After Friday's torrid surge, which some speculated was due to pension funds tactically delaying their month-end buying until the start of the next month coupled with another major squeeze as recession fears overflowed and the market priced in a whopping 15bps of rate cuts in Q1 2023 due to the start of the Biden recession (because bad news is again good news), futures initially dipped before recovering most of their losses after the WSJ reported that Biden is "expected to roll back some tariffs on Chinese imports soon, a decision constrained by competing policy aims: addressing inflation and maintaining economic pressure on Beijing." Maybe, but all the decision which also weakened the dollar, will show is that as expected all along, the president - or rather his son - was in China's pocket from the very beginning.
In any case, after dropping below 3,800, S&P futures bounced and were trading near session highs, if still down 0.2% from Friday's high, when US stocks capped their 11th decline in 13 weeks (Let's go, Brandon). Today's illiquid session, which sees US cash markets closed due to the July 4 holiday, has also seen Nasdaq futures down 0.4% while Dow futs were down -0.1%.
After a catastrophic first half and the first bear market since Covid, stocks remain in the grip of the worst selloff in at least three decades as increasing chances of a global recession are spooking investors. At the same time, sticky inflation has left little room for the Federal Reserve to apply brakes on monetary tightening. This toxic combination presents markets a trading challenge not seen since the late 1970s, and only a massive recession, one which eliminates the risk of inflation and ushers in aggressive Fed easing can help save the day.
The MSCI All-Country World Index plunged 21% in the first half, the worst YTD losses since at least 1988. Similarly, the 14% loss in the Bloomberg Global Aggregate Index of investment-grade debt was its worst performance since 1990, the earliest date for which records are available.
"The market has begun to worry more about economic growth than just liquidity withdrawal and inflation,” Stephen Innes, managing partner at SPI Asset Management, wrote in a note. “Unlike previous downturns, inflation is much higher and unemployment is much lower. These dynamics delay any potential dovish central-bank pivot despite the rapid shift in front-end rate expectations over the past week."
Across the Atlantic, European stocks rose 0.9% for the first time in four days as dip-buyers emerged, and returned to best levels after a choppy start. Euro Stoxx 50 rose as much as 0.75%, with CAC outperforming. Energy, healthcare and telecoms are the strongest Stoxx 600 sectors. Banks that are most sensitive to economic conditions, including Spanish and Italians lenders as well as Germany’s Commerzbank, underperformed on Monday as investors remain concerned about an economic slowdown and high inflation. Among the worst performers are Sabadell -3.1%, Intesa -2.9%, Banco BPM. Italian bonds tumbled with investors watching domestic political tensions. Here are the biggest European movers:
- AO World shares slump as much as 18%, to the lowest since March 2020, after the Sunday Times reported that credit insurer Atradius has reduced cover for suppliers to AO World.
- Shop Apotheke falls 13%, the sharpest intraday decline since May 10, after Oddo downgrades the stock to neutral from outperform.
- Grafton shares drop as much as 8.8%, the most in more than two years, after the building and home products supplier announces that CEO Gavin Slark is stepping down.
- Ashmore shares drop as much as 4.7% after Numis cut its recommendation on the emerging-market fund manager to hold from add, saying the investment outlook is poor and performance is weak.
- Maisons du Monde shares drop as much as 7.5% to the lowest level since May 2020 after being downgraded to reduce from hold at Kepler Cheuvreux, in a note called “Between a rock and a hard place.”
- SBB falls as much as 8.2% Monday, giving up some of Friday’s 10% gain, having announced the sale of 25% of its shares in Solon Eiendom Holding AS to OBOS.
- Polish banks fall after Poland’s ruling party leader threatened lenders with additional tax on their profits if they don’t increase interest on household deposits.
- Alior Bank falls 4.9%, Bank Handlowy -4.5%, Millennium -4.1%
- Waberer’s gains as much as 27%, the biggest intraday jump on record, after owners that together control a majority of the Hungarian hauler filed a buyout offer at HUF2,336 per share.
Earlier in the session, Asian equities edged higher amid optimism the region’s earnings will prove resilient as the reporting season gets underway. The MSCI Asia Pacific Index climbed as much as 0.8%, buoyed by consumer discretionary shares as most sectors advanced. Benchmarks in Australia and Japan were among the best performers in the region. Bucking the trend, Indonesia’s stock gauge slumped more than 2% as a decline in commodity prices caused traders to book profits on Asia’s top-performing market this year. While recession concerns have been weighing on global stock markets, falling commodity prices may ease inflationary pressure in Asia. China’s progress toward economic reopening may also help Asian stocks recover from their worst first half in three decades. “We are less threatened by inflation in the region, so a lot of corporations in Asia are going to see a better time in terms of earnings” as valuations have fallen, Vicki Chi, a fund manager at Robeco, told Bloomberg Television. China’s shares closed modestly higher as the nation races to quash a new virus flareup that risks spilling over into one of its most economically significant regions.
In China, officials were trying to repel a Covid flareup that could buffet an economically significant region. That’s another test of Beijing’s strategy of trying to eliminate the pathogen with mass testing and disruptive lockdowns. Separately, developer Shimao Group Holdings Ltd. said it didn’t pay a $1 billion dollar note that matured Sunday, among the biggest dollar payment failures so far this year in China.
In FX, the dollar dipped after the WSJ report that Biden may announce a decision to cut Chinese tariffs this week; at the same time the USD/CNH dropped 0.2% near 6.68, and EMFX caught a small bid with ZAR outperforming.
Bitcoin hovered above the $19,000 level.
Fixed income traded heavy with curves bear flattening. Short end of the German curve underperforms, cheapening ~11bps in 2s and 5s. Gilts outperform bunds by ~2bps. Italian bonds slid before a meeting between Prime Minister Mario Draghi and Five Star leader Giuseppe Conte to settle weeks of political tensions. The nation’s 10-year yield jumped 12 basis points to 3.21%, widening its spread over German bunds to 1.90 percentage points. Cash Treasuries are closed for Independence Day, T-note futures are range-bound.
In commodities, crude futures extended their rebound from the recent hammering, rising over $15 to trade $109.44 while Brent rose to $113.3. Most base metals trade in the green; LME nickel rises 3.7%, outperforming peers. LME lead lags, dropping 0.4%. Spot gold falls roughly $6 to trade near $1,806/oz.
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DB's Jim Reid concludes the overnight wrap
Happy Independence Day to all of our US readers. It's nice that we can be friends again after 246 years. Although I hope relations haven't been strained by me publishing the chart over recent weeks that US 10yr treasuries (and earlier proxies) have seen their worst H1 for 244 years and just after the divorce.
