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Futures Rebound From Tuesday Rout As Dip Buyers Emerge

Futures Rebound From Tuesday Rout As Dip Buyers Emerge

After the worst day for stocks in a long time, which saw the Dow plunge 800 points…



Futures Rebound From Tuesday Rout As Dip Buyers Emerge

After the worst day for stocks in a long time, which saw the Dow plunge 800 points or 2.2% and the Nasdaq tumble almost 4% to the lowest level in nearly a year, it seemed that Wednesday would be another puke fest, with Google tumbling as much as 10% afterhours after reporting mixed earnings that missed on YouTube revenues and EPS, and dragging the Nasdaq with it. However, solid results from Microsoft as well as some long overdue stability in Chinese markets helped to reveres the dour mood, and aside for a brief but sharp selloff around the time Europe opened, US equity futures have been a diagonal line up, with the Nasdaq recovering from its lowest level in nearly a year, as dip buyers returned on corporate earnings and “all out” stimulus pledges by China.  As of 7:00am ET, S&P 500 and Nasdaq 100 contracts each rose around 0.8%, 10Y yields rose 3bps to 2.77%, the dollar rose again and Brent was flattish around $105.

Fears that the Fed would tip the world’s largest economy into a recession have plagued markets all week, all while activity slows in China as Covid lockdowns bite. Sentiment got a modest pickup overnight after China’s President Xi Jinping made a commitment to boost infrastructure construction in Beijing’s latest bid to rescue economic grow. In Europe, the euro touched the weakest level versus the greenback since 2017 on Wednesday as Russia said it will stop natural gas flows to Poland and Bulgaria. European gas prices surged as traders weighed the risk of other countries being hit next, spurring worries over a further spike in inflation and a sharp slowdown in the economy. However, after initially sliding, European stocks staged a strong rebound.

“The backdrop for risk assets continues to be weak, and wasn’t helped by headlines of Russia halting gas supplies to Poland,” wrote Mizuho International Plc strategists including Peter Chatwell. “If we get closer towards the 4200 level on the S&P 500, this may bring some temporary relief for risk, especially with the potential for some earnings positivity today.”

“On U.S. earnings, there is a risk of high-profile idiosyncratic disappointments, most likely among beneficiaries of the Covid-19 pandemic,” said UBS Wealth Management chief investment officer Mark Haefele. “Facing geopolitical risks, threats to growth from China’s lockdowns, and uncertainty over the prospect of overtightening by the Fed, equity markets are likely to remain volatile.”

Microsoft, along with Google parent Alphabet, kicked off a big week of tech earnings yesterday with a mixed bag that won't fully soothe jittery tech investors. Alphabet posted a rare miss on slower European ad sales and lackluster YouTube performance. YouTube was hit by its rivalry with TikTok and Apple's privacy changes. But Microsoft beat estimates, fueled by robust growth in cloud-services demand. This comes after a big subscriber loss by Netflix last week. Facebook parent Meta Platforms reports later today. The recent selloff in FANG stocks looks more significant than those that preceded it. As a result, Microsoft jumped 5.6% in premarket trading while Alphabet and Texas Instruments dropped as their earnings disappointed, putting the Nasdaq on pace for a 12% loss this month, its worst performance since October 2008 during the global financial crisis. Technology shares have been under particular pressure this year on the risks from rising rates amid a hawkish shift in the Federal Reserve’s monetary policy. Twitter again fell in premarket trading, set to extend losses on Wednesday as shares drop further below Elon Musk’s offer price of $54.20 per share. Tesla Inc. advanced after slumping on Tuesday.  Some other premarket movers:

  • Bank stocks are mostly higher in premarket trading Wednesday as the U.S. 10-year yield rebounds to hit 2.76%.
  • Robinhood stock rose after the company announced it is dismissing 9% of its workforce in a move that Morgan Stanley says boosts its chance to become profitable. Meanwhile, Visa shares jumped after the firm reported “impressive” second-quarter results
  • Mattel shares rise 13% in U.S. premarket amid a WSJ report that the the maker of Barbie and Hot Wheels has held preliminary discussions with at least two private-equity firms about a possible buyout.
  • NCR shares sink 20% in thin premarket trading Wednesday after the company cut its full-year outlook for revenue, adjusted EBITDA and non-GAAP earnings per share due to factors including the war in Ukraine and inflationary pressures.
  • Robert Half rises 2% in premarket trading after the provider of staffing services reported earnings per share for the first quarter that beat the average analyst estimate. BofA lifts the stock’s rating while highlighting “labor market momentum.”

