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Futures Rebound From Overnight Slide As Oil Keeps Rising

Futures Rebound From Overnight Slide As Oil Keeps Rising

US equity-index futures erased earlier declines, rebounding from a loss of as much as 0.8% helped by the start of the European session and easing mounting concerns about stagflation…

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Futures Rebound From Overnight Slide As Oil Keeps Rising

US equity-index futures erased earlier declines, rebounding from a loss of as much as 0.8% helped by the start of the European session and easing mounting concerns about stagflation from rising energy prices, signs of widening regulatory scrutiny by China, and the upcoming third-quarter earnings which is expected to post a sharply slower pace of growth and beats than recent record quarters. At 730am ET, Dow e-minis were up 5 points, or 0.1%, S&P 500 e-minis were up 7.25 points, or 0.16%, and Nasdaq 100 e-minis were up 46.75points, or 0.31%. Oiil rose 0.3% to $83.86/bbl while the dollar dipped and 10Y yield drifted back under 1.60%.

Gains in tech stocks kept Nasdaq futures afloat on Tuesday, while energy names rose as Brent resumed gains, trading around $84/bbl on expectations that a power crisis from Asia to Europe will lift demand and tighten global balances. Higher oil prices and supply chain disruptions have set off alarm bells for businesses and consumers ahead of the third-quarter reporting season that kicks off on Wednesday with JPMorgan results.  "We believe that market participants could stay concerned over high energy prices translating into further acceleration in inflation, and thereby faster tightening by major central banks," said Charalambos Pissouros, head of research at JFD Group.

In the pre-market, Tesla rose 0.7% after data showed the electric vehicle maker sold 56,006 China-made vehicles in September, the highest since it started production in Shanghai about two years ago. Oil firms including Exxon Mobil and Chevron Corp gained 0.1% and 0.3%, respectively, as Brent crude hit a near-three year high on energy crunch fears. Here are the notable movers:

  • China’s Internet sector is one of the “most undervalued” in Morningstar’s coverage, says Ivan Su, an analyst, adding that Tencent (TCEHY US) and Netease (NTES US) are top picks
  • MGM Resorts (MGM US) rises 2% in U.S. premarket trading after stock was upgraded to outperform from neutral and price target more than doubled to a Street-high $68 at Credit Suisse
  • Quanterix (QTRX US) jumped 20% in Monday postmarket trading after the digital-health company announced that its Simoa phospho-Tau 181 blood test has been granted breakthrough device designation by the U.S. FDA as an aid in diagnostic evaluation of Alzheimer’s disease
  • Relay Therapeutics (RLAY US) fell 7% in Monday postmarket trading after launching a $350 million share sale via Goldman Sachs, JPMorgan, Cowen, Guggenheim Securities
  • Westwater Resources (WWR US) rose as much as 26% in Monday postmarket trading after its board of directors approved construction of the first phase of a production facility in Alabama for battery ready graphite products
  • TechnipFMC (FTI US) in focus after co. was awarded a substantial long-term charter and services contract by Petrobras for the pipelay support vessel Coral do Atlântico

Fastenal, which was one of the first companies to report Q3 earnings, saw its shares fall 2.4% in premarket trading on Tuesday, after the industrial distributor said the Covid-related boost was fading. The company said growth in the quarter was slightly limited by either slower expansion or contraction in sales of certain products related to the pandemic, when compared to the previous year quarter. While there was an uptick in sales of certain Covid-related supplies, the unit price of many products was down significantly, the company said in a statement.  Third-quarter sales and profit were in line with the average analyst estimate

"While investors want to believe the narrative that stock markets can continue to move higher, this belief is bumping up against the reality of how the continued rise in energy prices, as well as supply-chain pressures, are likely to impact company profit margins,” said Michael Hewson, chief market analyst at CMC Markets in London.

In Europe, losses led by basic resources companies and carmakers outweighed gains for utilities and tech stocks, pulling the Stoxx Europe 600 Index down 0.1%. Metals miner Rio Tinto was among the worst performers, dropping 2.7%.

European equities climbed off the lows having lost over 1% in early trade. Euro Stoxx 600 was down -0.35% after dropping as much as 1.3% initially, led by basic resources companies and carmakers outweighed gains for utilities and tech stocks. The DAX is off 0.3%, FTSE 100 underperforms in a quiet morning for news flow. Miners, banks and autos are the weakest sectors after China reported a sharp drop in auto sales; utilities, tech and real estate post modest gains. European tech stocks slide, with the Stoxx Tech Index dropping as much as 1.4% in third straight decline, as another broker downgrades TeamViewer, while Prosus and chip stocks come under pressure. TeamViewer shares fall as much as 5.1% after Deutsche Bank downgrades the remote software maker to hold from buy following recent guidance cut.

Asian stocks fell, halting a three-day rally as uncertainty over earnings deepened amid elevated inflation, higher bond yields and the risk of a widening Chinese crackdown on private industry. The MSCI Asia Pacific Index slid as much as 1.2%, led by technology and communication shares. Alibaba plunged 3.9% following a rally over the past week, while Samsung Electronics tumbled to a 10-month low after at least five brokers slashed their price targets, as China’s power crisis is seen worsening supply-chain disruptions.

