Futures Trade In Narrow Range Ahead Of Tech Giant Earnings
Futures Trade In Narrow Range Ahead Of Tech Giant Earnings
US equity futures erased modest earlier gains and traded modestly in the red, after…
US equity futures erased modest earlier gains and traded modestly in the red, after rebounding from session lows as they struggled for direction while investors awaited major earnings reports and weighed last week's conflicting comments from central bankers who are now in a blackout period. As of 7:30am, contracts on the S&P 500 dropped 0.1% to 3,803 after positive corporate results boosted the underlying index on Monday; on Tuesday, Coca-Cola, General Motors and United Parcel Service all beat analysts’ earnings estimates, while 3M and General Electric fell short. Alphabet Inc. and Microsoft Corp. are among major companies still reporting after the close. Nasdaq 100 futures were flat, with traders awaiting earnings after market hours from tech giants including Microsoft, Texas Instruments and Alphabet. Treasury yields tumbled for a second day and the dollar was steady even as the Yuan plunged to the lowest on record after the weakest PBOC fix since 2008.
“While the earnings season could still produce many surprises, the outcome so far is consistent with our advice to favor more defensive parts of the market, such as healthcare and consumer staples,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
In pre-market trading, US-listed Chinese stocks staged a limited rebound after losing almost $80 billion of market value in a record selloff that pushed the shares to their lowest level in over nine years. Major internet companies including Alibaba, JD.com and Pinduoduo gained at least 2% each.
- Weber stock surged 22% in US premarket trading as BDT Capital Partners has proposed to buy the shares it doesn’t already own for $6.25 per share in cash.
- Mullen Automotive rose as much as 20% in US premarket trading, set to extend its four-day rising streak. Shares closed up by about a third on Monday after the firm secured exclusive sales rights for the I-GO electric vehicle, in select European markets.
- Taysha Gene Therapies shares surge as much as 60% in US premarket trading, putting the stock on track for a record gain, after Japanese pharmaceutical company Astellas Pharma said it will take a 15% stake in the US gene therapy developer for $50m.
- US-listed Chinese stocks rose in US premarket trading on Tuesday, following a rebound across Hong Kong peers which bounced back from Monday’s historic selloff. Alibaba (BABA US) +2.5%, Baidu (BIDU US) +2.9%, JD.com (JD US) +3.3%, Nio (NIO US) +2%, Li Auto (LI US) +3%, XPeng (XPEV US) +2.7%
- Linde shares dropped 1.9% in US premarket trading after the company said holders will vote on delisting shares from the Frankfurt Stock Exchange. The move would force Europe-only investors to sell their stakes, according to analysts.
- Packaging Corp shares fell 1.7% in US postmarket trading on Tuesday as the company’s 4Q guidance was lighter than expected, analysts said, pointing to weaker demand as the containerboard maker grapples with the impact of cost inflation, overshadowing a beat in 3Q adjusted earnings per share.
- Crown Holdings shares fell 9.4% in US after-hours trading on Monday with analysts pointing to a slowdown in demand as the main reason for the packaging products maker’s lowered guidance for both the 4Q and year, alongside a strong US dollar, higher European energy costs and increased interest expense.
- Keep an eye on Alphabet and Meta (META US) as their price targets were cut at KeyBanc, with the brokerage noting that investors are increasingly skeptical of revenue growth amid mounting concerns of a downturn in 2023.
- Watch Arista Networks stock as it was cut to neutral from outperform and PT slashed to a street-low $110 from $185 at Credit Suisse, with the broker seeing more challenging dynamics for the cloud networking group into 2023.
According to Bloomberg data, about a fifth of S&P 500 companies had posted third-quarter earnings before today, with more than half outperforming estimates. Still, investors are concerned the effects of a slowing economy will be felt further down the line, with the Fed set to raise interest rates next week even as the economy shows signs of flagging.
“What we’ve seen throughout the year is that equity risk premia have really compressed,” Christian Mueller-Glissmann, Goldman Sachs managing director for portfolio strategy, said on Bloomberg TV. “That makes you more vulnerable if you disappoint on growth, cash flows, et cetera. For now that hasn’t happened really, but all the lead indicators are pointing to risks in this direction.”
Manufacturing and services data for the US underwhelmed on Monday, indicating Federal Reserve rate hikes are beginning to slow activity. Fed officials have entered a blackout period ahead of the central bank’s meeting next week, where it’s expected to raise rates 75 basis points. Investors are starting to speculate that the central bank may be approaching the end of its aggressive tightening campaign.
“Investors are getting more confident that inflation will soften as the consumer rethinks massive purchases,” said Edward Moya, a senior markets analyst at OANDA Corp. “Fed rate-hike expectations will remain volatile, but expectations are growing that a weaker economy will let the Fed pause their tightening after the February policy meeting.”
“Even if optimism remains alive, investors are likely to need concrete evidence of monetary and economic improvements before driving stock indexes higher,” said Pierre Veyret, a technical analyst at ActivTrades. “Until then, it’s only investors buying rumours.”
In Europe, the Stoxx Europe 600 Index erased an early advance, with chemicals the worst-performing sector as Linde Plc dropped after proposing to de-list from the Frankfurt exchange. Spain's IBEX outperforms peers, adding 0.5%, FTSE 100 lags, dropping 0.4%. Banks underperformed as the ECB considers curbing windfall profits from rising interest rates, while HSBC Holdings Plc plunged more than 7% after reporting higher-than-expected charges for possible loan losses. The most notable mover was Adidas, which slumps as much as 3.9%, sinking to lowest since March 2016 after the German sportswear company announced plans to end a partnership with Kanye West, while the firm also received a downgrade from Morgan Stanley. On the plus side, UBS Group AG buoyed financial services after it exceeded earnings estimates, while technology stocks climbed after software developer SAP SE’s third-quarter revenue beat. Here are all the notable European movers:
- SAP shares gained as much as 4.7% after the software firm reported 3Q revenue and operating profit ahead of estimates, helped by strong growth in its cloud business, with gross margin and backlog strong despite macro uncertainties.
