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Futures Recover Losses After Netflix Disaster; 10Y Real Yields Turn Positive

Futures Recover Losses After Netflix Disaster; 10Y Real Yields Turn Positive

US index futures were little changed, trading in a narrow, 20-point…

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Futures Recover Losses After Netflix Disaster; 10Y Real Yields Turn Positive

US index futures were little changed, trading in a narrow, 20-point range, and erasing earlier declines as a selloff in bonds reversed with investors also focusing on the catastrophic Q1 earnings report from Netflix. Nasdaq 100 Index futures slipped 0.2% by 7:15 a.m. in New York, recovering from an earlier drop of as much as 1.2%; the Nasdaq 100 has erased $1.3 trillion in market value since April 4 as bond yields have been surging on fears of rate hikes. S&P 500 futures also recouped losses to trade little changed around 4,460. Treasuries rallied and 10Y yields dropped to 2.86% after hitting 2.98% yesterday. The dollar dropped for the first time in 4 days after hitting the highest level since July 2020, and gold was flat while bitcoin rose again, hitting $42K.

In perhaps the most notable move overnight, US 10-year real yields turned positive for the first time since March 2020, signaling a potential return to the pre-pandemic normal. But that was quickly followed by a global drop in bond yields as investors assessed growth challenges from the Ukraine war and the potential for a peak in inflation.

“Real yields matter for equities,” Esty Dwek, chief investment officer at Flowbank SA, said in an interview with Bloomberg Television. “It’s another aspect for the valuation picture that isn’t helping. It shouldn’t be that much of a surprise to see real yields are back closer to zero again. We’re pricing in so much bad news already between inflation and the hikes and war and supply chains.”

10-year Treasurys yield shed 7 basis points in choppy session after as money managers from Bank of America to Nomura indicated the panic over inflation has gone too far: “Our forecasts point to inflation peaking this quarter and falling steadily into 2023,” BofA analysts including Ralph Axel wrote in a note. “We believe this will reduce the panic level around inflation and allow rates to decline.”  Bank of America also said it has turned long on 10-year Treasuries.

Elsewhere, Japan's 10-year yield holds at 0.25%, the top of Bank of Japan’s trading band as the central bank resumes massive intervention. Despite the BOJ's dovish commitment to keep rates low, the Japanese yen rebounded from a 13-day slump and gold extended its decline.

Going back to stocks, Netflix shares which have a 1.2% weighting in the Nasdaq, sank 27% in premarket trading after the streaming service said it lost customers for the first time in a decade and forecast that the decline will continue. The shares were downgraded at many firms including UBS Group AG, KGI Securities and Piper Sandler. Other streaming stocks including Walt Disney and Roku also slipped. IBM, on the other hand, rose 2.5% after reporting revenue that beat the average analyst estimate on demand for its hybrid-cloud offerings. Analysts acknowledged the strong quarter of revenue performance. A dimmer outlook for corporate earnings as well as the rise in yields have dented demand for risk assets, with investors preferring defensive stocks such as healthcare to growth-linked stocks, which come under greater pressure from higher interest rates. Some other notable premarket movers:

  • Interactive Brokers (IBKR US) shares fell 1.1% in after-market trading as net income missed analysts’ consensus estimates. Still, analysts at Piper Sandler and Jefferies are positive.
  • Omnicom (OMC US) shares jumped 3.7% in postmarket. Its cautious outlook for the rest of the year could bring some positive surprises, according to analysts, after the company’s 1Q revenue beat estimates

In Europe, the Stoxx 600 rose 0.8%, led by banking and technology shares while miners underperformed as metals fell, as investors assessed a mixed bag of corporate results and the outlook for France’s presidential-election runoff on Sunday.  There’s a divergence in performance of European stocks; Euro Stoxx 50 rallies 1.2%. FTSE 100 lags, adding 0.4%. Danone SA rose after reporting its fastest sales growth in seven years, and Heineken NV advanced after sales climbed. Here are some of the biggest European movers today:

  • ASML shares rise as much as 8% with analysts saying the semiconductor-equipment group’s earnings show demand remains strong, even if a timing issue meant its outlook missed expectations.
  • Danone shares gain as much as 9% following a French financial newsletter report that rival Lactalis may be interested in buying its businesses and after the producer of Evian reported a surge in bottled water revenue.
  • Just Eat Takeaway shares rise as much as 7.7% after the company gave mixed guidance and said it is considering selling Grubhub. While analysts note the growth looks weak, they highlight the focus on profitability and the strategic review of Grubhub are positives.
  • Vopak shares rise as much as 7.2%, most since March 2020, after the tank terminal operator reported higher revenues and Ebitda for the first quarter.
  • Heineken shares rise as much as 5% after the Dutch brewer reported 1Q organic beer volume that beat analyst expectations and said net revenue (beia) per hectolitre grew 18.3%. Analysts were impressed by the company’s price-mix during the period.
  • Rio Tinto shares fall as much as 3.9%. A production miss for 1Q could prevent the miner’s shares from recovering after recent underperformance, RBC Capital Markets says.
  • Credit Suisse declines as much as 2.8% after the bank said it anticipates a first-quarter loss owing to a hit to revenue from Russia invading Ukraine and an increase in legal provisions.
  • Oxford Biomedica drops as much as 10% after reporting full-year revenue that was below consensus. RBC Capital said reasons for the revenue miss were “unclear,” adding that there was no new business development news.

Asian stocks rose as Japanese equities rallied on the back of a weaker yen, which will support exports. Shares in China fell as investors were disappointed by the decision among banks to keep borrowing rates there unchanged. The MSCI Asia Pacific Index gained as much as 0.9% and was poised to snap a three-day losing streak. Japanese exporters including Toyota and Sony helped lead the way, with shares also stronger in Singapore, Malaysia and the Philippines.  “It looks like the cheap yen may continue for a longer period than originally expected,” said Bloomberg Intelligence auto analyst Tatsuo Yoshida. “The weaker yen is good for all Japanese automakers.” China’s benchmarks bucked the uptrend and dipped more than 1%, as lenders maintained their loan rates for a third month despite the central bank’s call for lower borrowing costs to help an economy hurt by Covid-19 and geopolitical headwinds.  China’s rate stall, together with last week’s smaller-than-expected cut in the reserve requirement, has led some investors to believe broad and significant policy easing is unlikely. “Doubts about access to easier funding remain a bugbear despite headline easing,” Vishnu Varathan, head of economics and strategy at Mizuho Bank, wrote in a note. “Inadvertent restraints on actual lending may mute intended stimulus, revealing risks of ‘too little too late’ stimulus.”

In positive news, daily covid cases in Shanghai were in downtrend in recent days and number of communities with more than 100 daily infections fell for three consecutive days, Wu Qianyu, an official with Shanghai’s health commission, says at a briefing.

Financial stocks outside of China gained after U.S. 10-year Treasury real yields turned positive for the first time since 2020 as traders continue to bet on a series of aggressive Federal Reserve rate hikes. This may pose more headwinds for Asian tech stocks, which have dragged the broader market lower this year.

Japanese equities rose for a second day after the yen weakened against the dollar for a record 13 straight days. Automakers were the biggest boost to the Topix, which climbed 1%. Financials advanced as yields gained. Fast Retailing and SoftBank Group were the largest contributors to a 0.9% gain in the Nikkei 225. The yen strengthened slightly after shedding nearly 6% against the dollar since the start of the month. “It looks like the cheap yen may continue for a longer period than originally expected,” said Bloomberg Intelligence auto analyst Tatsuo Yoshida. “The weaker yen is good for all Japaneseautomakers, “no one loses,” he added.

