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Risk Cracks After Moderna CEO Comments Spark Global Stock Rout

Risk Cracks After Moderna CEO Comments Spark Global Stock Rout

Ask a drug dealer if methadone helps cure a cocaine addition and – shockingly – you will hear that the answer is "hell no", after all an affirmative response would mean the fixer.

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Risk Cracks After Moderna CEO Comments Spark Global Stock Rout

Ask a drug dealer if methadone helps cure a cocaine addition and - shockingly - you will hear that the answer is "hell no", after all an affirmative response would mean the fixer needs to get a real job. Just as shocking was the "admission" of Moderna CEO, Stéphane Bancel, who in the latest stop on his media whirlwind tour of the past 48 hours gave the FT an interview in which he predicted that existing vaccines will be much less effective at tackling Omicron than earlier strains of coronavirus and warned it would take months before pharmaceutical companies could manufacture new variant-specific jabs at scale.

“There is no world, I think, where [the effectiveness] is the same level . . . we had with [the] Delta [variant],” Bancel told the Financial Times, claiming that the high number of Omicron mutations on the spike protein, which the virus uses to infect human cells, and the rapid spread of the variant in South Africa suggested that the current crop of vaccines may need to be modified next year. Here, the self-serving CEO whose sell-mode was fully engaged - after all what else would the maker of a vaccine for covid say than "yes, the world will need more of my product" - completely ignored the earlier comments from Barry Schoub, chairman of South Afruca's Ministerial Advisory Committee on Vaccines, who over the weekend said that the large number of mutations found in the omicron variant appears to destabilize the virus, which might make it less “fit” than the dominant delta strain. As such, it would be a far less virulent strain... but of course that would also reduce the need for Moderna's mRNA therapy and so Bancel failed to mention it.

What is grotesque is that the Moderna CEO’s comments on existing vaccines’ effectiveness against the omicron variant is “old news so should be a fade,” says Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities in Singapore. Indeed as Bloomberg notes, Bancel reiterated comments made by Moderna’s Chief Medical Officer Paul Burton during the weekend.

Alas, the last thing algos care about is nuance and/or reading between the lines, and so moments after Bancel's interview hit, markets hit risk off mode on Tuesday, and yesterday’s bounce in markets immediately reversed amid fresh worries about the efficacy of currently available vaccines with U.S. equity futures dropping along with stocks in Europe. Bonds gained as investors sought havens.

After dropping as much as 1.2%, S&P futures pared losses to -0.7%, down 37 points just above 4,600. Dow Eminis were down 339 points or 1% and Nasdaq was down -0.8%. Adding to concerns is Fed Chair Jerome Powell who today will speak, alongside Janet Yellen, at the Senate Banking Committee in congressional oversight hearings related to pandemic stimulus. Last night Powell made a dovish pivot saying the new variant poses downside risks to employment and growth while adding to uncertainty about inflation. Powell's comments dragged yields lower and hit bank stocks overnight.

“The market’s reaction to reports such as Moderna’s suggest the ball is still very much in the court of proving that this will not escalate,” said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong. “Until that time, mode is to sell recoveries in risk and not to try and pick the extent of the selloff”

U.S. airline and cruiseliner stocks dropped in premarket trading Tuesday, after vaccine maker Moderna’s top executives reiterated that the omicron variant of the coronavirus may require new vaccines. Most U.S. airline stocks were down: Alaska Air -5%, United -3.2%, American -3%, Spirit -2.7%, Delta -2.6%, JetBlue -2.6%, Southwest -1.7%. Here are some other notable movers today:

  • U.S. banks decline in premarket trading following comments from Federal Reserve Chair Jerome Powell that may push back bets on when the central bank will raise rates. Citigroup (C US) -2.4%, JPMorgan (JPM US) -2.2%, Morgan Stanley (MS US) -2.6%
  • Vaccine manufacturers mixed in U.S. premarket trading after rallying in recent days and following further comments from Moderna about treating the new omicron Covid-19 variant. Pfizer (PFE US) +1.6%, Novavax  (NVAS US) +1.3%, Moderna (MRNA US) -3.8%
  • U.S. airline and cruiseliner stocks dropped in premarket trading Tuesday, after vaccine maker Moderna’s top executives reiterated that the omicron variant of the coronavirus may require new vaccines. Alaska Air (ALK US) -5%, United (UAL US) -3.2%, American (AAL US) -3%
  • Krystal Biotech (KRYS US) jumped 4.3% in postmarket trading on Monday, extending gains after a 122% jump during the regular session. The company is offering $200m of shares via Goldman Sachs, BofA, Cowen, William Blair, according to a postmarket statement
  • MEI Pharma (MEIP US) gained 8% postmarket after the cancer-treatment company said it will hold a webcast Tuesday to report on data from the ongoing Phase 2 Tidal study evaluating zandelisib in patients with relapsed or refractory follicular lymphoma
  • Intuit (INTU US) declined 3.4% postmarket after holder Dan Kurzius, co-founder of Mailchimp, offered the stake via Goldman Sachs

In Europe, the Stoxx 600 index fell to almost a seven-week low. Cyclical sectors including retail, travel and carmakers were among the biggest decliners, while energy stocks tumbled as crude oil headed for the worst monthly loss this year; every industry sector fell led by travel stocks.

