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Futures Slide As Oil And Gold Jump, Treasuries Find Tentative Buyers With Yields At 2007 Highs

Futures Slide As Oil And Gold Jump, Treasuries Find Tentative Buyers With Yields At 2007 Highs

Global stock dipped and US equity futures traded…

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Futures Slide As Oil And Gold Jump, Treasuries Find Tentative Buyers With Yields At 2007 Highs

Global stock dipped and US equity futures traded lower as crude oil extended the weekly advance for a 4th day, rising above $90 on concerns Israel and Hamas war could widen into a regional conflict and as the DOE announced plans to refill the largely drained SPR with another $6 million barrels (good luck doing that with the proposed purchase price of "$79 or below"). As of 8:00am, S&P and Nasdaq 100 futures were down 0.3%; Europe's Stoxx 600 was down 0.7% to a seven month low and on course for a fourth day of declines. Meanwhile, Treasuries rose, led by gains in 10-year debt which briefly topped 5% yesterday for the first time since 2007, after Fed chair Jerome Powell suggested the US central bank is likely to hold interest rates steady at its next meeting. Asian equities also fell, on course for their worst week since August; China Evergrande Group is revising the terms of its proposed restructuring plan and Country Garden’s default on dollar bond interest payment still looms. A burst of buying among cryptocurrencies sent bitcoin above $30K, the highest since August.

In premarket trading, American Express gained in premarket trading after third-quarter revenue and profit soared to records. SolarEdge Technologies Inc. slumped 27% after cutting its sales forecast because of canceled orders. The declines spread across the sector, with German photovoltaic systems maker SMA Solar Technology AG down 16%. Stocks exposed to cryptocurrencies, including Cleanspark and Coinbase Global, rise, tracking the Bitcoin price as the digital asset inches closer toward the closely watched $30,000 level. Intuitive Surgical shares fall 7.8% in premarket trading after the maker of surgical tools reported third-quarter revenue that missed estimates. Analysts flagged the systems segment for the miss, noting that it had a higher mix of operating leases. Here are some other notable premarket movers:

  • HP Enterprise hares fell as much as 4.3% after the computing-services provider forecast adjusted earnings per share for 2024 that missed the average analyst estimate. Analysts note that investments in AI and other projects are pressuring the company’s operating profit and free cash flow.
  • Jazz Pharmaceuticals rose as much as 6.4% after Bloomberg News reports the company is exploring strategic options including a potential sale.
  • Regions Financial shares slide 6% after the firm’s third-quarter adjusted earnings per share missed estimates and its net interest margin was lower than consensus.
  • Riot Platforms and stocks exposed to cryptocurrencies rise in US premarket trading on Friday, tracking the Bitcoin price as the digital asset inches closer toward the closely watched $30,000 level. Riot rises 6%.
  • Union Pacific is raised to buy at Deutsche Bank, which notes the US railway company is benefiting from the recent positive volume inflection.

A turbulent week in markets has seen Middle East events drive volatility in oil prices and push investors out of riskier assets into havens like gold. At the same time, 10-year Treasury yields have soared 30 points as traders position for higher-for-longer interest rates from the Federal Reserve to cool inflation. Chair Jerome Powell suggested Thursday the Fed is inclined to hold rates steady again at its next meeting, while it watches key growth data.

“This week we had several things weighing on sentiment: the war, poor corporate results, plus strong September US data supporting Powell’s comments yesterday,” said Liberum strategist Susana Cruz, referring to Federal Reserve Chair Jerome Powell. “If things stay like this with oil and gas, we might end up in a stagflation situation, making it less likely for a rebound in 2024.”

In terms of the latest geopolitical updates, the main rise in concerns came later in the US session after the Pentagon reported that a US military base in Southern Syria was targeted with a drone attack and a US Navy warship intercepted missiles near Yemen. Brent Crude prices had traded below $90 early in the day, but ended the day +0.96% higher at $92.38/bl. Overnight, oil prices are continuing to climb for the fourth consecutive day with Brent Crude up +0.93% trading above $93bbl as we go to press. Other markets also reacted to the geopolitical risks, with gold prices (+1.38%) hovering around a 21-week high and Israel’s TA-35 Index (-1.85%) seeing a noticeable underperformance .

“The risk premium in crude has shot up again,” said Vandana Hari, founder of consultancy Vanda Insights. “As long as the Israel-Hamas tensions run high, crude will remain susceptible to further spikes on signs of an escalation.”

