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Review: Nintendo Switch OLED is a boon to handheld users but skippable as a home console update

The new version of Nintendo’s hit Switch console is just different enough to justify itself, but hardly a must-buy for any of the millions who bought the launch version. With a bigger, brighter, and better screen, it’s a good choice for someone buying…

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The new version of Nintendo’s hit Switch console is just different enough to justify itself, but hardly a must-buy for any of the millions who bought the launch version. With a bigger, brighter, and better screen, it’s a good choice for someone buying now who intends to use it mostly as a handheld — but if you’re planning or already using your Switch primarily as a stationary console, there pretty much no reason to upgrade. All the same, there will probably be a lot of units moving this holiday season.

Even at the best of times it can be hard to tell what Nintendo’s hardware strategy is, or whether there is indeed a strategy at all. The $350 Switch OLED provides a perfect example of this: at a time when rivals Sony and Microsoft are striving to show that their next-gen console is the most powerful, Nintendo releases an almost identical version of a console that was underpowered when it came out five years ago. Is it faltering? Or is it just that confident?

Signs point to neither — the rumor being that a new new Switch, with upgraded internals and a new screen but identical form factor, was planned for this year but the pandemic and chip shortage rendered this impossible. Making the best of the situation — or so the story goes — Nintendo slapped the OLED screens on the original hardware and is selling it as a minor quality-of-life update, the way it iterated on the 3DS for years. Nintendo has denied pretty much all accounts and speculation, but this story (again, just rumors) has the right smell.

It’s hard to know what to say about the result; on one hand, it’s plainly better than the original. On the other, it’s only better by a small amount, and for some people, no amount at all.

The screen itself is obviously the biggest improvement. I had the pleasure of playing Metroid: Dread on it, and the game’s fast-moving, colorful, high contrast environments looked fantastic on it. The darker darks of the OLED screen made the light areas and colors pop more (though measurements have shown peak brightness is actually lower), and the additional screen real estate, while it looks minimal in photos, does in fact matter in person, making details, UI and text that much more comprehensible.

Oh, and the dust it attracts really stands out on that all-black frontage.

Image Credits: Darrell Etherington

The clarity seems improved in motion by the OLED’s faster individual pixel refresh rate, leaving less of a feeling of one frame blurring into the next. The original Switch’s screen is just fine, to be clear, but it’s clearly outmatched here.

The color has a different cast to it than the original’s LCD, but in games most people won’t notice: a shift towards the green where the old one tends toward magenta to my eye. Interestingly there are “vivid” and “standard” options on the OLED model deep in the settings; “vivid” was pre-selected and I certainly found it pleasant, giving a bit more saturation to the image but not to the point where it’s bothersome.

The Nintendo Switch OLED on a table.

Image Credits: Darrell Etherington

In addition to this, the build quality feels better in general. The flimsy kickstand has been made far more beefy and adjustable, and the whole thing feels better put together. Although there are no significant changes to the internals, a slightly improved thermal profile should mean it runs a little cooler and uses the fans more sparingly. The speakers have supposedly been improved, but are still pretty much a last resort.

The Switch OLED comes with 64 GB of internal space, which is a nice upgrade from the 32 on the original. Of course everyone is going to put a micro SD card in there anyway, but the system volume is preferred and now there’s just that much less need to archive old games.

If you’re someone who plays their Switch games primarily on the device itself, or plans to, the Switch OLED is simply a superior device. I would not say it’s worth paying full price again to upgrade, but it’s definitely worth the $50 extra should you need to buy a new console after gifting or selling your first. (It’s $150 more than the handheld-only Lite, but to me the tradeoff of no TV mode has always been too much to justify.)

The Nintendo Switch OLED on a table.

Image Credits: Darrell Etherington

Of course, if you — like me — tend to keep the Switch in its dock at all times except when traveling, almost nothing will change. There is technically a new dock, a bit more solid-feeling as well, and featuring an ethernet connection for those who love wires, but pretty much everything else will be the same for you.

It’s beyond question that the Switch OLED is the best way to play Switch games right now, but even so no one should feel the need to upgrade. Who knows when the next generation of Nintendo consoles will arrive? I think even Nintendo isn’t quite sure on that. So for now hold onto your cash unless your existing Switch is beat up or would do more good in someone else’s hands.