“Overall earnings are not that bad and that should come as a support to the market right now,” said Barclays Plc strategist Emmanuel Cau. “It’s essential to focus on earnings to figure out what you want to buy and what you want to sell.”

European equities started off in the red but inched higher bouncing off six-week lows, as investors assessed the economic implications of cuts in gas supplies from Russia. Euro Stoxx 50 rises 0.6% having traded down as much as 1.2%. CAC 40 and FTSE 100 outperform slightly. Miners, autos and chemicals are the best performing sectors. Mercedes-Benz jumped 3.4% after the German carmaker published better-than-expected earnings and an upbeat outlook. Michelin also reported earnings beats, helping to turn around an earlier loss in the Stoxx 600 Europe Index and propelling automakers to session leaders. Meanwhile, perennial disappointment Deutsche Bank slumped 5.2%, falling for a fourth consecutive session. Here are some of the other notable European movers today

  • SEB rises as much as 9% after 1Q earnings showed beats across the board, with outperformance on net interest income, fees and trading.
  • Handelsbanken gains as much as 6.3% after the lender’s quarterly results beat analyst estimates on several points, including net interest income, net income and commission.
  • Clariant climbs as much as 12% after the conclusion of investigations into 2020-21 accounting of non-cash reserves proved “positive,” Zurcher Kantonalbank says in a note.
  • Umicore rises as much as 6.3% after the company signed a long-term supply agreement for electric vehicle high-nickel cathode materials with Automotive Cells Company.
  • Deutsche Bank shares fall as much as 6.7% after quarterly results as higher costs offset a better-than-expected performance at its investment banking business.
  • Credit Suisse drops as much as 1.8% as 1Q results fail to ease concerns about the bank’s momentum and provide another negative surprise after its warning earlier in the month.
  • Stoxx 600 Automobiles & Parts Index gains as much as 2.6% and is the second-best performing subgroup on the wider equity gauge after slew of positive 1Q results. Valeo +3%, Mercedes-Benz +3.7%, Michelin +3.1%
  • Aveva slides as much as 21% after the engineering software firm said it ceased new operations in Russia and anticipates its FY23 revenue will be hit by the war in Ukraine.
  • Bank of Ireland drops as much as 8.6% after its 1Q trading update was overshadowed by the announced departure of its CEO Francesca McDonagh.
  • Schneider Electric falls as much as 3.8% following 1Q results as analysts said the beat from the electrical-goods group wasn’t a surprise following recent peer reports.

Earlier in the session, Asia’s stocks benchmark declined to the lowest level since July 2020 as caution prevailed in a busy week of earnings. The MSCI Asia Pacific Index slumped as much as 1.3% Wednesday, with all but two sectors in the red. Tech was the biggest sectoral loser, dragged down by giants TSMC and Samsung Electronics. Earnings reports from chipmakers including Texas Instruments and SK Hynix disappointed investors, hurting sentiment in an industry already hammered by rising global interest rates and supply-chain woes.  The overall growth outlook for the region remains weak, with China’s Covid-19 outbreaks and lockdowns in the spotlight.

“As bond yields continue to face upward pressure it’s going to be a very, very difficult situation for tech,” Eli Lee, head of investment strategy at Bank of Singapore, told Bloomberg Television. “Value will still outperform growth, large cap will outperform mid cap in the next two to three months. There will be a strong bid for energy and commodity names.”   Equity benchmarks with heavy tech weightings such as those in Taiwan, South Korea and Japan underperformed, with each dropping about 1% or more. China stocks advanced following President Xi Jinping’s pledge to boost construction and infrastructure.   READ: Xi’s Pledge Boosts Hopes Among Jaded China Stock Traders

Japanese equities dropped, as disappointing earnings at home and abroad added to concerns on inflation, U.S. monetary policy and China lockdowns.  The Topix Index fell 0.9% to close at 1,860.76, while the Nikkei declined 1.2% to 26,386.63. Shimano Inc. contributed the most to the Topix Index decline, decreasing 13%. Out of 2,170 shares in the index, 768 rose and 1,352 fell, while 50 were unchanged.