Having said that the week ended with a monster rally in bonds, and although it'll likely be on the quieter side in markets today, we won't be able to escape the near-term recession risks for very long. The Atlanta Fed Q2 tracker is now at -2.08% after slumping into negative territory at the end of last week, and if this is close to the mark that would mean two negative quarters and a technical recession. The official definition is owned by the NBER and they will likely need more evidence before they would declare it as they look at a broader range of indicators than just headline growth. However we'll likely know we're in it before it's declared so it'll be crucial to work out if this is the start to a descent into bigger problems or if that's still some months away. Note it continues to be "when not if".
A big swing factor here could be employment and this week is jam packed with US labour data. Payrolls (Friday) will be the headliner but JOLTS (Wednesday), ADP and claims (Thursday) will also be very important. Labour markets remain strong around the world and although this is a generally a lagging indicator, we think some kind of turn should occur before we can declare what is absolutely the inevitable dive into recession.
Our economists expect payrolls to slow (+225k forecast vs. +390k previously) but with unemployment falling a tenth to 3.5%. In many ways JOLTS (Wednesday) is our favoured employment measure but it has the disadvantage of being a month behind so we'll only get May's data this week. In the report, job openings have remained roughly 4.5mn above where they were prior to the pandemic so unless this dips there will still be a lot of demand for labour and the tightness will continue, thus leaving the Fed with a huge dilemma as growth slows. June's US services ISM on Wednesday will be watched for the headline growth implications and also the employment component which has been 'only' hovering around 50 in recent months.
Ironically the increased growth pessimism towards the end of last week stabilised equities as a big rally in bonds and a more dovish repricing of the Fed kicked in. 10yr Treasuries rallied -25.0bps last week (-13.3bps Friday), their largest weekly decline since March 2020, and although the S&P 500 finished -2.21% lower, it did rally +1.06% on Friday on lower yields as Fed expectations kicked in.
Back to the week ahead and we'll see how central banks were thinking about this weak growth vs labour tightness dilemma in the minutes from the Fed's (Wednesday) and ECB's (Thursday) June meetings but this will be slightly dated in light of how rapidly the macro is evolving.
Elsewhere, trade and industrial data will be due from key economies globally. May trade data will be out for the US (Thursday), Germany (today), Japan and France (Friday). For the US, May factory orders will be released tomorrow, followed by June's ISM services index on Wednesday. In Europe, the Eurozone's PPI for May is due today, followed by May industrial production for Germany (Thursday) and France, June PMIs for Italy (Tuesday), and Germany's May factory orders (Wednesday).
In Asia, the highlight will perhaps be the Caixin services and composite PMIs for China and the RBA meeting taking place tomorrow. Our economists expect the central bank to hike by +50bp. The full week ahead is in the day by day calendar at the end as usual.
This morning in Asia, markets are quiet with the Nikkei (+0.58%) leading the pack and with the Shanghai Composite (+0.14%) and CSI (+0.16%) swinging between gains and losses in early trade. Elsewhere, the Hang Seng (-0.63%) is lagging as the market resumes trading after a holiday on Friday. Meanwhile, the Kospi (-0.58%) is struggling a bit after paring its early morning gains. Over the weekend there has been some chattter of Covid-19 cases in China continuing to climb as new Coronavirus clusters emerged in eastern cities. So one to watch over the next few days.
Recapping last week now, and it marked the end of an ignominious first half for markets, which is an understatement if anything. See our H1, Q2 and June performance review here but in short, the S&P 500 had its worst start to the year in six decades, falling in return terms for consecutive quarters for the first time since the GFC, while 10yr Treasuries returned their worst first half since 1788.
Zooming in on the week in isolation, a nasty cocktail of underwhelming production, spending, and confidence figures, mixed with still stubbornly high inflation led to a risk sell-off but with a rare recent flight to quality into bonds.
Starting in Europe, ECB President Lagarde noted she did not believe we would return to the low environment world that defined the years running up to the pandemic, which, along with other ECB speakers throughout the week, continued to lay the groundwork for the hiking cycle to begin in July. Indeed, Eurozone CPI increased to 8.6% YoY, edging expectations of 8.5% even if German inflation temporarily eased. The STOXX 600 tumbled -1.40% (-0.02% Friday), which saw banks fall even more (-5.00%, -0.40% Friday).
10yr bund yields fell -21.0bps (-10.4bps Friday) while the 2yr rallied -29.7bps (-13.3bps Friday), bringing their decline to -57.8bps over the last two weeks, the largest two week decline since August 2011, on the prospect of a global growth slowdown that would stymie the ECB’s hiking cycle. In a sign of how volatile things have been, the weekly decline in 2yr yields was topped just back in March this year. On the periphery, 10yr BTPs kept pace, falling -37.2bps (-17.3bps Friday). Indeed, President Lagarde emphasised the ECB could use flexibility in reinvesting PEPP redemptions to support implementation starting this month.
In the US, consumer confidence sagged while inflation expectations climbed. Meanwhile, every regional Fed manufacturing index is now in contractionary territory, though PMIs and ISM Manufacturing figures remain in expansion, printing at 52.7 and 53.0, respectively on Friday. Piling on to the poor near-term outlook, however, ISM New Orders fell into contraction zone at 49.2 versus 52.0 expectations. Meanwhile, core PCE managed to still print at 6.3% YoY. That mix is driving grave comments from Fed officials. Chair Powell re-emphasised that this hiking cycle would cause some pain, while SF Fed President Daly noted a Fed-induced recession was now in her outlook - a rare comment from a Fed official.
It seems it’s also the market’s outlook. 10yr Treasuries rallied -25.0bps (-13.3bps Friday), their largest weekly decline since March 2020 when the pandemic first gripped global markets. That corresponded with a modest flattening in the 2s10s yield curve, but the shock lower was more or less parallel, as markets reduced the amount of tightening they believed the Fed would impart this cycle, with 2yr yields down -23.0bps (-12.0bps Friday), also the largest decline since March 2020.
With that mix, it’s perhaps unsurprising that the S&P 500 gave up ground over the week, closing -2.21% lower (+1.06% Friday). Utilities outperformed given the terrible risk sentiment, gaining +4.11% (+2.48% Friday), while mega-cap FANG+ (-5.42%, +0.92% Friday) and tech-heavy NASDAQ (-4.13%, +0.90% Friday) had a rougher time.
Brent futures fell -1.48% (-2.93% Friday) in light of the slowing global growth narrative, registering their first monthly decline (-6.54%) since November when Omicron drove slowing global demand fears. In Europe, natural gas prices climbed +15.0% (+2.26 Friday), as supply constraints look set to grip markets, between a failing compressor in Norway and fears that Russia's planned maintenance period (July 11-21) for the Nordstream pipeline will be opportunistically used to restrict supply thereafter.
“Yes, The Market Is Categorically Unfun And Ugly” – What JPMorgan’s Traders Think Happens Next
"Yes, The Market Is Categorically Unfun And Ugly" – What JPMorgan’s Traders Think Happens Next
Today is the last day of Q3 2022, and so far…
Today is the last day of Q3 2022, and so far this quarter, the S&P is down 25% from its all time highs, and down 15% from its peak of the summer rally, it is also set for a -3.8% quarterly loss - the third negative quarter in a row - the longest such stretch since 2008.
