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Futures Reverse Overnight Weakness, Surge To Record High

Futures Reverse Overnight Weakness, Surge To Record High

Despite a bevy of banks now warning that this is as good as it gets and a sharp market correction is imminent, nothing could spoil the markets party overnight, overnight we saw futures.



Futures Reverse Overnight Weakness, Surge To Record High

Despite a bevy of banks now warning that this is as good as it gets and a sharp market correction is imminent, nothing could spoil the markets party overnight, overnight we saw futures reverse a modest weakness and rebound back to all time highs as investors cheered solid earnings reports from companies including Bank of America and BlackRock and waited what should be a blockbuster retail sales report.

At 8:00 a.m. ET, Dow e-minis were up 161  points, or 0.47%, S&P 500 e-minis were up 22.25 points, or 0.56%, and Nasdaq 100 e-minis were up 114.75 points, or 0.83%.

“We are probably entering the last stage of the pricing of the growth acceleration, and we see encouraging signs suggesting the ‘reflationary’ environment can continue and be supportive for risky assets in the near term,” Goldman Sachs Group Inc. strategists led by Alessio Rizzi wrote in a note. “Across assets we continue to prefer equity over credit, and favor a pro-cyclical stance within equity.”

S&P 500 contracts rose 0.4% after the underlying index eased back from an all-time high on Wednesday. Bank of America Corp. and other financialstocks rose in the U.S. pre-market after the lender posted better-than-expected trading revenue. Meanwhile, BlackRock said its assets under management rose to a record $9 trillion in the first quarter, and reported a 16% jump in first-quarter profit as investors poured more money into its diverse funds and fee revenue jumped.

Top U.S. banks kicked off first-quarter reporting season on Wednesday, with Goldman Sachs Group Inc, JPMorgan Chase & Co and Wells Fargo & Co posting sold results largely thanks to massive reserve releases and solid trading revenue.

Most high-flying technology stocks rebounded from a drop in the previous session, with Apple Inc, Microsoft Corp Facebook Inc and Inc rising between 0.5% and 1%. The newly-listed cryptocurrency exchange Coinbase jumped 8.8%, a day after going public in a high-profile debut on the Nasdaq that briefly valued it at more than $100 billion.

European equities climbed as electrical power firm ABB Ltd. boosted its sales guidance and miners rallied. The ruble slid as the Biden administration looked poised to take action against Russian individuals and entities in retaliation for alleged misconduct related to the SolarWinds hack and the U.S. election.  Here are some of the biggest European movers today:

  • AB InBev shares jump as much as 5.4% after being upgraded to overweight at Barclays, which said the market’s expectations of margins declining in FY21 was “too pessimistic.” The broker added that AB InBev was the only beverage stock in coverage that could “theoretically double” during 2021.
  • Neste shares gain as much as 3.8% after UBS raised the stock to buy, saying the shares discount “an overly cautious” outlook for renewable products in the long term.
  • Publicis shares rise as much as 4.6% to their highest level in over two years as the ad firm reported 1Q revenue that beat estimates. Analysts praised its return to organic growth, with Citi saying that Publicis is “back to growth with a bang.”
  • Deutsche Wohnen shares gain as much as 6.8% after Germany’s top court struck down Berlin’s five-year rent freeze and restrictions forcing landlords to reduce prices, saying the city lacked the power to impose the rules.
  • ABB shares advanced as much as 4.1% as preliminary results came in above expectations. Handelsbanken said the stronger outcome in 1Q for operational Ebita increases its FY 2021 earnings outlook by 4.3%.
  • THG shares fall as much as 5.2% after the online retailer maintained recently upgraded FY ‘21 revenue growth guidance of +30% to +35% and signaled capital expenditure would be higher.
  • SEB shares decline as much as 1.8%, with the stock being cut to sell at Handelsbanken. The broker said it saw weak loan demand from corporates, but strong capital position.

Earlier in the session, Asian stocks gained, overcoming a midday dip, as a gauge of technology shares erased a loss and climbed. TSMC was the biggest boost to the MSCI Asia Pacific Index and Taiwan’s benchmark stock gauge, climbing into the close ahead of its results. The chipmaker beat profit expectations and raised its capex target for the year to $30 billion from a range of $25 billion to $28 billion. Japanese stocks rose as gains in the yen slowed and oil surged to the highest level in a month amid an increase in U.S. demand. China and Hong Kong stocks declined as the People’s Bank of China refrained from adding more liquidity into the banking system for a fourth month, seeking to contain rising leverage. Thailand’s stock market was closed for a holiday.

Chinese stocks fell on Thursday, after the central bank underlined its intention to contain leverage and pursue policy normalization by adding just enough cash to maintain medium-term liquidity. The CSI 300 Index pared an earlier 1.6% decline to close 0.6% lower, just above its 200-day moving average. Liquor giant Wuliangye Yibin lost 3% and Industrial Bank fell 3.9%, among the biggest drags. Hong Kong’s Hang Seng Index slid 0.4%. PBOC’s Cash Injection Disappoints Stock Traders Wanting More The PBOC injected 150 billion yuan ($23 billion) into the financial system on Thursday with its medium-term lending facility, slightly less than the 100 billion yuan in one-year policy loans and 56.1 billion yuan of targeted loans maturing on April 25.