“Given the run-up in tech so far, it’s not difficult for investors to harvest profits first before figuring out if techs can maintain their growth when yields rise,” said Justin Tang, head of Asian research at United First Partners. Shares in Hong Kong and the mainland were among the worst performers after Chinese authorities kicked off an inspection of the nation’s financial regulators and biggest state-run banks in an effort to root out corruption. The MSCI Asia Pacific Index is down 12% from a February peak, with a global energy crunch lifting input prices and the debt crisis at China Evergrande Group weighing on the financial sector. Investors are waiting to see how this impacts earnings, according to Jun Rong Yeap, a market strategist at IG Asia.  “Increasing concerns on inflation potentially being more persistent have started to show up,” he said. “This comes along with the global risk-off mood overnight, as investors look for greater clarity from the earnings season on how margins are holding up, along with the corporate economic outlook.”

Japan’s Topix index also fell, halting a two-day rally, amid concerns about a global energy crunch and the possibility of a widening Chinese crackdown on private industry. The Topix fell 0.7% to 1,982.68 at the 3 p.m. close in Tokyo, while the Nikkei 225 declined 0.9% to 28,230.61. SoftBank Group Corp. contributed the most to the Topix’s drop, decreasing 2.4%. Out of 2,181 shares in the index, 373 rose and 1,743 fell, while 65 were unchanged. “Market conditions were improving yesterday, but pushing for higher prices got tough when the Nikkei 225 approached its key moving averages,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.  The Nikkei’s 75-day moving average is about 28,500 and the 200-day moving average is about 28,700, so some investors were taking profits, he said. Japan’s spot power price increased to the highest level in nine months, as the global energy crisis intensifies competition for generation fuel before the winter heating season.

In FX, the Bloomberg Dollar Spot Index reversed an overnight gain as the greenback slipped against all of its Group-of-10 peers. Risk sensitive Scandinavian currencies led gains, followed by the New Zealand and Australian dollars. The pound was little changed while speculators ramped up wagers on sterling’s decline at the fastest rate in more than two years, Commodity Futures Trading Commission data show, further breaking the link between anticipated rate increases and currency gains. The yen steadied after three days of declines. The Turkish lira extended its slide to a record low after President Recep Tayyip Erdogan hinted at a possible military offensive into neighboring Syria.

Fixed-income was quiet by recent standards: Treasury futures were off lows of the day, improving as S&P 500 futures pare losses during European morning, and as cash trading resumed after Monday’s holiday. The 10Y yield dipped from 1.61% to 1.59% after hitting 1.65% based on futures pricing on Monday, but the big mover was on the front end, where 2-year yields climbed as much as 4bps to 0.35% the highest level since March 2020 reflecting increased expectations for Fed rate hikes, as Treasury cash trading resumed globally. Two coupon auctions during U.S. session -- of 3-and 10-year notes -- may weigh on Treasuries however.  Treasury and gilt curves bull-flatten with gilts outperforming at the back end. Bunds have a bull-steepening bias but ranges are narrow. Peripheral spreads tighten a touch with long-end Italy outperforming peers.

In commodities, Crude futures drift higher in muted trade. WTI is up 0.25% near $80.70, Brent trades just shy of a $84-handle. Spot gold remains range-bound near $1,760/oz. Base metals are mixed with LME lead and nickel holding small gains, copper and aluminum in the red.

Looking at the day ahead, central bank speakers include the Fed’s Vice Chair Clarida,Bostic and Barkin, as well as theECB’s President Lagarde, Makhlouf, Knot, Villeroy, Lane and Elderson. Data highlights from the US include the JOLTS job openings for August, and the NFIB’s small business optimism index for September which came in at 99.1, below last month's 100.1. The IMF will be releasing their latest World Economic Outlook.

Market Snapshot

  • S&P 500 futures little changed at 4,351.50
  • STOXX Europe 600 down 0.6% to 454.90
  • MXAP down 0.9% to 194.41
  • MXAPJ down 1.0% to 635.42
  • Nikkei down 0.9% to 28,230.61
  • Topix down 0.7% to 1,982.68
  • Hang Seng Index down 1.4% to 24,962.59
  • Shanghai Composite down 1.2% to 3,546.94
  • Sensex little changed at 60,149.85
  • Australia S&P/ASX 200 down 0.3% to 7,280.73
  • Kospi down 1.4% to 2,916.38
  • German 10Y yield fell 6 bps to -0.113%
  • Euro up 0.1% to $1.1565
  • Brent Futures up 0.4% to $84.01/bbl
  • Gold spot up 0.2% to $1,757.84
  • U.S. Dollar Index little changed at 94.29

Top Overnight Headlines from Bloomberg

  • The EU drew record demand for its debut green bond, in the sector’s biggest-ever offering. The bloc registered more than 135 billion euros ($156 billion) in orders Tuesday for a sale of 12 billion euros of securities maturing in 2037
  • Investors are dumping negative-yielding debt at the fastest pace since February as concerns about inflation and reduced central bank stimulus propel global interest rates higher
  • French President Emmanuel Macron unveiled a 30-billion-euro ($35 billion) plan to create the high-tech champions of the future and reverse years of industrial decline in the euro area’s second-largest economy
  • British companies pushed the number of workers on payrolls above pre-coronavirus levels last month, an indication of strength in the labor market that may embolden the Bank of England to raise interest rates.
  • As the Biden administration and governments around the world celebrate another advance toward an historic global tax accord, an obscure legal question in the U.S. threatens to tear it apart
  • Chinese property developers are suffering credit rating downgrades at the fastest pace in five years, as a recent slump in new-home sales adds to concerns about the sector’s debt woes
  • German investor confidence declined for a fifth month in October, adding to evidence that global supply bottlenecks and a surge in inflation are weighing on the recovery in Europe’s largest economy
  • Social Democrat Olaf Scholz’s bid to succeed Angela Merkel as German chancellor is running into its first test as tensions emerge in talks to bridge policy differences with the Greens and pro-business Free Democrats