Australia stocks also fell: the S&P/ASX 200 index fell 0.8% to 7,261.20, capping a third day of declines, after Australia’s core inflation accelerated to the fastest pace since 2009, intensifying pressure on policy makers to raise interest rates during an election campaign. Life360 dropped by a record after releasing a 1Q trading update and saying it’s halting plans for a U.S. dual listing. Downer EDI was a top performer after saying it sees strong demand in 4Q. In New Zealand, the S&P/NZX 50 index fell 0.7% to 11,726.39

In FX, the Bloomberg Dollar Spot Index rose as the greenback advanced against most of its Group-of-10 peers and the three-year Treasury yield added 8bps, The euro extended its drop against the dollar to touch 1.0588, while bunds reversed opening losses, sending yields as much as 3bps lower. Australia’s front-end bond yields rose and the Australian dollar advanced for the first time in five days versus the greenback after trimmed mean CPI climbed to hit 3.7%; swaps traders are now fully pricing in a 15bps hike by the Reserve Bank of Australia on Tuesday that would push up the cash rate to 0.25%. Sweden’s currency fluctuated against the dollar; it rose against the euro and overnight volatility in the euro-krona pair touched the highest level in six weeks as it captured tomorrow’s Riksbank decision where some expect it to raise the repo rate for the first time since 2019. The yen resumed its decline after a two-day gain amid a surge in U.S. Treasury yields on expectations of aggressive policy tightening by global central banks. Benchmark 10-year yields rose near the Bank of Japan’s upper limit ahead of the bank’s policy decision Thursday.

In rates, Treasuries bear flatten as stocks recover a portion of Tuesday’s losses, leaving underperforming front-end yields cheaper by up to 7bp into early U.S. session. U.S. 10-year yields around 2.77%, with bunds and gilts outperforming by 4bp and 1.5bp in the sector; front-end led losses flattens 2s10s, 5s30s spreads by 3.1bp and 1.8bp. Bunds, gilts outperform Treasuries; bunds bull steepen, richer by ~1.5bps across the short end. Gilts seen a roughly 1bps parallel cheapening move. Peripheral spreads are wider to core with 10y Bund/BTP spread hitting the widest since June 2020. U.S. session includes 5-year note sale, follows strong 2-year auction on Tuesday.

In commodities, crude futures hold a relatively narrow range. WTI is up ~50c near $102.20.

Spot gold fades a small dip by remains below $1,900/oz. European gas surged 20% after Russia blocked flows to Poland and Bulgaria. Base metals trade well with LME zinc outperforming. 

Bitcoin attempts to recover from yesterday's slide and meanders around 39k.

Looking to the day ahead now, and US data releases include preliminary wholesale inventories for March, pending home sales for March, and the advance goods trade balance for March. Over in Europe, there’s also Germany’s GfK consumer confidence reading for May, and France’s consumer confidence for April. Central bank speakers include ECB President Lagarde, the ECB’s Muller and Bank of Canada Governor Macklem. Finally, earnings releases include Meta, T-Mobile, Qualcomm, Amgen, American Tower, Boeing and PayPal.

Market Snapshot

  • S&P 500 futures up 0.9% to 4,209.25
  • MXAP down 1.0% to 164.75
  • MXAPJ down 0.7% to 541.64
  • Nikkei down 1.2% to 26,386.63
  • Topix down 0.9% to 1,860.76
  • Hang Seng Index little changed at 19,946.36
  • Shanghai Composite up 2.5% to 2,958.28
  • Sensex down 0.8% to 56,885.14
  • Australia S&P/ASX 200 down 0.8% to 7,261.17
  • Kospi down 1.1% to 2,639.06
  • STOXX Europe 600 up 0.2% to 441.88
  • German 10Y yield little changed at 0.80%
  • Euro down 0.2% to $1.0612
  • Brent Futures up 0.3% to $105.31/bbl
  • Gold spot down 0.5% to $1,895.06
  • U.S. Dollar Index up 0.26% to 102.57