Banks fell, with the CSI 300 Financial Index declining the most in three weeks. The PBOC’s stance on Thursday also suggests it isn’t concerned about possible contagion from the recent credit stress engulfing China Huarong Asset Management Co., one of the nation’s largest distressed-debt managers. The CSI 300 Index has lost 15% since climbing to a 13-year high in February, amid investor concerns about tighter monetary policy as the economy recovers. The “PBOC’s operation confirmed the relative pessimistic expectations,” said Wang Chen, partner at XuFunds Investment Management Co., noting that it had a negative impact on the market

In rates, treasuries hold gilt-led gains accumulated during European morning, leaving long-end yields richer by ~2bp, amid gains for stock futures. U.S. 10-year, lower by 1.8bp at 1.615%, trails gilts by ~1bp with bunds broadly in line; curve flattens, with 2s10s tigher by 1.5bp, 5s30s by 0.7bp. Asia session featured choppy price action on low volume, with some focus on front-end buying following Credit Suisse analyst Zoltan Pozsar’s call for limited year-end funding pressures. U.S. economic data slate includes retail sales and industrial production. 

In FX, the Bloomberg Dollar Spot Index fell to a day low in the European session as the greenback fell against all of its Group- of-10 peers while the 10-year Treasury yield neared a three-week low. Commodity currencies, led by the kiwi and Aussie, were the top performers; the yen held its strongest level in three weeks. The euro rose to a six-week high of $1.1993 before erasing the move; options that capture the ECB monetary policy decision on April 22 suggest market makers see no big risk of a strong pick up in volatility. The pound traded in a narrow range, lacking a clear catalyst as concerns grow that its early year outperformance has run out of steam. The Australian dollar rebound in the European session; it earlier retreated after a decline in the number of full-time jobs took the shine off the nation’s March employment data. Russian bonds sank the most since March last year and the ruble tumbled as the U.S. prepared to unveil sanctions on Russian sovereign debt, the so-called “nuclear option” that has dimmed investor appetite for the market for years.

Elsewhere, Bitcoin was steady and Coinbase Global Inc. climbed 9.4% in pre-market trading following news that three funds at Cathie Wood’s Ark Investment Management bought shares. Oil declined after Wednesday’s surge.

Looking at the day ahead, there’s an array of data out from the US including March retail sales, industrial production and capacity utilisation. In addition, there’s the weekly initial jobless claims, and April data on the Empire State manufacturing survey, the Philadelphia Fed business outlook and the NAHB housing market index. Otherwise, Fed speakers include Bostic, Daly and Mester, and there are an array of earnings releases including UnitedHealth Group, Bank of America, PepsiCo, Citigroup, Charles Schwab, BlackRock and Delta Air Lines.

Market Snapshot

  • S&P 500 futures up 0.4% to 4,135.50
  • STOXX Europe 600 up 0.33% to 438.03
  • MXAP up 0.3% to 207.85
  • MXAPJ up 0.3% to 692.58
  • Nikkei little changed at 29,642.69
  • Topix up 0.4% to 1,959.13
  • Hang Seng Index down 0.4% to 28,793.14
  • Shanghai Composite down 0.5% to 3,398.99
  • Sensex down 0.2% to 48,428.51
  • Australia S&P/ASX 200 up 0.5% to 7,058.62
  • Kospi up 0.4% to 3,194.33
  • Brent Futures down 0.7% to $66.14/bbl
  • Gold spot up 0.5% to $1,745.45
  • U.S. Dollar Index little changed at 91.64
  • Euro little changed at $1.1984
  • German 10Y yield down 1bp to -0.27%

Top Overnight News from Bloomberg

  • The Biden administration is poised to take action against Russian individuals and entities in retaliation for alleged misconduct including the SolarWinds hack and efforts to disrupt the U.S. election, according to people familiar with the matter
  • The number of U.K. online job advertisements returned to levels seen before the Covid-19 pandemic for the first time last week, a tentative sign of recovery after economy’s worst slump in three centuries
  • Global bond demand appears to be reviving with the latest sign being a splurge by Japanese investors at the start of their fiscal year. Funds based in the Asian nation snapped up 1.7 trillion yen ($15.6 billion) in overseas fixed- income assets in the first full week of April, the most in five months, according to data released by the Ministry of Finance. That may set the tone for strategy briefings by local insurers this month
  • Anyone hoping Libor’s death notice would accelerate the shift of hundreds of trillions of dollars worth of derivatives toward replacement benchmarks will be sorely disappointed. In the U.S, just 4.7% of contracts traded in March were pegged to the Secured Overnight Financing Rate, or SOFR, the benchmark slated to replace the London interbank offered rate, down from 5% in February
  • Installed after Turkey’s President Recep Tayyip Erdogan abruptly fired his predecessor following a bigger-than-expected rate increase, central bank Governor Sahap Kavcioglu is under pressure to reduce rates but has so far signaled he would not rush to loosen the stance he inherited
  • The U.S. canceled plans to send two warships through Turkish straits into the Black Sea this week, Turkish Foreign Minster Mevlut Cavusoglu said Thursday, after Russia warned American vessels to stay away from a coastal region it annexed in 2014
  • The direct listing of Coinbase Global Inc. on Nasdaq is a turning point for the whole cryptocurrency sector, according to the firm’s Chief Executive Officer Brian Armstrong

Quick look at global markets courtesy of Newsquawk

Asian equity markets were cautious after the choppy performance stateside where there was a reversal of fortunes among the major indices from the day before in which the S&P 500 and Nasdaq finished negative amid underperformance in tech. Conversely, the DJIA bucked the trend and notched a fresh record high with energy the biggest gaining sector after oil prices rallied by more than 4% and financials remained afloat despite mixed trade among the blue-chip banks which kick-started earnings season. ASX 200 (+0.5%) swung between gains and losses as pressure in tech and an initially subdued financials sector were offset by energy and mining names, with participants also mulling over updates from the likes of Bank of Queensland, Qantas and Whitehaven Coal. Nikkei 225 (+0.1%) also lacked firm direction amid an indecisive currency and as Japan considers stricter COVID-19 measures for areas surrounding Tokyo, while KOSPI (+0.3%) was kept afloat after a lack of surprises by the BoK which kept rates unchanged at 0.50% and noted uncertainties for growth are high but added the recovery will continue on exports and investment. Hang Seng (-0.4%) and Shanghai Comp. (-0.5%) underperformed as tensions between US and China lingered amid the US delegation visit to Taiwan and with China’s military to conduct live-fire drills off Taiwan which is viewed as a ‘declaration of sovereignty’ and warning to foreign nations, while China's top official in Hong Kong also warned that any foreign power which attempts to use Hong Kong as a pawn will face counter measures. Furthermore, the PBoC announced a CNY 150bln 1-year MLF operation although this failed to spur risk appetite and is expected to result to net drain for the month as there were CNY 100bln of MLF maturing today and CNY 56bln of targeted MLF loans due next week. Finally, 10yr JGBs were flat as prices held on to yesterday’s gains amid the non-committal tone seen across most the regional bourses, while the firmer demand at then enhanced liquidity auction for long-end JGBs failed to inspire price action