A more detailed breakdown of global markets from Newsquawk

Asian equity markets traded mostly lower following the indecisive mood stateside where the major indices gave back initial gains to finish negative amid lingering inflation and global slowdown concerns, with sentiment overnight also hampered by tighter Beijing scrutiny and with US equity futures extending on losses in which the Emini S&P retreated beneath its 100DMA. ASX 200 (-0.3%) was subdued as weakness in energy, tech and financials led the declines in Australia and with participants also digesting mixed NAB business survey data. Nikkei 225 (-0.9%) was on the backfoot after the Japan Center for Economic Research noted that GDP contracted 0.9% M/M in August and with retailers pressured after soft September sales updates from Lawson and Seven & I Holdings, while the KOSPI (-1.4%) was the laggard on return from holiday with chipmakers Samsung Electronics and SK Hynix subdued as they face new international taxation rules following the recent global minimum tax deal. Hang Seng (-1.4%) and Shanghai Comp. (-1.3%) adhered to the downbeat picture following a continued liquidity drain by the PBoC and with Beijing scrutinising Chinese financial institutions’ ties with private firms, while default concerns lingered after Evergrande missed yesterday’s payments and with Modern Land China seeking a debt extension on a USD 250mln bond to avoid any potential default. Finally, 10yr JGBs eked minimal gains amid the weakness in stocks but with demand for bonds limited after the recent subdued trade in T-note futures owing to yesterday’s cash bond market closure and following softer results across all metrics in the 30yr JGB auction.

Top Asian News

  • Alibaba Stock Revival Halted on Concerns of Rising Bond Yields
  • Iron Ore Rally Pauses as China Steel Curbs Cloud Demand Outlook
  • China’s Star Board Sees Rough Start to Fourth Quarter: ECM Watch
  • Citi Lists Top Global Stock Picks for ‘Disruptive Innovations’

European bourses kicked the day off choppy but have since drifted higher (Euro Stoxx 50 -0.4%; Stoxx 600 Unch) as the region remains on standby for the next catalyst, and as US earnings season officially kicks off tomorrow – not to mention the US and Chinese inflation metrics and FOMC minutes. US equity futures have also nursed earlier losses and reside in relatively flat territory at the time of writing, with broad-based performance seen in the ES (Unch), NQ (+0.2%), RTY (-0.2%), YM (Unch). From a technical standpoint, some of the Dec contracts are now hovering around their respective 100 DMAs at 4,346 for the ES, 14,744 for the NQ, whilst the RTY sees its 200 DMA at 2,215, and the YM topped its 21 DMA at 34,321. Back to Europe, cash markets see broad-based downside with the SMI (-0.1%) slightly more cushioned amid gains in heavyweight Nestle (+0.6%). Sectors kicked off the day with a defensive bias but have since seen a slight reconfiguration, with Real Estate now the top performer alongside Food & Beverages, Tech and Healthcare. On the flip side, Basic Resources holds its position as the laggard following yesterday's marked outperformance and despite base metals (ex-iron) holding onto yesterday's gains. Autos also reside at the bottom of the bunch despite constructive commentary from China's Auto Industry Body CAAM, who suggested the chip supply shortage eased in China in September and expected Q4 to improve, whilst sources suggested Toyota aims to make up some lost production as supplies rebound. In terms of individual movers, GSK (+2.3%) shares spiked higher amid reports that its USD 54bln consumer unit has reportedly attracted buyout interest, according to sources, in turn lifting the FTSE 100 Dec future by 14 points in the immediacy. Elsewhere, easyJet (-1.9%) gave up its earlier gains after refraining on guidance, and despite an overall constructive trading update whereby the Co. sees positive momentum carried into FY22, with H1 bookings double those in the same period last year. Co. expects to fly up to 70% of FY19 planned capacity in FY22. In terms of commentary, the session saw the Germany ZEW release, which saw sentiment among experts deteriorate, citing the persisting supply bottlenecks for raw materials and intermediate products. The release also noted that 49.1% of expects still expect inflation to rise further in the next six months. Heading into earnings season, experts also expect profits to go down, particularly in export-tilted sectors such a car making, chemicals and pharmaceuticals. State-side, sources suggested that EU antitrust regulators are reportedly likely to open an investigation into Nvidia's (+0.6% Pre-Mkt) USD 54bln bid from Arm as concessions were not deemed sufficient.

Top European News

  • Soybeans Near 10-Month Low as Supply Outlook Expected to Improve
  • EasyJet Boosts Capacity as Travel Rebound Gathers Pace
  • Currency Traders Are Betting the BOE Is About to Make a Mistake
  • Citi Lists Top Global Stock Picks for ‘Disruptive Innovations’

In FX, the Buck has reclaimed a bit more lost ground in consolidatory trade rather than any real sign of a change in fundamentals following Monday’s semi US market holiday for Columbus Day and ahead of another fairly light data slate comprising NFIB business optimism and JOLTS. However, supply awaits the return of cash Treasuries in the form of Usd 58 bn 3 year and Usd 38 bn 10 year notes and Fed commentary picks up pace on the eve of FOMC minutes with no less than five officials scheduled to speak. Meanwhile, broad risk sentiment has taken a knock in wake of a late swoon on Wall Street to give the Greenback and underlying bid and nudge the index up to fresh post-NFP highs within a 94.226-433 band.