Earlier in the session, the Asia Pacific Index dropped 0.6% while the Hang Seng China Enterprises Index lost 1.5% to finish at its weakest level since May 2016. Asian stocks erased early gains to head for a third day of losses on fresh concerns that existing Covid-19 vaccines will be less effective at tackling the omicron variant. The MSCI Asia Pacific Index extended its fall to nearly 1% after having risen as much as 0.8% earlier on Tuesday. The current crop of vaccines may need to be modified next year, Moderna Chief Executive Officer Stephane Bancel said in an interview with the Financial Times, adding that it may take months before pharmaceutical firms can manufacture new variant-specific jabs at scale. U.S. futures also reversed gains. Property and consumer staples were the worst-performing sectors on the regional benchmark. Key gauges in Hong Kong and South Korea were the biggest losers in Asia, with the Kospi index erasing all of its gains for this year. The Hang Seng China Enterprises Index lost 1.5% to finish at its weakest level since May 2016. The fresh bout of selling offset early optimism spurred by data showing China’s factory sentiment improved in November.

“With the slower vaccination rate and more limited health-care capacity in the region, uncertainty from the new omicron variant may seem to bring about higher economic risks for the region at a time where it is shifting towards further reopening,” said Jun Rong Yeap, a market strategist at IG Asia Pte. Asia’s stock benchmark is now down 3.5% for the month, set for its worst performance since July, as nervousness remains over the U.S. Federal Reserve’s tapering schedule and the potential economic impact of the omicron variant. “Moderna is one of the primary mRNA vaccines out there, so the risk-off sentiment is justified,” said Kelvin Wong, an analyst at CMC Markets (Singapore) Pte. Liquidity is thinner going into the end of the year, so investors are “thinking it’s wise to take some money off the table,” he added

Japanese equities fell, reversing an earlier gain to cap their third-straight daily loss, after a report cast doubt on hopes for a quick answer to the omicron variant of the coronavirus. Telecoms and electronics makers were the biggest drags on the Topix, which dropped 1%, erasing an earlier gain of as much as 1.5%. Fast Retailing and SoftBank Group were the largest contributors to a 1.6% loss in the Nikkei 225. The yen strengthened about 0.4% against the dollar, reversing an earlier loss. Japanese stocks advanced earlier in the day, following U.S. peers higher as a relative sense of calm returned to global markets. Tokyo share gains reversed quickly in late afternoon trading after a Financial Times report that Moderna’s Chief Executive Officer Stephane Bancel said a new vaccine may be needed to fight omicron. “The report of Moderna CEO’s remarks has bolstered an overall movement toward taking off risk,” said SMBC Trust Bank analyst Masahiro Yamaguchi. “Market participants will probably be analyzing information on vaccines and the new virus variant for the next couple of weeks, so shares will likely continue to fluctuate on these headlines.”

In FX, the dollar dropped alongside commodity-linked currencies while the yen and gold climbed and bitcoin surged as safe havens were bid. The yen swung to a gain after Moderna Inc.’s chief executive Stephane Bancel was quoted by the Financial Times saying existing vaccines may not be effective enough to tackle the omicron variant. Commodity-linked currencies including the Aussie, kiwi and Norwegian krone all declined, underperforming the dollar

In rates, treasuries held gains after flight-to-quality rally extended during Asia session and European morning, when bunds and gilts also benefited from haven flows. Stocks fell after Moderna CEO predicted waning vaccine efficacy. Intermediates lead gains, with yields richer by nearly 6bp across 7-year sector; 10-year Treasuries are richer by 5.6bp at 1.443%, vs 2.5bp for German 10-year, 4.7bp for U.K. Long-end may draw support from potential for month-end buying; Bloomberg Treasury index rebalancing was projected to extend duration by 0.11yr as of Nov. 22. Expectations of month-end flows may support the market, and Fed Chair Powell is slated to testify to a Senate panel.      

In commodities, crude futures are off their late-Asia lows but remain in the red. WTI trades close to $68.30, stalling near Friday’s lows; Brent is off over 2.5% near $71.50. Spot gold rises ~$11 near $1,796/oz. Base metals are mixed: LME zinc outperforms, rising as much as 1.6%. 

To the day ahead now, and the main central bank highlight will be Fed Chair Powell’s appearance before the Senate Banking Committee, alongside Treasury Secretary Yellen. In addition, we’ll hear from Fed Vice Chair Clarida, the Fed’s Williams, the ECB’s Villeroy and de Cos, and the BoE’s Mann. On the data side, we’ll get the flash November CPI reading for the Euro Area today, as well as the readings from France and Italy. In addition, there’s data on German unemployment for November, Canadian GDP for Q3, whilst in the US there’s the Conference Board’s consumer confidence measure for November, the FHFA house price index for September, and the MNI Chicago PMI for November.

Market Snapshot

  • S&P 500 futures down 1.2% to 4,595.00
  • STOXX Europe 600 down 1.4% to 460.47
  • MXAP down 0.5% to 190.51
  • MXAPJ down 0.6% to 620.60
  • Nikkei down 1.6% to 27,821.76
  • Topix down 1.0% to 1,928.35
  • Hang Seng Index down 1.6% to 23,475.26
  • Shanghai Composite little changed at 3,563.89
  • Sensex down 0.2% to 57,122.74
  • Australia S&P/ASX 200 up 0.2% to 7,255.97
  • Kospi down 2.4% to 2,839.01
  • German 10Y yield little changed at -0.36%
  • Euro up 0.6% to $1.1362
  • Brent Futures down 3.0% to $71.26/bbl
  • Brent Futures down 3.0% to $71.26/bbl
  • Gold spot up 0.7% to $1,796.41
  • U.S. Dollar Index down 0.65% to 95.72

Top Overnight News from Bloomberg

  • Euro-area inflation surged to a record for the era of the single currency and exceeded all forecasts, adding to the European Central Bank’s challenge before a crucial meeting next month on the future of monetary stimulus.
  • If the drop in government bond yields on Friday signaled how skittish markets were, fresh declines are leaving them looking no less nervous.
  • One of Germany’s most prominent economists is urging the European Central Bank to be more transparent in outlining its exit from unprecedented monetary stimulus and argues that ruling out an end to negative interest rates next year may be a mistake.
  • The Hong Kong dollar fell into the weak half of its trading band for the first time since December 2019 as the emergence of a new coronavirus variant hurt appetite for risk assets.