"So where we go from here?" That's the question JPMorgan market intelligence trader Andrew Tyler asks this morning, and to answer it he quotes from a handful of JPM strategists and traders. We start with the JPM trading desk:
Ronald Alder (TMT)
Yes, the market is categorically unfun and ugly. Equities remain at the mercy of eco data and the bond market. Economic data remains solid (PCE, Jobs, etc.) albeit backwards looking and, in concert with the fed commentary, won’t allow for the market to be constructive just yet (even as high frequency data points to lower inflation). Yesterday’s Long-Only buyers in TMT (primarily the megacaps) are notably absent or more passive, while see more defensive buying in Telco, etc. AAPL breaking is making things a bit precarious for everyone and everything. The desk is 1.3:1 better for sale now with volumes down in the HSD% range. It’s early, but conversations continue to skew bearish with the challenge to find the bullish narrative. I still think the risk-reward is fairly balanced here at 3600-3700.
- The tape remains very choppy and macro driven. ETF volumes are currently in the high-30%s (and were >40% this am). Liquidity in S&P futures is ok while Treasuries (and from what I hear in the bond market) remains abysmal. The strength in the MOVE Index and the sustained VIX Index levels have led to risk management challenges (which typically leads to de-risking) and broad frustration. It’s hard to fight the Fed commentary (and CBs more broadly) + hot global macro data. It remains The Fed Funds ceiling – which was a tailwind for the past two days – has crept back up today to ~4.53%.
- We have been consolidating for a little while this am 3620-3650. Our supply is drying up a bit (we are now 1.2:1 better to buy on the desk) and there’s a lot of hope (again, per [@Jack Johnston] perhaps not the best strategy – but sometimes you must work with what you have) that we could rally post the European close
Brian Heavey (Consumer)
NKE: Overall the print is mixed; the top-line is very strong (NA nearly doubled our estimate at 10% FXN vs. St. 4.5%, EMEA in-line and sequential improvement in China). EPS beat JPM and missed Street by a penny (.93 vs. St. .94 and JPMe .87). Higher tax rate hurt EPS by 5 cents - so revenues and operational EPS beat vs Street. The GM was down ~220bps which offset the revenue beat and is tied to the inventory clearing actions NKE has been undertaking (recall Boss has been previewing this has seasonal inventory has being cleared). We will guide on the call which will be the main driver of the stock (as well as information on inventory clearance).
- The desk was very active yesterday w/ primarily LO demand in discretionary and supply in Staples (i.e. much more "risk on" in nature). Client activity is down substantially today as the daily volatility remains paralyzing.
- I think the magnitude of the KMX miss shows just how much downside remains in SPX earnings estimates. Yes, I think expectations were low, but KMX embodies all of the issues facing the market right now: Weakening consumer demand, higher SG&A (primarily Labor), and difficulty in forecasting given a rapidly changing macro environment. This follows an EPS cut from VFC yesterday, and while a lot of VFC's issues are company and brand specific, it was another data point that the $230 EPS estimate for the SPX that even the bulls are clinging to is probably too high.
- It's not all bad today... we are finally seeing the DXY stop making new highs. I think if we can move the USD into a downtrend it will provide some relief to EPS estimates (especially in the more FX sensitive staples names). Today's move lower is immaterial in the context of the last few weeks rip, but something to watch going forward
Stuart Humphrey (TMT)
MU | Bad Q, worse guide. Q4 revs in at $6.64B vs STe at $6.73B and JPMe at $6.56B (we lowered estimates into the print) with Q1 guide well below as revs for Q1 to be $4.25B at midpt vs STe of $5.71B came in well below expectations - GMs down below 30%, likely cutting utilization. Double ordering and supply chains are easing. Stock might be down more prob if not for positioning and the 50% capex cut vs last year.
Then we move on to the JPM strategists and economists:
Nikolaos Panigirtzoglou (strategist)
Nikolaos reminds us that cash allocation for non-bank investors has risen sharply this year due to simultaneous decline in both equities and bonds, and “a backdrop of high cash allocation may provide backstop for both equities and bonds likely limiting any further downside from here.” JPM still feels like a bear rally would be difficult to launch without a better CPI print to boost the market sentiment. As we are closer to Q3 earnings, a better-than-expected earnings and companies outlooks may also trigger a rally, but the margin shrinking and FX risks are still the biggest unknowns. More bullets from his note below:
Following this year’s unprecedented rise in bond yields, we find that non-bank investors globally have erased 14 years of previous bond overweights and lowered their allocation to bonds to only 17% currently, even below the pre-Lehman crisis average of 18%.
We see two main implications from this low bond allocation. First, going forward a sustained bull market in equities could require a bull market in bonds. Second, the pressure on multi asset investors to sell equities to offset the mechanical increase in their equity allocations stemming from bond price declines has diminished.
Outside any interplay between equity and bond allocations, a backdrop of high cash allocations provides in our opinion a backstop to both equities and bonds, likely limiting any further downside from here.
BoE calms concerns over collateral calls for now.
Revenue has declined for ethereum block makers post merge, yet the staking yield has increased
This year’s rise in bond yields is of historic proportions. The 250bp YTD rise in the Global Agg bond index yield that took place in a period of nine months, represents the steepest and largest rise in the history of the index, exceeding the bond yield rise of 1994. What is even more unprecedented is the decline in the return of the Global Agg bond index on a currency unhedged basis. Effectively more than a decade of previous returns has been unwound in a period of only nine months.
Similar to previous large bond selloffs, this year’s bond selloff has been taking place against a backdrop of very low liquidity. This is shown in Figure 3, which shows that, for most of this year, the market depth for USTs has been even lower than that seen in March 2020 at the peak of the pandemic crisis.
In other words, at the current juncture of very low market depth and elevated rate volatility one is feeding the other in an intense way: as rate volatility rises bond market makers step back from their market making role and raise bid offer spreads inducing low market depth and lower liquidity, which in turns creates even more rate volatility.
Michael Feroli (economist, discussing net trade)
So far the factory sector has held up well in the face of a surging dollar. But that’s unlikely to last, as lagged exchange rate effects and a European recession hit exporters. We expect net trade will subtract a little more than 1%-pt from GDP growth in ‘23.
Fans of Kung Fu movies will be familiar with the delayed touch of death: a lethal blow whose effects are only realized after the passage of time. The closest equivalent among the various monetary transmission channels has to be the exchange rate channel. Whereas some financial conditions (e.g., mortgage rates) manifest themselves in the economy in a matter of months, historically it can take several quarters for the effect of moves in the exchange rate to play out in export and import growth.
