The new week has picked up where last week left off: with futures selling off and global markets lower as yields continued their relentless treck higher, hitting fresh two year highs (amid concerns of a faster Fed balance sheet drawdown coupled with a massive IG issuance slate forcing managers to put on rate locks in what remains an illiquid market).
US index futures traded down to session lows as US traders sat at their desks after rising modestly earlier in the session, and were down 27 points or 0.6% at 730am...
... while Treasury yields stabilized after reversing an earlier spike rising as high as 1.8064% before dropping to 1.7656% following a global bond selloff last week as investors awaited key inflation data later in the week. Tech stocks again led the decline with Nasdaq futs down 0.63%, while Dow futures were down 0.12% or 44 points. The dollar rose, bitcoin dropped and crude oil steadied around $79 a barrel.
“Market volatility continues to grow almost everywhere,” with lingering uncertainties keeping pressure on sentiment, said Pierre Veyret, technical analyst at ActivTrades. “Traders are likely to wait for new major market drivers before pushing stock prices in new directions. All eyes will remain on monetary policy this week with a new batch of comments from major Fed speakers alongside the crucial U.S. inflation report on Wednesday.”
As Bloomberg notes, markets face increasing volatility as investors grapple with how to reprice assets as the pandemic liquidity that helped drive equities to record highs is withdrawn. The latest U.S. consumer price index data due this week will be keenly watched as the Federal Reserve prepares to subdue price pressures with faster-than-expected rate increases. HSBC strategists raised their S&P 500 year-end target to 4,900 from 4,650, but say this year will be challenging for risk assets and consensus expectations are too sanguine. Watch Adidas and Nike shares after HSBC downgraded its ratings on both to hold from buy, citing a lack of short-term catalysts. Here are some of the biggest U.S. movers today:
- BioMarin (BMRN US) shares jump 5.5% in U.S. premarket trading after the biotech firm announced positive results for its hemophilia treatment trial on Sunday.
- The bull and bear cases for Adidas (ADS GY) and Nike (NKE US) are “quite balanced from here,” according to HSBC, which downgrades its ratings on both to hold from buy, citing a lack of short-term catalysts.
- Zscaler (ZS US) has “plenty of growth levers to pull,” UBS writes in note upgrading the company to buy from neutral. The stock gains 2.5% in premarket trading.
- New Oriental’s (EDU US) Chinese ADRs rose 2.2% in U.S. premarket trading, and peer TAL Education (TAL US) gained 2.9% amid news that New Oriental dismissed 60,000 workers in 2021 after ending all K-9 tutoring services. Still, analysts foresee more regulations for the industry this year.
In Europe, the Stoxx 600 Index was slightly down, fading an initial dip through Friday’s lows. The Euro Stoxx 50 is flat, DAX off 0.1%; FTSE MIB and IBEX post small gains. Cyclical stocks in energy firms and banks tied to economic expansion were among the biggest gainers on the Stoxx Europe 600, offsetting declines in technology firms and real estate. Travel is the stand out best performer, the Stoxx 600 sector rising 2.5%, rebounding strongly after an early dip. Atos’s shares slumped as much as 19% to their lowest since June 2012, following a profit warning.
Earlier in the session, Asia’s stocks rose for a second day amid the overhang of rising interest rates, as investors awaited U.S. inflation data this week for further cues on where Treasury yields are headed. The MSCI Asia Pacific Index rallied as much as 0.4%, boosted by financial shares. Hong Kong stocks were among the best performers as technology giants including Tencent and Meituan continued to recoup some of their recent losses, while real estate shares extended a rally on state support. South Korea’s Kospi Index fell 1% to be among the region’s biggest decliners, dragged down by losses in the nation’s large chipmakers and internet stocks. Asia’s stock benchmark capped a loss of 0.5% last week. Omicron’s rapid spread in Asia is clouding the growth outlook for many economies, just as the Federal Reserve’s increasingly hawkish stance roils bond markets and hammers growth stocks including tech shares. “Some market participants may still view this pullback as another healthy correction and potentially an opportunity to buy more,” said Margaret Yang, a strategist at DailyFX, adding that the omicron variant may cause concerns about a delay in reopening among investors.
Japanese markets were closed for a holiday on Monday.
Australian stocks slipped as health-care, consumer shares hit index. The S&P/ASX 200 index fell 0.1% at 7,447.10 as of 4:15 p.m. on Monday in Sydney, after the S&P 500 capped its worst weekly start to a year since 2016. The Australian index was weighed down by consumer discretionary and health-care stocks, while shares in miners and energy firms rose. AGL Energy surged after Credit Suisse raised its recommendation on the stock to outperform from neutral. Reliance Worldwide was the biggest decliner after sliding the most in 14 months intraday. In New Zealand, the S&P/NZX 50 index fell 0.6% to 12,892.94.
In FX, the Bloomberg Dollar Spot Index was steady after earlier advancing and the greenback was mixed against its Group-of-10 peers. The Canadian and Australian dollars along with Norway’s krone were the best G-10 performers amid supportive economic data and commodity prices. Norway’s krone advanced after inflation accelerated more than estimated in December, adding pressure on the central bank to speed up interest-rate hikes. The Australian dollar reversed a drop as exporter demand and solid building data prompted leveraged funds to square short positions. The euro shed around half of Friday’s gains against the dollar and bunds mostly slipped, yet outperformed Treasuries.
