocks rose with Japan leading after the country’s central bank kept its easing stance unchanged, while the stabilizing of Covid cases in China also helped investor sentiment.  The MSCI Asia Pacific Index advanced as much as 1%, rebounding from its lowest since mid-2020. Australian miner BHP Group and Chinese internet giant Alibaba provided the biggest boosts to the benchmark, with financials and materials leading the sectoral advances.  Japan stocks outperformed in the region as the yen tumbled to the 130 per dollar level for the first time since 2002, bolstering exporters including Toyota Motor, which was the third-biggest contributor to the Asian measure’s gain. 

The Bank of Japan “didn’t shift to a tightening policy bias and the yen fell as a result so that helped to boost Japanese stocks,” said Fumio Matsumoto, chief strategist at Okasan Securities.  “Materials shares were doing well and I think their gains reflect easing of concerns over the global economic outlook, as cases in Shanghai are falling and iron ore prices seem to be rebounding,” Matsumoto said.   Stocks in China gained for a second day after fresh policy pledges to promote internet platform firms and easing virus outbreaks in Beijing and Shanghai buoyed sentiment. Equity gauges across Australia, South Korea and India also advanced.  The MSCI Asia Pacific Index is still poised for a fourth-straight weekly decline and its steepest monthly drop since March 2020

Japanese stocks jumped after the Bank of Japan maintained its ultra-easy monetary policy and the yen tumbled below the 130 per dollar level for the first time since 2002. The central bank kept its yield curve control settings and the scale of its asset purchases unchanged and said it would buy an unlimited amount of bonds at fixed-rates every business day to protect a 0.25% ceiling on 10-year government debt yields. The Japanese currency tumbled 1.4% against the greenback, bolstering the outlook for the nation’s exporters.

“It’s now abundantly clear to markets that Governor Kuroda, who is very strong-willed, and the BOJ will continue to insist that only when domestic wages rise more fully will inflation be persistent,” Nikko Asset Management strategist John Vail. “Until then, the BOJ will continue to cap bond yields, but some moderate policy tightening will likely occur later this year.” The Topix climbed 2.1% to close at 1,899.62, while the Nikkei advanced 1.7% to 26,847.90. Toyota Motor Corp. contributed the most to the Topix gain, increasing 3.2%. Out of 2,172 shares in the index, 1,720 rose and 395 fell, while 57 were unchanged

India’s benchmark equities index rose, tracking peers across Asia, buoyed by gains in Reliance Industries Ltd.  The S&P BSE Sensex advanced 1.2% to 57,521.06, a one-week high, while the NSE Nifty 50 Index also climbed by a similar magnitude. Reliance added 1.5% to rise to a record and was the biggest boost to the Sensex, which had 26 of 30 member-stocks trading higher.   All but one of 19 sectoral sub-indexes compiled by BSE Ltd. gained, led by a gauge of consumer goods companies.   In earnings, of the 12 Nifty 50 firms that have announced results so far, five have missed, while seven have either met or beat analyst estimates.

In rates, Treasuries advanced across the curve, clawing back a portion of Wednesday’s losses. Session highs were reached late in Asia session after the BOJ pledged to buy unlimited amount of bonds at a fixed rate every business day to cap 10-year yields at 0.25%. 10Y TSY Yields are richer by 1bp-2bp across the curve with curve spreads little changed, the 10-year yield around 2.815% outperforms bunds by 3.5bp, gilts by 3bp. The week's coupon auction cycle concludes with $44b 7-year note sale at 1pm ET; Wednesday’s 5- year tailed by 0.9bp. European fixed income rallied after a soft Spanish inflation print, although the bulk of the move in the rates space is subsequently faded. German curve bear flattens, cheapening 2-3bps across the short end. Gilts bear steepened a touch. Peripheral spreads tighten with the belly of the Italian curve outperforming peers.

In FX, Bloomberg dollar spot index rises 0.4%, trading off the late Asia high. SEK outperforms in G-10, rallying after a surprise rate hike and more hawkish guidance. JPY is the standout underperformer with USD/JPY stalling near 131 after BOJ Kuroda’s press conference. JPY trades off worst levels after official comments that Japan will take appropriate action on FX if needed, describing the latest moves as warranting extreme concern. Some more details:

  • The yen plunged, hitting a 20-year low against the dollar after the Bank of Japan pledged to keep rates at rock-bottom levels, sparking more demand for the greenback. USD/JPY continued to climb in the European session, up as much as 2% to hit 131.01, its highest since April 2002, before pulling back after a Japanese finance ministry official said it will act appropriately on FX if needed. USD/JPY has jumped 7.3% so far this month, its best performance since late 2016. Jerky moves in the yen suggest that its Ministry of Finance will continue to jawbone the currency as it approaches the next key level of 135. “Markets will likely next test intervention possibilities and at what level such warnings may appear,” according to Yoshifumi Takechi, chief analyst at Money Partners in Tokyo. If the currency pair rises past 135, then the probability of intervention may rise, he said
  • The greenback boosted broadly, led higher on expectations that the Fed will raise interest rates by 50 basis points next week, embarking on an aggressive monetary tightening cycle. U.S. Treasuries advance, pushing two-year yield 2 basis points lower. “The focus of FX markets has primarily been on rate differentials and how bonds are adjusting given the continuous shift in growth conditions,” says Simon Harvey, head of FX analysis at Monex Europe, He adds that volatility in the bond market has also boosted the USD on safe-haven demand, suggesting that expectations for outperformance in U.S. rates is not the only driver of the stronger dollar. The Bloomberg Spot Dollar Index hits nearly 2-year high of 1,250 and is poised to post a near 5% gain in April, its best monthly performance since May 2012.
  • EUR/USD slides to a five-year low of 1.0483 hit in early European trade, before pulling back to around 1.0505. EUR on track to lose more than 5% vs USD in April, its worst month since 2015.
  • Swedish krona rallies after the Riksbank raises interest rates by 25 basis points from zero and signals up to three more hikes this year. EUR/SEK drops roughly 1% to 10.25, a one-week low, before paring move
  • GBP/USD drops 0.7% to touch 1.2462, lowest since July 2020, as rate differentials continue to favour the USD

