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Futures Tumble, Oil And Treasury Yields Plunge As Lockdowns Return

Futures Tumble, Oil And Treasury Yields Plunge As Lockdowns Return

Having briefly touched new all time highs of 4,723.5 overnight, S&P futures tumbled shortly after Europe opened as a fourth wave of the pandemic in Europe resulted in…

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Futures Tumble, Oil And Treasury Yields Plunge As Lockdowns Return

Having briefly touched new all time highs of 4,723.5 overnight, S&P futures tumbled shortly after Europe opened as a fourth wave of the pandemic in Europe resulted in a new lockdown in Austria and the prospect of similar action in Germany wiped out earlier gains and forced stock markets down close to 1% as it overshadowed optimism about corporate earnings and the economic recovery. Friday is also a major options-expiry day, which could trigger volatility in equities. Two progressive Democratic senators said they oppose the renomination of Federal Reserve Chair Jerome Powell to a second term, because he "refuses to recognize climate change" joining Elizabeth Warren in urging President Joe Biden to choose someone else.

S&P and Dow futures fell tracking losses in banks, airlines, and other economically sensitive sectors. Uncertainty over rising inflation and the Federal Reserve's tightening also kept demand for value stocks low. At 745am Dow e-minis were down 218 points, or 0.609%. S&P 500 e-minis were down 12.25 points, or 0.26% and Nasdaq 100 e-minis were up 68 points, or 0.41%.

With the lockdown trade storming back, Nasdaq futures hit a record high on Friday as investors sought economically stable sectors after a small delay in voting on President Joe Biden's $1.75 trillion spending bill, while fears of Europe-wide lockdowns sent yields plunging. The U.S. House of Representatives early on Friday delayed an anticipated vote on passage of Biden's social programs and climate change investment bill, and will instead reconvene at 8 a.m. EST (1300 GMT) to complete the legislation

“Everyone is holding his and her breath to find out who will be the next Fed Chair,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “More or less dovish, will it really matter? The one that will take or keep the helm of the Fed will need to hike rates at some point.”

Among major premarket movers, Intuit Inc jumped 10.3% as brokerages raised their price targets on the income tax software company after it beat quarterly estimates and raised forecast. The stock was the top S&P 500 gainer in premarket trade. Chipmaker Nvidia also boosted Nasdaq futures, rising 1.7% in heavy trade after posting strong quarterly results late Wednesday.

On the other end, Applied Materials dropped 5.7% after the chipmaker forecast first-quarter sales and profit below market estimates on supply chain woes. Oil firms Exxon and Chevron slipped 2.1% and 1.8% as crude prices sank, while big banks including JPMorgan and Bank of America were down between 0.9% and 1.1%, tracking a fall in U.S. Treasury yields. Carriers Delta Air Lines, United Airlines and American Airlines and cruiseliners Norwegian Cruise Line and Carnival Corp fell between 1.4% and 2.3%. Here are all the other notable movers:

  • Farfetch (FTCH US) shares drop 23% after the online apparel retailer reported 3Q revenue that missed estimates and trimmed its FY forecast for digital platform gross merchandise value growth. Analysts see scope for the shares to stay in the “penalty box” in the near term, but recommend buying on weakness.
  • Workday (WDAY US) analysts say that the software firm’s strong quarterly results and guidance were not quite enough to meet high expectations. The stock dropped as much as 11% in extended trading on Thursday.
  • Intuit (INTU US) climbed 9.7% in premarket as analysts said the tax software company posted strong results that were ahead of expectations and raised its outlook. Several increased their price targets for the stock, including a new Street high at Barclays.
  • Palo Alto Networks (PANW US) shares rise 2.8% in U.S. premarket trading after the cyber- security firm reports results and hikes full-year sales guidance, with RBC saying co. saw a strong quarter.
  • Tesla (TSLA US) shares dip 0.5% in premarket trading. The EV maker’s price target is raised to a joint Street-high at Wedbush, with the broker saying that the EV “revolution” presents a $5t market opportunity over the next decade.
  • Datadog (DDOG US) rises 1.8% after it is upgraded to outperform from sector perform at RBC, with the broker saying that it has more conviction on the software firm following its TMIT conference.
  • Mammoth Energy (TUSK US) jumps as much as 34% in U.S. premarket trading after the energy-services company said a subsidiary has been awarded a contract by a major utility to help build electric-vehicle charging station infrastructure.
  • Ross Stores (ROST US) shares dropped 2.2% in postmarket trading on Thursday after its profit outlook for fourth quarter missed the average analyst estimate.

In Europe, banks and carmakers led the Stoxx Europe 600 Index down 0.3%, reversing early gains. Fears of fresh lockdowns have hit travel stocks, but boosted the delivery sector and other pandemic winners, with German meal-kit company HelloFresh jumping as much as 7.1% to a record. Stoxx Europe 600 index tumbled after Germany’s health minister said he couldn’t rule out a lockdown as infections surge relentlessly in the region’s largest economy. That came after Austria said it would enter a nationwide lockdown from Monday. Here are some of the biggest European movers today:

  • Ocado shares jump as much as 8.4%, the most intraday since November 2020, after a Deutsche Bank note on joint venture partner Marks & Spencer highlighted scope for a potential transaction.
  • VGP shares gain as much as 7.7% to a record after KBC raised its rating to accumulate from hold, based on a “strong” 10-month trading update.
  • HelloFresh shares surge as much as 7.1% and other lockdown beneficiaries including Delivery Hero, Logitech and Zalando gain after the German health minister says a lockdown can’t be ruled out. Mall landlords Unibail and Klepierre and duty-free retailer Dufry drop.
  • Truecaller shares rise as much as 14% after it received its first analyst initiations after last month’s IPO. Analysts highlighted the company’s potential for continued strong growth. JPMorgan called current growth momentum “unparalleled.”
  • Hermes shares jump as much as 5.2% to a fresh record, rising for a seventh day, amid optimism that the stock may be added to the Euro Stoxx 50 Index as soon as next month. Shares also rise after bullish current- trading comments of peer Prada.
  • Kingfisher shares drop as much as 5.8%, even after the home-improvement retailer said it expects profit to be toward the higher end of its forecast. Investor focus has probably shifted to 2022, and Friday’s update doesn’t have any guidance for next year, according to Berenberg.
  • GB Group shares tumble as much as 18%, the most since October 2016, after the identity-verification software company raised about GBP300m in a placing of new shares at a discount.
  • Mode Global shares sink as much as 19%, reversing most of this week’s gains, after it said some brands had withdrawn the company as an affiliate.

In Fx, the Bloomberg Dollar Spot Index jumped at the London open and the greenback was higher versus all of its Group-of-10 fears apart from yen. Norway’s krone was the biggest loser as energy prices prices dropped after Austria announced a nationwide lockdown starting on Monday, while Germany’s health minister refused to rule out closures in the country.  The pound fell on the back of a stronger dollar; data showed U.K. retail sales rose for the first time in six months as consumers snapped up toys, sports equipment and clothing, while the cost of servicing U.K. government debt more than tripled in October from a year earlier due to surging inflation

The euro plunged by 1% to a new YTD low of $1.1255 as the repricing in the front-end of euro options suggests the common currency is settling within a new range. The euro is also falling at the end of the week following the announcement that Austria will begin a 20-day full Covid-19 lockdown from Monday in response to surging case numbers which have far surpassed last year's peak. While fatalities remains well below the peak, they are accelerating and the government is clearly keen to arrest it before the situation potentially becomes much worse. With Germany seeing a similar trend, the question now becomes whether the regions largest economy will follow the same path. Its Health Minister, Jens Spahn, today suggested nothing can be ruled out and that they are in a national emergency.

In rates, Treasury yields fell by around 4bps across the board and the bunds yield curve bull flattened, with money markets pushing back bets on a 10bps ECB rate hike further into 2023. Treasury 10-year yields richer by 4.5bp on the day at around 1.54% and toward lows of the weekly range -- bunds, gilts outperform Treasuries by 1bp and 1.5bp in the sector as traders reassess impact of future ECB rate hikes. Treasuries rally across the curve, following wider gains across EGB’s and gilts as investors weigh the impact of further European lockdowns amid a fourth wave of Covid-19. Flight-to-quality pushes Treasury yields lower by up to 5bp across front- and belly of the curve, which slightly outperform.  Bunds and Treasury swap spreads widen, while gilts move tighter as risk assets mostly trade to the downside and demand for havens increases on news regarding coronavirus restrictions. German 10-year swap spreads climbed above 50bps for the first time since March 2020.

