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Markets Are “Sea Of Red” Amid “Total Meltdown In Anything Tech And Pandemic Winners”

Markets Are "Sea Of Red" Amid "Total Meltdown In Anything Tech And Pandemic Winners"

Futures, yields, oil, dollar, cryptos – everything is lower on this $3.1 trillion option expiration day…

… as US traders relocate from their bedroom..



Markets Are "Sea Of Red" Amid "Total Meltdown In Anything Tech And Pandemic Winners"

Futures, yields, oil, dollar, cryptos - everything is lower on this $3.1 trillion option expiration day...

... as US traders relocate from their bedroom to their basement on the last day of the week, discovering a sea of red in most assets and a "total meltdown" in others. Emini S&P futures are down 0.5% or 22 points to 4,452 which by the way is well off the session lows which saw the S&P plunge as low as 4,429. Nasdaq futures are down 0.8% or 122 and Dow futures are lower by 95 points or 0.25%, while European stocks touched the lowest level in a month weighed by miners, travel and leisure and automakers. 10Y TSY yields are at 1.778%, rising from 1.76% at the session lows, but down from Thuesday's close around 1.80%.

Cryptocurrencies crashed with Bitcoin trading below $38,000, the level that Mike Novogratz said is where he would be buying. Presumably he isn't doing so. Ether, the second largest cryptocurrency by market cap, extends its decline to trade at around $2,750, in its longest daily losing streak since late July. Meanwhile, oil extends declines, with Brent falling 1.7% to below $87, while WTI falls over 2% to below $84 a barrel. Spot gold -0.4% to $1,832/oz, while the dollar also slips 0.1%.

“Risk appetite is widely down, and the cautious trading mood reflects the global uncertainty investors are now facing,” said  Pierre Veyret, technical analyst at ActivTrades. “Sentiment is being driven down by monetary policies, uneven corporate results, a bigger Omicron impact on economies as well as rising geopolitical tensions between the USA and Russia over Ukraine.”

Meanwhile, a report that Washington is allowing some Baltic states to send U.S.-made weapons to Ukraine stoked concerns about a standoff with Russia. 

“The 2022 outlook for risky assets is likely to be more challenging as central bank accommodation is withdrawn,” said Mohit Kumar, managing director at Jefferies International. “We would wait for more clarity from the Fed before shifting our cautious stance on equities.”

Besides the huge negative gamma overhang (much of which will fade by EOD as trillions in options expire) and the prospect of rising interest rates weighing on investor sentiment, corporate earnings aren’t helping the mood with disappointing earnings from PPG Industry and CSX, while Netflix plunged 21% in premarket trading  as analysts cut their ratings and slash price targets after the streaming company’s first-quarter subscriber outlook missed estimates, prompting worries over slowing growth. Alibaba Group dropped in U.S. premarket trading as market participants weigh the stock impact of a report that China’s state broadcaster has implicated Jack Ma’s Ant Group in a corruption scandal. Expected data on Friday include Leading Index, while Huntington Bancshares, IHS Markit, Schlumberger are among companies reporting earnings. Here are all notable premarket movers:

  • Peloton (PTON US) shares rise 8.6% in U.S. premarket trading, set to rebound following Thursday’s 24% tumble in the wake of a CNBC report saying the company is temporarily halting production of bikes and treadmills over slow demand, which CEO John Foley later disputed in a memo to staff.
  • Apple’s (AAPL US) price target and estimates are raised at Wells Fargo ahead of the tech giant’s results next Thursday. The shares edge 0.1% lower in U.S. premarket trading.
  • Alibaba (BABA US) drops as much as 1.5% in U.S. premarket trading as market participants weigh the stock impact of FT report saying China’s state broadcaster has implicated Jack Ma’s Ant Group in a corruption scandal.
  • PPG (PPG US) fell 3% postmarket after the chemicals maker forecast adjusted earnings per share for the first quarter that missed the average analyst estimate and cited “significantly higher operating costs.”
  • CSX (CSX US) shares dropped over 3.8% in postmarket trading as fourth-quarter profit and revenue beat was overshadowed by a miss in operating ratio, a measure of the railroad’s efficiency.

In Europe, stocks dropped to the lowest level in a month echoing Asia’s slump. Euro Stoxx 600 drops as much as 1.7% with most European cash indexes ~1% in the red.  Cyclical sectors such as basic resources, autos and travel led the declines, along with tech, while defensive stocks such as food, personal care and utilities outperformed. European e-commerce stocks fall on Friday, with chief market analyst Neil Wilson noting the “total meltdown in anything tech and pandemic winners.” There’s a “huge momentum unwind” and “no one wants to touch them now,” with investors looking for defensive cash flows and value, Wilson writes in emailed comments: Naked Wines -6%, Home24 -5.4%, Global Fashion Group -5.2%, THG -3.5%, Moonpig -3.3%, Asos -3.2%, -2.9%, Allegro 2.6%, AO World -2.5%, Zalando -2.4%, Westwing -2.1%.

Earlier in the session, Asian equities resumed declines after a one-day reprieve, as global inflation concerns and the impact on borrowing costs weighed on technology stocks. The MSCI Asia Pacific Index fell as much as 1.4%, dragged down by shares of chipmakers TSMC and Samsung, as the global tech selloff deepened. The regional benchmark was headed for a weekly drop of more than 1.7%, its steepest since late November. Read more: A Year’s Worth of Nasdaq Tumult Gets Jammed Into Three Weeks   Benchmarks fell across Asia, with Australia’s main gauge sliding more than 2% and Japan’s Topix narrowly missing a technical correction. Elevated energy costs and rising prices of other goods amid supply-chain bottlenecks have added to worries about faster-than-expected monetary-policy tightening. “A world shaped by supply constraints will bring more macro volatility,” BlackRock Investment Institute strategists including Elga Bartsch wrote in a note. “Monetary policy cannot stabilize both inflation and growth: it has to choose between them.” Toyota also ranked among the biggest drags on the regional benchmark after the auto giant announced more production halts on rising Covid-19 cases. Alibaba dropped after a Financial Times report said China’s state broadcaster has implicated Jack Ma’s Ant Group in a corruption scandal

Indian stocks completed their biggest weekly decline since November, as concerns about policy moves by the U.S. Federal Reserve and a rally in crude oil prices dented investors’ appetite for riskier emerging market assets.  The S&P BSE Sensex dropped 0.7% to 59,037.18 in Mumbai, extending this week’s losses this to 3.6%. The NSE Nifty 50 Index also fell 0.8% on Friday. Technology stocks were hammered for a fourth consecutive session, with the sector gauge ending with the worst weekly performance since April 2020. Infosys Ltd., down 2.1%, was the biggest drag on the key indexes. All but one of 19 sub-indexes fell, led by a gauge of realty stocks. As the Federal Reserve looks at tackling higher inflation, investors are grappling with the prospect of reduced stimulus that had driven flows into emerging markets and bolstered riskier assets.   “The likely Fed action and crude surge have been negative for sentiment after the market had a strong start to the year, and we expect this downward pressure to continue,” said A. K. Prabhakar, head of research at IDBI Capital Ltd. “In earnings, tech results have been strong, but attrition is high, while for others, higher raw material costs are a drag.” Of the 13 Nifty 50 companies that have announced results so far, six have either met or exceeded expectations, six have missed and one can’t be compared. Reliance Industries Ltd., the nation’s most-valuable company, is scheduled to announce results in the day