Top Asian News

  • TSMC Lifts Targets After Warning Chip Crunch May Spill Into 2022
  • Hong Kong Widens Vaccine Access to Residents Ages 16 And Up
  • TSMC Raises 2021 Capex, Sales Growth Outlook
  • ByteDance Is Said to Kick Off IPO Preparations for China Assets

Major bourses in Europe eke mild gains (Euro Stoxx 50 +0.2%) after experiencing somewhat of a lukewarm cash open as sentiment is seemingly more constructive following a cautious and indecisive APAC lead. US equity futures meanwhile see more pronounced gains following the reversal seen on Wall Street yesterday - with the cyclically-driven RTY (+1.0%) outpacing peers - whilst the next wave of US earnings gets underway; for reference, Bank of America, Citi, Delta, UnitedHealth, BlackRock and PepsiCo are on the docket. Back to Europe, the FTSE 100 (+0.6%) has thus far maintained a narrow lead as heavyweight oil and mining names reap rewards from the higher crude and base metal prices, whilst broad-based gains are seen across Euro bourses. Sectors in Europe kicked off trade with a more procyclical tilt, but that earlier bias dissipated with no theme to be derived. Energy and Financials lag amid recent losses in
the oil/gas and yields. The sectoral breakdown does not provide much by way more meat on the bones, but the tech sector bodes well following upbeat earnings from chip-giant TSMC, who also sees chip demand continuing to be high and the chip shortage maybe lasting into 2022. The Travel & Leisure sectors has also waned alongside commentary from the German Health Minister who stated it will take until Q3 for group immunity from COVID in Germany. In terms of individual movers, AB InBev (+4.5%) leads the gains in the Stoxx 600 as the a broker upgrade at Barclays bolstered the Co., whilst Publicis (+3.8%) is a close second amid a constructive Q1 sales update. Meanwhile, Deutsche Wohnen (+4%) and AroundTown Properties (+1.1%) derived impetus from reports a German Court has ruled that the Berlin rent cap is invalid.

Top European News

  • Berlin’s Rent Freeze Toppled Ending Aggressive Housing Clampdown
  • DNB, Norway’s Biggest Bank, Offers $1.3 Billion for Sbanken
  • Deliveroo CEO Shu Pins Weak IPO on Volatility, Archegos Fallout
  • German Institutes Cut 2021 Economic Outlook on Longer Lockdowns

In FX, the Dollar is holding in, albeit remaining soft against most major counterparts and several EM rivals as the DXY pares some losses within a 91.487-704 range. US Treasury and other bond yields are softening again awaiting a relatively busy docket including top-tier data, regional Fed surveys and 4 speakers, while the Greenback is also striving to stay above certain psychological and technical levels amidst decent option expiry interest.

  • NZD/AUD: Both still gleaning more than most from Buck weakness, but the Kiwi also benefiting from further retracement in the Aud/Nzd cross post-RBNZ and in wake of a somewhat mixed Aussie labour report overnight, as the headline employment change exceeded expectations 2-fold, but was all due to part-time workers given a near 21k fall in the number of full time jobs. Nzd/Usd is hovering towards the upper end of 0.7135-80 parameters, with Aud/Nzd testing 1.0800 and Aud/Usd trying to clear resistance around 0.7750 convincingly, but also facing a formidable hurdle in the form of 1.1 bn option expiries from the half round number up to 0.7765. Ahead, NZ manufacturing PMI and more Chinese data after conflicting trade earlier this week.
  • CAD: The next best G10 performer as the Loonie reclaims 1.2600+ status vs its US peer awaiting Canadian manufacturing sales for some independent impetus rather than ADP payrolls that are now pretty outdated, if not redundant in wake of last Friday’s blowout official employment release.
  • JPY/GBP/EUR: Also firmer against the Dollar with the Yen nearer 108.70 than 109.00 where the start of some hefty option expiry interest resides stretching up to 109.25 (2 bn from 109.00-10 and 1 bn between 109.15-25 to be precise), Sterling eyeing 1.3800 vs a 1.3765 low and the Euro looking at 1.2000 next despite ongoing COVID-19 concerns across the Eurozone that have prompted Germany’s Economic Institutes to downgrade their 2021 GDP forecast to 3.7% from 4.7%, though raising next year’s growth estimate to 3.9% from 2.7% at the same time. Note also, Eur/Usd has option expiries to contend with as 1.9 bn roll off at the NY cut between 1.1975-60, so covering the 1.1970 trough.
  • CHF: The Franc is straddling 0.9225 and 1.1055 against the Greenback and Euro respectively in the run up to speeches from SNB’s Maechler and Moser on the pandemic, financial markets and digital transformation that is likely to reinforce standard policy guidance if either Board member make remarks on negative rates and currency intervention.

