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Futures Rise On China Growth Hopes

Futures Rise On China Growth Hopes

After US stocks were set to start week with modest gains as optimism around an economic recovery in China…



Futures Rise On China Growth Hopes

After US stocks were set to start week with modest gains as optimism around an economic recovery in China offset fears that the Fed is pushing the US economy off a recessionary cliff. S&P and Nasdaq futures were both up 0.4% as of 7:45 a.m. ET led by energy and tech shares, after China’s leaders said they will focus on boosting the economy next year, hinting at business-friendly policies, and further support for the property market.

In premarket trading, Tesla gained after Chief Executive Officer Elon Musk polled users on Twitter over whether he should step down as head of the social-media company, with the result so far leaning toward yes. At the same time, Ardelyx slumped after the biotech said that the FDA may need “up to a few more weeks” to finalize its response to the company’s appeal over the complete response letter for its new drug application for its kidney disease therapy XPHOZAH (tenapanor). Here are some other notable premarket movers:

  • Tesla shares gain 5.1% in US premarket trading after CEO Elon Musk polled users on Twitter over whether he should step down as head of the social-media company, with the result so far leaning toward yes.
  • Moderna gains 4% as Jefferies upgraded the stock to buy from hold, saying it can rebound in 2023 on a return of pipeline opportunities.
  • Ardelyx shares drop 13% after the biotech said that the FDA may need “up to a few more weeks” to finalize its response to the company’s appeal over the complete response letter for its new drug application for its kidney disease therapy XPHOZAH.
  • Aerojet shares rise 3% after L3Harris Technologies (LHX US) agreed to buy the rocket engine maker in a deal valued at about $4.7 billion. The purchase makes strategic sense, although analysts at Truist said the offer price looks expensive.
  • Watch Netflix stock as its price target was raised at Morgan Stanley on the back of currency “swings,” though broker flagged risk that expectations and valuation have run “too far too fast.”
  • Vertex Pharmaceuticals stock is downgraded to hold at Jefferies, which says that the company continues to offer a good pipeline, but risk/reward and valuation seem “balanced” following strong gains this year.
  • KeyBanc adds to recent upgrades for PerkinElmer moving to overweight from sector weight based on transformational sale of analytical instruments business.

A fourth-quarter rally in the S&P 500 fizzled out as investors grew worried the Fed would keep interest rates higher for longer despite signs of cooling in inflation. Unexpectedly hawkish comments from the European Central Bank added to the pessimism last week, keeping the benchmark index on course for its biggest annual slump since 2008.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said although stock-index futures were climbing today, sentiment is still expected to be subdued into the year-end. “Concerns that the US will be dragged into recession as the Fed tries to tame the wild horse of inflation are still front and center,” she said.

Morgan Stanley strategist Michael Wilson warned US corporate earnings next year are facing their biggest drop since the global financial crisis as the economy weakens. That could spark a new stock-market low that’s “much worse than what most investors are expecting,” he wrote in a note.

Yet while underlying stock indexes remain on track to end the month lower, some investors are starting to look past fears of an economic recession triggered by higher interest rates, and betting that inflation has peaked allowing the Federal Reserve and other central banks some leeway in tightening policy.  

Markets have begun to price in that inflation will decline, in part due to the action by central banks,” Jacob Vijverberg, multi-asset investment manager at Aegon Asset Management, told clients, pointing to recent below-forecast US inflation figures. This would help riskier assets such as higher yielding fixed income and equities to outperform, he added.

European stocks also gained after a downbeat close to the past week, the Stoxx 600 rising 0.5% led by energy shares which outperformed on Monday as oil advanced following a pledge from China to revive consumption and a plan from the Biden administration to begin refilling US strategic crude reserves. The Stoxx 600 Energy sub-index rose 2.2% as of 8:30 a.m. in London, outpacing all other groups in the regional equity benchmark, which gained 0.5%. Here are the biggest Eureopean movers:

  • BP shares rise as much as 3.3%, Shell 3.2% and TotalEnergies 3.4%. European energy shares outperform on Monday as oil advances following a pledge from China to revive consumption and a plan from the Biden administration to begin refilling US strategic crude reserves.
  • Suedzucker shares rise as much as 6.4%, adding to last week’s strong gains following the German sugar producer’s guidance increase, with Warburg today upgrading the stock to buy from hold.
  • Innate Pharma surged as much as 19% at the open after the French biotech company announced it had expanded its collaboration with Sanofi for natural killer cell therapeutics in oncology.
  • Freenet shares rise as much as 4.8% after Deutsche Bank raises the stock to buy from hold, saying the telecom and media firm could be a defensive addition to portfolios in 2023.
  • TietoEVRY shares gain as much as 3.5% after Nordea raised its recommendation to buy from hold, saying the break-up case for the firm is “becoming partly de-risked” following the announced disposals of Banking, Connect and Transform businesses.
  • Nexi shares advance as much as 5% to lead gains on the FTSE MIB index after the government dropped a proposed measure on a minimum threshold to accept digital payments.
  • Fugro shares dropped as much as 30%, the most since 1995, after report on involvement with 2019 dam breach in Brazil that killed 270 people.
  • Tokmanni shares fall as much as 6.8%, extending losses into a fourth session, after Nordea cut its recommendation for the shares to hold from buy, noting the company’s “unwillingness to increase prices” hurts its investment case “at least temporarily.”

