S&P futures and European stocks rebounded from Friday’s selloff while Asian shares fell, as investors took comfort in reports from South Africa which said initial data doesn’t show a surge of hospitalizations as a result of the omicron variant, a view repeated by Anthony Fauci on Sunday. Meanwhile, fears about a tighter Fed were put on the backburner.
Also overnight, China’s central bank announced it will cut the RRR by 50bps releasing 1.2tn CNY in liquidity, a move that had been widely expected. The cut comes as insolvent Chinese property developer Evergrande was said to be planning to include all its offshore public bonds and private debt obligations in a restructuring plan. US equity futures rose 0.3%, fading earlier gains, and were last trading at 4,550. Nasdaq futures pared losses early in the U.S. morning, trading down 0.4%. Oil rose after Saudi Arabia boosted the prices of its crude, signaling confidence in the demand outlook, which helped lift European energy shares. The 10-year Treasury yield advanced to 1.40%, while the dollar was little changed and the yen weakened.
“A wind of relief may blow the current risk-off trading stance away this week,” said Pierre Veyret, a technical analyst at U.K. brokerage ActivTrades. “Concerns related to the omicron variant may ease after South African experts didn’t register any surge in deaths or hospitalization.”
As Bloromberg notes, the mood across markets was calmer on Monday after last week’s big swings in technology companies and a crash in Bitcoin over the weekend. Investors pointed to good news from South Africa that showed hospitals haven’t been overwhelmed by the latest wave of Covid cases. Initial data from South Africa are “a bit encouraging regarding the severity,” Anthony Fauci, U.S. President Joe Biden’s chief medical adviser, said on Sunday. At the same time, he cautioned that it’s too early to be definitive.
Here are some of the biggest U.S. movers today:
- Alibaba’s (BABA US) U.S.-listed shares rise 1.9% in premarket after a 8.2% drop Friday prompted by the delisting plans of Didi Global. Alibaba said earlier it is replacing its CFO and reshuffling the heads of its commerce businesses
- Rivian (RIVN US) has the capabilities to compete with Tesla and take a considerable share of the electric vehicle market, Wall Street analysts said as they started coverage with overwhelmingly positive ratings. Shares rose 2.2% initially in U.S. premarket trading, but later wiped out gains to drop 0.9%
- Stocks tied to former President Donald Trump jump in U.S. premarket trading after his media company agreed to a $1 billion investment from a SPAC
- Cryptocurrency-exposed stocks tumble amid volatile trading in Bitcoin, another indication of the risk aversion sweeping across financial markets
- Laureate Education (LAUR US) approved the payment of a special cash distribution of $0.58 per share. Shares rose 2.8% in postmarket Friday
- AbCellera Biologics (ABCL US) gained 6.2% postmarket Friday after the company confirmed that its Lilly-partnered monoclonal antibody bamlanivimab, together with etesevimab, received an expanded emergency use authorization from the FDA as the first antibody therapy in Covid-19 patients under 12
European equities drifted lower after a firm open. Euro Stoxx 50 faded initial gains of as much as 0.9% to trade up 0.3%. Other cash indexes follow suit, but nonetheless remain in the green. FTSE MIB sees the largest drop from session highs. Oil & gas is the strongest sector, underpinned after Saudi Arabia raised the prices of its crude. Tech, autos and financial services lag. Companies that benefited from increased demand during pandemic-related lockdowns are underperforming in Europe on Monday as investors assess whether the omicron Covid variant will force governments into further social restrictions. Firms in focus include meal-kit firm HelloFresh (-2.3%) and online food delivery platforms Delivery Hero (-5.4%), Just Eat Takeaway (-5.6%) and Deliveroo (-8.5%). Remote access software firm TeamViewer (-3.7%) and Swedish mobile messaging company Sinch (-3.0%), gaming firm Evolution (-4.2%). Online pharmacies Zur Rose (-5.1%), Shop Apotheke (-3.5%). Online grocer Ocado (-2.2%), online apparel retailer Zalando (-1.5%).