A more detailed look at global markets courtesy of Newsquawk

Asian equities traded mixed with early momentum seen following the rebound on Wall Street where risk assets recovered from Friday’s heavy selling pressure as liquidity conditions normalized post-Thanksgiving and after some of the Omicron fears abated given the mild nature in cases so far, while participants also digested a slew of data releases including better than expected Chinese Manufacturing PMI. However, markets were later spooked following comments from Moderna's CEO that existing vaccines will be much less effective against the Omicron variant. ASX 200 (+0.2%) was underpinned by early strength across its sectors aside from utilities and with gold miners also hampered by the recent lacklustre mood in the precious metal which failed to reclaim the USD 1800/oz level but remained in proximity for another attempt. In addition, disappointing Building Approvals and inline Net Exports Contribution data had little impact on sentiment ahead of tomorrow’s Q3 GDP release, although the index then faded most its gains after the comments from Moderna's CEO, while Nikkei 225 (-1.6%) was initially lifted by the recent rebound in USD/JPY but then slumped amid the broad risk aversion late in the session. Hang Seng (-1.6%) and Shanghai Comp. (Unch) were varied in which the mainland was kept afloat for most the session after a surprise expansion in Chinese Manufacturing PMI and a mild liquidity injection by the PBoC, with a central bank-backed publication also suggesting that recent open market operations demonstrates an ample liquidity goal, although Hong Kong underperformed on tech and property losses and with casino names pressured again as shares in junket operator Suncity slumped 37% on reopen from a trading halt in its first opportunity to react to the arrest of its Chairman. Finally, 10yr JGBs were initially contained following early momentum in stocks and somewhat inconclusive 2yr JGB auction which showed better results from the prior, albeit at just a marginal improvement, but then was underpinned on a haven bid after fears of the Omicron variant later resurfaced.

Top Asian News

  • China’s Biggest Crypto Exchange Picks Singapore as Asia Base
  • SoftBank-Backed Snapdeal Targets $250 Million IPO in 2022
  • Omicron Reaches Nations From U.K. to Japan in Widening Spread
  • Slump in China Gas Shows Spreading Impact of Property Slowdown

Major European bourses are on the backfoot (Euro Stoxx 50 -1.5%; Stoxx 600 -1.5%) as COVID fears again take the spotlight on month-end. APAC markets were firmer for a large part of the overnight session, but thereafter the risk-off trigger was attributed to comments from Moderna's CEO suggesting that existing vaccines will be much less effective against the Omicron COVID strain. On this, some caveats worth keeping in mind - the commentary on the potential need for a vaccine does come from a vaccine maker, who could benefit from further global inoculation, whilst data on the new variant remains sparse. Meanwhile, WSJ reported Regeneron's and Eli Lilly's COVID antiviral cocktails had lost efficacy vs the Omicron variant - however, the extent to which will need to be subject to further testing. Furthermore, producers appear to be confident that they will be able to adjust their products to accommodate the new variant, albeit the timeline for mass production will not be immediate. Nonetheless, the sullied sentiment has persisted throughout the European morning and has also seeped into US equity futures: the cyclically bias RTY (-1.7%) lags the ES (-1.0%) and YM (-1.3%), whilst the tech-laden NQ (-0.5%) is cushioned by the slump in yields. Back to Europe, broad-based losses are seen across the majors. Sectors tilt defensive but to a lesser extent than seen at the European cash open. Travel & Leisure, Oil & Gas, and Retail all sit at the bottom of the bunch amid the potential implications of the new COVID variant. Tech benefits from the yield play, which subsequently weighs on the Banking sector. The retail sector is also weighed on by Spanish giant Inditex (-4.3%) following a CEO reshuffle. In terms of other movers, Glencore (-0.9%) is softer after Activist investor Bluebell Capital Partners called on the Co. to spin off its coal business and divest non-core assets. In a letter seen by the FT, Glencore was also asked to improve corporate governance. In terms of equity commentary, analysts at JPM suggest investors should take a more nuanced view on reopening as the bank expects post-COVID normalisation to gradually asset itself over the course of 2022. The bank highlights hawkish central bank policy shifts as the main risk to their outlook. Thus, the analysts see European equities outperforming the US, whilst China is seen outpacing EMs. JPM targets S&P 500 at 5,050 (closed at 4,655.27 yesterday) by the end of 2022 with EPS at USD 240 – marking a 14% increase in annual EPS.