- Air Liquide climbs as much as 4.7%, the most since March, after company delivered “strong set of results,” Stifel says in note as 3Q revenue beat estimates.
- UBS Group shares extend gains to as much as 6.0%, the most since June, after it reported net income for the third quarter that beat the average analyst estimate, driven by the investment bank and global wealth management divisions, which benefited from higher rates.
- Universal Music Group rises as much as 9.8%, the most since IPO in 2021, after Citi wrote that Apple’s price increase would “give comfort to UMG bulls.”
- Novartis shares shake off early losses to trade steady after the company released 3Q results that were broadly in line with expectations, with a small increase to the outlook for generics unit Sandoz a positive surprise, analysts say.
- Linde shares drop as much as 7.9%, the most intraday since February, after saying holders will vote on delisting shares from the Frankfurt Stock Exchange.
- HSBC shares drop as much as 8.2% in London, the most in six months, after the lender announced a change of chief financial officer and reported higher-than- expected loan loss charges in its third-quarter results.
- Alfa Laval drops as much as 11.3%, the most since May, as 3Q showed a “big margin miss,” impacted by weak trading in the Marine and Food & Water divisions, Citi writes.
- Viaplay shares drop as much as 31%, the most on record, after Nordic streaming company cut its guidance on slower growth in its Nordic business.
Earlier in the session, Asian stocks climbed, helped by a rebound in Chinese technology shares that followed Monday’s steep losses in the wake of the Communist Party congress. The MSCI Asia Pacific Index rose as much as 0.9% before paring the advance to 0.3%, boosted by gains in internet giants Alibaba and JD.com. A gauge of Chinese tech stocks erased an early loss of almost 3% to jump by a similar magnitude, as Alibaba Health and JD Health climbed. Tech and materials shares in the broader region fell. Benchmarks in Hong Kong and on the mainland whipsawed in volatile trading, closing marginally lower. Sentiment remains fragile after the dramatic selloff Monday following Xi Jinping’s move to secure his grip on power and amid ongoing concern over the nation’s Covid-zero policy.
“Without reopening, visibility on China’s economy and corporate earnings will remain very low, and risk-off trade in the stock market may continue,” BofA Securities strategists, including Winnie Wu, wrote in a note. Value stocks will likely outperform growth stocks, and the onshore market may outperform offshore, they added. China Budget Gap Widens to 7.16t Yuan as Covid, Property Weigh Vietnamese equities fell before reversing losses after the central bank unexpectedly raised interest rates by another one percentage point. Shares in Japan climbed for a second day amid optimism over corporate earnings and hopes for an eventual slowdown in Federal Reserve interest rate hikes.
“We’re certainly staying away from the Chinese market right now because the political scene is not favorable,” Laila Pence, president of Pence Wealth Management, said in an interview on Bloomberg TV. “There’s a lot less risk in the US and just as much upside.”
Japanese stocks climbed, following an extended rally in US peers, as investors assessed the potential for good corporate earnings amid continued monetary tightening by the Fed. The Topix rose 1.1% to close at 1,907.14, while the Nikkei advanced 1% to 27,250.28. Keyence Corp. contributed the most to the Topix Index gain, rising 2.9%. Out of 2,166 stocks in the index, 1,584 rose and 477 fell, while 105 were unchanged. Stocks are getting a boost from the potential slowdown of Fed interest rate hikes, and US earnings “are not that bad,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management. “Japanese earnings are not that bad as well, with the weak yen, and price pass-throughs have shown up this quarter so domestic-oriented companies are expected to perform better.”
Australia's S&P/ASX 200 index rose 0.3% to close at 6,798.60, extending gains for a second day, as property and financial sectors supported the benchmark. Traders are also awaiting the unveiling of Australia’s budget later on Tuesday. The nation’s budget deficit in fiscal 2023 is forecast to be less than half the level anticipated by the previous administration in March, bolstered by windfall revenue from surging commodity prices. Read: Australia Budget Expected to Rock Stocks From Housing to Mining In New Zealand, the S&P/NZX 50 index rose 1.1% to 10,902.31.
In rates, treasuries traded at the best levels of the day into early US session, following wider gains across bunds where long-end of the curve is richer by up to 10bp. Treasuries rally led by intermediates, stretching 5s30s spread past 4bp and onto steepest levels since Sept. 13. Focal points of US session include start of auction cycle with 2-year at 1pm New York time. US yields richer by as much as 7bp across 5- to 7-year sector with 2s5s30s fly dropping 5bp as belly outperforms; 10-year yields around 4.1585% with bunds outperforming by 2.5bp and gilts underperforming by 2.5bp anticipating new Prime Minister Rishi Sunak’s fiscal plans over the coming days. German bonds rally ahead of the ECB rate decision this week, led by the long-end. Bunds 10-year yield down ~6.5bps to 2.26%. Peripheral spreads tighten to Germany with 10y BTP/Bund narrowing 5.2bps to 219.8bps. The US auction cycle includes $42b 2-year note followed by $43b 5-year Wednesday and $35b 7- year Thursday. WI 2-year around 4.455% is above auction stops since 2007 and ~16.5bp cheaper than last month’s, which tailed by 1.6bp.