In Asia, the losses were more severe as investors remained wary over the outlook for U.S. monetary policy and the spread of the omicron variant. The Hang Seng Tech Index closed at the lowest level since its inception. SoftBank Group Corp. fell as much as 9% in Tokyo trading as the value of its portfolio came under more pressure. The MSCI Asia Pacific Index slid as much as 0.9%, hovering above its lowest finish in about a year. Consumer discretionary firms and software technology names contributed the most to the decline, while the financial sector outperformed. Hong Kong’s equity benchmark was among the region’s worst performers amid the selloff in tech shares. The market also slumped after the omicron variant spread among two fully vaccinated travelers across the hallway of a quarantine hotel in the city, unnerving health authorities.
“People are waiting for new information on the omicron variant,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management in Tokyo. “We’re at a point where it’s difficult to buy stocks.” Separately, China’s central bank announced after the country’s stock markets closed that it will cut the amount of cash most banks must keep in reserve from Dec. 15, providing a liquidity boost to economic growth. Futures on the Nasdaq 100 gained further in Asia late trading. The underlying gauge slumped 1.7% on Friday, after data showed U.S. job growth had its smallest gain this year and the unemployment rate fell more than forecast. Investors seem to be focusing more on the improved jobless rate, as it could back the case for an acceleration in tapering, Ichikawa said.
Asian equities have been trending lower since mid-November amid a selloff in Chinese technology giants, concern over U.S. monetary policy and the spread of omicron. The risk-off sentiment pushed shares to a one-year low last week.
Overnight, the PBoC cut the RRR by 50bps (as expected) effective 15th Dec; will release CNY 1.2tln in liquidity; RRR cut to guide banks for SMEs and will use part of funds from RRR cut to repay MLF. Will not resort to flood-like stimulus; will reduce capital costs for financial institutions by around CNY 15bln per annum. The news follows earlier reports via China Securities Daily which noted that China could reduce RRR as soon as this month, citing a brokerage firm. However, a separate Chinese press report noted that recent remarks by Chinese Premier Li on the reverse repo rate doesn't mean that there will be a policy change and an Economics Daily commentary piece suggested that views of monetary policy moves are too simplistic and could lead to misunderstandings after speculation was stoked for a RRR cut from last week's comments by Premier Li.
Elsewhere, Indian stocks plunged in line with peers across Asia as investors remained uncertain about the emerging risks from the omicron variant in a busy week of monetary policy meetings. The S&P BSE Sensex slipped 1.7% to 56,747.14, in Mumbai, dropping to its lowest level in over three months, with all 30 shares ending lower. The NSE Nifty 50 Index also declined by a similar magnitude. Infosys Ltd. was the biggest drag on both indexes and declined 2.3%. All 19 sub-indexes compiled by BSE Ltd. declined, led by a measure of software exporters. “If not for the new omicron variant, economic recovery was on a very strong footing,” Mohit Nigam, head of portfolio management services at Hem Securities Ltd. said in a note. “But if this virus quickly spreads in India, then we might experience some volatility for the coming few weeks unless development is seen on the vaccine side.” Major countries worldwide have detected omicron cases, even as the severity of the variant still remains unclear. Reserve Bank of Australia is scheduled to announce its rate decision on Tuesday, while the Indian central bank will release it on Dec. 8. the hawkish comments by U.S. Fed chair Jerome Powell on tackling rising inflation also weighed on the market
Japanese equities declined, following U.S. peers lower, as investors considered prospects for inflation, the Federal Reserve’s hawkish tilt and the omicron virus strain. Telecommunications and services providers were the biggest drags on the Topix, which fell 0.5%. SoftBank Group and Daiichi Sankyo were the largest contributors to a 0.4% loss in the Nikkei 225. The Mothers index slid 3.8% amid the broader decline in growth stocks. A sharp selloff in large technology names dragged U.S. stocks lower Friday. U.S. job growth registered its smallest gain this year in November while the unemployment rate fell by more than forecast to 4.2%. There were some good aspects in the U.S. jobs data, said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Institute. “We’re in this contradictory situation where there’s concern over an early rate hike given the economic recovery, while at the same time there’s worry over how the omicron variant may slow the current recovery.”
Australian stocks ended flat as staples jumped. The S&P/ASX 200 index closed little changed at 7,245.10, swinging between gains and losses during the session as consumer staples rose and tech stocks fell. Metcash was the top performer after saying its 1H underlying profit grew 13% y/y. Nearmap was among the worst performers after S&P Dow Jones Indices said the stock will be removed from the benchmark as a result of its quarterly review. In New Zealand, the S&P/NZX 50 index fell 0.6% to 12,597.81.