In commodities, WTI and Brent front-month futures are again experiencing choppy price action heading into the US open with no particular catalyst attributed to the price action. That being said, the energy market attempts to juggle several factors including the resurgence of the virus in some economies, the limited vaccine rollouts amid blood clot reports, OPEC+ supply and geopolitical developments. Some earlier weakness in oil prices coincided with commentary from the German Health Minister who stated it will take until Q3 for group immunity, which translates to a slower pickup in domestic activity, but more-so a slower recovery in air travel. In terms of geopolitical developments, Saudi Aramco facilities were again targeted by Houthi militia - but Saudi reportedly intercepted these attacks. Elsewhere, eyes remain on the Russia /Ukraine tensions as rhetoric ramps up, with Ukraine laying out its red lines - the crossing of the border - which could prompt a military response. Meanwhile, China is poised to conduct military drill during US' visit to Taiwan. Further, participants will also be eyeing the JCPOA talks that are set to continue today as Iran gets closer to developing  weapongrade uranium. WTI Jun is back below USD 63/bbl (vs high USD 63.50/bbl) whilst Brent loses ground below USD 66.50 /bb (vs high 65.96/bbl). Elsewhere, spot gold and silver benefit from the softer Buck with the former meandering just under the USD 1,750/oz (vs low USD 1,734/oz) mark with technicians citing a double-top at 1,749/oz. Turning to base metals, LME copper is benefitting from the broader gains across stocks, and the softer Buck, with prices comfortably back above USD 9,000/t.

US Event Calendar

  • 8:30am: March Retail Sales Ex Auto and Gas, est. 6.4%, prior -3.3%
  • 8:30am: April Continuing Claims, est. 3.7m, prior 3.73m
  • 8:30am: March Retail Sales Control Group, est. 7.2%, prior -3.5%
  • 8:30am: March Retail Sales Ex Auto MoM, est. 5.0%, prior -2.7%
  • 8:30am: April Initial Jobless Claims, est. 700,000, prior 744,000
  • 8:30am: April Philadelphia Fed Business Outl, est. 41.5, prior 51.8
  • 8:30am: March Retail Sales Advance MoM, est. 5.8%, prior -3.0%
  • 8:30am: April Empire Manufacturing, est. 20.0, prior 17.4
  • 9:15am: March Capacity Utilization, est. 75.6%, prior 73.8%
  • 9:15am: March Manufacturing (SIC) Production, est. 3.6%, prior -3.1%
  • 9:15am: March Industrial Production MoM, est. 2.5%, prior -2.2%
  • 9:45am: April Langer Consumer Comfort, prior 51.9
  • 10am: Feb. Business Inventories, est. 0.5%, prior 0.3%
  • 10am: April NAHB Housing Market Index, est. 84, prior 82
  • 4pm: Feb. Total Net TIC Flows, prior $106.3b

DB's Jim Reid concludes the overnight wrap

Global markets are a bit dull at the moment but a lively listing from Coinbase turned another grind higher into a small risk-off session later in US trading. The S&P 500 (-0.41%) fell back from its record highs due to the underperformance of technology stocks after the Coinbase reversal (after a blistering start) and as global yields rose slightly.

Even with the marginal pullback, financial conditions are the most benign in years by some metrics, with Bloomberg’s index of financial conditions in the US easing to its most accommodative level since 2007 yesterday, which just shows how rapidly things have normalised relative to how long it took after the GFC. For comparison’s sake it took until the latter part of 2014 for the index to approach pre-GFC levels.

The turn lower in technology stocks seemed to coincide with a pullback in the new Coinbase direct listing, which at one point valued the cryptocurrency exchange at around $112bn. This was when it traded at $429 after being launched at $250 on the NASDAQ exchange. It eventually closed at $328.28. As a reference point companies around a $110bn market value in the US include Goldman Sachs ($119bn), Lockheed Martin ($108bn), and 3M ($114bn). That’s how big Bitcoin has become.

With technology shares falling back, cyclicals outperformed yesterday led primarily by the energy sector (+2.91%) as WTI futures rose +4.94% and Brent crude added +4.57%. The rally in oil prices came after a larger-than-expected draw on crude inventories. Much of the weakness in risk assets came in the latter part of US trading, and so the STOXX 600 (+0.19%) and other European bourses were able to hold on to their marginal gains.

Elsewhere in cyclicals, largely positive earnings for US financials saw earnings season start in earnest. Three of the largest US banks reported yesterday morning. JPMorgan (-1.75%) started off the cycle and reported a +49% beat on EPS at $4.5/share. Trading revenue climbed 25% even as expectations were for lower volumes across the market. The higher trading numbers were dimmed by lower loan demand, but the bank had a larger-than-expected reserve release as the lender did not see as much loan losses coming in the future. In the ensuing conference call, bank executives noted that many of the bank’s clients seem to be saving or paying down debt with the recent stimulus checks rather than going out and spending it. Goldman Sachs (+2.31%) saw a record profit last quarter on the back of strong trading and deal-making, with the firm’s SPAC business boosting equity underwriting revenues by over 300%. Lastly Wells Fargo (+5.63%) rose strongly as Q1 net income increased to $4.7bn, aided by a larger-than-expected release of loan-loss reserves, even as net interest income was lower than expected. The bank’s CEO noted on the conference call that the lower-for-longer rates will continue to drag on earnings. ‘

In addition, we heard from Fed Chair Powell, who took part in a moderated discussion sponsored by the Economic Club of Washington late in the US session. Chair Powell spoke about the order of operations when it comes to tightening financial conditions and said the Fed would follow the 2013-2014 blueprint, where asset purchases were tapered “well before” any interest rate hikes were considered. Powell noted that the FOMC, “haven't voted on that order, but that is the sense of the guidance that it would work in that way.” He noted that there also has been no discussion of whether the Fed would then shrink the balance sheet – by letting bonds mature – after additional purchases were paused. When speaking on market pricing, Powell noted that “Markets focus too much on what we call the economic predictions, and I would focus more on the outcomes that we’ve described” – pointing specifically to job creation and price levels.