Australia's S&P/ASX 200 index slumped 2.3% to close at 7,175.80, its lowest level since June 1, following U.S. shares lower after the tech-heavy Nasdaq 100 slipped into a correction. The Australian benchmark shed 3% this week amid anxiety over interest rates and the outlook for corporate earnings, capping its worst weekly performance since October 2020. Paladin Energy was the worst performer on Friday, plunging 11%, and Whitehaven fell after trimming its full-year managed ROM coal production forecast.  In New Zealand, the S&P/NZX 50 index fell 1.2% to 12,348.00. The gauge lost 3.5% this week in its biggest such loss in 11 months

In rates, demand for havens pushed the 10-year U.S. Treasury yield below 1.80%. Treasury futures are off session highs reached during Asia trading hours, hold modest gains from belly to long end, trimming yields by ~1bp vs Thursday’s closing levels. 10-year TSY yield around 1.775% is ~2bp richer on the day after dropping as low as 1.763% during Asia session; German 10- year outperforms by 1.2bp with Estoxx50 down 1.7%. IG dollar issuance slate empty so far; three-deal docket Thursday consisted entirely of banks for combined $5.4bn. Bunds bull flatten, richer by ~3bps at the long end; gilts bull steepen with the belly outperforming.

In FX, Bloomberg Dollar Spot dips 0.2% into the red. SEK and CHF are the best performers in G-10; NZD, AUD and GBP lag, with cable near session low of 1.3562, one tick above the 21-DMA at 1.3561. The Bloomberg dollar index slipped as the greenback traded mixed versus its Group-of-10 peers. The pound lagged most of its Group-of-10 peers, extending declines after data showed U.K. retail sales plummeted in December. BOE’s Mann to speak later. Sweden’s krona is the best G-10 performer as it retraces about half of yesterday’s deep losses that took it to an 18- month low against the greenback in the U.S. session after a triggering stop-losses and options barriers. Australian and New Zealand dollars weakened amid risk-off price action in stocks and commodities. The yen strengthened on haven demand; BOJ minutes of its December meeting showed one board member noting that policy adjustment now would be too early.

In commodities, crude futures are deep in the red, but off worst levels, after a surprise climb in U.S. crude stockpiles. The White House also said it can work to accelerate the release of strategic reserves. WTI regained a $84-handle, Brent trades back above $87. Spot gold drops ~$5 before finding support near $1,830/oz. Base metals are mostly in the green and up on the week. LME lead and tin outperform.

Looking at the day ahead, data releases included UK retail sales for December, which missed badly, and the US Conference Board’s leading index for December. Central bank speakers include ECB President Lagarde and the BoE’s Mann.

Market Snapshot

  • S&P 500 futures down 0.2% to 4,467.50
  • STOXX Europe 600 down 1.3% to 476.89
  • MXAP down 0.9% to 191.91
  • MXAPJ down 1.0% to 630.82
  • Nikkei down 0.9% to 27,522.26
  • Topix down 0.6% to 1,927.18
  • Hang Seng Index little changed at 24,965.55
  • Shanghai Composite down 0.9% to 3,522.57
  • Sensex down 0.8% to 58,998.67
  • Australia S&P/ASX 200 down 2.3% to 7,175.81
  • Kospi down 1.0% to 2,834.29
  • Brent Futures down 1.9% to $86.66/bbl
  • Gold spot down 0.3% to $1,832.94
  • U.S. Dollar Index down 0.14% to 95.60
  • German 10Y yield little changed at -0.05%
  • Euro up 0.3% to $1.1344
  • Brent Futures down 2.0% to $86.63/bbl

Top Overnight News from Bloomberg

  • Federal Reserve officials will signal next week they’ll raise interest rates in March for the first time in more than three years and shrink their balance sheet soon after, economists surveyed by Bloomberg said
  • The European Union is ripping up the green investing playbook with plans to allow some gas and nuclear projects to be called sustainable. The bloc is poised to include these kinds of power generation with conditions in its rulebook for sustainable activities, or taxonomy. That’s divided the fund community, as some worry their holdings will no longer be in line with the rules, while others think it’s a necessary compromise.
  • China is quietly urging banks to increase lending after a slow start to the year, ramping up efforts to combat the weakest economic expansion since early 2020
  • Italy’s papal-style vote for a new president each seven years is the culmination of Rome’s political intrigues and power games. For the first time, the process is attracting international interest as Prime Minister Mario Draghi is touted as a top contender for the job. Voting will start on Jan. 24 at 3 p.m. local time, and it is expected to last a few days
  • Iron ore futures climbed to the highest intraday level since October as China made it clear that it will take action to stabilize the economy, bolstering the demand outlook for the raw material

A more detailed look at global markets courtesy of Newsquawk

Asia Pacific

  • APAC markets traded lower amid wide-spread risk aversion after late Wall Street selling . ASX 200 (-2.3%) underperformed as miners led the broad downturn.
  • Nikkei 225 (-0.9%) dropped more than 500 points intraday on currency strength but finished off lows
  • Hang Seng (U/C) and Shanghai Comp. (-0.9%) downside was somewhat cushioned on subsequently confirmed reports of further PBoC action.
  • US equity futures traded with losses across the board: NQ underperformed post-Netflix earnings.

Top Asian News

  • Rising Cases Spark Covid Superspreader Fears in Hong Kong
  • Alibaba Drops in U.S. Premarket on Corruption Report Speculation
  • Playtech Sinks as Former F1 Boss Jordan Pulls Possible Offer
  • Coal Soars to $300 a Ton as Asia Scrambles for Power Plant Fuel


  • Major European bourses are pressured Euro Stoxx 50 -1.3%; Stoxx 600 -1 5%. as the Wall St rally faded and reverberated through APAC trade . Although, the Stoxx 600 remains -0.5% on the week.
  • US futures have been lifting off overnight lows, though the NO continues to lag post-Netflix.
  • European sectors are all in the red. but defensives are faring slightly better than cyclicals

Top European News

  • U.K. Retail Sales Drop as Omicron Keeps Shoppers Away
  • Lotus Explores Electric-Car Battery Tie-Up With Britishvolt
  • Amazon’s Alexa Voice Assistant Reportedly Suffers Europe Outages
  • Greece Is Great Place to Be in Rough January for Europe Stocks


  • Franc finally evades SNB clutches to rally and outshine other safe-haven currencies.
  • Pound discounted after dire UK retail sales data and deterioration in consumer sentiment.
  • Buck betwixt and between as USTs rebound, but risk aversion gathers momentum.
  • Kiwi and Aussie lag due to unfavorable market conditions and their high beta characteristics but Yuan continues to rally as PBoC adds SLFs to the list of official rates being cut to support the Chinese economy Click here for a detailed summary.

