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Futures Steady After Fed-Inspired Rout As Tech, Bitcoin Slide Continues

Futures Steady After Fed-Inspired Rout As Tech, Bitcoin Slide Continues

US equity futures were little changed after earlier swings as traders digested hawkish Fed minutes that sparked a global stock rout on Wednesday. As discussed yesterday,.



Futures Steady After Fed-Inspired Rout As Tech, Bitcoin Slide Continues

US equity futures were little changed after earlier swings as traders digested hawkish Fed minutes that sparked a global stock rout on Wednesday. As discussed yesterday, minutes from the Fed’s December meeting showed a growing preference for a faster path of rate hikes and a shrinking of the bank’s balance sheet (one which would lead to yet another market crash and even more stimulus). However, while rising rates is terrible news for tech and high duration names, it's good news for the value sector, and investors bet while the Fed's faster-than-expected policy tightening (which will lead to faster than expected easing) may crimp highly valued technology stocks it will offer opportunities in other equity sectors, and sure enough with Nasdaq futures bombing again, energy names like Exxon are at 2 year highs. Treasury yields extended a spike, with the 10Y rising to 1.75%, the dollar was unchanged and bitcoin's plunge continued even though the selling in stocks has subsided. At 730am, Emini S&P futures were down 3 points or -0.06%, Dow futures were up 82 points or 0.2% and Nasdaq futures were down 76 points or 0.5% but off worst levels.

A faster Fed balance sheet normalization could bring curtains down on unprecedented policy accommodation which underwrote asset prices through the worst of the pandemic. The Fed is now at the core of the investment outlook for 2022, overriding continuing concerns such as slowing global growth, China’s regulatory crackdown and supply bottlenecks.

While the prospect of faster tightening hit stocks, with highly-valued technology shares seeing the biggest drops, some investors say equities can withstand the turbulence. “We believe any correction should be relatively short-lived as central banks will be keen to avoid excess volatility,” Julien Lafargue, chief market strategist at Barclays Private Bank, said by email. “2022 is likely to be a more challenging year for equity markets as well as investors’ nerves.”

That pep talk did little to boost megacap tech stocks all of which dropped again in premarket trading, set for another day of declines amid concerns about the impact of higher interest rates and rising bond yields on the sector (Apple -0.4%, Netflix -0.8%, Meta -0.3%). Among sectors, U.S. cryptocurrency-exposed stocks fell in premarket trading as Bitcoin slumped to the lowest level since December’s flash crash. Some small-cap biotech and pharma stocks rose amid positive trial results and broker upgrades. Obseva (OBSV US) +6.8% after positive results for its Phase 3 Edelweiss 3 trial of linzagolix. Magenta Therapeutics (MGTA US) +6.1% after Goldman upgrades to buy. Some other notable premarket movers:

  • U.S. cryptocurrency-exposed stocks fall in premarket trading as Bitcoin slumps to lowest level since the December flash crash. Riot Blockchain (RIOT US) -1.9%, Marathon Digital (MARA US) -1.7%.
  • Berkeley Lights (BLI US) declined 29% in U.S. premarket trading hours after its preliminary revenue missed estimates and it announced CEO Eric Hobbs will transition to be president of the Antibody Therapeutics business line.
  • Carnival’s U.S.-listed shares (CCL US) rise 1.2% in premarket trading even after the London stock fell as Reuters reported that peers Royal Caribbean and Norwegian canceled some sailings.
  • Sutro Biopharma (STRO US) shares dropped 13% postmarket after the drugmaker reported interim data from a dose-expansion Phase 1 study of STRO-002 on 44 patients with advanced ovarian cancer.
  • Turtle Beach (HEAR US) fell 4.6% postmarket after the maker of gaming accessories said its preliminary full year 2021 revenue was about $365 million, the low end of its guidance of $365 million to $380 million.
  • SomaLogic (SLGC US) climbed 16% in extended trading after announcing a worldwide strategic collaboration with Illumina.

European bourses were also in the red, following a weak, tech-led Asia session. Euro Stoxx 50 is down 1.1%, roughly halving opening losses; the Stoxx 600 index declined 0.9% led by a 2.6% drop in technology shares. Tech and media sectors are off 2%. FTSE 100 outperforms peers but remains in negative territory.  European luxury were hit amid a broader market selloff, with Hermes, LVMH and Richemont underperforming the benchmark Stoxx 600 Index (Hermes -2.8%, LVMH -2.6%, Moncler -2.5%, Tod’s -2.3%, Burberry -2.1%, Richemont -1.9%, Kering -1.8%, Swatch -1.6%, Hugo Boss -1.2%). The selloff in luxury stocks is related to Wednesday’s U.S. market selloff and the impact of rising bonds yields, which is favoring value stocks, GAM investment manager Swetha Ramachandran writes in an email.

“At current levels, we do not believe that higher (real) yields are a game-changer for global equity markets,” Mathieu Racheter, the head of equity strategy at Julius Baer said in an email. “In terms of market dynamics, the rotation from long-duration stocks, which have been among the big winners in 2021, toward more economically-sensitive sectors could continue in the short-term.”

“There will undoubtedly be pockets of volatility surrounding Fed meetings throughout the year, but investors shouldn’t excessively fear the Fed, especially when there continue to be exciting alpha opportunities in markets,” Madison Faller, a global strategist at JPMorgan Private Bank, wrote in an email. “Growth and inflation will be decelerating throughout 2022, but nonetheless remain above historic trend levels. We think this will call for a much lower risk of a Fed-induced material market correction.”