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Futures Surge To All Time High As Earnings Supercharge Market Meltup

Futures Surge To All Time High As Earnings Supercharge Market Meltup

The wall of worry that preoccupied traders just weeks ago has melted away, and has been replaced with a global market melt up (just as Goldman predicted again this weekend),

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Futures Surge To All Time High As Earnings Supercharge Market Meltup

The wall of worry that preoccupied traders just weeks ago has melted away, and has been replaced with a global market melt up (just as Goldman predicted again this weekend), which pushed US index futures to a new all time high this morning when spoos hit 4,580.75, while propelling European and Asian stocks higher as corporate earnings helped boost sentiment amid lingering concerns about inflation and growth. As of 715am ET, US equity futures were up 0.42% or 19.25 points, Dow Jones futures were up 126 points or 0.35% and Nasdaq futures jumped 0.61%, extending cash market gains boosted by Tesla’s rally to a $1 trillion market value on a big order and Facebook’s results announcement revealing strong user growth and a $50 billion stock buyback. 10-year Treasury yields dropped by 1 basis point while the dollar slid to session lows. Bitcoin traded around $63,000.

The barrage of earnings reports continued on Tuesday morning, with United Parcel Service, General Electric and 3M all gaining in pre-market trading after strong results. Eli Lilly advanced after raising full-year forecasts. Bakkt shares jumped 36% in the U.S. premarket session after more than tripling Monday when Mastercard said it has inked a deal with the firm to help banks offer cryptocurrency rewards on their debit and credit cards.  Facebook also rose after pledging to buy back as much as $50 billion more in stock, with tech heavyweights Twitter, Alphabet and Microsoft reporting after the market close on Tuesday. Here are all the notable premarket movers:

  • Facebook (FB US) rises as much as 2.5% in premarket as analysts stay bullish despite a third-quarter revenue miss and an outlook that was below consensus. Advertising growth is seen improving in 2022.
  • Tesla (TSLA US) gains 1% after stock closed at a record high, boosted by several factors on Monday including a large car order from rental firm Hertz and Morgan Stanley lifting its price target.
  • Creatd (CRTD US) was up 27% adding to a 50% gain over the past two trading sessions amid a rally in a growing number of retail-trader favorite stocks linked to former U.S. President Donald Trump.
  • Redbox (RDBX US) rises as much as 130% after the firm completed a business combination with Seaport Global Acquisition, a special purpose acquisition company.
  • Cryptocurrency-exposed stocks rise, with Eqonex (EQOS US), previously known as Diginex, more than doubling in value after listing Polkadot on its platform and Bakkt (BKKT US) extending Monday’s gains.

Earnings season is helping to counter concerns that elevated inflation and tightening monetary policy will slow the recovery from the pandemic. Some 81% of S&P 500 members have reported better-than-expected results so far, though CitiGroup Inc. warned that profit growth may be close to peaking.

Equity markets are “continuing their recovery and we expect this process to continue past big-tech earnings” and this week’s European Central Bank meeting, where policy makers may flag the end to their pandemic bond-buying program, Sebastien Galy, senior macro strategist at Nordea Investment Funds, wrote in a note.

Still, some analysts voiced caution over the impact of the COVID-19 pandemic on supply chains: “Even though this has been a good earnings season in aggregate we are starting to see more companies with supply backlogs, hiring difficulties, and rising input prices that are eating into profits,” Deutsche Bank analysts wrote.

The debate over price pressures continued when former Treasury Secretary Lawrence Summers said officials are unlikely to deal with “inflation reality” successfully until it’s fully recognized.

The MSCI world equity index, which tracks shares in 50 countries, added 0.1%

European shares hit the highest level in seven weeks: the Stoxx Europe 600 index rose more than 0.5% led by gains in travel stocks and insurers, and edging close to a the record high reached in September while German stocks gained 0.9%. Reckitt Benckiser gained more than 5% after the maker of Strepsils throat lozenges raised its sales forecast. Swiss lender UBS Group AG climbed after posting a surprise jump in profit, while Novartis AG advanced on news it may spin off its generic-drug unit. After a stellar quarter for U.S. and British banks, Switzerland’s UBS rose over 2% on its highest quarterly profit since 2015, helping the financial services sector climb about 1%.

Earlier in the session, the MSCI Asia Pacific Index traded 0.3% higher in afternoon trading, paring an earlier gain of as much as 0.7% which pushed it to its highest level in six weeks.  Asian stocks rose as investors focused on encouraging earnings reports from some of the world’s biggest technology companies. The advance was driven by a subgauge of IT names including South Korean memory chipmaker SK Hynix, which climbed after reporting record sales and forecasting further demand growth. Japanese electronics giants Nidec Corp. and Canon Inc. reported results after Tuesday’s close. “The earnings season so far continues to meet investor expectations and assuage inflationary concerns,” said Justin Tang, head of Asianresearch at United First Partners. Tesla’s order from Hertz, good prospects for the $550 billion U.S. infrastructure bill and the latest talks between U.S. and China officials also helped “inject some risk appetite,” Tang said. Japan led gains among national benchmarks, with the Topix rising more than 1%. The market was helped by a local media report that the ruling Liberal Democratic Party may be able to win a majority of seats on its own in the general elections scheduled for next week. Key gauges in tech-heavy South Korea and Taiwan also jumped more than 0.5%, while benchmarks fell in Hong Kong and China.