Indian equities snapped their five-day drop as energy companies advanced on expectations of blockbuster earnings, driven by wider refining margins. Software exporters Infosys, Tata Consultancy and lender HDFC Bank bounced back from a slump, triggered by weaker results.  The S&P BSE Sensex gained 1% to 57,037.50 in Mumbai, while the NSE Nifty 50 Index rose 1.1%. The two gauges posted their biggest surge since April 4. Thirteen of the 19 sector sub-indexes compiled by BSE Ltd. climbed, led by a gauge of automobile companies. “A series of sharp negative reactions to minor misses in earnings from large caps points to a precarious state of positioning among investors,” according to S. Hariharan, head of sales trading at Emkay Global Financial. He expects corporate commentary on the margin outlook for FY23 to be key to investors’ reaction to other quarterly results, which will be released over the next couple of weeks. The benchmark Sensex lost about 5% in the five sessions through Tuesday, dragged lower by a selloff in software makers, a slump in HDFC Bank and its parent Housing Development Finance Corp. Foreign investors, who have been net sellers of Indian stocks since the start of October, have withdrawn $1.7 billion from local equities this month through April 18. The IMF slashed its world growth forecast by the most since the early months of the Covid-19 pandemic and projected even faster inflation. It expects India’s economy to grow by 8.2% in fiscal 2023 compared with an earlier estimate of 9%. Reliance Industries contributed the most to the Sensex’s gain, increasing 3%. Out of 30 shares in the Sensex index, 20 rose, while 10 fell.

In FX, the Bloomberg Dollar Spot Index fell 0.4%, its first drop in four days, after yesterday reaching its highest level since July 2020, as the greenback weakened against all Group-of-10 peers. Scandinavian and Antipodean currencies led gains followed by the yen, which halted a 13-day rout. The euro advanced a second day and bunds extended gains, underperforming euro-area peers as money markets pared ECB tightening wagers. The yen snapped a historic declining streak amid short covering after the currency approached a key level of 130 per dollar. The Bank of Japan stepped in to cap 10-year yields for the first time since late March as it reiterated its ultra loose monetary policy with four days of unscheduled bond buying. The Australian and New Zealand dollars gained as risk sentiment improved after a selloff in Treasuries paused. The Aussie was supported by offshore funds buying into contracting yield spreads with the U.S. and on demand from exporters for hedging at the week’s low, according to FX traders. The pound edged higher against a broadly weaker dollar, but lagged behind the rest of its Group-of-10 peers, with focus on the risks to the U.K. economy.

In rates, Treasuries advanced, reversing a portion of Tuesday’s sharp selloff which pushed the 10Y as high as 2.98%, with gains led by belly of the curve amid bull-flattening in core Focal points of U.S. session include Fed speakers and $16b 20-year bond reopening. US yields were richer by ~7bp across belly of the curve, 10-year yields around 2.87% keeping pace with gilts while outperforming bunds, Fed-dated OIS contracts price in around 222bp of rate hikes for the December FOMC meeting vs 213bp priced at Monday’s close; 49bp of hikes remain priced in for the May policy meeting. Japan 10-year yields held at 0.25%, the top of Bank of Japan’s trading band as the central bank resumes massive intervention. Australian and New Zealand bonds post back-to-back declines.

Coupon issuance resumes with $16b 20-year bond sale at 1pm New York time; WI yield at around 3.10% sits ~45bp cheaper than March result, which stopped 1.4bp through.  IG dollar issuance slate includes Development Bank of Japan 5Y SOFR, Canada 3Y and ADB 3Y/10Y SOFR; six deals priced almost $19b Tuesday, headlined by financials including JPMorgan and Bank.

In commodities, crude futures advance. WTI trades within Tuesday’s range, adding 1.1% to around $103. Brent rises 0.9% to around $108. Most base metals trade in the red; LME lead falls 1.6%, underperforming peers. Spot gold falls roughly $4 to trade near $1,946/oz.

Looking at the day ahead now, and data releases include German PPI for March, Euro Area industrial production for February, US existing home sales for march, and Canadian CPI for March. From central banks, we’ll hear from the Fed’s Bostic, Evans and Daly, as well as the ECB’s Rehn and Nagel, whilst the Federal Reserve will be releasing their Beige Book. Earnings releases include Tesla, Procter & Gamble, and Abbott Laboratories. Finally, French President Macron and Marine Le Pen will debate tonight ahead of Sunday’s presidential election.

Market Snapshot

  • S&P 500 futures down 0.4% to 4,443.50
  • STOXX Europe 600 up 0.4% to 458.21
  • MXAP up 0.5% to 171.88
  • MXAPJ up 0.2% to 570.00
  • Nikkei up 0.9% to 27,217.85
  • Topix up 1.0% to 1,915.15
  • Hang Seng Index down 0.4% to 20,944.67
  • Shanghai Composite down 1.3% to 3,151.05
  • Sensex up 0.9% to 56,945.14
  • Australia S&P/ASX 200 little changed at 7,569.23
  • Kospi little changed at 2,718.69
  • German 10Y yield little changed at 0.88%
  • Euro up 0.3% to $1.0823
  • Brent Futures up 1.0% to $108.27/bbl
  • Brent Futures up 1.0% to $108.27/bbl
  • Gold spot down 0.3% to $1,943.30
  • U.S. Dollar Index down 0.28% to 100.67

Top Overnight News from Bloomberg

  • On the surface the yen looks like the perfect well for carry traders to dip into, under pressure from a Bank of Japan determined to keep local yields anchored to the floor even as interest rates around the world push higher. But despite consensus building for further losses -- peers look like better funding options on certain key metrics
  • Almost eight weeks after Vladimir Putin sent troops into Ukraine, with military losses mounting and Russia facing unprecedented international isolation, a small but growing number of senior Kremlin insiders are quietly questioning his decision to go to war
  • French President Emmanuel Macron and nationalist leader Marine le Pen are gearing up for their only live TV debate on Wednesday evening, a high-stakes event just days before the final ballot of the presidential election this weekend
  • China will continue strengthening strategic ties with Russia, a senior diplomat said, showing the relationship remains solid despite growing concerns over war crimes in Vladimir Putin’s war in Ukraine

A more detailed look at global markets courtesy of Newsquawk

APAC stocks eventually traded mostly positive after the firm handover from the US despite continued upside in yields. ASX 200 was led by the healthcare sector as shares in Ramsay Health Care surged due to a takeover proposal from a KKR-led consortium, but with gains capped by miners after Rio Tinto's lower quarterly iron ore production and shipments. Nikkei 225 was underpinned by the initial currency depreciation and with the BoJ defending its yield cap. Hang Seng and Shanghai Comp were mixed with the mainland subdued after the PBoC defied expectations for a cut to its benchmark lending rates and instead maintained the 1yr and 5yr Loan Prime Rates at 3.70% and 4.60%, respectively.

Top Asian News

  • Fed’s Aggressive Rate Hike Plans Jolt Policy in China and Japan
  • BOJ Further Boosts Bond Buying as Yields Advance to Policy Limit
  • Sunac Bondholders Say They Haven’t Received Interest Due Tuesday
  • Regulators Under Pressure to Ease Loan Curbs: Evergrande Update
  • China Buys Cheap Russian Coal as World Shuns Moscow

European bourses and US futures were choppy at the commencement of the European session, but, have since derived impetus in relatively quiet newsflow amid multiple earnings and as yields continue to ease; ES Unch. Currently, Euro Stoxx 50 +1.8%, while US futures are little changed on the session but rapidly approaching positive territory ahead of key earnings incl. TSLA. Netflix Inc (NFLX) - Q1 2022 (USD): EPS 3.53 (exp. 2.89), Revenue 7.87bln (exp. 7.93bln), Net Subscriber Additions: -0.2mln (exp. +2.5mln). Q1 UCAN streaming paid net change -640k (exp.+87.5k). Co. lost 640k subscribers in US/Canada, 300k in EMEA, and 350k in LatAm. Co. Said macro factors, including sluggish economic growth, increasing inflation, geopolitical events such as Russia’s invasion of Ukraine, and some continued disruption from COVID are likely having an impact, via PR Newswire. Click here for the full breakdown. -26% in the pre-market. Chinese Civil Aviation publishes prelim report looking into the China Eastern Airline crash; still recovering and analysing damaged black boxes from the plane: there was no abnormal communication between air crew and air controllers before the aircraft deviated from cruising altitude; no dangerous weather, goods or overdue maintenance.