Earlier in the session, a fresh bout of selling hit Asian stocks on Thursday as the risk of accelerated interest-rate hikes by the Federal Reserve sparked a broad decline from industrials to the technology sector. The MSCI Asia Pacific Index extended losses to 1.7%, on track to fall for a second day, as tech and industrial names led the slump. Fed officials warned of a “potentially faster pace of policy rate normalization” in the minutes of its December meeting, a move that investors fear could snuff out a global recovery and hurt corporate earnings. Japan’s benchmark Nikkei 225 slid the most in the region, plunging almost 3%, while measures in Australia and China also fell.The Hang Seng Tech Index in Hong Kong, which had echoed the Nasdaq selloff by falling to the lowest level since May 2020, rebounded late in the session. Alibaba closed 5.7% higher. Sony Group and Taiwan Semiconductor Manufacturing Co. were among the biggest decliners on the regional measure, while a gauge of communication stocks traded at its lowest since June 2020. 

“The markets took the Fed minutes as signaling that the March meeting is now live and that the possibility for actually scaling back the balance sheet faster than last time by a significant margin is on the table,” said Ilya Spivak, head of greater Asia at DailyFX. The gloomy start to the year is culling hopes of a turnaround in Asian equities after they underperformed global stocks last year. A deepening Treasury rout has sent 10-year yields to beyond 1.7%, heightening concerns about rising borrowing costs.

Japanese stocks were hit especially hard, with the Nikkei 225 dropping by the most since June 21, as Fast Retailing fell on weak sales and investors sold technology shares amid concerns on higher interest rates. The blue-chip gauge closed 2.9% lower, with Tokyo Electron and Terumo also among the biggest drags. A measure of electronics makers was the largest contributor to a 2.1% loss in the Topix. The S&P 500 slid 1.9% Wednesday, while the Nasdaq 100 shed 3.1% after the Federal Reserve’s meeting minutes signaled faster rate hikes this year. Technology stocks plunged for a second day and the 10-year Treasury yield climbed to 1.71%, the highest since April.  “If you compare what the situation is now to what it was like on Dec. 14-15 when the meeting took place, I think the impact of the omicron variant on the U.S. economy is being taken more seriously than back then,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management in Tokyo. “Higher yields mean tech shares are likely to be exposed to selling pressure.”

Elsewhere, in rates fixed income continued to trade heavy. Treasuries extended a selloff over Asia session and broadly held losses into early US, leaving yields cheaper by 3bp to 4bp across the curve vs Wednesday’s close. 10-year yields push toward the top of daily range at around 1.75%, cheaper by 4bps on the day; spreads steady with yields across the curve higher by similar amounts. Session focus remains on IG issuance, where $54b has already been priced this week, while busy data slate and Fed speakers are also scheduled. IG dollar issuance slate includes IADB 5Y SOFR; eleven borrowers priced almost $20b Wednesday, taking weekly total to more than $54b vs $40b projected. Gilts bear steepened, cheaper by 5.5bps across the back end, underperforming bunds and Treasuries by ~1-2bps in 10s. German 10-year borrowing costs jumped to the highest since May 2019, while their Italian counterparts surged to a June 2020 high. Japan’s benchmark yield climbed to the highest since April 2021, while similar rates in Australia and New Zealand rose to the most since November and the U.K.’s 10-year yield jumped to an October high.

In FX, the Bloomberg dollar spot index traded flat, fading a brief push through Tuesday’s highs. AUD and NZD recover off the lows but remain the worst performers in G-10.

In commodities, crude futures rallied to best levels for the week. WTI adds over 1.5%, regaining a $79-handle, Brent stalls near $82. Spot gold recovers a late-Asia selloff, still in the red but back near $1,800/oz. Base metals trade poorly with much of the complex down over 1%. 

Looking at the day ahead, data releases include German’s preliminary December CPI reading and November’s factory orders, while in the US there’s the weekly initial jobless claims, the ISM services index for December, and the trade balance and factory orders for November. From the UK, there’s also the final December services and composite PMIs. Otherwise, central bank speakers include the Fed’s Daly and Bullard.

Market Snapshot

  • S&P 500 futures down 0.2% to 4,685.00
  • STOXX Europe 600 down 1.2% to 488.58
  • MXAP down 1.4% to 190.95
  • MXAPJ down 1.0% to 619.64
  • Nikkei down 2.9% to 28,487.87
  • Topix down 2.1% to 1,997.01
  • Hang Seng Index up 0.7% to 23,072.86
  • Shanghai Composite down 0.3% to 3,586.08
  • Sensex down 1.0% to 59,644.23
  • Australia S&P/ASX 200 down 2.7% to 7,358.32
  • Kospi down 1.1% to 2,920.53
  • German 10Y yield little changed at -0.06%
  • Euro little changed at $1.1307
  • Brent Futures up 0.1% to $80.89/bbl
  • Gold spot down 0.9% to $1,794.55
  • U.S. Dollar Index little changed at 96.22

Top Overnight News from Bloomberg

  • Federal Reserve officials are preparing to move faster than their previous round of tightening to keep a high-inflation and a near-full-employment economy from overheating, leaving behind the gradualism that marked the central bank’s approach in the prior decade
  • Russia and its allies said they would send troops to help Kazakh President Kassym-Jomart Tokayev quell protests after anti-government demonstrators seized official buildings and a major airport in the biggest challenge to the central Asian country’s leadership in decades
  • Oil retreated for the first time in four days on the prospect of tightening U.S. monetary policy, and on signs Chinese demand will weaken due to the worst Covid-19 outbreak since the initial flareup in Wuhan
  • More U.K. businesses than ever before are worried about inflation, and a record number are planning to increase their own prices, according to a survey by the British Chambers of Commerce
  • Mexico’s plan to halt crude exports by 2023 could curb the size of its giant oil hedge and help boost longer-dated prices
  • North Korea said it test-fired a “hypersonic” missile on Wednesday for the second time in about four months, as it continues to develop nuclear-capable weapons designed to evade interception by the U.S. and its allies