In this note we discuss what these lags—combined with the recent strength of the dollar— imply for the outlook for trade and manufacturing next year. Layered on top of the dollar appreciation is a looming recession in the Eurozone, one of the US’s largest trading partners. We also discuss why the lags from the dollar to trade may be even longer than usual now, and that when the dollar effects do hit they may hit with even more force than usual. All in, we think trade could subtract more than a percentage point from GDP growth next year, with more drag to come in ’24.
Trade models are pretty simple, as far as economic models go. Demand for exports is determined by foreign income (GDP) and by the relative price of domestically-produced goods, i.e., the real exchange rate. Demand for imports is similarly a function of domestic income and the real exchange rate. Looking at the first of these, foreign income, Europe - both the Eurozone and other Europe—accounts for about a quarter of exports and appears to be heading into recession.
More generally, the J.P. Morgan forecast for our trading partners next year looks for one of the slowest growth years outside of global recessions (Figure 2).
The other main driver of US trade performance is the real, trade-weighted dollar. The real exchange weight is the nominal exchange weight adjusted for the price level differential between countries. Since various price indices can be used, there are various real exchange rates. The J.P. Morgan real dollar indices are up between 13% and 18% since the beginning of the year. Taking the average, and using our estimated trade elasticities, over time this should reduce the level of GDP—through both lower exports and more domestic demand shifted to imports—by over 1.5%-pts.
Bounce In Futures Fizzles As Dollar Surge Returns
Bounce In Futures Fizzles As Dollar Surge Returns
If yesterday markets made little sense, when the dollar and yields slumped yet stocks and…
If yesterday markets made little sense, when the dollar and yields slumped yet stocks and other risk assets tumbled alongside them in a puzzling reversal of traditional risk relationships (a move which was likely precipitated by the plunge in AAPL and KMX), today things are a bit more logical with the dollar initially extending its slide helping futures rise to session highs just below 3,700, before the dollar surged just after 5am as sterling tumbled after Bloomberg reported that Prime Minister Liz Truss’s government signaled it was sticking with its plan for tax cuts after a meeting with the UK’s fiscal watchdog, dashing market expectations that a policy U-turn might be imminent which has pushed cable briefly above 1.12 overnight, wiping out a week's worth of losses. As a result, after rising as much as 0.8%, S&P futures were flat, up just 0.1%, the same as Nasdaq futures. Government bonds rallied across Europe and the US, as the dollar strengthened after reversing its earlier loss.
In premarket trading, Nike shares fall 10% after the sportswear giant cut its margin outlook for the year while reporting surging inventory, fueling worries over consumers’ ability to spend as inflation takes a toll. Micron shares rose 3% in premarket trading, after analysts said the ongoing inventory correction was only a short-term hurdle and that the bottom is near, a potential relief for semiconductor stocks that have taken a beating this year. Amylyx Pharmaceuticals’s (AMLX US) shares soared as much as 13% in US premarket trading after winning FDA approval for its Relyvrio drug, for the treatment of amyotrophic lateral sclerosis (ALS) in adults. Analysts said they expected the drug to see a strong launch given demand from patients. Xos jumped 6.3% in extended trading after delivering 13 battery-electric vehicles to FedEx.
Thursday's bruising session took the S&P 500 down 2% to the lowest in almost two years and the Nasdaq 100 tumbling almost 4%. The S&P 500 Index has dropped on seven of the past 8 days, and is headed for its third straight quarter of losses for the first time since 2008-2009 and the Nasdaq 100 Stock Index for the first time in 20 years. Fears of global recession are growing by the day as the threat of higher rates saps growth and as the Fed confirms with every speech that not even a recession will stop it. The case of the UK shows how faultlines between government and central bank policy on tackling inflation can erupt into a crisis. Hopes evaporated that the British government would succumb to pressure to back down from tax cuts that brought the pound to the edge of dollar parity.
“Today, everything is just oversold so you are seeing a rebound,” said Esty Dwek, chief investment officer at Flowbank SA. “We are closer to bottoms and sentiment is so negative the downside is becoming more limited.”
Elsewhere, Global equity funds garnered inflows of $7.6 billion in the week to Sept. 28, according to data compiled by EPFR Global. Bonds had $13.7 billion of outflows in the week, while $8.9 billion flowed into US stocks, the data showed.
In Europe, the Stoxx 50 rose 0.9%. Real estate, energy and retailers are the strongest-performing sectors. Here are some of the biggest European movers today:
- Krones shares rose as much as 2.7% to their highest intra-day level since Feb. 2022, after HSBC increased the German machinery and equipment company’s price target to EU102
- Clariant shares rally by the most intraday since mid-May after Credit Suisse raises to outperform, partly as it expects Clariant’s new management team to boost performance
- ABN Amro jumped as much as 6.3% after Goldman Sachs raised the stock to buy from neutral, citing its gearing toward higher interest rates, increasing estimates on net interest income
- Zealand Pharma rise as much as 35%, the most on record, after the company announced positive data from its phase 3 trial of glepaglutide to treat patients with short bowel syndrome
- Sinch shares rise as much as 24% after SoftBank sold its entire stake in Sinch AB following a share price collapse of more than 90% in the Swedish cloud-based platform provider
- Adidas and Puma drop as their US peer Nike slumped in late trading Thursday after it said inventory buildup forced it to push through margin-busting discounts
- Hurricane Energy shares drop as much as 5.6% after 1H earnings; Canaccord Genuity notes the results did not surprise, and flags lack of regulatory reassurance on gas-management approvals
- Fingerprint Cards shares drop as much as 17% after saying it is raising fresh capital in order to strengthen the balance sheet and to address a forecasted covenant breach
Earlier in the session, Asian stocks fell again, putting the regional benchmark on course for its worst monthly performance since 2008, as a selloff spurred by concerns over higher interest rates and a global recession deepened. The MSCI Asia Pacific Index slid 0.5% after earlier falling as much as 1% on Friday. Still down over 12% this month, the gauge has trailed global peers and is set to cap a seventh straight week of declines. That matches its losing streak from September 2015, which was the longest since 2011. Equities in Japan, which has the highest weight in the Asia index, were among the biggest losers on Friday, with the Topix falling 1.8%. Consumer discretionary and industrials were the worst sectors, while Chinese tech shares listed in Hong Kong also fell. READ: China Shares Plunge to Lowest Valuation on Record in Hong Kong Global funds have pulled almost $10 billion from Asian emerging-market stocks excluding China this month, as the dollar and Treasury yields climbed after Federal Reserve officials ramped up their rate-hike rhetoric. Taiwan’s tech-heavy market has suffered the bulk of the outflow from Asia. Its regulators tightened short selling rules as shares extended their slide.