In FX, the Bloomberg Dollar Spot Index gave up a modest advance as the European session got underway; the greenback traded mixed versus its Group-of-10 peers with commodity currencies among the leaders and havens among the laggards. JPY and CHF are the weakest in G-10, SEK outperforms after hawkish comments in the Riksbank’s minutes. USD/CNH drifts back to flat after a fairly well telegraphed RRR cut materialized early in the London session. The euro fell to a day low of $1.1275 before paring. The pound strengthened against the euro and dollar, following stocks higher. Bank of England deputy governor Ben Broadbent due to speak. Market participants will be watching for his take on the impact of the omicron variant following the cautious tone of Michael Saunders’ speech on Friday.
Treasury yields gapped higher at the start of the day and futures remain near lows into early U.S. session, leaving yields cheaper by 4bp to 5bp across the curve. Treasury 10-year yields around 1.395%, cheaper by 5bp vs. Friday’s close while the 2s10s curve steepens almost 2bps with front-end slightly outperforming; bunds trade 4bp richer vs. Treasuries in 10-year sector. November's mixed U.S. jobs report did little to shake market expectations of more aggressive tightening by the Federal Reserve. Italian bonds outperformed euro-area peers after Fitch upgraded the sovereign by one notch to BBB, maintaining a stable outlook.
In commodities, crude futures drift around best levels during London hours. WTI rises over 1.5%, trading either side of $68; Brent stalls near $72. Spot gold trends lower in quiet trade, near $1,780/oz. Base metals are mixed: LME copper outperforms, holding in the green with lead; nickel and aluminum drop more than 1%.
There is nothing on today's economic calendar. Focus this week includes U.S. auctions and CPI data, while Fed speakers enter blackout ahead of next week’s FOMC.
- S&P 500 futures up 0.7% to 4,567.50
- STOXX Europe 600 up 0.8% to 466.39
- MXAP down 0.9% to 189.95
- MXAPJ down 1.0% to 617.01
- Nikkei down 0.4% to 27,927.37
- Topix down 0.5% to 1,947.54
- Hang Seng Index down 1.8% to 23,349.38
- Shanghai Composite down 0.5% to 3,589.31
- Sensex down 1.5% to 56,835.37
- Australia S&P/ASX 200 little changed at 7,245.07
- Kospi up 0.2% to 2,973.25
- Brent Futures up 2.9% to $71.89/bbl
- Gold spot down 0.2% to $1,780.09
- U.S. Dollar Index up 0.15% to 96.26
- German 10Y yield little changed at -0.37%
- Euro down 0.2% to $1.1290
Top Overnight News from Bloomberg
- Speculators were caught offside in both bonds and stocks last week, increasing their bets against U.S. Treasuries and buying more equity exposure right before a bout of volatility caused the exact opposite moves
- Inflation pressure in Europe is still likely to be temporary, Eurogroup President Paschal Donohoe said Monday, even if it is taking longer than expected for it to slow
- China Evergrande Group’s stock tumbled close to a record low amid signs a long-awaited debt restructuring may be at hand, while Kaisa Group Holdings Ltd. faces a potential default this week in major tests of China’s ability to limit fallout from the embattled property sector
- China Evergrande Group is planning to include all its offshore public bonds and private debt obligations in a restructuring that may rank among the nation’s biggest ever, people familiar with the matter said
- China tech shares tumbled on Monday, with a key gauge closing at its lowest level since launch last year as concerns mount over how much more pain Beijing is willing to inflict on the sector
- The U.S. is poised to announce a diplomatic boycott of the Beijing Winter Olympics, CNN reported, a move that would create a new point of contention between the world’s two largest economies
- SNB Vice President Fritz Zurbruegg to retire at the end of July 2022, according to statement
- Bitcoin has markedly underperformed rivals like Ether with its weekend drop, which may underscore its increased connection with macro developments
- Austrians who reject mandatory coronavirus vaccinations face 600-euro ($677) fines, according to a draft law seen by the Kurier newspaper
- Some Riksbank board members expressed different nuances regarding the asset holdings and considered that it might become appropriate for the purchases to be tapered further next year, the Swedish central bank says in minutes from its Nov. 24 meeting
A more detailed look at global markets courtesy of Newsquawk