Asia stocks headed lower for a third day as traders assessed rising infection numbers in China and risks of a regional economic slowdown. The MSCI Asia Pacific Index erased initial gains to fall as much as 0.4%, as health care and industrials dragged on the gauge. Initial optimism for stocks in China and Hong Kong faded amid concerns that Asia’s biggest economy will suffer from a spike in virus cases in Beijing, Shanghai and other major cities. Beijing Covid Death Reports Fuel Concern China Hiding Data Benchmarks also slumped in Japan as the yen strengthened, joining the Philippines and South Korea lower, while India and Singapore advanced.   Asian shares could climb more than 9% through 2023, according to strategists surveyed by Bloomberg. But the road may be bumpy as uncertainty remains over the pace of China’s reopening and the outlook for Federal Reserve policy. Moreover, the world’s biggest money managers are set to unload up to $100 billion of stocks in the final few weeks of the year. Still, “modest valuations, light investor positioning and good fundamentals are buffers that should help Asian stocks withstand near-term volatility,” said Zhikai Chen, head of Asian and global emerging market equities at BNP Paribas Asset Management.

The yen strengthens and JGB futures fall on report PM Kishida may add flexibility to BOJ’s 2% inflation goal. Japan’s 5-year yield climbs to 0.145%, highest since 2015. The moves are later pared after Japan’s Matsuno denies plans to revise BOJ accord. Most currency majors grind higher against the dollar; yuan marginally softer. Asian stocks fall for third day, with Japan and China leading the retreat. Hang Seng erases a gain of as much as 1.7%, Shanghai Composite falls 1.5%. S&P futures nudge 0.1% higher, Nasdaq contracts also slightly firmer. Treasury 10-year yield adds three basis points to 3.51%; Australian curve bear steepens after 10-year yield jumps six basis points. WTI crude rises to around $75.20; gold muted near $1,792.

Australia stocks edged lower: the S&P/ASX 200 index fell 0.2% to close at 7,133.90, with real-estate shares leading declines on the gauge. Shares of Star Entertainment slid 18% to become the worst performer on the gauge after the government issued new proposed tax changes that may impact its business. In New Zealand, the S&P/NZX 50 index fell 0.7% to 11,518.14

Indian stocks rose the most in nearly a month, in contrast to the broader Asian market that traded lower.  The S&P BSE Sensex gained 0.8% to 61,806.19, while the NSE Nifty 50 Index also advanced by a similar measure. Benchmark indexes in most other regional economies, including China, Hong Kong and Japan, fell. Broad-based buying in the market lifted overall sentiments, said Osho Krishan, senior analyst, technical and derivative research, Angel One. “Technically, there has been no substantial change in the market outlook as the bulls made a comeback from their support zone and showcased their resilience,” Krishan said.  The gains come as demand in India’s large domestic market cushions it from the impact of a slowing global economy. High-frequency indicators show the economic activity has stayed steady in recent months but may slow going forward as resilience wanes.  Reliance Industries gave the biggest boost to the index, adding 1.4%.

In FX, the Bloomberg Dollar Spot Index fell 0.5% as the greenback weakened against all of its Group-of-10 peers. Here is how other key pairs did:

  • The euro rose by 0.6% to 1.0653, erasing Friday’s loss after ECB Vice President Luis de Guindos said half-point increases in borrowing costs will continue as officials try to tame soaring prices. In Germany, the IFO business confidence index rose to 88.6 (estimate 87.5) in December from revised 86.4 in November, according to the IFO Institute
  • The pound rose while gilts plunged across the curve with the belly outperforming slightly as money markets added to BOE tightening wagers and traders looked ahead to QE sales starting January
  • The yen whipsawed after reports on a potential change to a key agreement between the government and central bank fueled speculation policy makers are moving closer to a hawkish pivot. The BOJ is expected to keep monetary stimulus unchanged Tuesday, yet elevated overnight volatility in the yen reflects risk of a shift in tone when it comes to forward guidance
  • Australian dollar climbed amid broad greenback weakness spurred by speculation of a hawkish pivot in Japan. Gains were refreshed on news that Australia’s Foreign Minister Penny Wong will travel to Beijing on Tuesday

In rates, the Treasury curve twist-steepened; the 2-year yield fell 1bp and the 10-year yield rose by around 4bps. US 10-year yields around 3.54%, cheaper by 6bps vs. Friday close with bunds and gilts lagging by additional 1.5bp and 10bp in the sector; long-end led losses widens 2s10s, 5s30s spreads by 3.5bp and 3bp on the day. Dollar issuance slate remains light, with issuance likely concluded now for the year. Treasuries follow more aggressive bear steepening move across gilts, where long-end yield are cheaper by 13bp as traders look ahead to QE sales starting January. This week’s US auctions include $12b 20-year bond reopening Wednesday and $19b 5-year TIPS Thursday. In Europe, Bunds and Italian bonds extend the streak of declines to four, the longest in 6 weeks and money markets added to ECB tightening bets as markets continued to digest last week’s hawkish policy messaging.

In commodities, oil futures rose boosted by Beijing’s pro-growth pledge and a US move to refill strategic crude reserves boosted oil futures, though economic growth fears kept prices on track for a second monthly loss.  

Bitcoin is softer on the session, but resides towards the mid-point of relative narrow parameters.

It's a quiet economic calendar, with just the NAHB Housing Market Index on deck (est. 34, prior 33).