In FX, the Bloomberg Dollar Spot Index steadied and the greenback traded mixed versus its Group-of-10 peers. Here's how all other majors did:
- The pound led gains and UK government bonds advanced, led by the long end, as investors awaited more details on economic and fiscal policy from the incoming prime minister, who takes office later in the day.
- The euro erased gains, after rising toward $0.99 in Asian trading. Bunds extended yesterday’s advance, while Italian bonds stretched gains to a fourth session, the longest run since November 2021, as money markets pared ECB tightening bets ahead of Thursday’s policy outcome. Germany Oct. IFO business confidence index came in at 84.3 versus estimate 83.5.
- The yen was little changed as traders remained wary of further intervention by authorities, while a drop in US yields weighed on the greenback. Super-long government bonds rallied. Front-end volatility in dollar-yen retreats sharply as the latest round of Japanese intervention makes the case for tighter ranges.
- The Australian dollar inched up. Gains were tempered by elevated Covid case numbers in China and iron ore falling to its lowest level since November. The New Zealand dollar swung to a loss in European trading; the government said it’s made no decision yet on raising the minimum wage for the next year.
- The onshore yuan fell by the most among Asian peers to its lowest level since 2007 after the PBOC’s weaker fixing was interpreted by traders as a sign for a weaker currency. One-month implied volatility of USD/CNH rose to 10.46%, the highest on record in data back to 2011. China’s foreign exchange regulator is consulting some banks on positioning in the currency market as the yuan declines to the lowest levels since 2008, Reuters reports, citing unidentified people familiar with the matter. PBOC adjusted rules to allow companies to borrow more from overseas, enabling more foreign capital inflows at a time when the currency is plunging to fresh 2008 lows against the dollar.
In commodities, WTI trades within Monday’s range, falling 0.6% to near $84 with crude benchmarks pressured amid the general risk tone with sentiment slipping throughout the morning amid a resilient USD and Ifo pointing to a German recession. Currently, WTI and Brent Dec contracts are lower by just over 1% or USD 1/bbl and reside at session lows of USD 83.50/bbl and USD 92/bbl respectively. IEA's Birol said the OPEC+ decision to cut output by 2mln BPD is a risky one especially as several economies are on the brink of recession; the Global LNG market to tighten further next year as European imports increase and China's appetite may rebound, via Reuters.
Bitcoin is pressured but within a narrow USD 200 range that is itself a similar magnitude above the USD 19k mark.
Looking to the day ahead now and economic indicators in store will feature the Conference Board consumer confidence index for October, Richmond Fed manufacturing index and August FHFA house price index for the US. In Europe, we will get October Ifo survey for Germany and the Eurozone bank lending survey will also be published. The earnings line-up for today will be key, featuring most prominently Microsoft and Alphabet after the US market close. Earlier in the day, we will hear from Coca-Cola, General Electric, General Motors and UPS. Other notable names reporting will feature Visa, Novartis, Texas Instruments, Raytheon Technologies, HSBC, SAP, 3M, UBS, ADM, Valero Energy, Chipotle, Biogen, Halliburton, Spotify and Norsk Hydro.
- S&P 500 futures down 0.2% at 3,800.00
- STOXX Europe 600 up 0.2% to 402.68
- MXAP up 0.4% to 134.79
- MXAPJ little changed at 430.13
- Nikkei up 1.0% to 27,250.28
- Topix up 1.1% to 1,907.14
- Hang Seng Index little changed at 15,165.59
- Shanghai Composite little changed at 2,976.28
- Sensex down 0.1% to 59,750.45
- Australia S&P/ASX 200 up 0.3% to 6,798.62
- Kospi little changed at 2,235.07
- German 10Y yield down 2.6% at 2.27%
- Euro down 0.1% at $0.9863
- Brent Futures down 1.2% to $92.13/bbl
- Gold spot down 0.4% to $1,642.86
- U.S. Dollar Index little changed at 112.031
Top Overnight News from Bloomberg
- Two younger officials promoted to the Communist Party’s ranks are standing out as the most likely candidates to be tasked with steering the People’s Bank of China through challenging economic times
- The era of negative-yielding global bonds looks tantalizingly close to an end, with Japan’s two-year yield on the cusp of breaking above zero for the first time since 2015
- New Zealand’s central bank is “hopeful” that inflation has peaked, even though it was higher than anyone expected in the third quarter, Chief Economist Paul Conway said
- China’s central bank adjusted rules to allow companies to borrow more from overseas, enabling more foreign capital inflows at a time when the currency is plunging to fresh 2008 lows against the dollar
- The offshore yuan fell to a fresh record low after the People’s Bank of China loosened its grip on the tightly controlled fixing by setting the rate at the weakest level in 14 years
- New Zealand’s central bank is “hopeful” that inflation has peaked, even though it was higher than anyone expected in the third quarter, chief economist Paul Conway said
- Australia’s budget deficit in fiscal 2023 is set to be less than half the level anticipated by the previous administration in March, bolstered by windfall revenue from surging commodity prices
- Oil steadied as traders assessed near-term supply tightness in the crude market and broad appetite for risk assets including commodities
- WhatsApp Appears to Have Outage, With Thousands Reporting Issues
- US Stays China Course, Works on Biden Meeting as Xi Cements Grip
- Carney Addresses ‘Tension’ After Bankers Balked at CO2 Proposal
- Oil Steadies as Market Tightness Vies With Slowdown Concerns
- Fed Is Losing Billions, Wiping Out Profits That Funded Spending
- China Rout Puts Focus on Stocks With Foreign Holdings, BofA Says
- Carnival Unit Halts Asia Cruises as China Covid Zero Bites
- Xi Rewards Combat-Ready China Generals Amid Taiwan Tensions
- Warner Bros. Discovery Expects Billions in Restructuring Charges
- Barrack Testifies Trump Presidency Was ‘Disastrous’ for Him
- Sunak Expected to Keep Hunt as He Readies New UK Cabinet
- Tesla Options Hint at Trouble Ahead With Bets Around $200
- State Street’s CEO Says Private Credit Can Lower Risk for Banks
- VIX’s Tandem Swings With S&P 500 Show Options Obsession Persists
- What the Alzheimer’s Drug Breakthrough Means for Other Diseases
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks eventually traded higher following a firm lead from Wall Street, with the Chinese market experiencing a choppy session overnight. ASX 200 held onto gains as the clock ticks down for the unveiling of the Australian Federal Budget, with gains in the index led by financials, telecoms and healthcare. Nikkei 225 remained above the 27,000 mark as its manufacturing stocks kept the index buoyed. KOSPI was supported by the chip sector but gains were capped as South Korean President Yoon said North Korea has completed preparations for a seventh nuclear test, whilst South Korean consumer inflation expectations also ticked up from the prior month. Hang Seng and Shanghai Comp were volatile throughout the session and both indices swung between gains and losses with the former dipping under the 15,000 mark at one point - desks pointed to continued angst following the CCP National Congress. The indices later surged whilst there were unconfirmed reports of Chinese intervention in the stock market.