Asian equities began the week cautiously following last Friday's negative performance stateside whereby the Russell 2000 and Nasdaq closed lower by around 2% apiece, whilst the S&P 500 and Dow Jones saw shallower losses. The Asia-Pac region was also kept tentative amid China developer default concerns and conflicting views regarding speculation of a looming RRR cut by China's PBoC. The ASX 200 (+0.1%) was initially dragged lower by a resumption of the underperformance in the tech sector, and with several stocks pressured by the announcement of their removal from the local benchmark, although losses for the index were later reversed amid optimism after Queensland brought forward the easing of state border restrictions, alongside the resilience in the defensive sectors. The Nikkei 225 (-0.4%) suffered from the currency inflows late last week but finished off worse levels. The Hang Seng (-1.8%) and Shanghai Comp. (-0.5%) were mixed with Hong Kong weighed by heavy tech selling and as default concerns added to the headwinds after Sunshine 100 Holdings defaulted on a USD 170mln bond payment, whilst Evergrande shares slumped in early trade after it received a demand for payments but noted there was no guarantee it will have the sufficient funds and with the grace period for two offshore bond payments set to expire today. Conversely, mainland China was kept afloat by hopes of a looming RRR cut after comments from Chinese Premier Li that China will cut RRR in a timely manner and a brokerage suggested this could occur before year-end. However, other reports noted the recent remarks by Chinese Premier Li on the reverse repo rate doesn't mean a policy change and that views of monetary policy moves are too simplistic which could lead to misunderstandings. Finally, 10yr JGBs were steady after having marginally extended above 152.00 and with prices helped by the lacklustre mood in Japanese stocks, while price action was tame amid the absence of BoJ purchases in the market today and attention was also on the Chinese 10yr yield which declined by more than 5bps amid speculation of a potentially looming RRR cut.
Top Asian News
- SoftBank Slumps 9% Monday After Week of Bad Portfolio News
- Alibaba Shares Rise Premarket After Rout, Leadership Changes
- China PBOC Repeats Prudent Policy Stance With RRR Cut
- China Cuts Reserve Requirement Ratio as Economy Slows
Bourses in Europe kicked off the new trading week higher across the board but have since drifted lower (Euro Stoxx 50 +0.1%; Stoxx 600 +0.3%) following a somewhat mixed lead from APAC. Sentiment across markets saw a fleeting boost after the Asia close as China’s central bank opted to cut the RRR by 50bps, as touted overnight and in turn releasing some CNY 1.2tln in liquidity. This saw US equity futures ticking to marginal fresh session highs, whilst the breakdown sees the RTY (+0.6%) outpacing vs the ES (Unch), YM (+0.3%) and NQ (-0.6%), with the US benchmarks eyeing this week’s US CPI as Fed speakers observe the blackout period ahead of next week’s FOMC policy decision – where policymakers are expected to discuss a quickening of the pace of QE taper. From a technical standpoint, the ESz1 and NQz1 see their 50 DMAs around 4,540 and 16,626 respectively. Back to trade, Euro-indices are off best levels with a broad-based performance. UK’s FTSE 100 (+0.8%) received a boost from base metals gaining impetus on the PBoC RRR cut, with the UK index now the outperformer, whilst gains in Oil & Gas and Banks provide further tailwinds. Sectors initially started with a clear cyclical bias but have since seen a reconfiguration whereby the defensives have made their way up the ranks. The aforementioned Oil & Gas, Banks and Basic Resources are currently the winners amid upward action in crude, yields and base metals respectively. Food & Beverages and Telecoms kicked off the session at the bottom of the bunch but now reside closer to the middle of the table. The downside meanwhile sees Travel & Tech – two sectors which were at the top of the leaderboard at the cash open – with the latter seeing more noise surrounding valuations and the former initially unreactive to UK tightening measures for those travelling into the UK. In terms of individual movers, AstraZeneca (+0.7%) is reportedly studying the listing of its new vaccine division. BT (+1.2%) holds onto gains as Discovery is reportedly in discussions regarding a partnership with BT Sport and is offering to create a JV, according to sources. Taylor Wimpey (Unch) gave up opening gains seen in wake of speculation regarding Elliott Management purchasing a small stake.