Market Snapshot

  • S&P 500 futures up 0.4% to 3,894.00
  • STOXX Europe 600 up 0.5% to 426.88
  • MXAP down 0.2% to 156.07
  • MXAPJ little changed at 507.98
  • Nikkei down 1.1% to 27,237.64
  • Topix down 0.8% to 1,935.41
  • Hang Seng Index down 0.5% to 19,352.81
  • Shanghai Composite down 1.9% to 3,107.12
  • Sensex up 0.7% to 61,781.21
  • Australia S&P/ASX 200 down 0.2% to 7,133.87
  • Kospi down 0.3% to 2,352.17
  • German 10Y yield little changed at 2.19%
  • Euro up 0.6% to $1.0647
  • Brent Futures up 1.1% to $79.90/bbl
  • Gold spot up 0.2% to $1,796.99
  • U.S. Dollar Index down 0.46% to 104.22

Top Overnight News from Bloomberg

  • EU member states will on Monday discuss a gas-price cap that’s almost one-third lower than an original proposal as they attempt to break a deadlock over the controversial proposal to contain the impact of a historic energy crisis
  • After this winter, the EU will have to refill gas reserves with little to no deliveries from Russia, intensifying competition for tankers of the fuel. Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. That means no respite from high prices
  • China’s swift abandonment of Covid Zero has seen infections explode, especially in Beijing, which has seen shortages of medicine, overwhelmed hospital staff and deserted streets as residents stay home sick or to avoid the virus. That aligns with what other places experienced as they shifted from eliminating Covid to living with it — except for the lack of officially reported deaths
  • China’s top leaders said they will focus on boosting the economy next year, hinting at business-friendly policies, further support for the property market while likely scaling back fiscal stimulus

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks eventually traded lower across the board following the downbeat performance on Wall Street on Friday. ASX 200 was weighed on by its heavyweight Financials and Healthcare sectors but losses were cushioned by gains in the metals-related names. Nikkei 225 was pressured following weekend reports that Japan's government is set to revise a 10-year-old joint statement with  the BoJ that commits the central bank to achieve its 2% inflation "at the earliest date possible," while Toshiba Corp shares slid over 5% amid Nikkei reports that its preferred bidder JIP reportedly appears to be mulling a lower valuation for a buyout. Hang Seng and Shanghai Comp were initially mixed but the former failed to hold onto opening gains whilst the latter overlooked the PBoC injecting fresh funds via 14-day reverse repo for the first time in nearly two months, with sentiment dampened by reports of two COVID-related deaths in mainland China. US equity futures traded flat within tight ranges - the ES March contract remained under 3,900.

Top Asian News

  • China reported two new COVID-related deaths in the mainland on December 18th vs zero a day earlier, according to Reuters.
  • China's Shanghai Education Bureau said it is to shut down all in-person classes in kindergartens and childcare centres in the city from December 19th due to COVID-19 infections, according to Reuters.
  • Chip maker Renesas Electronics (6723 JT) suspended work at its Beijing plant from Friday for several days due to the spread of COVID-19 in the city, according to Reuters.
  • Beijing has removed or adjusted 126 COVID-19 prevention measures, and all factories and construction sites above designated size and commercial buildings in the city have fully resumed work, officials cited by Global Times said Sunday.
  • Macau's government is to cancel COVID risk regulations for mainland China from Tuesday; arrivals from China must have a negative COVID test in the last 72 hours, according to Reuters.
  • Hong Kong leader Lee to begin a four-day trip to Beijing on Wednesday, at which he is expected to discuss the reopening of the border with mainland China, via SCMP citing sources.
  • Beijing, China is to buy imported COVID medicines to relive pressure on domestic shortages, via Reuters citing an official; customs will speed up the clearance for imported COVID medicines.
  • USTR Office has announced a nine-month extension of tariff exclusion on 352 Chinese import product categories, according to Reuters.
  • China is to maintain ample liquidity in 2023 to implement proactive fiscal policy, according to state media citing the PBoC Vice Governor.
  • China’s Central Economic Work Conference suggested China will focus on stabilising its economy in 2023 and step up policy to ensure key targets are met, according to a statement cited by Reuters.
  • PBoC injected CNY 9bln via 7-day reverse repos with the rate maintained at 2.00%; injects CNY 76bln via 14-day reverse repos with the rate maintained at 2.15% - for a daily net injection CNY 83bln. according to Reuters.
  • Toshiba Corp's (6502 JT) preferred bidder JIP reportedly appears to be mulling a lower valuation for a buyout, according to Nikkei.
  • Japan is reportedly eyeing an initial budget at a record JPY 114tln for FY23, according to Kyodo.
  • Australia’s sovereign wealth fund is positioning for inflationary pressures to persist globally and believes that gold and other commodities will offset hindered returns across asset classes, according to Bloomberg.
  • South Korean Finance Minister said the economy is slowing more rapidly than expected; economic slowdown is to be at its worst pace in H1 2023, via Reuters.

European bourses have commenced the week on a firmer footing, Euro Stoxx 50 +0.7%, shaking off the softer APAC handover in minimal newsflow. Sectors are firmer ex-Media/Real Estate, featuring outperformance in Energy after Friday's pressure. Stateside, futures are similarly supported, ES +0.5%, in-tandem with the European tone ahead of a sparse US docket.

Top European News

  • UK Chancellor Hunt has commissioned the OBR to prepare an economic & fiscal forecast, to be presented alongside the Spring Budget due 15th March, 2023.
  • UK PM Sunak scrapped Liz Truss' plan to purchase energy from foreign producers, according to Sky News. Elsewhere, Sunak is set to sign off an extension to the government's energy support package for businesses for up to 12 months.
  • Bank of France cut France's 2023 growth forecast to 0.3% (prev. 0.5%) and cut the 2024 forecast to 1.2% (prev. 1.8%), according to Reuters.
  • ECB's de Guindos says the ECB will keep hiking rates and does not know when they will stop, not planning on altering the 2% mid-term price stability goal.
  • ECB's Simkus is in no doubt that there will be a 50bps hike in February.
  • ECB's Kazimir says rates will not only need to go to restrictive territory but stay there much longer.