In rates, treasury futures were off session lows amid gains for bunds and gilts, with cash yields across the curve still slightly cheaper on the day. Into the U.S. session, yields cheaper by up to 1.2bp across belly of the curve, spreads within 1bp of Friday session close; 10-year yields around 1.778%,lagging bunds and gilts by 1.5bp and 1bp in the sector. As we warned last night, Treasuries are hampered by expectations for another heavy IG credit issuance slate this week, but the market - dumb as always - sees today's rate locks as indication of more panicked outright selling in rates which it isn't.
We are looking at another boatload of IG issuance this week so brace for massive rate locks which will again be mistaken for panic treasury selling— zerohedge (@zerohedge) January 9, 2022
Coupon auctions also resume this week, beginning with 3-year note sale Tuesday and including 10- and 30-year reopenings. Last week’s steep UST selloff resumed during European morning after a recommended market close during Asia session because of Japanese holiday; 10-year yields topped at 1.806% before buyers emerged
In commodities, crude futures are little changed with WTI trading either side of $79 and Brent near $82. Spot gold pushes ~$4 higher near $1,800/oz after a slow start in European hours. Base metals are in the green with LME aluminum outperforming slightly.
- S&P 500 futures down 0.6% to 4,639.25
- STOXX Europe 600 down 0.1% to 485.58
- MXAP up 0.4% to 192.99
- MXAPJ up 0.6% to 629.71
- Nikkei little changed at 28,478.56
- Topix little changed at 1,995.68
- Hang Seng Index up 1.1% to 23,746.54
- Shanghai Composite up 0.4% to 3,593.52
- Sensex up 1.1% to 60,402.57
- Australia S&P/ASX 200 little changed at 7,447.07
- Kospi down 1.0% to 2,926.72
- Brent Futures up 0.5% to $82.14/bbl
- Gold spot up 0.0% to $1,796.81
- U.S. Dollar Index up 0.17% to 95.88
- German 10Y yield little changed at -0.03%
- Euro down 0.2% to $1.1335
Top Overnight News from Bloomberg
- Bond yields are soaring globally in line with Treasuries as investors preparing for the first Federal Reserve interest-rate hike of the pandemic era set aside concern the outbreak will slow their already fragile economies
- Major emerging markets are set to report a slowdown in inflation this week, offering clues on when investors can finally shake off the burden of negative real yields
- U.K. Foreign Secretary Liz Truss said she’s prepared to unilaterally override parts of the post-Brexit agreement on Northern Ireland if talks with the EU fail
- President Vladimir Putin vowed to protect Russia and its ex-Soviet allies from what he called outside efforts to destabilize their governments with public protests, just days after Russian-led troops helped Kazakh authorities subdue nationwide demonstrations
- The Biden administration and U.S. allies are discussing possible export controls on Russia, including curbs on sensitive technology and electronics, to be imposed if President Vladimir Putin seizes more of Ukraine, a person familiar with the discussions said
- There’s growing evidence that China is encouraging state- owned property developers to take market share from stressed rivals to limit the spread of contagion from the debt-stricken industry
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac markets traded mixed and US equity futures were initially pressured after last Friday's post-NFP weakness amid higher yields despite the miss on the headline jobs data, as a wider than expected decline in the Unemployment Rate provided evidence of the US moving towards full employment and boosted odds for a rate hike at the March meeting. This resulted in underperformance in consumer discretionary and tech with the latter also not helped by the worst start to the year for the Nasdaq 100 since 2000, while ongoing Omicron woes and the absence of Japanese participants due to Coming of Aged day further added to the uninspired mood. ASX 200 (-0.1%) was subdued as consumer discretionary and tech mirrored the underperformance of their US counterparts and with Australia suffering from the ongoing surge in COVID-19 cases, although loses for the index were cushioned by strength in the commodity-related sectors and better than expected Building Approvals data. KOSPI (-1.0%) continued its descent beneath the 3,000 level as it succumbed to the tech and consumer stock woes, with participants also cautious amid mixed expectations regarding the prospects of another rate hike by the BoK later this week. Hang Seng (+1.0%) and Shanghai Comp. (+0.4%) remained afloat with Hong Kong underpinned as some property concerns eased after Shimao placed all its property projects for sale and Kaisa agreed to the Shenzhen government's request to generate a plan by end-January to repay wealth management products to investors. Furthermore, China’s Guangdong provincial government held meetings with property enterprises which was said to likely pave the way for state-owned real estate enterprises to conduct M&A with troubled property firms, although not all developers joined in on the spoils as Modern Land reversed initial double-digit gains and slumped almost 40% on resumption from a two-month trading halt with the Co. in talks on a potential debt restructuring plan, while sentiment in the mainland was also contained after China reported its first community transition of the Omicron variant in Tianjin which is a gateway city to Beijing.