In China, Modern Land China Co. became the latest builder to miss a payment on a dollar bond, in a further sign of stress in the nation’s real estate sector. Defaults from Chinese borrowers on offshore bonds have jumped to a record.

Japanese stocks advanced as investors looked toward earnings reports from major companies and political stability after the upcoming election. Electronics makers and telecommunications providers were the biggest boosts to the Topix, which gained 1.2%. Fast Retailing and Tokyo Electron were the largest contributors to a 1.8% rise in the Nikkei 225. Asian stocks and U.S. futures also rose, following the S&P 500’s climb to a record high, amid positive news from Tesla and Facebook. Japanese companies reporting results today include Canon, Nidec and Hitachi Construction Machinery.  Meanwhile, the ruling Liberal Democratic Party may be able to exceed a majority of 233 seats on its own in the general elections scheduled for Oct. 31, a poll conducted by Asahi showed. “There’s a lot of noise out there but for stocks, it’s about fundamentals, which are corporate earnings,” said Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management. “We’re starting to see some pretty good earnings figures, so I’m thinking we’ll see the Nikkei 225 consolidate around the 29,000 level this week.”

In rates, Treasuries were cheaper across front-end of the curve, fading a portion of Monday’s gains even as corporate earnings propel stock futures to new highs. The 10-year TSY yield is lower by less than 1bp at 1.622%; 2-year yields are cheaper by ~1bp on the day while long-end of the curve is richer by ~1.5bp, flattening 2s10s, 5s30s spreads by ~2bp. The TSY curve is flatter with long-end yields richer on the day, unwinding Monday’s steepening move. Treasury auction cycle begins with sale of 2-year notes, followed by 5- and 7-year offerings over next two days. 

In FX, the Bloomberg Dollar Spot Index was mixed but slumped to session lows as US traders walked in. The pound led gains followed by other risk-sensitive currencies such as the Australian and New Zealand dollars. Sterling gained even as overnight index swaps show traders trimmed back bets for BOE tightening, pricing in 14 basis points of hikes in November, down from 15 points previously. The yen was the worst performer as demand for haven assets receded following talks between U.S. and Chinese officials on the economy and cooperation in which some incremental progress was made. The euro inched up after gyrating toward the $1.16 handle; the euro’s volatility skew flattened in the past two weeks, suggesting a rebound in the spot market. Given the latter has stalled at a key resistance area, risk reversals could show downside risks once again. The Turkish lira rallied the most in more than four months after President Recep Tayyip Erdogan dropped his demand for 10 Western ambassadors to be expelled from the country.

China’s offshore yuan gained for a fourth straight day, lifted by a phone call between the U.S. and China on trade and economic issues. Overnight borrowing costs sunk to one-month lows after the central bank boosted cash injections into the financial system. 

In commodities, WTI crude oil was steady around $84 a barrel and Brent traded above $86 as investors weighed the outlook for U.S. stockpiles and prospects for talks that may eventually help to revive an Iranian nuclear accord, allowing a pickup in crude exports.
Gold held above $1,800 an ounce and Bitcoin hovered around $62,500.

Looking at today's calendar, we get the August FHFA house price index, September new home sales, October Conference Board consumer confidence and Richmond Fed manufacturing index. In central banks, ECB’s Villeroy and de Cos will speak. In corporate earnings, we will get results from Microsoft, Alphabet, Visa, Eli Lilly, Novartis, Texas Instruments, UPS, General Electric, UBS and Twitter

Market Snapshot

  • S&P 500 futures up 0.4% to 4,576.25
  • STOXX Europe 600 up 0.6% to 474.91
  • MXAP up 0.4% to 200.93
  • MXAPJ up 0.2% to 662.77
  • Nikkei up 1.8% to 29,106.01
  • Topix up 1.2% to 2,018.40
  • Hang Seng Index down 0.4% to 26,038.27
  • Shanghai Composite down 0.3% to 3,597.64
  • Sensex up 0.4% to 61,232.14
  • Australia S&P/ASX 200 little changed at 7,443.42
  • Kospi up 0.9% to 3,049.08
  • German 10Y yield little changed at -0.12%
  • Euro little changed at $1.1609
  • Brent Futures down 0.3% to $85.76/bbl
  • Gold spot down 0.3% to $1,802.76
  • U.S. Dollar Index little changed at 93.86