Top Asian News
- US Treasury Secretary Yellen is unaware of Japan's FX intervention and Tokyo hasn't informed them.
- PBoC relaxed cross-border funding by raising the macroprudential parameter to 1.25 from 1.
- PBoC injected CNY 230bln via 7-day reverse repos at a maintained rate of 2.00% for a daily injection of CNY 228bln
- China State Planner said China is to promote the expansion of foreign investments focusing on the manufacturing industry.
- Japan kept its overall economic view unchanged that the economy is picking up moderately, and added that "full attention" must be paid to market volatility. Govt raised Capex view for the first time in eight months; downgrades view on imports.
- Japanese Finance Minister Suzuki does not comment on daily forex moves, ready to take appropriate action on FX movements if necessary; watching FX with a high sense of urgency. Suzuki said they are in constant communication with US authorities and he is aware of US Treasury Secretary Yellen's comments that she did not know about Japan's intervention.
- Japanese government official citing BoJ Governor Kuroda said sharp one-sided JPY weakening is not desirable for the economy; BoJ will work closely with govt to monitor financial and currency market moves and their impact on Japan's economy and prices
- Japanese PM Kishida is to appoint former Health Minister Goto as the new economy minister to replace Yamagiwa, via NHK.
- Japan FX intervention on October 24th has been estimated at JPY 700-900bln, according to calculation provided by a market source to Reuters.
- South Korean Oct 12-month consumer median inflation expectation 4.3% (prev. 4.2% in Sep), according to the BoK.
- RBNZ Chief Economist said the RBNZ anticipates that inflationary pressures will ease and notes that falling house prices are expected to slow consumption.
- Australian Federal Budget: 2022/23 budget deficit seen at 1.5% of GDP, 2023/24 seen at 1.8% of GDP, 2024/25 seen at 2.0% of GDP. Click here for full details.
European bourses are on the backfoot despite a firmer open as participants digest numerous heavyweight earnings and the latest Ifo ahead of key US prints; Euro Stoxx 50 -0.3%. Sectors post outperformance in Media and Tech following Apple's pricing update and SAP +4.0%, respectively, while Chemicals are pressured as heavyweight Linde considers a Frankfurt delisting. Stateside, futures are pressured and having been moving in-tandem with European bourses as we look to heavyweight US names; ES -0.4%. United Parcel Service Inc (UPS) Q3 2022 (USD): EPS 2.96 (exp. 2.84), Revenue 24.2bln (exp. 24.32bln).
Top European News
- Sky News sources suggest Jeremy Hunt is to remain UK Chancellor, while Penny Mordaunt wants the Foreign Secretary job.
- BoE Chief Economist Pill says might have benefitted if "other institutions" had respected UK institutional framework in recent weeks.
- EU has warned that a price cap on natural gas will need the involvement of the UK and Switzerland for it to be effective, according to Bloomberg citing sources.
- German gov't increases tax revenue forecast for 2022-2026 by EUR 110bln, via Handelsblatt.
- DXY rangy around the 112.000 handle and Dollar mixed against major peers, Pound reclaims 1.1300+ status as new PM Sunak prepares to take the reins from Truss.
- Loonie lagging ahead of BoC policy meeting on Wednesday as WTI retreats further.
- Aussie hovers above 0.6300 vs the Buck post-as anticipated Budget.
- Euro remains confined between tight 0.9899-52 lines against the Greenback with little reaction to mixed Ifo and ECB lending surveys.
- PBoC set USD/CNY mid-point at 7.1668 vs exp. 7.1348 (prev. 7.1230); weakest since 2008
- China's FX regulator surveyed banks regarding Yuan positioning as the currency tumbles, via Reuters citing sources.
- Turkish Finance Minister held a meeting with the bank association and senior executives on Monday, via Reuters citing sources; subsequently confirmed.
- Bonds resume recovery rally as Bunds breach 137.00 and Bobls scale 119.00 irrespective of a weak 5 year auction.
- Gilts establish firmer foothold above 100.00 as new UK PM takes over the helm and US Treasuries flip from bear-steepening to bull-flattening ahead of 2 year note supply.