In commodities, oil edged higher with West Texas Intermediate futures around $103 a barrel. Crude prices have struggled for direction this week as China’s spreading virus outbreak continued to weigh on the outlook for global demand. Natural gas prices in Europe declined following two days of gains as buyers considered options to keep getting supply from Russia without violating sanctions. Spot gold pared losses, now little changed at $1,888/oz. Base metals are mixed; LME nickel falls 0.9% while LME aluminum gains 0.7%.

Looking at the the day ahead, data releases will include German CPI for April and US Q1 GDP reading, alongside the weekly initial jobless claims. From central banks, we’ll hear from ECB Vice President de Guindos and the ECB’s Wunsch, and the ECB will also be publishing their Economic Bulletin. Finally, earnings releases include Apple, Amazon, Mastercard, Eli Lilly, Merck & Co., Thermo Fisher Scientific, Comcast, Intel, McDonald’s, Caterpillar and Twitter.

Market Snapshot

  • S&P 500 futures up 1.6% to 4,248.25
  • STOXX Europe 600 up 1.3% to 450.14
  • MXAP up 0.9% to 165.94
  • MXAPJ up 1.2% to 548.04
  • Nikkei up 1.7% to 26,847.90
  • Topix up 2.1% to 1,899.62
  • Hang Seng Index up 1.7% to 20,276.17
  • Shanghai Composite up 0.6% to 2,975.49
  • Sensex up 1.5% to 57,691.20
  • Australia S&P/ASX 200 up 1.3% to 7,356.89
  • Kospi up 1.1% to 2,667.49
  • German 10Y yield little changed at 0.83%
  • Euro down 0.1% to $1.0543
  • Brent Futures down 0.3% to $105.00/bbl
  • Gold spot down 0.2% to $1,882.45
  • U.S. Dollar Index up 0.29% to 103.25

Top Overnight News from Bloomberg

  • The ascendant U.S. dollar headed for its best month in a decade, as renewed yen selling cemented the greenback’s strength against major peers
  • As inflation fears surge, holders of U.S. government debt are having a rough ride. Investors have abandoned the market en masse, making the first quarter the worst on record and devastating the value of bond portfolios. But now fixed- income returns are starting to get a lift from that same boogeyman
  • The yen’s plunge to a 20-year low threatens to leave it significantly weaker for years to come, shaking up global money flows and undermining Japan’s efforts to get its fragile economy back on track
  • Russia’s war in Ukraine has created new bottlenecks and these “are exacerbated by additional supply chain difficulties stemming from new pandemic measures in Asia,” ECB Vice President Luis de Guindos tells lawmakers in Brussels
  • “My assessment is that we are very close to the peak and that we will start to see inflation decline in the second half of the year,” ECB Vice President Luis de Guindos says in Brussels
  • The spike in energy costs was behind recent inflation-forecasting mistakes by the ECB, including the biggest in its history, according to new research from the institution
  • “We expect underlying inflation to continue to rise, driven by high imported goods inflation, limited spare capacity in the Norwegian economy and prospects for rising wage growth,” Norges Bank Governor Ida Wolden Bache says in a statement
  • Turkey central bank raised its end-2022 inflation estimate to 42.8%, from 23.2% in previous inflation report

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were higher across the board amid a slew of earnings updates and a dovish BoJ. ASX 200 gained with mining stocks mostly underpinned following production updates. Nikkei 225 benefitted as the BoJ reaffirmed its dovishness and kept its ultra-loose policy. Hang Seng and Shanghai Comp are both higher but with gains capped in the mainland due to ongoing lockdown fears  with Hangzhou city to conduct mass testing and after China's Qinhuangdao city in the Hebei province locked down its district due to COVID.

Top Asian News

  • China Stocks Rise for Second Day as Shanghai Covid Cases Decline
  • StanChart Shares Soar 14% as Lender Raises Revenue Outlook
  • China Cuts Coal Import Tariffs to Zero to Increase Supply
  • Huawei’s Profit Dives 67% After U.S. Sanctions Wallop Phone Arm

Equities in Europe continue to gain heading into month-end, with overall sentiment across stocks bolstered by Meta (+17% pre-market) earnings yesterday. All sectors are in the green to varying degrees and clearly portray an anti-defensive bias – with the exception of Basic Resources, which sits at the bottom of the bunch after heavily outperforming yesterday. Stateside, US equity futures are firmer across the board, with the NQ clearly outpacing its peers.