Top Overnight News from Bloomberg

  • Russia said it stopped natural gas flows to Poland and Bulgaria on Wednesday, making good on a threat to cut off buyers if they refuse President Vladimir Putin’s demand to pay in rubles. European gas prices surged more than 20% on the move and the euro fell to its lowest against the dollar since April 2017
  • Ten European gas companies have opened the accounts at Gazprombank needed to meet Russia’s demand to pay in rubles and four have already made payments, according to a person familiar with the matter
  • New Zealand’s central bank said it will design a framework to impose debt-to-income mortgage lending restrictions, but indicated they may not be needed anytime soon as the housing market cools
  • Shanghai hinted at an easing of lockdown measures as coronavirus infections dropped to the lowest in three weeks, while case numbers in Beijing stabilized, in a potential sign authorities are starting to bring the twin outbreaks under control.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were mostly negative after the losses in the US where participants braced for the large-cap tech results including Alphabet which disappointed, while the region also navigated through a deluge of earnings. ASX 200 was dragged lower by underperformance in tech and the consumer-related stocks, while mostly firmer than expected CPI data added to the pressure for the RBA to hike as early as next week. Nikkei 225 retreated with the worst-performing stocks in the index pressured by earnings updates. Hang Seng and Shanghai Comp were choppy as Beijing lockdown fears were stoked after Chaoyang district was classified as high-risk and the Tongzhou district halted schools, although participants also digested firmer Industrial Profits and President Xi’s recent announcement to step up infrastructure construction.

Top Asian News

  • Malaysia Scraps Covid Tests for Travelers, Outdoor Mask Mandate
  • Hong Kong’s New Travel Easing Leaves Business Still Wanting More
  • HKEX Outlook Weak as Stock Market Activity Sluggish: Street Wrap
  • China’s Covid Outbreak Hits Profits of Foreign Firms

European bourses recovered from the losses seen at the cash open, with the region currently posting board-based gains.     Sector performance in Europe is mostly firmer but with no clear theme; Basic Resources is the clear outperformer.     Stateside, US equity futures see slightly more pronounced gains vs Europe following yesterday’s hefty losses.     Alphabet Inc (GOOG) - Q1 2022 (USD): EPS 24.62 (exp. 25.96), Revenue 68bln (exp. 68.1bln); authorised to buyback additional 70bln. (Newswires) Shares fell 3.0% after market. Microsoft (MSFT) - Adj. EPS 2.22 (exp. 2.19), Revenue 49.4bln (exp. 49.05bln). Co. guides Q4 intelligent cloud rev. USD 21.1bln-21.35bln, productivity and business process rev. USD 16.65bln-16.9bln. (PR Newswire) Shares rose 5.4% after market

Top European News

  • Moldova’s Transnistria Says It Was Fired Upon From Ukraine: IFX
  • Twitter Extends Losses to Dip Further Below Musk’s Offer Price
  • Private Equity Firms Set Sights on Battered IPO Stocks in Europe
  • Mercedes Sees Strong Returns Persist Through War, Supply Turmoil


  • Greenback continues to grind higher in its guise of global reserve and prime safe haven with DXY inching closer to 103.000, at 102.780 vs 2020 peak of 102.990.
  • Aussie inflated as sizzling CPI metrics up the RBA rate hike ante amidst calls for liftoff next week.
  • Yen hits resistance and importer offers after probing 127.00 vs Dollar.
  • Euro hits new sub-1.0600 multi year low as Russia threatens to suspend gas supplies from more unfriendly nations and Pound flounders mostly under 1.2600 with little help from dire CBI Survey.
  • Yuan loses RRR cut momentum as spread of Covid continues in China - Usd/Cny closes at highest in a year around 6.5500+, Usd/Cnh eyeing 6.6000 again.

 In Fixed income

  • Choppy midweek session for bonds, so far, as recovery momentum fades amidst a raft of issuance
  • Bunds fade after topping Tuesday's peak at 155.77 in wake of a lukewarm reception for new 2038 benchmark
  • Gilts top out at 119.72 before much worse than feared UK CPI sales survey
  • Treasuries edgy ahead of 5 year supply with T-note probing 120-00 vs 120-18+ overnight high

In commodities

  • WTI and Brent June futures have been moving horizontally since yesterday's settlement, US Private Energy Inventory Data (bbls): Crude +4.8mln (exp. +2.2mln), Gasoline -3.9mln (exp. +0.5mln), Distillates +0.4mln (exp. -0.6mln), Cushing +1.1mln
  • Russian Economy Ministry expects Russian oil exports to fall this year to 228.3mln tonnes (vs 231mln in 2021) in its baseline scenario and to 213.3mln tonnes in its conservative scenario.
  • Spot gold saw some selling pressure in which the yellow metal fell below the 25th April low (USD 1,891.20/oz) and tripped stops below USD 1,890/oz.
  • Base metals markets are relatively mixed, with nothing interesting standing out.