Top Overnight News from Bloomberg

  • Traders are wagering on rate hikes of as much as 158 basis points over the next year in countries including the U.K., New Zealand and South Korea amid soaring costs of living and commodity prices. Yet a flattening in yield curves -- historically seen as the market’s assessment of economic health -- indicates rising concern that such a rapid withdrawal of support will hurt the nascent recovery
  • Financial markets have stubbornly ignored recent warnings from ECB policy makers including Chief Economist Philip Lane that they’re wrong to anticipate a rate hike at the end of next year. The task of persuading people otherwise will fall to President Christine Lagarde as she presents the Governing Council’s latest decision on Thursday

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were lifted by the tailwinds seen stateside, whereby the SPX and DJIA both notched fresh all-time-highs, although the NDX outperformed as Tesla shot past the USD 1000/shr mark and USD 1trl market cap milestone. US equity futures overnight drifted higher with the NQ narrowly outperforming its peers. European equity futures also posted mild gains. Back to APAC, the ASX 200 (+0.1%) was kept afloat by tech names as the sector saw tailwinds from the stateside performance. The Nikkei 225 (+1.8%) outperformed following the prior session’s underperformance, and as the JPY drifted lower during the session. The KOSPI (+0.9%) was also firmer with SK Hynix rising some 3% at the open as chip demand supported earnings. The Hang Seng (-0.4%) and Shanghai Comp (-0.3%) opened flat but the latter was initially underpinned following another chunky CNY 190bln net liquidity injection by the PBoC. The Hang Seng Mainland Properties Index fell almost 5% in early trade, whilst Modern Land noted that it will not be able to meet payments and shares were halted until future notice. Finally, 10yr JGBs were lower amid spillover selling from T-notes and Bund futures.

Top Asian News

  • MediaTek Sees 2021 Revenue Growing by 52%; 3Q Profit Beats
  • UBS Going ‘Full Bull’ on China Despite Outflows, Growth Worry
  • China’s IPO Flops Raise Red Flag Over Shares Pricing: ECM Watch
  • Asian Stocks Rise as Investors Focus on Major Tech Earnings

European equities (Stoxx 600 +0.6%) trade on a firmer footing after extending on the tentative gains seen at the cash open with the Stoxx 600 at its best level in around seven weeks. The APAC session saw some support via the tailwinds seen in the US after the SPX and DJIA both notched fresh all-time highs and the NDX outperformed and Tesla shot past the USD 1000/shr mark and USD 1trl market cap milestone. The Nikkei 225 (+1.7%) led gains in the region alongside a firmer JPY whilst the Shanghai Comp (-0.3%) was unable to benefit from another chunky liquidity injection by the PBoC. Stateside, futures are indicative of a firmer cash open with the NQ (+0.6%) continuing to outpace peers with Facebook +2.4% in pre-market trade post-results which saw the Co. announce a USD 50bln boost to its share buyback authorisation. From a macro perspective, with the Fed in its blackout period and events on Capitol Hill not providing much impetus for price action, the equity landscape will likely be dominated by earnings with the likes of Alphabet, Microsoft, General Electric, 3M, Visa, AMD and Twitter all due to report today. Earnings are also playing a pivotal role in Europe today with Reckitt (+6.4%) top of the FTSE 100 and supporting the Personal and Household Goods sector after Q3 results prompted the Co. to raise its sales outlook. UBS (+0.6%) is off best levels but still firmer on the session after reporting its highest quarterly profits in six years. Countering the upside from UBS in the Banking sector is Nordea (-4.0%) with shares weighed on by Sampo selling 162mlnn shares in the Co. to institutional investors. Novartis (+1.6%) shares are trading broadly inline with the market after opening gains were scaled back post-Q3 earnings which saw the Co. report a 10% increase in operating profits and announce a strategic review of its generic drug unit Sandoz. Telecoms are near the unchanged mark and unable to benefit from the broader gains seen across the region as Orange (-2.7%) acts as a drag on the sector after announcing a decline in Q3 earnings.

Top European News

  • UBS Going ‘Full Bull’ on China Despite Outflows, Growth Worry
  • Adler Sells Real Estate Portfolio Valued at More Than EU1B
  • Europe Gas Extends Gains With Weak Russian Flows, Norway Outages
  • Latest Impact of Europe’s Energy Crisis is a Plunge in Trading

In FX, the 94.000 level remains tantalisingly or agonisingly close, but elusive for the Dollar index, and it could simply be a psychological barrier as a breach would clear the way for a complete comeback from trough to 94.174 peak set last week. However, the Greenback has lost some yield attraction and the broad risk tone is bullish to dampen demand on safe-haven grounds, while chart resistance and option expiries are also preventing the Buck from staging a more pronounced rebound ahead of a busier US agenda including housing data, consumer confidence, several regional Fed surveys and the first slug of issuance in the form of Usd 60 bn 2 year notes. Back to the DXY, 93.965-795 encapsulates trade thus far, and the 21 DMA stands at 93.966 today, just 3 ticks shy of Monday’s high.