Top Asian News
- Tencent Nears Deal for Smartphone Maker in Major Metaverse Push
- Fintech Startup Pine Labs Said to Seek $500 Million in U.S. IPO
- Omicron Flares in China as Variant Inches Closer to Beijing
- Shimao Group Holdings Downgraded to B- by S&P
European equities (Euro Stoxx 50 Unch; Stoxx 600 -0.1%) have erased the mild opening gains of around 0.4% as the pick-up from Friday’s losses lost steam early doors. There wasn’t much in the way of a catalyst after the cash open for the price action with not much in the way of fresh developments for the region over the weekend. The handover from the APC region was a mixed one (Japan away from markets) with the ASX (-0.1%) a touch softer amid losses on consumer discretionary and tech names, whilst Chinese bourses (Shanghai Comp. +0.4%, Hang Seng +1.1%) shrugged off COVID angst with property stocks in Hong Kong boosted after Shimao placed all its property projects for sale and Kaisa agreed to the Shenzhen government's request to generate a plan by end-January to repay wealth management products to investors. Stateside, US futures are mixed (ES Unch, NQ -0.1%, RTY +0.2%) after last week’s losses of 2.5%, 5.7% and 4.1% for the S&P 500 Nasdaq and Russell 2000 respectively. In a note published today, HSBC has raised its S&P 500 target to 4,900 from 4,650 (vs 4,677 close on Friday). The focus in the US remains on the pace of Fed tightening, on which, Goldman Sachs now anticipates a total of four hikes this year beginning in March and for the balance runoff to start in July. Elsewhere, JPMorgan recommends overweighting stocks which are positively correlated to upside in bond yields; banks, autos, mining, energy and insurance. Back to Europe, sectors are painting a relatively mixed picture, with Travel & Leisure names best in class thus far amid support from airline names, whilst Oil & Gas and Banking names are also seen higher with the latter supported by the ongoing favourable yield environment. To the downside, Real Estate names lag with softness observed in UK homebuilders (Persimmon -3.8%, Berkeley -2.8%, Barratt Developments -3.2%) as companies attempt to push back on government plans to resolve the cladding crisis which could result in them footing the bill of as much as GBP 4bln. In terms of stock specifics, Credit Suisse (+1.6%) sits at the top of the SMI following reports in Inside Paradeplatz suggesting rumours of a potential sale or merger of the Co. with UniCredit and BNP Paribas mentioned in the article. To the downside, Atos (-17%) is the standout laggard in the Stoxx 600 after issuing a further profit warning and announcing that it will present a new re-organisation to the board of directors.
Top European News
- Gold Extends Weekly Loss as U.S. Bond Yields Continue to Rise
- European Natural Gas Declines With LNG Imports at Two-Year High
- Putin Vows to Defend Ex-Soviet Allies from ‘Color Revolutions’
- Credit Suisse Sale or Merger ‘Rumored’: Inside Paradeplatz
In FX, the DXY has lost some steam after an early resurrection from Friday’s NFP-induced fall under 96.000 (to a 95.710 low), with overnight and early European gains a function of a rise in US yields and a decline in the EUR. US cash yields continue the grind higher with the 10yr eclipsing Friday’s 1.8010% peak, in part spurred (or at least influenced) by Goldman Sachs now expecting four Fed hikes this year alongside faster quantitative tightening, citing above-target inflation. This comes ahead of the CPI metrics on Wednesday - which is expected to see the headline Y/Y at 7.0% and the Core Y/Y at 5.4%; but before that, Fed Chair Powell and 2022-voters (and hawks) George and Bullard are slated for tomorrow ahead of the Fed blackout commencing on the 15th Jan. Back to this week’s inflation metrics and using last week’s PMIs (Markit and ISM) as proxies, the releases are consistent with a rise in CPI and a cooling in PPI in December. Markit noted “Input shortages, transportation delays and upticks in labor costs drove the rate of private sector input price inflation to a fresh series high in December”, whilst ISM suggested “Vendors are trying not to pass on expenses, but their margins are such that they will need to raise prices…Prices continue to be driven up, with shipping costs the largest driver due to inflated pressures on capacity and fuel costs.” From a technical standpoint, the index remains above its 50 DMA (95.838), with the 21 DMA (96.171) the closest point of resistance ahead of Friday’s 96.299 pinnacle, if 96.00 sees a convincing upside break. Ahead, the State-side calendar is light, with 2024-voter Bostic’s speech seemingly postponed.
- EUR, GBP - EUR has been offered this morning and stands as the current G10 laggard as GBP/EUR threatens an upside breach of 1.2000 (a 23-month peak), with traders noting potential stops above for GBP/EUR and below the corresponding 0.8333 mark in EUR/GBP. The weekend also saw commentary from ECB-regular Schnabel, who suggested that rising energy prices could require the ECB to act on policy but added there have not been signs so far of broader second-round effects of higher inflation. Eyes remain on the German 10yr cash yield eyeing positive territory. Nonetheless, the ECB policy divergence with the Fed and BoE keeps the single currency subdued against major peers. From a technical standpoint, EUR/USD is back under its 50 DMA (1.1345) with the 21 DMA (1.1308) the next support ahead of 1.1300. Sterling is in turn supported, with GBP/USD testing 1.3600 to the upside at the time of writing – with clean air seen until 1.3650.
- AUD, NZD, CAD, JPY - The high-beta FX are the current top performers with the Loonie leading the gains as crude prices remain firm. USD/CAD has dipped under its 100 DMA, (1.2625) for the first time since November last year. The AUD is the next best gainer with copper firm and the AUD/NZD cross topped 1.0600 once again. NZD/USD meanwhile tested but failed to breach resistance at its 21 DMA (0.6787). Conversely to the high-betas, the havens are among the straddlers with USD/JPY off its overnight highs (with Japan also observing a market holiday) and stuck within a 115.55-85 range with upside capped by the recent downside across stocks.