Top European News

  • Omicron Reaches Nations From U.K. to Japan in Widening Spread
  • ECB Bosses Lack Full Diplomatic Immunity, EU’s Top Court Says
  • Adler Keeps Investors Waiting for Answers on Fraud Claims
  • European Gas Prices Surge Above 100 Euros With Eyes on Russia

In FX, the Greenback may well have been grounded amidst rebalancing flows on the final trading day of November, as bank models are flagging a net sell signal, albeit relatively weak aside from vs the Yen per Cit’s index, but renewed Omicron concerns stoked by Moderna’s CEO casting considerable doubt about the efficacy of current vaccines against the new SA strain have pushed the Buck back down in any case. Indeed, the index has now retreated further from its 2021 apex set less than a week ago and through 96.000 to 95.662, with only the Loonie and Swedish Krona underperforming within the basket, and the Antipodean Dollars plus Norwegian Crown in wider G10 circles. Looking at individual pairings, Usd/Jpy has reversed from the high 113.00 area and breached a Fib just below the round number on the way down to circa 112.68 for a marginal new m-t-d low, while Eur/Usd is back above 1.1350 having scaled a Fib at 1.1290 and both have left decent option expiries some distance behind in the process (1.6 bn at 113.80 and 1.3 bn between 1.1250-55 respectively). Elsewhere, Usd/Chf is eyeing 0.9175 irrespective of a slightly weaker than forecast Swiss KoF indicator and Cable has bounced firmly from the low 1.3300 zone towards 1.3375 awaiting commentary from BoE’s Mann.

  • NZD/AUD/CAD - As noted above, the tables have turned for the Kiwi, Aussie and Loonie along with risk sentiment in general, and Nzd/Usd is now pivoting 0.6800 with little help from a deterioration in NBNZ business confidence or a decline in the activity outlook. Similarly, Aud/Usd has been undermined by much weaker than forecast building approvals and a smaller than anticipated current account surplus, but mostly keeping hold of the 0.7100 handle ahead of Q3 GDP and Usd/Cad has shot up from around 1.2730 to top 1.2800 at one stage in advance of Canadian growth data for the prior quarter and month of September as oil recoils (WTI to an even deeper trough only cents off Usd 67/brl). Back down under, 1 bn option expiry interest at 1.0470 in Aud/Nzd could well come into play given that the cross is currently hovering near the base of a 1.0483-39 range.
  • SCANDI/EM - The aforementioned downturn in risk appetite after Monday’s brief revival has hit the Sek and Nok hard, but the latter is also bearing the brunt of Brent’s latest collapse to the brink of Usd 70/brl at worst, while also taking on board that the Norges Bank plans to refrain from foreign currency selling through December having stopped midway through this month. The Rub is also feeling the adverse effect of weaker crude prices and ongoing geopolitical angst to the extent that hawkish CBR rhetoric alluding to aggressive tightening next month is hardly keeping it propped, but the Cnh and Cny continue to defy the odds or gravity in wake of a surprise pop back above 50.0 in China’s official manufacturing PMI. Conversely, the Zar is struggling to contain losses sub-16.0000 vs the Usd on SA virus-related factors even though Gold is approaching Usd 1800/oz again, while the Try is striving to stay within sight of 13.0000 following a slender miss in Turkish Q3 y/y GDP.

In commodities, WTI and Brent front month futures are once again under pressure amid the aforementioned COVID jitters threatening the demand side of the equation, albeit the market remains in a state of uncertainty given how little is known about the new variant ahead of the OPEC+ confab. It is still unclear at this point in time which route OPEC+ members will opt for, but seemingly the feasible options on the table are 1) a pause in output hikes, 2) a smaller output hike, 3) maintaining current output hikes. Energy journalists have suggested the group will likely be influenced by oil price action, but nonetheless, the findings of the JTC and JMMC will be closely watched for the group's updated forecasts against the backdrop of COVID and the recently coordinated SPR releases from net oil consumers – a move which the US pledged to repeat if needed. Elsewhere, Iranian nuclear talks were reportedly somewhat constructive – according to the Russian delegate – with working groups set to meet today and tomorrow regarding the sanctions on Iran. This sentiment, however, was not reciprocated by Western sources (cited by WSJ), which suggested there was no clarity yet on whether the teams were ready for serious negotiations and serious concessions. WTI Jan resides around session lows near USD 67.50/bbl (vs high USD 71.22/bbl), while Brent Feb dipped under USD 71/bbl (vs high USD 84.56/bb). Over to metals, spot gold remains underpinned in European trade by the cluster of DMA's under USD 1,800/oz – including the 100 (USD 1,792/oz), 200 (USD 1,791/oz) and 50 (1,790/oz). Turning to base metals, LME copper is modestly softer around the USD 9,500/t mark, whilst Dalian iron ore futures meanwhile rose over 6% overnight, with traders citing increasing Chinese demand.

US Event Calendar

  • 9am: 3Q House Price Purchase Index QoQ, prior 4.9%
    • 9am: Sept. FHFA House Price Index MoM, est. 1.2%, prior 1.0%
  • 9am: Sept. Case Shiller Composite-20 YoY, est. 19.30%, prior 19.66%; S&P/CS 20 City MoM SA, est. 1.20%, prior 1.17%
  • 9:45am: Nov. MNI Chicago PMI, est. 67.0, prior 68.4
  • 10am: Nov. Conf. Board Consumer Confidenc, est. 111.0, prior 113.8
    • 10am: Nov. Conf. Board Present Situation, prior 147.4
    • 10am: Nov. Conf. Board Expectations, prior 91.3

Central Banks

  • 10am: Powell, Yellen Testify Before Senate Panel on CARES Act Relief
  • 10:30am: Fed’s Williams gives remarks at NY Fed food- insecurity event
  • 1pm: Fed’s Clarida Discusses Fed Independence

DB's Jim Reid concludes the overnight wrap

Just as we go to print markets are reacting negatively to an interview with the Moderna CEO in the FT that has just landed where he said that with regards to Omicron, “There is no world, I think, where (the effectiveness) is the same level... we had with Delta…… I think it’s going to be a material drop (efficacy). I just don’t know how much because we need to wait for the data. But all the scientists I’ve talked to . . . are like ‘this is not going to be good’.”” This is not really new news relative to the last 3-4 days given what we know about the new mutation but the market is picking up on the explicit comments. In response S&P futures have gone from slightly up to down just over -0.5% and Treasury yields immediately dipped -4bps to 1.46%. The Nikkei has erased gains and is down around -1% and the Hang Seng is c.-1.8%. This is breaking news so check your screens after you read this.