  • AUD - In similar vein to its US counterpart, the Aussie is finding 0.7500 a tough round number to crack, convincingly, but Aud/Usd is deriving support from the ongoing recovery in industrial metals awaiting independent impetus via Q3 inflation data tomorrow.
  • JPY/CHF - The Yen and Franc continue to lag their major peers and retreat further vs the Dollar, with the former now struggling to keep sight of the 114.00 handle even though hefty option expiries reside from 113.85 to the big figure (1 bn), and Usd/Jpy faces more at the 114.50 strike (1.1 bn), while the latter is sub-0.9200 and unwinding more gains relative to the Euro as the cross probes 1.0700.
  • GBP/NZD - Conversely, Sterling remains primed for further attempts to extend gains beyond Fib resistance and breach 1.3800, while eyeing 0.8400 against the Euro irrespective of some UK bank research suggesting that BoE Governor Bailey may not back up recent hawkish words with a vote to hike rates at the November MPC. Elsewhere, the Kiwi is still hovering above 0.7150 and defending 1.0500 vs its Antipodean rival with a degree of traction via RBNZ Governor Orr warning that climate change could culminate in a lengthy phase of stronger inflation that needs a policy response.
  • EUR/CAD - Both rather flat, as the Euro continues to pivot 1.1600 and rely on option expiry interest for underlying support (1.5 bn rolling off from the round number to 1.1610 today), but also anchored by the 21 DMA that aligns with the big figure, while the Loonie has lost its crude prop on the eve of the BoC, though should also receive protection from expiries at 1.2400 (1 bn) within a 1.2394-68 range.
  • EM - The Try has reclaimed more lost ground to trade above 9.5000 vs the Usd on a mix of corrective price action and short covering rather than any real relief about Turkey’s latest rift with international partners given another blast from President Erdogan who said statements issued by ambassadors on Kavala target his country’s judiciary and sovereignty, adding that the Turkish judiciary does not take orders from anyone. On the flip-side, the Zar is softer alongside Gold and ongoing issues with SA power supply provided by Eskom.

In commodities, WTI and Brent have been softer throughout the European morning dipping from the initially steady start to the APAC session after yesterday’s pressured; nonetheless, prices haven’t dipped too far from recent peaks. Newsflow for the complex and broadly has been sparse thus far as focus remains very much on earnings and events due later in the week. Specifically for energy, we had commentary from Russian Deputy PM Novak that he wants OPEC+ to stick to the agreement to increase production by 400k BPD at the November gathering, commentary which had little impact on crude at the time. Elsewhere, the weekly Private Inventory report is due later in the session and expectations are for a build of 1.7mln for the headline crude figure; for reference, both distillates and gasoline stocks are expected to post a draw. Moving to metals, spot gold and silver are pressured this morning with initial downside perhaps stemming from a short-lived resurgence in the USD; however, while the metals do have a negative bias, the magnitude of this – particularly in spot gold – is fairly minimal. Separately, base metals are softer with LME copper hindered and still shy of the 10k figure. Again, newsflow this morning has been limited but we did see a production update from Hochschild who confirmed FY21 production guidance of 360-370k gold-equivalent ounces after reporting that Q3 was the strongest period of the year, thus far.

US Event Calendar

  • 9am: Aug. S&P Case Shiller Composite-20 YoY, est. 20.00%, prior 19.95%; 9am: MoM SA, est. 1.50%, prior 1.55%
  • 9am: Aug. FHFA House Price Index MoM, est. 1.5%, prior 1.4%
  • 10am: Oct. Conf. Board Consumer Confidenc, est. 108.2, prior 109.3
    • Present Situation, prior 143.4
    • Expectations, prior 86.6
  • 10am: Oct. Richmond Fed Index, est. 5, prior -3
  • 10am: Sept. New Home Sales, est. 758,000, prior 740,000; MoM, est. 2.5%, prior 1.5%; 

DB's Jim Reid concludes the overnight wrap

If you’ve never seen Lord of the Flies feel free to come round to our house where you’ll get a live performance that gets more authentic the longer this two week half-term holiday we’re in goes on. Yet again working is the safest option. We have the option to “purchase” extra holiday each year but I’m thinking of seeing if I can give some back and take the money instead. They are hard work when put into a room together for any period of time.