In commodities, WTI and Brent front-month futures have trimmed earlier gains after seeing overnight support with the inflation narrative underpinning prices at the time, although supply woes arising from Kazakhstan (1.6mln BPD) could be abating as production at its largest oilfield comes back online and the President claims the domestic unrest is now under control. In terms of some themes to be aware of: China’s COVID situation will be eyed heading into the Lunar New Year – which is marked as the largest human migration – with COVID restrictions likely to dampen the demand side of the equations. On the geopolitical front, noises out of the Iranian nuclear talks have been more sanguine but progress remains to be seen. Meanwhile, the Russian-Ukraine spat is picking up traction with punch verbal rhetoric from both sides and talks set to take place later in the week. WTI Feb has falling back under USD 79.50/bbl (vs low USD 78.36/bbl) while Brent Mar briefly topped USD 82/bbl (vs low USD 81.20/bbl). In terms of metals, spot gold remains sub-1,800/oz but topped its 100 DMA (1,792/oz) and 21 DMA (1,799/oz) with technical re-eyeing the 200 DMA (1,800/oz) and 50 DMA (1,804/oz) from a technical standpoint ahead of Wednesday’s US CPI. LME copper has been constrained to a tight range above USD 9,500/t amid the overall indecisive mood. Coal meanwhile eyes the potential resumption of Indonesian coal exports, which was paused last week amid domestic power worries. Elsewhere, Vale announced that it has partially suspended trains at the Vitoria-Minas railway amid rain in the Minas Gerais state, but maintained guidance for 2022 iron ore productions of 320-335mln tonnes.
US Event Calendar
- 10am: Nov. Wholesale Trade Sales MoM, prior 2.2%
- 10am: Nov. Wholesale Inventories MoM, est. 1.2%, prior 1.2%
DB's Jim Reid concludes the overnight wrap
Wow. What a start to the year. To be fair it’s felt to us that the Fed have been way behind the curve since the spring of last year. One can argue that a fair degree of this was deliberate due to their move to FAIT which we may look back on in the future as having arrived with very unfortunate timing. The reason we say that is that the policy mostly fights the battle of the last war and not this one where we’ve had genuine helicopter money at a time when the global banking system wasn’t in turmoil and heavily deleveraging as it was in the post-GFC years. To be fair the Fed were starting to catch up with reality late last year but Omicron meant that the market was reluctant to read their more hawkish move as entirely realistic given the risks that the variant presented. However the holiday season provided more evidence that Omicron was notably milder, especially amongst the vaccinated, and the result has been that the market has looked through this more than they were willing to before Xmas whilst at the same time the Fed have become even more hawkish by upping the ante on QT. So a perfect storm.
So in today’s EMR we wanted to start with a detailed review of the events of last week alongside commentary as to what it all might mean. Let’s start with Treasuries. 10 year yields moved +25.2bps higher (+4.1bps Friday) to 1.76%, and finally above the highs reached in 2021. The policy-driven selloff meant most of the gains were in real yields, with 5yr and 10yr real yields climbed an astonishing +32.7bps (+3.4bps Friday) and +32.6bps (+2.3bps Friday) on the week, respectively. It was the biggest weekly climb for both since the wild swings in yields we saw in March 2020. In our 2022 credit outlook we highlighted how rising real yields were much more negative for credit than rising nominal yields. The risk of real yields risking due to a Fed that would have to accelerate tightening was behind our H1 widening view (see the report from November here). We’ll see if it actually materialises though.
The fun and games started on Tuesday when a WSJ story revealed the Fed was considering starting quantitative tightening (QT) earlier in the cycle than they did last time. We didn’t need to wait long for confirmation. Minutes from the December FOMC released the next day revealed that starting QT closer to liftoff and proceeding at a faster pace than last cycle was indeed the position of the Committee. On top of that, there were strong signals that the FOMC thought that full employment and therefore liftoff were right around the corner, and Friday’s jobs numbers (recapped below) did nothing to dissuade that notion.
In turn, our US economics team have updated their Fed call. Full details here, but to recap, they’re moving their liftoff call to the March meeting and calling for four Fed rate hikes in 2022. Although not many economists have yet pencilled in a March hike, Fed Funds futures now price in an 86% chance, up from 63% at the close on New Year’s Eve, just 27% at the end of November and 0% in early October. Our economists also believe that QT will commence after two rate hikes, starting sometime in the third quarter.
The minutes forcefully argued for an aggressive QT program, noting that the Fed needed to signal a strong commitment to fighting inflation, that the balance sheet was large compared to GDP, and the imposition of the new standing repo facility should alleviate strains in money and Treasury markets that may arise from a drawdown of their portfolio. Notably, Fed presidents spanning the dove-hawk spectrum came out in support of a relatively soon start to QT in subsequent communications, with both President Daly and Bullard giving their blessing.
When QT starts, its pace, and how its decomposed between Treasury and MBS remain unknowns, but the communications had the desired effect of tightening financial conditions. After being unresponsive to the start of taper and subsequent doubling of the pace, Fed policymakers probably welcomed this tightening, although this can be a fine line to tread. All told, more than 3 hikes are priced into markets during 2022 but you would have to say that unless financial conditions notably tighten then all seven meetings from March to the end of 2022 are now potentially in play.