- German Finance Agency Diemer says volatility is making it harder for primary dealers to take risk in bidding within German auctions, via Reuters.
- Crude benchmarks are pressured amid the general risk tone with sentiment slipping throughout the morning amid a resilient USD and Ifo pointing to a German recession.
- Currently, WTI and Brent Dec contracts are lower by just over 1% or USD 1/bbl and reside at session lows of USD 83.50/bbl and USD 92/bbl respectively.
- IEA's Birol said the OPEC+ decision to cut output by 2mln BPD is a risky one especially as several economies are on the brink of recession; the Global LNG market to tighten further next year as European imports increase and China's appetite may rebound, via Reuters.
- The European Commission is to discuss a proposal today for a permanent fix to decouple gas from electricity prices, according to Politico.
- Spot gold is tarnished by ongoing USD strength with the DXY remaining resilient around the 112.00 mark after a brief move below. As such, the yellow metal remains below the 10-DMA.
- Aluminium is faring better than the likes of copper at present and perhaps deriving some support from Norsk Hydro announcing it is to commence a partial curtailment of its Norwegian aluminium smelters
- Russia will regard the use of a "dirty bomb" by Kyiv as an act of nuclear terrorism; Russia said it has not intended nor intends to use nuclear weapons in Ukraine, according to a letter cited by Reuters.
- US DoJ said four Chinese nationals, including three intelligence officials, have been charged in a spy recruitment campaign, according to Reuters.
- South Korean President Yoon said North Korea has completed preparations for a seventh nuclear test, via Yonhap.
US Event Calendar
- 09:00: Aug. S&P CS Composite-20 YoY, est. 14.05%, prior 16.06%
- S&P/CS 20 City MoM SA, est. -0.80%, prior -0.44%
- FHFA House Price Index MoM, est. -0.6%, prior -0.6%
- 10:00: Oct. Conf. Board Expectations, prior 80.3
- Conf. Board Present Situation, prior 149.6
- Conf. Board Consumer Confidenc, est. 106.0, prior 108.0
- 10:00: Oct. Richmond Fed Index, est. -5, prior 0
DB's Jim Reid concludes the overnight wrap
I’m off to New York this morning as soon as I press send on this. I've been told that the kids are queueing up to replace me and sleep on my side of the bed when I'm gone. So much so that I'm not sure I'll get my old slot back! It’ll be my first visit to NY since just prior to the pandemic. That's a lot of missing products from the Apple store to make up for. However Sterling's fall, and inflation since then will likely temper my enthusiasm for the new iPad out on Thursday!
Talking of inflation, this morning we've just put out a note looking at what normally happens next when inflation hits 8% through history using 50 DM and EM countries, around 320 unique observations and covering up to a 100 years of data. With consensus being so bad at predicting inflation in this cycle we thought we'd look at what history says. Without too many spoilers, it would be unusual to see inflation now fall back as quickly as consensus believes over the next 2 years. In fact using data from the last 50 years (the fiat money era) current consensus forecasts would be in the most optimistic decile of observations over this period. Whether consensus or the median observation through history is correct will have profound implications for assets over the next few months and years. See the short report here for more.
On a related subject, we wondered in yesterday's EMR whether the WSJ article on Friday would mark the 6th attempt this year to try to pre-empt a Fed pivot after Friday's reaction to the story. The reality is though that there hasn't been enough follow-through in US rates pricing yesterday for this to yet qualify as a 6th attempt. In fact, we saw a part reversal of Friday’s move yesterday. Indeed, even with a monster rally in UK bonds, US rates edged back up with 2 and 10yr yields +4.5bps and +3.2bps, respectively. Implied rates from the December 2022 - July 2023 Fed contracts increased c.+2-6bps. In Asia, 2yr and 10yr UST are back -1.2bps and -4bps lower, respectively, though.
Gilts have been the standout rates mover over the last 24 hours though with 2yr and 10yrs around -37bps and -31bps lower yesterday as Rishi Sunak's path to PM was cleared by all others dropping out. 2yr notes had their largest gain in nearly 30 years. Sunak will be formally appointed today. The rates repricing has also tempered expectations of BoE hikes beyond the next couple of meetings, amid hopes for greater fiscal discipline, with the June 23 contract falling 21bps. For further reference, from morning trading just before the mini-budget on September 23rd, 2yr, 10yr and 30yr gilts are now -15.1bps, +24.8bps and -1.5bps, respectively, with GBP c.1% higher. A massive round trip. Interestingly, 10yr UST and 10yr Bunds are +51bps and +40bps over the exact same period, so Gilts have outperformed.
Although US rates haven't followed through on Friday's price action, European equivalents followed Gilts and perhaps reacted to weak PMIs (more below) and the UK move more. 10yr Bunds (-8.4bps), OATs (-11.0bps) and BTPs -16.4bps rallied hard. 2yr yields also declined (-4.2bps in Germany, -4.3bps in France and -12.2 in Italy) ahead of the ECB’s meeting on Thursday.
US stocks carried on their recent bounce, shrugging off weak PMIs there too, with the S&P 500 (+1.19%) and Dow Jones (+1.34%) finishing in the green for the day amid gains in health care (+1.91%), IT (+1.38%) and staples (+1.79%). Only two sectors ended up with losses on the day – real estate (-0.1%) and materials (-0.62%) – and 82% of S&P 500 members were in the green. News of Tesla (-1.49%) lowering prices on its cars sold in China amid competitive pressures weighed on the Nasdaq (+0.86%) as well. Watch out for an upcoming 48-hour blitz of tech earnings with 20% of the S&P 500 market cap reporting across 5 names. We have Microsoft, Alphabet (after hours today), Meta (tomorrow) and Apple and Amazon (Thursday).