In China the official November PMI data came in stronger than expected with the Manufacturing PMI at 50.1 (49.7 consensus vs 49.2 previous) and the non-manufacturing PMI at 52.3 (51.5 consensus vs 52.4 previous).

The negative headlines above as we go to print followed a market recovery yesterday as investors hoped that the Omicron variant wouldn’t prove as bad as initially feared. In reality, the evidence is still incredibly limited on this question, and nothing from the Moderna CEO overnight changes that. However the more positive sentiment was also evident from the results of our flash poll in yesterday’s EMR where we had 1569 responses so very many thanks. The poll showed that just 10% thought it would still be the biggest topic in financial markets by the end of the year, with 30% instead thinking it’ll largely be forgotten about. The other 60% thought it would still be an issue but only of moderate importance. So if that’s correct and our respondents are a fair reflection of broader market sentiment, then it points to some big downside risks ahead if we get notable bad news on the variant. For the record I would have been with the majority with tendencies towards the largely forgotten about answer. So I will be as off-side as much as most of you on the variant downside risk scenario. When I did a similar poll on Evergrande 2 and a half months ago, only 8% thought it would be significantly impacting markets a month later with 78% in aggregate thinking limited mention/impact, and 15% thinking it would have no impact. So broadly similar responses and back then the 15% were most correct although the next 78% weren’t far off.

In terms of the latest developments yesterday, we’re still waiting to find out some of the key pieces of information about this new strain, including how effective vaccines still are, and about the extent of any increased risk of transmission, hospitalisation and death. Nevertheless, countries around the world are continuing to ramp up their own responses as they await this information. President Biden laid out the US strategy for tackling Omicron in a public address yesterday, underscoring the variant was a cause for concern rather than panic. He noted travel bans from certain jurisdictions would remain in place to buy authorities time to evaluate the variant, but did not anticipate that further travel bans or domestic lockdowns would be implemented, instead urging citizens to get vaccinated or a booster shot.

Over in Europe, Bloomberg reported that EU leaders were discussing whether to have a virtual summit on Friday about the issue, and Poland moved to toughen up their own domestic restrictions, with a 50% capacity limit on restaurants, hotels, gyms and cinemas. In Germany, Chancellor Merkel and Vice Chancellor Scholz will be meeting with state premiers today, whilst the UK government’s vaccination committee recommended that every adult be eligible for a booster shot, rather than just the over-40s at present. Boosters have done a tremendous job in dramatically reducing cases in the elder cohort in the UK in recent weeks so one by product of Omicron is that it may accelerate protection in a wider age group everywhere. Assuming vaccines have some impact on Omicron this could be a positive development, especially if symptoms are less bad.

Markets recovered somewhat yesterday, with the S&P 500 gaining +1.32% to recover a large portion of Friday’s loss. The index was driven by mega-cap tech names, with the Nasdaq up +1.88% and small cap stocks underperforming, with the Russell 2000 down -0.18%, so the market wasn’t completely pricing out omicron risks by any means. Nevertheless, Covid-specific names performed how you would expect given the improved sentiment; stay-at-home trades that outperformed Friday fell, including Zoom (-0.56%), Peloton (-4.35%), and HelloFresh (-0.8%), while Moderna (+11.80%) was the biggest winner following the weekend news that a reformulated vaccine could be available in early 2022. Elsewhere, Twitter (-2.74%) initially gained after it was announced CEO and co-founder Jack Dorsey would be stepping down, but trended lower throughout the rest of the day. The broader moves put the index back in positive territory for the month as we hit November’s last trading day today. Europe saw its own bounceback too, with the STOXX 600 up +0.69%.

Over in rates, the partial unwind of Friday’s moves was even smaller, with yields on 10yr Treasuries moving up +2.6bps to 1.50%, driven predominantly by real rates, as inflation breakevens were a touch narrower across the curve. One part of the curve that didn’t retrace Friday’s move was the short end, where markets continued to push Fed rate hikes back ever so slightly, with the first full hike now being priced for September (though contracts as early as May still price some meaningful probability of Fed hikes). We may see some further movements today as well, with Fed Chair Powell set to appear before the Senate Banking Committee at 15:00 London time, where he may well be asked about whether the Fed plans to accelerate the tapering of their asset purchases although it’s hard to believe he’ll go too far with any guidance with the Omicron uncertainty. The Chair’s brief planned testimony was published on the Fed’s website last night. It struck a slightly more hawkish tone on inflation, noting that the Fed’s forecast was for elevated inflation to persist well into next year and recognition that high inflation imposes burdens on those least able to handle them. On omicron, the testimony predictably stated it posed risks that could slow the economy’s progress, but tellingly on the inflation front, it could intensify supply chain disruptions. The real fireworks will almost certainly come in the question and answer portion of the testimony.

The bond moves were more muted in Europe though, with yields on 10yr bunds (+2.0bps), OATs (+1.0bps) and BTPs (+0.4bps) only seeing a modest increase.

Crude oil prices also didn’t bounce back with as much rigor as equities. Brent gained +0.99% while WTI futures increased +2.64%. They are back down -1 to -1.5% this morning.