In commodities, spot gold is little changed around $1,860/oz, while base metals are in the green, with LME copper and aluminum leading peers. Oil tumbled with WTI and Brent contracts down well over 2%. 

Brent crudes brief dip below $80 was short-lived on Thursday and prices were continuing to recover on the final trading day of the week until Austria announced its lockdown. Brent crude quickly reversed course and trades almost 2% lower on the day as it takes another run at $80.
Oil has been declining over the last week as demand forecasts have been pared back, OPEC and the IEA have warned of oversupply in the coming months and the US has attempted to coordinate an SPR release with China and others.

The market still remains fundamentally in a good position but lockdowns are now an obvious risk to this if other countries follow Austria's lead. A move below $80 could deepen the correction, perhaps pulling the price back towards the mid-$70 region. This looks more likely now than it did a day ago and if Germany announces similar measures, it could be the catalyst for such a move. Perhaps OPEC+ knows what it's talking about after all.

Looking at To the day ahead now, there is no macro news; central bank speakers include ECB President Lagarde, Bundesbank President Weidmann, Fed Vice Chair Clarida, the Fed’s Waller and BoE Chief Economist Pill. Separately, data highlights include UK retail sales and German PPI for October.

Market Snapshot

  • S&P 500 futures down 0.09% to 4,696.25
  • STOXX Europe 600 up 0.2% to 488.66
  • MXAP little changed at 199.11
  • MXAPJ down 0.2% to 648.18
  • Nikkei up 0.5% to 29,745.87
  • Topix up 0.4% to 2,044.53
  • Hang Seng Index down 1.1% to 25,049.97
  • Shanghai Composite up 1.1% to 3,560.37
  • Sensex down 0.6% to 59,636.01
  • Australia S&P/ASX 200 up 0.2% to 7,396.55
  • Kospi up 0.8% to 2,971.02
  • Brent Futures little changed at $81.17/bbl
  • Gold spot up 0.1% to $1,860.34
  • U.S. Dollar Index up 0.43% to 95.96
  • German 10Y yield little changed at -0.32%
  • Euro down 0.6% to $1.1304

Top Overnight News from Bloomberg

  • Germany’s Covid crisis is about to go from bad to worse, setting the stage for a grim Christmas in Europe. With infections surging relentlessly and authorities slow to act amid a change in power, experts warn that serious cases and deaths will keep climbing
  • Austria will enter a nationwide lockdown from Monday as a record spike in coronavirus cases threatens to overwhelm the country’s health care system
  • The pundits are coming for the Fed and Chair Jerome Powell. Mohamed El-Erian, chief economic adviser to Allianz SE and a Bloomberg Opinion columnist, recently said the central bank has made one of the worst inflation calls in its history. Writing in the Financial Times, the economist Willem Buiter called on the Fed to abandon the more flexible inflation target it established last year
  • Bitcoin continued its slide Thursday, falling for a fifth consecutive day as it slipped below $57,000 for the first time since October, in a retreat from record highs. The world’s largest cryptocurrency hasn’t slumped that long since the five days that ended May 16
  • House Democrats pushed expected passage of President Joe Biden’s $1.64 trillion economic agenda to Friday as Republican leader Kevin McCarthy delayed a vote with a lengthy floor speech that lasted into the early morning hours
  • ECB President Christine Lagarde said policy makers “must not rush into a premature tightening when faced with passing or supply- driven inflation shocks”
  • Markets are increasingly nervous about the common currency with the pandemic resurgent, geopolitical tensions rising and gas supply issues mounting

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mostly positive after the mixed performance stateside where the S&P 500 and Nasdaq notched fresh record closes, but cyclicals lagged as comments from Senator Manchin cast some uncertainty on the Build Back Better bill. The ASX 200 (+0.2%) was rangebound with upside in healthcare and consumer stocks offset by weakness in tech and a lacklustre mining sector. Crown Resorts (CWN AT) was the stellar performer after it received an unsolicited, non-binding takeover proposal from Blackstone (BX) valued at AUD 12.50/shr which boosted its shares by around 16%, although gains in the broader market were limited as COVID-19 concerns lingered following a further jump of cases in Victoria state. The Nikkei 225 (+0.5%) benefitted from a mostly weaker currency and after PM Kishida confirmed the details of the incoming stimulus package valued at a total JPY 79tln including JPY 56tln in fiscal spending. The KOSPI (+0.8%) was also positive but with gains initially capped as South Korean wholesale inflation surged to a 13-year high and further added to the case for the BoK to hike rates for the second time this year at next week’s meeting. The Hang Seng (-1.1%) and Shanghai Comp. (+1.1%) were mixed with the mainland kept afloat amid press reports that China is considering measures to reduce taxes and fees by up to CNY 500bln, although the mainland was initially slow to start after another liquidity drain by the PBoC and with stocks in Hong Kong spooked amid substantial losses in Alibaba following a miss on its earnings and Country Garden Services suffered on reopening from the announcement of a 150mln-share placement. Finally, 10yr JGBs were rangebound with mild gains seen after the modest bull flattening stateside, but with upside restricted amid the gains in Japanese stocks and lack of BoJ purchases, as well as the incoming fiscal spending and extra budget from the Kishida government.

Top Asian News

  • Bitcoin Falls Almost 20% Since Record as Crypto Bulls Retreat
  • Singapore’s Insignia Ventures Intensifies Push Into Healthtech
  • Binance Chief Zhao Buys His First Home in ‘Pro-Crypto’ Dubai
  • Property Stocks Surge; Land Sale Rules Eased: Evergrande Update

The earlier positive sentiment in Europe dissipated amid a string of back-to-back downbeat COVID updates – with Austria now resorting to a full-scale lockdown and Germany sounding alarms over their domestic COVID situation and not ruling out its own lockdown. European bourses flipped from the mostly positive trade at the open to a negative picture (Euro Stoxx 50 -0.5%; Stoxx 600 Unch), with headlines also flagging the European stock market volatility gauge jumping to three-week highs. It is also worth noting the monthly option expiries for stocks today, with desks pointing to the second-largest expiry day on record. US equity futures have also seen headwinds from the pullback in Europe, but US futures are mixed with the NQ (+0.4%) benefitting from the slide in yields. Back to Europe, Austria’s ATX (-1.0%) sit as the laggard after the Austrian Chancellor said a full domestic COVID lockdown will be imposed as of Monday for a maximum of 20 days with compulsory vaccination from 1st February 2022. Switzerland’s SMI (+0.2%) owes its gains to the defensive flows into healthcare propping up heavyweights Novartis (+0.5%) and Roche (+0.7%). Sectors overall are mostly negative with Healthcare the current winner, whilst Tech benefits from the yield slump and Basic Resources recover from yesterday’s slide as base metals rebound. The downside sees Banks on yield dynamics, whilst Oil & Gas lost the ranks as crude prices were spooked by the COVID headlines emanating from Europe. In terms of individual movers, Ocado (+6%) resides at the top of the FTSE 100 – with some citing a Deutsche Bank note which suggested shareholder Marks & Spencer could be mulling a buyout, although the note is seemingly speculation as opposed to chatter.

Top European News

  • Ryanair Drops London Listing Over Brexit Compliance Hassles
  • ECB Mustn’t Tighten Despite ‘Painful’ Inflation, Lagarde Says
  • Austria to Lock Down, Impose Compulsory Covid Vaccinations
  • German Covid Measures May Bolster ECB Stimulus Stance: El-Erian

In FX, it remains to be seen whether the Dollar can continue to climb having descended from the summit, and with no obvious fundamental drivers on the agenda in terms of US data that has been instrumental, if not quite wholly responsible for the recent bull run. However, external and technical factors may provide the Greenback and index with enough momentum to rebound further, as the COVID-19 situation continues to deteriorate in certain parts of Europe especially. Meanwhile, the mere fact that the DXY bounced off a shallower low and appears to have formed a base above 95.500 is encouraging from a chart perspective, and only the Yen as a safer haven is arguably capping the index ahead of the aforementioned w-t-d peak within 95.554-96.090 extremes. Ahead, more Fed rhetoric and this time via Waller and Clarida.