European equities also rallied amid a -15% fall in European natural gas prices to a below the 100 euro mark for the first time since June amid milder weather (not on my weekend break away!!) and good storage metrics. Indeed, "next hour" delivery TTF gas contracts briefly traded in negative territory yesterday having been over €300 in late August. With storage nearly full and the weather warm, there is very limited immediate delivery demand. This doesn't change the medium-term problems but for now there's a glut of near-term gas. The Stoxx 600 rallied +1.40%, led by utilities (+2.68%) and IT (+2.20%), with no sector in the red on the day. Bourses of Spain (IBEX +1.79%) and Italy (FTSE MIB +1.93%) were the relative outperformance but the DAX (+1.58%) and CAC 40 (+1.59%) also posted solid gains.
That's it for the good news as the global flash PMIs painted a rather bleak picture on both sides of the Atlantic. Perhaps the most glaring miss was that for the US, with the manufacturing gauge (49.9) sliding into contractionary territory for the first time since June 2020 from September’s 52.0 reading and way off the 51.0 median estimate on Bloomberg. The services PMI reading disappointed even more, falling to 46.6 from 49.3 and defying expectations of a mild rebound to 49.5. Adding to the gloom, the employment component of the index fell to 49.4 from 52.2 and business expectations contracted to 57.4 (vs 66.7), the lowest since June and September of 2020, respectively. A silver lining came from a fall in input prices in the manufacturing PMI (63.9 vs 65.2), the lowest level since November 2020, although the measure crept higher for services (68.5 vs 67.7). Overall, this meant a fourth month in a row of being in contractionary theory for the composite.
Manufacturing PMIs disappointed to the downside in Europe as well, falling to 46.6 from 48.4 (vs 47.9 expected) for the Eurozone aggregate and to 45.7 in Germany (vs 47.0 expected). Over in the UK, the services gauge also had a solid miss, falling from 50.0 to 47.5 (vs 49.0 expected), in addition to the manufacturing index (45.8 vs 48.0 expected). Amid these results, France stood out by having a “breakeven” composite of 50.0 on the back of an upward beat on manufacturing (47.4 vs 47.0 expected) and a miss on services (51.3 vs 51.5).
Overnight in Asia, major bourses are catching up to yesterday’s price action in the US, with the Nikkei (+1.25%) and the Kospi (+0.29%) in the green and Chinese assets recording a volatile session after yesterday’s rout that saw the Hang Seng falling by -6.36%, the most in a day since the financial crisis. As of this morning, the index is notching a rebound of +0.87% on hopes of prior overselling and further parsing of the Communist Party Congress while the Shanghai composite is also higher (+0.74%). Dip buying is especially strong in the Hang Seng Tech index (+3.95%) which declined by nearly -10% yesterday and today’s volatility was boosted by news of PBOC’s multi-year-low fixing which sent the onshore yuan below the 7.30 level, the weakest since the financial crisis. Little of this is currently spilling over into US assets, with S&P 500 futures broadly flat.
To the day ahead now and economic indicators in store will feature the Conference Board consumer confidence index for October, Richmond Fed manufacturing index and August FHFA house price index for the US. In Europe, we will get October Ifo survey for Germany and the Eurozone bank lending survey will also be published. The earnings line-up for today will be key, featuring most prominently Microsoft and Alphabet after the US market close. Earlier in the day, we will hear from Coca-Cola, General Electric, General Motors and UPS. Other notable names reporting will feature Visa, Novartis, Texas Instruments, Raytheon Technologies, HSBC, SAP, 3M, UBS, ADM, Valero Energy, Chipotle, Biogen, Halliburton, Spotify and Norsk Hydro.
Warren Buffett’s Advice on Stocks vs. Bonds
In October 2010, Warren Buffett thought that stocks were far more attractive than bonds, a prediction that proved to be accurate.
“It’s quite clear that stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities. But people do because they, the lack of confidence. But that’s what makes for the attractive prices. If they had their confidence back, they wouldn’t be selling at these prices. And believe me, it will come back over time.”
— Warren Buffett, October 5, 2010
From our perspective in mid-2023, Warren Buffett’s advice in late 2010 seems obvious, but it was not self-evident at the time. The United States had recently emerged from a financial crisis and it took years for investors to regain confidence. In retrospect, most of the fluctuations that seemed meaningful to us on a day-to-day basis have receded into mere noise when we zoom out and look at markets over a period of many years.
With the benefit of hindsight, Mr. Buffett’s observations nearly thirteen years ago were exactly on target. From October 2010 to May 2023, the S&P 500 posted an annualized return of 10.7%. Those who reinvested dividends would have achieved a 12.7% annualized return over that timeframe. Berkshire Hathaway Class A shares have compounded at an annualized rate of 11.8% since October 4, 2010.
Stocks have done very well indeed, just as Mr. Buffett predicted. How does this compare to the experience of bond investors over the same timeframe?
When I listen to Mr. Buffett comment on bonds, I usually think of treasury securities because Berkshire Hathaway tends to concentrate its fixed maturity investments in treasuries rather than accept credit risk. The occasional drama over the debt ceiling notwithstanding, treasury securities are considered very safe when it comes to credit risk. This lack of credit risk usually comes at the cost of relatively low returns.
On October 5, 2010, the following yields were available on treasury securities:
Although no one knew it at the time, treasuries were at the beginning of a very long period of extremely low returns. In 2010, the Federal Reserve did not yet have an explicit inflation target, but Chairman Ben Bernanke would soon announce a 2% target. Investing at the short end of the yield curve was a near guarantee of loss of purchasing power of time. A yield in excess of inflation expectations at the time could be obtained in treasuries, but only by purchasing a maturity of ten years or more which involves taking considerable duration risk.