The increase in yields and steepening of curves reverberated through other advanced economy sovereign bond markets. 10yr gilt and bund yields increased +20.7bps (+2.2bps Friday) and +13.4bps (+1.8bps Friday) respectively. 10yr bund yields finished the week at -0.04%, approaching positive territory for the first time since spring 2019.
US equity markets took some collateral damage due to the yield selloff. The S&P 500 dropped -1.87% (-0.41% Friday), with discount exposed sectors such as large technology (FANG -2.77%, -0.60% Friday) and real estate (-4.94%, -0.55% Friday) the biggest losers. The drop in tech stocks sent the NASDAQ down -4.53% on the week (-0.96% Friday). Of course, steeper yield curves boosted financial stocks, with the S&P 500 bank index up +9.37% (+1.50% Friday). As you’ll see below, a few US financials will kickoff earnings season late this week. European equity indices proved much more resilient, with the STOXX 600 (-0.32%, -0.39% Friday), DAX (+0.40x%, -0.65% Friday), and CAC (+0.93%, -0.42% Friday) all finishing within a percent of the prior week’s close.
Oil prices climbed to start the year. OPEC+ announced they would proceed with the expected modest 400k barrel per day increase to production in February; Brent and WTI futures increased +5.10% (-0.83% Friday) and +4.91% (-1.24% Friday), respectively.
On the Covid front, a number of advanced economies registered record positive one-day case counts, including the US breaching a mind-boggling 1 million daily cases. Nevertheless, there were signs for optimism, as London, an early victim of Omicron, saw ventilator usage hit its lowest mark since mid-October coupled with a decline in positive test rates. Prime Minister Johnson remarked further lockdowns were not likely in response to Omicron, suggesting we’re moving toward an official policy of living with and adapting to Covid.
December employment data in the US showed the economy was rapidly approaching full employment. The unemployment rate sank to 3.9%, below the FOMC’s estimate of the longer-run rate of 4.0% which might be too low post covid. Headline payroll gains were below the expectations of +450k, printing at +199k, though the prior two months were revised higher. Average hourly earnings increased to +0.6%, beating expectations, while the prime-age employment-population ratio increased 0.2pps. Taken in concert, the data were consistent with an FOMC expecting the economy to reach full employment “relatively soon”, as described in the December minutes, and thus enabling the March rate hike our economists now expect. The Fed have long been way behind the curve and they are now starting to catch up with markets now finally listening.
Staying with a central bank theme, ECB board member Schnabel gave a very interesting speech over the weekend where she became the first major central bank speaker to acknowledge the risk of higher inflation with the energy transition away from carbon. Clearly this is a medium to longer-term theme but it’s been one of the reasons we’ve felt this decade will see notably higher structural inflation than the last one.
The highlight of the week ahead will clearly be US CPI on Wednesday. The Fed goes into pre-FOMC blackout at the weekend and all this week’s Fedspeak will therefore be very closely watched as the committee are moving very rapidly at the moment towards an ever tightening bias in their commentary. Even the doves are coming over to the other side. Elsewhere we start US earnings season, albeit slowly and late in the week with some important financials reporting. In terms of other data, this week sees a slew of hard US data for December with PPI (Thursday) and retail sales and industrial production on Friday alongside consumer sentiment.
There’ll also be some interest in Fed Chair Powell’s nomination hearing for a second term as Fed Chair, which is taking place before the Senate Banking Committee tomorrow. There’ll also be Governor Brainard’s nomination hearing to become Fed Vice Chair, which is taking place on Thursday. Both positions do require Senate confirmation, although last time in January 2018 Chair Powell was confirmed by a large bipartisan majority of 84-13. So a formality but there might be a fair bit of probing of their leadership
Previewing US CPI, recent months have seen consistent upside surprises as inflation has increasingly broadened out, and it’s now the case that 7 of the last 9 CPI releases have seen the monthly headline increase come in above the consensus among economists on Bloomberg, which just demonstrates how this has taken a lot of people by surprise. In terms of what to expect this time round, our US economists are projecting that year-on-year inflation will move higher once again, with an increase to +7.0%, which would be the fastest pace of inflation since 1982, back when Ronald Reagan was in his first term as president. Interestingly though, they think we could be at a turning point with December marking the peak in the year-on-year readings. For more information, take a look at our economists’ inflation outlook (link here) .
As discussed, earnings season will slowly get going this week, with a number of US financials among those reporting. The highlights include Delta Air Lines on Thursday, before we hear from Citigroup, JPMorgan Chase, Wells Fargo and BlackRock on Friday.
Boeing Jumps On First Positive Cash Flow Since 2019 Despite Another Huge 787 Charge
Boeing Jumps On First Positive Cash Flow Since 2019 Despite Another Huge 787 Charge
It was another painful quarter for Boeing, which reported revenue and earnings both of which missed expectation amid mounting 787 Dreamliner losses which…
It was another painful quarter for Boeing, which reported revenue and earnings both of which missed expectation amid mounting 787 Dreamliner losses which amounted to another $3.5 billion in pre-tax non-cash charge s (focused on actions required to resume deliveries) however a surprise boost in 737 Max output from 19 to 26 per month was welcome news as was the unexpected end of the company's chronic cash burn as Boeing reported its first positive free cash flow since early 2019.