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac equities succumbed to the downbeat handover from Wall Street, which saw growth and tech stocks among the hardest hit by the hawkishly perceived FOMC minutes - with the Nasdaq closing lower by 3.3%. Markets were spooked by the prospect of an earlier Fed rate lift-off and closer balance sheet runoff trigger date. US equity futures resumed trade relatively flat with a downward bias around the prior day’s lows and drifted lower after the Chinese cash open. Eurozone equity futures experienced more pronounced losses with the DAX and Euro Stoxx 50 Mar'20 contracts down by over 1.5% each after the end of the Tokyo lunch break. In APAC, the ASX 200 (-2.7%) was pressured by its tech sector alongside its gold miners. The Nikkei 225 (-2.9%) also saw outflows from Tech and Electronics, whilst Services and Air Transportation were hit by the domestic COVID situation. The overnight JPY appreciation also provided headwinds for the Japanese exporters in the Index. The KOSPI (-1.0%) traded lower to a lesser extent following yesterday’s underperformance. The Hang Seng (+0.7%) and Shanghai Comp (-0.3%) initially saw milder losses with the PBoC conducting another daily liquidity drain at half the size of the prior day's operation, whilst Chinese Services PMI also topped expectation with accompanying commentary highlighting lower inflationary pressure. In fixed income, US T-note futures initially clambered off lows amid potential early APAC demand as stocks sentiment remained sour, but this upside faded throughout the session and cash yields went back on the rise - with the US 10yr yield above 1.73% heading into the European open - the highest since March 2021. Meanwhile, the BoJ said it will inject JPY 2tln into the market via temporary bond purchases, a move that came after the Japanese 10yr yield hit 0.105% - levels seen last November - before tracking Treasury yields higher.

Top Asian News

  • Chinese Developer Shimao Defaults on Loan, Trust Firm Says
  • Hong Kong Home Minister in Quarantine After Party, HK01 Says
  • Samsung Co-CEO Expects ‘Good News’ on M&A in Near Future
  • Climate Mushrooms Into Too-Big-to-Ignore Risk for Supply Chains

European bourses, Stoxx 600 (-1.0%), are lower across the board as the region focuses on the fallout from the hawkishly perceived FOMC minutes which suggested rate lift-off may be warranted sooner or at a faster pace than was earlier anticipated. The handover from the APAC region was also a downbeat one as investors focused on the consequences of tighter monetary policy stateside with the Nikkei 225 (-2.9%) the laggard in the region amid a firmer JPY. US futures are a touch softer with the ES lower by 0.1% whilst the NQ (-0.3%) narrowly lags following yesterday’s session of heavy losses which saw the cash index close lower by 3.3%. Developments in the yield space will likely remain a driver for prices as the US 10yr yield eyes 1.75% to the upside. In a recent note, analysts at Goldman Sachs have suggested increasing rates should be favourable for European equities given the larger share of shorter-duration and rate sensitive sectors in the Stoxx 600. Goldman’s year-end target for the index is at 530 vs. current level of 488 and recommends European banking and energy names. Elsewhere, Berenberg maintains a bullish outlook on the region amid expectations that synchronized global growth will support an extension of the EPS recovery this year. Sectors in Europe are, for the most part, lower with Tech underperforming peers with the Stoxx 600 Tech Index (-2.5%) erasing a bulk of the gains seen since December 20th. Elsewhere, Banking names are faring notably better than peers and have moved notably into positive territory overall (Stoxx 600 Banking Index +1.0%) as the sector remains underpinned by the more favourable yield environment which has brought 0% to the upside into play for the German 10yr yield. In terms of stock specifics, Carrefour (+4.1%) is the clear outperformer in the Stoxx 600 with reports suggesting that PE firms could back a bid for the Co. by Auchan for EUR 23.50/shr. SocGen (+2.6%) is also seen higher on the session after the Co.’s ALD is to purchase LeasePlan for EUR 5bln. To the downside, Dr Martens (-8.6%) sits at the foot of the Stoxx 600 after Pemira offloaded 65mln shares in the Co.

Top European News

  • U.K. Inflation Builds With Companies Planning 5% Price Increases
  • U.K. Minister Urges Johnson to Cut Tax as Living Costs Rise
  • Macron Under Pressure as Daily Covid Cases Soar to Record
  • Next Raises Profit Forecast as Party Clothes Buoy Sales

In FX, having largely shrugged off a bumper ADP print, Markit’s services and composite PMIs, the Buck paid full attention to the account of December’s Fed policy meeting that was clearly more hawkish than the actual event, latest set of SEP dot plots and chair Powell’s press conference. Indeed, FOMC members generally noted that it might necessary to tighten sooner and more aggressively than previously anticipated, while some are of the opinion that QT may start relatively quickly after the end of tapering, so March is live for lift-off as inferred by Waller recently and unwinding the balance sheet could follow shortly after. In response, the Greenback firmed up almost across the board and the index would arguably have been even higher if the Yen continued to track yields in context of UST/JGB differentials instead of risk sentiment that has been rattled by the latest Fed guidance. However, the DXY is holding just above 96.000 and below 96.500 within a 96.393-089 range awaiting two scheduled Fed speakers (Daly and Bullard), US trade data, the services ISM and factory orders.

  • JPY - As noted above, the Yen is outperforming and maintaining its recovery momentum on risk rather than rate dynamics, with Usd/Jpy retreating through 116.00 again, but not any closer to the semi-psychological 115.50 level that also forms the top of a decent band of option expiries starting from 115.45 (1.1 bn).
  • AUD/NZD - At the other end of the G10 spectrum, risk-off positioning along with their US peer’s revival has hit the Aussie and Kiwi especially hard, as Aud/Usd strives to keep sight of 0.7150 and Nzd/Usd faces a similar task around the 0.6750 mark, though the latter is benefiting from a turnaround in the Aud/Nzd cross towards 1.0600. In terms of regional news, Fitch affirmed its AA rating for NZ with a positive outlook, while Australia’s final services and composite PMIs were unrevised and Queensland suffered its first COVID related fatality since April last year.
  • CHF/GBP/CAD/EUR - Also tracking their US rival, albeit to varying degrees and well off overnight or earlier lows amidst some consolidation, retracement and corrective price/yield action in other global bonds to the initial bear-flatting in Treasuries post the aforementioned FOMC minutes. In fact, the Euro has reclaimed 1.1300+ status in wake of supportive Eurozone data including PPI, German industrial orders and state CPIs that infer an upside bias to the consensus for the national reading. Conversely, option expiry interest in Eur/Usd is heavily skewed to the downside today and may drag the pair back down - see 8.09GMT post on the Headline Feed for details. Elsewhere, the Franc is staying afloat of 0.9200, the Pound is meandering between 1.3559-1.3490, but still within striking distance of the 100 DMA (at 1.3555 today) and the Loonie has recouped losses from under 1.2800 ahead of Canadian trade data and with some assistance from an even firmer rebound in crude prices (WTI up to Usd 79.25/brl at best).