European equities extended their drop to a seven-month low and on course for a fourth day of declines. The Stoxx Europe 600 fell 0.7% to the lowest since March 20. Miners lagged, along with travel and leisure stocks.  L’Oreal SA pared losses as traders weighed disappointing North Asia sales against better than expected performance in North America and Europe. Here are the biggest movers on Friday:

  • Sika gains as much as 3.6%, the most since August, after the Swiss construction chemicals group reported strong third-quarter figures. Baader says the figures could be overshadowed by antitrust concerns in the sector
  • Brunello Cucinelli gains as much 5.4%, the most intraday since Sept. 29, after the luxury company increased its full-year sales growth guidance as results showed double-digit growth across all regions in the third quarter
  • L’Oreal shares fall as much as 3.7% in Paris, the biggest intraday decline since February 10, after the beauty company reported an unexpected decline in North Asia comparable sales, offsetting a better than expected performance in North America and Europe
  • Yara shares fall as much as 7.2% to their lowest intraday since Dec. 2020 after 3Q Ebitda from the Norwegian fertilizer company missed analyst estimates. Norne Securities calls the release “disappointing,”
  • Boliden falls as much as 8% to its lowest intraday level since Nov. 2020 after the miner reported 3Q earnings. Analysts note weak cash flow in the quarter due to working capital build
  • Husqvarna falls as much as 10%, the most since May 2022, after the Swedish gardening and outdoor group reported a weak set of third-quarter figures, with analysts noting the soft end-user demand continuing throughout 3Q and 4Q
  • InterContinental Hotels shares drop as much as 3.3%, as analysts look past the hotel operator’s forecast-beating revenue-per-available room in 3Q to highlight macroeconomic and financing issues impacting the development of new hotels
  • Rexel shares drop as much as 6.7% to their lowest level in nearly 10 months, after the French electrical supplies distributor’s same-day sales for the third quarter missed analyst estimates given a tough backdrop
  • Forvia shares fall as much as 2.5% after the auto-parts company’s third-quarter revenue beat consensus and announced an “encouraging” new disposal program, but analysts remain cautious given high financial costs
  • Duerr shares fall as much as 22%, the most on record, to the lowest intraday since May 2020, as the machine maker cut its adjusted Ebit margin on a strong decline in its wood-processing arm HOMAG’s order intake
  • Salvatore Ferragamo shares fall as much as 6.5% to the lowest intraday level since November 2020 after the Italian luxury group reported weak third-quarter results as expected, with double-digit sales declines across geographies

Earlier in the session, Asian equities fell, on course for their worst week since August, as investors fretted over escalation in the Middle East crisis in addition to Federal Reserve policy and China’s uneven recovery.  The MSCI Asia Pacific Index fell as much as 0.9% before paring its decline, with Samsung, Tencent and BHP Group among the biggest drags.

A record injection of extra cash by China may offer support after the nation’s stocks erased all gains seen during their massive reopening rally that took off late last year. The economy has been challenged this year by a lack of demand and a downturn in the property market. Still, Morgan Stanley advises against buying the dip in Chinese equities as market sentiment is likely to stay fragile while foreign fund outflow could persist near-term. Meanwhile, concerns around property sector lingered on with Country Garden Holdings missing a dollar bond interest payment, effectively triggering the largest property sector default since Evergrande.

  • China’s mainland stock benchmark trimmed losses but remained on course for its worst week since March, even as the central bank injected the most cash on record into the financial system in an effort to keep funding costs low.  “Investor sentiment is likely to stay fragile, while foreign fund outflow could persist near term, if without meaningful macro improvement,” Morgan Stanley China strategists including Laura Wang wrote in a note Thursday, adding that there is need for stimulus and additional market liquidity support.
  • Japan's Nikkei 225 retreated at the open but then gradually pared its losses amid reports of potential temporary income tax cuts and with participants also digesting the latest Japanese CPI data which printed mostly firmer than expected but softened from the previous month’s pace.
  • Australia's ASX 200 was dragged lower with broad weakness seen across all sectors aside from energy which is kept afloat by the geopolitical risk premium uplift in oil prices.
  • India stocks extended losses to a third day, as concerns that the Israel- Hamas conflict may escalate gripped global markets. The S&P BSE Sensex fell 0.4% to 65,397.62 in Mumbai on Friday, taking the weekly fall to 1.3%. The NSE Nifty 50 Index also declined by a similar measure. All of the 18 sectoral gauges maintained by BSE recorded losses for the day.

In FX, the Bloomberg Dollar Spot Index steadied as investors weighed comments from Federal Reserve Chair Jerome Powell on the likelihood of rates being held steady.

  • USD/JPY was in focus after briefly dumping when USD/JPY inched to 149.99 before retracing slightly lower.
  • The New Zealand dollar, Australian dollar and Norwegian krone underperformed on risk-aversion as markets braced for a potential escalation in Middle East conflict over the weekend
  • GBP/USD dropped as much as 0.4% to 1.2093 after UK retail sales fell more than expected; money markets pared wagers on further BOE hikes to a 60% chance of a final 25 basis point hike, from 90% earlier this week
  • The Canadian dollar is the outperformer among the G-10’s, rising 0.1% versus the greenback.
  • The Israeli shekel weakened for a 10th day amid concerns over the potential for a broadening conflict.

In rates, treasuries rose across the curve as yields at multi-year highs drew buyer interest and as rising tensions in the Middle East push investors towards perceived safe haven assets. The curve bull-flattened, unwinding a portion of Thursday’s aggressive steepening that pushed 2s10s spread to least inverted level in more than a year. 10-year Treasury yields are around 4.94% after re-opening in Asia session at 4.992%, new multiyear high; bunds and gilts underperform by 4.5bp and 6bp in the sector. The US 2s10s spread sits around -21bp after topping at -16.9bp Thursday, least inverted level since September 2022. US yields richer by 1bp to 5bp across the curve with long-end-led gains flattening 2s10s, 5s30s spreads by 4..2bp and 0.3bp on the day;

In commodities, spot gold added 0.5% to around $1,984. Oil prices also gain, with Brent futures rising 1.2% to trade near $93.50.