Fixed Income

  • USTs extend rebound from post-20 year auction highs on amidst more pronounced risk-off positioning.
  • Bunds play catch up with Treasuries as demand for safe-havens picks up
  • Gilts also correct higher and pay some heed to downbeat UK fundamental


  • WTI and Brent March contacts remain pressured by the broader risk tone, with focus on geopolitics
  • Morgan Stanley has increased its Q3 Brent price forecast to USD 100/bbl vs prev. viev; of around USD 90/bbl.
  • Spot gold looks heavy as traders booked some profits from yesterdays rally, while the yellow metal found support around the USD 1 830/oz.
  • LME copper re-tested USD 10k/t to the upside but failed to mount the level

DB's Jim Reid concludes the overnight wrap

Don’t tell anyone but I’m going to betray my first love this weekend. It’s with someone 5 years younger but much less attractive on the eye and with far, far, far less money. I’ll also be introducing them to my kids but will be meeting up in a place that it is far less likely I’ll be seen. Yes as Liverpool fight to keep alive in the Premier League title race I'll be taking the twins to their first football match at non-league Woking Town who are around 105 places lower in the English football structure. Anfield was just too long a journey to be stuck with them for that length of time! The twins play for Woking Cubs although at this stage persuading them to not pick up the ball and run off with it mid-practise is an achievement.

The bears took control of the ball last night as markets followed the recent script whereby equities showed some stability only to take a turn late in the New York session. The S&P 500 was as much as +1% higher intraday, before selling off in the US afternoon, finishing the session down a steep -1.10% and is now -6.48% lower year-to-date. Consumer discretionary (-1.94%) and technology (-1.33%) were again among the biggest decliners, as big tech stocks underperformed. The NASDAQ fell -1.30%, and is down -9.53% YTD, -11.85% from all-time highs and closed below its 200 day average for the first time since the March 2020 Covid-induced volatility.

The S&P declines were broad-based though with 84% of the constituents lower after as much as 90% of the index was in the green intraday. The S&P 500 is on track for a 3rd consecutive weekly decline for the first time since September 2020. The story only got worse for tech stocks after the close, as Netflix posted poor earnings, missing subscriber estimates. The stock declined more than -20% in after hours trading.

Europe saw a stronger performance, but this was before the weak US close with the STOXX 600 ending the day up +0.51%.

Having experienced the highest levels in yields for many months earlier this week, sovereign bonds also rallied yesterday, with the 10yr Treasury yield down -6.1bps to 1.80%. True to form, most of the declines took place later in the New York session. About half of the declines came from real yields, down -3.4bps. These moves also occurred alongside a further flattening in the yield curve, with the 2s10s slope down -2.8bps to 77.5bps, which is its lowest closing level of the year so far, and not far off the recent low of 73.6bps we saw in late December. As a reminder, whether or not you’re in agreement as to its explanatory power, every US recession in recent times has been preceded by an inversion of the 2s10s curve, and our analysis shows that in the Fed hiking cycles since 1955 you generally see a flattening in the curve of around 80bps in the first year (see our rate hike primer here for more on this). So if the Fed hikes in March and things play out in line with that historic playbook, then that would imply a curve inversion in H1 next year. For the record 10yr yields are currently -3bps in the Asian session and the curve another couple of basis points flatter.

Central bankers will be hopeful they can avoid yield curve inversion, and ECB President Lagarde emphasised yesterday that the ECB had “every reason to not react as quickly and as abruptly as we could imagine the Fed might”. Nevertheless, the minutes from the ECB’s Governing Council meeting in December were released yesterday, which said “it was cautioned that a “higher for longer” inflation scenario could not be ruled out.” The minutes noted that the 2023 and 2024 inflation forecasts were “already relatively close to 2% and, considering the upside risk to the projection, could easily turn out above 2%.” It came as the final reading of December’s Euro Area inflation matched the initial estimate of +5.0%, the highest since the single currency’s formation, whilst sovereign bond yields in Europe followed the US lower, with those on 10yr bunds (-1.3bps), OATs (-1.8bps) and BTPs (-3.7bps) all declining.

Overnight in Asia, all major stock indexes are sharply lower. The Nikkei (-1.49%) is weak, giving up the gains in the previous session as Japan’s headline inflation (+0.8% y/y) in December failed to surpass market expectations of a +0.9% reading and may quell some of the recent policy normalisation stories. The core-CPI remained unchanged at +0.5% y/y in December below the market forecast of +0.6% rise. Elsewhere, the Kospi (-1.48%), Shanghai Composite (-0.82%), CSI (-0.85%) and the Hang Seng (-0.75%) are also down. Looking ahead, stock futures in the DM world continue to paint a weaker picture with S&P 500 (-0.5%), Nasdaq (-1%) and DAX (-1.25%) contracts trading lower again.

After remaining buoyant most of the session yesterday, Oil was also a victim of the late sell-off. Brent crude fell by -1.13% to $87.44/bbl, while WTI was only a smidge lower, declining -0.07% to $86.90/bbl. However the Asian session hasn't been kind with WTI trading in the low $84s as we type. Other commodities kept the trend going before the late sell-off. Agricultural prices saw fresh gains, with Bloomberg’s agriculture spot index (+0.68%) advancing to a post-2012 high, and both industrial and precious metals generally moved higher on the day as well.

In terms of yesterday’s data, Germany’s PPI inflation accelerated to +24.2% year-on-year in December (vs. +19.3% expected), marking the fastest increase since that statistic was introduced in 1949. Over in the US meanwhile, the weekly initial jobless claims rose to a 3-month high of 286k in the week through January 15. That was some way above the 225k reading expected and potentially reflects the growing impact of the Omicron variant on the labour market. Furthermore, the 4-week rolling average of claims rose to 231k as a result, marking its 3rd consecutive move higher. When it comes to other US data, the Philadelphia Fed’s business outlook survey for January was more promising at 23.2 (vs. 19.0 expected), but the existing home sales for December fell for the first time in 4 months to an annualised rate of 6.18m (vs. 6.42m expected). There were some indications that this was a lack of supply rather than demand issue.

For what it's worth, after the US close Treasury Chief Janet Yellen lent her support to the Biden administration by expressing confidence in its ability along with the Fed to bring back inflation closer to 2% by the end of 2022.

To the day ahead now, and data releases include UK retail sales for December, the Euro Area’s advance consumer confidence reading for January, and the US Conference Board’s leading index for December. Central bank speakers include ECB President Lagarde and the BoE’s Mann.

Tyler Durden Fri, 01/21/2022 - 08:03

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S&P Futures Jump Above 4,000 As Fed Fears Fade

S&P Futures Jump Above 4,000 As Fed Fears Fade

After yesterday’s post-FOMC ramp which sent stocks higher after the Fed’s Minutes were…



S&P Futures Jump Above 4,000 As Fed Fears Fade

After yesterday's post-FOMC ramp which sent stocks higher after the Fed's Minutes were less hawkish than feared and also hinted at a timeline for the Fed's upcoming pause (and easing), US index futures initially swung between gains and losses on Thursday as investors weighed the "good news" from the Fed against downbeat remarks on the Chinese economy from premier Li who warned that China would struggle to post a positive GDP print this quarter coupled with Apple’s conservative outlook. Eventually, however, bullish sentiment prevailed and even with Tech stocks underperforming following yesterday's disappointing earnings from Nvidia, e-mini futures rose to session highs as of 715am, and traded up 0.6% above 4,000 for the first time since May 18, while Nasdaq 100 futures were up 0.2% after earlier dropping as much as 0.8%. The tech-heavy index is down 27% this year. Treasury yields and the dollar slipped. Fed policy makers indicated their aggressive set of moves could leave them with flexibility to shift gears later if needed.