Top European News

  • Le Pen Upset Would Be as Big a Shock to Markets as Brexit
  • Macron and Le Pen Set for High Stakes French Debate
  • Riksbank Governor Leaves Door Open for String of Rate Hikes
  • Danone Gains on Lactalis Takeover Speculation, Evian Rebound
  • Heineken Rises; MS Says Results Were Widely Expected

FX:

  • Buck concedes ground to recovering Yen as US Treasury yields recede, USD/JPY over 150 pips below new 20 year high circa 129.42.
  • Yuan on the rocks after PBoC set a soft onshore reference rate and regardless of unchanged LPRs, USD/CNH eyes 6.4500 after breach of 200 DMA.
  • Aussie back in pole position as high betas benefit from Greenback retreat and Kiwi in second spot ahead of NZ CPI data; AUD/USD rebounds through 0.7400 and NZD/USD from under 0.6750.
  • Loonie also bouncing before Canadian inflation metrics, with Usd/Cad closer to 1.2550 than 1.2625, while Euro and Pound are both firmer on 1.0800 and 1.3000 handles respectively as DXY dips below 100.500.
  • Rand shrugs aside mixed SA CPI prints as correction from bull run continues and Gold slips under Usd 1950/oz, USD/ZAR holds above 15.0000.
  • ECB's Kazaks says a rate hike is possible as soon as July this year; ending APP early in Q3 is possible and appropriate; zero is not an a cap for the deposit rate, via Bloomberg. Adds, a gradual approach does not mean a slow approach, do not need to wait for stronger wage growth.

Fixed Income:

  • Debt redemption, as futures retrace following tests/probes of cycle lows.
  • Lack of concession not really evident at longer-dated German and UK bond sales, but 20 year US supply may be a separate issue.
  • BoJ ramps up intervention and aims to anchor rather than cap 10 year JGB yield around zero percent, while BoA suggests contra-trend position in 10 year UST to target 2.25% from current levels close to 3.0%.

Commodities:

  • Crude benchmarks are firmer on the session in what is more of a consolidation from yesterday's pressured settlement than a concerted effort to move higher, also benefitting from broader equity action.
  • Currently, WTI and Brent reside at the top-end of USD 2/bbl parameters; focus very much on China-COVID, Iran, Libyan supply and Ukraine-Russia developments.
  • US Private Energy Inventory Data (bbls): Crude -4.5mln (exp. +2.5mln), Cushing +0.1mln, Gasoline +2.9mln (exp. -1.0mln), Distillate -1.7mln (exp. -0.8mln).
  • Spot gold/silver are contained at present but have seen bouts of modest pressure, including the loss of the USD 1946.45/oz 21-DMA at worst.

US Event Calendar

  • 07:00: April MBA Mortgage Applications, prior -1.3%
  • 10:00: March Existing Home Sales MoM, est. -4.1%, prior -7.2%
  • 10:00: March Home Resales with Condos, est. 5.77m, prior 6.02m
  • 14:00: U.S. Federal Reserve Releases Beige Book

Central Bank Speakers

  • 11:25: Fed’s Daly Discusses the Outlook
  • 11:30: Fed’s Evans Discusses the Economic and Policy Outlook
  • 13:00: Fed’s Bostic Discusses Equity in Urban Development

DB's Jim Reid concludes the overnight wrap

It took me a while to adjust to being back to the office yesterday after two and a half weeks off. No screaming kids, no stealing half their food as I made their meals, and no stepping on endless lego and screaming myself. My team at work are much better behaved, protect their food, and clear up after playing with their toys. Talking of lego, the first day of the holiday was spent in a snow blizzard at LEGOLAND and the last day in shorts and t-shirt on a family bike ride on the Thames. No I haven't been off for that long just a typical April in the UK. When I left you, I was in constant agony due to sciatica in my back and a knee that was very fragile post surgery. On my last day I had a back injection that I wasn't that hopeful about as three previous ones hadn't done anything. However after a second opinion and a new consultant, this injection hit the spot and my sciatica has completely gone and I'm just back to the long-standing normal wear and tear related back stiffness. The consultant can't tell me how long it'll last so Reformer Pilates starts next week. My knee is slowly getting better via some overuse flare ups. So until the next time, I'm in as good a shape as I have been for quite some time!

It's hard to guage how good a shape the market is in at the moment as there are lots of conflicting forces. Since I've been off global yields have exploded higher, the US yield curve has resteepened notably and risk is a bit softer. As regular readers know I think a late 2023/early 2024 US recession is likely in this first proper boom and bust cycle for over 40 years. However we're still in some kind of boom phase and I've been trying not to get too bearish too early. While I was off, I published our latest credit spread forecasts and having met our earlier year widening targets, we've moved more neutral for the rest of the year. However into year end 2023, we now have a very big widening of spreads in the forecasts to reflect the likely recession. See the report here. Also while I've been off, the House View is now also that we'll get a US recession at a similar point which as far as I can see is the first Wall Street bank to officially predict this. See the World Outlook here for more.

On the steepening I don't have a strong view but ultimately I think 2 year yields will probably have to rise again at some point after a recent pause as the risks are skewed to the Fed having to move faster than the market expects. The long end is complicated by QT but generally I suspect the curve will be fairly flat or inverted for most of the next few months.

Coming back after my holidays and the long Easter weekend, the bond market sell-off resumed yesterday with yields climbing to fresh highs. In fact, the losses for Treasuries so far in April now stand at -2.95% on a total return basis, just outperforming the -3.04% decline in March that itself was the worst monthly performance since January 2009, back when the US economy started emerging from the worst phase of the GFC.

Elsewhere the US yield curve flattened for the first time in six sessions, with 2yr yields climbing +14.4bps to 2.59%, their highest level since early 2019. Yields on 10yr Treasuries rose +8.3bps to 2.94%, a level unseen since late 2018, on another day marked by heightened rates volatility. Meanwhile 30yr yields breached 3.00% intraday for the first time since early 2019, climbing +5.4bps. And what was also noticeable was the continued rise in real yields, with the 10yr real yield closing at -0.009% yesterday, and briefly trading in positive territory for the first time since March 2020 in early trading this morning. Bear in mind that the 10yr real yield has surged roughly 110bps in around 6 weeks, and since we’ve been able to calculate real yields using TIPS, the only faster moves over such a short time period have been during the GFC and a remarkable 2-week period in March 2020 around the initial Covid-19 wave. On the other hand, as I pointed out in my CoTD yesterday (link here), the 10yr real yield based on spot inflation is currently around -5.6%, so still incredibly negative.

The latest moves come ahead of the Fed’s next decision two weeks from now, where futures are placing the odds of a 50bp hike at over 100% now. We’ve been talking about 50bps for some time, and we’d probably have had one last month had it not been for Russia’s invasion of Ukraine, but it would still be a historic moment if it happens, since the last 50bp hike was all the way back in 2000. Nevertheless, we could be about to see a whole run of them, with our economists pencilling in 50bp hikes at the next 3 meetings, whilst St Louis Fed President Bullard (the only dissenting vote at the last meeting who wanted 50bps) said on Monday night that he wouldn’t even rule out a 75bps hike, which probably gave some fuel to the subsequent front end selloff.

The bond selloff also took hold in Europe yesterday, where yields on 10yr bunds (+6.9ps), 10yr OATs (+5.0bps) and BTPs (+6.2bps) all hit fresh multi-year highs. Indeed, those on 10yr bunds (0.91%) were at their highest level since 2015, having staged an astonishing turnaround since they closed in negative territory as recently as March 7. Rising inflation expectations have been a driving theme behind this, and yesterday we saw the 5y5y forward inflation swap for the Euro Area close above 2.4%, which is the first time that’s happened in almost a decade, and just shows how investor confidence in the idea of “transitory” inflation is becoming increasingly subdued given that metric is looking at the 5-10 year horizon. Those moves higher in inflation expectations came in spite of the fact that European natural gas prices fell to their lowest level since Russia’s invasion of Ukraine began yesterday. By the close, they’d fallen -1.94% to €93.77/MWh, whilst Brent crude oil prices were down -5.22% to $107.25/bbl. In Asia, oil prices are a touch higher, with Brent futures +0.82% higher as we go to press.

Whilst bonds sold off significantly on both sides of the Atlantic, equities put in a much more divergent performance, with the US seeing significant advances just as Europe sold off. By the close of trade, the S&P 500 (+1.61%) had posted its best day in more than a month, as part of a broad-based advance that left 446 companies in the index higher on the day, the most gainers in a month. Tech stocks outperformed in spite of the rise in yields, with the NASDAQ (+2.15%) and the FANG+ index (+1.81%) posting solid advances, and the small-cap Russell 2000 (+2.04%) also outperformed. In Europe however, the STOXX 600 shed -0.77%, with others including the DAX (-0.07%), the CAC 40 (-0.83%) and the FTSE 100 (-0.20%) also losing ground.