  • NZD/AUD - A slight change in fortunes down under as the Kiwi derives some comfort from the fact that the Aud/Nzd has not breached 1.0600 to the upside and Nzd/Usd maintaining 0.6950+ status irrespective of mixed NZ electric card sales data, while the Aussie takes on board contrasting NAB business conditions and confidence readings in advance of consumer sentiment, with Aud/Usd rotating either side of 0.7350.
  • EUR/CAD/GBP/CHF/JPY - All rangy and marginally mixed against their US counterpart, as the Euro straddles 1.1560, the Loonie meanders between 1.2499-62 with less fuel from flat-lining crude and the Pound tries to keep sight of 1.3600 amidst corrective moves in Eur/Gbp following a rebound through 0.8500 after somewhat inconclusive UK labour and earnings data, but hardly a wince from the single currency even though Germany’s ZEW survey missed consensus and the institute delivered a downbeat assessment of the outlook for the coming 6 months. Elsewhere, the Franc continues to hold within rough 0.9250-90 extremes and the Yen is striving to nurse outsize losses between 113.00-50 parameters, with some attention to 1 bn option expiries from 113.20-25 for the NY cut. Note also, decent expiry interest in Eur/Usd and Usd/Cad today, but not as close to current spot levels (at the 1.1615 strike in 1.4 bn and between 1.2490-1.2505 in 1.1 bn respectively).
  • SCANDI/EM - The Nok and Sek have bounced from lows vs the Eur, and the latter perhaps taking heed of a decline in Sweden’s registered jobless rate, but the Cnh and Cny remain off recent highs against the backdrop of more Chinese regulatory rigour, this time targeting state banks and financial institutions with connections to big private sector entities and the Try has thrown in the towel in terms of its fight to fend off approaches towards 9.0000 vs the Usd. The final straw for the Lira appeared to be geopolitical, as Turkish President Erdogan said they will take the necessary steps in Syria and are determined to eliminate threats, adding that Turkey has lost its patience on the attacks coming from Syrian Kurdish YPG controlled areas. Furthermore, he stated there is a Tal Rifaat pocket controlled by YPG below Afrin and that an operation could target that area which is under Russian protection. However, Usd/Try is off a new ATH circa 9.0370 as oil comes off the boil and ip came in above forecast.

In commodities, WTI and Brent front-month futures are choppy and trade on either side of the flat mark in what is seemingly some consolidation and amid a distinct lack of catalysts to firmly dictate price action. The complex saw downticks heading into the European cash open in tandem with the overall market sentiment at the time, albeit the crude complex has since recovered off worst levels. News flow for the complex has also remained minimal as eyes now turn to any potential intervention by major economies in a bid to stem the pass-through of energy prices to consumers heading into winter. On that note, UK nat gas futures have been stable on the day but still north of GBP 2/Thm. Looking ahead, the weekly Private Inventory data has been pushed back to tomorrow on account of yesterday's Columbus Day holiday. Tomorrow will also see the release of the OPEC MOMR and EIA STEO. Focus on the former will be on any updates to its demand forecast, whilst commentary surrounding US shale could be interesting as it'll give an insight into OPEC's thinking on the threat of Shale under President Biden's "build back better" plan. Brent Dec trades on either side of USD 84/bbl (vs prev. 83.13-84.14 range) whilst WTI trades just under USD 81/bbl after earlier testing USD 80/bbl to the downside (USD 80-80.91/bbl range). Over to metals, spot gold and silver hold onto modest gains with not much to in the way of interesting price action, with the former within its overnight range above USD 1,750/oz and the latter still north of USD 22.50/oz after failing to breach the level to the downside in European hours thus far. In terms of base metals, LME copper is holding onto most of yesterday's gains, but the USD 9,500/t mark seems to be formidable resistance. Finally, Dalian and Singapore iron ore futures retreated after a four-day rally, with traders citing China's steel production regaining focus.

US Event Calendar

  • 6am: Sept. SMALL BUSINESS OPTIMISM 99.1,  est. 99.5, prior 100.1
  • 10am: Aug. JOLTs Job Openings, est. 11m, prior 10.9m
  • 11:15am: Fed’s Clarida Speaks at IIF Annual Meeting
  • 12:30pm: Fed’s Bostic Speaks on Inflation at Peterson Institute
  • 6pm: Fed’s Barkin Interviewed for an NPR Podcast

DB's Jim Reid concludes the overnight wrap

It’s my wife’s birthday today and the big treat is James Bond tomorrow night. However, I was really struggling to work out what to buy her. After 11.5 years together, I ran out of original ideas at about year three and have then scrambled round every year in an attempt to be innovative. Previous innovations have seen mixed success with the best example being the nearly-to-scale oil portrait I got commissioned of both of us from our wedding day. She had no idea and hated it at the closed eyes big reveal. It now hangs proudly in our entrance hall though. Today I’ve bought her a lower key gamble. Some of you might know that there is a US website called Cameo that you can pay famous people to record a video message for someone for a hefty fee. Well, all her childhood heroes on it were seemingly too expensive or not there. Then I saw that the most famous gymnast of all time, Nadia Comăneci, was available for a reasonable price. My wife idolised her as a kid (I think). So after this goes to press, I’m going to wake my wife up with a personalised video message from Nadia wishing her a happy birthday, saying she’s my perfect ten, and praising her for encouraging our three children to do gymnastics and telling her to keep strong while I try to get them to play golf instead. I’m not sure if this is a totally naff gift or inspired. When I purchased it I thought the latter but now I’m worried it’s the former! My guess is she says it’s naff, appreciates the gesture, but calls me out for the lack of chocolates.