  • USD has faded despite hawkish weekend Fed rhetoric, with the DXY nearer the lower-end of 10412-83 parameters.
  • Action which benefits peers across the board, with marked outperformance in the JPY as USD/JPY gapped lower from the 136.69 close to either side of the figure.
  • Antipodeans are the current best performers, with the Kiwi through 0.64 vs USD at best and AUD holding above 0.67.
  • EUR is bid but to a slightly lesser extent despite hawkish (as expected) ECB rhetoric and strong German Ifo release while Cable has reclaimed 1.22 convincingly.
  • ZAR is the marked outperformer after Ramaphosa secures re-election as ANC leader for the 2024 presidential campaign.
  • PBoC sets USD/CNY mid-point at 6.9746 vs exp. 6.9753 (prev. 6.9791)
  • South African President Ramaphosa has been re-elected as leader of the governing ANC party.

Fixed Income

  • Bunds are facing modest pressure, though are off worst levels which occurred in wake of ECB's Kazimir which prompted the 10yr German yield to test 2.20%, action which is being felt more keenly in the periphery.
  • Gilts are the marked underperformers after last week's relative resilience, with the UK yield around 3.45%.
  • USTs are softer, but comparably more contained and haven't really threatened a breach of initial early-European parameters.


  • A choppy but ultimately fairly contained start to the week for the crude benchmarks. Price action throughout the European morning has been two-way in nature and at times without an overt catalyst or driver.
  • Currently, WTI & Brent Fed’23 are firmer by around USD 1.00/bbl on the session but are shy of their overnight peaks by around another USD 1.00/bbl, and as such are someway from last week’s respective USD 77.77/bbl and USD 75.26/bbl best levels.
  • EU countries are reportedly mulling a gas price cap at levels lower than suggested to date, with the bloc set to meet on Monday in a bid to come to an agreement, according to a document cited by Reuters. Czech Republic proposed a EUR 188/MWh cap on Dutch TTF front-month contract vs the EUR 275/MWh cap originally suggested, according to Reuters.
  • Saudi Aramco, Sinopec and SABIC have expanded refining and petrochemical cooperation and expect to start operations by the end of 2025, according to Reuters.
  • Algeria is considering exporting its spare power capacity to Europe, according to the Algerian Energy Minister cited by Reuters.
  • Uniper (UN01 GY) said the first German LNG terminal is to open in Wilhelmshaven; an annual volume of at least 5bcm of natural gas is expected to be imported, according to Reuters.
  • El Paso Natural Gas Co. has lifted the force majeure at its Amarillo compressor station, according to Reuters.
  • North Dakota Pipeline Authority said an estimated 200-250k BPD of oil was curtailed on Friday as a result of an extended storm system but anticipated a relatively quick return of production over the next several days, according to Reuters.
  • USDA and USTR chiefs said Mexican officials have presented potential amendments to restrictions on genetically modified corn and other biotech products, according to Reuters.
  • Indian antitrust agency raided some steel firms for alleged price collusion, according to Reuters sources.
  • Peruvian President has urged congress to pass a bill to bring forward general elections amid protests, according to Reuters.
  • Spot gold and silver are benefitting from the dented dollar while base metals derive support from the generally positive risk tone and the aforementioned unwinding of restrictions in China, with LME Copper firmer by over 1.0%.


  • Blasts were heard across Ukrainian capital Kyiv early Monday morning, according to a Reuters witness.
  • Russian military stationed in Belarus are to conduct tactical exercises, according to Interfax citing the Russian Defence Ministry
  • Ukrainian advisor Podolyak says, to European partners, Ukraine will not surrender to or fulfil the demands of Russia; adds, "War ending can only be accelerated by increasing artillery/tanks supply. Even unilaterally…"
  • Qatari diplomat said Qatar has been "exclusively criticised and attacked" in the investigation into the European parliament, according to a statement cited by Reuters. Qatari diplomat added that "limiting dialogue and cooperation" on Qatar before the legal process has ended will negatively affect discussions on global energy security and security cooperation.
  • North Korea fired two ballistic missiles towards the Korean Peninsula's east coast on Sunday, according to the South Korean military cited by Reuters. The missiles appeared to have landed outside of Japan's Exclusive Economic Zone (EEZ), according to NHK.
  • US State Department said the US is gravely concerned that Iranian authorities are reportedly continuing to kill protesters, according to Reuters.
  • Italian Economy Minister urged the EU to give a strong and strategic response to the US Inflation Reduction Act (IRA), and suggested some Italian companies are considering moving production to the US, according to Reuters.
  • Australian PM said Foreign Minister Wong is to travel to Beijing on Tuesday at the invitation of China, according to Reuters.

US Event Calendar

  • 10:00: Dec. NAHB Housing Market Index, est. 34, prior 33

DB's Jim Reid concludes the overnight wrap

Well, I had Argentina in the research World Cup sweepstake. After hours of studying form, player fatigue, different systems, the climate etc., I skillfully closed my eyes and put my hand in a jar and pulled the winners out. I will try to not let my success change me.