Bitcoin convincingly broke above the $29k mark and has continued to climb to within relative proximity of the $30k handle, though the move has currently stalled/paused for breath around the $29.85k current session high. Action which takes BTC to a fresh WTD peak and to levels not seen since early August. Coinbase's legal officer Grewal said he is confident that the US SEC will approve a US Bitcoin ETF, via CNBC; adding, it is likely the approval will be "soon".

Looking to the day ahead now, and data releases include UK retail sales and German PPI for September. Central bank speakers include the Fed’s Harker and Mester. Lastly, earnings releases include American Express.

Market Snapshot

  • S&P 500 futures little changed at 4,300.25
  • MXAP down 0.5% to 152.82
  • MXAPJ down 0.6% to 478.71
  • Nikkei down 0.5% to 31,259.36
  • Topix down 0.4% to 2,255.65
  • Hang Seng Index down 0.7% to 17,172.13
  • Shanghai Composite down 0.7% to 2,983.06
  • Sensex down 0.3% to 65,416.08
  • Australia S&P/ASX 200 down 1.2% to 6,900.72
  • Kospi down 1.7% to 2,375.00
  • STOXX Europe 600 down 0.5% to 437.52
  • German 10Y yield little changed at 2.93%
  • Euro little changed at $1.0586
  • Brent Futures up 1.0% to $93.30/bbl
  • Gold spot up 0.4% to $1,981.64
  • U.S. Dollar Index little changed at 106.27

Top Overnight News

  • Middle East tensions escalated as the Pentagon said it’s experiencing an increase in drone attacks on military bases in Iraq and Syria. A US destroyer shot down cruise missiles and drones launched by Iran-backed Houthi militants in Yemen that were fired toward Israel. BBG
  • China took a fresh step to ensure funding costs in its financial markets are sufficiently low so a tentative pickup in the nation’s economy can take hold. The PBOC handed lenders a record sum of cash via a short-term liquidity tool on Friday, as an indicator for funding costs surged to the highest since April. BBG
  • China has imposed export controls on graphite, a material used in electric vehicle batteries, as Beijing hits back at US-led restrictions on technology sales to Chinese companies. FT
  • In a war with the U.S. over Taiwan, China would need to create a global network of companies under U.S. sanctions, seize American assets within its borders, and issue gold-denominated bonds, according to Chinese government-affiliated researchers studying the Western response to Russia after its invasion of Ukraine. RTRS
  • BOJ Governor Kazuo Ueda said on Friday the central bank will "patiently" maintain ultra-loose monetary policy to achieve its 2% inflation target in a stable manner. RTRS
  • Jim Jordan is weighing his next move in the campaign for House speaker ahead of a planned third vote at 10 a.m. The Ohio Republican has lost two ballots this week. Jordan is scheduled to hold a press conference at 8 a.m. BBG
  • The long-awaited delivery of aid to the besieged Gaza Strip has been delayed by disagreements over how to ensure the supplies cannot be used by Hamas, according to three people familiar with the matter. FT
  • UBS’ next round of job cuts at Credit Suisse — targeting about 10% of support staff — is set to begin Nov. 6, Financial News reported. Compliance, risk and marketing roles may be impacted. BBG
  • OpenAI is in talks with investors about selling shares at a valuation of $86bn, roughly three times what it was worth six months ago, as advances in artificial intelligence transform the market’s appetite for the industry’s leading companies. FT

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks mostly declined after the losses on Wall St where the curve steepened as markets digested various comments from Fed Chair Powell and with sentiment pressured by the escalating geopolitical situation. ASX 200 was dragged lower with broad weakness seen across all sectors aside from energy which is kept afloat by the  geopolitical risk premium uplift in oil prices. Nikkei 225 retreated at the open but then gradually pared its losses amid reports of potential temporary income tax cuts and with participants also digesting the latest Japanese CPI data which printed mostly firmer than expected but softened from the previous month’s pace. Hang Seng and Shanghai Comp. were subdued albeit with the downside cushioned after the PBoC’s actions in which it unsurprisingly maintained its benchmark lending rates but boosted liquidity in the interbank market with its largest-ever open market operation net daily injection.

Top Asian News

  • PBoC 1-Year Loan Prime Rate (Oct) 3.45% vs. Exp. 3.45% (Prev. 3.45%)
  • PBoC 5-Year Loan Prime Rate (Oct) 4.20% vs. Exp. 4.20% (Prev. 4.20%)
  • PBoC injected CNY 828bln via 7-day reverse repos with the rate kept at 1.80% for a CNY 733bln net daily injection.
  • BoJ Financial Stability Report: Financial system has been maintaining stability on the whole; Japanese banks have sufficient capital bases even amid global tightening of financial conditions; vigilance against tail risks continues to be warranted.
  • BoJ's Ueda says the economy is recovering moderately, exports and output are moving sideways. Aim at stably and sustainably achieving 2% inflation target, by patiently maintaining current easy policy. Inflation likely to narrow the pace of its rise, then re-accelerate, reflecting changes in corporate wages and price-setting behaviour. Uncertainty surrounding the domestic economy is very high. Need to manage interest rate risk increasing, given very high uncertainty on the domestic economic/price outlook.