Top European News
- Johnson Says U.K. Awaiting Advice on Omicron Risks Before Review
- Scholz Names Harvard Medical Expert to Oversee Pandemic Policy
- EU Inflation Still Seen as Temporary, Eurogroup’s Donohoe Says
- Saudi Crown Prince Starts Gulf Tour as Rivalries Melt Away
In FX, the Buck has settled down somewhat after Friday’s relatively frenetic session when price action and market moves were hectic on the back of a rather mixed BLS report and stream of Omicron headlines, with the index holding a tight line above 96.000 ahead of a blank US agenda. The Greenback is gleaning some traction from the firmer tone in yields, especially at the front end of the curve, while also outperforming safer havens and funding currencies amidst a broad upturn in risk sentiment due to perceivably less worrying pandemic assessments of late and underpinned by the PBoC cutting 50 bp off its RRR, as widely touted and flagged by Chinese Premier Li, with effect from December 15 - see 9.00GMT post on the Headline Feed for details, analysis and the initial reaction. Back to the Dollar and index, high betas and cyclicals within the basket are doing better as the latter meanders between 96.137-379 and well inside its wide 95.944-96.451 pre-weekend extremes.
- AUD/GBP/CAD/NZD - A technical correction and better news on the home front regarding COVID-19 after Queensland announced an earlier date to ease border restrictions, combined to give the Aussie a lift, but Aud/Usd is tightening its grip on the 0.7000 handle with the aid of the PBoC’s timely and targeted easing in the run up to the RBA policy meeting tomorrow. Similarly, the Pound appears to have gleaned encouragement from retaining 1.3200+ status and fending off offers into 0.8550 vs the Euro rather than deriving impetus via a rise in the UK construction PMI, while the Loonie is retesting resistance around 1.2800 against the backdrop of recovering crude prices and eyeing the BoC on Wednesday to see if guidance turns more hawkish following a stellar Canadian LFS. Back down under, the Kiwi is straddling 0.6750 and 1.0400 against its Antipodean peer in wake of a pick up in ANZ’s commodity price index.
- CHF/JPY/EUR - Still no sign of SNB action, but the Franc has fallen anyway back below 0.9200 vs the Buck and under 1.0400 against the Euro, while the Yen is under 113.00 again and approaching 128.00 respectively, as the single currency continues to show resilience either side of 1.1300 vs its US counterpart and a Fib retracement level at 1.1290 irrespective of more poor data from Germany and a deterioration in the Eurozone Sentix index, but increases in the construction PMIs.
- SCANDI/EM - The aforementioned revival in risk appetite, albeit fading, rather than Riksbank minutes highlighting diverse opinion, is boosting the Sek, and the Nok is also drawing some comfort from Brent arresting its decline ahead of Usd 70/brl, but the Cnh and Cny have been capped just over 6.3700 by the PBoC’s RRR reduction and ongoing default risk in China’s property sector. Elsewhere, the Try remains under pressure irrespective of Turkey’s Foreign Minister noting that domestic exports are rising and the economy is growing significantly, via Al Jazeera or claiming that the Lira is exposed to high inflation to a degree, but this is a temporary problem, while the Rub is treading cautiously before Russian President Putin and US President Biden make a video call on Tuesday at 15.00GMT.
In commodities, WTI and Brent front month futures are firmer on the day with the complex underpinned by Saudi Aramco upping its official selling prices (OSPs) to Asian and US customers, coupled with the lack of progress on the Iranian nuclear front. To elaborate on the former; Saudi Arabia set January Arab light crude oil OSP to Asia at Oman/Dubai average +USD 3.30/bbl which is an increase from this month’s premium of USD 2.70/bbl, while it set light crude OSP to North-West Europe at ICE Brent USD -1.30/bbl vs. this month’s discount of USD 0.30/bbl and set light crude OSP to the US at ASCI +USD 2.15/bbl vs this month’s premium of USD 1.75/bbl. Iranian nuclear talks meanwhile are reportedly set to resume over the coming weekend following deliberations, although the likelihood of a swift deal at this point in time seems minuscule. A modest and fleeting boost was offered to the complex by the PBoC cutting RRR in a bid to spur the economy. WTI Jan resides on either side of USD 68/bbl (vs low USD 66.72/bbl) whilst Brent Feb trades around USD 71.50/bbl (vs low 70.24/bbl). Over to metals, spot gold trades sideways with the cluster of DMAs capping gains – the 50, 200 and 100 DMAs for spot reside at USD 1,792/oz, USD 1,791.50/oz and USD 1,790/oz respectively. Base metals also saw a mild boost from the PBoC announcement – LME copper tested USD 9,500/t to the upside before waning off best levels.