Top European News

  • Erdogan Plans Meeting With Saudi Crown Prince to Revive Ties
  • Erdogan Says Jailed Businessman Kavala Is ‘Turkey’s Soros’
  • JPM Quants Expects Global Earnings Downgrades and Volatility
  • Riksbank Hikes Rate in U-Turn to Join Global Central Banks

FX:

  • The Buck’s bull run continues, with DXY up to 103.700, Euro losing 1.0500+ status and Sterling testing sub-1.2500 Fib before  retracements.
  • Swedish Krona soars after surprise Riksbank rate hike, higher repo path and slowdown in QE.
  • Japanese Yen extends losing streak following no change from ultra accommodative BoJ policy before partial recovery on extreme concern from Japan’s MOF.
  • Japanese MOF official says excess FX volatility is undesirable, recent FX moves are "extremely worrying"; will take appropriate action if needed, communicating closely with the BoJ and foreign currency authorities, via Reuters .
  • Yuan is weaker again as China increases efforts to contain covid and PBoC sets another softer onshore reference rate.

Fixed Income

  • EU debt rattled to a degree by Riksbank decision to taper QE and US Treasuries to a lesser extent
  • Bunds nearer 155.00 than 156.00, Gilts towards base of 119.68-08 range and 10 year T-note under 120-00 within a 120-01/119-19 band
  • BTPs outperform on the eve of month end auctions after breaching, but unable to retain 133.00+ status
  • Treasury curve flat ahead of 7 year issuance that normally entices foreign buyers even when the Dollar is not so elevated

Commodities

  • WTI June and Brent July post modest intraday gains, but in the grander scheme, prices are consolidating.
  • Spot gold briefly dipped under its 100 DMA (USD 1,877.50/oz) to a current low of around USD 1,871/oz as the Buck was rampant at the time.
  • Base metals markets are relatively mixed with some underperformance seen in LME nickel.
  • China is to grant zero-tariff on coal imports from May 1 2022 to March 31 2023 to increase supply.

US Event Calendar

  • 08:30: April Initial Jobless Claims, est. 180,000, prior 184,000; Continuing Claims, est. 1.4m, prior 1.42m
  • 08:30: 1Q GDP Annualized QoQ, est. 1.0%, prior 6.9%
    • 1Q Personal Consumption, est. 3.5%, prior 2.5%
    • 1Q GDP Price Index, est. 7.2%, prior 7.1%
    • 1Q PCE Core QoQ, est. 5.5%, prior 5.0%
  • 11:00: April Kansas City Fed Manf. Activity, est. 35, prior 37

DB's Jim Reid concludes the overnight wrap

We’ve also released our April survey results this morning (see link here). This was our first survey since Russia’s invasion of Ukraine, and you can see the impact across a number of answers. More than 60% of respondents expect the next US recession by 2023, in line with our out of consensus house view, while inflation expectations were revised higher in the US and EU. The survey results also show expectations for bonds and the S&P 500 to dip from current levels along with much more, so do peruse the full results.

Whilst global growth concerns remain prominent in markets, with investors having to navigate Chinese lockdowns, major geopolitical tensions and the prospect of a Fed-induced hard landing, equities begun to stabilise yesterday and the S&P 500 managed to eke out a +0.21% gain, albeit only after another second-half selloff that saw the index move down from its intraday high of +1.56% around the US lunchtime. Even with the equity gains however, geopolitical developments led to a weaker performance among a broader section of European assets, with the Euro itself nearing the $1.05 mark for the first time in nearly 5 years as multiple signs pointed to a further escalation between the EU and Russia on the energy side.

In terms of those developments, markets woke up to the news that Gazprom would be stopping gas flows to Poland and Bulgaria, which saw European natural gas futures surge more than 20% following the open. Russia said this was because they hadn’t agreed to pay for gas in rubles, but European Commission President von der Leyen said in a statement that Russia was using “gas as an instrument of blackmail”, and warned companies not to accede to Russia’s demands to pay in rubles. Later in the session it was even reported by Bloomberg that Germany was prepared to support an EU ban on Russian oil, on the condition it was gradual and came with a transition period, so this fits into the pattern over recent days of an acceleration in the EU’s attempts to eliminate its dependence on Russian energy. According to the report, the Russian oil ban would be part of the sixth package of sanctions, and proposals could be put forward as soon as next week.

By the end of the session, European natural gas futures had pared back their initial gains, and “only” closed up +4.09% at €107.43/MWh. But as mentioned at the top, the bigger damage was seen to the Euro’s value, which closed at a 5-year low of $1.0557, having started the month above $1.10, and this morning is down yet further at $1.0515. Those declines also came in spite of remarks from ECB President Lagarde, who leant into recent suggestions that we could get a rate hike as soon as July. In her remarks, she said that asset purchases would be concluding “probably in July”, and that would also be the time to “look at interest rates and an increase in interest rates.”

European sovereign bonds had a pretty mixed performance against this backdrop, but there was a consistent story of widening spreads as investors favoured bunds over peripheral debt. In fact, the gap between Italian 10yr yields over bunds widened by +2.8bps to 177bps yesterday, which is the widest its been since June 2020. Similar moves were seen in credit markets too, where Itraxx Crossover widened +4.0bps to 414bps, which is just shy of its recent peak at 421bps on March 7, and up from 333bps just over 3 weeks ago. Havens were the beneficiary of yesterday’s moves though, with yields on 10yr bunds down -1.2bps, and the US Dollar index (+0.64%) strengthened for the 18th time in the last 20 sessions, surpassing its March 2020 peak to close at levels not seen since early 2017. This morning that trend has accelerated following the Bank of Japan’s policy decision (more on which below), and the index has risen a further +0.50% to trade at levels not seen since 2002, at 103.47.