In commodities, crude benchmarks are underpinned this morning in-spite of the pressure seen in global equities after the December FOMC minutes; action was has become more pronounced throughout the morning and now sees WTI, for instance, eclipse yesterday's peak by circa USD 0.50/bbl. The upside in the benchmarks has occurred as a grinding bid since the arrival of European participants, after a softer APAC session given the broader risk aversion. Of note this morning is commentary from Goldman Sachs’ Global Head of Commodities Currie who stated that he is extremely bullish on commodities, believing that the super cycle could continue for decades. Separately, it is worth remaining cognisant of the increasing focus on Kazakhstan/Uzbekistan geopolitics, though overnight reports indicated there was no output disruption yet due to the Kazak fuel protests. Elsewhere, spot gold and silver are pressured but have lifted off of the overnight lows spurred by the FOMC minutes and the ongoing rally in yields experienced globally since. Separately, the likes of copper are under pressure given broader risk sentiment though the LME contact has reclaimed the 9.5k mark.

US Event Calendar

  • 7:30am: Dec. Challenger Job Cuts -75.3% YoY, prior -77.0%
  • 8:30am: Jan. Initial Jobless Claims, est. 195,000, prior 198,000; Continuing Claims, est. 1.68m, prior 1.72m
  • 8:30am: Nov. Trade Balance, est. -$81b, prior -$67.1b
  • 10am: Nov. Durable Goods Orders, est. 2.5%, prior 2.5%; -Less Transportation, prior 0.8%
  • 10am: Nov. Factory Orders Ex Trans, est. 1.1%, prior 1.6%
  • 10am: Nov. Factory Orders, est. 1.5%, prior 1.0%
  • 10am: Nov. Cap Goods Ship Nondef Ex Air, prior 0.3%
  • 10am: Nov. Cap Goods Orders Nondef Ex Air, prior -0.1%
  • 10am: Dec. ISM Services Index, est. 67.0, prior 69.1

DB's Jim Ried concludes the overnight wrap

The December FOMC minutes last night shattered the early year calm in financial markets as they confirmed a WSJ story 24 hours earlier that Fed officials are considering QT shortly after policy rates are raised. This pushed real yields across the Treasury curve much higher. The jump in yields hit the S&P 500 index and specifically companies exposed to higher discount rates, including big tech names. 10yr treasury yields ended the day +5.8bps higher while the S&P 500 index retreated -1.94%, and the Nasdaq down -3.34%. It comes ahead of a couple of important days for markets this side of the weekend, with the ISM services out later today ahead of tomorrow’s all-important US jobs report, in addition to the flash Euro Area CPI reading tomorrow as well.

The shift in sentiment came against the backdrop of continued rises in sovereign bond yields, with those on 10yr treasuries (+5.8bps) climbing for a 4th consecutive session as mentioned, marking the longest run of gains since October. Furthermore, shorter-dated yields rose to fresh post-pandemic highs once again on the hawkish minutes, including those on both 2yr yields (+6.6ps) and 5yr yields (+7.2bps). Real rates have been the clear driver given the shift in monetary policy, with the 10yr real rate up another +11.2bps yesterday, the biggest one-day climb since October, to its highest level since late-June at -0.86%. That said, they’re still some way beneath their closing peak of the last 12 months, having hit -0.585% back in March 2021 when the ‘reflation’ narrative was at its height. In Asia 10yr yields are up another +2bps to 1.726% overnight but driven by breakevens this time.

Diving into the Fed minutes, which adopted the more hawkish tone that had been building on balance sheet policy and QT of late. There was a staff presentation on normalising the balance sheet and signals that those discussions would continue at upcoming meetings as no decisions were made. Nevertheless, the minutes revealed that the Committee was prepared to normalise the size of the balance sheet faster than during the last cycle. In practice, that means QT can begin sooner after the fed funds rate is lifted for the first time and the balance sheet can shrink at a faster pace. While some members flagged there were risks to financial stability of a fast exit, there was a sense of confidence that the new standing repo facility would serve to keep control of money market rates while also supporting Treasury market functioning, and that the larger balance sheet and current state of the economy called for a quicker withdrawal.

There are a few other big questions outstanding, including how many rate hikes would take place before QT begins and how Treasury and MBS holdings would be treated during runoff; some Committee members advocated for MBS holdings to be runoff at a faster rate. How those questions are resolved will be the primary focus of interpreting Fed policy for the next few meetings. Even with outstanding questions, the hawkish shift on QT pushed the entire yield curve a few basis points higher as mentioned, bringing 10yr treasury yields above 1.70% for the first time since October, unsurprisingly driven by real yields. The more aggressive QT stance turned equity markets, with the S&P 500 decreasing -1.94% on the day, most of the declines taking place after the minutes were published. Sectors exposed to higher long-term interest rates, including real estate (-3.22%) and big tech names (FANG -3.29%) were hit hardest.

In the near term, the minutes reiterated prior communications that maximum employment would be reached relatively soon and therefore prompt liftoff, and that the pace of rate hikes may need to be faster. There was a sense that the Committee should convey a strong commitment to address elevated inflation pressures, calling for tighter policy. Right now the market is pricing in 3 full Fed rate hikes in 2022, which is the same as the median FOMC dot, the first time they’ve been aligned that far into the future in a while. The market is pricing the first full hike by the May meeting.