“I think emerging markets as a whole are still going to have a pretty difficult six months until the Fed rate peaks,” Louis Lau, a fund manager at Brandes Investment Partners, said in an interview with Bloomberg TV. How much damage is a strong dollar causing? That’s the theme of this week’s MLIV Pulse survey. It’s brief and we don’t collect your name or any contact information. Please click here to share your views. The turmoil in the UK has been another source of market volatility for Asia investors, who continue to grapple with the fallout from strict lockdowns in China, the region’s biggest economy. “There’s been some correlation (between risk assets and sterling) recently,” said Takeo Kamai, head of execution services at CLSA. Overall, “the theme hasn’t changed. The scenario that the Fed will cut rates next year is breaking down. I think we could see further downside in stock prices towards November,” he said. Stocks in India gained after the central bank raised the benchmark rate by an expected 50 basis points. The MSCI Asia Pacific Index is down 4% this week and on course for its lowest close since April 2020
Japanese equities extended declines on Friday as a global market rout deepened, capping its worst month since the onset of the pandemic in 2020. The Topix Index fell 1.8% to 1,835.94 as of market close Tokyo time, taking declines in September to 6.5%. The Nikkei declined 1.8% to 25,937.21. Toyota Motor Corp. contributed the most to the Topix Index decline, decreasing 4.2%. Out of 2,169 stocks in the index, 299 rose and 1,823 fell, while 47 were unchanged. Federal Reserve officials reiterated Thursday that they will keep raising interest rates to rein in high inflation. “There are concerns that the economy will slow from further rate hikes while inflation doesn’t stop,” said Kenji Ueno, a portfolio manager at Sompo Asset Management.
In Australia, the S&P/ASX 200 index fell 1.2% to close at 6,474.20, dragged by banks and industrials, after another plunge on Wall Street as the prospect of higher interest rates and turmoil in Europe stoked fears of global recession. The benchmark notched its third-straight week of losses. In New Zealand, the S&P/NZX 50 index fell 1.2% to 11,065.71
Stocks in India outperformed Asian peers after the Reserve Bank of India raised borrowing costs and exuded confidence to tackle inflation without any major impact to its growth projections. The S&P BSE Sensex added 1.8% to 57,426.92, while the NSE Nifty 50 Index rose by 1.6% as the indexes posted their biggest single-day jump since Aug. 30. Despite the rally, the key gauges fell more than 1% each for the week and over 3% for the month, their biggest decline since June. India’s central bank raised its repurchase rate by 50 basis points to 5.90%, matching the expectations of most economists. The RBI trimmed the economic growth outlook for the financial year ending March to 7% while retaining it 6.7% forecast for inflation. The increase in the benchmark interest rate “mainly supports stocks of financial companies, which have been seeing strong credit growth,” said Prashanth Tapse, an analyst at Mehta Securities.
In FX, the Bloomberg Dollar Spot Index rebounded after sliding initially, as cable tumbled when it emerged that Liz Truss is not backtracking on its massive fiscal easing. Iniitlally, the pound advanced a fourth day, to briefly trade above $1.12, fully reversing the moves since last Friday, however it then tumbled, wiping out all gains after Prime Minister Liz Truss’s government signaled it’s sticking with its plan for tax cuts after a meeting with the UK’s fiscal watchdog, dashing market expectations that a policy U-turn might be imminent. Notable data: U.K. 2Q final GDP rises 0.2% q/q versus preliminary -0.1%. The Aussie and kiwi crept higher, but are still set for their biggest monthly declines since April as rising Fed interest rates and fears of a global economic slowdown sap demand for risk assets
In rates, Treasuries advanced, 10-year yield dropping 8bps while bunds 10-year yield drops 6bps to 2.11%. Treasury 10-year yields around 3.685%, richer by 10bp on the day -- largest moves seen in UK front-end where 2-year yields are richer by 25bp on the day as BOE tightening premium fades out of interest-rate swaps. Short-end UK bonds surged amid political pressure on the government to water down some of its budget proposals, while the pound regained its budget-shock losses. US session focus is on PCE data and host of Federal Reserve speakers while month end may add some support into long end of the curve. Long end of the Treasuries curve may find additional month-end related buying support over the session; Bloomberg index projects 0.07yr Treasury extension for October. Gilts rallied, with short-end bonds leading gains as traders trimmed BOE tightening bets amid political pressure on the government to water down some of its budget proposals. Meanwhile in Japan, JGBs gained after the BOJ boosted purchases for maturities covering the benchmark 10-year zone. The Bank of Japan will buy more bonds with maturities of at least five years in the October-December period, according to a statement from the central bank
In commodities, WTI trades within Thursday’s range, adding 1.3% to near $82.26. Spot gold rises roughly $10 to trade near $1,671/oz.
Bitcoin is essentially unchanged and in very tight ranges of circa. USD 400 and as such well within the week's existing parameters
Looking to the day ahead now, and data releases include the flash Euro Area CPI release for September, as well as the Euro Area unemployment rate for August and German unemployment for September. In the US, we’ll also get August data on personal income and personal spending, the MNI Chicago PMI for September, and the University of Michigan’s final consumer sentiment index for September. Finally, central bank speakers include Fed Vice Chair Brainard, the Fed’s Barkin, Bowman and Williams, as well as the ECB’s Schnabel, Elderson and Visco.
- S&P 500 futures up 0.9% to 3,686.00
- STOXX Europe 600 up 1.3% to 387.83
- MXAP down 0.5% to 139.25
- MXAPJ little changed at 453.72
- Nikkei down 1.8% to 25,937.21
- Topix down 1.8% to 1,835.94
- Hang Seng Index up 0.3% to 17,222.83
- Shanghai Composite down 0.6% to 3,024.39
- Sensex up 2.0% to 57,539.66
- Australia S&P/ASX 200 down 1.2% to 6,474.20
- Kospi down 0.7% to 2,155.49
- Brent Futures up 1.2% to $89.55/bbl
- Gold spot up 0.7% to $1,671.56
- U.S. Dollar Index down 0.52% to 111.67
- German 10Y yield little changed at 2.10%
- Euro up 0.3% to $0.9840
Top Overnight News from Bloomberg
- Prime Minister Liz Truss is under pressure to cut spending on the same scale as George Osborne’s infamous austerity drive of 2010 in order to stabilize the UK public finances and win back the confidence of investors
- Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng are holding talks Friday with the UK government’s fiscal watchdog, amid intense criticism over their unfunded tax cuts that roiled markets
- A dash for cash among sterling investors after market turmoil sparked by pension fund margin calls is coming at a bad time, according to an M&G Investments executive
- The ECB shouldn’t let concerns about its profitability obstruct decision-making over monetary policy, according to Governing Council member Gediminas Simkus
- The SNB trimmed its foreign-exchange portfolio in the second quarter as the franc gyrated against the euro before rising above parity for the first time since 2015. The central bank sold 5 million francs ($5.1 million) worth of foreign currencies in the three months through June
- Norway’s central bank will increase its purchases of foreign currency to 4.3 billion kroner ($400 million) a day in October from 3.5 billion in September as it deposits energy revenues into the $1.1 trillion sovereign wealth fund.