First, this is what Boeing reported for Q4:
- Revenue $14.79 billion, -3.2% q/q, -3.3% y/y, missing estimates $16.67 billion (Bloomberg Consensus)
- Core loss per share of ($7.69), on the continued Dreamliner charges, which was an "improvement" from the whopping ($15.25) reported but clearly missed estimates of (0.42).
If the massive Q4 charge was not enough, Boeing now sees 787-Related abnormal costs about $2B, above from the $1BN it had seen previously. The company said that it continues to perform rework on 787 in inventory and is focused on actions required to resume 787 deliveries.
Remarkably, as the following table from Boeing's earnings release shows, pretty much every Y/Y comparison is NM, which should tell you all you need to know about the company's headline financials.
And a prettier rendering:
Looking at revenue we get the following disappointing picture:
- Commercial Airplanes revenue $4.75 billion, +0.5% y/y, missing estimates $5.50 billion
- Defense, Space & Security revenue $5.86 billion, -14% y/y, missing estimate $6.85 billion
- Global Services revenue $4.29 billion, +15% y/y, beating estimate $4.18 billion
- Boeing Capital operating earnings $7 million, missing the estimate $24.4 million
- Total commercial planes deliveries 99, +68% y/y, missing the estimate 102.36
- Backlog $377 billion, +3.9% y/y
Adding insult to injury, the planemaker reported $5.5 billion in total costs to cover rising factory and customer expenses for the Dreamliner. Boeing took write-offs on the KC-46 aerial tanker and the global services division as well. As Bloomberg notes,
the 787 program’s profits have been wiped out as Boeing pays airlines for service they’ve lost because of delivery disruptions. The company hasn’t handed over any Dreamliners since June as it addresses structural imperfections on the roughly 100 aircraft in its system.
“This effort continues to impact our deliveries and our financial results -- but we are fully confident it is the right thing to do,” Calhoun’s memo said. “I view the financial impacts of this work as a long-term investment in a program that has significant runway ahead.”
It wasn't all bad news, however, as Boeing announced it is hiking the output of the 737 to 26 jets a month, up from 19 in October, Chief Executive Officer Dave Calhoun said in a note to employees. That was taken by the market as a sign the planemaker may be turning around its operations after burning through more than $31 billion during a nearly three-year-long slump marked by the Max’s grounding, the Covid-19 pandemic and a spate of quality lapses.
Looking ahead, Boeing said it still expects passenger traffic to return to 2019 levels in 2023 to 2024, and said that commercial recovery is broadening as regional dynamics continue to evolve driven by COVID-19. It also said says increasing 777/777X production rate to 3 per month in 2022.
But the biggest positive surprise was the company's announcement that in Q4, it generated $494 million in fourth-quarter free cash flow, up from a cash burn of over $4.2 billion a year ago; analysts had expected an outflow of about $1 billion.
This was the first positive FCF from Boeing since Q1 2019. It also meant that operating cash flow of $716 million as beat estimates of negative $429.0 million and was far above the negative $4.01 billion reported a year ago.
"2021 was a rebuilding year for us as we overcame hurdles and reached key milestones across our commercial, defense and services portfolios. We increased 737 MAX production and deliveries, and safely returned the 737 MAX to service in nearly all global markets. As the commercial market recovery gained traction, we also generated robust commercial orders, including record freighter sales. Demonstrating progress in our overall recovery, we also returned to generating positive cash flow in the fourth quarter," said David Calhoun, Boeing President and Chief Executive Officer.
"On the 787 program, we're progressing through a comprehensive effort to ensure every airplane in our production system conforms to our exacting specifications. While this continues to impact our near-term results, it is the right approach to building stability and predictability as demand returns for the long term. Across the enterprise, we remain focused on safety and quality as we deliver for our customers and invest in our people and in our sustainable future."
Also notably, the company which has been flirting with junk status for the past two years, managed to reduce its gross debt load again, even if its net debt remained unchanged as the entire reduction came at the expense of cash on hand.
Boeing shares ignored the latest huge 787 charge and operating loss and instead focused on the positive free cash flow and improvement in 737 MAX output, and rose 2% premarket. The shares gained 1.4% this year through Tuesday, while the Dow Jones Industrial Average dropped 5.6%.
Benchmark called Q4 a “kitchen sink” quarter, and noted that the Max production schedule was progressing, which is the main focus for analysts and investors.
The company's Q4 investor presentation is below (pdf link)
Stock Market Today: Dow Jones, S&P 500 Rebounds; Microsoft Rebounds Ahead Of FOMC Meeting
Investors are eagerly waiting for the Federal Reserve policy-setting meeting.
The post Stock Market Today: Dow Jones, S&P 500 Rebounds; Microsoft Rebounds Ahead Of FOMC Meeting appeared first on Stock Market News, Quotes, Charts and Financial Informat
Stock Market Today Mid-Morning Updates
On Wednesday, the Dow Jones Industrial Average is up by 380 points after yet another steep decline yesterday. Investors are anticipating the Federal Reserve’s press conference about its tightening plans after its two-day Federal Open Market Committee (FOMC) meeting. This is in the hopes that the Fed will reassure the markets on its outlook for monetary policy. Anticipation over a pullback in Federal Reserve stimulus has left the stock market in a volatile state.