  • EUR - The Euro has been hit hardest by the Greenback revival, but also the latest pandemic waves that have forced Austria into total lockdown and are threatening to see Germany follow suit. Moreover, EGBs are front-running the latest squeeze amidst risk-off trade in stocks, oil and other commodities to widen spreads vs Treasuries and the divergence between the ECB/Fed and other more hawkishly or less dovishly positioned. Hence, Eur/Usd has reversed further from circa 1.1374 through 1.1350 and 1.1300, while Eur/Yen is eyeing 128.50 vs almost 130.00 at one stage and Eur/Chf is probing fresh multi-year lows around 1.0450.
  • NZD/GBP/AUD/CAD - All catching contagion due to their high beta, cyclical or activity currency stature, with the Kiwi back under 0.7000, Pound hovering fractionally above 1.3400, Aussie beneath 0.7250 and Loonie striving to contain declines beyond 1.2650 pre-Canadian retail sales against the backdrop of collapsing crude prices.
  • JPY/CHF - As noted above, the Yen is offering a bit more protection than its US counterpart and clearly benefiting from the weakness in global bond yields until JGBs catch up, with Usd/Jpy down from 114.50+ towards 113.80, but the Franc is showing its allure as a port in the storm via the Euro cross rather than vs the Buck as Usd/Chf holds above 0.9250.

In commodities, WTI and Brent front month futures retreated with the trigger point being back-to-back COVID updates – with Austria confirming a full-scale lockdown from Monday and Germany not ruling out its own lockdown. Crude futures reacted to the prospect of a slowdown in activity translating to softer demand. That being said, COVID only represents one factor in the supply/demand equation. Oil consuming nations are ramping up rhetoric and are urging OPEC+ to release oil. The White House confirmed the US discussed a possible joint release of oil from reserves with China and other countries, while it reiterated that it has raised the need for available oil supply in the market with OPEC. Meanwhile, the Japanese Cabinet said it will urge oil-producing nations to increase output and work closely with the IEA amid risks from energy costs. Further, energy journalists have also been flagging jitters of Chinese crude demand amid the likelihood of another tax probe into independent refiners. All in all, a day of compounding bearish updates (thus far) has prompted the contracts to erase all of their APAC gains, with WTI Dec just above USD 76/bbl (76.06-79.33/bbl range) and Brent Jan back under USD 79/bbl (78.75-82.24/bbl range). Elsewhere, spot gold saw a pop higher around the flurry of European COVID updates and despite a firmer Buck – pointing to haven flows into the yellow metal – which is nonetheless struggling to convincingly sustain a breach its overnight highs around USD 1,860/oz and we are attentive to a key fib at USD 1876/oz. Base metals prices are relatively mixed but have waned off best levels amid the risk aversion that crept into the markets, but LME copper holds onto a USD 9,500+/t status.

US Event Calendar

  • Nothing major scheduled

Central Banks

  • 10:45am: Fed’s Waller Discusses the Economic Outlook
  • 12:15pm: Fed’s Clarida Discusses Global Monetary Policy Coordination

DB's Jim Reid concludes the overnight wrap

It was another mixed session for markets yesterday, with equities and other assets continuing to trade around their recent highs even as a number of risk factors were increasingly piling up on the horizon. By the close of trade, the S&P 500 had advanced +0.34% to put the index at its all-time high, whilst oil prices pared back their losses from earlier in the day to move higher. That said, there was more of a risk-off tone in Europe as the latest Covid wave continues to gather pace, with the STOXX 600 (-0.46%) snapping a run of 6 successive gains and being up on 17 out of the previous 19 days as it fell back from its all-time high the previous day, as haven assets including sovereign bonds were the beneficiaries.

Starting with those equity moves, it was difficult to characterise yesterday’s session in some ways, since although the S&P advanced +0.34%, it was driven by a relatively narrow group of sectors, with only a third of the index’s components actually moving higher on the day. Indeed, to find a bigger increase in the S&P 500 on fewer advancing companies, one needs to go back to March 2000 (though it came close one day in August 2020, when the index advanced +0.32% on 153 advancing companies). Consumer discretionary (+1.49%) and tech (+1.02%) stocks were the only sectors to materially advance. Nvidia (+8.25%), the world’s largest chipmaker, was a key outperformer, and posted very strong third quarter earnings and revised higher fourth quarter guidance. Following the strong day, Nvidia jumped into the top ten S&P 500 companies by market cap, ending yesterday at number eight.

The S&P gain may have been so narrow due to some negative chatter about President Biden’s build back better package, with CNN’s Manu Raju tweeting that Senator Joe Manchin “just told me he has NOT decided on whether to vote to proceed to the Build Back Better bill.” Manchin’s position in a 50-50 senate has given him an enormous amount of influence, and separate comments created another set of headlines yesterday on the Fed Chair decision, after The Hill reported Manchin saying that he’s “looking very favourably” at supporting Chair Powell if he were re-nominated, following a chat between the two about inflation. Mr Manchin is seemingly one of the most powerful people in the world at the moment.

While the Senate still presents a hurdle for the President’s build back better bill, House Democrats are close to voting on the bill but couldn’t last night due to a three hour speech by House Republican leader McCarthy. It will probably happen this morning. This follows the Congressional Budget Office’s ‘score’ of the bill, which suggested the deficit would increase by $367bn as a result of the bill, higher figures than the White House suggested, but low enough to garner support from moderate House Democrats.

Over in Europe there was a much weaker session yesterday, with the major equity indices falling across the continent amidst mounting concern over the Covid-19 pandemic. Germany is making another forceful push to combat the recent increase in cases, including expanded vaccination efforts, encouraging work from home, and restricting public transportation for unvaccinated individuals. Elsewhere, the Czech Republic’s government said that certain activities will be limited to those who’ve been vaccinated or had the virus in the last six months, including access to restaurants and hairdressers. Slovakia also agreed a similar move to prevent the unvaccinated accessing shopping malls, whilst Hungary is expanding its mask mandate to indoor spaces from Monday. Greece imposed further restrictions for its unvaccinated population. So a theme of placing more of the restrictions in Europe on the unvaccinated at the moment and trying to protect the freedoms of those jabbed for as long as possible.

That risk-off tone supported sovereign bonds in Europe, with yields on 10yr bunds (-3.0bps), OATs (-4.1bps) and BTPs (-5.5bps) all moving lower. That was a larger decline relative to the US, where yields on 10yr Treasuries were only down -0.3bps to 1.59%, with lower real yields driving the decline.

One asset class with some pretty sizeable moves yesterday was FX, where a bunch of separate headlines led to various currencies hitting multi-year records. Among the G10 currencies, the Swiss Franc hit its strongest level against the euro in over 6 years yesterday on an intraday basis. That came as the Covid wave has strengthened demand for haven assets, though it went on to weaken later in the day to close down -0.15%. Meanwhile, the Norwegian Krone was the weakest G10 performer (-0.72% vs USD) after the Norges Bank said it would be stopping its daily foreign exchange sales on behalf of the government for the rest of the month. Finally in EM there were some even bigger shifts, with the Turkish Lira falling to a record low against the US dollar, which follows the central bank’s decision to cut interest rates by 100bps, in line with expectations. And then in South Africa, the Rand also fell to its weakest in over a year, in spite of the central bank’s decision to hike rates, after the decision was interpreted dovishly.

Overnight in Asia stocks are trading mostly higher led by the Nikkei (+0.45%), KOSPI (+0.43%), Shanghai Composite (+0.34%) and CSI (+0.18%). The Hang Seng (-1.76%) is sharply lower and fairly broad based but is being especially dragged down by Alibaba which dived -11% after it downgraded its outlook for fiscal year 2022 and missed sales estimate for the second quarter. Elsewhere in Japan headline CPI for October came in at +0.1% year-on-year (+0.2% consensus & +0.2% previous) while core CPI matched expectations at +0.1% year-on-year. The numbers reflect plunging mobile phone fees offsetting a 21% surge in gas prices. If the low mobile phone costs are stripped out, core inflation would be at 1.7% according to a Bloomberg calculation. Prime Minister Fumio Kishida is expected to deliver a bigger than expected stimulus package worth YEN 78.9 trillion ($690 bn) according to Bloomberg. We should know more tomorrow. Moving on futures are pointing to a positive start in US and Europe with S&P 500 (+0.42%) and DAX (+0.39%) futures both up.

Turning to commodities, oil prices had been on track to move lower before paring back those losses, with Brent Crude (+1.20%) and WTI (+0.83%) both up by the close and edging up around half this amount again in Asia. That comes amidst continued chatter regarding strategic oil releases, and follows comments from a spokeswoman from China’s National Food and Strategic Reserves Administration, who Reuters reported as saying that they were releasing crude oil reserves.