These signs of stress weren’t as evident in equity markets yesterday, which begun to recover from their Tuesday slump on both sides of the Atlantic. The S&P 500 rose +0.21%, which meant it was no longer in negative territory on a rolling annual basis, which it had been the previous session for the first time since May 2020, whilst Europe’s STOXX 600 (+0.73%) also posted a decent advance. That said, the S&P 500 is still down -7.65% over the month of April, keeping it on track for its worst monthly performance since the initial phase of the pandemic in March 2020. The equity reversal caused the Vix to retreat -1.92ppts but still finished above 30 for only the second time since mid-March. And on top of that, US Treasuries snapped their gains from Monday and Tuesday, with the 10yr yield up +11.1bps to 2.83%, as a rise in real yields (+8.5bps) drove the move higher on another day of heightened rates volatility ahead of next week’s FOMC.

After the close, Meta posted sales slightly below analyst estimates with earnings beating. Shares were more than +13% higher after the close, after Facebook’s daily users surprised to the upside and the firm cut their expense outlook. Like many other firms that have reported, the war, current inflation, and issues with supply chains have forced some of the platform’s advertisers to cut spending.

Overnight in Asia, the main news comes from the Bank of Japan’s decision, where they left their main policy interest rates unchanged, but did announce a decision to buy unlimited 10-yr JGBs at 0.25% every business day. They also raised their inflation forecasts, now projecting core CPI to to reach +1.9% in the current fiscal year ending in March 2023, before moderating to +1.1% in the following two fiscal years. So a big difference in stance to the other major central banks like the Fed and the ECB which have been progressively moving in a hawkish direction over recent months, and this saw the Japanese Yen weaken further, currently trading at 129.69 per US dollar, which is a level unseen since 2002.

Against that backdrop, the Nikkei (+1.32%) is leading the equity gains in Asia, although other indices including the Hang Seng (+1.22%), the CSI 300 (+0.37%), the Shanghai Composite (+0.25%) and the Kospi (+0.81%) are all in positive territory this morning. Meanwhile oil prices have lost ground as concerns about Chinese demand persist, and Brent Crude is down -1.41% this morning to $103.84/bbl. Looking forward, equity futures in the US are pointing towards further gains today, with those on the S&P 500 (+0.74%) and the NASDAQ 100 (+1.34%) moving higher.

Looking forward, we’ve got a couple of important data releases today. One is the first look at US GDP in the first quarter, for which our US economists have published a preview (link here). They see the reading coming in at exactly 0.0. The other is the German CPI reading for April, which comes ahead of the flash CPI reading tomorrow for the entire Euro Area. Our economist has also published a preview for that one (link here).

On yesterday’s data, the US goods trade deficit for March rose to a record of $125.3bn (vs. $105.0bn expected). Otherwise, the number of pending home sales fell -1.2% in March, marking a 5th consecutive monthly decline.

To the day ahead, and data releases will include the aforementioned German CPI for April and US Q1 GDP reading, alongside the weekly initial jobless claims. From central banks, we’ll hear from ECB Vice President de Guindos and the ECB’s Wunsch, and the ECB will also be publishing their Economic Bulletin. Finally, earnings releases include Apple, Amazon, Mastercard, Eli Lilly, Merck & Co., Thermo Fisher Scientific, Comcast, Intel, McDonald’s, Caterpillar and Twitter.

Tyler Durden Thu, 04/28/2022 - 07:46

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Off Campus Texas A&M Housing With “Resort Style” Rooftop Pool Defaults On Debt Payment

Off Campus Texas A&M Housing With "Resort Style" Rooftop Pool Defaults On Debt Payment

Who could have possibly thought, amidst all this…

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Off Campus Texas A&M Housing With "Resort Style" Rooftop Pool Defaults On Debt Payment

Who could have possibly thought, amidst all this euphoria, that luxury college housing complexes for students might not be the best idea in the world?

It's looking like for one complex - with, of course, a "resort style" rooftop pool (which everybody knows is integral to ones studies) - near the Texas A&M University campus is starting to find out this harsh reality. 

The 3,400-bed student housing complex, called Park West, is going to default on its July debt payment according to Moody’s Investors Service, who downgraded the company's bonds deeper into junk territory this week.

The property, which provides off-campus housing for students, is located in College Station, Texas, Bloomberg reported in a mid-week wrap up. It has reportedly been struggling since even before the pandemic, thanks to the building's higher rents.

Moody's commented: “The project’s financial distress is directly linked to prolonged weakness within its College Station, Texas student housing submarket which has been an ongoing problem since Park West opened for fall 2017.”

$15.3 million is due in principal and interest, but the complex will only pay $8.5 million. The company that sold the bonds, NCCD-College Station Properties LLC, still has about $342 million in bonds outstanding, Bloomberg reported. 

The vice president and director of operations for the company confirmed that the company would default but offered up no other color. 

For a look at the complex's posh amenities, you can review its website here. 

Tyler Durden Fri, 07/01/2022 - 21:55

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“Worst Start Since 1788”: A Closer Look At The Catastrophic First Half Performance

"Worst Start Since 1788": A Closer Look At The Catastrophic First Half Performance

As discussed yesterday…

Worst first half for stocks…

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"Worst Start Since 1788": A Closer Look At The Catastrophic First Half Performance

As discussed yesterday...

... and again this morning, when Rabobank's Michael Every said that "if you bought stocks in H1, you lost; if bonds, you lost; if commodities, you were doing great until recently; if crypto you lost; if the US dollar, you were fine" but lost purchasing power to inflation, the first six months of the year were terrible.