US Event Calendar

  • 07:00: April MBA Mortgage Applications -8.3%, prior -5.0%
  • 08:30: March Retail Inventories MoM, est. 1.4%, prior 1.1%; Wholesale Inventories MoM, est. 1.5%, prior 2.5%
  • 08:30: March Advance Goods Trade Balance, est. -$105b, prior -$106.6b, revised -$106.3b
  • 10:00: March Pending Home Sales YoY, est. -8.1%, prior -5.4%; Pending Home Sales (MoM), est. -1.0%, prior -4.1%

DB's Jim Reid concludes the overnight wrap

Staying in advertising mode, yesterday saw DB’s Head of Research and Chief Economist David Folkerts-Landau publish an important piece alongside Peter Hooper and myself. In our World Outlook earlier in the month, we became the first bank to forecast a US recession by the end of 2023, but in this note we argue that if anything, the risks are skewed towards a much more significant recession. Indeed, we find it bizarre that consensus forecasters expect us to believe there’ll be a soft landing from a starting point at which a soft landing has never been achieved. We outline the full rationale in the report, but our view is that the Fed is behind the curve in a manner unseen in a generation, that inflation is going to prove a lot stickier than expected, and hence monetary tightening will push the US economy into a significant recession, with unemployment ultimately rising several percentage points. The link is here.

Speaking of growth concerns, yesterday saw global equities return to the sell-off mode they were in before the second half bounce back yesterday. The S&P 500 gave up a further -2.82%, it’s worst daily return since the Ukraine invasion in early March, to keep the index on track for its worst monthly performance (-7.84%) since the pandemic chaos of March 2020. There wasn’t one single catalyst, but the widespread collection of risks are giving investors serious pause right now, including Chinese lockdowns, persistent inflation, selected corporate earnings weakness, the risk of a hard landing from the Fed, as well as the ongoing geopolitical worries given Russia’s invasion of Ukraine. Some of the media commentary even blamed our note for the market falls.

We’ll start with the geopolitics, since there were several negative headlines on that front that dampened risk appetite significantly. First, there were reports from Moldova of a further attack on a military unit yesterday in the breakaway region of Transnistria. The Kremlin said it was following events closely and it was a cause for serious concern, whilst Moldova’s President Sandu said the government would resist “attempts to drag Moldova into actions that may endanger peace within the country.” Then we also saw European gas futures surge in the afternoon after it was reported by the website that gas flows to Poland had been halted, before falling back somewhat to end the day up “only” +6.64%. After European energy markets finished trading, it was revealed Russia would stop flows to Bulgaria as well, so the risk is more countries get added to the list as the payment currency becomes weaponised. This could be a big story today. With energy remaining a significant geopolitical tool right now, we also heard from German economy minister Habeck, who said that an embargo on Russian oil would be “manageable”, with Germany having cut its share of Russian oil in its imports from 35% before the invasion to around 12%.

This darkening backdrop saw the selloff gather pace as the day went on, with major equity indices including the S&P 500 (-2.82%), the NASDAQ (-3.95%), the STOXX 600 (-0.90%) and the DAX (-1.20%) all seeing significant losses. The pullback led to the VIX spiking +6.5ppts higher to 33.52, its third highest closing level of the year, only pipped by two days around the invasion of Ukraine in early March. As mentioned, it was the worst day for the S&P 500 since early March, but for the NASDAQ it was the worst day since September 2020, bringing the index into correction territory for the month alone, down -12.16% in April – and that was before mixed mega-tech earnings after the close (more below). The declines in the main index were incredibly broad-based, though Tesla (-12.18%) was the worst performer in the S&P 500 following the move by their CEO Elon Musk to acquire Twitter, whilst General Electric (-10.34%) was the second-worst performer as the company released its earnings and warned of supply-chain challenges. Energy was one of the few outperformers on both sides of the Atlantic, and indeed the only sector to close above flat in both the S&P 500 and STOXX 600, aided by higher prices that included a rebound in Brent Crude (+2.61%) to $104.99/bbl. They are +0.35% this morning.

On those aforementioned tech earnings, Alphabet missed revenue expectations on a combination of slower-than-expected ad growth as well as some impact from the war in Europe, sending shares -2.84% lower in after hours trading. Microsoft shares, meanwhile, were supported by growth in their cloud-computing business, which saw shares +4.64% higher after the close.