European bourses are in the red, Euro Stoxx 50 -1.0%, in a continuation of APAC pressure with fresh catalysts comparably light and the region on track for a week of marked downside. Sectors feature pressure in Basic Resources closely followed by Travel/Leisure given IHG after earnings, while Healthcare is bucking the trend given its defensive status and after pronounced losses on Thursday following Roche. Stateside, futures reside in the red but are yet to deviate significantly from the unchanged mark, ES -0.3%, and holding just below the 4300 figure post-Powell and ahead of Fed's Harker & Mester alongside a handful of pre-market earnings.

Top European News

  • UK PM Sunak's Conservatives lost the by-elections in Tamworth and Mid-Bedfordshire to the Labour Party where the Conservatives previously had a large majority.
  • BoE's Bailey expected a "marked fall" in inflation next month, via Belfast Telegraph; September inflation figures were not far from what the BoE had expected. Core inflation fell slightly from what we had expected, this is "quite encouraging", pay growth as measured is still well above anything consistent with the inflation target.
  • Riksbank sold USD 1.34bln (between October 6-13th) vs. prev. 390mln, sold EUR 80mln vs. prev. EUR 0 in its currency FX reserve hedging.

FX

  • Buck betwixt and between as USTs bull-flatten amidst heightened geopolitical risk heading into the weekend, DXY underpinned within a 106.170-420 range.
  • Loonie firmer pre-Canadian retail sales in contrast to Pound-post weak UK consumption data, consumer sentiment and dovish BoE commentary, USD/CAD and Cable towards base of 1.3683-1.3734 and 1.2093-1.2145 respective parameters.
  • Euro firm vs Dollar and flanked by decent option expiry interest either side of 1.0565-95 band.
  • Yen on the brink of 150.00 against the Greenback after dovish BoJ rhetoric and relying on barriers, export offers and expiries to keep afloat.
  • Aussie and Kiwi hang on 0.6300 and 0.5800 handles vs US peer in face of rising Middle East conflict tension.
  • PBoC set USD/CNY mid-point at 7.1793 vs exp. 7.3055 (prev. 7.1795).

Fixed Income

  • Debt futures decouple and diverge in volatile pre-weekend trade.
  • Bunds hold just above par within 127.90-52 bounds, Gilts reverse from 91.90 to 91.28 and into negative territory awaiting UK rating reviews and T-note firm between 105-28/135 parameters ahead of Fed's Harker and Mester.

Commodities

  • Crude futures are on a firmer footing in a continuation of the geopolitically induced gains seen after the benchmarks settled higher by USD 1.10/bbl and USD 0.88/bbl respectively.
  • Currently, WTI Dec'23 hovers around USD 85.50/bbl (in a USD 88.88-89.60/bbl range) and Brent edges towards USD 93.50/bbl (in a USD 92.78-93.46/bbl range.)
  • Spot gold/silver remain firmer going into a weekend with geopolitical tensions/risk high, XAU at highs of USD 1985/oz. Conversely, the downbeat risk tone and poor APAC performance have dented base metals with LME Copper near lows just above USD 7.9k/T.
  • US and EU reportedly stalled on a steel accord although both sides are seeking a deal to avoid the return of Trump-era levies, according to Bloomberg.

Geopolitics

  • US President Biden said they are facing an inflection point in history and the US is pursuing every avenue to bring hostages home, while he added the assault on Israel echoes the brutality inflicted on Ukraine and that Hamas and Putin share a want to annihilate neighbouring democracies. Furthermore, Biden said making sure Israel and Ukraine succeed is vital for US national security and they will continue to hold Iran accountable, while he confirmed he is sending an urgent budget request to Congress today.
  • US President Biden's supplemental spending request to Congress will include USD 60bln for Ukraine, USD 14bln for Israel, USD 10bln for humanitarian aid, USD 14bln for border security and USD 7bln for the Indo-Pacific, according to sources cited by Reuters.
  • EU Commission President von der Leyen said 93% of Hamas's equipment comes from Iran and it is important to step up sanctions on Iran and crackdown on evasion, while she added that Western sanctions on Russia are crippling the economy but ongoing pressure is necessary.
  • China's Middle East envoy met with the Russian President's Special Representative for Middle East and African Countries on Thursday and said China is saddened by the large number of civilian casualties from the Israeli-Palestinian conflict. China's envoy added that China and Russia share the same position on the Palestinian issue and China is ready to maintain communication and coordination with Russia in order to cool down the situation.
  • North Korean leader Kim met with Russian Foreign Minister Lavrov and expressed resolve to fulfil commitments made at the summit with Russian President Putin, while they discussed expanding cooperation to actively respond to regional and global issues. It was also reported that North Korea said it has already enacted action plans to be triggered when signs of an imminent nuclear attack are detected, according to KCNA.