Just how terrible? To quantify the destruction, we go to the latest chart of the day from DB's Jim Reid who writes that "the good news is that H1 is now over. The bad news is that the outlook for H2 is not looking good."

To demonstrate just how bad H1 was, Reid shares three charts.  They show that:

1) Deutsche Bank's US 10yr Treasury proxy index did indeed see the worst H1 since 1788 in spite of a sizeable late June rally, and...

2) the S&P 500 saw the worst H1 total return since 1962 after a rally last week just pulled it back from being the worst since 1932.

Here, BofA has outdone DB, and notes that in real timers, the S&P500's performance was the worst since 1872!

As Reid further notes, "I’ve found through my career that these type of charts are always the most demanded as investors want to put their performance in context." Which is why he also added a the third chart which is an abridged version of one published by DB's Henry Allen in a report fully reviewing H1, June and Q2 (more below, and also available to professional subs in the usual place).

As Reid concludes, "if you like horror stories its an alternative to Stranger Things which returns to our global screens today. Obviously if you run a commodity fund you may think differently!"

Stepping back from this narrow take, we look at the full performance review for June and Q2 conducted by Reid's colleague, Henry Allen, which finds that "it's hard to overstate just how bad markets have performed over recent months, with the returns in Q2 very much following in Q1’s footsteps... a range of asset classes saw significant losses, including equities, credit and sovereign bonds, whilst the US dollar and some commodities like oil were among the few exceptions. In fact, in total return terms we’ve just seen the biggest H1 decline for the S&P 500 in 60 years, and in June alone just 2 of the 38 non-currency assets in our sample were in positive territory, which is the same as what we saw during the initial market chaos from the pandemic in March 2020."

On a YTD basis as well, just 4 of 38 tracked assets are in positive territory, which as it stands is even lower than the 7 assets that managed to score a positive return in 2008.

The main reason for these broad-based declines is the fact that recession and stagflation risks have ramped up significantly over Q2. This has been for several reasons, but first among them is the fact that inflation has proven far more persistent than the consensus expected once again, requiring a more aggressive pace of rate hikes from central banks than investors were expecting at the start of the quarter. For instance, the rate priced in by Fed funds futures for the December 2022 meeting has risen from 2.40% at the end of Q1 to 3.38% at the end of Q2. A similar pattern has been seen from other central banks, and the effects are beginning to show up in the real economy too, with US mortgage rates reaching a post-2008 high. The good news is that as of today, the market is now pricing in not just rate hikes to peak in Q4, but about 14bps of rate cuts in Q1.

in any case, the big worry from investors’ point of view is that the cumulative effect of these rate hikes will be enough to knock the economy into recession, and on that front we’ve seen multiple signs pointing to slower growth recently in both the US and Europe. For instance, the flash Euro Area composite PMI for June came in at a 16-month low of 51.9, whilst its US counterpart fell to a 5-month low of 51.2. Other recessionary indicators like the yield curve are also showing concerning signs, with the 2s10s Treasury curve still hovering just outside inversion territory at the end of the quarter, at just +5.1bps. The energy shock is adding to these growth concerns, and that’s persisted over Q2 as the war in Ukraine has continued. Brent crude oil prices built on their sizeable gains from Q1, with a further +6.4% rise in Q2 that left them at $115/bbl. Meanwhile, European natural gas is up by +14.8% to €145 per megawatt-hour. However, fears of a global recession have knocked industrial metals prices significantly, and the London Metal Exchange Index has just seen its first quarterly fall since the initial wave of the pandemic in Q1 2020, and its -25.0% decline is the largest since the turmoil of the GFC in Q4 2008.

That decline in risk appetite has knocked a range of other assets too:

  • The S&P 500 slumped -16.1% over Q2, meaning its quarterly performance was the second worst since the GFC turmoil of Q4 2008.
  • Sovereign bonds built on their losses from Q1,
  • Euro sovereigns (-7.4%) saw their worst quarterly performance of the 21st century so far as the ECB announced their plan to start hiking rates from July to deal with high inflation.
  • Cryptocurrencies shared in the losses too, with Bitcoin’s (59.0%) decline over Q2 marking its worst quarterly performance in over a decade

Which assets saw the biggest gains in Q2?

  • Energy Commodities: The continued war in Ukraine put further upward pressure on energy prices, with Brent crude (+6.4%) and WTI (+5.5%) oil both advancing over the quarter. The rise was particularly noticeable for European natural gas, with futures up by +14.8% as the continent faces up to the risk of a potential gas cut-off from Russia.
  • US Dollar: The dollar was the best-performing of the G10 currencies in Q2 as it dawned on investors that the Fed would hike more aggressively than they expected, and the YTD gains for the dollar index now stand at +9.4%.

Which assets saw the biggest losses in Q2?