Investors took some comfort from the Fed minutes that didn’t show an even more aggressive path being mapped to tackle elevated prices, though central banks remain steadfast in their resolve to douse inflation. Still, volatility has spiked as the risk of a US recession, the impact from China’s lockdowns and the war in Ukraine simmer.

While the Fed minutes “provided investors with a temporary relief, today’s mixed price action on stocks mostly shows that major bearish leverages linger,” said Pierre Veyret, a technical analyst at ActivTrades in London. “The war in eastern Europe and concerns about the Chinese economy still add stress to market sentiment,” he wrote in a report. “Investors will want to see evidence of improvements regarding the pressure coming from rising prices.”

“We expect key market drivers to continue to be centered around inflation and how central banks react; global growth concerns and how China gets to grip with its zero-Covid policy; and the geopolitical conflict between Russia and Ukraine,” said Fraser Lundie, head of fixed income for public markets at Federated Hermes Limited. “Positive news flow on any of these market drivers could sharply improve risk sentiment; however, there is a broad range of scenarios that could play out in the meantime.”

In premarket trading, shares in Apple dropped 1.4% after a report said that the tech giant is planning to keep iPhone production flat in 2022, disappointing expectations for a ~10% increase. The company also said it was raising salaries in the US by 10% or more as it faces a tight labor market and unionization efforts. In other premarket moves, Nvidia dropped 5.3% as the biggest US chipmaker by market value gave a disappointing sales forecast. Software company Snowflake slumped 14%, while meme stock GameStop Corp. fell 2.9%. Among gainers, Twitter Inc. jumped 5.2% after billionaire Elon Musk dropped plans to partially fund his purchase of the company with a margin loan tied to his Tesla stake and increased the size of the deal’s equity component to $33.5 billion. Other notable premarket movers include:

  • Shares of Alibaba and Baidu rise following results, sending other US-listed Chinese stocks higher in US premarket trading. Alibaba shares shot up as much as 4.5% after reporting fourth- quarter revenue and earnings that beat analyst expectations.
  • Lululemon’s (LULU US) stock gains 2.4% in premarket trading as Morgan Stanley raised its recommendation to overweight, suggesting that the business can be more resilient through headwinds than what the market is expecting.
  • Macy’s (M US) shares gain 15% in premarket trading after Co. increases its adjusted earnings per share guidance for the full fiscal year
  • Williams-Sonoma (WSM US) shares jumped as much as 9.6% in premarket trading after 1Q sales beat estimates. The retailer was helped by its exposure to more affluent customers, but analysts cautioned that it may be difficult to maintain the sales momentum amid macroeconomic challenges.
  • Nutanix (NTNX US) shares shed about a third of their value in US premarket trading as analysts slashed their price targets on the cloud platform provider after its forecast disappointed.
  • US airline stocks rise in premarket trading on Thursday, after Southwest and JetBlue provided upbeat outlooks for the second-quarter. LUV up 1.5% premarket, after raising its second-quarter operating revenue growth forecast. JBLU up 2% after saying it expects second-quarter revenue at or above high end of previous guidance.
  • Cryptocurrency-tied stocks fall in premarket trading as Bitcoin snaps two days of gains. Coinbase -2.6%; Marathon Digital -2.3%; Riot Blockchain -1.2%. Bitcoin drops 1.9% at 6:11 am in New York, trading at $29,209.88.

It’s time to buy the dip in stocks after a steep global selloff in equity markets, according to Citi strategists. Meanwhile, Fidelity International Chief Executive Officer Anne Richards said the risk of a recession has increased and markets are likely to remain volatile, the latest dire warning on the outlook at the World Economic Forum.

“If inflation gets tame enough over summer, there may not be continued raising of rates,” Carol Pepper, Pepper International chief executive officer, said on Bloomberg TV, adding that investors should look to buy tech stocks after the selloff. “Stagflation, I just don’t think that’s going to happen anymore. I think we are going to be in a situation where inflation will start tapering down and then we will start going into a more normalized market.”

In Europe, the Stoxx Europe 600 Index rose 0.3%, pare some of their earlier gains but remain in the green, led by gains for retail, consumer and energy stocks. IBEX outperforms, adding 0.6%, FTSE MIB is flat but underperforms peers. Retailers, energy and consumer products are the strongest-performing sectors, with energy shares outperforming for the second day as oil climbed amid data that showed a further decrease in US crude and gasoline stockpiles. Here are the most notable European movers:

  • Auto Trader rises as much as 3.5% after its full-year results beat consensus expectations on both top- and bottom-lines.
  • Galp climbs as much as 4.1% as RBC upgrades to outperform, saying the stock might catch up with the rest of the sector after “materially” underperforming peers in recent years.
  • Rightmove rises as much as 1.5% after Shore upgrades to hold from sell, saying the stock has reached an “appropriate” level following a 27% decline this year.
  • FirstGroup soars as much as 16% after the bus and train operator said it received a takeover approach from I Squared Capital Advisors and is currently evaluating the offer.
  • United Utilities declines as much as 8.9% as company reports a fall in adjusted pretax profit. Jefferies says full-year guidance implies a materially-below consensus adjusted net income view.
  • Johnson Matthey falls as much as 7.5% after the company reported results and said it expects operating performance in the current fiscal year to be in the lower half of the consensus range.
  • BT drops as much as 5.7% after the telecom operator said the UK will review French telecom tycoon Patrick Drahi’s increased stake in the company under the National Security and Investment Act.
  • JD Sports drops as much as 12% as the departure of Peter Cowgill as executive chairman is disappointing, according to Shore Capital.

Earlier in the session, Asian stocks were mixed as traders assessed China’s emergency meeting on the economy and Federal Reserve minutes that struck a less hawkish note than markets had expected.  The MSCI Asia Pacific Index was little changed after fluctuating between gains and losses of about 0.6% as technology stocks slid. South Korean stocks dipped after the central bank raised interest rates by 25 basis points as expected. Chinese shares eked out a small advance after a nationwide emergency meeting on Wednesday offered little in terms of additional stimulus. The benchmark CSI 300 Index headed for a weekly drop of more than 2%, despite authorities’ vows to support an economy hit by Covid-19 lockdowns. Investors took some comfort from Fed minutes in which policy makers indicated their aggressive set of moves could leave them with flexibility to shift gears later if needed. Still, Asia’s benchmark headed for a weekly loss amid concerns over China’s lockdowns and the possibility of a US recession.

“The coming months are ripe for a re-pricing of assets across the board with a further shake-down in risk assets as term and credit premia start to feature prominently,” Vishnu Varathan, the head of economics and strategy at Mizuho Bank, wrote in a research note. 

Japanese stocks closed mixed after minutes from the Federal Reserve’s latest policy meeting reassured investors while Premier Li Keqiang made downbeat comments on China’s economy. The Topix rose 0.1% to close at 1,877.58, while the Nikkei declined 0.3% to 26,604.84. Toyota Motor Corp. contributed the most to the Topix gain, increasing 1.9%. Out of 2,171 shares in the index, 1,171 rose and 898 fell, while 102 were unchanged.