Overnight in Asia benchmarks are all trading lower as the tech rout continues with the Nikkei (-2.24%), CSI (-0.86%), KOSPI (-0.79%), Hang Seng (-0.36%) and Shanghai Composite (-0.16%) all lower. Faster rate hike expectations have spread into Asian markets too. There has even been some chatter on the BoJ changing it’s policy stance and Bloomberg’s WIRP now shows that the BoJ’s policy rate could emerge into positive territory by year end. Futures markets are indicating a weaker start in DM markets with the S&P 500 (-0.37%), Nasdaq (-0.53%) and DAX (-1.71%) contracts all in negative territory.

European trading finished before the minutes release, and saw a continued broad equity acceleration, with the STOXX 600 (+0.07%) at a fresh high of its own, having achieved new closing highs in all 3 trading sessions of 2022 so far. This movement was echoed across the continent, with Germany’s DAX (+0.74%) and France’s CAC 40 (+0.81%) likewise at record highs. The calm before the storm.

Sovereign bond yields were also more subdued in Europe but the US yield rises accelerated around the US close so there will likely be some delayed catch up this morning. Optically 10yr bunds rose around +3.5bps but this was due to a new benchmark. Nevertheless the move takes us to -0.089% and ever closer to the magic zero for the first time since May 2019. It was only 5 days before Xmas that we nudged up against -0.40%.

Staying in Europe, the final December PMIs were fairly resilient relative to the flash prints, in spite of the arrival of the Omicron variant. Indeed, the final Euro Area composite PMI was only down a tenth from the flash reading to 53.3, whilst Germany’s was also only down a tenth to 49.9 and the French reading at 55.8 was revised up two-tenths. This was echoed in the US, where the composite PMI was revised up a tenth to 57 as well.

The relatively strong data helped to bolster risk appetite more broadly, and oil prices continued their run of having advanced every day of 2022 so far. In fact, at one point WTI oil prices (+1.12%) were trading above their pre-Omicron closing level of $78.39/bbl for the first time since news of the variant emerged, although by the end of the session it had pared back those gains slightly to close just shy at $77.85/bbl. In Asia we’re back down around -1% on the overall risk off. Staying on energy, European natural gas futures were up a further +3.13% yesterday, which brings their YTD 2022 performance to a major +30.11% in the space of just 3 days, which is probably one of the strongest you’ll see out there for any asset. Admittedly that’s a bounceback following their significant falls at the end of 2021 however, when they went on a run of 8 successive declines that saw them lose more than half their value.

Markets continue to remain pretty impervious to Omicron for now, even amidst some of the highest global case growth of the entire pandemic. Indeed France saw a humungous 332k cases yesterday. As a benchmark they averaged closer to 15k daily cases in November and fewer than 10k daily cases in October. Elsewhere, Hong Kong moved to tighten restrictions yesterday, with a ban on dining-in after 6pm, the closure of bars and gyms, as well as a ban on flights from 8 countries, including the US and the UK. Elsewhere in London, which is interesting since it’s one of the first places where Omicron spread widely in the developed world, the growth in hospitalisations has continued to slow, with the total numbers in hospital now up by +23% over the last week, which is the slowest rate of growth in 3 weeks now.

Otherwise on the data front, we had the ADP’s report of private payrolls that showed much stronger-than-expected growth of +807k for the month (vs. +410k expected). In the ADP series, that’s the strongest jump since May, and follows up the employment component of the ISM manufacturing hitting an 8-month high the previous day.

To the day ahead now, and data releases include German’s preliminary December CPI reading and November’s factory orders, while in the US there’s the weekly initial jobless claims, the ISM services index for December, and the trade balance and factory orders for November. From the UK, there’s also the final December services and composite PMIs. Otherwise, central bank speakers include the Fed’s Daly and Bullard.

Tyler Durden Thu, 01/06/2022 - 08:04

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HW+ Member Spotlight: Ben Bernstein

This week’s HW+ member spotlight features Ben Bernstein as he shares why it’s an interesting time to be tracking the housing market and all of the…



This week’s HW+ member spotlight features Ben Bernstein, director at Axonic Capital, an investment firm with a deep focus on the structured credit sector of the financial markets. Prior to that, Bernstein held leadership roles in Odeon Capital Group and JPMorgan Chase.

Below, Bernstein answers questions about the housing industry:

HousingWire: What is your current favorite HW+ article and why?

Ben Bernstein: Logan and Sarah’s Monday podcast is my go to. Logan cuts through all the noise and delivers clear concise opinions rooted in the data. So not only do I get updates on what is going on in the housing market but I learn which data points are relevant and how to analyze them. And Sarah always asks insightful questions. On top of that, it is super entertaining!

HousingWire: What has been your biggest learning opportunity?

Ben Bernstein: My biggest learning opportunity (and weirdest job I ever had) was every job I ever had. I started my career at Bear Stearns on February 23 2008. To say that was an interesting time and place to start a career would be an understatement. Two weeks later I was working for JPMorgan and eventually made it to a desk whose focus was working out of the assets that brought Bear down in the first place.

Think funky bonds linked to housing like subprime RMBS and CDOs. Getting to dig deep into what these bonds were and how the underlying mortgages impacted them was priceless. I started at Axonic, a credit fund focused on investments linked to residential and commercial real estate, in November of 2019.

Another interesting time to join an investment firm! Three months later, I was working remotely and figuring out how to be productive from home. Fourteen years into my career and my biggest learning opportunity is right now.

I’m learning new stuff every single day whether it be about the bond market, housing, trading, macro economics, etc. All I need to do is turn around and ask a question out loud and I’ll learn something new.

HousingWire: What is the best piece of advice you’ve ever received?

Ben Bernstein: The best piece of advice I’ve ever received was what is important is what you do when no one is looking. Your reputation, work ethic, success, productivity and integrity are all linked to what you do because you know you need to do it as opposed to what you think other people want you to do.