  • Equities: Growing fears about a recession led to significant equity losses in Q2, with the S&P 500 (-16.1%) seeing its second-worst quarterly performance since the GFC turmoil of Q4 2008. That pattern was seen across the world, with Europe’s STOXX 600 down -9.1%, Japan’s Nikkei down -5.0%, and the MSCI EM index down -11.4%.
  • Credit: For a second consecutive quarter, every credit index we follow across USD, EUR and GBP moved lower. EUR and USD HY saw some of the worst losses, with declines of -10.7% and -9.9% respectively.
  • Sovereign Bonds: As with credit, sovereign bonds lost ground on both sides of the Atlantic, and the decline in European sovereigns (-7.4%) was the worst so far in the 21st century. Treasuries also lost further ground, and their -4.1% decline over Q2 brings their YTD losses to -9.4%.
  • Non-energy commodities: Whilst energy saw further gains over Q2, other commodities saw some major declines. Industrial metals were a significant underperformer, with the London Metal Exchange Index (-25.0%) seeing its largest quarterly decline since the GFC turmoil of 2008. Precious metals lost ground too, with declines for both gold (-6.7%) and silver (-18.2%). And a number of agricultural commodities also fell back, including wheat (-13.6%).
  • Japanese Yen: The Japanese Yen weakened against the US Dollar by -10.3% over Q2, which also marked its 6th consecutive quarterly decline against the dollar. By the close at the end of the quarter, that left the Yen trading at 136 per dollar, which is around its weakest level since 1998. That came as the Bank of Japan has become the outlier among the major advanced economy central banks in not hiking rates with even the Swiss National Bank hiking in June for the first time in 15 years.
  • Cryptocurrencies: The broader risk-off tone has been bad news for cryptocurrencies, and Bitcoin’s -59.0% decline over Q2 is its worst quarterly performance in over a decade. Other cryptocurrencies have lost significant ground as well, including Litecoin (-59.2%) and XRP (-61.2%).

June Review

Looking specifically at June rather than Q2 as a whole, the picture looks even worse in some ways since just 2 of the 38 non-currency assets are in positive territory for the month, which is the same number as in March 2020 when global markets reacted to the initial wave of the pandemic. The two positive assets are the Shanghai Comp (+7.5%) and the Hang Seng (+3.0%), which have been supported by improving economic data as Covid restrictions have been eased. Otherwise however, it’s been negative across the board, and even commodities have struggled after their strong start to the year, with Brent crude (-6.5%) and WTI (7.8%) posting their first monthly declines so far this year as concerns about a recession have mounted. The main catalyst for this was the much stronger-than-expected US CPI print for June, which triggered another selloff as it dawned on investors that the Fed would be forced to hike rates even more aggressively to rein in inflation, which they followed through on at their meeting when they hiked by 75bps for the first time since 1994.

Finally, without further ado, here are the charts showing total returns for the month of June...

... for Q2...

... and for YTD.

Tyler Durden Fri, 07/01/2022 - 15:00

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Risk Capital and Markets: A Temporary Retreat or Long Term Pull Back?

As inflation has taken center stage, markets have gone into retreat globally, and across asset classes. In 2022, as bond rates have risen, stock prices…

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As inflation has taken center stage, markets have gone into retreat globally, and across asset classes. In 2022, as bond rates have risen, stock prices have fallen, and crypto has imploded, even true believers are questioning what the bottom for markets might be, and when we will get there. While it is easy to call the market movement in 2022 a correction and to argue that it is overdue, it is facile, and it fails to address the question of why it is happening now, and whether the correction is overdone or has more to go. In this post, I will argue that almost everything that we are observing in markets, across asset classes, can be explained by a pull back on risk capital, and that understanding the magnitude of the pull back, and putting in historical perspective, is key to gauging what is coming next.

Risk Capital: What is it?

To put risk capital in perspective, it is best to start with a definition of risk that is comprehensive and all-inclusive, and that is to think of risk as a combination of danger (downside) and opportunity (upside) and to consider how investments vary in terms of exposure to both. In every asset class, there is a range of investment choices, with some being safer (or even guaranteed) and others being riskier.

Risk capital is the portion of capital that is invested in the riskiest segments of each market and safety capital is that portion that finds its way to the safest segments in each market

While risk and safety capital approach the market from opposite ends in the risk spectrum, one (safety capital) being driven by fear and the other (risk capital), by greed, they need to not only co-exist, but be in balance, for the market to be healthy. When to two are not in balance, these imbalances can have profound and often unhealthy effects not just of markets, but also on the overall economy. At the extremes, when risk capital is absent and everyone seeks safety, the economy and markets will atrophy, as businesses and investors will stay away from risky ventures, and when risk capital is too easy and accessible, risky asset prices will soar, and the economy will see too much growth in its riskiest segments, often at the expense of more stable (and still necessary) businesses.

Risk Capital's Ebbs and Flows

It is a common misconception that the risk-takers supply risk capital (risk takers) and that the investors who invest for safety draw from different investor pools, and that these pools remain unchanged over time. While investor risk aversion clearly does play a role in whether investors are drawn to invest in risk or safety capital, it obscures two realities:

  1. Variation within an investor's portfolio: Many investors, including even the most risk averse, may and often do  set aside a portion of their portfolios for riskier investments, drawn by the higher expected returns on those investments. For some investors, this set aside will be the portion that they can afford to lose, without affecting their life styles in any material way. For others, it can be the portion of their capital with the longest time horizon (pension fund savings or 401Ks, if you are a young investor, for example), where they believe that any losses on risk capital can be made up over time. For still others, it is that segment of their portfolios that they treat las long shot gambles, hoping for a disproportionately large payoff, if they are lucky. The amount that is put into the risk capital portion will vary with investor risk aversion, with more risk averse investors putting less or even nothing into the riskiest assets, and less risk averse investors putting in more.
  2. Variation across time: The amount that investors are willing to put into risk capital, or conversely redirect to safety capital, will change over time, with several factors playing a role in determining whether risk capital will be plentiful or scarce. The first is market momentum, since more money will be put into the riskiest asset classes, when markets are rising, because investors who benefit from these rising markets will have more capital that they are willing to risk. The second is the the health and stability of the economy, since investors with secure jobs and rising paychecks are more willing to take risks. 