US Event Calendar

  • 04:00: Bloomberg Oct. United States Economic Survey
  • Oct. 20-Oct. 23: Sept. Monthly Budget Statement, est. -$166b, prior -$429.8b

Fed speakers

  • 09:00: Fed’s Harker Speaks on Economic Outlook
  • 12:15: Fed’s Mester Speaks at Manhattan Institute for Policy Research

DB's Jim Reid concludes the overnight wrap

Not long after I send this I'm off to a Center Parcs for an activity weekend with the family. The kids are incredibly excited. My wife is pretty excited. I am considerably less so and will have to tolerate doing things such as climbing up high above the ground to the tree canopies on dodgy rope bridges with the risk of having to do a zip wire across a lake to get back down to earth.

Markets have been sliding down a zip wire of their own over the last 24 hours, as the confluence of uncertain forces currently impacting markets continued to linger. 10yr US yields closed around a basis point off 5%, a level we haven't breached since 2007 and were up +7.5bps on the day. The big story was a significant steepening encouraged by Fed Chair Powell’s remarks at the Economic Club of New York. 30yr US yields rose +11.5bps on the day (+12bps after Powell) and 2yr yields fell -6.3bps (-7bps after Powell), leading to the sharpest 2s30s steepening since the March banking stress. And the 2s10s slope rose +13.7ps to -17.2bps, its highest since September 2022 and a long way from the -46bps we were last Thursday. There has been a bit of a correction this morning in Asia as 2, 10 and 30yr US yields are down -1.2bps, -5.1bps and -4.8bps, respectively. So volatile markets.

In the speech on the economic outlook, Powell said that they were “proceeding carefully”, and explicitly nodded to the fact that financial conditions “have tightened significantly in recent months” which you could interpret as lessoning the need for the Fed to act. This led to an initial dovish rates reaction across the board, though there were also some more hawkish comments, including that “ Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy .” Powell then added a notable comment during the Q&A, saying “I think the evidence is not that policy is too tight right now”.

Overall given the huge steepening, markets must have concluded that the hints that near-term rates didn't need to go up much more, but that policy wasn't overly tight, perhaps suggested a "reasonably high for longer" interpretation rather than a "lets make sure we crush inflation before we do anything else" one. Or maybe I'm clutching at straws as to explaining why curves steepened so much on one relatively "to form" speech.

The reaction at the front end was clear though and market pricing for the chance of a Fed hike this year fell back to 25%, from 40% the previous day. US equities seesawed as Powell spoke, with the S&P 500 trading nearly +0.5% up on the day around the end of this speech. But renewed geopolitical concerns contributed to a pronounced weakening during the rest of the session and left it closing down -0.85% on the day. The VIX volatility index rose +2.2pts to 21.4, its highest since March. The equity decline was broad-based with the NASDAQ down -0.96%. Tech megacaps saw a contrasting performance as Netflix, the 42nd biggest company in the S&P 500 was +16.05% and Tesla, the 7th biggest was -9.30% after Wednesday evenings' results. This morning, the S&P 500 (-0.16%) and NASDAQ 100 (-0.30%) futures continue to drift lower.

In terms of the geopolitical situation, the main rise in concerns came later in the US session amid news that a US military base in Southern Syria was targeted with a drone attack and a US Navy warship intercepted missiles near Yemen. Brent Crude prices had traded below $90 early in the day, but ended the day +0.96% higher at $92.38/bl. Overnight, oil prices are continuing to climb for the fourth consecutive day with Brent Crude up +0.93% trading above $93bbl as we go to press. Other markets also reacted to the geopolitical risks, with gold prices (+1.38%) hovering around a 21-week high and Israel’s TA-35 Index (-1.85%) seeing a noticeable underperformance .

The day's action followed a fairly divergent set of US data yesterday. On the plus side, the weekly initial jobless claims fell beneath 200k for the first time since January, coming in at 198k (vs. 210k expected). That’s not just a blip either, as it pushed the smoother 4-week moving average down to 205.75k, which is the lowest it's been since early February. But there were also several more negative reports. For instance, the continuing claims ticked up to 1.734m (vs. 1.706m expected), which is their highest since early July. Then we got more negative news from the housing market, as the number of existing home sales fell to a 13-year low in September, at an annualised rate of 3.96m (albeit a bit above the 3.89m expected). And lastly, the Conference Board’s Leading Index fell for an 18th consecutive month with a -0.7% decline (vs. -0.4% expected).

Ahead of Powell’s speech, European markets had lost a decent amount of ground yesterday, with the STOXX 600 (-1.19%) posting a third consecutive decline and falling to a 7-month low. That was echoed across the major indices, with losses for the FTSE 100 (-1.17%), the CAC 40 (-0.64%) and the DAX (-0.33%), whilst the Swiss Market Index (-2.13%) had its worst daily performance of 2023 so far. European sovereign bonds saw a mixed performance, with yields on 10yr bunds (+0.5bps) inching up but OATs (-0.6bps) and BTPs (-3.8bps) moving lower. Gilts underperformed, with the 10yr yield up +1.6bps and the 30yr yield (+3.5bps) closing at its highest level since 2002, at 5.07%.