In 2010, fixed income investors might have waited on the sidelines in short term treasury bills expecting that long term treasuries would eventually provide more attractive yields as the economy recovered. While the ten year treasury did offer better yields occasionally, the story of the past thirteen years has been one of consistently low long term yields, as we can see from the chart of the ten year treasury note:
According to the inflation calculator provided by the Bureau of Labor Statistics, the consumer price index compounded at approximately 2.7% from October 2010 to April 2023. Investors in the S&P 500 or Berkshire Hathaway have compounded their wealth far in excess of inflation while an investor in longer term treasury securities would have been lucky to achieve any real return after inflation and taxes.
What if a skittish investor worried about the risk of investing in stocks but found the yields offered on ordinary treasuries unappealing because of the risk of inflation?
Since 1997, the United States Treasury has offered Treasury Inflation Protected Securities (TIPS) which are meant to provide investors with a real return adjusted for inflation. Just as we have a yield curve for regular treasury securities, we also have a yield curve for TIPS. This is what TIPS yields looked like on October 5, 2010:
Unlike regular treasury securities, TIPS are only offered as longer term securities at auction, although one can purchase TIPS on the secondary market for shorter maturities. For purposes of this discussion, I have displayed TIPS yields for five to thirty year maturities in the chart above. Note that the yields are expressed in real terms. In addition to the real yield, investors receive an adjustment for inflation.
At the time, the yield curve was upward sloping for TIPS, with the five year offering a real yield of negative 0.19% and the thirty year security offering a real yield of 1.54%.
It is interesting to note the difference between the yield on the regular ten year treasury of 2.5% and the yield on the ten year TIPS of 0.65% which implies that the market expected the inflation rate to be approximately 1.85% over the ten year period. This means that the choice of investing in the regular ten year treasury or the ten year TIPS would depend on the investor’s expectation of inflation. The investor who expected inflation higher than 1.85% would opt for the TIPS over the regular treasury.
Just as the interest rate for regular treasury securities fluctuates over time, TIPS real yields also fluctuate. The following chart shows how the real yield on the ten year TIPS has varied over the past thirteen years:
We should note that the real yield on longer term TIPS can become negative, as we can see from the exhibit above. This happened early in the thirteen year period and, in a more extreme way, during the period following the pandemic. As of mid-2023, real yields on TIPS are back in positive territory again.
The other option for risk averse small investors in October 2010 would have been to buy I Series U.S. Savings Bonds, also known as I Bonds. However, at the time, the I Bond offered a real yield of 0%, lower than the yields available on TIPS.
The bottom line is that unless an investor in October 2010 was willing to take credit risk in bonds and had a high degree of skill, it is almost certain that stocks provided far higher returns. A long-term investor who took Warren Buffett’s advice to heart would have achieved returns well in excess of inflation. In the bond world, an investor would have struggled to keep his head above water in real purchasing power terms.
This raises the question of whether it ever makes sense to invest in bonds over long periods of time, especially during periods of inflation. The answer depends on the yields offered on bonds, the likely level of inflation in the future, and the current valuation of a broad-based index of U.S. stocks.
I recently wrote an article about the role of TIPS in a fixed income portfolio, but this was in the context of a five year cash flow ladder rather than a long term investment. However, the fact is that the majority of investors will want to allocate a portion of their assets to bonds, especially those who are approaching their retirement years. A bond allocation usually provides a baseline level of perceived stability which permits many investors to view stock price fluctuations with greater equanimity, avoiding panic during the inevitable periods when stocks are declining.
For U.S. based investors who are unwilling to take credit risk, it makes sense to focus on securities backed by the United States government. Both marketable treasury securities and savings bonds have no credit risk, although all marketable securities, including regular treasuries and TIPS, have duration risk if sold prior to maturity.
Anyone investing in bonds needs to be aware of the risk of inflation, the topic of an article published yesterday. TIPS and I Bonds are both viable options that can provide limited inflation protection. In my next article, I will provide a detailed comparison of how TIPS and I Bonds work along with my opinion on how they might be used for various investment goals based on the interest rates that currently prevail.
Copyright, Disclosures, and Privacy Information
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Small Bank Insiders Are Buying Shares In Their Companies At A Near Record Pace
Small Bank Insiders Are Buying Shares In Their Companies At A Near Record Pace
On a day when the euphoric AI mania is taking a break (which…
On a day when the euphoric AI mania is taking a break (which hasn't stopped the Nasdaq from hitting fresh 52 week highs), market flows have reversed modestly out of tech and into small caps, which are surging and reversing just a little of that record QQQ/RTY skew ...
... on the back of aggressive buying of energy (which had been shorted furiously for the past few months) and especially small banks, with the KRE exploding higher, and rising for a 3rd straight week.
And while we wait until today's 4:15pm release of the latest bank deposit and loan data to see if such buying is indeed justified at a time of a persistent bank jog, there is a group of investors that isn't waiting: bank insiders are buying shares in their own companies at the fastest pace since the covid crash, a strong vote of confidence in the industry after the collapse of four regional lenders earlier this year.
While one can debate if management knows something that others don't, and as a reminder the management of SVB and FRC were completely clueless about what was coming and lost everything in just days, the number of buyers has already jumped to 778 in the second quarter through May 26 from 524 in the first three months of the year, according to Bloomberg which cites data from research firm VerityData, and which said the surge is being driven by small and midsize banks. More purchasers stepped up even as share prices sank to multiyear lows in early May.