As everyone recovers from a breathtaking final, it'll be interesting to see whether market activity drops off a cliff this week as we approach Christmas even if there was lots of unfinished business after last week. The market doesn't believe the Fed, with a pricing disconnect now opening up, and the market is now worried the ECB has upped its level of hawkishness. Outside of the ECB's Guindos and Simkus speaking today we won't hear much from these two central banks before Xmas so there is unlikely to be much official follow-through to last week's meetings. It will therefore be left to quite a full slate of data to move markets in what is likely to be a week low on liquidity.

The US consumer will be a big focus with consumer confidence (Wednesday) and personal income data, along with PCE inflation (both Friday). We'll also see various housing market and business activity indicators from the US, as well as Japan's CPI report and PPI numbers from Europe.

Elsewhere, the BoJ will be the last major central bank to make a monetary policy decision this year tomorrow. It could be a bit more interesting than usual as we'll see below.

In terms of some of the highlights now, we start with US housing. This is obviously a big focus at the moment and today's NAHB housing index (33 DB forecast vs 33 previously), tomorrow's housing starts (1.400mn vs. 1.425mn) and building permits (1.500mn vs. 1.512mn), Wednesday's existing home sales (4.25mn vs. 4.43mn) and Friday's new home sales (600k vs. 632k) will all be important. The hard data is all expected to slow further from last month.

Probably more important is Friday's income and consumption report which contains the latest reading on core PCE. Our economists think it should come in at 0.2% mom (vs. 0.2% previously), taking the YoY rate down three-tenths to 4.7%. Normally core PCE is above core CPI but over the next 12 months our economists think that anomalies in healthcare components between the two means that the former will edge above the latter at 3.2% for 2023 Q4/Q4 against 3.1%. Friday also see the final revisions to the University of Michigan consumer sentiment, including the important consumer expectations of inflation.

Other business activity gauges for the US include durable goods orders on Friday, with both headline (DB forecast -3.5% vs +1.1% in October) and core (DB forecast unch vs +0.6%) seen showing signs of weakening by our US economists. Indicators of manufacturing activity from regional Feds are also due throughout the week. These releases will follow an array of downside surprises in activity-related gauges recently, including the fall in industrial production last Thursday.

Over in Europe, we will get PPIs from several countries starting with Germany tomorrow. As a reminder, the latest YoY reading stands at 34.5%, some way off the 45.8% peak reached in August. October's report also showed the first MoM decrease in producer prices since May 2020 amid falling energy costs.

From central banks, all eyes will be on the BoJ tomorrow and we will also get minutes from their October meeting on Thursday. Our Chief Japan economist previews the meeting and addresses the potential for YCC revision or a policy assessment here.

The yen initially rallied as much as +0.61% this morning after Kyodo News reported on Saturday that Japan’s Prime Minister Fumio Kishida was looking to add flexibility around the 2% inflation goal and would discuss it with the next governor after Kuroda's term ends in April. This follows Bloomberg last week reporting that a policy review is being considered for next year. However, some of the Japanese currency’s early gains today were reversed after a government spokesman denied the report and the Yen (+0.28%) is currently trading at $136.22.

Following the BoJ's decision, the CPI report for Japan will be released on Thursday. Our Chief Japan economist (full preview here) expects the overall index to reach 3.9% YoY (vs +3.7% in October), the core index excluding fresh food to be up 3.8% (+3.6%), and core-core index excluding fresh food and energy to rise to 2.8% (+2.5%) as food and durable goods continue to be the key drivers of inflation.

Speaking of energy prices, EU energy ministers will meet today to resume talks regarding a natural gas price cap as well as other measures to cope with the energy crisis as winter looms.

Similar to the US, a number of sentiment indicators will be released in Europe. For Germany, they will include the Ifo survey today and the GfK's consumer confidence reading on Wednesday. Manufacturing and consumer confidence will also be released for Italy on Friday.

Asian stock markets had a negative start to the final full trading week of 2022, tracking Friday’s losses on Wall Street as synchronised interest rate hikes and a hawkish tone from global central banks weigh on sentiment. Rising Covid-19 cases in China, particularly in Beijing, following the abandonment of Covid Zero are also adding to the bearish mood. Chinese equities are retreating with the Shanghai Composite (-1.31%) and the CSI (-1.03%) both in the red. The Nikkei (-1.15%), the KOSPI (-0.60%) and the Hang Seng (-0.45%) are also weak in early trading. In overnight trading, US stock futures are little changed with contracts on the S&P 500 (-0.06%) and the NASDAQ 100 (-0.07%) slightly down after posting two consecutive weekly losses.

In energy markets, oil futures have moved higher in Asian trading hours with Brent oil (+0.94%) trading at $79.81/bbl and WTI futures (+1.00%) at $75.03/bbl after China indicated its intention to revive consumption heading into 2023. Meanwhile, yields on 10Yr USTs are up +2.92 bps, trading at 3.51%.

Looking back at last week, it was a familiar 2022 story in markets since hawkish central bank announcements from the Fed and the ECB sparked a fresh selloff. The decisions themselves were actually in line with expectations, with both hiking by 50bps. But what struck investors was the much more aggressive tone on future rate hikes than the consensus had expected. For instance, the FOMC’s dot plot signalled that rates would be at 5.1% even by end-2023, which was up from 4.6% in the September dot plot. Meanwhile, the ECB said that rates would “still have to rise significantly”, with President Lagarde explicitly pointing to further 50bp moves ahead.