His counterpart in Europe, ECB President Lagarde spoke at a Reuters Newsmaker event yesterday as well. She described the European economy as still standing on the “two crutches” of monetary and fiscal policy and that neither should be removed until there is a full recovery. The comments come ahead of the ECB meeting next week, which is the first since they increased the pace of the Pandemic Emergency Purchase Programme (PEPP) to slow the surge in bond yields and keep credit cheaper for member governments.

Even before Powell had begun speaking sovereign bond yields had moved higher, and actually 10yr US Treasuries peaked (+3.4bps) just prior to the Fed Chair’s comments before ending up +1.8bps at 1.632%, with inflation expectations (+2.2bps) increasing even as real yields (-0.4bps) fell back slightly. Europe saw more noticeable moves, with yields on bunds (+3.4bps), OATs (+3.4bps) and BTPs (+4.6bps) rising as well.

Asian markets are trading mixed this morning with the Nikkei (+0.10%) and Kospi (+0.38%) up while the Hang Seng (-0.96%) and Shanghai Comp (-1.18%) are losing ground. The underperformance of the Shanghai Comp comes as the PBOC injected CNY 150bn into the financial system which is just enough to offset CNY 100bn due today and CNY 56.1bn of targeted loans maturing on April 25. This came short of expectations as sales of government bonds are forecast to accelerate and banks are assisting corporate clients in paying taxes. Outside of Asia, futures on the S&P 50 are up +0.13% while European ones are pointing to a mixed open with those on the Stoxx 50 (-0.15%) and Dax (-0.09%) trading weak but with FTSE 100 futures up +0.13%.

On the pandemic, the rise in the global case count has shown no sign of abating, with John Hopkins data showing that the number of confirmed cases rose by over 5m in the week through Tuesday. That’s the first time the weekly increase has been above 5m since mid-January and is a sizeable reversal from the recent low in mid-February, when cases were rising by “only” 2.5m a week. India has been one of the worst affected, and only yesterday reported another record 200,739 new cases, according to India’s Health Ministry data. Iran also reported a record 25,582 new cases yesterday. Some areas of the US are also in serious difficulty right now, with Michigan experiencing a major surge in new cases (70 cases per 100k people), and numerous states are experiencing rising caseloads, albeit not to the same extent. Elsewhere, Japanese daily Jiji cited Toshihiro Nikai, the secretary general of the ruling Liberal Democratic Party, as saying that the Tokyo Olympics could be cancelled if it was determined to be impossible to hold the Games.

There were some further developments on the vaccine front, as Denmark became the first EU country to drop the use of the AstraZeneca vaccine permanently from its rollout. This follows a number of countries restricting its usage to various age categories in the aftermath of blood clotting incidents. Meanwhile on the Johnson & Johnson vaccine, which the US has recommended be paused, the European Medicines Agency separately confirmed that they expected to issue a recommendation on the vaccine next week. In more positive news however, European Commission President von der Leyen said that 50m extra doses of the Pfizer/BioNTech vaccine would arrive in Q2, having previously been foreseen for Q4. In turn, this will take the total number of doses from Pfizer/BioNtech to 250m in Q2.

It was a fairly quiet day on the data side yesterday ahead of today’s more notable releases, but we did get Euro Area industrial production for February, which fell by -1.0% in February (vs. -1.3% expected). Otherwise, the US import price index in March rose by +1.2% month-on-month (vs. +0.9% expected), while the export price index also rose by a stronger-than-expected +2.1% (vs. +1.0% expected).

To the day ahead now, and there’s an array of data out from the US including March retail sales, industrial production and capacity utilisation. In addition, there’s the weekly initial jobless claims, and April data on the Empire State manufacturing survey, the Philadelphia Fed business outlook and the NAHB housing market index. Otherwise, Fed speakers include Bostic, Daly and Mester, and there are an array of earnings releases including UnitedHealth Group, Bank of America, PepsiCo, Citigroup, Charles Schwab, BlackRock and Delta Air Lines.

Tyler Durden Thu, 04/15/2021 - 08:30

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Rates, The Dollar, & The Fed’s Dis-Inflationary Dilemma

Rates, The Dollar, & The Fed’s Dis-Inflationary Dilemma

Authored by Lance Roberts via,

As we move into the second half of 2021, interest rates and the dollar continue to shape the outlook.

Of course, much of…



Rates, The Dollar, & The Fed's Dis-Inflationary Dilemma

Authored by Lance Roberts via,

As we move into the second half of 2021, interest rates and the dollar continue to shape the outlook.

Of course, much of the debate focuses on whether rates and the dollar continue to miss the bigger picture. For example, just recently, Jim Bianco tweeted a critical point.

However, while I very much respect his opinion, I am not sure I entirely agree. Such is where the analysis of rates and the dollar suggests a different story.

The Inflation Premise

We previously discussed that inflation might indeed be more transitory given the drivers of increased prices were artificial. (i.e., stimulus, semi-conductor shortages, and pandemic-related shutdowns.) To wit:

“Inflation is and remains an always ‘transient’ factor in the economy. As shown, there is a high correlation between economic growth and inflation. As such, given the economy will quickly return to sub-2% growth over the next 24-months, inflation pressures will also subside.” 

“Significantly, given the economy is roughly comprised of 70% consumption, sharp spikes in inflation slows consumption (higher prices lead to less quantity), thereby slowing economic growth. Such is particularly when inflation impacts things the bottom 80% of the population, which live paycheck-to-paycheck primarily, consume the most.”

However, another important factor behind inflationary pressures is an individual’s actions. As noted last week by Société Générale’s Albert Edwards:

“Surveys suggest that inflation fears have become investors’ number one concern. But why look at it that way? We could equally say it is investors’ own bullishness on the strength of this economic cycle that is driving prices sharply higher in the most cyclically exposed equity sectors and industrial commodities.”