Asian equity markets are extending losses this morning with the Nikkei (-0.52%), the Hang Seng (-0.34%), the CSI (-0.30%) and the Shanghai Composite (-0.27%) all lower.

Early morning data showed that Japan’s core inflation dropped below 3% for the first time in over a year on the back of easing gas and electricity prices. National core consumer prices grew +2.8% y/y in September (v/s +2.7% expected so a touch above) from +3.1% in August. At the same time, the national CPI rose +3.0% y/y in September as expected but down from +3.2%. Core ex-food and energy was a tenth higher than expected at 4.2%. Overall this data suggests the BoJ remains on course to tighten policy in the months ahead. See our Japan economists upgraded CPI forecasts after the number here.

In the US House of Representatives, there’s still no sign that any Speaker candidate can get a majority, with Republican Jim Jordan having fallen short in two votes thanks to opposition from fellow Republicans. Earlier yesterday, reporting from several outlets including the Washington Post suggested that Jordan would instead endorse a plan to temporarily empower Patrick McHenry until January 3. However, this plan appeared to be abandoned after a lengthy meeting of House Republicans. On the next steps ahead, Jordan would push for another vote (a third vote) on his candidacy to become speaker. McHenry is currently the Speaker pro tempore of the House, which is a member who acts in the Speaker’s absence when the office becomes vacant. But they don’t have the powers of a normal speaker, meaning the House is still unable to pass legislation, and there’s still an upcoming government shutdown deadline on November 17 if new funding isn’t passed.

To the day ahead now, and data releases include UK retail sales and German PPI for September. Central bank speakers include the Fed’s Harker and Mester. Lastly, earnings releases include American Express.

Tyler Durden Fri, 10/20/2023 - 08:19

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Stock Bull Market Might Just Be Getting Started, But…

Stock Bull Market Might Just Be Getting Started, But…

Authored by Simon White, Bloomberg macro strategist,

The rally in equities might…

Published

on

Stock Bull Market Might Just Be Getting Started, But...

Authored by Simon White, Bloomberg macro strategist,

The rally in equities might have much further to go, based on the positive outlook for liquidity.

It might not seem like it after a seemingly relentless advance and fevered speculation, but the new bull market is comparatively mild versus the postwar past.

Yet that could change. Excess liquidity - the difference between real money growth and economic growth - shows that the stock rally could have much further to go, turning a so-far historically below-par bull market into one that’s above the past average.

There are many reasons why this might not transpire...

As a natural cynic, I’m more comfortable when the outlook is pessimistic (no room for disappointment) versus when it is optimistic (plenty of opportunity to end up with egg on your face when things do go wrong after all). But sometimes the data just isn’t there to support a downbeat view.

That’s the case today. One of the best medium-term drivers of stock returns is excess liquidity. It’s an intuitive measure: when money, which is created by banks and central banks, is growing faster in real terms than GDP, liquidity is left which is “excess” to the needs of the real economy, and which thus tends to find its way into risk assets.

After beginning to rise in the first half of last year, and supporting the equity rally that began in March, excess liquidity has continued to rise. It is difficult for markets to sell off significantly when there is plenty of risk-asset-supporting liquidity sloshing around the system.

Fiscal and monetary policy are conspiring to keep excess liquidity climbing despite the cumulative impact of higher rates coursing through the economy.

First, what has been driving excess liquidity so far?

It has three main elements: inflation, economic growth and narrow money, with the latter responsible for most of the measure’s rise over the last year.

But that’s not the full picture.

Excess liquidity is a global measure, made up of the money and economic growth of countries in the G10, in dollar terms. That means a weaker dollar boosts non-US excess liquidity.

As the chart below shows, it’s the weaker dollar - down over 9% from its September 2022 highs - that has been the biggest driver of excess liquidity.


 
We can blame fiscal policy here. The US’s expansive deficit has been one of the most important longer-term negative influences on the dollar. There is little sign the deficit is about to improve by much, based on (no doubt conservative) Congressional Budget Office forecasts. Government finances are also unlikely to be straitened whoever the next president is, meaning the primary trend in the dollar (DXY) is likely to remain down.

We can also blame monetary policy for the dollar’s malaise and excess liquidity’s buoyancy. The latter looked like it was about to start turning lower last year, but was saved in the nick of time by the Federal Reserve’s pivot in December.

How? On a shorter-term basis (6-9 months), the dollar is led by the real yield curve. The US currency is driven at the margin by the real return of foreign investors in long-term US assets. In the latter months of 2023, the real yield curve had been steepening, as longer-term real yields were rising more than shorter ones.


 
Then the Fed came with its still unfathomable pivot. Shorter-term real yields fell, but their longer-term counterparts fell by more, and the curve re-flattened. What was a strong supportive sign for the dollar returned to being a weight on it – and thus a continued tailwind for excess liquidity.