HousingWire: What’s 2-3 trends that you’re closely following?

Ben Bernstein: I don’t think anyone will be surprised by the trends I’m following these days: Inflation, credit spreads, housing prices and how they are all intertwined. Fortunately I have smart people around me (including HousingWire) to give me their opinions on where we are headed. It’s my job to put it all together. The past two years have been some of the most interesting times in markets and from where I sit I don’t think that will change any time soon.

HousingWire: What keeps you up at night and why?

Ben Bernstein: What keeps me up at night is the state of the housing market. 35+% home price appreciation since COVID-19 began. Two months supply of housing. Mortgage rates going up faster than they ever have. There’s a lot going on!

One thing as bond traders that we do is we look down before we look up. In other words we look at risk before we look at upside. An overheated housing market is something we pay close attention to because we don’t want prices to go down precipitously but we don’t want inflation to run away either. So it’s really an interesting time to be tracking the housing market and all of the ancillary markets that are impacted by it.  

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The post HW+ Member Spotlight: Ben Bernstein appeared first on HousingWire.

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Risk Appetites Improve Ahead of the Weekend

Overview: Equities are higher and bonds lower as the week’s activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong…



Overview: Equities are higher and bonds lower as the week's activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong and South Korea. Japan's Nikkei rallied more than 1%, as did China's CSI 300. Most of the large markets but South Korea and Taiwan advanced this week, though only China and Hong Kong are up for the month. Europe's Stoxx 600 is up 1.3% through the European morning, its biggest advance of the week and what looks like the first weekly gain in four weeks. US futures are trading around 0.6%-0.8% higher. The NASDAQ is 4% higher and the S&P 500 is 3.3% stronger on the week coming into today. The US 10-year yield is virtually unchanged today and around 3.08%, is off about 14 bp this week. European bonds are mostly 2-4 bp firmer, and peripheral premiums over Germany have edged up. The US dollar is sporting a softer profile against the major currencies but the Japanese yen. Emerging market currencies are also mostly higher. The notable exception is the Philippine peso, off about 0.6% on the day and 2.2% for the week. Gold fell to a five-day low yesterday near $1822 and is trading quietly today and is firmer near $1830. August WTI is consolidating and remains inside Wednesday’s range (~$101.50-$109.70). It settled at almost $108 last week and assuming it does not rise above there today, it will be the first back-to-back weekly loss since March. US natgas is stabilizing after yesterday’s 9% drop. On the week, it is off about 10% after plummeting 21.5% last week. Europe is not as fortunate. Its benchmark is up for the 10th consecutive session. It soared almost 48% last week and rose another 7.7% this week. Iron ore’s 2% loss today brings the weekly hit to 5.1% after last week’s 14% drop. Copper is trying to stabilize after falling 7.5% in the past two sessions. It is at its lowest level since Q1 21. September wheat is up about 1.5% today to pare this week’s decline to around 8%.


Asia Pacific

Japan's May CPI was spot on expectations, unchanged from April. That keeps the headline at 2.5% and the core rate, which excludes fresh food, at 2.1%, slightly above the 2% target. However, the bulk of that 2.1% rise is attributable to energy prices. Without fresh food and energy, Japan's inflation remains at a lowly 0.8%.

The BOJ says that Japanese inflation is not sustainable, which is another way to say transitory. In turn, that means no change in policy. The fallout though is increasing disruptive. The yield curve control defense roiled the cash-futures basis and the uncertainty about hedging may have contributed to the soft demand at this week's auction. In addition, interest rates swap rates have risen as if the market is seeking compensation for the added uncertainty. Meanwhile, for the fourth session there were no takers of the BOJ's offer to buy bonds at a fixed rate.

The approaching month-end pressures saw the PBOC step up its liquidity provisions and injected the most in three months today. Still, the seven-day repo rate rose 16 bp to 1.17%. In Hong Kong, three-month HIBIOR rose to 1.68%, the highest since April 2020. Australian rates moved in the opposite direct. Australia's three-year yield fell 14 bp today after falling 10 bp in each of the past two sessions. It has fallen every day this week for a cumulative 43 bp drop to 3.20%. It had risen by slightly more than 50 bp the previous week. There was a dramatic shift in expectations for the year-end policy rate. The bill futures imply a year-end rate of 3.17%, which is about 68 bp lower than a week ago. It had risen by a little more than 150 bp in the previous two weeks.

The dollar traded in a two-yen range yesterday, but today is consolidating in a one-yen range above yesterday's low near JPY134.25. The pullback in US yields has been the key development and the dollar is lower for the third consecutive day. If sustained, this would be the longest losing streak for the greenback in three months. The Australian dollar is straddling the $0.6900 level, where options for A$1 bln expire today. It is mired near this week's low, set yesterday near $0.6870. Australia's two-year yield swung back to a discount to the US this week after trading at a premium for most of last week and the start of this week. The greenback was confined to a tight range against the Chinese yuan below CNY6.70 today but holding above CNY6.6920. The greenback traded with a heavier bias this week and snapped a two-week advance with a loss of around 0.3% this week. The PBOC set the dollar's reference rate at CNY6.7000, a little below the median forecast (Bloomberg survey) of CNY6.7008. It was the fourth time this week that the fix was for as weaker dollar/stronger yuan.


The week that marked the sixth anniversary of the UK referendum to leave the EU could have hardly gone worse. Consider:  The May budget report showed a 20% increase in interest rate servicing costs. Inflation edged higher. The flash June composite PMI remained pinned at its lowest level since February 2021. The GfK consumer confidence fell to -41, a new record low. Retail sales slumped by 0.5% in May and excluding gasoline were off 0.7%. Separately, as the polls had warned, the Tories lost both byelection contests held yesterday. And perhaps not totally unrelated, the Cabinet Secretary revealed that at the Prime Minister's request a position his wife in the royal charity was discussed. This continues a pattern that had included trying to appoint her as Johnson's chief of staff when he was the foreign minister and plays on the image of crass favoritism.