The S&P was higher despite a day of mixed earnings. Of the ten companies reporting during trading yesterday, only 4 beat both sales and earnings expectations. After hours, Netflix was the main story, losing subscribers for the first quarter in over a decade and forecasting further declines this quarter, which sent the stock as much as -24% lower in after hours trading. It’s 2 bad earnings releases in a row for the world’s largest streaming service, who saw their stock dip -21.79% the day after their fourth quarter earnings in January.

Asian equity markets are mixed this morning as the People’s Bank of China (PBOC) defied market expectations by keeping its benchmark lending rates steady. In mainland China, the Shanghai Composite (-0.21%) and the CSI (-0.43%) are lagging on the news. Bucking the trend is the Nikkei (+0.57%) and the Hang Seng (+0.66%). Outside of Asia, stock futures are indicating a negative start in the US with contracts on the S&P 500 (-0.35%) and Nasdaq (-0.75%) both trading in the red partly due to the Netflix earnings miss.

Separately, the Bank of Japan (BOJ) reiterated its commitment to purchase an unlimited amount of 10-yr Japanese Government Bonds (JGBs) at 0.25% to contain yields, underscoring its desire for ultra-loose monetary settings, in contrast to the global move in a more hawkish direction.

The yen has moved slightly higher (+0.3%) after depreciating for 13 straight days, a streak which hasn’t been matched since the US left the gold standard in the early 70s and effectively brought the global free floating exchange rate regime into being. The pace and magnitude of the depreciation has brought some expressions of consternation from Japanese officials, but no official intervention. The reality is, it would be extraordinarily difficult to credibly support the currency at the same time as maintaining strict control of the yield curve. 10yr JGBs continue to trade just beneath the important 0.25% level.

Over in France, we’re now just 4 days away from the French presidential election run-off on Sunday, and tonight will see President Macron face off against Marine Le Pen in a live TV debate. Whilst that will be an important moment, recent days have seen a slight widening in Macron’s poll lead that has also coincided with signs of an easing in market stress, with the spread of French 10yr yields over bunds coming down to its lowest level since the start of the month yesterday, at 46.7bps. In terms of yesterday’s polls, Macron was ahead of Le Pen by 56-44 (Opinionway), 56.5-43.5 (Ipsos), and 55-54 (Ifop), putting his lead beyond the margin of error in all of them.

Elsewhere, the IMF released their latest World Economic Outlook yesterday, in which they downgraded their estimates for global growth in light of Russia’s invasion of Ukraine. They now see global growth in both 2022 and 2023 at +3.6%, down from estimates in January of +4.4% in 2022 and +3.8% in 2023. Unsurprisingly it was Russia that saw the biggest downgrades, but they were broadly shared across the advanced and emerging market economies, whilst inflation was revised up at the same time.

Otherwise on the data side, US housing starts grew at an annualised rate of 1.793m in March (vs. 1.74m expected), which is their highest level since 2006. Building permits also rose to an annualised rate of 1.873m (vs. 1.82m expected), albeit this was still beneath its post-GFC high reached in January.

To the day ahead now, and data releases include German PPI for March, Euro Area industrial production for February, US existing home sales for march, and Canadian CPI for March. From central banks, we’ll hear from the Fed’s Bostic, Evans and Daly, as well as the ECB’s Rehn and Nagel, whilst the Federal Reserve will be releasing their Beige Book. Earnings releases include Tesla, Procter & Gamble, and Abbott Laboratories. Finally, French President Macron and Marine Le Pen will debate tonight ahead of Sunday’s presidential election.

Tyler Durden Wed, 04/20/2022 - 08:02

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Futures, Commodities Jump After China Cuts Quarantine

Futures, Commodities Jump After China Cuts Quarantine

US stock futures rebounded from Monday’s modest losses and traded near session highs…

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Futures, Commodities Jump After China Cuts Quarantine

US stock futures rebounded from Monday's modest losses and traded near session highs after China reduced quarantine times for inbound travelers by half - to seven days of centralized quarantine and three days of health monitoring at home -  the biggest shift yet in a Covid-19 policy that has left the world’s second-largest economy isolated as it continues to try and eliminate the virus. The move, which fueled optimism about stronger economic growth and boosted appetite for both commodities and risk assets, sent S&P 500 futures and Nasdaq 100 contracts higher by 0.6% each at 7:15 a.m. in New York, setting up heavyweight technology stocks for a rebound. Mining and energy shares led gains in Europe’s Stoxx 600 and an Asian equity index erased losses to climb for a fourth session. 10Y TSY yields extended their move higher rising to 3.25% or about +5bps on the session, while the dollar and bitcoin were flat, and oil and commodity-linked currencies strengthened.

In premarket trading, the biggest mover was Kezar Life Sciences which soared 85% after reporting positive results for its lupus drug. On the other end, Robinhood shares fell 3.2%, paring a rally yesterday sparked by news that FTX is exploring whether to buy the company. In a statement, FTX head Sam Bankman-Fried said he is excited about the firm’s business prospects, but “there are no active M&A conversations with Robinhood." Here are some of the other most notable premarket movers"

  • Playtika (PLTK US) shares rallied 11% in premarket trading after a report that private equity firm Joffre Capital agreed to acquire a majority stake in the gaming company from a Chinese investment group for $21 a share.
  • Nike (NKE US) shares fell 2.3% in US premarket trading, with analysts reducing their price targets after the company gave a downbeat forecast for gross margin and said it was being cautious in its outlook for the China market.
  • Spirit Airlines (SAVE US) shares rise as much as 5% in US premarket trading after JetBlue boosted its all-cash bid in response to an increased offer by rival suitor Frontier in the days before a crucial shareholder vote.
  • Snowflake (SNOW US) rises 3.3% in US premarket trading after Jefferies upgraded the stock to buy from hold, saying its valuation is now “back to reality” and offers a good entry point given the software firm’s long-term targets.
  • Sutro Biopharma (STRO US) shares rise 34% in US premarket trading after the company and Astellas said they will collaborate to advance development of immunostimulatory antibody-drug conjugates, which are a modality for treating tumors and designed to boost anti-cancer activity.
  • State Street (STT US) shares could be in focus after Deutsche Bank downgraded the stock to hold, while lowering EPS estimates and price targets across interest rate sensitive coverage of trust banks and online brokers.
  • US bank stocks may be volatile during Tuesday’s trading session after the lenders announced a wave of dividend increases following last week’s successful stress test results.

Stock rallies have proved fleeting this year as higher borrowing costs to fight inflation restrain economic activity in a range of nations. European Central Bank President Christine Lagarde affirmed plans for an initial quarter-point increase in interest rates in July, but said policy makers are ready to step up action to tackle record inflation if warranted. Some analysts also argue still-bullish earnings estimates are too optimistic. Earnings revisions are a risk with the US economy set to slow next year, though China emerging from Covid strictures could act as a global buffer, according to Lorraine Tan, Morningstar director of equity research.

“You got a US slowdown in 2023 in terms of growth, but you have China hopefully coming out of its lockdowns,” Tan said on Bloomberg Radio.

In Europe, stocks are well bid with most European indexes up over 1%. Euro Stoxx 50 rose as much as 1.2% before drifting off the highs. Miners, energy and auto names outperform. The Stoxx 600 Basic Resources sub-index rises as much as 3.5% led by heavyweights Rio Tinto and Anglo American, as well as Polish copper producer KGHM and Finnish forestry companies Stora Enso and UPM- Kymmene. Iron ore and copper reversed losses after China eased its quarantine rules for new arrivals, while oil gained for a third session amid risks of supply disruptions. Iron ore in Singapore rose more than 4% after being firmly lower earlier in the session, while copper and other base metals also turned higher. Here are the biggest European movers:

  • Luxury stocks climb boosted by an easing of Covid-19 quarantine rules in the key market of China. LVMH shares rise as much as 2.5%, Richemont +3.1%, Kering +3%, Moncler +3%
  • Energy and mining stocks are the best-performing groups in the rising Stoxx Europe 600 index amid commodity gains. Shell shares rise as much as 3.8%, TotalEnergies +2.7%, BP +3.4%, Rio Tinto +4.6%, Glencore +3.9%
  • Banco Santander shares rise as much as 1.8% after a report that the Spanish bank has hired Credit Suisse and Goldman Sachs for its bid to buy Mexico’s Banamex.
  • GN Store Nord shares gain as much as 4.2% after Nordea resumes coverage on the hearing devices company with a buy rating.
  • Swedish Match shares rise as much as 4% as Philip Morris International’s offer document regarding its bid for the company has been approved and registered by the Swedish FSA.
  • Wise shares decline as much as 15%, erasing earlier gains after the fintech firm reported full- year earnings. Citi said the results were “mixed,” with strong revenue growth being offset by lower profitability.
  • UK water stocks decline as JPMorgan says it is turning cautious on the sector on the view that future regulated returns could surprise to the downside, in a note cutting Severn Trent to underweight. Severn Trent shares fall as much as 6%, Pennon -7.7%, United Utilities -2.3%
  • Akzo Nobel falls as much as 4.5% in Amsterdam trading after the paint maker announced the appointment of former Sulzer leader Greg Poux-Guillaumeas chief executive officer, succeeding Thierry Vanlancker.
  • Danske Bank shares fall as much as 4%, as JPMorgan cut its rating on the stock to underweight, saying in a note that risks related to Swedish property will likely create some “speed bumps” for Nordic banks though should be manageable.