New York Fed President, and Vice Chair of the FOMC, John Williams, upgraded his assessment of inflation in public remarks yesterday. A heretofore stalwart member of team transitory, he noted that they wouldn’t want to see inflation expectations move much higher from here, and that recent price pressures have been broad-based, driving underlying inflation higher. Williams is one of the so-called core members of FOMC leadership, so his view carries some weight and is a useful barometer of momentum within the FOMC. Indeed, Chicago Fed President Evans, one of the most resolutely dovish Fed Presidents, expressed similar sentiment, recognising that rate hikes may need to come as early as 2022 given the circumstances.

There wasn’t much in the way of data yesterday, though the weekly initial jobless claims from the US for the week through November 13 came in higher than expected at 268k (vs. 260k expected), and the previous week’s reading was also revised up +2k. That said, the 4-week moving average now stands at a post-pandemic low of 272.75k. Otherwise, the Philadelphia Fed’s manufacturing business outlook survey surprised to the upside at 39.0 in November (vs. 24.0 expected), the highest since April. That had signs of price pressures persisting, with prices paid up to 80.0, the highest since June, and prices received up to 62.9, the highest since June 1974. Finally, the Kansas City Fed’s manufacturing index for November fell to 24 (vs. 28 expected).

To the day ahead now, and central bank speakers include ECB President Lagarde, Bundesbank President Weidmann, Fed Vice Chair Clarida, the Fed’s Waller and BoE Chief Economist Pill. Separately, data highlights include UK retail sales and German PPI for October.

Tyler Durden Fri, 11/19/2021 - 08:11

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SocGen Is Telling Its Nervous Clients “Don’t Leave The Party Yet” – Here’s Why

SocGen Is Telling Its Nervous Clients "Don’t Leave The Party Yet" – Here’s Why

A surge in cross-asset volatility over the past two weeks has left investors with many questions about its nature and implications and whether it is safe to buy…

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SocGen Is Telling Its Nervous Clients "Don't Leave The Party Yet" - Here's Why

A surge in cross-asset volatility over the past two weeks has left investors with many questions about its nature and implications and whether it is safe to buy the dip (technically there is no longer a dip).

In a note seeking to ease client concerns, SocGen strategists Jitesh Kumar and Alain Bokobza say "don’t leave the party yet" because they found that the main trigger for the recent market turmoil has been "investors seeking to deleverage their more illiquid/expensive assets to protect profits as the year ends." And while the market may be shaken by residual liquidity tremors over the next couple of weeks, "recent trends nevertheless underpin our recommendation to remain invested and stay overweight in equities, real assets (including commodities), and the dollar."

Drilling down on the increasingly nervous market since the Fed’s recent hawkish turn and the move higher in rates since the September FOMC meeting, SocGen points to several other catalysts that have kept investors on their toes, including:

  1. collateral scarcity in Europe, fueling very high demand for ‘safe’ assets, wider asset swap spreads and a wider cross-currency basis swaps due to a drop in ECB net issuance;

  2. the threat of COVID Delta-variant related lockdowns in Europe (Austria, Germany) even before the emergence of Omicron;

  3. the 6%+ CPI print in the US, followed by the re-nomination of Jerome Powell at the Fed, enabling him to signal scope for a faster taper and earlier rate hikes, stoking policy error fears;

  4. credit spread widening against plummeting German bond yields, while corporate bond issuance has remained robust; and

  5. high pension funding ratios fueling demand for ‘safer’ assets (bonds) to rotate into.

One read of the above is that these combined pressures have increased demand for bonds, while Omicron spooked some investors into cutting over-extended positions on the Friday following Thanksgiving amid low market liquidity. These pressures triggered very sharp moves in some widely owned illiquid assets, including:

  • rotation from high beta stocks into quality stocks;

  • a shift in preference to US equities/large cap tech from small caps/other overseas investments;

  • increased hedging to lock in gains before year-end, triggering higher equity/credit volatility;

  • a sharp rise in funding currencies at the expense of high yielders/EM, leading to a weaker dollar.

Additionally, as the SocGen duo notes, some highly extended inflation plays have been among the most impacted, e.g. both crude oil and breakeven inflation linkers saw substantial one-day drops on 26 November as shown below (the French bank is quick to note that it remains overweight on both commodities and inflation-linked bonds as they provide protection against higher inflation prints and a Fed tightening cycle over 2022).

The market turbulence also took an already extended VIX complex up to the highest levels since the March 2020 crash. So illiquid was the market that the VIX bid/offer spread exploded to 4 vol points, but here too SocGen thinks the Left Tail risks are in fact a manifestation of a lack of liquidity in downside hedges

But how does the sharp risk off episode square with dollar weakness - after all the dollar usually surges when there is a dump in risk.

According to SocGen, dollar weakness coinciding with broader market weakness "was unusual but makes sense when seen through the deleveraging lens." The chart below left shows that during the turmoil on 26 November, the typical funding currencies (EUR, JPY, CHF) strengthened while EM currencies (most of which are high yielders) weakened. This had the overall effect of weakening the broad dollar, especially in the G10 space. However, this trend is expected to reverse and take us back to a strong dollar environment given that we see a full Fed hiking cycle ahead of us (unless of course Omicron or whatever variant comes next ruins these plans).

Looking at actual stock positions, SG’s derivatives team notes that options positioning on US small caps had been increasing throughout October. Therefore, it says, "the risk-off episode came at an inopportune moment for some well invested market participants, who likely had to reduce risk in US small caps faster than they would have preferred." As can be seen in the chart above right, Russell 2000 index turnover in the cash market was overwhelmed by the futures market on 26 November, triggering large intraday moves.

Separately, SocGen also points to the combined position changes visible in the CFTC data for hedge funds and asset managers which it says provides further evidence of the pressure on Russell 2000 futures, which in aggregate saw $5.4bn in selling in the holiday-curtailed last week of November (23-30 Nov data). This was the largest weekly sale of Russell 2000 futures as per CFTC data in more than four years.

In contrast to small caps, positioning on large cap equities has not been under the same pressure. Asset manager + hedge fund flows in S&P500 e-mini futures totalled -$6.4bn in the last available dataset, a relatively small amount for the S&P500. More tellingly, the overall flow on the Nasdaq 100 was slightly positive over this period at +$0.8bn, as shown in the right-hand chart above.

Generally speaking, short-term repo is also a useful indicator of the demand/supply profile of major equity indices. A sharply negative repo rate usually signifies very high demand for balance sheet exposure relative to supply, while a very positive repo rate signifies risk aversion. The chart below shows the 1-month repo rate on S&P500, while the balance sheet pressures faced by banks during the fourth quarter of every year are well known. That said, the current quarter, despite recent weakness in broad equities, has not seen positive repo levels, indicating that US large caps have not been hit by material drawdowns according to SocGen (and their price).

So what should traders do?

In a word, nothing, at least that's the recommendation of SocGen. The bank continues to believe that tightening spells are flattening, and thus recommend being positioned for a flattening of the yield curve, which also supports US stocks that are longer-duration assets and are tilted toward quality. In terms of sectors, long Information & Technology against the financial sector is very well correlated with the trend in the yield curve and is one of our key sector calls linked to the Fed tightening cycle.

Sure enough, the curve has not only flattened at the very long end, but market pricing of the total number of hikes from the Fed over the next few years has also reduced. Hikes previously priced for 2024 and  2025 have all been brought forward to 2023, as the chart below shows. Indeed, as we first showed a week ago, the market is now pricing a small probability of a rate cut in 2025.

One take on these moves is that i) either inflation is not going to be a longer-term problem, and that longer-duration assets should therefore continue to do well, or ii) inflation will be a problem but the Fed will be powerless to do anything about it without blowing up the entire market in the process. Our money is on the latter.

Last but not least, SocGen continues to see support for broader financial markets going into next year as private-sector balance sheets remain strong. To wit, US corporates hold close to $7 trillion in liquid assets and US households have $17 trillion tucked away in deposit and money market funds post the pandemic (then again most of this cash belongs to the 1% with few benefits trickling down to the lower 90%). In short, the French bank believes that there is still plenty of cash on the sidelines and investors will sooner or later need to move away from cash in a 6%+ inflation environment.

In conclusion, SocGen's remains alert to the risks that would flare up in the event of more hawkish central banks as well new COVID variants, but for now it recommends its playbook for 2022, "which is working well so far."