Given those developments, risk assets sold off across the board, with the S&P 500 ending the week -2.08% lower (-1.11% Friday). That was a massive turnaround from earlier in the week, when the index had surged on the back of the US CPI print on Tuesday that surprised to the downside. Indeed, by the close on Friday the S&P 500 was down -6.06% from its intraday peak for the week just after the release. It was a similar story elsewhere too, with the STOXX 600 down -3.28% over the week (-1.20% Friday), and the Nikkei down -1.34% (-1.87% Friday).

In Europe, sovereign bonds saw significant losses in light of the ECB’s rhetoric, and yields on 10yr German bunds rose by +21.9bps (+7.0bps Friday) to 2.14%. The moves at the front-end of the curve were even larger, with the 2yr German yield up +26.5bps (+3.7bps Friday) to a post-2008 high, which came as investors increased their expectations for the ECB terminal rate. For Treasuries there was a rather different reaction however, with 10yr yields ending the week down -9.6bps (+3.6bps Friday). That occurred as investors grew increasingly confident that the Fed would be able to keep long-term inflation in check, with the 10yr breakeven down to a nearly two-year low of 2.13%.

Tyler Durden Mon, 12/19/2022 - 08:06

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New ways to protect food crops from climate change and other disruptions

“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether…



“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether – because of war and conflict and corruption and destabilization – we do,” said World Food Programme leader David Beasley in an interview with Time magazine earlier this year.    

Credit: NMBU

“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether – because of war and conflict and corruption and destabilization – we do,” said World Food Programme leader David Beasley in an interview with Time magazine earlier this year.    

Indeed, projections show that we are not on track to achieve Sustainable Development Goal 2 of Zero Hunger by 2030. As climate and security crises continue to destabilise our food sources, researchers are taking a critical look not just at how we produce food – but at the entire systems behind our food supplies. In this case, the systems behind the seeds that produce our food crops.    

“Whilst adapting crops to climate change and conserving their variation is essential for food security, these measures are meaningless if farmers do not have access to the seeds,” says crop scientist and food system expert Ola Westengen. Westengen leads the team of researchers from the Norwegian University of Life Sciences (NMBU) who recently reviewed the state of seed systems for small-holder farmers in low/middle income countries. Their findings are now published in the Proceedings of the National Academy of Sciences (PNAS).   

What are seed systems?    

Seed systems are the provision, management and distribution of seeds. They cover the entire seed chain, from the conservation of their diversity and variety development, to their production and distribution, and the rules that govern these activities.  In short, they are the structures that make seeds available to farmers so that crops can be sown, harvested and end up on our plates.    

Whilst a well-functioning seed system will ensure seed security for all farmers, the researchers say that, in practice, it is rarely the case that seed systems function as well as they might. Seed systems can be disrupted by conflict and disasters, as well as by problems stemming from social inequality, lack of coordination or inappropriate policies.      

What does this study tell us that we don’t already know?   

“There are recent innovations and investments by governments and donors to improve farmers’ access to diverse crop varieties and quality seeds,” explains Teshome Hunduma, a seed governance researcher and co-author of the study. “For example, there are now more flexible policies and regulations that encourage diversity in the seed systems used by farmers, rather than pushing farmers to switch to commercial seed systems that focus on less diverse commodity crops – which is the norm.” Commodity crops are those grown in large volume and high intensity for the purpose of sale, as opposed to those grown by small-holder farmers for direct processing and consumption.   

“The study highlights emerging initiatives that are helping farmers to secure food supplies, such as participatory plant breeding,” says Teshome. Participatory plant breeding is the development and selection of new crop varieties where the farmers are in control. Farmers, who know the needs of their farms best, work with researchers and others to improve crops and develop plant varieties that are in line with their household needs and culture, and that are resilient to environmental and climate challenges.    

“Farmers prefer and need different types of seeds, based on diverse social, cultural and ecological conditions,” adds ethnobotanist and co-author Sarah Paule Dalle.       

The study discusses various disruptions to farmer’s access to seeds. Social inequality is one such disruption. How so?   

“A seed system that only serves a segment of a farming society contributes to seed insecurity,” replies Teshome. “For example, commercial seed systems deliver high-yielding varieties of quality hybrid seeds. Whilst wealthy farmers can afford such seeds, poor farmers can’t.”    

“Similarly, whilst commercial seed systems that focus on commodity crops may benefit men who might primarily be interested in market value, such systems have little to offer women who want crops that provide household nutrition and meet their cultural preferences.”   

“This means poor farmers and women do not have the same access to seeds that meet their needs. The result is seed, and thus food, insecurity due to social and economic inequality.”     

Political-economic factors have driven the globalization of food systems over the last decades, which also includes seed systems. “Seeds have become big business”, say the researchers. According to studies quoted in the article, the four largest multinational companies in seed trade today control about 60% of the ~50 billion USD global commercial seed market. The large private actors have the power not only to shape markets, but also to influence science and innovation agendas and policy frameworks.     

This can be problematic, say the researchers, when private sector research and development typically focuses on the most profitable crops, such as maize and soy. Crops grown and consumed by subsistence farmers are thus largely neglected, and the potential of crop diversity – the foundation of agriculture – remains largely untapped. Technology that could help develop more robust varieties remains hypothetical.   

How does the ownership of crop diversity threaten food supplies and what can be done?      

The term crop diversity refers both to different crops and different varieties of a crop. According to the Global Crop Diversity Trust (one of the world’s primary international organizations on crop diversity conservation), securing and making available the world’s crop diversity is essential for future food and nutrition security.      