In Australia, the S&P/ASX 200 index fell 0.7% to close at 7,105.90 as all sectors tumbled except for technology. Miners contributed the most to the benchmark’s decline. Whitehaven slumped after peer New Hope cut its coal output targets. Appen soared after confirming a takeover approach from Telus and said it’s in talks to improve the terms of the proposal. Appen shares were placed in a trading halt later in the session. In New Zealand, the S&P/NZX 50 index fell 0.6% to 11,102.84.

India’s key stock indexes snapped three sessions of decline to post their first advance this week on recovery in banking and metals shares. The S&P BSE Sensex rose 0.9% to 54,252.53 in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. Both benchmarks posted their biggest single-day gain since May 20 as monthly derivative contracts expired today. All but one of the 19 sector sub-indexes compiled by BSE Ltd. gained.  HDFC Bank and ICICI Bank provided the biggest boosts to the two indexes, rising 3% and 2.2%, respectively. Of the 30 shares in the Sensex, 24 rose and 6 fell. As the quarterly earnings season winds up, among the 45 Nifty companies that have so far reported results, 18 have trailed estimates and 27 met or exceeded expectations. Aluminum firm Hindalco Industries is scheduled to post its numbers later today.

In FX, the Bloomberg Dollar fell 0.3%, edging back toward the lowest level since April 26 touched Tuesday. The yen jumped to an intraday high after the head of the Bank of Japan said policymakers could manage an exit from their decades-long monetary policy, and that U.S. rate rises would not necessarily keep the yen weak. Commodity currencies including the Australian dollar fell as China’s Premier Li Keqiang offered a bleak outlook on domestic growth. The Chinese economy is in some respects faring worse than in 2020 when the pandemic started, he said.

Central banks were busy overnight:

  • Russia’s central bank delivered its third interest-rate reduction in just over a month and said borrowing costs can fall further still, as it looks to stem a rally in the ruble and unwinds the financial defenses in place since the invasion of Ukraine.
  • The Bank of Korea raised its key interest rate on Thursday as newly installed Governor Rhee Chang-yong demonstrated his intention to tackle inflation at his first policy meeting since taking the helm. New Zealand’s central bank has also shown its commitment this week to combat surging prices.

In rates, Treasuries bull-steepen amid similar price action in bunds and many other European markets and gains for US equity index futures. Yields richer by ~3bp across front-end of the curve, steepening 2s10 by ~2bp, 5s30s by ~3bp; 10-year yields rose 2bps to 2.76%, keeps pace with bund while outperforming gilts. 2- and 5-year yields reached lowest levels in more than a month, remain below 50-DMAs. US auction cycle concludes with 7-year note sale, while economic data includes 1Q GDP revision. Bund, Treasury and gilt curves all bull-steepen. Peripheral spreads tighten to Germany with 10y BTP/Bund narrowing 5.1bps to 194.6bps.

The US weekly auction calendar ends with a $42BN 7-year auction today which follows 2- and 5-year sales that produced mixed demand metrics, however both have richened from auction levels. WI 7-year yield at ~2.735% is ~17bp richer than April’s, which tailed by 1.7bp. IG dollar issuance slate includes Bank of Nova Scotia 3Y covered SOFR; issuance so far this week remains short of $20b forecast, is expected to remain subdued until after US Memorial Day.

In commodities,  WTI trades within Wednesday’s range, adding 0.6% to around $111. Spot gold falls roughly $7 to trade around $1,846/oz. Cryptocurrencies decline, Bitcoin drops 2.5% to below $29,000. 

Looking at the day ahead now, and data releases from the US include the second estimate of Q1 GDP, the weekly initial jobless claims, pending home sales for April, and the Kansas City Fed’s manufacturing index for May. Meanwhile in Italy, there’s the consumer confidence index for May. From central banks, we’ll hear from Fed Vice Chair Brainard, the ECB’s Centeno and de Cos, and also get decisions from the Central Bank of Russia and the Central Bank of Turkey. Finally, earnings releases include Costco and Royal Bank of Canada.

Market Snapshot

  • S&P 500 futures little changed at 3,974.25
  • STOXX Europe 600 up 0.2% to 435.16
  • MXAP little changed at 163.17
  • MXAPJ down 0.3% to 529.83
  • Nikkei down 0.3% to 26,604.84
  • Topix little changed at 1,877.58
  • Hang Seng Index down 0.3% to 20,116.20
  • Shanghai Composite up 0.5% to 3,123.11
  • Sensex up 0.4% to 53,975.57
  • Australia S&P/ASX 200 down 0.7% to 7,105.88
  • Kospi down 0.2% to 2,612.45
  • German 10Y yield little changed at 0.90%
  • Euro little changed at $1.0679
  • Brent Futures up 0.5% to $114.55/bbl
  • Gold spot down 0.3% to $1,847.94
  • U.S. Dollar Index little changed at 102.11

Top Overnight News from Bloomberg

  • Federal Reserve officials agreed at their gathering this month that they need to raise interest rates in half-point steps at their next two meetings, continuing an aggressive set of moves that would leave them with flexibility to shift gears later if needed.
  • Russia’s central bank delivered its third interest-rate reduction in just over a month and said borrowing costs can fall further still, halting a rally in the ruble as it unwinds the financial defenses in place since the invasion of Ukraine.
  • China’s trade-weighted yuan fell below 100 for the first time in seven months as Premier Li Keqiang’s bearish comments added to concerns that the economy may miss its growth target by a wide margin this year.
  • Bank of Japan Governor Haruhiko Kuroda said interest rate increases by the Federal Reserve won’t necessarily cause the yen to weaken, saying various factors affect the currency market.

A more detailed breakdown of global markets courtesy of Newsquawk

Asia-Pac stocks were indecisive as risk appetite waned despite the positive handover from Wall St where the major indices extended on gains post-FOMC minutes after the risk event passed and contained no hawkish surprises. ASX 200 failed to hold on to opening gains as weakness in mining names, consumer stocks and defensives overshadowed the advances in tech and financials, while capex data was mixed with the headline private capital expenditure at a surprise contraction for Q1. Nikkei 225 faded early gains but downside was stemmed with Japan set to reopen to tourists on June 6th. Hang Seng and Shanghai Comp were mixed with early pressure after Premier Li warned the economy was worse in some aspects than in 2020 when the pandemic began, although he stated that China will unveil detailed implementation rules for a pro-growth policy package before the end of the month, while the PBoC issued a notice to promote credit lending to small firms and the MoF announced cash subsidies to Chinese airlines.