In the Bavarian Alps, limiting Russia’s profits from rising energy prices that fuel its war in Ukraine have been among the main topics of discussion at a Group of Seven summit. G-7 leaders agreed that they want ministers to urgently discuss and evaluate how the prices of Russian oil and gas can be curbed.

Earlier in the session, Asian stocks erased earlier losses as China’s move to ease quarantine rules for inbound travelers bolstered sentiment. The MSCI Asia Pacific Index rose as much as 0.6% after falling by a similar magnitude. The benchmark is set for a fourth day of gains, led by the energy and utilities sectors. BHP and Toyota contributed the most to the gauge’s advance, while China’s technology firms were among the biggest losers as a plan by Tencent’s major backer to further cut its stake fueled concern of more profit-taking following a strong rally.   A move by Beijing to cut quarantine times for inbound travelers by half is helping cement gains which have made Chinese shares the world’s best-performing major equity market this month. The nation’s stocks are approaching a bull market even as their recent rise pushes them to overbought levels.

Still, the threat of a sharp slowdown in the world’s largest economy may pose a threat to the outlook. “US recession risk is still there and I think that’ll obviously have impact on global sectors,” Lorraine Tan, director of equity research at Morningstar, said on Bloomberg TV. “Even if we do get some China recovery in 2023, which could be a buffer for this region, it’s not going to offset the US or global recession.”  Most stock benchmarks in the region finished higher following China’s move to ease its travel rules. Main equity measures in Japan, Hong Kong, South Korea and Australia rose while those in Taiwan and India fell. Overall, Asian stocks are on course to complete a monthly decline of about 4%.   

Meanwhile, the People’s Bank of China pledged to keep monetary policy supportive to help the nation’s economy. It signaled that stimulus would likely focus on boosting credit rather than lowering interest rates.

Japanese stocks gained as investors adjusted positions heading into the end of the quarter.  The Topix Index rose 1.1% to 1,907.38 as of the market close in Tokyo, while the Nikkei 225 advanced 0.7% to 27,049.47. Toyota Motor contributed most to the Topix’s gain, increasing 2.2%. Out of 2,170 shares in the index, 1,736 rose and 374 fell, while 60 were unchanged. “As the end of the April-June quarter approaches, there is a tendency for institutional investors to rebalance,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley. “It will be easier to buy into cheap stocks, which is a factor that will support the market in terms of supply and demand.”

India’s benchmark stock gauge ended flat after trading lower for most of the session as investors booked some profits after a three-day rally.  The S&P BSE Sensex closed little changed at 53,177.45 in Mumbai, while the NSE Nifty 50 Index gained 0.1%.  Six of the the 19 sector sub-gauges compiled by BSE Ltd. dropped, led by consumer durables companies, while oil & gas firms were top performers.  ICICI Bank was among the prominent decliners on the Sensex, falling 1%. Out of 30 shares in the Sensex index, 17 rose and 13 fell.

In rates, fixed income sold off as treasuries remained under pressure with the 10Y yield rising as high as 3.26%, following steeper declines for euro-zone and UK bond markets for second straight day and after two ugly US auctions on Monday. Yields across the curve are higher by 2bp-5bp led by the 7-year ahead of the $40 billion auction. In Europe, several 10-year yields are 10bp higher on the day after comments by an ECB official spurred money markets to price in more policy tightening. WI 7Y yield at around 3.32% exceeds 7-year auction stops since March 2010 and compares with 2.777% last month. Monday’s 5-year auction drew a yield more than 3bp higher than its yield in pre-auction trading just before the bidding deadline, a sign dealers underestimated demand. Traders attributed the poor results to factors including short base eroded by last week’s rally, recently elevated market volatility discouraging market-making, and sub-par participation during what is a popular vacation week in the US. Focal points for US session include 7-year note auction at 1pm ET; a 5-year auction Monday produced notably weak demand metrics.

The belly of the German curve underperformed as markets focus  on hawkish comments from ECB officials: 5y bobl yields rose 10 bps near 1.46%, red pack euribors dropped 10-13 ticks and ECB-dated OIS rates priced in 163 basis points of tightening by year end.

In FX, Bloomberg dollar spot index is near flat as the greenback reversed earlier losses versus all of its Group-of-10 peers apart from the yen while commodity currencies were the best performers. The euro rose above $1.06 before paring gains after ECB Governing Council member Martins Kazaks said the central bank should consider a first rate hike of more than a quarter-point if there are signs that high inflation readings are feeding expectations. Money markets ECB raised tightening wagers after his remarks. ECB President Lagarde later affirmed plans for an initial quarter-point increase in interest rates in July but said policy makers are ready to step up action to tackle record inflation if warranted. The ECB is likely to drain cash from the banking system to offset any bond purchases made to restrain borrowing costs for indebted euro-area members, Reuters reported, citing two sources it didn’t identify.

Elsewhere, the pound drifted against the dollar and euro after underperforming Monday, with focus on quarter-end flows, lingering Brexit risks and the UK economic outlook. Scottish First Minister Nicola Sturgeon due to speak later on how she plans to hold a second referendum on Scottish independence by the end of next year. The yen gave up an Asia session gain versus the dollar as US equity futures reversed losses. The Australian dollar rose after China cut its mandatory quarantine period to 10 days from three weeks for inbound visitors in its latest Covid-19 guidance. JPY was the weakest in G-10, drifting below 136 to the USD.

In commodities, oil rose for a third day with global output threats compounding already red-hot markets for physical supplies and as broader financial sentiment improved. Brent crude breached $117 a barrel on Tuesday, but some of the most notable moves in recent days have been in more specialist market gauges. A contract known as the Dated-to-Frontline swap -- an indicator of the strength in the key North Sea market underpinning much of the world’s crude pricing -- hit a record of more than $5 a barrel. The rally comes amid growing supply outages in Libya and Ecuador, exacerbating ongoing market tightness.

Oil prices also rose Tuesday as broader sentiment was boosted by China’s move to cut in half the time new arrivals must spend in isolation, the biggest shift yet in its pandemic policy. Meanwhile, the G-7 tasked ministers to urgently discuss an oil price cap on Russia. 

Finally, the prospect of additional supply from two of OPEC’s key producers also looks limited. On Monday Reuters reported that French President Emmanuel Macron told his US counterpart Joe Biden that the United Arab Emirates and Saudi Arabia are already pumping almost as much as they can.

In the battered metals space, LME nickel rose 2.7%, outperforming peers and leading broad-based gains in the base-metals complex. Spot gold rises roughly $3 to trade near $1,826/oz

Looking to the day ahead now, data releases include the FHFA house price index for April, the advance goods trade balance and preliminary wholesale inventories for May, as well as the Conference Board’s consumer confidence for June and the Richmond Fed’s manufacturing index. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Lane, Elderson and Panetta, the Fed’s Daly, and BoE Deputy Governor Cunliffe. Finally, NATO leaders will be meeting in Madrid.