- Japan’s factory output expanded by 2.7% in August from July, according to the economy ministry Friday, beating analysts’ 0.2% forecast. The output of semiconductor and flat-panel making equipment hit its highest level in data going back to 2003, as the effect of lockdowns in China abated
- Japanese Prime Minister Fumio Kishida instructed the government Friday to come up with an economic stimulus package by the end of October to help mitigate the impact of inflation, as economists warned against over-sized spending
- China’s factory activity continued to struggle in September, while services slowed, as the country’s economic recovery was challenged by lockdowns in major cities and an ongoing property market downturn. The official manufacturing purchasing managers index rose to 50.1 from 49.4 in August
- An organization formed by China’s biggest foreign- exchange traders asked banks to trade the currency at levels closer to the central bank’s fixing at the market open, according to people familiar with the matter
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks were mostly lower after the negative performance across global peers amid inflationary headwinds and with risk appetite subdued heading quarter-end, while the region also digested mixed Chinese PMI data. ASX 200 declined amid weakness across most sectors and with tech the notable underperformer after the recent upside in yields and with Meta the latest major industry player to announce a hiring freeze. Nikkei 225 was pressured and fell below the 26,000 level with better-than-expected Industrial Production and Retail Sales data releases overshadowed by the broad risk aversion. Hang Seng and Shanghai Comp were indecisive after the PBoC conducted its largest weekly cash injection in more than 32 months ahead of the week-long closure in the mainland, while participants also digested mixed PMI data in which Official Manufacturing PMI topped forecasts with a surprise return to expansion, but Non-Manufacturing and Composite PMIs slowed and Caixin Manufacturing PMI printed at a wider contraction. NIFTY eventually notched mild gains in the aftermath of the RBI rate decision in which it hiked the Repurchase Rate by 50bps to 5.90% as expected via 5-1 split and with the central bank refraining from any major hawkish surprises.
Top Asian News
- Japan's Chief Cabinet Secretary Matsuno said they want to compile an extra budget swiftly after the economic package in late October, while they will consider further support for hard-hit consumers and businesses in view of higher energy and food prices, as well as consider steps to promote wage hikes, according to Reuters.
- Chinese Finance Ministry is to offer a tax refund for people who sell their homes and repurchases new ones by the end of 2023; additionally, China has told banks to provide USD 85bln in property funding by the end of the year, according to Bloomberg.
- Chinese NBS Manufacturing PMI (Sep) 50.1 vs. Exp. 49.6 (Prev. 49.4); Non-Manufacturing PMI (Sep) 50.6 vs Exp. 52.4 (Prev. 52.6)
- Chinese Composite PMI (Sep) 50.9 (Prev. 51.7)
- Chinese Caixin Manufacturing PMI Final (Sep) 48.1 vs. Exp. 49.5 (Prev. 49.5)
- Japanese Industrial Production MM SA (Aug P) 2.7% vs. Exp. 0.2% (Prev. 0.8%); Retail Sales YY (Aug) 4.1% vs. Exp. 2.8% (Prev. 2.4%)
European equities are attempting to claw back some of yesterday’s downside on quarter and month end. Sectors are firmer across the board with Real Estate outperforming peers in what has been a tough week for the UK property market. Stateside, futures are also attempting to recover from yesterday’s losses which saw a tough session for the tech sector after Apple shed the best part of 5%.
Top European News
- UK OBR Chair Hughes says a statement will be released today after the meeting with UK PM Truss and Chancellor Kwarteng. On this, the UK Treasury has not sought to accelerate watchdog's economic forecast, according to Bloomberg. Reminder, UK PM Truss to conduct emergency talks with the OBR on Friday after failing to calm markets, according to the Guardian.
- UK cross-party MPs in the Treasury Select Committee called for Chancellor Kwarteng to release a full economic forecast from the OBR by end of October, according to Sky News.
- UK PM Truss has confirmed she will attend next week's European Political Community summit, via BBC.
- Reports that technical level discussions between the UK and EU could resume as soon as next week, via BBC's Parker; writing, that there has been a 'warmer' tone in recent weeks, some believe pressure from the US on the UK has had influence.
- German VDMA, survey of members: majority expect nominal sales growth in 2022 and 2023.
- GBP's revival has continued ahead of a meeting between PM Truss and the OBR, with a statement expected, a move that has taken Cable above 1.12 but shy of mini-Budget levels.
- USD is firmer overall but continues to retreat from YTD peaks, though the DXY is seemingly drawn to the 112.00 area.
- Yuan derived further, fleeting, support from reports the FX body has asked banks to trade closer to the onshore fixing.
- Elsewhere, FX peers are under modest pressure but more contained vs USD; EUR unfased by a record EZ flash CPI print of 10.0%.
- Benchmarks bid but modestly off best levels with Bunds leading the charge, but well within recent ranges, amid potential month/quarter-end influence.
- Gilts lifted, but the 10yr yield remains above 4.0% ahead of the OBR statement.
- Stateside, USTs are equally buoyed ahead of a packed PM agenda include PCE Price Index and Fed speak.
- The broader commodity market is benefitting from a pullback in the USD coupled with a broader risk appetite.
- Metals are buoyed by the recent pullback in the Dollar with spot gold edging above its 10 DMA (USD 1,656.72/oz) and towards the USD 1,680/oz mark which coincides with the yellow metal’s 21DMA (USD 1,680.56/oz) and 200WMA (USD 1,680.20/oz).
- Base metals are also firmer across the board with 3M LME copper back above the USD 7,500/t mark, whilst nickel and aluminium outperform on the exchange.
- China loosened FX restrictions in response to the Fed rate hike and the yuan's fall over the past week, according to people familiar with the matter cited by FT.
- China's FX body is reportedly asking banks to trade the Yuan closer to the PBoC fixing, according to Bloomberg.
- PBoC injected CNY 128bln via 7-day reverse repos with the rate kept at 2.00% and injected CNY 58bln via 14-day reverse repos with the rate kept at 2.15% for a CNY 184bln net daily injection and a net CNY 868bln weekly injection.
- RBI hiked Repurchase Rate by 50bps to 5.90%, as expected, via 5-1 vote and the Standing Deposit Facility was adjusted to 5.65%. RBI Governor Das said MPC is to remain focused on the withdrawal of accommodation and that the persistence of high inflation necessitates further calibrated withdrawal of monetary accommodation. However, Das noted that the Indian economy continues to be resilient with economic activity stable and overall monetary and liquidity conditions still remain accommodative, while Real GDP growth forecast for 2022/23 was revised lower to 7.0% from 7.2% and 2022/23 CPI was seen at 6.7%.
- RBI is reportedly encouraging state-run refiners to reduce USD buying in the spot market; asking to lean on USD 9bln credit line instead, according to Reuters sources.