US Event Calendar
- Nothing major scheduled
DB's Jim Reid concludes the overnight wrap
We’re really at a fascinating crossroads in markets at the moment. The market sentiment on the virus and the policymakers at the Fed are moving in opposite directions. The greatest impact of this last week was a dramatic 21.1bps flattening of the US 2s10s curve, split almost evenly between 2yr yields rising and 10yrs yields falling. As it stands, the Fed are increasingly likely to accelerate their taper next week with a market that is worried that it’s a policy error. I don’t think it is as I think the Fed is way behind the curve. However I appreciate that until we have more certainly on Omicron then it’s going to be tough to disprove the policy error thesis.
The data so far on Omicron can be fitted to either a pessimistic or optimistic view. On the former, it seems to be capable of spreading fast and reinfecting numerous people who have already had covid. Younger people are also seeing a higher proportion of admissions which could be worrying around the world given lower vaccinations levels in this cohort. On the other hand, there is some evidence in South Africa that ICU usage is lower relative to previous waves at the same stage and that those in hospital are largely unvaccinated and again with some evidence that they are requiring less oxygen than in previous waves. It really does feel like Omicron could still go both ways. It seems that it could be both more transmittable but also less severe. How that impacts the world depends on the degree of both. It could be bad news but it could also actually accelerate the end of the pandemic which would be very good news. Lots of people more qualified than me to opine on this aren’t sure yet so we will have to wait for more news and data. I lean on the optimistic side here but that’s an armchair epidemiologist’s view. Anthony Fauci (chief medical advisor to Mr Biden) said to CNN last night that, “We really gotta be careful before we make any determinations that it is less severe or really doesn’t clause any severe illness comparable to Delta, but this far the signals are a bit encouraging….. It does not look like there’s a great degree of severity to it.”
Anyway, the new variant has taken a hold of the back end of the curve these past 10 days. Meanwhile the front end is taking its guidance from inflation and the Fed. On cue, could this Friday see the first 7% US CPI print since 1982? With DB’s forecasts at 6.9% for the headline (+5.1% for core) we could get close to breaking such a landmark level. With the Fed on their media blackout period now, this is and Omicron are the last hurdles to cross before the FOMC conclusion on the 15th December where DB expect them to accelerate the taper and head for a March end. While higher energy prices are going to be a big issue this month, the recent falls in the price of oil may provide some hope on the inflation side for later in 2022. However primary rents and owners’ equivalent rents (OER), which is 40% of core CPI, is starting to turn and our models have long suggested a move above 4.5% in H1 2022. In fact if we shift-F9 the model for the most recent points we’re looking like heading towards a contribution of 5.5% now given the signals from the lead indicators. So even as YoY energy prices ease and maybe covid supply issues slowly fade, we still think inflation will stay elevated for some time. As such it was a long overdue move to retire the word transitory last week from the Fed’s lexicon.
Another of our favourite measures to show that the Fed is way behind the curve at the moment is the quits rate that will be contained within Wednesday’s October JOLTS report. We think the labour market is very strong in the US at the moment with the monthly employment report lagging that strength. Having said that the latest report on Friday was reasonably strong behind the headline payroll disappointment. We’ll review that later.
The rest of the week ahead is published in the day by day calendar at the end but the other key events are the RBA (Tuesday) and BoC (Wednesday) after the big market disruptions post their previous meetings, Chinese CPI and PPI (Thursday), final German CPI (Friday) and the US UoM consumer confidence (Friday). Also look out for Congressional newsflow on how the year-end debt ceiling issue will get resolved and also on any progress in the Senate on the “build back better” bill which they want to get through before year-end. Mr Manchin remains the main powerbroker.
In terms of Asia as we start the week, stocks are trading mixed with the CSI (+0.62%), Shanghai Composite (+0.37%) and KOSPI (+0.11%) trading higher while the Nikkei (-0.50%) and Hang Seng (-0.91%) are lower. Chinese stock indices are climbing after optimism over a RRR rate cut after Premier Li Kequiang's comments last week that it could be cut in a timely manner to support the economy. In Japan SoftBank shares fell -9% and for a sixth straight day amid the Didi delisting and after the US FTC moved to block a key sale of a company in its portfolio. Elsewhere futures are pointing a positive opening in US and Europe with S&P 500 (+0.46%) and DAX (+1.00%) futures both trading well in the green. 10yr US Treasury yields are back up c.+4.2bps with 2yrs +2.6bps. Oil is also up c.2.2% Over the weekend Bitcoin fell around 20% from Friday night into Saturday. It’s rallied back a reasonable amount since (from $42,296 at the lows) and now stands at $48,981, all after being nearly $68,000 a month ago.