Maybe in this day and age a barrel of oil or a tank of petrol would have been the most valuable birthday present. With investor anticipation continuing to build ahead of tomorrow’s CPI release from the US, yesterday saw yet another round of commodity price rises that’s making it increasingly difficult for central banks to argue that inflation is in fact proving transitory. You don’t have to be too old to remember that back in the summer, those making the transitory argument cited goods like lumber as an example of how prices would begin to fall back again as the economy reopened. But not only have commodity aggregates continued to hit fresh highs since then, but lumber (+5.49%) itself followed up last week’s gains to hit its highest level in 3 months.

Looking at those moves yesterday, it was a pretty broad-based advance across the commodity sphere, with big rises among energy and metals prices in particular. Oil saw fresh advances, with WTI (+1.47%) closing above $80/bbl for the first time since 2014, whilst Brent Crude (+1.53%) closed above $83/bbl for the first time since 2018. Meanwhile, Chinese coal futures (+8.00%) hit a record after the flooding in Shanxi province that we mentioned in yesterday’s edition, which has closed 60 of the 682 mines there, and this morning they’re already up another +6.41%. So far this year, the region has produced 30% of China’s coal supply, which gives you an idea as to its importance. And when it came to metals, aluminium prices (+3.30%) on the London Metal Exchange rose to their highest level since the global financial crisis, whilst Iron Ore futures in Singapore jumped +7.01% on Monday, and copper was also up +2.13%. The one respite on the inflation front was a further decline in natural gas prices, however, with the benchmark European future down -2.73%; thus bringing its declines to over -47% since the intraday high that was hit only last Wednesday.

With commodity prices seeing another spike and inflation concerns resurfacing, this proved bad news for sovereign bonds as investors moved to price in a more hawkish central bank reaction. Yields in Europe rose across the continent, with those on 10yr bunds up +3.0bps to 0.12%, their highest level since May. The rise was driven by both higher inflation breakevens and real rates, and leaves bund yields just shy of their recent post-pandemic closing peak of -0.10% from mid-May. If they manage to surpass that point, that’ll leave them closer to positive territory than at any point since Q2 2019 when they last turned negative again. It was a similar story elsewhere, with 10yr yields on OATs (+2.6bps), BTPs (+3.9bps) and gilts (+3.1bps) likewise reaching their highest level in months.

The sell-off occurred as money markets moved to price in further rate hikes from central banks, with investors now expecting a full 25 basis point hike from the Fed by the end of Q3 2022. It seems like another era, but at the start of this year before the Georgia Senate race, investors weren’t even pricing in a full hike by the end of 2023, whereas they’re now pricing in almost 4. So we’ve come a long way over 2021, though pre-Georgia the consensus CPI forecast on Bloomberg was just 2.0%, whereas it now stands at 4.3%, so it does fit with the story of much stronger-than-expected inflation inducing a hawkish response. Yesterday’s repricing came alongside a pretty minimal -0.15% move in the Euro versus the dollar, but that was because Europe was also seeing a similar rates repricing. Meanwhile, the UK saw its own ramping up of rate hike expectations, with investors pricing in at least an initial 15bps hike to 0.25% happening by the December meeting in just two months’ time.

Overnight in Asia, stocks are trading in the red with the KOSPI (-1.46%), Shanghai Composite (-1.21%), Hang Seng (-1.20%), the Nikkei (-0.93%) and CSI (-0.82%) all trading lower on inflation concerns due to high energy costs and aggravated by a Wall Street Journal story that Chinese President Xi Jinping is increasing scrutiny of state-run banks and big financial institutions with inspections. Furthermore, there were signs of a worsening in the Evergrande debt situation, with the firm missing coupon payments on a 9.5% note due in 2022 and a 10% bond due in 2023. And there were fresh indications of a worsening situation more broadly, with Sinic Holdings Group Co. saying it doesn’t expect to pay the principal or interest on a $250m bond due on October 18. Separately in Japan, Prime Minister Fumio Kishida said on Monday that he will raise pay for public workers and boost tax breaks to firms that boost wages to try and improve the country’s wealth distribution.

Back to yesterday, and the commodity rally similarly weighed on thin-volume equity markets, though it took some time as the S&P 500 had initially climbed around +0.5% before paring back those gains to close down -0.69%. Before the late US sell-off, European indices were subdued, but the STOXX 600 still rose +0.05%, thanks to an outperformance from the energy sector (+1.49%), and the STOXX Banks Index (+0.13%) hit a fresh two-year high as the sector was supported by a further rise in yields.

On the central bank theme, we heard from the ECB’s chief economist, Philip Lane, at a conference yesterday, where he said that “a one-off shift in the level of wages as part of the adjustment to a transitory unexpected increase in the price level does not imply a trend shift in the path of underlying inflation.” So clearly making a distinction between a more persistent pattern of wage inflation, which comes as the ECB’s recent forward guidance commits them to not hiking rates “until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon”, as well as having confidence that “realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term”.