It also sets the stage for the central bank policy-setting meeting this week. Although the Fed has signaled that it will likely raise rates multiple times this year, the first post-pandemic rate increase is not expected this week. Instead, the FOMC policy-setting will outline the higher rates coming in its March meeting. “It really is time for us to begin to move away from those emergency pandemic settings to a more normal level,” Fed Chairman Jerome Powell told Congress two weeks ago, adding that “2022 will be the year in which we take steps toward normalization.”
Among the Dow Jones leaders, shares of Apple (NASDAQ: AAPL) are up 1.24% today while Microsoft (NASDAQ: MSFT) is also up by 4.69%. Home Depot (NYSE: HD) and Nike (NYSE: NKE) ticked higher on Wednesday as well. Among the Dow financial leaders, Visa (NYSE: V) and Goldman Sachs (NYSE: GS) are trading higher at 2.66% and 2.08% respectively.
Shares of electric vehicle (EV) leader Tesla (NASDAQ: TSLA) are up by 3.06% on Wednesday. Rival EV companies like Rivian (NASDAQ: RIVN) and Lucid Group (NASDAQ: LCID) are also up by 4.45% and 0.28% today. Chinese EV leaders like Li Auto (NASDAQ: LI) and Xpeng Motors (NYSE: XPEV) are also trading higher at 3.26% and 2.34% respectively.
Dow Jones Today: Indicators Could Point To A March Interest Rate Hike
Following the stock market opening on Wednesday, the S&P 500, Dow Jones, and Nasdaq are trading 1.80%, 1.36%, and 2.31% higher. Among exchange-traded funds, the Nasdaq 100 tracker Invesco QQQ Trust (NASDAQ: QQQ) is up by 2.05% on Wednesday, while the SPDR S&P 500 ETF (NYSEARCA: SPY) is also up by 1.77%.
The 10-year Treasury yield dipped to around 1.77% early on Wednesday after the benchmark yield topped 1.9% highs since January 2020. With inflation persisting over the last few months, how the Fed plans to further combat it will be the focus of investors today as the central bank releases its policy statement at 2:00 p.m. ET. Chairman Jerome Powell will hold his post-meeting news conference at 2:30 p.m. ET.
U.S. Auto Sales Expected To Dip In January
Today, consultants J.D. Power and LMC Automotive say that U.S. auto retail sales are expected to dip. This is due to reduced manufacturing from the Omicron variant, supply chain constraints, and global inflation that caused prices to soar amid high demand. They expect retail sales of new vehicles to fall 8.3% to 828,900 units from a year earlier.
“The volume of new vehicles being delivered to dealerships in January has been insufficient to meet strong consumer demand, resulting in a significantly diminished sales pace,” said Thomas King, president of the data and analytics division at J.D. Powers. With consumer demand skyrocketing in recent months, new vehicle prices could continue to go up.
Boeing Posts Positive Cash Flow Despite Massive Miss On Earnings Estimates
On the earnings front today, we have Boeing (NYSE: BA) reporting in. To begin with, the aerospace giant posted a loss per share of $7.69 on revenue of $14.8 billion. Now, at face value, some would argue that these figures are less-than-desirable. For some perspective, this is versus Wall Street’s estimates of a loss of $0.42 a share on revenue of $16.59 billion. All of this adds up to make for Boeing’s third annual loss in a row amidst pandemic and production problems. For this quarter, its losses are likely due to Boeing taking a $3.5 billion charge on its 787 Dreamliners. This charge would be from production issues preventing the firm from delivering aircraft for the past 15 months.
However, there is one positive point from this earnings call. That is, Boeing was able to generate a positive cash flow in its latest quarter. Notably, this is a major milestone for the firm as the last time it did so was before the pandemic. According to Boeing, a key growth driver contributing to this would be the deliveries of its 737 Max airliner. As demand for air travel did pick up over the previous quarter, this is not all that surprising.
According to CEO David Calhoun, the company sees 2021 as a “key rebuilding year.” Following this, Calhoun says, “I am confident that we are well-positioned to accelerate our progress in 2022 and beyond.” The real question now is whether investors should jump on BA stock which is trading lower by 1.28% today.
Microsoft Shares Jump On Earnings Beat And Notable Strength In Cloud Business
At the same time, Microsoft seems to be on the other end of the spectrum from Boeing. In its latest quarterly earnings update yesterday, the company saw green across the board. Namely, it raked in a total revenue of $51.73 billion for the quarter, topping estimates of $50.88 billion.
This would indicate a record high for Microsoft alongside it crossing the $50 billion revenue mark for the first time. Also, the leading productivity software firm posted an earnings per share of $2.48, beating forecasts of $2.31. In terms of year-over-year comparisons, revenue and net income increased by 20% and 21% respectively. As a result of all this, MSFT stock is currently trading higher by 4.69% today.
More importantly, according to CFO Amy Hood, the company has and continues to see strength across its core services. Among its top-performing divisions would be its cloud computing arm, Microsoft Azure. The likes of which posted a revenue jump of 46% year-over-year. After considering all of this, investors appear to be keen on MSFT stock now. Even Dan Ives, managing director at Wedbush Securities says, “We’re buyers here all day long,” referring to the company’s shares.