It’s not just liquidity that could charge the bull market further. The absence of a US recession, which continues to look off the cards for the time being, also bolsters the case that equities should not soon face a steep selloff. Traditional recession indicators have been misleading in this pandemic-addled cycle, but it has become increasingly clear a downturn in the US is now less likely than not.

Furthermore, the rally might be on shakier legs if sentiment and technicals were overly bullish, but they are not yet historically stretched. The net number of stocks making new 52-week highs, the number trading above their 200-day moving average or their upper Bollinger band, and the advance-decline line are all high but have been higher. Moreover, sentiment is net bullish but not at extremes, while retail allocation to stocks is only at its 5-year average.

Leadership is narrow, with only a handful of stocks driving the advance, but there is little historically to show that this leads to sub-par returns. And when markets eclipse new highs, as the S&P did a few weeks ago, it acts as a psychological all-clear that we are indeed in a new bull market. Whether you agree that’s justified or not, the catch-up money that floods the market creates its own momentum.

No bull market comes without risks and this one is no different. The biggest is a recession. While, as mentioned above, that does not look likely in the near term, a sudden and unanticipated economic slump (either endogenous or due to an exogenous shock) would decimate returns. Also, a bull market that does not begin either during a recession or within 18 months of one is unusual, with only one postwar example (1966).

Equities experience their largest drawdowns in recessions, and given there is little ex ante to indicate one is coming in the current environment, it would likely be particularly devastating.

A blow-off top is another risk. Even then, despite the upset one would cause, it might not be enough to kick-start a new bear market. Inflation, too, will pose a risk to stocks, but to their real returns, unless price growth’s revival is particularly abrupt or steep (bull and bear markets are, sub-optimally, based off nominal returns). A persistent bear-steepening of the yield curve would be the sign the rally is at risk.

To misquote John Templeton, bull markets are born on pessimism, but they grow on liquidity. As long as excess liquidity is supported, the market is primed to keep grinding higher, regardless of how cynical you might be.

Tyler Durden Tue, 02/27/2024 - 14:40

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Fed And Treasury Ensure Dollar Downside Is Ahead

Fed And Treasury Ensure Dollar Downside Is Ahead

Authored by Simon White, Bloomberg macro strategist,

The Fed’s pivot in December and the…

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Fed And Treasury Ensure Dollar Downside Is Ahead

Authored by Simon White, Bloomberg macro strategist,

The Fed’s pivot in December and the Treasury’s willingness to run persistently large fiscal deficits will lead the dollar to resume its downtrend from 2022 highs.

Dollar strength seems to be in vogue again, but fiscal and monetary policy will conspire to make that trend unlikely to persist much longer. Running pro-cyclical fiscal deficits, not just in the US but across much of the developed world, has become the norm. Electorates’ expectations widened after the pandemic, and now there is an unwritten pact between governments and their voters that they will underwrite a growing itinerary of risks from job loss to disease – the Treasury put.

Large fiscal deficits are a long-term negative for the currency as they are inflationary, and considering the US deficit is one of the largest in GDP terms, it poses greater downside risk to the dollar versus other currencies. This will also be a tailwind for the new bull market in stocks.

But shorter-term leading indicators are also dollar negative. On this horizon, the real yield curve gives one of the best leads on the dollar, by about six-to-nine months. This is where the Fed’s pivot comes in.

The real yield curve had been steepening last year, as longer-term real yields were rising more than shorter-term ones, due in part to the influence of rising term premium. That would have anticipated a rising dollar. The real yield curve then began to re-flatten, which continued even after the Fed performed its verbal volte-face in December, as longer-term real yields have risen much less than short-term ones.

The DXY index is up ~2.3% this year, versus the average of 1.4% in the first two months of the year (data back to 1980). But the dollar typically sees all its net gains in the first three months of the year (1.7%) versus an average decline of 0.9% through the remainder.

Net positioning in the dollar is flat, leaving speculators free to move with or against it. They should favor the latter, and not be deterred by recent dollar strength (which is fairly unremarkable), and instead look to the seasonally negative latter three quarters of the year, given extra credence by fiscal and monetary policy that will continue to be a headwind.

Tyler Durden Tue, 02/27/2024 - 12:20

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This Is Nuts – An Entire Market Chasing One Stock

This Is Nuts – An Entire Market Chasing One Stock

Authored by Lance Roberts via RealInvestmentAdvice.com,

“When you sit down with your…

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This Is Nuts – An Entire Market Chasing One Stock

Authored by Lance Roberts via RealInvestmentAdvice.com,

“When you sit down with your portfolio management team, and the first comment made is ‘this is nuts,’ it’s probably time to think about your overall portfolio risk. On Friday, that was how the investment committee both started and ended – ‘this is nuts.’”

 – January 11th, 2020.

revisited that original post a couple of weeks ago as the market approached its 5000 psychological milestone. Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate.

Even one of the “always bullish” media outlets took notice, which is notable.

“In a normal functioning market, Nvidia doing amazingly is bad news for competitors such as AMD and Intel. Nvidia is selling more of its chips, meaning fewer sales opportunities for rivals. Shouldn’t their stocks drop? Just because Meta owns and uses some new Nvidia chips, how is that going to positively impact its earnings and cash flow over the next four quarters? Will it at all?