Turning to the political scene, Brexit is likely to be in the headlines again today as the UK’s Brexit negotiator David Frost gives a speech in Lisbon where he’s expected to warn that the EU’s proposals on the Northern Ireland Protocol are insufficient. That comes ahead of a new set of proposals that are set to come from the EU tomorrow, with the two sides disagreeing on the extent of border controls required on trade from Northern Ireland with the rest of the UK. Those controls were put in place as part of the Brexit deal to prevent a hard border being put up between Northern Ireland and the Republic of Ireland, whilst also preserving the integrity of the EU’s single market. But the UK’s demands for adjustments have been met with opposition by the EU, and speculation has risen that the UK could trigger Article 16, which allows either side to take unilateral safeguard measures, if the protocol’s application “leads to serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade”.

On the data front, there wasn’t much data to speak of with the US holiday, but Italy’s industrial production contracted by -0.2% in August, in line with expectations.

To the day ahead now, andcentral bank speakers include the Fed’s Vice Chair Clarida,Bostic and Barkin, as well as theECB’s President Lagarde, Makhlouf, Knot, Villeroy, Lane and Elderson. Data highlights from the US include the JOLTS job openings for August, and the NFIB’s small business optimism index for September. In Europe, there’s also UK unemployment for August and the German ZEW Survey for October. Lastly, the IMF will be releasing their latest World Economic Outlook.

 

 

Tyler Durden Tue, 10/12/2021 - 07:56

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‘Build Back… You Know, The Thing’: Americans Have No Idea What’s In Biden’s Economic Plan

‘Build Back… You Know, The Thing’: Americans Have No Idea What’s In Biden’s Economic Plan

While Congressional Democrats spar over the ultimate size of President Biden’s "Build Back Better" economic plan, Bloomberg astutely points out that..

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'Build Back... You Know, The Thing': Americans Have No Idea What's In Biden's Economic Plan

While Congressional Democrats spar over the ultimate size of President Biden's "Build Back Better" economic plan, Bloomberg astutely points out that Americans have no clue what they're signing up for with their tax dollars. In fact, according to a CBS News poll published Oct. 10, just 10% of Americans say they know the specifics of the bill, while only 1/3 think it would benefit them directly.

What's more, "Not even Congress knows what the bill would accomplish, with the contents of the plan changing day-by-day as Democrats squabble over how much it should spend, who it should benefit and who should pay for it."

For example, on Tuesday, the White House suggested it would jettison free community college. The next day, Democrats were focused on proposed tax hikes after moderate Sen. Kyrsten Sinema (D-AZ) put her foot down over corporate and personal tax rates.

In an attempt to provide some clarity (don't hold your breath), Biden on Thursday night held a CNN town hall-style event (on the same night as Dune's US release).

In short, their messaging sucks.

"I will state the obvious, but they need to shift the focus away from process to policy. So far, the coverage around their proposal is all around Democratic divisions, which inevitably makes it impossible to sell," said former Marco Rubio communications director, Alex Conant. "Frankly, they need to talk about what their goals are," he added. "Why is this necessary?"

Republicans, on the other hand, are clear on their messaging; "Massive government spending leads to massive tax hikes," according to GOP strategist Ron Bonjean. "When you have a shifting number and shifting programs, it becomes confusing to follow."

Instead of focusing on the legislation’s new investments in child care, the elderly, education, healthcare and climate change, Democratic lawmakers have openly haggled over the price tag. A standoff between the party’s progressive and centrist factions has created cable news-ready drama.

Given how much is wrapped up in this package, it was always going to be a long and intense negotiation,”  said Ben LaBolt, a former spokesperson for President Barack Obama. “One way to start is to build the case for the way this will help middle class families and focus the public on those conversations, while at the same time preserving room for the closed-door negotiations to bring all of the elements of the party together for the biggest, most comprehensive approach possible.” -Bloomberg

In a Wednesday speech in Scranton, PA, Biden tried - and failed - to  convey how his economic agenda would help working class families - by intermingling stories about growing up in the area and programs contained in the legislation.

"Frankly, they’re about more than giving working families a break; they’re about positioning our country to compete in the long haul," said Biden, doing his usual poor job of reading a teleprompter. "Economists left, right, and center agree."

Meanwhile, Biden - let's face it, Biden's 'advisers' have failed to ink a final compromise between warring factions of Democrats. For the Build Back Better plan to pass, every single Senate Democrat must be on board. As moderates Sinema and Joe Manchin (D-WV) balk on the price tag and demanding deep cuts, progressive House Democrats are sure to similarly balk at passing the smaller, $1.2 trillion infrastructure package that's already passed the Senate.

While advocacy groups have started to spend heavily to promote policies in the plan, most of the discussion remains centered on its cost.

Biden’s advisers are banking on the presumption that ordinary Americans don’t pay much attention to the machinations of everyday Washington. Much as they were during the presidential campaign, the president’s aides are largely dismissive of what they call horse-race stories.

But Biden’s team had a much easier time selling his pandemic relief legislation, the American Rescue Plan, in March, with its convenient focus on three clear issues -- money for vaccines, money to re-open schools and checks sent directly to American households. -Bloomberg

"They haven’t laid out why we need this, other than Democrats are in power now and aren’t going to have it again for a long time," said Conant.

Good luck with that.

Tyler Durden Fri, 10/22/2021 - 08:51

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Government

Parents were fine with sweeping school vaccination mandates five decades ago – but COVID-19 may be a different story

Public health experts know that schools are likely sites for the spread of disease, and laws tying school attendance to vaccination go back to the 1800s.

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Children and parents lined up for polio vaccines outside a Syracuse, New York school in 1961. AP Photo

The ongoing battles over COVID-19 vaccination in the U.S. are likely to get more heated when the Food and Drug Administration authorizes emergency use of a vaccine for children ages 5 to 11, expected later this fall.