Elsewhere in DC, Senator Joe Manchin noted that Democrats could raise the debt ceiling on their own through the reconciliation process, but indicated a preference for the increase not to be included in the build back better bill, for which his support still seems lukewarm. We’re approaching crucial deadlines on the debt ceiling and financing the federal government, so these headlines should become more commonplace over the coming days.

There were some further developments on the inflation front yesterday as Germany reported that inflation had risen to +6.0% in November (vs. +5.5% expected) on the EU-harmonised measure, and up from +4.6% in October. The German national measure also rose to +5.2% (vs. +5.0% expected), which was the highest since 1992. Speaking of Germany, Bloomberg reported that the shortlist for the Bundesbank presidency had been narrowed down to 4 candidates, which included Isabel Schnabel of the ECB’s Executive Board, and Joachim Nagel, who’s currently the Deputy Head of the Banking Department at the Bank for International Settlements. Today we’ll likely get some further headlines on inflation as the flash estimate for the entire Euro Area comes out, as well as the numbers for France and Italy.

There wasn’t much in the way of other data yesterday, though UK mortgage approvals fell to 67.2k in October (vs. 70.0k expected), which is their lowest level since June 2020. Separately, US pending home sales were up +7.5% in October (vs. +1.0% expected), whilst the Dallas Fed’s manufacturing activity index for November unexpectedly fell to 11.8 (vs. 15.0 expected). Finally, the European Commission’s economic sentiment indicator for the Euro Area dipped to 117.5 in November as expected, its weakest level in 6 months.

To the day ahead now, and the main central bank highlight will be Fed Chair Powell’s appearance before the Senate Banking Committee, alongside Treasury Secretary Yellen. In addition, we’ll hear from Fed Vice Chair Clarida, the Fed’s Williams, the ECB’s Villeroy and de Cos, and the BoE’s Mann. On the data side, we’ll get the flash November CPI reading for the Euro Area today, as well as the readings from France and Italy. In addition, there’s data on German unemployment for November, Canadian GDP for Q3, whilst in the US there’s the Conference Board’s consumer confidence measure for November, the FHFA house price index for September, and the MNI Chicago PMI for November.

Tyler Durden Tue, 11/30/2021 - 07:50

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Recession On Deck? BofA Slashes GDP Forecast, Sees “Significant Risk Of Negative Growth Quarter”

Recession On Deck? BofA Slashes GDP Forecast, Sees "Significant Risk Of Negative Growth Quarter"

With a panicking Biden likely to continue freaking out over soaring inflation, and calling Powell every day ordering the Fed chair to do somethin

Published

on

Recession On Deck? BofA Slashes GDP Forecast, Sees "Significant Risk Of Negative Growth Quarter"

With a panicking Biden likely to continue freaking out over soaring inflation, and calling Powell every day ordering the Fed chair to do something about those approval rate-crushing surging prices...

... which in turn has cornered Powell to keep jawboning markets lower, with threats of even more rate hikes and even more price drops until inflation somehow cracks (how that happens when it is the supply-driven inflation that remains sticky, and which the Fed has no control over, nobody knows yet) we recently joked that the market crash will continue until Biden's approval rating raises.

Sarcasm aside, we are dead serious that at this point only the risk - or reality - of a recession can offset the fear of even higher prices. After all, no matter how many death threats Powell gets from the White House, he will not hike into a recession just because Biden's approval rating has hit rock bottom. It's also why we said, far less joingkly, that "every market bull is praying for a recession: Biden can't crash markets fast enough"

Which brings us to the current Wall Street landscape where some banks, most notably the likes of Goldman, continue to predict even more rate hikes while ignoring the risk of a slowdown, it's entire bullish economic outlook for 2022 predicated on households spending "excess savings" which they have spent a long time ago (expect a huge downgrade to GDP in 2022 from Goldman in the next few weeks as the bank realizes this), while on the other hand we have banks like JPMorgan, which recently pivoted to the new narrative, and as we reported last weekend, now sees a sharp slowdown in the US economy following a series of disappointing data recently...

... and as a result, JPM now "forecast growth decelerated from a 7.0% q/q saar in 4Q21 to a trend like 1.5% in 1Q22."

And while not yet a recession, today Bank of America stunned market when it chief economist joined JPM in slashing his GDP for 2022, and especially for Q1 where his forecast has collapsed from 4.0% previously to just 1.0%, a number which we are confident will drop to zero and soon negative if the slide in stocks accelerates due to the impact financial conditions and the (lack of) wealth effect have on the broader economy.

Harris lists 3 clear reasons for his gloomy revision, which are all in line with what we have been warning for quite some time now, to wit:

1. Omicron: The Omicron wave has exacerbated labor-supply constraints and slowed services consumption. All else equal, we estimate that services spending could slice 0.6pp off January real consumer spending, although a pickup in stay-at-home durable goods demand could offset some of the shock. This is consistent with the aggregated BAC card data: Anna Zhou has flagged a significant slowdown in spending on leisure services, and a pickup in durables spending. Meanwhile Jeseo Park finds that our BofA US Consumer Confidence Indicator has slipped further from already weak levels. All of this points to a slowdown in economic activity in January. With cases already down around 25% from their mid-January peak, however, we expect the Omicron shock to be short-lived. The data should improve meaningfully starting in February. This creates downside to 1Q GDP growth and upside to 2Q, given favorable base effects.