- BoE was reportedly warned about a looming catastrophe in the pensions sector within the next 5 years before it was forced to intervene to prevent a market collapse, according to The Telegraph.
- Fed's Daly (2024 voter) said a downshift in economic activity and labour is needed to bring down inflation and additional rate increases are necessary and appropriate. Daly also stated that a myriad of risks narrows the path to a smooth landing but does not close it, while she added they have gotten rates to neutral and expect to raise rates further in coming meetings and early next year.
- Norges Bank will purchase FX equivalent to NOK 4.3bln/day in October (3.5bln in September); reflecting an increase in projected NOK revenues from petroleum activity.
- Russian President Putin signed decrees recognising occupied Ukrainian regions of Kherson and Zaporizhzhia as independent territories which is an intermediate step before the regions are formally incorporated into Russia, according to Reuters.
- ** Russia's Kremlin says strikes against the new territories incorporated into Russia will be considered an act of aggression against Russia**; says Ukraine has shown no willingness to negotiate, via Reuters.
- Russia's Spy Chief says they have material which show a Western role in Nord Stream incidents, via Ifx.
- Armenia's Foreign Ministry says their Ministers and Azerbaijani counterparts will meet in Geneva on October 2nd, via AJA Breaking.
US Event Calendar
- 08:30: Aug. Personal Spending, est. 0.2%, prior 0.1%
- Aug. Real Personal Spending, est. 0.1%, prior 0.2%
- Aug. Personal Income, est. 0.3%, prior 0.2%
- Aug. PCE Deflator MoM, est. 0.1%, prior -0.1%
- Aug. PCE Core Deflator MoM, est. 0.5%, prior 0.1%
- Aug. PCE Core Deflator YoY, est. 4.7%, prior 4.6%
- Aug. PCE Deflator YoY, est. 6.0%, prior 6.3%
- 09:45: Sept. MNI Chicago PMI, est. 51.8, prior 52.2
- 10:00: Sept. U. of Mich. Current Conditions, est. 58.9, prior 58.9
- U. of Mich. Sentiment, est. 59.5, prior 59.5
- U. of Mich. Expectations, est. 59.9, prior 59.9
- U. of Mich. 1 Yr Inflation, est. 4.6%, prior 4.6%; 5-10 Yr Inflation, est. 2.8%, prior 2.8%
Central Bank Speakers
- 08:30: Fed’s Barkin Speaks at Chamber of Commerce Event
- 09:00: Fed’s Brainard Speaks at Fed Conference on Financial Stability
- 11:00: Fed’s Bowman Discusses Large Bank Supervision
- 12:30: Fed’s Barkin Discusses the Drivers of Inflation
- 16:15: Williams Speaks at Fed Conference on Financial Stability
DB's Jim Reid concludes the overnight wrap
As we arrive at the end of a tumultuous month in financial markets, there’s been little sign of respite for investors over the last 24 hours, with the S&P 500 (-2.11%) reversing the previous day’s gains to close at a 21-month low. There were a number of factors behind the latest selloff, but fears of further rate hikes were prominent after the US weekly initial jobless claims showed that the labour market was still in decent shape, whilst the PCE inflation readings for Q2 were revised higher as well. That came alongside fresh signals of inflationary pressures in Europe, where German inflation in September moved into double-digits for the first time in over 70 years. Thanks to some hawkish rhetoric from central bank officials on top of that, the result was that the synchronised selloff for equities and bonds continued. In fact, barring a massive turnaround today, both the S&P 500 and the STOXX 600 are on course for their third consecutive quarterly decline, which is the first time that’s happened to either index since the financial crisis.
We’ll come to some of that below, but here in the UK there were signs that the market turmoil was beginning to stabilise slightly relative to earlier in the week. For instance, sterling (+2.09%) strengthened against the US Dollar for a third consecutive session, moving back above $1.10 for the first time since last Friday when the mini-budget was announced, and at a couple of points overnight was very briefly trading above $1.12. Indeed, it was the strongest-performing G10 currency on the day, so this wasn’t simply a case of dollar weakness. In the meantime, investors moved again to lower the chances of an emergency inter-meeting hike from the Bank of England, instead looking ahead to the next scheduled MPC meeting on November 3. That followed a speech from BoE Chief Economist Pill, in which he said “it is hard to avoid the conclusion that the fiscal easing announced last week will prompt a significant and necessary monetary policy response in November.”
However, gilts continued to struggle yesterday following the massive Wednesday rally after the BoE’s intervention. Yields on 10yr gilts were up by +13.0bps by the close, a larger increase than for German bunds (+6.4bps) or French OATs (+8.0bps). Furthermore, the spread on the UK’s 5yr credit default swaps closed at its highest level since 2013, so there are still plenty of signs of investor jitters. That came as the government showed no signs of U-turning on their programme of tax cuts, with Prime Minister Truss saying “I’m very clear the government has done the right thing”. It’s also worth noting that one factor seen as supporting sterling overnight was growing speculation that Truss might come under political pressure to reverse course on the fiscal announcements, particularly after a YouGov poll gave the opposition Labour Party a 33-point lead, which is its largest in any poll since the late-1990s. We also heard from the Conservative chair of the Treasury Select Committee, who tweeted that Chancellor Kwarteng should bring forward the November 23 statement on his medium-term fiscal plan and publish the independent OBR forecast as soon as possible.
Away from the UK, the broader selloff in financial markets resumed yesterday as investors priced in a more hawkish response from central banks over the months ahead. In the US, that followed a fresh round of data that was collectively seen as offering the Fed more space to keep hiking rates. First, the weekly initial jobless claims fell to a 5-month low of 193k over the week ending September 24. That was beneath the 215k reading expected, and the previous week was also revised down by -4k. Nor was this just a blip either, as the 4-week moving average is now at its lowest level since late May as well. In the meantime, we had an upward revision to core PCE in Q2, taking the rate up by three-tenths to an annualised +4.7%.
Those data releases came alongside some pretty hawkish Fed rhetoric, with Cleveland Fed President Mester saying that a recession wouldn’t stop the Fed from raising rates. And in turn, that led markets to price in a more aggressive Fed reaction, with the terminal rate expected in March 2023 up by +3.0bps on the day. Incidentally, we saw yet further signs that the Fed’s tightening was having an effect on the real economy, with Freddie Mac’s mortgage market survey showing that the average 30-year fixed rate had risen to 6.70%, which is their highest level since 2007. The more hawkish developments were reflected in US Treasury yields too, particularly at the front end, with yields on 2yr Treasuries up +5.8bps to 4.19%, and those on 10yr Treasuries up +5.4bps to 3.79%. Overnight in Asia, yields on the 10yr USTs are fairly stable as we go press, seeing a small +0.3bps rise, whilst those on 2yr Treasuries are up +1.8bps to 4.21%.