It was not only the fighting that was the same as last week, markets were pretty similar yesterday too as we saw fresh equity highs alongside renewed multi-year highs in breakevens. There are a few subtle changes in company reporting trends though. Even though this has been a good earnings season in aggregate we are starting to see more companies with supply backlogs, hiring difficulties, and rising input prices that are eating into profits. Indeed yesterday saw a few consumer staples companies lower full year profit outlooks in their earnings releases.

Nevertheless, major equity indices marched higher, with the small cap Russell 2000 (+0.93%) and Nasdaq composite (+0.90%) outperforming the S&P 500 (+0.47%). Consumer discretionary stocks were the clear outperformer, driven by news of Tesla (+12.66%) receiving a 100k car order from Hertz. Tesla’s big day saw it become the first automaker to cross 1 trillion dollar market cap and also drove the outperformance of the FANG index ahead of Facebook’s after hours earnings release.

Speaking of which, Facebook missed revenue estimates but beat on earnings. Shares were slightly higher in after-hours trading, where they are betting big on virtual reality technology.

Overnight in Asia, the Nikkei 225 (+1.75%) and the KOSPI (+0.61%) are outperforming the Hang Seng (-0.42%) and Shanghai Composite (+0.01%). The sentiment in China is being clouded by the news of another developer, Modern Land China Co., missing a payment on a $250 million dollar bond. This news came as Bloomberg reported that Chinese firms set a yearly record on offshore bond defaults. Another development in the region is that Hong Kong has pushed back against yesterday’s calls for an easing in its virus rules which the banks in particular were calling for. In geopolitics, China’s Vice Premier Liu He and U.S. Treasury Secretary Janet Yellen held a call about trade and economic concerns, boosting sentiment in Asian markets, while the S&P 500 mini futures (+0.24%) is trading higher. The yield on 10y Treasury (+0.7bps) is also up. In data releases, South Korean preliminary GDP for Q3 came in at +4.0% versus +4.3% expected, while Japan’s services PPI for September declined to +0.9%, missing estimates of +1.1%.

Back to yesterday and in fixed income, as mentioned at the top inflation breakevens continued their march higher. In the US, 10-year Treasury breakevens (+2.7 bps) closed at 2.67%, just shy of their widest levels since 10-year TIPS began trading in 1997. 10yr nominal yields were -0.2 bps lower as real yields slipped -2.3bps to their lowest levels since mid-September. European breakevens kept pace, with 10-year German breakevens increasing +1.9bps to 1.93% and UK breakevens increasing +1.2 bps to 4.20%. As was the case with the US, real yields fell as nominal 10-year yields decreased across Europe. Bunds (-0.9bps), Gilts (-0.5bps), OATs (-1.1bps) and BTP (-3.4bps) yields all fell.

Crude oil futures put in a mixed performance. Multiple OPEC+ members signaled they won’t increase supply at their upcoming meeting leading to gains in crude, yet the gains were short lived, as headlines noted that Iran and the EU will stage talks to restore the 2015 nuclear deal, paving a way for Iranian oil supply to return to the market. Brent futures finished +0.54% higher while WTI futures were unchanged. Natural gas prices were on a one-way track higher, however. US natural gas prices had their biggest one-day gain in a year, increasing +11.70%, on the back of a colder forecast for the upcoming winter as supply issues still abound. European and UK natural gas prices were only modestly higher by comparison, increasing +1.27% and +1.86%, respectively. European leaders are gathering in Luxembourg today for an emergency meeting on the energy crisis.

European equities were almost unchanged, with the STOXX 600 (+0.07%) finishing with marginal gains with energy (+1.27%) leading. The German DAX (+0.36%) gained with the help of stronger IT (+1.76%) performance despite Ifo expectations (95.4) coming in below consensus (96.6).

In other data releases, the Chicago Fed National Activity Index came at -0.13 versus 0.20 expected. The Dallas Fed Manufacturing Activity Index (14.6), however, surprised on the upside by coming above expectations (6.0). Delivery times remained elevated in the survey, and a special question showed that labour supply issues got slightly worse.

In virus news, Moderna reported that its vaccine showed a strong immune response for children from 6 to under 12 years old. Meanwhile, China announced in its initial guidelines that unvaccinated athletes at the 2022 Winter Olympics in Beijing would have to quarantine for 21 days, while Hong Kong was pressured by banks to relax its zero-COVID policy.