“Plant breeders and scientists use crop diversity to develop new, more resilient and productive varieties that consumers want to eat, that are nutritious and tasty, and that are adapted to local preferences, environments and challenges,” explains Benjamin Kilian, a plant genetics expert at the Global Crop Diversity Trust. The Crop Trust, together with the Norwegian University of Life Sciences, implements the major project from which this study emerged: Biodiversity for Opportunities, Livelihoods and Development (BOLD). Coordinated by Kilian, the project supports the conservation and use of crop diversity to strengthen food and nutrition security on a global scale. It builds on the Crop Wild Relatives project and is funded by the Norwegian government.   

“In the BOLD project, researchers work with genebanks, plant breeders and others in the seed value chain to co-develop seed systems that are both resilient to climate stresses and inclusive of small-holder farmers on the frontline of adaptation,” adds Westengen.     

Will access to seeds in the vulnerable areas that you are studying be improved in time to make a difference?   

“We hope so, if we make the right moves to include small-holder farmers in seed system development,” says Dalle. “A well-functioning seed system should also be resilient. That is, it should withstand shocks such as drought or pandemics and breakdowns or disruptions such as war and conflict.”    

“To do this, the system should promote a diversity of seeds, both local varieties and those improved to better adapt to stresses. It should also involve diverse groups of people such as farmer cooperatives/groups, and both public and private companies to increase the choice of seeds and seed sources. During lockdowns in the COVID-19 pandemic, for example, farmers’ own seed systems enabled access to seeds in developing countries when the activities of private companies and agro-dealers were restricted,” explains Dalle.   

Westengen summarizes: “Our study highlights links between the crucial work of the Global Crop Diversity Trust and the farmers on the frontline of adapting our food systems to climate change. It is an argument for co-designing seed system development in full cooperation with farmers and other actors in the seed system. This way, efforts can meet the needs of various groups of farmers in different agroecological contexts. There is no one-size-fits-all; if there is one natural law in biology, it is that diversity is key to future evolution. That also goes for seed systems – and food system development.”   

Navigating towards resilient and inclusive seed systems by Ola T. Westengen, Sarah Paule Dalle and Teshome Hunduma Mulesa was published in Proceedings of the National Academy of Sciences (PNAS) this week. PNAS is widely considered one of the most prestigious and highly cited multidisciplinary research journals.   

About the Norwegian University of Life Sciences (NMBU)  
NMBU’s research and education enables people all over the world to tackle the big, global challenges regarding the environment, sustainable development, how to improve human and animal health, renewable energy sources, food production, and land- and resource management. 

 About the Crop Trust 
The Crop Trust is an international organization working to conserve crop diversity and thus protect global food and nutrition security. At the core of Crop Trust is an endowment fund dedicated to providing guaranteed long-term financial support to key genebanks worldwide. The Crop Trust supports the Svalbard Global Seed Vault and coordinates large-scale projects worldwide to secure crop diversity and make it available for use. The Crop Trust is recognized as an essential element of the funding strategy of the International Treaty on Plant Genetic Resources for Food and Agriculture.  

About the BOLD Project 
BOLD (Biodiversity for Opportunities, Livelihoods, and Development) is a major 10-year project to strengthen food and nutrition security worldwide by supporting the conservation and use of crop diversity. The project works with national genebanks, pre-breeding and seed system partners globally. Funded by the government of Norway, BOLD is led by the Crop Trust in partnership with the Norwegian University of Life Sciences and the International Plant Treaty. 

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A Federal Reserve Pivot is not Bullish

An old saying cautions one to be careful of what one wishes for. Stock investors wishing for the Federal Reserve to pivot may want to rethink their logic…



An old saying cautions one to be careful of what one wishes for. Stock investors wishing for the Federal Reserve to pivot may want to rethink their logic and review the charts.

The second largest U.S. bank failure and the deeply discounted emergency sale of Credit Suisse have investors betting the Federal Reserve will pivot. They don’t seem to care that inflation is running hot and sticky, and the Fed remains determined to keep rates “higher for longer” despite the evolving crisis.

Like Pavlov’s dogs, investors buy when they hear the pivot bell ringing. Their conditioning may prove harmful if the past proves prescient.

The Bearish History of Rate Cuts

Since 1970, there have been nine instances in which the Fed significantly cut the Fed Funds rate. The average maximum drawdown from the start of each rate reduction period to the market trough was 27.25%.

The three most recent episodes saw larger-than-average drawdowns. Of the six other experiences, only one, 1974-1977, saw a drawdown worse than the average.  

So why are the most recent drawdowns worse than those before 1990? Before 1990, the Fed was more active. As such, they didn’t allow rates to get too far above or below the economy’s natural rate. Indeed, high inflation during the 1970s and early 1980s forced Fed vigilance. Regardless of the reason, higher interest rates helped keep speculative bubbles in check.

During the last 20 years, the Fed has presided over a low-interest rate environment. The graph below shows that real yields, yields less inflation expectations, have been trending lower for 40 years. From the pandemic until the Fed started raising rates in March 2022, the 10-year real yield was often negative.

real yields wicksell

Speculation often blossoms when interest rates are predictably low. As we are learning, such speculative behavior emanating from Fed policy in 2020 and 2021 led to conservative bankers and aggressive hedge funds taking outsized risks. While not coming to their side, what was their alternative? Accepting a negative real return is not good for profits.

We take a quick detour to appreciate how the level of interest rates drives speculation.