Tyler Durden Wed, 12/08/2021 - 13:46

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Spread & Containment

BoJo Unveils “Plan B” Restrictions To Fight Omicron As New Cases Double Every 2-3 Days

BoJo Unveils “Plan B” Restrictions To Fight Omicron As New Cases Double Every 2-3 Days

Update (0800ET): More details about BoJo’s "Plan B" are coming into focus. The plan could be announced as early as Wednesday evening, or possibly…

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BoJo Unveils “Plan B” Restrictions To Fight Omicron As New Cases Double Every 2-3 Days

Update (0800ET): More details about BoJo's "Plan B" are coming into focus. The plan could be announced as early as Wednesday evening, or possibly Thursday. According to the BBC, the UK cabinet is meeting at 15:45GMT and has scheduled a press conference for 17:30GMT on Plan B.

As of now, the UK government is reportedly drawing up plans that will include a Christmas work from home order as PM Johnson considers measures to slow the spread of the Omicron variant. The measures are expected to include the introduction of vaccine passports to slow the spread of Omicron, along with a renewed work-from-home guidance, vaccine passports for nightclubs, alongside guidance on indoor and outdoor events.

Elsewhere in Europe, Norway's Prime Minister said they must install more restrictions to control the spread of COVID but must avoid a full lockdown of society. The PM added that there should be no more than 10 visitors in private homes, while bars and restaurants must stop serving alcohol from midnight every day. The government will introduce new economic compensations for companies hit by COVID restrictions.

* * *

Since the start of the pandemic, we have cautioned readers to look past what political leaders are saying about lockdowns and vaccine mandates intended to "keep us safe", and focus more on ulterior motives, like pushing the Fed to monetize mountains of debt to keep the market-sustaining money tap open. Like with every other major decision, it's important to ask oneself: Cui bono - who benefits?

With that in mind, UK PM Boris Johnson is facing bitter criticism from Britons after he allegedly rushed the announcement of England's "Plan B" - BoJo's more restrictive version of President Biden's "winter plan" - allegedly to try and distract from a national scandal caused by leaked footage of a 10 Downing Street Christmas Party held last winter, when holiday parties were expressly forbidden by COVID lockdown rules.

The FT, which broke the news of BoJo's "Plan B" plans, described the impending announcement as a "dead cat" - that is, something done to draw attention away from a much bigger scandal.

One said the move to Plan B — much earlier than expected — was a “dead cat” move by Johnson to distract attention from the furore over a leaked video of a mock Downing Street press conference showing staff laughing about the party, which breached Covid-19 rules.

The new restrictions - intended to try and stop the spread of omicron - are expected to be announced at a press conference as early as Wednesday, with the new measures put before parliament on Thursday.

Still, according to the UK's top COVID scientists, the new lockdowns couldn't come soon enough, as cases of the omicron variant are believed to be doubling "every two to three days." Neil Ferguson, one of the UK's leading coronavirus experts, warned on Wednesday that if no further measures were introduced, the peak of the current wave of infection would likely arrive in January, and that new infections caused by omicron could potentially overtake delta by Christmas. Whether that actually happens remains to be seen.

But word of BoJo's rush to impose "Plan B" in England has rattled markets in the UK by stoking fears that more omicron lockdowns would be announced in the UK, and elsewhere in Europe. The plan includes requiring vaccine passports to enter large buildings, along with an order to work from home.

British travel and leisure stocks tumbled Wednesday on the news, with Wizz, EasyJet, IAG all down about 4%. Restaurant Group dropped as much as 6.2%, while Cineworld shed 5.6%; the two companies were the worst performers on the All-Shares Index. Gilts, the UK's government bonds, rallied on the news, sending yields down 3 basis points to outperform German bunds. It's expected that "Plan B" will extend requirements for vaccine passports for travelers, and potentially cause up to £18 billion ($23.75 billion) in economic damage, according to documents seen by the Guardian.

In the face of a national uproar caused by the Christmas Party revelations, UK health secretary Sajid Javid pulled out of a number of national broadcast interviews that had been scheduled for Wednesday after a video showing BoJo's top aides holding a mock press conference where they joked about the Christmas Party (which they later denied happened).

Javid had been expected to discuss the UK’s vaccination efforts on the BBC and Sky News, as well as a number of radio stations, delivering an update on the one-year anniversary of the first jab being given in Britain.

Adding to the sting from the news of the Downing Street Christmas Party, ITV also published this video from a mock press conference featuring staffers joking about the Christmas Party, which they later denied happened.

It's an early Christmas present for the opposition...and any European leaders who are tired of BoJo's brusque negotiating style.

Tyler Durden Wed, 12/08/2021 - 07:00

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Bonds

Futures Jump In Volatile Session Dragged By Latest Twists In Omicron Saga

Futures Jump In Volatile Session Dragged By Latest Twists In Omicron Saga

Much of the overnight session was a snooze fest with stocks drifting first higher then lower after surging on Tuesday, as the narrative meandered from "omicron fears…

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Futures Jump In Volatile Session Dragged By Latest Twists In Omicron Saga

Much of the overnight session was a snooze fest with stocks drifting first higher then lower after surging on Tuesday, as the narrative meandered from "omicron fears ease" optimism to "vaccines won't work" pessimism, before futures took a sudden leg lower, dropping into the red just after 530am ET, following news that UK's Boris Johnson would introduce new restrictions in England to curb Omicron spread, sparking fears that Omicron is more dangerous that expected (and than futures reflected). However, this episode of pessimism proved short-lived because just an hour later, the WSJ confirmed that Omicron is really just a pitch for covid booster shots when it reported that even though the covid vaccine loses significant effectiveness against Omicron in an early study, this is miraculously reversed with a booster shot as three doses of the vaccine were able to neutralize the variant in an initial laboratory study, and the companies said two doses may still protect against severe disease.

Futures quickly shot up on the news, spiking above the gamma "all clear" level of 4,700 in a move best summarized with the following chart.

And so, after going nowhere, S&P futures climbed for a third day, last seen 12 points, or 0.3% higher, just around 4,700 after rising the most since March on Tuesday. Europe’s Stoxx 600 Index rose following the biggest jump in more than a year. In addition to the omicron soap opera, which as we noted yesterday turns out was just one staged covid booster shot advertisement (because Pfizer and Moderna can always do with a bigger yacth), sentiment was also lifted by Chinese authorities' reversal to "easing mode" and aggressive efforts to limit the fallout from property market woes which lifted risk assets in Asia even as key debt deadlines at China Evergrande Group and Kaisa Group Holdings Ltd. passed without any sign of payment.

"Clearly in the very short term uncertainty has risen over the Omicron virus... but overall at this stage we do not believe it will derail the macro picture in the medium-term," said Jeremy Gatto, multi-asset portfolio manager at Unigestion.

Treasury yields were little changed after rising across the curve Tuesday. The VIX spiked first on the FT news, then dropped back into the red, while the dollar was flat and crude rose after turning red.

Besides macro, micro was also in play and here are some other notable premarket movers

  • Apple (AAPL US) ticks 1% higher in premarket trading following a Nikkei report that the tech giant told suppliers to speed up iPhone output for Nov.-Jan, citing people it didn’t identify.
  • Amazon.com (AMZN US) shares in focus after an Amazon Web Services outage is wreaking havoc on the e-commerce giant’s delivery operation
  • Stitch Fix (SFIX US) tumbles 25% in U.S. premarket trading after a 2Q forecast miss that analysts called “surprising,” while customer additions also disappointed
  • Pfizer (PFE US) shares drop 2% in U.S. premarket trading after an early study showed that the company’s vaccine provides less immunity to the omicron variant
  • Dare Bioscience (DARE US) soars 41% in premarket trading after Xaciato gets FDA approval for treating bacterial vaginosis
  • EPAM Systems (EPAM US) soars 8% in premarket after S&P Dow Jones Indices said co. will replace Kansas City Southern in the S&P 500 effective prior to the opening of trading on Dec. 14
  • Goodyear Tire & Rubber (GT US) upgraded to buy from hold and target boosted to Street-high $32 from $29 at Deutsche Bank with the company seen as a major beneficiary from the shift to electric vehicles. Shares up 4.3% in premarket trading
  • NXP Semiconductor (NXPI US) shares slide 2.2% in U.S. premarket trading after the chipmaker got a new sell rating at UBS
  • Dave & Buster’s (PLAY US) gained 3.5% postmarket after the dining and entertainment company reported EPS that beat the average analyst estimate and authorized a $100 million share buyback program

"Every day that passes without a wave of severe cases driven by Omicron is offering more hope that this won't be the curveball to throw the recovery off course," wrote Deutsche Bank strategist Jim Reid in a note to clients.