In today’s data releases, August FHFA house price index, September new home sales, October Conference Board consumer confidence and Richmond Fed manufacturing index are due from the US. In central banks, ECB’s Villeroy and de Cos will speak. In corporate earnings, we will get results from Microsoft, Alphabet, Visa, Eli Lilly, Novartis, Texas Instruments, UPS, General Electric, UBS and Twitter

 

Tyler Durden Tue, 10/26/2021 - 07:47

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Bonds

Evergrande Fallout: Modern Land Defaults On US$250 Million Bond As Investors Question Chinese Developers’ Willingness To Pay

Modern Land (China) added to a string of defaulters among Chinese property developers after it reneged on a US$250 million bond on Monday, highlighting investor concerns about the willingness to pay within the industry.
The Beijing-based developer…

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Modern Land (China) added to a string of defaulters among Chinese property developers after it reneged on a US$250 million bond on Monday, highlighting investor concerns about the willingness to pay within the industry.

The Beijing-based developer did not repay the principal or interest on the 12.85 per cent bond when it matured on October 25, according to a Hong Kong stock exchange filing on Tuesday. The firm cited unexpected liquidity issues, blaming macroeconomic and industry conditions and the Covid-19 pandemic.

The decision to renege on the offshore debt came after it cancelled a repayment proposal last week. Under the plan first unveiled on October 11, Modern Land had offered to repay only 35 per cent of the face amount on October 25, while delaying the rest by three months.

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"The recent bond defaults have hurt confidence," Industrial Securities said in a report dated October 23. "Given the large amount of maturities in the first quarter next year, investors in dollar bonds sold by Chinese firms expect fluctuations in the property segment to be relatively high."

While the Modern Land subject reignited concerns about widening defaults in China's US$2.7 trillion property market amid China Evergrande Group's distress, it also raised a few questions about Chinese developers' willingness, rather than their ability, to repay offshore investors.

Los Angeles-based TCW Group, for example, has trimmed its holdings in Chinese property debt, according to a Morningstar report, saying recent events have altered the team managers' perspective on the situation and raised doubts about reliability of financial statements in the industry.

"The [emerging-market debt] team members expressed concern at the recent slew of requests by Chinese real estate companies with stated large cash positions to delay payments to bondholders," according to the Morningstar report issued on October 19.

"The managers worry that recent events might be a signal that companies are being urged by the government to use cash to finish projects and pay suppliers at the expense of bondholders."

Modern Land's decision to default came as a bit of a surprise after its chairman and controlling shareholder Zhang Lei and company president Zhang Peng both offered to loan the company 800 million yuan (US$125.4 million) "within the next two to three months", according to a "voluntary announcement" to the stock exchange earlier this month.

Contracted sales grew 52 per cent in the first six months to 21.6 billion yuan from a year earlier, according to its interim report. It received credit lines of more than 100 billion yuan from lenders during the period, citing the stability of its ratings at home and abroad.

It raised US$398 million from a green-bond offering, and got a green loan of HK$100 million (US$12.9 million) from Hang Seng Bank. The group's unrestricted cash and bank balances grew 26 per cent to 13.3 billion yuan on June 30 from December 31 last year. The company last month spent some cash to buy back bonds due in 2022 and 2023.

The defaulted 12.85 per cent bond was indicated at about 35 cents on the dollar as of 12.35pm local time. Its next bond due February 26 was priced at 19 cents on the dollar, according to Bloomberg data. The Hang Seng Properties Index of stocks tumbled 1.9 per cent as of 3.13pm on Tuesday.

"Assessing companies' willingness to pay [not just their ability to do so] could become a much more important factor when analysing the Chinese property sector than it was in the past," Morningstar said, citing the TCW managers. Lower property demand and tight government policies are likely to depress pricing and impact funding for homebuyers and developers, they added.

Modern Land said it was working with its legal advisers at Sidley Austin and will engage independent financial advisers soon to help formulate a plan to resolve its debt.

Property developers assessed by S&P Global Ratings face around 480 billion yuan of both onshore and offshore maturities within one year, it said in a report last month. For Evergrande, a 30-day grace period for an interest payment on a US$1 billion ends on October 29.

China's top economic planning body, the National Development and Reform Commission, has summoned top developers for a meeting in Beijing to discuss issues related to their dollar borrowings.

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Economics

What *Seems* Inflation Now Is Something Else Entirely

This is yet another one of those crucial recent developments which should contribute much clarity about the economic situation, yet is exploited in other ways (political) adding only more to the general state of economic confusion. The shelves may be…

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This is yet another one of those crucial recent developments which should contribute much clarity about the economic situation, yet is exploited in other ways (political) adding only more to the general state of economic confusion. The shelves may be empty in a lot of places around the country, leaving anyone with the impression there just aren’t enough goods.

Shortage of goods, everyone’s thinking, by virtue of economics (small “e”) it will be another significant inflationary pressure. Maybe even the straw that breaks the post-70s camel’s back.

But is there actually a shortage of goods? Is that really what this supply shock is all about?

If there is one thing unambiguously in short supply, it’s actually physical structures and locations to warehouse goods. Contrary to public perception, an enormous quantity of material is being produced and even shipped, the issue is that it can’t get as far as its destination because of bottlenecks/constraints in transit.