The risk of a new crisis in Europe is under-appreciated. In retaliation for Europe's actions, which in earlier periods, would have been regarded as acts of war, Russia has dramatically reduced its gas shipments to Europe. Many Americans and European who scoff at Russia's "special military operation" may be too young to recall that America's more than 10-year war in Vietnam was a police action and never officially a war. Now, the critics are incensed that Moscow has weaponized gas, while overlook the extreme weaponizing of finance. Aren't US and European sanctions a bit like weaponizing the dollar and euro?  In any event, Putin has ended the European illusion that it would determine the pace of the decoupling from Russia's energy. Germany's Economic Minister and Vice-Chancellor heralds from the Green Party. The gas "embargo" has forced him to swallow principles and allow an increased use of coal. Habeck increased the gas emergency warning system and drew parallels with the Lehman crisis for the energy sector. 

It is with this backdrop that the Swiss National Bank felt obligated to hike its deposit rate by 50 bp last Thursday (June 17). The euro had been trading comfortable in a CHF1.02 to CHF1.05 trading range since mid-April. Judging from the increase in Swiss sight deposits, the SNB may have intervened in late April and early May. However, in recent weeks there was no "need" to intervene and sight deposits fell for four consecutive weeks through June 17. The euro traded at three-and-a-half week lows against the franc yesterday, trading to CHF1.0070 for the first time since March 8. In fact, the Swiss franc is the strongest of the major currencies this week, rising about 1.15% against the dollar and about 0.75% against the euro.

The German IFO survey of investor confidence weakened again but did not seem to impact the euro. The assessment of the business climate slipped (92.3 from 93.0). This reflected the mild downgrade of existing conditions (99.3 from 99.6) and the sharper drop in expectations (85.8 vs. 86.9). This is the most pessimistic outlook since March, which itself was the poorest since May 2020. The euro remains within the range seen Wednesday (~$1.0470-$1.0605). It closed near $1.05 last week. There are options for almost 1.2 bln euros that expire there today but have likely been neutralized. Assuming the euro holds above there, it will be the first weekly gain since the end of May. Par for the course today, sterling is also trading quietly in a narrow half-cent range above $1.2240. If it closes above there, it too will be the first weekly gain in four weeks. Sterling's range this week has been roughly $1.2160 to $1.2325. The US two-year premium over the UK has risen for the Monday and is now around 110 bp, up from about 88 bp in the first part of the week.


Bloomberg's survey of 58 economists produced a median forecast of 3.0% for Q2 US GDP. Only five of them see growth lower than 2%. The median has it remaining above 2% in H2 before slowing to what the Fed sees as long-term non-inflationary growth of 1.8% throughout next year. The market does not share this optimism. The shape of the Fed funds and Eurodollar futures curve suggests investors sees the Fed breaking something sooner. Given where inflation is, it is hard to take seriously talk about the Fed front-loading tightening, what it is doing is catching up. But monetary policy impacts with notorious lag, and as several Fed officials have acknowledged, financial conditions began tightening six months before the first hike was delivered. The Fed funds futures strip has terminal rate around 3.5% by late Q1 23. The first cut priced in for Q4 23.

The US reports May new home sales. There are supply issues that are important here, but it will likely be the fifth consecutive monthly decline. Through April, they were off 30% so far this year. New home sales stood at 591k (saar) in April. At the worst of the pandemic, they were at 582k in April 2020. The University of Michigan survey was specifically mentioned by Fed Chair Powell at his press conference following the FOMC's decision to hike by 75 bp. The final report is rarely significantly different than the preliminary report, but it cannot help by draw attention.

Mexico's central bank unanimously delivered the widely expected 75 bp hike in its overnight rate to take it to 7.75%. It was the ninth hike in the cycle that began last June for a cumulative 375 bp. The move followed slightly firmer than expected inflation in the first half of this month (7.88%) and stronger than expected April retail sales. The key is that it matched the Fed's move. It indicated that it will likely move just as "forcefully" at its next meeting in August. The swaps market has almost another 200 bp more of tightening this year. Banxico also revised its inflation forecast. Previously, it saw inflation peaking in Q2 22 at 7.6% and now it says the peak will be 8.1% in Q3. It has inflation finishing the year at 7.5%, up from 6.4%. Separately, reports suggest the US is escalating complaints that President AMLO's energy policies, favoring the state companies, violates the free-trade agreement.

The US dollar rose a little more than 3.5% against the Canadian dollar in the past two weeks as the S&P 500 tumbled nearly 11%. With today's roughly 0.25% pullback, the greenback doubled its loss to 0.50% this week, and the S&P 500 is up about 3.3% this week coming into today. The macro backdrop for the Canadian dollar looks constructive:  strong jobs market, better than expected April retail sales reported this week and firmer May price pressures. The market 70 bp hike priced in for the July 13 Bank of Canada meeting. The year-end rate is off four basis points this week to 3.41%. In comparison, the US year-end rate is off about 13 bp this week to about 3.44%. The US dollar is off for the sixth consecutive session against the Mexican peso. The peso is the strongest currency in the world this week, leaving aside the machinations of the Russian rouble, with a 1.8% gain, including today's 0.2% advance through the European morning. The greenback frayed support around MXN20.00 yesterday for the first time in nearly two weeks. It is spending more time below there today with a move to MXN19.96. A convincing break of the MXN19.94 area could signal a move toward MXN19.80. There is a $1 bln option expiring at MXN20.00 today, and the related hedging may have weighed on the dollar. 


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Spread & Containment

Will the price of gold rise? Why One Of The World’s Most Successful Hedge Fund Managers Is Sure It Will

Historically seen as a safe have asset, the gold price typically rises sharply during periods of economic stress and geopolitical uncertainty. It also…



Historically seen as a safe have asset, the gold price typically rises sharply during periods of economic stress and geopolitical uncertainty. It also tends to do especially well over periods of high inflation and bearish stock market conditions, acting as an inflation-hedged alternative to cash or bonds when holding either means losing purchasing power.