2. Inventories. Earlier this week we learned that inventories surged in December and contributed 4.9pp to 4Q GDP growth. Inventories remain depressed relative to pre-pandemic levels because of continued supply bottlenecks. And with demand surging, there is room for even more of an increase. However, it is important to remember that GDP depends on the change in inventories (not the level), and GDP growth depends on the change in the change in inventories. Therefore the $173.5bn increase in inventories in 4Q limits the scope for inventories to drive growth again in 1Q. So inventories create more downside for 1Q growth.

3. Less fiscal easing.  We now expect a fiscal package about half the size of the Build Back Better Act, with less front-loaded fiscal stimulus. We think it will boost 2022 growth by just 15-20bp, compared to our earlier estimate of 50bp. Our base case is that outlays will start in April: the delay in passage means that the growth impact relative to our earlier forecast will again be largest in 1Q. Given the deadlock between moderate and progressive Democrats, the risk is that nothing gets passed. We think that the retirement of Justice Breyer increases this risk because appointing his replacement will be a policy priority for Democrats, eating into the limited time they have before the midterm elections. If there is no further fiscal stimulus, we would expect modest downside to 2Q-4Q growth.

Putting together the Omicron shock, the expected path of inventories and our base case fiscal outlook, BofA has cut its 1Q growth forecast to 1.0% from 4.0% and ominously adds that "risks of a negative growth quarter are significant, in our view." To offset the risk of a full-blown technical recession (where we get 2 quarters of negative GDP prints) however, BofA has increased 2Q slightly to 5.0% from 4.0%: this would amount to only partial payback for various 1Q shocks. Growth remains unchanged for 2H 2022, but it would now be coming off a lower base. As a result, BofA's annual growth forecast for 2022 drops to 3.6% from 4.0%. But what about 2023?

The wildcard of course, is the fourth reason for a potential slowdown, namely monetary tightening. As a reminder, with Dems guaranteed to lose control of Congress, any further fiscal stimulus becomes a non-factor until at least the Nov 2024 presidential elections, meaning the fate of the US economy is now entirely in the hands of the Fed, especially if Biden's BBB fails to pass, even in truncated form.

Here the core tension emerges: while the US economy is slowing, BofA still sees inflation remaining quite sticky for a long, long time.

As such, and following the continued hawkish pivot at the January FOMC meeting, BofA now expects the Fed to start tightening at the March 2022 meeting, raising rates by 25bp at every remaining meeting this year for a total of seven hikes, and in every quarter of 2023 for a total of four hikes. This means that BofA's target for a terminal rate of 2.75-3.00% will be reached in December 2023. Harris explains the logic behind this upward revision to the bank's tightening forecast:

... the Fed is behind the curve and will be playing catch-up this year and next. We think the economy will have to pay some price for 175bp of rate hikes in 2022, 100bp in 2023, and quantitative tightening. Given the lags with which monetary policy affects the real economy, we think growth will slow to around trend in 1Q 2023, before falling below trend in 2Q-4Q. This compares to our previous forecast of slightly
above-trend growth throughout 2023.

As the chief economist also notes, at of this moment, the markets are now pricing in 30bp of hikes at the March meeting, 118bp for the year and a terminal rate of around 1.75%. In his view, "that is not enough. Markets underpriced Fed hikes at the start of the last two hiking cycles and we think that will be the case again (Exhibit 2). We now expect the Fed to hike rates by 25bp at all seven remaining meetings this year, and also announce QT (i.e., balance sheet shrinkage) in May. When you are behind in a race you don’t take water breaks."

But how does the Fed hike up a storm at a time when BofA admits the risks are growing for a negative GDP quarter in Q1? Well, as Harris admits, "the new call raises a number of questions."

  • Will the Fed hike by 50bp in March? We think this is unlikely. If the Fed wanted to get going quickly they would have hiked this week and ended QE. Moreover, we see the Fed continuing to gradually concede ground rather than suddenly lurching in a hawkish direction. Hence we think it is more likely that the Fed will quickly shift to 25bp hikes at every meeting.
  • Could the markets force them to do more? On the margin more aggressive pricing in the markets could nudge the Fed along. For example, if the markets start to price in a high likelihood of a 50bp move in March, the Fed could see that as a “free option” to start faster. However, the Fed is still in charge of the narrative. The sell-off in the bond market in recent weeks has been driven by more hawkish commentary out of the Fed. Powell is quite adept at dodging questions at his press conferences, but this week he left no ambiguity about the hawkish shift at the Fed, driving the repricing.
  • How will the economy and markets handle hikes? Clearly risk assets are vulnerable. One way to view the recent stock market correction is that with the Fed no longer in deep denial, markets have caught on to the idea that inflation is a problem and the Fed is going to do something about it. As the Fed pivot continues—and the bond market prices in more hikes—we could see more volatility. However, the stock market is not the economy. The fundamental backdrop for growth remains solid regardless of whether stocks are flat or down 20%. Even the hikes we are forecasting only bring the real funds rate slightly above zero at the end of next year

Then there is the question whether we worry about an inverted yield curve (spoiler alert: yes)?

As BofA notes, historically the yield curve slope — for example, the spread between the funds rate and 10-year Treasuries — has been the best standalone financial indicator of recession risk. However, as now everyone seems to admit (this used to be another "conspiracy theory" not that long ago), "the yield curve is heavily distorted by huge central bank balance sheets and US bond yields are being held down by remarkably low yields overseas, "according to Harris. As such, in an attempt to spin the collapse in the yield curve, the chief economist notes that if Fed hikes lead to smaller-than-normal pressure on long-end yields that is good news for the economy, not bad news (actually this is wrong, but we give it 2-3 months before consensus grasps this).