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First Helium Licenses Second Exploration Well at Worsley
TSXV: HELI FRA: 2MC Drilling of the "4-29" Well Planned for Mid-February First Helium Inc. ("First Helium" or the "Company") (TSXV: HELI) (FRA: 2MC), today announced that it has received its license from the Alberta Energy Regulator ("AER")…
TSXV: HELI FRA: 2MC
Drilling of the "4-29" Well Planned for Mid-February
First Helium Inc. ("First Helium" or the "Company") (TSXV: HELI) (FRA: 2MC), today announced that it has received its license from the Alberta Energy Regulator ("AER") to drill its second exploration well, the " 4-29 ", which is located on First Helium's 100% owned, 79,000 acre Worsley landholdings in Northern Alberta, Canada . The Company expects to begin drilling operations in mid-February, 2022.
"Identified by a comprehensive 3D seismic study, the "4-29" well location at Worsley will be drilled as a follow up to our successful 1-30 well, targeting multiple helium gas horizons and potential oil accumulations," said Ed Bereznicki , President & CEO of First Helium. "Drilling 4-29 is an opportunity to build on the strong results from the 15-25 and 1-30 discovery wells, which collectively represent significant growth potential and underlying asset value to First Helium shareholders."
The 4-29 well is located near the Company's 1-30 light oil discovery well, and approximately 3 km SE of the 15-25 helium well on the core Worsley Property. A geologic and seismic review of the region suggests that like the 1-30 and 15-25, the 4-29 prospect presents as a structural high on the Leduc Reef Complex.
The 1-30 light oil discovery well tested at approximately 419 barrels of 35 degree API light oil over 3 days and is expected to be brought on-stream in early February at approximately 400 barrels per day.
The 15-25 was most recently tested last month to contain 1.3% helium content based on a 10-day flow period at 2 million cubic feet per day of raw gas. The raw gas stream is comprised of approximately 65% natural gas, which will be produced along with the helium gas, sold to market and also used to generate power for facility operations.
The 1-30 Leduc well was drilled based on a detailed 3D seismic evaluation of the Worsley Property. The results confirm the Company's geologic model for the area. Based on the Company's assessment of economic Leduc wells along the Worsley Trend, approximately 20% have been light oil producers, the balance have been natural gas producers containing potential economic helium content. A detailed geological and geophysical evaluation of the Company's lands in the vicinity of the 15-25 well, the 1-30 well, and along the broader Worsley Trend has yielded additional compelling drill targets. First Helium will incorporate the results from the drilling and testing of the 4-29 well to strategically pursue new drilling locations across the highly prospective, 90 km wide Worsley Trend.
ABOUT First Helium
Led by a core Senior Executive Team with extensive backgrounds in Oil & Gas Exploration and Operations, Mining, Finance, Capital Markets and public junior growth companies, First Helium seeks to be one of the leading independent providers of helium gas in North America .
Building on its successful 15-25 helium discovery well at the Worsley project, the Company has identified numerous follow-up drill locations and acquired an expansive infrastructure system to facilitate future exploration and development of helium across its Worsley land base. Future cash flow from its successful 1-30 oil well at Worsley , anticipated to begin in Q1 2022, will help support First Helium's ongoing helium exploration and development growth strategy.
First Helium holds over 79,000 acres along the highly prospective Worsley Trend in Northern Alberta , and 276,000 acres in the Southern Alberta Helium Fairway, near existing helium production. In addition to continuing its ongoing exploration and development drilling at Worsley , the Company has identified a number of high impact helium exploration targets on the prospective Southern Alberta Helium Fairway lands to set up a second core exploration growth area for the Company.
For more information about the Company, please visit www.firsthelium.com .
ON BEHALF OF THE BOARD OF DIRECTORS
Edward J. Bereznicki
President, CEO and Director
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX) accepts responsibility for the adequacy or accuracy of this release.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This news release contains certain statements or disclosures relating to First Helium that are based on the expectations of its management as well as assumptions made by and information currently available to First Helium which may constitute forward-looking statements or information ("forward-looking statements") under applicable securities laws. All such statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results, or developments that First Helium anticipates or expects may or will occur in the future (in whole or in part) should be considered forward-looking statements. In some cases, forward-looking statements can be identified by the use of the words "expect", "will" and similar expressions. In particular, but without limiting the foregoing, this news release contains forward-looking statements pertaining to the timing and rate of production of the 1-30 discovery well; the timing of the completion of the construction and commissioning of an oil battery at 1-30; anticipated cash flows; the entering into of off-take marketing arrangements; the use of funds and the Company's strategy. The forward-looking statements contained in this news release reflect several material factors and expectations and assumptions of First Helium including, without limitation: that First Helium will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; availability of debt and/or equity sources to fund First Helium's capital and operating requirements as needed; and certain cost assumptions.
Forward-looking statements are based on estimates and opinions of management at the date the statements are made and are subject to risks, uncertainties and assumptions, including those set out in the Final Prospectus dated June 28, 2021 and filed under the Company's profile on SEDAR at www.sedar.com . Readers are cautioned that actual results may vary materially from the forward-looking statements made in this news release. Risks that could cause actual events or results to differ materially from those projected in forward-looking statements include, but are not limited to, risks associated with the oil and gas industry; the ability of First Helium to fund the capital and operating expenses necessary to achieve its business objectives; the impact of the COVID-19 pandemic on the business and operations of First Helium; the state of financial markets; increased costs and physical risks relating to climate change; loss of key employees and those risks described in the Final Prospectus dated June 28 , 2021. First Helium does not undertake any obligation to update forward looking statements, except as required by applicable securities laws. Investors should not place undue reliance on forward-looking statements.
SOURCE First Helium Inc.
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