Another measure of insider sentiment is the buyers-to-sellers ratio, which compares unique insider buying to unique insider selling. The average quarterly ratio for banks since 2011 has been 1.8 to 1, according to the report. So far in the second quarter, the ratio is at a record high of 14.7 to 1.
“Insiders in this group are expressing a strong belief that the regional-banking system as a whole is sound, that there’s not a danger of a wide-scale collapse,” Ben Silverman, director of research at VerityData, said in a Bloomberg interview.
“This is the type of insider signaling you want to see in a sector when it goes down,” Silverman said. “As an investor, if you feel that these are good banks that will be here for the long run, then it’s a buying opportunity.”
“This signifies long-term confidence in these banks’ ability to weather whatever near-term storm there might be.”
In theory, yes it does, but is that merely to convince others to also buy (herd psychology works damn well in such cases), or is it because management actually believes that their stock prices are undervalued. Or, perhaps, management knows nothing and is simply hoping that the Fed will not let any more banks fail.
Whatever the answer, insiders aggressively bought shares of their own companies following the collapse of regional banks including SVB Financial Group’s Silicon Valley Bank in March, pausing only when rules barring insider trading near the release of quarterly results kicked in at the end of the quarter. Buying steadily increased again when the trading window reopened, with May levels exceeding March, according to the data.
The second quarter has so far been the most active period for insider buying in the industry since the first three months of 2020, when stock prices plummeted at the onset of the Covid-19 pandemic, according to the report.
Jobs data shows the truth about the labor market
Follow the trend to understand Friday’s jobs data, which showed 339,000 jobs were created in May while the unemployment rate increased.
We’ve had some odd job reports over the years, but the key is to always follow the trend. That’s especially important with Friday’s data, which showed 339,000 jobs were created in May even while the unemployment rate increased.
As someone who wrote that we should get job openings toward 10 million in this expansion, I am always mindful of my other labor talking point. If COVID-19 didn’t happen, the total employment numbers in the U.S. today should be between 158 million and 159 million, or in a weaker labor market growth scenario, between 157 million and 158 million.
Today, we stand at 156,105,000, so I think we are still in make-up mode until we reach a range acceptable to a fast economic recovery.
That’s why the jobs data has beaten expectations 14 months in a row. What the U.S. has that other countries don’t is a massive young workforce. While population growth is slowing here, we have the demographic muscle that other countries don’t have — if we didn’t have that, our economic discussion would be different.
Now let’s look at the labor market on all fronts from the data we got this week to get a comprehensive view of the labor market today. On Friday the BLS reported job growth came in at 339,000, with positive revisions, while the unemployment rate went higher, as there was a drop in self-employed workers.
From BLS: Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose by 0.3 percentage point to 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance.
Hours worked have fallen in the last few months, and wage growth is slowing. The fear of 1970s-style inflation was that wages could grow out of control in a tight labor market. In theory, 2022 and 2023 are tight labor markets and wage growth is slowing down. This trend should continue for the next 12 months as well.
Here is a breakdown of that data for those aged 25 and older:
- Less than a high school diploma: 5.7% (2 months ago, 4.8%)
- High school graduate and no college: 3.9%
- Some college or associate degree: 3.2%
- Bachelor’s degree or higher: 2.1%.
The noticeable data line here is that the unemployment rate for those without a high school education is up almost 1% from two months ago.
Here is the breakdown of the jobs created this month, another big month for the government, which typically doesn’t continue at this pace. Construction labor has held up very well, even though housing permits have been falling for some time. The backlog from COVID-19 has been a jobs program for the U.S. as we are still slowly growing the housing completion data.
So the BLS jobs report is still pushing along, while wage growth is slowing down. Jobs Friday is one piece of the labor pie — we have two other data lines that we always need to keep an eye on to know the health of the labor market: job openings and jobless claims.
As the only person on Earth who talked about job openings data getting to 10 million in this recovery, I am surprised that job openings data is still around that mark. But that is off the recent highs of 12 million.
At this point of the economic expansion, I am putting more weight on jobless claims data than job openings (JOLTS). For me, the Fed doesn’t pivot, or the 10-year yield doesn’t break under 3.21%, until jobless claims break over 323,000 on the four-week moving average, and that isn’t happening either.
As we can see below, the Gandalf line in the sand has held up the entire year, even though it was tested many times.
As we can see below, the jobless claims four-week moving average is still far from breaking over 323,000. I chose that number using many different variables as I think when we crack about that level, it will be noticeable to everyone — even the Fed — that the labor market has broken.
From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 2,000 in the week ended May 27, to 232,000. The four-week moving average declined, to 229,500.
It’s important to understand the labor dynamics of this economic expansion. We had such a shock in the economy with COVID-19 and a strong labor market recovery that the make-up labor demand, which doesn’t get talked about much, is a significant reason we still see healthy numbers.
Also, it’s essential to understand the demographic difference now and what we had to deal with after 2008. The Baby Boomers are leaving the labor market, and every month that happens, they need to be replaced if demand is growing. This is why having a healthy number of younger workers not only helps with that but also provides replacement consumers, as those who leave the labor market tend to consume a bit differently than younger workers.
At this stage of the economic cycle jobless claims is the data line that matters most. Once jobless claims break above 323,000, then and only then I believe we can talk about a Fed pivot — first in their language and then possibly with rate cuts.
The Federal Reserve is scared to death of the 1970s inflation, and they genuinely believe that breaking the labor market is the best way to prevent that type of inflation from happening. As a country, we are fighting against a group of people stuck in the wrong decade with their economic mindset on inflation.
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