Bloomberg’s John Authers discussed the same, noting a “reflexivity” to investors’ belief in rising inflation.

“In inflation, as in many other areas of economic life, perceptions can form reality, and that is certainly true of inflation. The University of Michigan monthly survey of consumers’ expectations perennially shows shoppers foreseeing more inflation than will in fact arrive. The important factor here is the direction of travel. If they are more worried about inflation, they will do more to guard against it, which will tend to push up prices.”

Psychological Inflation & China

Such is an important point, as Albert notes:

“When investors pile into commodities as an investment vehicle to benefit from rising inflation, they create substantial upstream cost pressures. Beyond the cascading effect of upstream commodity price pressures, headline CPIs are also quickly impacted as food and energy prices rip higher.”

In other words, investors cause inflation by their actions. However, this is where Albert keys in on another critical driver of inflation.

“In addition to this, the observation by investors that industrial commodity prices are rising only serves to reaffirm their belief about cyclical strength and rising inflation, most especially ‘Dr. Copper.” Many investors see copper as extremely sensitive to economic conditions.

The circular, or as George Soros terms it, ‘reflexive’ nature of financial markets makes them extremely vulnerable to being whipsawed. Yet because of the current extreme momentum, it would take a very heavy weight of evidence to convince this market to reverse direction.

We continue to highlight that commodity prices are at high risk of a major reversal because of the steep downturn in the Chinese Credit Impulse. We have highlighted this before and we are not alone. Julien Bittel of Pictet Asset Management posted the following chart.”

“When commodity prices do start to fall, expect a major reversal in inflation sentiment. Furthermore, expect momentum to become as self-reinforcing and reflexive on the way down just as it was on the way up.”

As we discussed previously, this is something the bond market already expects.

What Rates Are Saying About Inflation

While investors expect surging inflation, the bond market continues to price in weaker future economic growth. As noted in “No, Bonds Aren’t Over-Valued.”

“The correlation between rates and the economic composite suggests that current expectations of sustained economic expansion and rising inflation are overly optimistic. At current rates, economic growth will likely very quickly return to sub-2% growth by 2022.”

Note: The “economic composite” is a compilation of inflation (CPI), economic growth (GDP), and wages.

There is a fundamental reason why the bond market is pricing in deflation currently.

“The correlation should be surprising given that lending rates get adjusted to future impacts on capital.

  • Equity investors expect that as economic growth and inflationary pressures increase, the value of their invested capital will increase to compensate for higher costs.

  • Bond investors have a fixed rate of return. Therefore, the fixed return rate is tied to forward expectations. Otherwise, capital is damaged due to inflation and lost opportunity costs. 

As shown, the correlation between rates and the economic composite suggests that current expectations of sustained economic expansion and rising inflation are overly optimistic. At current rates, economic growth will likely very quickly return to sub-2% growth by 2022.”

The Fed Will Push Deflation

The problem for the Federal Reserve is that the fiscal and monetary stimulus imputed into the economy is “dis-inflationary.” 

“Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.” – Dr. Lacy Hunt

The point here is that while economic growth may be booming momentarily, inflation, which is destructive when not paired with rising wages, will be transient. Given the massive surge in prices for homes, autos, and food, the reversal will cause a substantial disinflationary drag on economic growth.

The most considerable risk is a divergence among Fed policymakers which possibly leads to a policy mistake of tapering too quickly or even hiking rates. 

The majority of the inflation and economic growth pressures are artificial, stemming from the stimulus injections over the last year. However, with those inputs fading as year-over-year comparisons become more challenging, the “deflationary” impact could be more significant than expected.

There is also one other point about the Fed tapering the purchases. As shown in the chart below, rates rise during phases of QE as money rotates from bonds to stocks for the “risk-on” trade. The opposite occurs when they start to taper, suggesting a decline in rates if “taper talk” increases.

The Story Of The Dollar

While many view the US Dollar as a proxy for economic strength, there is very little correlation between the currency on a short-term basis. However, as shown below, there is a long-term trend of the dollar’s value as compared to economic growth. In other words, the value of the dollar does reflect economic strength over the longer term.

Currently, the U.S. dollar is weakening as the Government is flooding the system with liquidity. Now, the money supply is spiking, but given the relative surge in debt, the injections fail to spur an increase in monetary velocity.

With the US dollar breaking down to the lowest level since 2014 and trading below its 2-year moving average, the risk of the dollar retrenching to “Financial Crisis” lows is not out of the question.

The massive increase in the US budget deficit as a percent of GDP also suggests that “deflationary” pressures weigh both on economic growth and the dollar. As Bryce Coward of Gavekal recently noted:

“The ballooning budget deficit suggests a level of 70 or 80 on the US dollar index over the coming years would not be out of the realm of possibilities. That would equate to a further decline of 11% to 22% from here. If the US dollar drops below $90 such would have fairly large ramifications for equities.”

The Fed May Be Right For The Wrong Reason

With double-digit rates of change in essential items like transportation (going back to work), food, goods and services, and energy, the impact on disposable incomes will come much quicker than expected. If we strip out “housing and healthcare,” which are fixed budget items (mortgage and insurance payments), we see that “household” inflation is pushing 5.86% annualized.

Such is particularly problematic when wages aren’t keeping up with inflation.

The Fed is probably right. Inflation will be transitory, but for all the wrong reasons.


There is a significant difference between a “recovery” and an “expansion.” One is durable and sustainable; the other is not.

Those expecting a significant surge in inflation will likely be disappointed for the one reason which seems to get mostly overlooked.

“If the economy was growing organically, which would create stronger rates of wage growth and inflation, then there would be no need for zero interest rates, continued monetary interventions by the Federal Reserve, or deficit spending from the Government.”