In Europe, the Stoxx Europe 600 Index initially drifted both higher and lower then bounced 0.3% on the favorable Pfizer and BioNTech news one day after posting its bigger surge in a year. European benchmark index earlier rose as much as 2%, dropped 2.1%. Health care sub-index leads gains, rising 1.2%, followed by travel stocks. The Stoxx 600 closed 2.5% higher on Tuesday, biggest gain since November 2020

Earlier in the session, Asia stocks also rose for a second day as concerns about the omicron variant and China’s economic slowdown eased. The MSCI AsiaPacific Index climbed as much as 0.9% after capping its biggest one-day gain in more than three months on Tuesday. Technology and health-care shares provided the biggest boosts. Benchmarks in New Zealand and India -- where the central bank held rates at a record low -- were among the day’s best performers.

“The biggest point appealing to investors is that the Omicron variant doesn’t seem to be too fatal,” which is encouraging to those who had been going short to close out their positions, said Tomoichiro Kubota, a senior market analyst at Matsui Securities in Tokyo. “Worry that the Chinese economy will lose its growth momentum has subsided quite a bit.” Thus far, Omicron cases haven’t overwhelmed hospitals while vaccine developments indicate some promise in dealing with the variant. While vaccines like the one made by Pfizer and BioNTech SE may be less powerful against the new strain, protection can be fortified with boosters. The two-day rally in the Asian stock benchmark marks a sharp turnaround following weeks of declines since mid-November. Stocks in China also climbed for a second day. The nation’s central bank said Monday it will cut the amount of cash most banks must keep in reserve from Dec. 15, providing a liquidity boost and helping restore investor confidence

In FX, news on the Omicron variant rippled through G-10 currencies after a report the Pfizer vaccine could neutralize the Omicron variant boosted risk appetite. The pound underperformed other Group-of-10 peers, extending declines after reports that the U.K. government is poised to introduce new Covid-19 restrictions.  A gauge of the dollar’s strength fluctuated as Treasuries pare gains and stocks rally after a report that said Pfizer and BioNTech claim three vaccine doses neutralize the omicron variant. EUR/USD rose 0.1% to 1.1277; USD/NOK falls as much as 0.8% to 8.9459, lowest since Nov. 25

Sterling fell against the euro and the dollar, as traders pare bets on the path of Bank of England rate hikes following reports that the U.K. could introduce fresh Covid-19 restrictions such as working from home and vaccine passports for large venues. Money markets pare rate hike bets, with just six basis points of interest rate hikes priced in for the BOE meeting next week. GBP/USD falls as much as 0.6% to 1.3163, testing the key level of 1.3165, the 38.2% Fibonacci retracement of gains since March 2020. EUR/GBP gains as much as 0.7% to 0.85695, the highest since Nov. 11.

“The market will probably see this as more U.K. specific and therefore an issue for the pound at least in the short term,” said Stuart Bennett, FX strategist at Santander.

In rates, Treasuries were mixed with markets reacting in a risk-on manner to the Dow Jones report that Pfizer and BioNTech claim three vaccine doses neutralize the omicron variant. Yields remain richer by less than 1bp across long-end of the curve while front-end trades cheaper on the day, flattening curve spreads. Session’s focal points include $36b 10-year note reopening at 1pm ET, following Tuesday’s strong 3-year note auction. Treasury 10-year yields around 1.475%, near flat on the day; gilts outperform slightly after Financial Times report that further Covid restrictions will be announced imminently to curb the variant’s spread. U.S. 2-year yields were cheaper by 1bp on the day, rose to new 2021 high following Pfizer vaccine report; 2s10s spread erased a flattening move

In commodities, crude futures turned red, WTI falling 0.8%, popping back below $72. Spot gold holds Asia’s modest gains, adding $8 to trade near $1,792/oz.

Looking at the day ahead, and Olaf Scholz is expected to become German Chancellor in a Bundestag vote today. From central banks, the Bank of Canada will be deciding on rates, and we’ll also hear from ECB President Lagarde, Vice President de Guindos and the ECB’s Schnabel. Finally, data releases include the JOLTS job openings from the US for October.

Market Snapshot

  • S&P 500 futures up 0.2% to 4,693.75
  • STOXX Europe 600 little changed at 480.55
  • MXAP up 0.7% to 194.84
  • MXAPJ up 0.6% to 632.78
  • Nikkei up 1.4% to 28,860.62
  • Topix up 0.6% to 2,002.24
  • Hang Seng Index little changed at 23,996.87
  • Shanghai Composite up 1.2% to 3,637.57
  • Sensex up 1.8% to 58,654.25
  • Australia S&P/ASX 200 up 1.3% to 7,405.45
  • Kospi up 0.3% to 3,001.80
  • Brent Futures down 0.5% to $75.04/bbl
  • Gold spot up 0.3% to $1,790.33
  • U.S. Dollar Index down 0.17% to 96.20
  • German 10Y yield little changed at -0.38%
  • Euro up 0.2% to $1.1286
  • Brent Futures down 0.5% to $75.04/bbl

Top Overnight News from Bloomberg

  • The omicron variant of Covid-19 must inflict significant damage on the euro-area economy for European Central Bank Governing Council member Martins Kazaks to back additional stimulus
  • “The current phase of higher inflation could last longer than expected only some months ago,” ECB vice president Luis de Guindos says at event
  • The earliest studies on omicron are in and the glimpse they’re providing is cautiously optimistic: while vaccines like the one made by Pfizer Inc. and BioNTech SE may be less powerful against the new variant, protection can be fortified with boosters
  • U.K. Prime Minister Boris Johnson is set to announce new Covid-19 restrictions in England, known as “Plan B,” to stop the spread of the Omicron variant, the Financial Times reported, citing three senior Whitehall officials familiar with the matter.
  • French economic activity will continue to rise in December, despite another wave of the Covid-19 pandemic and fresh uncertainty over the omicron variant, according the Bank of France
  • The Kingdom of Denmark will sell a sovereign green bond for the first time next month to help the Nordic nation meet one of the world’s most ambitious climate targets
  • Tom Hayes, the former UBS Group AG and Citigroup Inc. trader who became the face of the sprawling Libor scandal, has lost his bid to appeal his U.K. criminal conviction
  • Poland is poised for a hefty increase in interest rates after a spike in inflation to a two- decade high convinced central bankers that spiraling price growth isn’t transitory. Of 32 economists surveyed by Bloomberg, 20 expect a 50 basis-point hike to 1.75% today and 10 see the rate rising to 2%. The other two expect a 25 basis-point increase
  • Australia is weighing plans for a central bank-issued digital currency alongside the regulation of the crypto market as it seeks to overhaul how the nation’s consumers and businesses pay for goods and services
  • Bank of Japan Deputy Governor Masayoshi Amamiya dropped a strong hint that big firms are in less need of funding support, a comment that will likely fuel speculation the BOJ will scale back its pandemic buying of corporate bonds and commercial paper

A detailed summary of global markets courtesy of Newsquawk

Asian equity markets traded positively as the region took impetus from the global risk momentum following the tech-led rally in the US, where Apple shares rose to a record high and amid increased optimism that Omicron could be less dangerous than prior variants. This was after early hospitalisation data from South Africa showed the new variant could result in less severe COVID and NIH's Fauci also suggested that Omicron was 'almost certainly' not more severe than Delta, although there were some slight headwinds in late Wall Street trade after a small study pointed to reduced vaccine efficacy against the new variant. The ASX 200 (+1.3%) was underpinned in which tech led the broad gains across sectors as it found inspiration from the outperformance of big tech stateside, and with energy bolstered by the recent rebound in underlying oil prices. The Nikkei 225 (+1.4%) conformed to the upbeat mood although further advances were capped after USD/JPY eased off the prior day’s highs and following a wider-than-expected contraction to the economy with the final annualised Q3 GDP at -3.6% vs exp. -3.1%. The Hang Seng (+0.1%) and Shanghai Comp. (+1.2%) were less decisive and initially lagged behind their peers as sentiment was mired by default concerns due to the failure by Evergrande to pay bondholders in the lapsed 30-day grace period on two USD-denominated bond payments and with Kaisa Group in a trading halt after missing the deadline for USD 400mln in offshore debt which didn’t bode well for its affiliates. Furthermore, China Aoyuan Property Group received over USD 650mln in repayment demands and warned it may not be able to meet debt obligations, while a subdued Hong Kong debut for Weibo shares which declined around 6% from the offer price added to the glum mood for Hong Kong’s blue-chip tech stocks, as did reports that China is to tighten rules for tech companies seeking foreign funding. Finally, 10yr JGBs languished after spillover selling from T-notes and due to the heightened global risk appetite, but with downside stemmed by support at the key psychological 152.00 level and amid the presence of the BoJ in the market today for over JPY 1.0tln of JGBs.