‌The point is that investors are acting irrationally as Nvidia serves up eye-popping financial figures and the hype machine descends on social media. It makes sense until it doesn’t, and that is classic bubble action.” – Yahoo Finance

As Brian Sozzi notes in his article, we may be at the “this is nuts” stage of market exuberance. Such usually coincides with Wall Street analysts stretching to “justify” why paying premiums for companies is “worth it.”

We Can’t All Be Winners

Of course, that is the quintessential underpinning for a market that has reached the “this is nuts” stage. There is little doubt about Nvidia’s earnings and revenue growth rates. However, to maintain that growth pace indefinitely, particularly at 32x price-to-sales, means others like AMD and Intel must lose market share.

However, as shown, numerous companies in the S&P 1500 alone are trading well above 10x price-to-sales. (If you don’t understand why 10x price-to-sales is essential, read this.) Many companies having nothing to do with Nvidia or artificial intelligence, like Wingstop, trade at almost 22x price-to-sales.

Again, if you don’t understand why “this is nuts,” read the linked article above.

However, in the short term, this doesn’t mean the market can’t keep increasing those premiums even further. As Brian concluded in his article:

“Nothing says ‘investing bubble’ like unbridled confidence. It’s that feeling that whatever stock you buy — at whatever price and at whatever time — will only go up forever. This makes you feel like an investing genius and inclined to take on more risk.”

Looking at some current internals tells us that Brian may be correct.

This Is Nuts” Type Of Exuberance

In momentum-driven markets, exuberance and greed can take speculative actions to increasingly further extremes. As markets continue to ratchet new all-time highs, the media drives additional hype by producing commentary like the following.

“Going back to 1954, markets are always higher one year later – the only exception was 2007.”

That is a correct statement. When markets hit all-time highs, they are usually higher 12 months later due to the underlying momentum of the market. But therein lies the rub: what happened next? The table below from Warren Pies tells the tale.

As shown, markets were higher 12 months after new highs were made. However, a lot of money was lost during the next bear market or correction. Except for only four periods, those bear markets occurred within the next 24 to 48 months. Most gains from the previous highs were lost in the subsequent downturn.

Unsurprisingly, investing in the market is not a “risk-free” adventure. While there are many opportunities to make money, there is also a history of wealth devastation. Therefore, understanding the environment you are investing in can help avoid potential capital destruction.

From a technical perspective, markets are exceedingly overbought as investors have rushed back into equities following the correction in 2022. The composite index below comprises nine indicators measured using weekly data. That index is now at levels that have denoted short-term market peaks.

Unsurprisingly, speculative money is chasing the Mega-cap growth and technology stocks. The volume of call options on those stocks is at levels that have previously preceded more significant corrections.

Another way to view the current momentum-driven advance in the market is by measuring the divergence between short and long-term moving averages. Given that moving averages smooth price changes over given periods, the divergences should not deviate significantly from each other over more extended periods. However, as shown below, that changed dramatically following the stimulus-fueled surge in the markets post-pandemic. Currently, the deviation between the weekly moving averages is at levels only previously seen when the Government sent checks to households, overnight lending rates were zero, and the Fed bought $120 billion monthly in bonds. Yet, none of that is happening currently.

Unsurprisingly, with the surge in market prices, investor confidence has surged along with their allocation to equities. The most recent Schwab Survey of bullish sentiment suggests the same.

More than half of traders have a bullish outlook for the first quarter – the highest level of bullishness since 2021

Yes, quite simply, “This is nuts.”

Market Measures Advise Caution

In the short term, over the next 12 months, the market will indeed likely finish the year higher than where it started. That is what the majority of analysis tells us. However, that doesn’t mean that stocks can’t, and won’t, suffer a rather significant correction along the way. The chart below shows retail and professional traders’ 13-week average of net bullish sentiment. You will notice that high sentiment readings often precede market corrections while eventually rising to higher levels.

For example, the last time bullish sentiment was this extreme was in late 2021. Even though the market eventually rallied to all-time highs, it was 2-years before investors got back to even.

Furthermore, the compression of volatility remains a critical near-term concern. While low levels of volatility have become increasingly common since the financial crisis due to the suppression of interest rates and a flood of liquidity, the lack of volatility provides the “fuel” for a market correction.

Combining excessive bullish sentiment and low volatility into a single indicator shows that previous levels were warnings to more bullish investors. Interestingly, Fed rate cuts cause excess sentiment to unwind. This is because rate cuts have historically coincided with financial events and recessions.

While none of this should be surprising, given the current market momentum and bullish psychology, the over-confidence of investors in their decision-making has always had less than desirable outcomes.

No. The markets likely will not crash tomorrow or in the next few months. However, sentiment has reached the “this is nuts” stage. For us, as portfolio managers, such has always been an excellent time to start laying the groundwork to protect our gains.

Lean on your investing experience and all its wrinkles.” – Brian Sozzi

Tyler Durden Tue, 02/27/2024 - 08:11

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