California has announced it will require the vaccine for elementary school attendance once it receives full FDA approval after emergency use authorization, and other states may follow suit. COVID-19 vaccination mandates in workplaces and colleges have sparked controversy, and the possibility that a mandate might extend to younger children is even more contentious.

Kids are already required to get a host of other vaccines to attend school. School vaccination mandates have been around since the 19th century, and they became a fixture in all 50 states in the 1970s. Vaccine requirements are among the most effective means of controlling infectious diseases, but they’re currently under attack by small but vocal minorities of parents who consider them unacceptable intrusions on parental rights.

As a public health historian who studies the evolution of vaccination policies, I see stark differences between the current debates over COVID-19 vaccination and the public response to previous mandates.

Compulsory vaccination in the past

The first legal requirements for vaccination date to the early 1800s, when gruesome and deadly diseases routinely terrorized communities. A loose patchwork of local and state laws were enacted to stop epidemics of smallpox, the era’s only vaccine-preventable disease.

Vaccine mandates initially applied to the general population. But in the 1850s, as universal public education became more common, people recognized that schoolhouses were likely sites for the spread of disease. Some states and localities began enacting laws tying school attendance to vaccination. The smallpox vaccine was crude by today’s standards, and concerns about its safety led to numerous lawsuits over mandates.

The U.S. Supreme Court upheld compulsory vaccination in two decisions. The first, in 1905, affirmed that mandates are constitutional. The second, in 1922, specifically upheld school-based requirements. In spite of these rulings, many states lacked a smallpox vaccination law, and some states that did have one failed to enforce it consistently. Few states updated their laws as new vaccines became available.

School vaccination laws underwent a major overhaul beginning in the 1960s, when health officials grew frustrated that outbreaks of measles were continuing to occur in schools even though a safe and effective vaccine had recently been licensed.

Many parents mistakenly believed that measles was an annoying but mild disease from which most kids quickly recovered. In fact, it often caused serious complications, including potentially fatal pneumonia and swelling of the brain.

With encouragement from the Centers for Disease Control and Prevention, all states updated old laws or enacted new ones, which generally covered all seven childhood vaccines that had been developed by that time: diphtheria, pertussis, tetanus, polio, measles, mumps and rubella. In 1968, just half the states had school vaccination requirements; by 1981, all states did.

Smiling boy rolls up his sleeve to get a shot from a nurse
Sometimes, students even received vaccinations from nurses at school. NIH U.S. National Library of Medicine, CC BY-ND

Expanding requirements, mid-20th century

What is most surprising about this major expansion of vaccination mandates is how little controversy it provoked.

The laws did draw scattered court challenges, usually over the question of exemptions – which children, if any, should be allowed to opt out. These lawsuits were often brought by chiropractors and other adherents of alternative medicine. In most instances, courts turned away these challenges.

There was scant public protest. In contrast to today’s vocal and well-networked anti-vaccination activists, organized resistance to vaccination remained on the fringes in the 1970s, the period when these school vaccine mandates were largely passed. Unlike today, when fraudulent theories of vaccine-related harm – such as the discredited notion that vaccines cause autism – circulate endlessly on social media, public discussion of the alleged or actual risks of vaccines was largely absent.

Through most of the 20th century, parents were less likely to question pediatricians’ recommendations than they are today. In contrast to the empowered “patient/consumer” of today, an attitude of “doctor knows best” prevailed. All these factors contributed to overwhelmingly positive views of vaccination, with more than 90% of parents in a 1978 poll reporting that they would vaccinate their children even if there were no law requiring them to do so.

Widespread public support for vaccination enabled the laws to be passed easily – but it took more than placing a law on the books to control disease. Vaccination rates continued to lag in the 1970s, not because of opposition, but because of complacency.

Thanks to the success of earlier vaccination programs, most parents of young children lacked firsthand experience with the suffering and death that diseases like polio or whooping cough had caused in previous eras. But public health officials recognized that those diseases were far from eradicated and would continue to threaten children unless higher rates of vaccination were reached. Vaccines were already becoming a victim of their success. The better they worked, the more people thought they were no longer needed.

In response to this lack of urgency, the CDC launched a nationwide push in 1977 to help states enforce the laws they had recently enacted. Around the country, health officials partnered with school districts to audit student records and provide on-site vaccination programs. When push came to shove, they would exclude unvaccinated children from school until they completed the necessary shots.

The lesson learned was that making a law successful requires ongoing effort and commitment – and continually reminding parents about the value of vaccines in keeping schools and entire communities healthy.

Add COVID-19 to vaccine list for school?

Five decades after school mandates became universal in the U.S., support for them remains strong overall. But misinformation spread over the internet and social media has weakened the public consensus about the value of vaccination that allowed these laws to be enacted.

adults and kids with signs protesting COVID-19 vaccines
Some anti-vaccination activists are vocal opponents of vaccine mandates for kids. Sarah Reingewirtz/MediaNews Group/Los Angeles Daily News via Getty Images

COVID-19 vaccination has become politicized in a way that is unprecedented, with sharp partisan divides over whether COVID-19 is really a threat, and whether the guidance of scientific experts can be trusted. The attention focused on COVID-19 vaccines has given new opportunities for anti-vaccination conspiracy theories to reach wide audiences.

[Over 115,000 readers rely on The Conversation’s newsletter to understand the world. Sign up today.]

Fierce opposition to COVID-19 vaccination, powered by anti-government sentiment and misguided notions of freedom, could undermine support for time-tested school requirements that have protected communities for decades. Although vaccinating school-aged children will be critical to controlling COVID-19, lawmakers will need to proceed with caution.