Wicksell’s Elegant Model

A few years ago, we shared the logic of famed Swedish economist Knut Wicksell. The nineteenth-century economist’s model states two interest rates help assess economic activity. Per Wicksell’s Elegant Model:

First, there is the “natural rate,” which reflects the structural growth rate of the economy (which is also reflective of the growth rate of corporate earnings). The natural rate is the combined growth of the working-age population and productivity growth. Second, Wicksell holds that there is the “market rate” or the cost of money in the economy as determined by supply and demand.

Wicksell viewed the divergences between the natural and market rates as the mechanism by which the economic cycle is determined. If a divergence between the natural and market rates is abnormally sustained, it causes a severe misallocation of capital.

The bottom line:

Per Wicksell, optimal policy should aim at keeping the natural and market rate as closely aligned as possible to prevent misallocation. But when short-term market rates are below the natural rate, intelligent investors respond appropriately. They borrow heavily at the low rate and buy existing assets with somewhat predictable returns and shorter time horizons. Financial assets skyrocket in value while long-term, cash-flow-driven investments with riskier prospects languish.

The second half of 2020 and 2021 provide evidence of Wicksell’s theory. Despite brisk economic activity and rising inflation, the Fed kept interest rates at zero and added more to its balance sheet (QE) than during the Financial Crisis. The speculation resulting from keeping rates well below the natural rate was palpable.

What Percentage Drawdown Should We Expect This Time?

Since the market experienced a decent drawdown during the rate hike cycle starting in March 2022, might a good chunk of the rate drawdown associated with a rate cut have already occurred?

The graph below shows the maximum drawdown from the beginning of rate hiking cycles. The average drawdown during rate hiking cycles is 11.50%. The S&P 500 experienced a nearly 25% drawdown during the current cycle.

rate hikes and drawdowns

There are two other considerations in formulating expectations for what the next Federal Reserve pivot has in store for stocks.

First, the graph below shows the maximum drawdowns during rate-cutting periods and the one-year returns following the final rate cut. From May 2020 to May 2021, the one-year period following the last rate cut, the S&P 500 rose over 50%. Such is three times the 16% average of the prior eight episodes. Therefore, it’s not surprising the maximum drawdown during the current rate hike cycle was larger than average.

rate cuts and drawdowns

Second, valuations help explain why recent drawdowns during Federal Reserve pivots are worse than those before the dot-com bubble crash. The graph below shows the last three rate cuts started when CAPE10 valuations were above the historical average. The prior instances all occurred at below-average valuations.

cape 10 valuations

The current CAPE valuation is not as extended as in late 2021 but is about 50% above average. While the market has already corrected some, the valuation may still return to average or below it, as it did in 2003 and 2009.

It’s tough to draw conclusions about the 2020 drawdown. Unprecedented fiscal and monetary policies played a prominent role in boosting animal spirits and elevating stocks. Given inflation and political discord, we don’t think Fed members or politicians will be likely to gun the fiscal and monetary engines in the event of a more significant market decline.


The Federal Reserve is outspoken about its desire to get inflation to its 2% target. If they were to pivot by as much and as soon as the market predicts, something has broken. Currently, it would take a severe negative turn to the banking crisis or a rapidly deteriorating economy to justify a pivot, the likes of which markets imply. Mind you, something breaking, be it a crisis or recession, does not bode well for corporate earnings and stock prices.

There is one more point worth considering regarding a Federal Reserve pivot. If the Fed cuts Fed Funds, the yield curve will likely un-invert and return to a normal positive slope. Historically yield curve inversions, as we have, are only recession warnings. The un-inversion of yield curves has traditionally signaled that a recession is imminent. 

The graph below shows two well-followed Treasury yield curves. The steepening of both curves, shown in all four cases and other instances before 1990, accompanied a recession.

Over the past two weeks, the two-year- ten-year UST yield curve has steepened by 60 bps!

yield curves rate cuts and recessions

The post A Federal Reserve Pivot is not Bullish appeared first on RIA.

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COVID-19 impacted smoking assessment rates in community health centers, necessitating a closer examination on how procedures can be adapted

COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted Credit: Annals…



COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted

Credit: Annals of Family Medicine

COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted

Researchers from Oregon Health & Science University and OCHIN,  a large nonprofit network of community health centers, extracted electronic health record data from 217 primary care clinics between January 2019 through the end of July 2021, which included telehealth and in-person visits for 759,138 adult patients aged 18 and older years to determine how monthly rates of tobacco assessment had been affected by the COVID-19 pandemic. The team calculated the rates per 1,000 patients. The team found that between March and May 2020, tobacco assessment monthly rates declined from 155.7 per 1,000 patients down to 77.7 per 1,000 patients, a 50% decline. There was a subsequent increase in tobacco assessment between June 2020 and May 2021. However, assessments remained 33.5% lower than pre-pandemic levels. These findings are significant given the fact that tobacco use can increase the severity of COVID-19 symptoms.

What is Known on This Topic: While there is plentiful evidence on the impact that COVID-19 has had on primary health care seeking and delivery, little is known about how the pandemic affected tobacco use assessments and cessation programs.

What This Study Adds: The decline in the rate of tobacco assessments during the onset of the COVID-19 pandemic was substantial and rates have yet to return to pre-pandemic levels. Given that tobacco use can exacerbate COVID-19 symptoms, researchers recommend careful examination of procedural changes to adapt care delivery to support community health centers, specifically tobacco cessation efforts.

.Impact of COVID-19 Pandemic on Assessing Tobacco Status in Community Health Centers

Susan A. Flocke, PhD, et al,
Department of Family Medicine, Oregon Health & Science University, Portland, Oregon
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