Market Snapshot

  • S&P 500 futures up 0.5% to 3,922.50
  • STOXX Europe 600 up 0.6% to 417.65
  • MXAP up 0.4% to 162.36
  • MXAPJ up 0.4% to 539.85
  • Nikkei up 0.7% to 27,049.47
  • Topix up 1.1% to 1,907.38
  • Hang Seng Index up 0.9% to 22,418.97
  • Shanghai Composite up 0.9% to 3,409.21
  • Sensex down 0.3% to 52,990.39
  • Australia S&P/ASX 200 up 0.9% to 6,763.64
  • Kospi up 0.8% to 2,422.09
  • German 10Y yield little changed at 1.62%
  • Euro little changed at $1.0587
  • Brent Futures up 1.4% to $116.65/bbl
  • Gold spot up 0.3% to $1,828.78
  • U.S. Dollar Index little changed at 103.89

Top Overnight News from Bloomberg

  • In Tokyo’s financial circles, the trade is known as the widow- maker. The bet is simple: that the Bank of Japan, under growing pressure to stabilize the yen as it sinks to a 24-year low, will have to abandon its 0.25% cap on benchmark bond yields and let them soar, just as they already have in the US, Canada, Europe and across much of the developing world
  • Bank of Italy Governor Ignazio Visco may leave his post in October, paving the way for the appointment of a high profile executive close to Premier Mario Draghi, daily Il Foglio reported
  • NATO is set to label China a “systemic challenge” when it outlines its new policy guidelines this week, while also highlighting Beijing’s deepening partnership with Russia, according to people familiar with the matter
  • The PBOC pledged to keep monetary policy supportive to aid the economy’s recovery, while signaling that stimulus would likely focus on boosting credit rather than lowering interest rates

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were mixed with the region partially shrugging off the lacklustre handover from the US. ASX 200 was kept afloat with energy leading the gains amongst the commodity-related sectors. Nikkei 225 swung between gains and losses with upside capped by resistance above the 27K level. Hang Seng and Shanghai Comp. were pressured amid weakness in tech and lingering default concerns as Sunac plans discussions on extending a CNY bond and with Evergrande facing a wind-up petition.

Top Asian News

  • China is to cut quarantine time for international travellers, according to state media cited by Reuters.
  • Shanghai Disneyland (DIS) will reopen on June 30th, according to Reuters.
  • PBoC injected CNY 110bln via 7-day reverse repos with the rate at 2.10% for a CNY 100bln net daily injection.
  • China's state planner official said China faces new challenges in stabilising jobs and prices due to COVID and risks from the Ukraine crisis, while the NDRC added they will not resort to flood-like stimulus but will roll out tools in its policy reserve in a timely way to cope with challenges, according to Reuters.
  • China's state planner NDRC says China is to cut gasoline and diesel retail prices by CNY 320/tonne and CNY 310/tonne respectively from June 29th.
  • BoJ may have been saddled with as much as JPY 600bln in unrealised losses on its JGB holdings earlier this month, as a widening gap between domestic and overseas monetary policy pushed yields higher and prices lower, according to Nikkei.

European bourses are firmer as sentiment picked up heading into the cash open amid encouraging Chinese COVID headlines. Sectors are mostly in the green with no clear theme. Base metals and Energy reside as the current winners and commodities feel a boost from China’s COVID updates. Stateside, US equity futures saw a leg higher in tandem with global counterparts, with the RTY narrowly outperforming. Twitter (TWTR) in recent weeks provided Tesla (TSLA) CEO Musk with historical tweet data and access to its so-called fire hose of tweets, according to WSJ sources.

Top European News

  • UK lawmakers voted 295-221 to support the Northern Ireland Protocol bill in the first of many parliamentary tests it will face during the months ahead, according to Reuters.
  • Scotland's First Minister Sturgeon will set out a plan today for holding a second Scottish Independence Referendum, according to BBC News.
  • ECB’s Kazaks Says Worth Looking at Larger Rate Hike in July
  • G-7 Latest: Leaders Want Urgent Evaluation of Energy Price Caps
  • Ex- UBS Staffer Wants Payout for Exposing $10 Billion Swiss Stash
  • SocGen Blames Clifford Chance in $483 Million Gold Suit
  • GSK’s £40 Billion Consumer Arm Picks Citi, UBS as Brokers
  • Russian Industry Faces Code Crisis as Critical Software Pulled

ECB

  • ECB's Lagarde said inflation in the euro area is undesirably high and it is projected to stay that way for some time to comeFragmentation tool, via the ECB.
  • ECB's Kazaks said 25bps in July and 50bps in September is the base case, via Bloomberg TV. Kazaks said it is worth looking at a 50bps hike in July and front-loading hikes might be reasonable. Fragmentation risks should not stand in the way of monetary policy normalisation. If necessary, the ECB will come up with tools to address fragmentation.
  • ECB's Wunsch said he is comfortable with a 50bps hike in September; adds that 200bps of hikes are needed relatively fast, and anti-fragmentation tool should have no limits if market moves are unwarranted, via Reuters.
  • Bank of Italy said Governor Visco's resignation is not on the table, according to a spokesperson cited by Reuters.

Fixed Income

  • Bond reversal continues amidst buoyant risk sentiment, hawkish ECB commentary and supply.
  • Bunds lose two more big figures between 146.80 peak and 144.85 trough, Gilts down to 112.06 from 112.86 at best and 10 year T-note retreats within 117-01/116-14 range

FX

  • DXY regroups on spot month end as yields rally and rebalancing factors offer support - index within 103.750-104.020 range vs Monday's 103.660 low.
  • Euro continues to encounter resistance above 1.0600 via 55 DMA (1.0614 today); Yen undermined by latest bond retreat and renewed risk appetite - Usd/Jpy eyes 136.00 from low 135.00 area and close to 134.50 yesterday.
  • Aussie breaches technical and psychological resistance with encouragement from China lifting or easing more Covid restrictions - Aud/Usd through 10 DMA at 0.6954.
  • Loonie and Norwegian Krona boosted by firm rebound in oil as France fans supply concerns due to limited Saudi and UAE production capacity - Usd/Cad sub-1.2850 and Eur/Nok under 10.3500.
  • Yuan receives another PBoC liquidity boost to compliment positive developments on the pandemic front, but Rand hampered by latest power cut warning issued by SA’s Eskom

Commodities

  • WTI and Brent futures were bolstered in early European hours amid encouragement seen from China's loosening of COVID restrictions.
  • Spot gold is uneventful, around USD 1,825/oz in what has been a sideways session for the bullion since the reopening overnight.
  • Base metals are posting broad gains across the complex - with LME copper back above USD 8,500/t amid China-related optimism.

US Event Calendar

  • 08:30: May Advance Goods Trade Balance, est. -$105b, prior -$105.9b, revised -$106.7b
  • 08:30: May Wholesale Inventories MoM, est. 2.1%, prior 2.2%
    • May Retail Inventories MoM, est. 1.6%, prior 0.7%
  • 09:00: April S&P CS Composite-20 YoY, est. 21.15%, prior 21.17%
  • 09:00: April S&P/CS 20 City MoM SA, est. 1.95%, prior 2.42%
  • 09:00: April FHFA House Price Index MoM, est. 1.4%, prior 1.5%
  • 10:00: June Conf. Board Consumer Confidenc, est. 100.0, prior 106.4
    • Conf. Board Expectations, prior 77.5; Present Situation, prior 149.6
  • 10:00: June Richmond Fed Index, est. -5, prior -9

DB's Jim Reid concludes the overnight wrap

It's been a landmark night in our household as last night was the first time the 4-year-old twins slept without night nappies. So my task this morning after I send this to the publishers is to leave for the office before they all wake up so that any accidents are not my responsibility. Its hopefully the end of a near 7-year stretch of nappies being constantly around in their many different guises and states of unpleasantness. Maybe give it another 30-40 years and they'll be back.

Talking of unpleasantness, as we near the end of what’s generally been an awful H1 for markets, yesterday saw the relief rally from last week stall out, with another bond selloff and an equity performance that fluctuated between gains and losses before the S&P 500 (-0.30%) ended in negative territory.

In terms of the specific moves, sovereign bonds lost ground on both sides of the Atlantic, with yields on 10yr Treasuries up by +7.0bps following their -9.6bps decline from the previous week. That advance was led by real rates (+9.6bps), which look to have been supported by some decent second-tier data releases from the US during May yesterday. The preliminary reading for US durable goods orders surprised on the upside with a +0.7% gain (vs. +0.1% expected). Core capital goods orders also surprised on the upside with a +0.8% advance (vs. +0.2% expected). And pending home sales were unexpectedly up by +0.7% (vs. -4.0% expected). Collectively that gave investors a bit more confidence that growth was still in decent shape last month, which is something that will also offer the Fed more space to continue their campaign of rate hikes into H2. This morning 10yr USTs yields have eased -2.45 bps to 3.17% while 2yr yields (-4 bps) have also moved lower to 3.08%, as we go to press.