Top Asian News

  • PBoC issued a notice to promote credit lending to small firms and is to boost financial institutions' confidence to lend to small firms, according to Reuters.
  • BoK raised its base rate by 25bps to 1.75%, as expected, via unanimous decision. BoK raised its 2022 inflation forecast to 4.5% from 3.1% and raised its 2023 forecast to 2.9% from 2.0%, while it sees GDP growth of 2.7% this year and 2.4% next year. BoK said consumer price inflation is to remain high in the 5% range for some time and sees it as warranted to conduct monetary policy with more focus on inflation, according to Reuters.
  • Morgan Stanley has lowered China's 2022 GDP estimate to 3.2% from 4.2%.
  • CSPC Drops After Earnings, Covid Impact to Weigh: Street Wrap
  • China Builder Greenland’s Near-Term Bonds Set for Record Drops
  • Debt Is Top Priority for Diokno as New Philippine Finance Chief

European bourses are firmer across the board, Euro Stoxx 50 +0.7%, but remain within initial ranges in what has been a relatively contained session with much of northern-Europe away. Stateside, US futures are relatively contained, ES +0.2%, with newsflow thin and on familiar themes following yesterday's minutes and before PCE on Friday.  Apple (AAPL) is reportedly planning on having a 220mln (exp. ~240mln) iPhone production target for 2022, via Bloomberg. -1.4% in  the pre-market. Baidu Inc (BIDU) Q1 2022 (CNY): non-GAAP EPS 11.22 (exp. 5.39), Revenue 28.4bln (exp. 27.82bln). +4.5% in the pre-market. UK CMA is assessing whether Google's (GOOG) practises in parts of advertisement technology may distort competition.

Top European News

  • UK Chancellor Sunak's package today is likely to top GBP 30bln, according to sources via The Times; Chancellor will confirm that the package will be funded in part by windfall tax on oil & gas firms likely to come into effect in the autumn. Subsequently, UK Gov't sources are downplaying the idea that the overall support package is worth GBP 30bln, via Times' Swinford; told it is a very big intervention.
  • UK car production declined 11.3% Y/Y to 60,554 units in April, according to the SMMT.
  • British Bus Firm FirstGroup Gets Takeover Bid from I Squared
  • Citi Strategists Say Buy the Dip in Stocks on ‘Healthy’ Returns
  • The Reasons to Worry Just Keep Piling Up for Davos Executives
  • UK Unveils Plan to Boost Aviation Industry, Passenger Rights
  • Pakistan Mulls Gas Import Deal With Countries Including Russia


  • Dollar drifts post FOMC minutes that reaffirm guidance for 50bp hikes in June and July, but nothing more aggressive, DXY slips into lower range around 102.00 vs 102.450 midweek peak.
  • Yen outperforms after BoJ Governor Kuroda outlines exit strategy via a combination of tightening and balance sheet reduction, when the time comes; USD/JPY closer to 126.50 than 127.50 where 1.13bln option expiries start and end at 127.60.
  • Rest of G10, bar Swedish Crown rangebound ahead of US data, with Loonie looking for independent direction via Canadian retail sales, USD/CAD inside 1.2850-00; Cable surpassing 1.2600 following reports that the cost of living package from UK Chancellor Sunak could top GBP 30bln.
  • Lira hits new YTD low before CBRT and Rouble weaker following top end of range 300bp cut from CBR.
  • Yuan halts retreat from recovery peaks ahead of key technical level, 6.7800 for USD/CNH.

Fixed Income

  • Debt wanes after early rebound on Ascension Day lifted Bunds beyond technical resistance levels to 154.74 vs 153.57 low.
  • Gilts fall from grace between 119.17-118.19 parameters amidst concerns that a large UK cost of living support package could leave funding shortfall.
  • US Treasuries remain firm, but off peaks for the 10 year T-note at 120-31 ahead of GDP, IJC, Pending Home Sales and 7 year supply.


  • Crude benchmarks inch higher in relatively quiet newsflow as familiar themes dominate; though reports that EU officials are considering splitting the oil embargo has drawn attention.
  • Currently WTI and Brent lie in proximity to USD 111/bbl and USD 115/bbl respectively; within USD 1.50/bbl ranges.
  • Russian Deputy PM Novak expects 2022 oil output 480-500mln/T (prev. 524mln/T YY), via Ria.
  • Spot gold is similarly contained around the USD 1850/oz mark, though its parameters are modestly more pronounced at circa. USD 13/oz

Central Banks

  • CBR (May, Emergency Meeting): Key Rate 11.00% (exp. ~11.00/12.00%, prev. 14.00%); holds open the prospect of further reductions at upcoming meetings.
  • BoJ's Kuroda says, when exiting easy policy, they will likely combine rate hike and balance sheet reduction through specific means, timing to be dependent on developments at that point; FOMC rate hike may not necessarily result in a weaker JPY or outflows of funds from Japan if it affects US stock prices, via Reuters.

US Event Calendar

  • 08:30: 1Q PCE Core QoQ, est. 5.2%, prior 5.2%
  • 08:30: 1Q Personal Consumption, est. 2.8%, prior 2.7%
  • 08:30: May Continuing Claims, est. 1.31m, prior 1.32m
  • 08:30: 1Q GDP Price Index, est. 8.0%, prior 8.0%
  • 08:30: May Initial Jobless Claims, est. 215,000, prior 218,000
  • 08:30: 1Q GDP Annualized QoQ, est. -1.3%, prior -1.4%
  • 10:00: April Pending Home Sales YoY, est. -8.0%, prior -8.9%
  • 10:00: April Pending Home Sales (MoM), est. -2.0%, prior -1.2%
  • 11:00: May Kansas City Fed Manf. Activity, est. 18, prior 25

DB's Jim Reid concludes the overnight wrap

A reminder that our latest monthly survey is now live, where we try to ask questions that aren’t easy to derive from market pricing. This time we ask if you think the Fed would be willing to push the economy into recession in order to get inflation back to target. We also ask whether you think there are still bubbles in markets and whether equities have bottomed out yet. And there’s another on which is the best asset class to hedge against inflation. The more people that fill it in the more useful so all help from readers is very welcome. The link is here.

For markets it’s been a relatively quiet session over the last 24 hours compared to the recent bout of cross-asset volatility. The main event was the release of the May FOMC minutes, which had the potential to upend that calm given the amount of policy parameters currently being debated by the Fed. But in reality they came and went without much fanfare, and failed to inject much life into afternoon markets or the debate around the near-term path of policy. As far as what they did say, they confirmed the line from the meeting itself that the FOMC is ready to move the policy to a neutral position to fight the current inflationary scourge, with agreement that 50bp hikes were appropriate at the next couple of meetings. That rapid move to neutral would leave the Fed well-positioned to judge the outlook and appropriate next steps for policy by the end of the year, and markets were relieved by the lack of further hawkishness, with the S&P 500 extending its modest gains following the release to end the day up +0.95%.

As the Chair said at the meeting, and has been echoed by other Fed officials since, the minutes noted that the hawkish shift in Fed communications have already had a noticeable effect on financial conditions, with Fed staff pointing out that “conditions had tightened by historically large amounts since the beginning of the year.” Meanwhile on QT, which the Fed outlined their plans for at the May meeting, the minutes expressed some trepidation about market liquidity and potential “unanticipated effects on financial market conditions” as a result, but did not offer potential remedies.

With the minutes not living up to hawkish fears alongside growing concerns about a potential recession, investors continued to dial back the likelihood of more aggressive tightening, with Fed funds futures moving the rate priced in by the December meeting to 2.64%, which is the lowest in nearly a month and down from its peak of 2.88% on May 3. So we’ve taken out nearly a full 25bp hike by now, which is the biggest reversal in monetary policy expectations this year since Russia’s invasion of Ukraine began. That decline came ahead of the minutes and also saw markets pare back the chances of two consecutive +50bp hikes, with the amount of hikes priced over the next two meetings falling under 100bps for only the second time since the May FOMC. Yields on 10yr Treasuries held fairly steady, only coming down -0.5bps to 2.745%.