There are two macro factors that will come into play, and both are in play in markets today. The first is the return that can be earned on guaranteed investments, i.e., US treasury bills and bonds, for instance, if you are a investor in US dollar, since it is a measure of what someone who takes no or very low risk can expect to earn. When treasury rates are low or close to zero, refusing to take risk will result in returns that are very low or close to zero as well, thus inducing investors to expose themselves to more risk than they would have taken in higher interest rate regimes. The second is inflation, which reduces the nominal return you make on all your investments, and the effects of rising inflation on risk capital are complex. As expected inflation rises, you are likely to see higher interest rates, and as we noted above, that may induce investors to cut back on risk taking and focus on earning enough to cover the ravages of inflation. As uncertainty about inflation rises, you will see reallocation of investment across asset classes, with real assets gaining when unexpected inflation is positive (actual inflation is higher than expected), and financial assets benefiting when unexpected inflation is negative (actual inflation is less than expected).

And Consequences

    If you are wondering why you should care about risk capital's ebbs and flows, it is because you will feel its effects in almost everything you do in investing and business. 

  1. Risk Premiums: The risk premiums that you observe in every risky asset market are a function of how much risk capital there is in play, with risk premiums going up when risk capital becomes scarcer and down, when risk capital is more plentiful. In the bond and loan market, access to risk capital will determine default spreads on bonds, with lower rated bonds feeling the pain more intensely when risk capital is withdrawn or moves to the side lines. Not only will default spreads widen more for lower-rated bonds, but there will be less bond issuances by riskier companies. In the equity market, the equity risk premium is the price of risk, and its movements will track shifts in risk capital, increasing as risk capital becomes scarcer. 
  2. Price and Value Gaps: As those of you who read this blog know well, I draw a contrast between value and price, with the former driven by fundamentals (cash flows, growth and risk) and the latter by mood, momentum and liquidity. The value and price processes can yield different numbers for the same company, and the two numbers can diverge for long periods, with convergence not guaranteed but likely over long periods.

    I argue that investors play the value game, buying investments when the price is less than the value and hoping for convergence, and that traders play the pricing game, buying and selling on market momentum, rather than fundamentals. At the risk of generalizing, safety capital, with its focus on earnings and cash flows now, is more likely to focus on fundamentals, and play the investor game, whereas risk capital, drawn by the need to make high returns quickly, is more likely to play the trading game. Thus, when risk capital is plentiful, you are more likely to see the pricing game overwhelm the value game, with prices often rising well above value, and more so for the riskiest segments of every asset class. A pull back in risk capital is often the catalyst for corrections, where price not only converges back on value, but often overshoots in the other direction (creating under valuations). It behooves both investors and traders to therefore track movements in risk capital, since it is will determine when long term bets on value will pay off for the former, and the timing of entry into and exit from markets for the latter.
  3. Corporate Life Cycle: The ebbs and flows of risk capital have consequences for all businesses, but the effects will vary widely across companies, depending on where they are in the life cycle. Using another one of my favorite structures, the corporate life cycle, you can see the consequences of expanding and shrinking risk capital, through the lens of free cash flows (and how they vary across the life cycle).

    Early in the corporate life cycle, young companies have negative free cash flows, driven by losses on operations and investments for future growth, making them dependent on risk capital for survival and growth. As companies mature, their cash flows first become self sustaining first, as operating cash flows cover investments, and then turn large and positive, making them not only less dependent on risk capital for survival but also more valued in an environment where safety capital is dominant. Put simply, as risk capital becomes scarcer, young companies, especially those that are money-losing and with negative cash flows, will see bigger pricing markdowns and more failures than more mature companies.

Risk Capital: Historical Perspective

How do you track the availability and access to risk capital over time? There are three proxies that I will  use, and while each has its limitations, read together, they can provide a fuller measure of the ebbs and flows of risk capital. The first is funds invested by venture capitalists, with a breakdown further into types, from pre-seed and seed financing to very young companies to capital provided to more young companies with more established business models, as a prelude to exit (acquisition or IPO). The second is the trend line in initial public offerings (number and value raised), since companies are more likely to go public and be able to raise more capital in issue proceeds, when risk capital is plentiful. The third is original bond issuances by the riskiest companies (below investment grade and high yield), since these issuances are more likely to have a friendly reception when risk capital is easily available than when it is not.

Let’s start with venture capital, the typical source of capital for start ups and young companies for decades in the United States, and more recently, in the rest of the world. In the graph below, I trace out total venture capital raised, by year, between 1995 and 2021, in the US: 

Source: NVCA Yearbooks
The dot-com boom in the 1990s created a surge in venture capital raised and invested, with venture capital raised peaking at more than $100 billion in 2000, before collapsing as the that bubble burst. The 2008 banking and market crisis caused a drop of almost 50% in 2009, and it took the market almost five years to return to pre-crisis levels.   In the just-concluded decade, from 2011 to 2020,  the amount raised and invested by venture capitalists has soared, and almost doubled again in 2021, from 2020 levels, with venture capital raised in 2021 reaching an all-time high of $131 billion, surpassing the 2000 dot-com boom levels, albeit in nominal terms. Along the way, exits from past venture capital investments, either in IPOs or in M&A, have become more lucrative for the most successful companies, with 43 exits that exceeded a billion (the unicorn status) in 2021. 