Staying at the front end, when it comes to those rate hikes, if you look at Fed funds futures they show that investors are still only expecting them to continue for another 9 months, with the peak rate in March or April 2023 before markets are pricing in at least a full 25bps rate cut by end-2023 from that point. I pointed out in my chart of the day yesterday (link here) that the median time historically from the last hike of the cycle to the first cut was only 4 months, and last time it was only 7 months between the final hike in December 2018 and the next cut in July 2019. So it wouldn’t be historically unusual if Fed funds did follow that pattern whether that fits my view or not.

Over in Europe yesterday there was an even more aggressive rise in yields, with those on 10yr bunds (+10.9bps), OATs (+11.0bps) and BTPs (+9.1bps) all rising on the day as they bounced back from their even larger declines over the previous week. That came as investors pared back their bets on a more dovish ECB that they’d made following the more negative tone last week, and the rate priced in by the December ECB meeting rose by +8.5bps on the day.

For equities, the major indices generally fluctuated between gains and losses through the day. The S&P 500 followed that pattern and ultimately fell -0.30%, which follows its best daily performance in over 2 years on Friday Quarter-end rebalancing flows seem set to drive markets back-and-forth price this week. Even with the decline yesterday, the index is +6.36% higher since its closing low less than a couple of weeks ago. And over in Europe, the STOXX 600 (+0.52%) posted a decent advance, although that masked regional divergences, including losses for the CAC 40 (-0.43%) and the FTSE MIB (-0.86%).

Energy stocks strongly outperformed in the index, supported by a further rise in oil prices that left both Brent crude (+1.74%) and WTI (+1.81%) higher on the day. G7 ministers reportedly agreed to explore a cap on Russian gas and oil exports, with the official mandate expected to be announced today, but it would take time for any mechanism to be developed. The impact on global oil supply is not clear: if Russia retaliates supply could go down, if this enables other third parties to import more Russian oil supply could go up. Elsewhere, political unrest in Libya and Ecuador could simultaneously hit oil supply. In early Asian trading, oil prices continue to move higher, with Brent futures up +1.13% at $116.39/bbl and WTI futures gaining +1% to just above the $110/bbl level.

Asian equity markets are struggling a bit this morning. The Hang Seng (-1.00%) is the largest underperformer amid a weakening in Chinese tech stocks whilst the Nikkei (-0.15%), Shanghai Composite (-0.15%) and CSI (-0.19%) are trading in negative territory in early trade. Elsewhere, the Kospi (-0.05%) is just below the flatline. US stock futures are slipping with contracts on the S&P 500 (-0.12%) and NASDAQ 100 (-0.18%) both slightly lower.

In central bank news, the People’s Bank of China (PBOC) Governor Yi Gang pledged to provide additional monetary support to the economy to recover from Covid outbreaks and lockdowns and other stresses. In a rare interview conducted in English, the central bank chief did caution though that the real interest rate is low thereby indicating limited room for large-scale monetary easing.

Turning to geopolitical developments, the G7 summit continued in Germany yesterday, and in a statement it said they would “further intensify our economic measures against Russia”. Separately, NATO announced that it will increase the number of high readiness forces to over 300,000, with the alliance’s leaders set to gather in Madrid from today. And we’re also expecting a new round of nuclear talks with Iran to take place at some point this week, something Henry mentioned in his latest Mapping Markets out yesterday (link here), which if successful could in time pave the way for Iranian oil to return to the global market.

Finally, whilst there were some decent May data releases from the US, the Dallas Fed’s manufacturing activity index for June fell to a 2-year low of -17.7 (vs. -6.5 expected).

To the day ahead now, and data releases include Germany’s GfK consumer confidence for July, French consumer confidence for June, whilst in the US there’s the FHFA house price index for April, the advance goods trade balance and preliminary wholesale inventories for May, as well as the Conference Board’s consumer confidence for June and the Richmond Fed’s manufacturing index. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Lane, Elderson and Panetta, the Fed’s Daly, and BoE Deputy Governor Cunliffe. Finally, NATO leaders will be meeting in Madrid.

Tyler Durden Tue, 06/28/2022 - 08:00

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Is Bitcoin Really A Hedge Against Inflation?

The long-standing claim that bitcoin is a hedge against inflation has come to a fork in the road as inflation is soaring, but the bitcoin price is not.

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The long-standing claim that bitcoin is a hedge against inflation has come to a fork in the road as inflation is soaring, but the bitcoin price is not.

This is an opinion editorial by Jordan Wirsz, an investor, award-winning entrepreneur, author and podcast host.

Bitcoin’s correlation to inflation has been widely discussed since its inception. There are many narratives surrounding bitcoin’s meteoric rise over the last 13 years, but none so prevalent as the debasement of fiat currency, which is certainly considered inflationary. Now Bitcoin’s price is declining, leaving many Bitcoiners confused, as inflation is the highest it’s been in more than 40 years. How will inflation and monetary policy impact bitcoin’s price?

First, let’s discuss inflation. The Federal Reserve’s mandate includes an inflation target of 2%, yet we just printed an 8.6% consumer price inflation number for the month of May 2022. That is more than 400% of the Fed’s target. In reality, inflation is likely even higher than the CPI print. Wage inflation isn’t keeping up with actual inflation and households are starting to feel it big time. Consumer sentiment is now at an all-time low.

(Source)

Why isn’t bitcoin surging while inflation is running out of control? Although fiat debasement and inflation are correlated, they truly are two different things that can coexist in juxtaposition for periods of time. The narrative that bitcoin is an inflation hedge has been widely talked about, but bitcoin has behaved more as a barometer of monetary policy than of inflation.

Macro analysts and economists are feverishly debating our current inflationary environment, trying to find comparisons and correlations to inflationary periods in history — such as the 1940s and the 1970s — in an effort to forecast where we go from here. While there are certainly similarities to inflationary periods of the past, there is no precedent for bitcoin’s performance under circumstances such as these. Bitcoin was born only 13 years ago from the ashes of the Global Financial Crisis, which itself unleashed one of the greatest monetary expansions in history up until that time. For the last 13 years, bitcoin has seen an environment of easy monetary policy. The Fed has been dovish, and anytime hawkishness raised its ugly head, the markets rolled over and the Fed pivoted quickly to reestablish calm markets. Note that during the same period, bitcoin rose from pennies to $69,000, making it perhaps the greatest-performing asset of all time. The thesis has been that bitcoin is an “up and to the right asset,” but that thesis has never been challenged by a significantly tightening monetary policy environment, which we find ourselves at the present moment.

The old saying that “this time is different,” might actually prove to be true. The Fed can’t pivot to quell the markets this time. Inflation is wildly out of control and the Fed is starting from a near-zero rate environment. Here we are with 8.6% inflation and near-zero rates while staring recession straight in the eyes. The Fed is not hiking to cool the economy … It is hiking in the face of a cooling economy, with already one quarter of negative gross domestic product growth behind us in Q1, 2022. Quantitative tightening has only just begun. The Fed does not have the leeway to slow down or ease its tightening. It must, by mandate, continue to raise rates until inflation is under control. Meanwhile, the cost-conditions index already shows the biggest tightening in decades, with almost zero movement from the Fed. The mere hint of the Fed tightening spun the markets out of control.

(Source)

There is a big misconception in the market about the Fed and its commitment to raising rates. I often hear people say, “The Fed can’t raise rates because if they do, we won’t be able to afford our debt payments, so the Fed is bluffing and will pivot sooner than later.” That idea is just factually incorrect. The Fed has no limit as to the amount of money it can spend. Why? Because it can print money to make whatever debt payments are necessary to support the government from defaulting. It’s easy to make debt payments when you have a central bank to print your own currency, isn’t it?

I know what you’re thinking: “Wait a minute, you’re saying the Fed needs to kill inflation by raising rates. And if rates go up enough, the Fed can just print more money to pay for its higher interest payments, which is inflationary?”

Does your brain hurt yet?

This is the “debt spiral” and inflation conundrum that folks like Bitcoin legend Greg Foss talks about regularly.