Ahead of the Fed minutes, markets had already been on track to record a steady performance, and the S&P 500 (+0.95%) extended its existing gains in the US afternoon. That now brings the index’s gains for the week as a whole to +1.98%, so leaving it on track to end a run of 7 consecutive weekly declines, assuming it can hold onto that over the next 48 hours, and futures this morning are only down -0.13%. That said, we’ve seen plenty of volatility in recent weeks, and after 3 days so far this is the first week in over two months where the S&P hasn’t seen a fall of more than -1% in a single session, so let’s see what today and tomorrow bring. In terms of the specific moves yesterday, it was a fairly broad advance, but consumer discretionary stocks (+2.78%) and other cyclical industries led the way, with defensives instead seeing a much more muted performance. Tech stocks outperformed, and the NASDAQ (+1.51%) came off its 18-month low, as did the FANG+ index (+1.99%).

Over in Europe, equities also recorded a decent advance, with the STOXX 600 gaining +0.63%, whilst bonds continued to rally as well, with yields on 10yr bunds (-1.5bps) OATs (-1.5bps) and BTPs (-2.7bps) all moving lower. These gains for sovereign bonds have come as investors have grown increasingly relaxed about inflation in recent weeks, with the 10yr German breakeven falling a further -4.2bps to 2.23% yesterday, its lowest level since early March and down from a peak of 2.98% at the start of May. Bear in mind that the speed of the decline in the German 10yr breakeven over the last 3-4 weeks has been faster than that seen during the initial wave of the Covid pandemic, so a big shift in inflation expectations for the decade ahead in a short space of time that’s reversed the bulk of the move higher following Russia’s invasion of Ukraine. Nor is that simply concentrated over the next few years, since the 5y5y forward inflation swaps for the Euro Area looking at inflation over the five years starting in five years’ time has come down from aa peak of 2.49% earlier this month to 2.07% by the close last night, so almost back to the ECB’s target. To be fair there’s been a similar move lower in US breakevens too, and this morning the 10yr US breakeven is down to a 3-month low of 2.56%.

That decline in inflation expectations has come as investors have ratcheted up their expectations about future ECB tightening. Yesterday, the amount of tightening priced in by the July meeting ticked up a further +0.2bps to 32.7bps, its highest to date, and implying some chance that they’ll move by more than just 25bps. We heard from a number of additional speakers too over the last 24 hours, including Vice President de Guindos who said in a Bloomberg interview that the schedule for rate hikes outlined by President Lagarde was “very sensible”, and that the question of larger hikes would “depend on the outlook”.

Overnight in Asia, equities are fluctuating this morning after China’s Premier Li Keqiang struck a downbeat note on the economy yesterday. Indeed, he said that the difficulties facing the Chinese economy “to a certain extent are greater than when the epidemic hit us severely in 2020”. As a reminder, our own economist’s forecasts for GDP growth this year are at +3.3%, which if realised would be the slowest in 46 years apart from 2020 when Covid first took off. Against that backdrop, there’s been a fairly muted performance, and whilst the Shanghai Composite (+0.65%) and the CSI 300 (+0.60%) have pared back initial losses to move higher on the day, the Hang Seng (-0.13%) has lost ground and the Nikkei (+0.07%) is only just in positive territory. We’ve also seen the Kospi (-0.08%) give up its initial gains overnight after the Bank of Korea moved to hike interest rates once again, with a 25bp rise in their policy rate to 1.75%, in line with expectations. That came as they raised their inflation forecasts, now expecting CPI this year at 4.5%, up from 3.1% previously. At the same time they also slashed their growth forecast to 2.7%, down from 3.0% previously.

There wasn’t much in the way of data yesterday, though we did get the preliminary reading for US durable goods orders in April. They grew by +0.4% (vs. +0.6% expected), although the previous month was revised down to +0.6% (vs. +1.1% previously). Core capital goods orders were also up +0.3% (vs. +0.5% expected).

To the day ahead now, and data releases from the US include the second estimate of Q1 GDP, the weekly initial jobless claims, pending home sales for April, and the Kansas City Fed’s manufacturing index for May. Meanwhile in Italy, there’s the consumer confidence index for May. From central banks, we’ll hear from Fed Vice Chair Brainard, the ECB’s Centeno and de Cos, and also get decisions from the Central Bank of Russia and the Central Bank of Turkey. Finally, earnings releases include Costco and Royal Bank of Canada.

Tyler Durden Thu, 05/26/2022 - 07:50

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Weekly investment update – Weaker economic outlook weighs on markets

Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing…



Global equities have continued their sell-off over the last week. What is new is that markets are now reacting to risks of weaker economic data weighing on earnings. Real bond yields, whose rise triggered the recent drop in equity markets, have fallen as investors price a higher probability of a recession.   

Yields of US Treasury bonds have slipped since reaching around 3.12% in early May (see Exhibit 1). The rally has been driven by fears of a global recession due to poor economic data, strong inflation numbers, aggressive talk from central bankers and concerns over the consequences of Covid in China.

Recent data that contributed to the bond market’s unease about the prospects for the US economy includes: 

  • The Richmond Federal Reserve Manufacturing survey, which fell to its lowest since 2020 at -9.
  • The monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York fell to -11.6, with the shipment measure falling at its fastest pace since the start of the pandemic two years ago.
  • The Federal Reserve Bank of Philadelphia’s May business index dropped 15 points to 2.6, with the six-month outlook falling to its lowest since December 2008 (though the underlying details were better than the headline number).
  • Existing and new home sales dropped for a third month, to its lowest since 2020, held back by lean inventory, rising prices and higher mortgage rates. 

Taken together, the various regional Federal Reserve surveys suggest that the ISM Report for Business may come in at around 53, above 50 so still clearly in expansion territory for the US economy, but down noticeably from the upper 50s/lows 60s readings to which markets have become accustomed.

US equities still weak

US equities have remained weak as the down move continues for its seventh week.

It has been apparent that, in contrast to the start of the year when rising real bond yields were undermining equity markets, it is now fears of falling earnings due to a weaker economy that are weighing on stocks.

The last week has seen, in accordance with the risk-off regime, more buying-the-dip and selling-the-rally. There has also been a rotation out of growth and cyclicals into value and defensives (healthcare, real estate, utilities and staples).

European markets under the cosh

Bearish sentiment is prevalent in Europe, too, with investors cutting exposures to European equities.

There was another outflow in the week to 18 May, taking the total to 14 weeks of outflows in a row. Cyclicals, in particular, saw strong outflows, led by the materials, financials and energy sectors.

Our multi-asset team are inclined to reduce exposure to equity markets given the deterioration in the outlook.

European economy resists

Economic activity indicators have fallen so far in May, but remain above 50. Activity edged up in the manufacturing sector despite the fallout from the Ukraine war and supply chain disruptions that have intensified with China’s coronavirus lockdowns.