Top Asian News

  • China Clean Car Sales Spike as Consumers Embrace Electric
  • Gold Edges Higher as Traders Weigh Vaccine Efficacy, Geopolitics
  • Paint Maker Avia Avian Falls in Debut After $763 Million IPO
  • Tokyo Prepares to Introduce Same-Sex Partnerships Next Year

Equities in Europe shifted to a lower configuration after a mixed open (Euro Stoxx 50 -0.7%; Stoxx 600 -0.1%) as sentiment was dented by rumours of tightening COVID measures in the UK. Markets have been awaiting the next catalyst to latch onto for direction amidst a lack of fresh fundamentals. US equity futures have also been dented but to a lesser extent, with the YM (-0.1%) and ES (Unch) straddling behind the NQ (+0.2%) and RTY (+0.2%). Sources in recent trade suggested an 85% chance of the UK implementing COVID Plan B, according to Times' Dunn; reports indicate such restrictions could be implemented on Thursday, with the potential for an announcement today. In terms of the timings, the UK cabinet is penciled in for 15:45GMT and presser for 17:30GMT on Plan B, according to BBC's Goodall. Note, this will not be a formal lockdown but more so work-from-home guidance, vaccine passports for nightlife and numerical restrictions on indoor/outdoor gatherings. APAC closed in the green across the board following the tech-led rally in the US. The upside overnight was attributed to a continuation of market optimism after early hospitalisation data from South Africa showed the new variant could result in less severe COVID, albeit after a small study pointed to reduced vaccine efficacy against the new variant. Participants will be closely watching any updates from the vaccine-makers, with the BioNTech CEO stating the drugmaker has data coming Wednesday or Thursday related to the new COVID-19 variant, thus markets will be eyeing a potential update this week ahead of the Pfizer investor call next Friday. Back to European, the UK’s FTSE 100 (Unch) and the Swiss SMI (+0.8%) are largely buoyed by their defensive stocks, with sectors seeing a defensive formation, albeit to a slightly lesser extent vs the open. Healthcare retains its top spot closely followed by Food & Beverages, although Personal & Household Goods and Telecoms have moved down the ranks. On the flip side, Retail, Banks and Travel & Leisure trade at the bottom of the bunch, whilst Tech nursed some earlier losses after opening as the lagging sector. In terms of individual movers, Nestle (+1.8%) is bolstered after announcing a CHF 20bln share repurchase programme alongside a stake reduction in L'Oreal (+1.0%) to 20.1% from 23.3% - worth some EUR 9bln. L’Oreal has shrugged off the stake sale and conforms to the firm sectoral performance across the Personal & Household Goods. Meanwhile, chip names are under pressure after Nikkei sources reported that Apple (+0.8% pre-market) was forced to scale back the total output target for 2021, with iPhone and iPad assembly halted for several days due to supply chain constraints and restrictions on the use of power in China, multiple sources told Nikkei. STMicroelectronics (-1.7%) and Infineon (-5.0%) are among the losers, with the latter also weighed on by a broker downgrade at JPM.

Top European News

  • ECB’s Kazaks Sets High Bar for Omicron-Driven Extra Stimulus
  • Biden Is Left Guessing Over Putin’s Ultimate Aim in Ukraine
  • Byju’s Buys Austria’s GeoGebra to Bolster Online Math Courses
  • Scholz Elected by Parliament to Take Charge as German Chancellor

In FX, the Dollar index continues to hold above 96.000, but bounces have become less pronounced and the range so far today is distinctly narrower (96.285-130) in fitting with the generally restrained trade in pairings within the basket and beyond, bar a few exceptions. Price action suggests a relatively muted midweek session unless a major game-changer arrives and Wednesday’s agenda does not bode that well in terms of catalysts aside from JOLTS and the BoC policy meeting before the second leg of this week’s refunding in the form of Usd 36 bn 10 year notes.

  • AUD/EUR - Notwithstanding the largely contained currency moves noted above, the Aussie is maintaining bullish momentum on specific factors including strength in iron ore prices and encouraging Chinese data plus PBoC easing that should have a positive knock-on effect for one of its main trading partners even though diplomatic relations between the two nations are increasingly strained. Aud/Usd has also cleared a couple of technical hurdles on the way up to circa 0.7143 and Aud/Nzd is firmer on the 1.0500 handle ahead of the RBA’s latest chart pack release and a speech by Governor Lowe. Elsewhere, the Euro has regained composure after its sub-1.1250 tumble on Tuesday vs the Buck and dip through 0.8500 against the Pound, but still faces psychological resistance at 1.1300 and the 21 DMA that comes in at 1.1317 today, while Eur/Gbp needs to breach the 100 DMA (0.8513) convincingly or close above to confirm a change in direction for the cross from a chart perspective.
  • CHF/CAD/JPY/GBP/NZD - All sitting tight in relation to their US counterpart, with the Franc paring some declines between 0.9255-30 parameters and the Loonie straddling 1.2650 in the run up to the aforementioned BoC that is widely seen as a non-event given no new MPR or press conference, not to mention the actual changes in QE and rate guidance last time. Nevertheless, implied volatility is quite high via a 63 pip breakeven for Usd/Cad. Meanwhile, Sterling lost grip of the 1.3200 handle amidst swirling speculation about the UK reverting to plan B and more Tory MPs calling for PM Johnson to resign, the Yen is rotating around 113.50 eyeing broad risk sentiment and US Treasury yields in context of spreads to JGBs, and the Kiwi is lagging after touching 0.6800 awaiting independent impetus from NZ manufacturing sales for Q3.
  • SCANDI/EM - The Nok extended its advantage/outperformance against the Sek as Brent rebounded towards Usd 76/brl in early trade and Riksbank’s Jansson retained reservations about flagging a repo rate hike at the end of the forecast horizon, while the Mxn and Rub also initially derived some support from oil with the latter also taking on board latest hawkish talk from the CBR. However, the Cny and Cnh are outpacing their rivals again with some assistance from a firmer PBoC midpoint fix to hit multi-year peaks vs the Usd and probe 6.3500 ahead of option expiry interest at 6.3000 and a Fib retracement at 6.2946, in stark contrast to the Try that is unwinding recent recovery gains with no help from the latest blast from Turkish President Erdogan - see 10.00GMT post in the Headline Feed for more. Conversely, the Czk has taken heed of CNB’s Holub underscoring tightening signals and expectations for the next rate convene and the Pln and Brl are anticipating hikes from the NBP and BCB.

In commodities, crude futures have been hit on the prospect of imminent COVID-related measures in the UK, albeit the measures do not involve lockdowns. Brent and WTI front month futures slipped from European highs to breach APAC lows. The former dipped below USD 74.50/bbl from a USD 76.00/bbl European peak while its WTI counterpart tested USD 71.00/bbl from USD 72.50/bbl at best. Overnight the benchmarks traded on either side the USD 75/bbl mark and just under USD 72/bbl after the weekly Private Inventories printed a larger-than-expected draw (-3.6mln vs exp. -3.1mln), albeit the internals were less bullish. Yesterday also saw the release of the EIA STEO, cut its 2021 world oil demand growth forecast by an insignificant 10k BPD but raised the 2022 metric by 200k BPD – with the IEA and OPEC monthly reports poised to be released next week. On the vaccine front, a small preliminary study of 12 people showed a 40x reduction in neutralization capacity of the Pfizer vaccine against Omicron, but early hospitalisation data from South Africa showed the new variant could result in less severe COVID. BioNTech CEO said they have data coming in on Wednesday or Thursday related to the new Omicron variant. The geopolitical space is also worth keeping on the radar, with US President Biden yesterday warning Russian President Putin that gas exports via Nord Stream 2 will be targeted and more troops will be deployed if he orders an invasion of Ukraine. Further, reports suggested, an Indian army helicopter crashed in Tamil Nadu, with Chief of Defence staff reportedly on board, according to Sputnik. Note, Tamil Nadu is located towards the south of the country and away from conflict zones. Elsewhere spot gold was supported by the overnight pullback in the Dollar, but the recent risk aversion took the yellow metal above the 100 DMA around USD 1,790/oz, with nearby upside levels including the 200 DMA (1,792/oz) and the 50 DMA (1,794/oz). Copper prices meanwhile consolidated within a tight range, with LME copper holding onto a USD 9,500/t handle (just about). Dalian iron ore extended on gains in a continuation of the upside seen in recent trade.