Now let me be clear, the above discussion of that possible outcome is widely and vigorously debated. The Fed is an independent entity, and its mandate is not to print money to pay our debts. However, it is entirely possible that politicians make moves to change the Fed’s mandate given the potential for incredibly pernicious circumstances in the future. This complex topic and set of nuances deserves much more discussion and thought, but I’ll save that for another article in the near future.

Interestingly, when the Fed announced its intent to hike rates to kill inflation, the market didn’t wait for the Fed to do it … The market actually went ahead and did the Fed’s job for it. In the last six months, interest rates have roughly doubled — the fastest rate of change ever in the history of interest rates. Libor has jumped even more.

(Source)

This record rate-increase has included mortgage rates, which have also doubled in the last six months, sending shivers through the housing market and crushing home affordability at a rate of change unlike anything we’ve ever seen before.

30-year mortgage rates have nearly doubled in the last six months.

All of this, with only a tiny, minuscule, 50 bps hike by the Fed and the very beginning of their rate hike and balance sheet runoff program, merely started in May! As you can see, the Fed barely moved an inch, while the markets crossed a chasm on their own accord. The Fed’s rhetoric alone sent a chilling effect through the markets that few expected. Look at the global growth optimism at new all-time lows:

(Source)

Despite the current volatility in the markets, the current miscalculation by investors is that the Fed will take its foot off the brake once inflation is under control and slowing. But the Fed can only control the demand side of the inflationary equation, not the supply side of the equation, which is where most of the inflationary pressure is coming from. In essence, the Fed is trying to use a screwdriver to cut a board of lumber. Wrong tool for the job. The result may very well be a cooling economy with persistent core inflation, which is not going to be the “soft landing” that many hope for.

Is the Fed actually hoping for a hard landing? One thought that comes to mind is that we may actually need a hard landing in order to give the Fed a pathway to reduce interest rates again. This would provide the government the possibility of actually servicing its debt with future tax revenue, versus finding a path to print money to pay for our debt service at persistently higher rates.

Although there are macro similarities between the 1940s, 1970s and the present, I think it ultimately provides less insight into the future direction of asset prices than the monetary policy cycles do.

Below is a chart of the rate of change of U.S. M2 money supply. You can see that 2020-2021 saw a record rise from the COVID-19 stimulus, but look at late 2021-present and you see one of the fastest rate-of-change drops in M2 money supply in recent history. 

(Source)

In theory, bitcoin is behaving exactly as it should in this environment. Record-easy monetary policy equals “number go up technology.” Record monetary tightening equals “number go down” price action. It is quite easy to ascertain that bitcoin’s price is tied less to inflation, and more to monetary policy and asset inflation/deflation (as opposed to core inflation). The chart below of the FRED M2 money supply resembles a less volatile bitcoin chart … “number go up” technology — up and to the right.

(Via St. Louis Fed)

Now, consider that for the first time since 2009 — actually the entire history of the FRED M2 chart — the M2 line is potentially making a significant direction turn to the downside (look closely). Bitcoin is only a 13-year-old experiment in correlation analysis that many are still theorizing upon, but if this correlation holds, then it stands to reason that bitcoin will be much more closely tied to monetary policy than it will inflation.

If the Fed finds itself needing to print significantly more money, it would potentially coincide with an uptick in M2. That event could reflect a “monetary policy change” significant enough to start a new bull market in bitcoin, regardless of whether or not the Fed starts easing rates.

I often think to myself, “What is the catalyst for people to allocate a portion of their portfolio to bitcoin?” I believe we are beginning to see that catalyst unfold right in front of us. Below is a total-bond-return index chart that demonstrates the significant losses bond holders are taking on the chin right now. 

(Source)

The “traditional 60/40” portfolio is getting destroyed on both sides simultaneously, for the first time in history. The traditional safe haven isn’t working this time around, which underscores the possibility that “this time is different.” Bonds may be a deadweight allocation for portfolios from now on — or worse.

It seems that most traditional portfolio strategies are broken or breaking. The only strategy that has worked consistently over the course of millennia is to build and secure wealth with the simple ownership of what is valuable. Work has always been valuable and that is why proof-of-work is tied to true forms of value. Bitcoin is the only thing that does this well in the digital world. Gold does it too, but compared to bitcoin, it cannot fulfill the needs of a modern, interconnected, global economy as well as its digital counterpart can. If bitcoin didn’t exist, then gold would be the only answer. Thankfully, bitcoin exists.

Regardless of whether inflation stays high or calms down to more normalized levels, the bottom line is clear: Bitcoin will likely start its next bull market when monetary policy changes, even if ever so slightly or indirectly.

This is a guest post by Jordan Wirsz. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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Economics

Why Government Anti-Inflation Plans Fail

Why Government Anti-Inflation Plans Fail

Authored by Daniel Lacalle,

Governments love inflation. It is a hidden tax on everyone and a transfer…

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Why Government Anti-Inflation Plans Fail

Authored by Daniel Lacalle,

Governments love inflation. It is a hidden tax on everyone and a transfer of wealth from bank deposits and real wages to indebted governments that collect more receipts via higher indirect taxes and devalue their debts. That is why we cannot expect governments to take decisive action on inflation.

To curb inflation effectively, interest rates must rise to a neutral level relative to inflation, to reduce the excessive increase in credit and new money from negative real rates. Additionally, central banks must end the repurchase of bonds, exchange traded funds and mortgage-backed securities as this would immediately reduce the quantity of currency in circulation. Finally, and most important of all, governments need to cut deficit spending which is ultimately financed by more debt and monetized with newly created central bank reserves. These three measures are crucial. One or two would not be enough.

However, governments are unwilling to cut deficit spending. The increase in outlays from 2020 due to extraordinary circumstances has been largely consolidated and is now annual structural expenditures. As we have seen in previous crises, many of the one-off and temporary measures become permanent, driving mandatory spending to a new all-time high.

Citizens are suffering the elevated inflation and consumer confidence is plummeting to historic lows in the economies that massively increased money supply growth throughout the pandemic, fuelling inflationary pressures through money printing well above demand and demand-side state expenditure plans financed with newly created currency. What do governments implement when this happens? More demand-side policies. Spending and debt.

Imagine for a second that we believed the myth of cost-push inflation and the argument that inflation comes from a supply shock. If that were the case, governments should implement supply-side measures, cutting spending and reducing taxes.

Reducing taxes does not drive inflation higher because it is the same quantity of currency, only a bit more in the hands of those who earn it. Cutting taxes would only be inflationary if demand for goods and services would soar due to higher consumer credit and demand, but that is not the case. Consumers would only have less difficulties to purchase daily essential goods and services that they acquire anyway. And some would save, which is good. That same money in the hands of government, which weighs more than 40% in the economy, will inevitably be spent and more, with rising public debt.

One unit of currency in the hands of the private sector may be consumed or invested-saved. The same unit in the hands of government is going to current spending and will be multiplied by adding debt, which means more currency in circulation and higher risk of inflation. Currency supply does not drive more currency demand. It is the opposite. If inflation ends up destroying the private sector consumption ability and the economy goes into recession, demand for currency will fall further from supply growth, keeping inflation elevated for longer.

The rules of supply and demand apply to currency the same as to everything else.

Rising discontent is leading governments to present bold and aggressive anti-inflation plans, yet almost none of those are supply-side measures but demand-side ones. Furthermore, the vast majority imply more spending, higher subsidies, rising debt, and increased money supply, which means higher risk of inflation.

Giving checks with newly printed money creates inflation. Providing more checks to reduce inflation is like stopping a fire with gasoline.

The Bank of International Settlements recently said that “leading economies are close to tipping into a high-inflation world where rapid price rises are normal, dominate daily life and are difficult to quell”. However, it is only difficult to quell because governments and central banks keep elevated levels of deficit and monetization. In the 70s media and analysts repeated constantly how difficult it was for governments to cut inflation, but they never explained that you cannot reduce price pressures destroying the purchasing power of the currency that governments monopolize.

Prices do not rise in unison for the same amount of currency. Anti-inflation plans as they have been presented in numerous countries are inflationary and hurt those that they pretend to help. Governments should stop helping with other people’s money and supporting by demolishing the purchasing power of their currency. The best way to reduce inflation is to defend real wages and deposit savings.

Tyler Durden Mon, 06/27/2022 - 14:45

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