The Conversation

James Colgrove has received funding from the National Library of Medicine, the Greenwall Foundation, the Milbank Memorial Fund, and the William T. Grant Foundation.

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2 High Yielding Canadian Dividend Stocks to Add Today

Many investors are looking to achieve financial freedom. Ditching that 9-5 job and being financially free is certainly a lifestyle to get excited about. To achieve this, many buy high-yielding Canadian dividend stocks. But, what many don’t realize is…

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Many investors are looking to achieve financial freedom. Ditching that 9-5 job and being financially free is certainly a lifestyle to get excited about.

To achieve this, many buy high-yielding Canadian dividend stocks. But, what many don't realize is that the dividend yield of a company is not the first thing you should be looking at. In fact, a high yield can sometimes be a looming disaster. Look no further than the record-breaking amount of dividend cuts we had during the COVID-19 pandemic.

There's no point in purchasing a high yielding Canadian dividend stock if you're going to watch your capital shrink. So, in this article we're going to highlight a few options that not only present a high dividend yield for investors buying stocks to churn out more passive income, but a reliable dividend yield, one that can stand the test of time.

Reliability found in Enbridge (TSX:ENB)

If you're an income investor, you've likely heard of Enbridge (TSE:ENB). The company has paid a notoriously high yield for decades, and has maintained one of the longest dividend growth streaks in the country, raising consistently for more than 2 and a half decades.

Enbridge is a midstream company with a growing renewable energy portfolio. To give an indication of the company's dominance, it states that it is responsible for shipping more than 20% of the natural gas that is consumed in the United States, and 25% of North America's crude oil.

Enbridge (TSX:ENB) and the renewable future

Its renewable energy portfolio is quite small, accounting for only 3% of 2020 adjusted EBITDA, but it is one that is growing fast, and investors should take note. As we move further into the future, renewables will no doubt play a key role in Enbridge's growth.

There's also a chance you've glanced at Enbridge during a pre-screen and avoided the company due to excessively high payout ratios. Which, is fairly reasonable. The company is currently paying out over 110% of trailing earnings towards its dividend. But, you may be missing a massive opportunity here.

Why has Enbridge been able to grow its dividend for as long as it has, despite payout ratios being over 100% for the better part of a decade? This is because the payout ratio in terms of both earnings and free cash flows are useless when it comes to pipelines.

When analyzing pipelines, you want to be looking at something called distributable cash flow, or DCF. This cash flow calculation is produced by the company themselves, and calculations can vary to some degree. Given the complex business structure of a pipeline company, this is the most reliable indicator to use when it comes to dividend safety.

In 2021, Enbridge expects to generate $4.70-5 in distributable cash flow. With a dividend of $3.34 per year, this puts the company's payout ratio at 66.8% on the high end. Of note, Enbridge's target is to keep its payout ratio within this range, and the company has done so for quite some time.

Consistent cash flows in "take or pay" contracts

How has it managed to do so? Cash flow with pipelines is extremely consistent, due to long term take or pay contracts. Regardless of whether or not Enbridge is shipping product, the pipeline space is paid for. And not only this, Enbridge can turn around and charge someone else to utilize that space, even if it has already been paid for and goes unused.

This creates an extremely reliable cash flow stream despite the price of natural gas or oil, and is one of the major reasons why Enbridge and other midstream companies are not as susceptible to volatility in commodity prices.

Yielding 6.47%, Enbridge is a solid option to help you bolster your passive income stream and start generating long-standing wealth.

Beefy distribution in A&W Revenue Royalties Income Fund (TSX:AW.UN)

TSE:AW.UN Stock

Royalty funds are often avoided due to their complex and confusing structure. However, many of them provide excellent opportunities for investors looking to generate passive income. A&W Revenue Royalties Income Fund (TSE:AW.UN) is one that does just that.

Many bears will point out that A&W in the United States has been struggling. However, in Canada it is a much different story.

A&W thriving in Canadian space

The company has over 1,000 restaurants in Canada and had system sales of over $1.4B in 2020, despite being in a global pandemic. The company has proven to be exceptionally skilled at marketing its products and has some of the best industry leading growth out of all fast food chains in Canada.

As a royalty company, A&W Royalty collects "top line" cash flows. Which means it is solely dependent on the sales driven through A&W restaurants. This means that its distribution can vary depending on how well the restaurants do, but overall it has been extremely reliable when it comes to payments.

Yes, the chain did suspend its $0.10 monthly distribution because of the pandemic in 2020, however it quickly made up for this by providing 2 special distributions of $0.30 and $0.20 when operations started back up later in the year.

Sales growth through the first 6 months of 2021

Prior to the pandemic, the company had achieved mid to high single digit same store sales growth over the last half decade, and it's off to a roaring start in 2021 as well, with 12.2% sales growth through the first 6 months. Through the first 6 months of the year the company has also added 34 new restaurants. To put this into perspective, the company added 37 in all of Fiscal 2020.

The fund yields 4.77%, and pays out on a monthly basis. Payout ratios will look high, but if you understand the operations of a royalty company, you'll know that it aims to pay out the vast majority of its distributable cash back to shareholders.

Overall, it seems consumers are willing to eat at A&W despite higher costs, which bodes well for the company's growth. It does this with great marketing and higher quality food than similar chains like Burger King and Mcdonalds, and investors are likely to enjoy a beefy (no pun intended) distribution for quite some time.

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