US Event Calendar

  • 7am: Dec. MBA Mortgage Applications, prior -7.2%
  • 10am: Oct. JOLTs Job Openings, est. 10.5m, prior 10.4m

DB's Jim Reid concludes the overnight wrap

A reminder that we are currently conducting our special 2022 survey. We ask about rates, equities, bond yields and the path of covid in 2022, amongst other things, and also return to a festive question we asked in 2019, namely your favourite ever Christmas songs. The link is here and it’ll be open until tomorrow. All help filling in very much appreciated.

My optimism for life has been shattered this morning. Not from the markets or the virus but just as I woke this morning England cricketers finally surrendered and collapsed in a heap on the first day of the Ashes - one the oldest international rivalries in sport. It was all I could do not to turn round and go back to bed. However out of duty I’m soldering on. After the twins nativity play went without incident yesterday, this morning it’s Maisie’s turn. Given she’s in a wheelchair at the moment she can’t get on stage so they’ve given her a solo singing spot at the start. I’m going so I can bring a bucket for all my wife’s tears as she sings!! If I shed a tear I’ll pretend it’s because of the cricket.

The global market rebound continued to gather strength yesterday as investors became increasingly optimistic that the Omicron variant wouldn’t prove as bad as initially feared. To be honest, it was more the absence of bad news rather than any concrete good news helping to drive sentiment. Late in the US session we did see some headlines suggesting that the Pfizer vaccine may provide some defence against Omicron but also that the new variant does evade some of the immunity produced by this vaccine. This report of the small study (12 people!!) from South Africa lacked substance but you could take positives and negatives from it. More information is clearly needed.

For the markets though, every day that passes without a wave of severe cases driven by Omicron is offering more hope that this won’t be the curveball to throw the recovery off course. Indeed, to get a sense of the scale of the market rebound, both the S&P 500 and the STOXX 600 in Europe have now clocked in their strongest 2-day performances of 2021 so far, with the indices up by +3.27% and +3.76% respectively since the start of the week. Meanwhile, the VIX fell below 25 for the first time in a week.

On the day, the S&P 500 (+2.07%) put in its strongest daily performance since March, whilst the STOXX 600 (+2.45%) saw its strongest daily performance since the news that the Pfizer vaccine was successful in trials back in November 2020. Once again the gains were incredibly broad-based, albeit with cyclical sectors leading the way. The Nasdaq (+3.03%) outperformed the S&P 500 for the first time in a week as tech shares led the rally. Small cap stocks also had a strong day, with the Russell 2000 up +2.28%, on the back of Omicron optimism.

This recovery in risk assets was also seen in the bounceback in oil prices, with Brent crude (+3.23%) and WTI (+3.68%) now both up by more than $5.5/bbl since the start of the week, which puts them well on the way to ending a run of 6 consecutive weekly declines.

For further evidence of this increased optimism, we can also look at the way that investors have been dialling back up their estimates of future rate hikes from the Fed, with yesterday seeing another push in this direction. Before the Omicron news hit, Fed fund futures were fully pricing in an initial hike by the June meeting, but by the close on the Monday after Thanksgiving they’d moved down those odds to just 61% in June, with an initial hike not fully priced until September. Fast forward just over a week however, and we’re now not only back to pricing in a June hike, but the odds of a May hike are standing at +78.8%, which is actually higher than the +66.1% chance priced before the Omicron news hit. A reminder that we’re just a week away now from the Fed’s next decision, where it’s hotly anticipated they could accelerate the pace at which they’ll taper their asset purchases.

With investors bringing forward their bets on monetary tightening, front-end US Treasury yields were hitting post-pandemic highs yesterday, with the 2yr Treasury yield up +5.8bps to 0.69%, a level we haven’t seen since March 2020. Longer-dated yield increases weren’t as large, with the 10yr yield up +3.9bps to 1.47%, and the 5s30s curve flattened another -1.8bps to 54.4bps, just above the post-pandemic low of 53.7bps. Over in Europe there was similarly a rise in most countries’ bond yields, with those on 10yr bunds (+1.4bps), OATs (+1.0bps) and BTPs (+4.4bps) all moving higher, though incidentally, the 5s30s curve in Germany was also down -2.2bps to its own post-pandemic low of 50.0bps.

One pretty big news story that markets have been relatively unperturbed by so far is the rising tensions between the US and Russia over Ukraine. Yesterday saw a video call between US President Biden and Russian President Putin. The US readout from the call did not offer much in the way of concrete details, but if you’re looking for any optimistic news, it said that both sides tasked their teams with following up. Setting the background for the call, there were reports immediately beforehand that the US was considering evacuating their citizens and posturing to stop Nord Stream 2 if Russia invaded Ukraine. The Ruble appreciated +0.42% against the dollar, and is now only slightly weaker versus the dollar on the week.

Overnight in Asia stocks are trading mostly higher led by the Nikkei (+1.49%), CSI (+1.11%), Shanghai Composite (+0.86%) and the KOSPI (+0.78%) as markets respond positively to the Pfizer study mentioned at the top. The Hang Seng (-0.12%) is lagging though. In Japan, the final Q3 GDP contracted -3.6% quarter on quarter annualised against consensus expectations of -3.1% on lower consumer spending than initially estimated. In India, the RBI left the key policy rate unchanged for the ninth consecutive meeting today while underscoring increasing headwinds from the Omicron variant. Futures markets indicate a positive start in the US and Europe with S&P 500 (+0.41%) and DAX (+0.12%) futures trading in the green.

Back on the pandemic, despite the relative benign news on Omicron, rising global case counts mean that the direction of travel is still towards tougher restrictions across a range of countries. In fact here in the UK, we saw the 7-day average of reported cases move above 48,000 for the first time since January. In terms of fresh restrictions, yesterday saw Canada announce that they’d be extending their vaccine mandate, which will now require employees in all federally regulated workplaces to be vaccinated, including road transportation, telecommunications and banking. In Sweden, the government is preparing a bill that would see Covid passes introduced for gyms and restaurants, while Poland put further measures in place, including remote schooling from December 20 until January 9, while vaccines would become mandatory for health workers, teachers and uniformed services from March 1. One move to ease restrictions came in Austria, where it was confirmed shops would be reopening on Monday, albeit only for those vaccinated, while restaurants and hotels would reopen the following week. If you see our daily charts you’ll see that cases in Austria have dropped sharply since the peaks a couple of weeks ago, albeit still high internationally.

In DC, Congressional leaders apparently agreed to a deal that would ultimately lead to the debt ceiling being increased, after some procedural chicanery. Senate Majority Leader McConnell voiced support for the measure, which is a good sign for its ultimate prospects of passing, but it still needs at least 10 Republican votes in the Senate to pass. McConnell indicated the votes would be there when the Senate ultimately takes it up, which is reportedly set to happen this week. The House passed the measure last night. Yields on Treasury bills maturing in December fell following the headlines.

Looking ahead, today will mark the end of an era in Germany, as Olaf Scholz is set to become Chancellor in a Bundestag vote later on, marking an end to Chancellor Merkel’s 16-year tenure. That vote will simply be a formality given the three parties of the incoming coalition (the centre-left SPD, the Greens and the liberal FDP) have a comfortable majority between them, and the new cabinet will feature 7 SPD ministers, 5 Green ministers, and 4 from the FDP. Among the positions will include Green co-leader Robert Habeck as Vice Chancellor, Green co-leader Annalena Baerbock as foreign minister, and FDP leader Christian Lindner as finance minister.

Running through yesterday’s data, the US trade deficit narrowed to $67.1bn in October (vs. $66.8bn expected), marking its smallest level since April. Meanwhile in the Euro Area, the latest Q3 growth estimate was left unchanged at +2.2%, but both Q1 and Q2’s growth was revised up a tenth. Over in Germany, industrial production grew by a stronger-than-expected +2.8% in October (vs. +1.0% expected), with the previous month’s contraction also revised to show a smaller -0.5% decline. In addition, the expectations component of the December ZEW survey fell by less than expected to 29.9 (vs. 25.4 expected), but the current situation measure fell to a 6-month low of -7.4 (vs. 5.7 expected).

To the day ahead now, and Olaf Scholz is expected to become German Chancellor in a Bundestag vote today. From central banks, the Bank of Canada will be deciding on rates, and we’ll also hear from ECB President Lagarde, Vice President de Guindos and the ECB’s Schnabel. Finally, data releases include the JOLTS job openings from the US for October.

Tyler Durden Wed, 12/08/2021 - 07:58

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