But since big gains between October 2018 and August 2020 when the gold price rose from $1187.2oz to $2032.16oz, a gain of a little over 70%, the precious metal has disappointed.

gold price chart


The gold price has traded up and down around $1800oz-$2000oz since, occasionally breaking above or below but resisting any significant bull run. It briefly spiked above $2052 in early March but has since fallen back below $1832 despite inflation rates around the world continuing to tick up, interest rate rises, a stock market slump and crystalising fears over a recession.

The gold price should have, according to historical market logic, seen some significant gains over the past three months. But it hasn’t. The question becomes, why not? And will that change? Many analysts believe it will and the gold price will rise in coming months.

But let’s look at the factors that have kept gold trading in a range over the past 2-3 years and why it could be about to break out in an upwards trajectory.

Why has the price of gold recently dropped despite surging inflation, global economic weakness and geopolitical instability?

Over the latter part of 2020 and throughout 2021, gold’s upwards price momentum of the previous two years was halted by booming stock markets. Riskier, high growth companies were having capital flung at them as markets went into melt-up after putting the Covid-19 pandemic sell-off of February to March behind them. When market sentiment is risk-on, gold loses its lustre.

However, since the beginning of this year, market sentiment has become decidedly more risk averse. The high-growth tech-centric Nasdaq 100 index has lost around 30% and the kind of low revenue/no profit tech start-ups recently valued in the billions have seen their 2021 valuations devastated. British online-only second-hand-cars dealer Cazoo, which listed on the NYSE at a $7 billion valuation last August is now worth $705.55 million after losing over 90% of its market capitalisation.

Russia also invaded Ukraine in late February, sparking fears war could spill further into Europe and sending the prices of energy and core food commodities rocketing. That’s an ongoing situation that could still very conceivably get worse again in terms of its threat to European security.

Even at current levels, with the active war relatively contained to the Donbas region, it continues to wreak havoc on the global economy through a combination of disruption to supply lines, Russia’s Black Sea blockade preventing the export of millions of tonnes of grain from Ukraine’s remaining ports, and Western sanctions against Russia. And inflation levels which continue to climb have hit forty-year highs.

But despite the host of factors that would be expected to be in favour of a climbing gold price, it has fallen over 10% in the past three months. Why’s that and can we expect it to change?

The biggest factor behind gold’s recent price decline, and generally sluggish performance over the first quarter of 2022, has been a surging dollar index, which hit a multi-decade peak on June 14. Investors are favouring the U.S. dollar over gold as a safe haven and that’s a trend that many expect to continue with the Fed tightening monetary policy aggressively in an attempt to put a lid on inflation.

dxy chart

Source: TradingView

Rising U.S. Treasury yields as interest rates rise are another factor against a new bull run for gold in the near future. Analysts bearish on gold believe its price could decline over the long term with brokers Capital quoting a forecast from the Australian Bank ANZ that the price per oz could drop to $1600 by 2023.

“Aggressive monetary tightening, rising yields and a stronger dollar are key drags for the gold prices. Rising inflation failed to impress the market, instead raising fears of a more hawkish stance by the central banks. That said, the spread between the fed funds rate and CPI is at its widest, suggesting the Fed is struggling to contain inflation,” analysts at ANZ wrote in their latest gold forecast.”

“Concerns about global economic growth, fuelled by sustained inflation and heightened geopolitical risks, should protect the gold price somewhat. We expect gold to remain supported at USD1,850/oz, with upside potential of USD1,950/oz.”

Could gold prices rise significantly? The bull case

There are also plenty of analysts who paint a positive picture and still expect a bull market for gold to return over the months and years ahead. In the shorter to medium term, The Telegraph’s Richard Evans expects demand from central banks to drive prices back up. He quotes James de Uphaugh of Edinburgh investment trusts, which has a stake in the American gold miner Newmont:

“Simply put, supply is all but certain to fall and demand is likely to rise. The extra demand will come from the central banks of certain countries around the world that have seen how Russia’s dollar holdings have been subject to sanctions and decide to invest instead in an asset that they can keep in their own vaults and has no ‘counterparty’.”

He expects supply to come under pressure over the next ten years because existing mines are running out of economically feasible gold to be mined and there is a lack of enthusiasm and capital for new projects.

“…gold is getting harder to find. If you want to develop a new gold mine it’s not obvious where to go.”

“All the places where gold can be taken from the ground easily have long been exhausted. Whereas once it could be found on the surface, now ever deeper mines are required. Mining companies have also lost their appetite for “prospecting” – searching for entirely new sources – and instead now concentrate on getting all the gold they can out of existing mines.”

“Searching for new mines is the glamorous side of the business and the previous generation of mining executives, their heads no doubt full of images from cowboy films, did just that. They sought to make their company the biggest by spending fortunes on seeking new sources or by buying rivals. This, of course, came at the expense of profitability.”

“Gold miners are now run by people with discipline, who are not gung ho but run their business in a systematised way. They have stricter financial criteria for going ahead with new projects.”

The result is that gold miners are becoming more profitable but fewer new sources of supply are coming online. As a result, production from existing mines is forecast to halve over the next decade and by a third according to the most optimistic estimates.

The Gold price could remain soft medium term but rise longer term

The upshot of the bear and bull cases for gold is that the precious metal’s price may well either hold roughly where it is in the short to near term, continuing the rangebound trend of the past couple of years. A recession could give it a boost.

But unless significant new deposits are discovered and mines invested in, the longer term outlook could favour gold. However, as a short-term safe haven investment amid currently turbulent conditions, the arguments in favour of gold are dubious against the backdrop of such a strong dollar and rising Treasury yields.

The post Will the price of gold rise? Why One Of The World’s Most Successful Hedge Fund Managers Is Sure It Will first appeared on Trading and Investment News.

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