The obvious problem is that not all “spending” is equal. Pulling forward consumption through stimulus is indeed short-term inflationary but long-term deflationary. Since 1980, there has been a shift in the economy’s fiscal makeup from productive to non-productive investment. 

As we have pointed out previously, you can not overstate the impact of psychology on an economy’s shift to “deflation.” When the prevailing economic mood in a nation changes from optimism to pessimism, participants change. Creditors, debtors, investors, producers, and consumers change their primary orientation from expansion to conservation.

  • Creditors become more conservative and slow their lending.

  • Potential debtors become more conservative and borrow less or not at all.

  • Investors become more conservative, and they commit less money to debt investments.

  • Producers become more conservative and reduce expansion plans.

  • Consumers become more conservative, and save more, and spend less.

As we have been witnessing since the turn of the century, these behaviors reduce the velocity of money. Consequently, the decline in velocity puts downward pressure on prices. Given the massive increases in debt and deficits, the deflationary drag continues to increase as stimulus fades from the system.

Likely, the dollar and rates already figured this out.

Tyler Durden Fri, 06/11/2021 - 10:20

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Bond Yields Plunge Most In A Year, Dollar Spikes As Inflation Soars

Bond Yields Plunge Most In A Year, Dollar Spikes As Inflation Soars

On the week, the major stock indices were mixed with The Dow lower, S&P unch-ish, and Small Caps and Big-Tech leading…

The flip-flopping rotation between big-tech…



Bond Yields Plunge Most In A Year, Dollar Spikes As Inflation Soars

On the week, the major stock indices were mixed with The Dow lower, S&P unch-ish, and Small Caps and Big-Tech leading...

The flip-flopping rotation between big-tech and small caps continued all week...

Growth won the week as traders rotated back from value stocks...

Source: Bloomberg

Meme stocks also roller-coastered this week...

Source: Bloomberg

Banks notably underperformed the market this week as yields tumbled...

Source: Bloomberg

Healthcare stocks outperformed as financials lagged...

Source: Bloomberg

VIX closed with a 15 handle for the first time since before the pandemic...

Source: Bloomberg

But, the big story of the week was the collapse in Treasury yields (in the face of a soaring CPI print) as bond shorts were increasingly squeezed...

Source: Bloomberg

Bond shorts this week...

This week saw 10Y Yields drop 10bps - the biggest weekly drop since last June (4th weekly drop in a row)...

Source: Bloomberg

The Treasury yield curve also flattened by the most since last June this week...

Source: Bloomberg

And breakevens saw their biggest weekly drop since April 2020...

Source: Bloomberg

The dollar screamed higher today... erasing all the losses from last Friday's payrolls plunge...

Source: Bloomberg

Cryptos ended the week mixed with Ether notably underperforming Bitcoin...

Source: Bloomberg

ETH/BTC saw a big drop on the week (second biggest weekly drop in ETH relative to BTC since Jul 2019)...

Source: Bloomberg

The dollar's spike today slammed gold to the week's biggest loser in commodity-land as crude managed gains...

Source: Bloomberg

Is it time for copper crash or gold run? Or are yields completely off base still?

Source: Bloomberg

And finally, The Fed's balance sheet reached $8 trillion this week for the first time ever - basically a double since the start of the pandemic panic-response...

Source: Bloomberg

And the balance sheet keeps expanding despite the collapse of COVID...

Source: Bloomberg

Tyler Durden Fri, 06/11/2021 - 16:00

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‘In the Heights’ celebrates the resilience Washington Heights has used to fight the COVID-19 pandemic

Local institutions and community bonds forged during the turmoil of the 1970s and 1980s helped a vulnerable neighborhood walloped by the pandemic endure.

For decades, Manhattan's Washington Heights neighborhood has been home to a mosaic of ethnic groups. Andrew Burton/Getty Images

With camera work that swoops from rooftops to street corners, the film “In the Heights” brings to life the dynamism of northern Manhattan’s Washington Heights neighborhood.

Directed by Jon M. Chu, “In the Heights” updates Lin-Manuel Miranda and Quiara Alegría Hudes’ Tony Award-winning musical of the same name. Set in a changing neighborhood defined by Dominicans and Latino immigrants, the film eloquently expresses the feel of a hardworking place where your block is your home and a 10-minute walk is a journey to another world.

For me, the film hit home. It brought me back to the years I spent researching and writing my book “Crossing Broadway: Washington Heights and the Promise of New York City,” when I interviewed residents, walked police patrols and dug into municipal records.

Lin-Manuel Miranda poses in front of a cart that sells flavored ice.
Lin-Manuel Miranda on location while filming ‘In the Heights’ in Manhattan’s Washington Heights neighborhood. James Devaney/GC Images via Getty Images

In Washington Heights, long home to a mosaic of ethnic groups, some people have recoiled from human differences and huddled up in tight but exclusionary enclaves – ignorant of their neighbors at best, nasty toward them at worst.

Other residents, street-smart cosmopolitans, learned to cross racial and ethnic boundaries to save their neighborhood from crime, decayed housing and inadequate schools. In the 1990s, their efforts turned Washington Heights, once known for a murderous drug trade, into a gentrification hot spot.

My book was released in paperback during the fall of 2019. Just five months later, COVID-19 came.

Could a neighborhood already grappling with the challenges of gentrification – a prominent theme of “In the Heights” – survive a global health disaster? And could a film conceived before COVID-19 emerged speak to a city that sometimes seems to be transformed by the pandemic?

So far – and even though Washington Heights stands out in Manhattan for its suffering due to the coronavirus pandemic – the answer is a cautious yes.

But that painful victory, won with vaccines, local institutions and local ingenuity, will be valuable only if enough can be learned from northern Manhattan’s solidarity and activism to build a healthier and more just city as the pandemic recedes.