Europe got a fresh reminder about inflation as well yesterday, after the German CPI release for September came in well above expectations. Using the EU-harmonised measure, inflation rose to +10.9% (vs. +10.2% expected), which marks the first time since 1951 that German inflation has been running in double-digits. Earlier in the day, the German government separately announced that they’d be borrowing another €200bn to cap gas prices, with the previously planned consumer levy not going ahead. Looking forward, it’ll be worth looking out for the flash CPI release for the entire Euro Area today at 10am London time, where the consensus is expecting we’ll see the highest inflation since the formation of the single currency. That would keep the pressure on the ECB, and markets are continuing to price in another 75bps hike as the most likely outcome at the October meeting.
With investors digesting the prospect of continued hawkishness from central banks, equities lost further ground over yesterday’s session. The S&P 500 fell -2.11%, meaning the index is now down by nearly a quarter (-24.10%) since its closing peak in early January. The declines were incredibly broad-based across sectors, but interest-sensitive tech stocks struggled in particular, with the NASDAQ (-2.84%) and the FANG+ index (-3.38%) seeing even larger losses. Those heightened levels of volatility were also reflected in the VIX index (+1.7pts), which closed at 31.8pts. For European equities it was much the same story, with the STOXX 600 (-1.67%) closing at a 22-month low. Adding to the tech woes, Meta (-3.67%) joined the growing list of firms announcing a hiring freeze, with the tech giant also issuing a warning of potential restructuring, so it’ll be important to see if this is echoed more broadly and what this means for the labour market. In overnight trading, equity futures are pointing to further losses today, with those on the S&P 500 (-0.25%) and NASDAQ 100 (-0.27%) both moving lower.
As we arrive at the final day of the month, Asian equities are similarly retreating this morning, putting a number of indices on course for their worst monthly performance in years. For instance, the Nikkei is currently on track for its worst month since March 2020, and the Hang Seng is on track for its worst month since September 2011. In terms of today, the Nikkei (-1.67%) is leading losses in the region with the Shanghai Composite (-0.21%), the CSI (-0.14%), the Kospi (-0.11%) and the Hang Seng (-0.07%) following after that overnight sell-off on Wall Street.
One source of better news came from the Chinese PMIs, with the official manufacturing PMI unexpectedly in positive territory in September with a 50.1 reading (vs. 49.7 expected), which is up from a contractionary 49.4 in August. The composite PMI was also in positive territory with a 50.9 reading. However, the Caixin manufacturing PMI unexpectedly deteriorated further to 48.1 in September, so not every indicator was positive. In the meantime, Japanese data showed that industrial production growth came in above expectations with a +2.7% reading (vs. +0.2% expected), as did retail sales with growth of +1.4% (vs. +0.2% expected).
There wasn’t much in the way of other data yesterday. However, the European Commission’s economic sentiment indicator for the Euro Area fell for a 7th consecutive month to 93.7 in September (vs. 95.0 expected).
To the day ahead now, and data releases include the flash Euro Area CPI release for September, as well as the Euro Area unemployment rate for August and German unemployment for September. In the US, we’ll also get August data on personal income and personal spending, the MNI Chicago PMI for September, and the University of Michigan’s final consumer sentiment index for September. Finally, central bank speakers include Fed Vice Chair Brainard, the Fed’s Barkin, Bowman and Williams, as well as the ECB’s Schnabel, Elderson and Visco.
When We’ll Know The Bear Market Is Over
When We’ll Know The Bear Market Is Over
By Simon White, Bloomberg Markets Live reporter and analyst
It’s a Gordian Knot, but it remains the central…
By Simon White, Bloomberg Markets Live reporter and analyst
It’s a Gordian Knot, but it remains the central question for investors: When will the bear market in US equities and other risk assets be over?
Nobody has a crystal ball, but there are three strong contenders for conditions that will first need to be met:
- A return of “fiscal credibility”.
- Real-yield curve inversion.
- Positive and rising liquidity.
Today’s backdrop is all about inflation. The seismic moves in assets and currencies around the world all boil down to the world’s largest central bank locked in a “death or glory” fight with unanchored price rises. The corollary is we won’t get a green light for risk assets to climb on a sustainable basis until the Federal Reserve has done enough to return inflation to a low and stable regime
The ultimate cause of the current inflation is the large fiscal deficits funded by monetary largesse in the years leading up to the pandemic. The pandemic itself and the Ukraine war didn’t jump-start the rise in prices, they merely worsened the already-changing underlying inflation dynamics.
The role of government spending is critical to understanding this. In a recent Fed paper presented at Jackson Hole, the authors show that when investors do not believe large fiscal imbalances will be stabilized the job of the central bank becomes extremely difficult.
Simply put, if there is a belief public debt will not be contained, it leads to a structural rise in inflation because any monetary tightening by the central bank causes growth to slump and the debt-to-GDP ratio rise. Due to the lack of fiscal credibility, debt buyers assume the rise in the ratio will have to be inflated away, and therefore expect higher inflation.
This is termed “fiscal stagflation,” and it means that the central bank can exacerbate inflation pressures by tightening rates when fiscal credibility is in short supply. The paper shows the massive fiscal interventions in Covid led to this loss in fiscal credibility in the US (although it is arguable it predated that, when Modern Monetary Theory came into vogue).
The first condition for an end to the bear market is thus fiscal credibility. With no strong commitment to bring debt down, there is little sign of it in the US at the moment.
The second condition is an inversion in the real-yield curve (as defined in the chart below). The curve steepened consistently all through the 1970s despite periods of very large interest-rate rises. The Fed in that decade did not have the will or the mandate to raise rates aggressively and persistently enough to break the back of inflation.
It wasn’t until Paul Volcker was at the helm that real progress was made. The Volcker Fed initially had “imperfect credibility” because it wasn’t willing to raise rates come what may, and the market assumed the central bank would ease when a recession hit, rejuvenating inflation. This was reflected in longer-term yields rising even as the Fed hiked aggressively.
After a false start in early 1980, when the Fed prematurely cut rates due to the slowdown, the central bank eventually got it right when it continued hiking aggressively through the 1981-82 recession, with rates peaking at 20%.
The real-yield curve began to flatten hard in 1980 as short-term real yields started to rise faster than long-term ones, and inverted in April 1981. Still, buying at that point would have been on the early side, before the multi-year rally started in August 1982.
Therefore a final condition is needed for the end of the bear market. Liquidity is one of most important medium-term drivers of equities. Its growth was still negative when the real-yield curve inverted in 1981, but by early 1982, it was positive and rising.
Buying the S&P in February 1982 after liquidity started growing would have faced about 10%-12% downside in the shorter term, before the position enjoyed an almost uninterrupted +220% rally.
With fiscal credibility in abeyance, the real-yield curve steep and still rising, and liquidity conditions very negative, none of the conditions are currently in place. Until they are it is difficult to have much confidence this bear market hasn’t got further to run.
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