In contrast to the last 3 weeks when US equities and Treasuries sold off side-by-side, the risk-off tone has seen a significant rally back in sovereign bonds over the last couple of days, not least since markets are now assuming that central banks won’t move quite as aggressively as they were expecting at the end of last week. For instance, fed funds futures have taken out -14.5bps of tightening this calendar year relative to Friday, even if they continue to expect +50bp hikes at the next 3 meetings, whilst they’ve also taken out -4.6bps from 2022 ECB tightening this week, too. That helped yields on 2yr Treasury yields fall -14.8bps, while 10yr Treasuries fell a further -9.9bps in yesterday’s session to 2.72%, in another day pocked with rates volatility, as 10yr yields went from +4.1bps higher before the US open to -9.8bps lower around the European close, selling off again before finishing the day at their lows. The decline in 10yr yields was roughly split between real yields and breakevens in line with fears of global growth and the commensurate shallower path of Fed tightening. In Europe it was much the same picture, with yields on 10yr bunds (-2.2bps), gilts (-4.5bps), and BTPs (-2.1bps) all falling back too, while OATs (+0.4bps) underperformed. Other safe havens benefited also, with the dollar index (+0.58%) strengthening for the 17th time in the last 19 sessions, leaving it at a 2-year high, just as gold (+0.42%) rallied as well. The treasury market yo-yo continues this morning with 10yr yields back up c.+5bps and 2yrs +9bps.

Asia is playing catch-up to the global sell/off but DM futures are up so there is a circuit breaker for now. The Nikkei (-1.88%) is leading losses across the region with the Kospi (-1.05%) also falling. Stocks in mainland China are attempting to bounce back with the Shanghai Composite (+0.38%) and CSI (+1.05%) higher after President Xi in a statement yesterday pledged to ramp up infrastructure construction to bolster domestic demand and drive economic growth going forward. Outside of Asia, stock futures in the US are indicating a positive start with contracts on the S&P 500 (+0.52%) and Nasdaq (+0.41%) trading up after their poor showing yesterday.

In terms of overnight data, China’s industrial profits advanced +8.5% y/y in the January-March period compared to a + 5.0% rise in the preceding three-months. Elsewhere, Australia’s CPI surged by +5.1% y/y for the March quarter, its fastest pace in 21 years and easily topping market estimates of a +4.6% gain, following a + 3.5% increase in the previous quarter. The dramatic rise in the inflation has prompted market participants to price-in an interest rate hike at the Reserve Bank of Australia’s (RBA) next meeting scheduled on May 03. DB now expect a 15bps hike next week with an additional 50bps in June. See their report here.

In terms of yesterday’s data, the US Conference Board’s consumer confidence reading for April came in a bit below expectations at 107.3 (vs. 108.2 expected). Otherwise, in the more backward-looking data, preliminary durable goods orders in March rose by +0.8% (vs. +1.0% expected) and core capital goods orders were up +1.0% (vs. +0.5%). Finally in February, there was still significant momentum in house prices, with the FHFA’s house price index rising by +2.1% (vs. +1.5% expected), which is the fastest monthly pace since the index begins in 1991. The year-on-year growth in the Case-Shiller national home price index also moved back up to +19.8% that month.

To the day ahead now, and US data releases include preliminary wholesale inventories for March, pending home sales for March, and the advance goods trade balance for March. Over in Europe, there’s also Germany’s GfK consumer confidence reading for May, and France’s consumer confidence for April. Central bank speakers include ECB President Lagarde, the ECB’s Muller and Bank of Canada Governor Macklem. Finally, earnings releases include Meta, T-Mobile, Qualcomm, Amgen, American Tower, Boeing and PayPal.

Tyler Durden Wed, 04/27/2022 - 08:00

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

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

Who could have possibly thought, amidst all this…



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

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

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

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

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

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

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

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

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

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

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

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

As discussed yesterday…

Worst first half for stocks…



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

As discussed yesterday...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Which assets saw the biggest gains in Q2?

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

Which assets saw the biggest losses in Q2?

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

June Review

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

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

... for Q2...

... and for YTD.

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

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

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



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

Risk Capital: What is it?

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

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

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

Risk Capital's Ebbs and Flows

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

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

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

And Consequences

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

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

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

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

Risk Capital: Historical Perspective

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

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

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

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

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

Source: SIFMA

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

An Update

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

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

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

Spreadsheet for implied ERP

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

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

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

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

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