A neighborhood rife with vulnerabilities

Like other immigrant neighborhoods confronting the pandemic, Washington Heights and Inwood – the neighborhood to its immediate north – faced serious vulnerabilities.

Immigrant labor and business acumen rescued New York City from the urban crisis in the 1970s and 1980s, when white flight, job losses, a withering tax base and high crime devastated the city.

But as my co-author David M. Reimers and I pointed out in “All the Nations Under Heaven: Immigrants, Migrants and the Making of New York,” the rebuilt city is marked by inequality. Rents are astronomic, so families in Washington Heights and Inwood often double up to make costs more bearable. In the face of an easily transmitted disease, overcrowded housing was a ticking bomb.

A sign in a storefront requests only three customers enter at a time.
Many Washington Heights residents couldn’t hunker down in their homes during the pandemic. They needed to staff stores that keep the city running. Led Black, Author provided

Residents in these uptown neighborhoods were also endangered by their jobs. In a city where many white-collar workers could work from home on their laptops, a disproportionate number of Washington Heights residents had to venture out to staff stores, clean buildings, deliver groceries and provide health and child care. As one uptown resident told me, her neighbors weren’t worrying about gaining 15 pounds – they were worried whether their next customer would infect them.

Equally troubling, many uptown residents had nowhere to run to. In more affluent neighborhoods, like the Upper East Side where I live, many people with country houses could decamp. In Washington Heights and Inwood, most people hunkered down in their apartments.

Bonds forged in mutual struggle

Nevertheless, Washington Heights and Inwood have strengths born in the hard experience of making a new home in New York.

The neighborhood has long been the destination of newcomers to the city, among them African Americans escaping Jim Crow, Irish immigrants putting behind them political and economic hardship, Puerto Ricans looking for prosperity, Eastern European Jews in flight from pogroms, German Jewish refugees from Nazism and Greeks expelled from Istanbul. In the 1970s, Dominicans fleeing political repression and economic hardship began to arrive in transforming numbers, along with a small but significant number of Soviet Jews escaping anti-Semitism.

For all their differences the German Jews, Soviet Jews and Dominicans had one thing in common: individual and collective memories of living with three brutal dictators – Hitler, Stalin and Rafael Trujillo. Such experiences were traumatic and could foster a tendency to stick to the safety of your own kind, but they also bred resilience.

Starting in the 1970s, and with cumulative impact by the late 1990s, significant numbers of these residents crossed racial and ethnic boundaries to revive and strengthen their neighborhood.

Thirty years later, when federal authority was absent and the pandemic surged, public-spirited residents – fortified by community institutions – stepped up again. In both cases, it was a clear example of what the sociologist Robert J. Sampson has called “collective efficacy.”

The community steps up

Back when the neighborhood was ravaged by the crack epidemic, Dave Crenshaw, the son of African American political activists, took action. Crenshaw set up athletic activities with the Uptown Dreamers – a youth group that combined sports, community service and educational uplift. The program gave young people, especially women, an alternative to dangerous streets.

When the COVID-19 pandemic erupted, Crenshaw built on his track record. He worked with The Community League of the Heights, a community development organization founded in 1952, Word Up, a community bookshop and arts space dating to 2011, and students from Columbia University’s Mailman School of Public Health. Together, they distributed food and masks, cleaned up grubby street corners, and got people tested and vaccinated.

Further north, the YM-YWHA of Washington Heights and Inwood, founded in 1917, built on its record of serving both Jews and the entire community. Victoria Neznansky – a social worker from the former Soviet Union – worked with her staff to help traumatized families, distribute money to people in need, and bring together two restaurants – one kosher and one Dominican – to feed homebound neighborhood residents.

At Uplift NYC, an uptown nonprofit with strong local roots, Domingo Estevez and Lucas Almonte had anticipated, during the summer of 2020, running summer programs that included a tech camp, basketball and a youth hackathon. When the pandemic struck, they nimbly shifted to providing culturally familiar foods – like plantains, chickens and Cafe Bustelo coffee – to neighbors in need and people who couldn’t go outside.

Arts and media organizations eased the isolation of lockdown. When the pandemic loomed, blogger Led Black, at the local website the Uptown Collective, told readers that “solidarity is the only way forward.” In his posts he shared his griefs and vented his rage at President Donald Trump. He closed every column with “Pa’Lante Siempre Pa’Lante!” or “Forward, Always Forward!”

Inwood Art Works, which promotes local artists and the arts, shut down a film festival scheduled for March 2020 and started “Short Film Fridays,” a weekly presentation of local films on YouTube. The organization also launched the “New York City Quarantine Film Festival,” which explored topics such as life uptown in the COVID-19 pandemic, the beauty of uptown parks and the life of an essential worker.

Dreams of a better life

Of course, Washington Heights suffered during the pandemic.

Beloved local businesses vanished. Foremost among them was Coogan’s, a bar and restaurant that was the unofficial town hall of upper Manhattan, whose life and death were chronicled in the documentary “Coogan’s Way,” which is now screening at film festivals.

People congregate outside Coogan's restaurant.
Coogan’s – a bar and restaurant that served as a neighborhood institution – wa shuttered during the pandemic. Rob Kim/Getty Images

Families were forced to live with unemployment, isolation and fear of infection. As the social fabric frayed, loud noise levels and reckless driving of motorcycles and all-terrain vehicles raised alarm. Worst of all, the neighborhood’s residents died at rates greater than in Manhattan overall.

In Washington Heights and the rest of New York City, the coronavirus pandemic exposed long-brewing inequalities. It also illuminated character, community, strong local institutions and dreams of a better life. All these receive loving and lyrical attention in “In the Heights.”

We live, I believe, in an era when it is important to see the strengths that immigrants and their institutions bring to our cities. This film could not have come at a better time.

[Get the best of The Conversation, every weekend. Sign up for our weekly newsletter.]

Robert W. Snyder does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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