If success in venture capital comes from exiting investments at a higher pricing, initial public offerings represent the most lucrative route, and tracking the number of initial public offerings over time provides a window on the ebbs and flows of risk capital, over long periods. Using data made public by Jay Ritter on IPOs, I track the number of IPO and dollar proceeds from offerings in the graph below from 1980 to 2021:
Source: Jay Ritter
As you can see, IPOs go through hot periods (when issuances surge) and cold ones (when there are relatively few listed), with much of the last decade representing hot periods and 2000/01 and 2008/09 representing periods when there were hardly any offerings. While the number of IPOs in 2021 is still below the peak dot-com years, the proceeds from IPOs has surged to an all-time high during the year.

    In the final graph, I look at corporate bond offerings, broken down into investment grade and high yield, by year, from 1996 to 2021:

Source: SIFMA

Here again, you see a familiar pattern, with the percentage of high-yield bond issuances tracking the availability of risk capital. As with IPOs, you see big dips in 2000-01and 2008-09, reflecting market corrections and crises, and a period of easy access to risk capital in the last decade. Again, the percentage of corporate bond issuances hit an all-time high in 2021, representing more than a quarter of all bond issuances. In sum, all three proxies for risk capital show the same patterns over time, pulling back and surging during the same time periods, and with all three proxies, it is clear that 2021 was a boom year.

An Update

The last two and a half years may not represent much time on a historical scale, but the period has packed in enough surprises to make it feel like we have aged a decade. We started 2020 with a pandemic that altered our personal, work and financial lives, and in 2022, at least in North America and Europe, we have seen inflation reach levels that we have not seen for decades. Looking at the 30 months through the lens of risk capital can help us understand not only the journey that markets have gone through to get where they are today, but also perhaps decipher where they may go next. In the graph below, I look at venture capital, IPOs and high yield bond issuances over the last two and a half years:


The first thing to note is that there was a pullback on all three measures in the first quarter of 2020, as COVID put economies into deep freeze and rolled markets. The big story, related to COVID, is that risk capital not only did not stay on the side lines for long but came surging back to levels that exceeded pre-COVID numbers, with all three measures hitting all-time highs in 2021. In a post in late 2020, I argued that it was the resilience of risk capital that explained why markets recovered so quickly that year, even as the global economy struggled, that year, and pointed to three explanatory factors. The first was the perception that the COVID shut-down was temporary, and that economies would come back quickly, once the immediate threat from the virus passed. The second was the decline in interest rates across the globe, with rates in developed market currencies (US $, Euro, Japanese Yen etc.) moving towards zero, increasing the costs of staying on the sidelines.  The third was a change in investor composition, with a shift from institutional to individual investor market leadership, and increased globalization.

    The first half of 2022 has been a trying period for markets, and as inflation has risen, it is having an effect on the availability of and access to risk capital. There has been a pullback in all three proxies for risk capital, albeit smaller in venture capital, than in IPOs and in high-yield bond issuances in the first few months of 2022. That pullback has had its consequences, with equity risk premiums rising around the world. In the graph below, I have updated the equity risk premium for the S&P 500 through the start of July 2022:

Spreadsheet for implied ERP

The chart reveals how unsettling this year has been for equity investors, in the United States. Not only has the implied ERP surged to 6.43% on June 23, 2022, from 4.24% on January 1, 2022, but stocks are now being priced to earn 9.45% annually, up from the 5.75% at the start of the year. (The jump in ERP may be over stated, since the forward earnings estimates for the index, from analysts, does not seem to be showing any upcoming pain from an expected recession. )

As inflation and recession fears have mounted, equity markets are down significantly around the world, but the drop in pricing has been greatest in the riskiest segments of the market. In the table below, I look at the price change in the first six months of 2022 for global stocks, broken down by quintiles, into net profit margin and revenue growth classes:
Source for raw data: S&P Cap IQ

Note that high growth, negative earnings companies have fared much worse, in general, during the 2022 downturn, than more mature, money-making companies.  The fear factor that is tilting the balance back to safety capital from risk capital has also had clear consequences in the speculative collectibles space, with cryptos bearing the brunt of the punishment. Finally, there are markdowns coming to private company holdings, both in the hands of venture capitalists, and public market investors (including mutual funds that have been drawn into this space and public companies like Softbank).

    The big question that we all face, as we look towards the second half of the year, is whether the pullback in risk capital is temporary, as it was in 2020, or whether it is more long term, as it was after the dot-com bust in 2000 and the market crisis in 2008. If it is the former, there is hope of not just a recovery, but a strong rebound in risky asset prices, and if it is the latter, stocks may stabilize, but the riskiest assets will see depressed prices for much longer. I don't have a crystal ball or any special macro forecasting abilities, but if I had to guess, it would be that it is the latter. Unlike a virus, where a vaccine may provide at least the semblance of a quick cure (real or imagined), inflation, once unleashed, has no quick fix. Moreover, now that inflation has reared its head, neither central banks nor governments can provide the boosts that they were able to in 2020 and may even have to take actions that make things worse, rather than better, for risk capital. Finally, at the risk of sounding callous, I do think that a return of fear and a longer term pullback in risk capital is healthy for markets and the economy, since risk capital providers, spoiled by a decade or more of easy returns, have become lazy and sloppy in their pricing and trading decisions, and have, in the process, skewed capital allocation in the economy. If a long-term slowdown is in the cards, it is almost certain that the investment strategies that delivered high returns in the last decade will no longer work in this new environment, and that old lessons, dismissed as outdated just a few years go, may need to be relearned. 

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