Turning back to last week now, and the virus and hawkish Fed communications were the major themes. Despite so many unknowns (or perhaps because of it) markets were very responsive to each incremental Omicron headline last week, which drove equity volatility to around the highest levels of the year. The VIX closed the week at 30.7, shy of the year-to-date high of 37.21 reached in January and closed above 25 for 5 of the last 6 days. The S&P 500 declined -1.22% over the week (-0.84% Friday). The Stoxx 600 fell a more modest -0.28% last week, -0.57% on Friday. To be honest both felt like they fell more but we had some powerful rallies in between. The Nasdaq had a poorer week though, falling -c.2.6%, after a -1.9% decline on Friday.
The other main theme was the pivot in Fed communications toward tighter policy. Testifying to Congress, Fed Chair Powell made a forceful case for accelerating the central bank’s asset purchase taper program, citing persistent elevated inflation and an improving labour market, amid otherwise strong demand in the economy, clearing the way for rate hikes thereafter. Investors priced in higher probability of earlier rate hikes, but still have the first full Fed hike in July 2022.
2yr treasury yields were sharply higher (+9.1bps on week, -2.3bps Friday) while 10yr yields declined (-12.0bps on week, -9.1bps Friday) on the prospect of a hard landing incurred from quick Fed tightening as well as the gloomy Covid outlook. The yield curve flattened -21.1bps (-6.8bps Friday) to 75.6bps, the flattest it has been since December 2020, or three stimulus bills ago if you like (four if you think build back better is priced in). German and UK debt replicated the flattening, with 2yr yields increasing +1.3bps (-0.7bps Friday) in Germany, and +0.3bps (-6.7bps) in UK this week, with respective 10yr yields declining -5.3bps (-1.9bps Friday) and -7.8bps (-6.4bps Friday).
On the bright side, Congress passed a stopgap measure to keep the government funded through February, buying lawmakers time to agree to appropriations for the full fiscal year, avoiding a disruptive shutdown. Positive momentum out of DC prompted investors to increase the odds the debt ceiling will be resolved without issue, as well, with yields on Treasury bills maturing in December declining a few basis points following the news.
US data Friday was strong. Despite the headline payroll increase missing the mark (+210k v expectations of +550k), the underlying data painted a healthy labour market picture, with the unemployment rate decreasing to 4.2%, and participation increasing to 61.8%. Meanwhile, the ISM services index set another record high.
Oil prices initially fell after OPEC unexpectedly announced they would proceed with planned production increases at their January meeting. They rose agin though before succumbing to the Omicron risk off. Futures prices ended the week down again, with Brent futures -3.67% lower (+0.55% Friday) and WTI futures -2.57% on the week (-0.15% Friday).
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
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.
Stocks will keep crashing until Biden's approval rating rises— zerohedge (@zerohedge) January 26, 2022
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"
every market bull is praying for a recession: Biden can't crash markets fast enough— zerohedge (@zerohedge) January 27, 2022
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...
In the span of four weeks, six negative daily Dow reversals of 1%+. This happened 99% of the time in the past in 1987 (crash); 1990 (recession), 1997-98 (Asian crisis); 2000-03 (tech wreck/recession), 2008-09 (GFC), 2018 (Powell!). All either ~20% corrections or 30%+ bear markets— David Rosenberg (@EconguyRosie) January 28, 2022
... 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:
Patience: the faster we crash, the faster the Fed buys everything— zerohedge (@zerohedge) January 21, 2022
The full BofA report is available to professional subs.
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…
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.
- 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.
- 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.
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
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?
- To calculate standard deviation, first choose a time period (e.g., 10 days).
- Take an average of a stock’s closing prices for that period.
- Calculate the difference between each day’s closing price and the stock’s average closing price for that time period.
- Square each of these differences.
- Add the squared differences up.
- 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).
- 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.bonds government bonds pandemic covid-19 sp 500 stocks
What Is Volatility in Finance? Definition, Calculation & Examples
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