Although factories continue to report widespread supply constraints and diminished demand for goods amid elevated price pressures, the eurozone economy is being boosted by pent-up demand for services as pandemic-related restrictions are wound down.

While purchasing manager indices are still pointing to growth, it may be that these surveys understate the shock to activity, while sentiment surveys likely overstate the shock. Markets are increasingly tilting towards anticipation of a contraction in the coming quarters.

Higher food prices

Restrictions on the export of Ukrainian cereals continue and risks increasing food insecurity as the UN World Food Programme has highlighted.

As much of Russian and Ukrainian wheat goes to poorer nations, hunger could be a critical risk, driving up political instability.

The risk of further rises in food prices will be a key driver of inflation, particularly in emerging markets, the worst-case scenario being that the situation worsens significantly.

Moreover, lower fertiliser supply will have a greater impact on the next few months’ harvests, while the pass-through of costlier logistics and input prices is likely to drive food prices even higher.

Coming up…

Minutes of the meeting of the US Federal Open Markets Committee on 3-4 May will be published later on Wednesday.

However, market conditions have soured appreciably since the Fed’s first 50bp rate rise, so some of the language in the minutes pertaining to financial risks and market conditions will be outdated.

Instead, the three major focus points for market participants will likely be: 

  • Policymakers’ views on the conditions which could lead to a shift down, back to a pace of raising rates by 25bp at each FOMC meeting;
  • Any hints as to how far and for how long policymakers intend to push policy rates into restrictive territory;
  • Guidance shaping expectations for the next Summary of Economic Projections — aka the dot plot — due to be released at the June meeting. 

Forthcoming economic data  

US personal income and spending data for April should give investors an insight into the US consumer’s behaviour: Are they tightening the purse strings? The report may also show the Fed’s preferred inflation gauge (core PCE deflator) starting to decelerate.

Perhaps equally important, the report should shed light on how consumers are responding to the current high inflation environment, indicating how wages are performing relative to inflation and how aggressively consumers are tapping into the USD 2.5 trillion of accumulated savings from the pandemic period.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Andrew Craig. The post Weekly investment update – Weaker economic outlook weighs on markets appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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China Will Struggle To Reach Positive GDP This Quarter Premier Says, Warning Economy “To Some Degree” Worse Than 2020

China Will Struggle To Reach Positive GDP This Quarter Premier Says, Warning Economy "To Some Degree" Worse Than 2020

Over the weekend, we…



China Will Struggle To Reach Positive GDP This Quarter Premier Says, Warning Economy "To Some Degree" Worse Than 2020

Over the weekend, we quoted Goldman's head of hedge fund sales Tony Pasquariello who had some very choice words for China, saying its economy was so bad, "it’s simply eye-popping (witness the worst IP print on record)", and prompted Goldman's sellside research desk to cut its expectation for 2022 Chinese GDP growth to just 4%, which ex-2020 would be the slowest growth rate since 1990! For the sake of balance, Pasquariello noted that Shanghai was set to reopen on June 1st which could be a potential upside catalyst at a time when foreign investors have largely written away Chinese equities.

Fast forward to today when we find that Pasquariello's hedging was not necessary, because on Wednesday, China's Premier Li Keqiang held a teleconference this afternoon under the topic of "stabilizing economic growth" with provincial, city-level and county-level local government officials across the country in which he had some very dismal comments about the current state of China's economy.

As Goldman notes, "while there are not many new measures being announced from this conference, the nature and scale of this conference is quite unusual. Chinese policymakers are in greater urgency to support the economy after the very weak activity growth in April, anemic recovery month-to-date in May, and continued increases in unemployment rates."

Specifically, premier Li said China’s economy is worse off to a “certain extent” than 2020 when the pandemic first emerged, urging efforts to reduce the unemployment rate which as we noted recently has soared to the highest level since the covid crash.

“Economic indicators in China have fallen significantly, and difficulties in some aspects and to a certain extent are greater than when the epidemic hit us severely in 2020,” Li said Wednesday following a meeting with local authorities, state-owned companies and financial firms to discuss how to stabilize the economy, Bloomberg reported.

China’s premier also said the world’s second-largest economy would struggle to record positive growth in the current quarter, urging officials to help companies resume production after Covid-19 lockdowns, according to the FT.

“We will try to make sure the economy grows in the second quarter,” Li said, according to a transcript that the Financial Times verified with three people briefed on the premier’s remarks. “This is not a high target and a far cry from our 5.5 per cent goal. But we have to do so.”

The last time China’s growth entered negative territory was when output plunged 6.9 per cent year on year in the first quarter of 2020 after the coronavirus pandemic ended an era of uninterrupted growth dating back more than 30 years.

The comments by Li Keqiang, to tens of thousands of officials on an internal videocast on Wednesday, underscore the difficulties President Xi Jinping’s administration will have in reaching its annual growth target of 5.5% while also battling Omicron outbreaks.

Concerned that the unemployment rate is approaching levels where the dreaded "social unrest" becomes a possibility, the premier urged officials to make sure the unemployment rate falls and the economy “operates in a reasonable range” in the second quarter of this year, state media cited him as saying. Earlier in May, Li warned of a “complicated and grave” employment situation after the nation’s surveyed jobless rate climbed to 6.1% in April, the highest since February 2020, and sent the yuan plunging to the lowest level since late 2020.

Today's meeting was the latest in a series of urgent calls by Li (who is quitting his job next March) to shore up the economy, which has come under enormous pressure from Covid outbreaks and lockdowns in recent months, threatening the government's growth target of about 5.5%. President Xi's stubborn commitment to Covid Zero means China is guaranteed to miss that goal this year: Economists now forecast gross domestic product growth will hit just 4.5%, according to a new Bloomberg survey, with Goldman predicting GDP will rise just 4.0% as noted above.

In hopes of offsetting some of the gloom and doom unleashed by Beijing's flawed covid policies, Li indicated that China will try to reduce the impact of its strict Zero-Covid policy on the economy. “At the same time as controlling the epidemic, we must complete the task of economic development,” he said.

Li also stressed implementation of current support policies, and said more detailed implementation measures would be issued by the end of this month. Somewhat bizarrely, he said that economic data for the second quarter would be released “accurately”, hinting that prior Chinese data was - gasp - inaccurate? Perish the thought.

As Bloomberg reported earlier this week, China's State Council outlined 33 support measures on Monday to help businesses struggling to cope with the lockdowns, including extra tax rebates, relief on social insurance payments and loans, and additional funding for aviation and rail construction. Local governments were told to spend most of the proceeds from special bonds -- used mainly for infrastructure -- by the end of August. Judging by the lack of market reaction, investors saw right through this latest mostly verbal attempt to prop up confidence in the country ahead of the 20th Party Congress later this year, where Xi's fate will be determine (amid some rumors that his political career may be cut short if China's economy does not stabilize).

The central bank and banking regulator also held a meeting with major financial institutions on Monday to urge them to boost loans.
Li met with local authorities in April, when Shanghai was in the middle of a lockdown, telling them to “add a sense of urgency” as they rolled out policy. During a trip to Yunnan province last week, he said they should “act decisively” to support growth. Of course, when banks artificially inject loans into an economy where there is no loan demand, what you end up getting is just another bubble.

Tyler Durden Wed, 05/25/2022 - 11:25

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