Outside of a few highly visible sectors, automobiles in particular, this unusual inventory cycle is being generated on the upside by how hard it is to transport things rather than having few things to transport. As we noted here, this has created a perverse chain of events whereby the ordering of goods is being conducted based on transportation worries rather than (honest) forecasts of end demand.

Suppose retailers (outside of automobiles) grow concerned about supply availability or shipping times. They might naturally react by boosting their current order flow if only to increase their chances some product makes it through the clogged shipping channels.

As that increased order flow unrelated to demand continues to move back through the supply chain, it probably would only make the transportation issues that much worse. It’s already a mess, and because it’s already a mess the entire supply chain tries to stuff more goods through it rather than less, rather than giving the system some time and space to work out enough kinks.

This would mean an overflow of goods but where many if not most of the goods lurk in the background, not anywhere visible at the end of the line. This is not a shortage. And if there is such a thing, then storage space would be the thing coming up for a huge price premium.

Last Friday, the Wall Street Journal reported:

Warehouse availability in the U.S. fell to record lows in the third quarter, according to figures from real-estate firms that show industrial space is all but disappearing near some of the country’s busiest distribution hubs.

One CFO at a major corporate real estate firm added, “Space in our markets is effectively sold out.”

Part of the problem is post-pandemic behavior; locked down originally due to governmental indifference, consumers began buying even more goods online than they had been prior to 2020. This required retooling much (too much) of the way goods are handled from producer to wholesaler to retail delivery.



But as the economy seeks its way back to normal, Americans, in particular, are still buying online; as if years of a slower trend toward virtual shopping were condensed all at once into the calendar space of a few months.

As we pointed out here, wholesalers have got product; a lot of inventory, if you exclude the effect of an auto sector plagued by an entirely different set of supply problems. In other words, for motor vehicles and parts, it is not the same thing at all as what’s going on everywhere else in the goods economy.

That’s not what the public is being led to believe, as social media flooded with images of empty shelves cultivate this misimpression how the whole economy must be in the same boat (pun intended) as the auto sector.



Stepping up the supply chain one rung, retailer inventories at first appear equally dismal (above); matching data with the perception of systemwide destocked shops. Inventory levels are at extreme lows, and inventory-to-sales ratios even more historically low still.

However, if you deal with the situation in the automobile industry separately, as you should, excluding retail auto inventories what you find is goods flowing if not flooding on the retail level that along with wholesale inventories (ex motor vehicles) matches the shortage of warehouse space described in Friday’s WSJ.


Many companies have claimed they are absolutely ready for “too many goods”, believing both their newfound penchant for individual supply chains as well as logistical consulting to manage more than ever. This so long as demand doesn’t “unexpectedly” fall off, even a little, which then might trigger the downside of the inventory cycle.

With this deluge of goods reaching US warehouses, wherever they might be in the country or within their own delivery process, it has to be a little unnerving how even mainstream commentary on the economy has itself shifted prominently. Earlier in the year, it was common enough (Warren Buffett!) to hear the term “red hot” thrown around regularly to the point of ubiquity.

Nowadays, you are far more likely to encounter the tag “stagflation” with few references to overheating left outside of the FOMC members already having cornered themselves into tapering (and therefore having to “justify” the upcoming act by, yet again, like every other time, being overly positive interpreting otherwise not-so-great economic data). It was the “red hot” economy from early 2021 which had built up Corporate America’s inventory exuberance.


A stagflation economy, on the other hand, with warehouse space already at a huge premium, the “flation” part becomes increasingly settled into the opposite of the one most Americans are thinking, and it is in large part because of the real reason for so many empty shelves.

Excessive levels of inventory given just a downgrade in expected future demand (see: Chicago Fed National Activity Index above) becomes highly disinflationary at the drop of a dime, not inflationary. Depending upon just how much of a demand downgrade, given these other factors, an inventory cycle downswing could actually end up being outright deflationary.

It is understandable why Americans have been left to believe all these things add up to consumer price acceleration far into the future. Vast swaths of grocery and department store shelves which go on unstocked for a noticeably long period play along with the perception of a goods shortage, seeming to be consistent on the surface with the previous (earlier in 2021) burst of consumer price increases.



While those price increases sure did happen, they were not inflation nor were they even a supply issue in the way it appears most people are being led to think of it. While there aren’t enough cars on dealer lots, the entire rest of the goods economy (apart from a few other sectors, like clothing) is on the verge of being overwhelmingly awash in all manner of non-auto stuff.

And this doesn’t even count what’s stuck afloat on logjammed ships already acting as warehouses-of-last-resort.

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