And while Harris caveats that the Fed could hike even more, going so far as throwing a 50bps rate increase in March "if the drop in the unemployment rate remains fast or if inflation cools much less than expected", we think risks are tilted much more in the opposite direction, namely Harris' downside scenario, where he writes that "our old forecast could prove correct if we have misjudged the fragility of the economy or if there is a serious shock to confidence from events abroad." Actually not just abroad, but internally, and if stocks continue to sink, the direct linkage between financial conditions and the broader economy will express themselves quickly and very painfully.

Bottom line: yes, inflation is a big problem for Biden, but a far bigger problem for the president and the Democrats ahead of the midterms is the US enters a recession with a market crash to boot. While this particular scenario remains relatively remote on Wall Street's radar, we are confident that as Q1 progresses and as data points continue to deteriorate and disappoint, there will finally be a shift in both institutional and Fed thinking, that protecting the economy from an all out recession (if not worse) will be even more important than containing inflation, which as we noted previously is driven by supply-bottlenecks, not demand, which the Fed doesn't control anyway.

Meanwhile, as David Rosenberg points out today, stocks are already in a bear market...

... and absent some assurances from the Fed, we could be looking at another Lehman-style crash in the coming months, especially if BofA's forecast of seven hikes in 2022 is confirmed.

In short, for all the posturing and rhetoric, we always go back to square one - when all it said and done, "it's not different this time", especially once inflation either fades away or its "adjusted" lower, and it will be up to Fed to keep the wealth effect buoyant, the dynamic observed without fail since 2009, and best summarized in the following tweet:

The full BofA report is available to professional subs.

Tyler Durden Fri, 01/28/2022 - 11:10

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Neurotic Futures Tumble Despite Record Apple Quarter

Neurotic Futures Tumble Despite Record Apple Quarter

If you thought that yesterday’s blowout, record earnings from Apple would be enough to put in at least a brief bottom to stocks and stop the ongoing collapse in risk assets, we have some…

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Neurotic Futures Tumble Despite Record Apple Quarter

If you thought that yesterday's blowout, record earnings from Apple would be enough to put in at least a brief bottom to stocks and stop the ongoing collapse in risk assets, we have some bad news for you: after staging a feeble bounce overnight, S&P futures erased earlier gains as traders ignored the solid results from Apple and instead focused on the risk of higher interest rates hurting economic growth.  Contracts in S&P 500 dropped as negative sentiment continued to prevail, while Nasdaq 100 futures erased earlier gains after strong Apple earnings. As of 730am, Emini futures were down 48 points or 1.12% to 4,269, Dow futures were down 335 points or 0.99% and Nasdaq futs were down 77 or 0.6%. The dollar was set for a fifth straight day of gains, the longest streak since November, 19Y TSY yields were up 3bps to 1.83%, gold and bitcoin both dropped.

Markets have been whiplashed by volatility this week as the Federal Reserve signaled aggressive tightening, adding to investor concerns about geopolitical tensions and an uneven earnings season. Also sapping sentiment on Friday were weak data on the German economy and euro-area confidence. Meanwhile, geopolitical tensions were still on the agenda with a potential conflict in Ukraine not yet defused.

“Market expectations for four to five rate hikes this year will not derail growth or the equity rally,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “We expect an eventual relaxation of tensions between Russia and Ukraine,” he added. Expected data on Friday include personal income and spending data, as well as University of Michigan Sentiment, while Caterpillar, Chevron, Colgate-Palmolive, VF Corp and Weyerhaeuser are among companies reporting earnings.

Money markets are now pricing in nearly five Fed hikes this year after a hawkish stance from Chair Jerome Powell. That’s up from three expected as recently as December.

“Tighter liquidity and weaker growth mean higher volatility,” Barclays Plc strategists led by Emmanuel Cau wrote in a note. The “current growth scare looks like a classic mid-cycle phase to us, while a lot of hawkishness is priced in.”

In premarket trading, Apple shares rose 4.5% as analysts rose their targets to some of the most bullish on the Street, after the iPhone maker reported EPS and revenue for the fiscal first quarter that beat the average analyst estimates. Watch Apple’s U.S. suppliers after the iPhone maker posted record quarterly sales that beat analyst estimates, a sign it was able to work through the supply-chain crunch. Peers in Asia rose, while European suppliers are active in early trading. Tesla shares also rise as much as 2% in premarket, set to rebound from yesterday’s 12% slump following a disappointing set of earnings and outlook. Other notable premarket movers:

  • Visa (V US) shares gain 5% premarket after company reported adjusted earnings per share for the first quarter that beat the average analyst estimate.
  • Cryptocurrency-exposed stocks gain as Bitcoin and other digital tokens rise. Riot Blockchain (RIOT US) +3.7%, Marathon Digital (MARA US) +3.3%, Bit Digital (BTBT US) +1.6%, Coinbase (COIN US) +0.5%.
  • Robinhood (HOOD US) shares tumbled 14% in premarket after the online brokerage’s fourth-quarter revenue and first-quarter outlook missed estimates. Some analysts cut their price targets.
  • Atlassian (TEAM US) shares jump 10% in extended trading on Thursday, after the software company reported second-quarter results that beat expectations and gave a third-quarter revenue forecast that was ahead of the analyst consensus.
  • U.S. Steel (X US) shares fall as much as 2.4% aftermarket following the steelmaker’s earnings release, which showed adjusted earnings per share results missed the average analyst estimate.

The U.S. stock market is priced “quite aggressively” versus other developed nations as well as emerging markets, and valuations in the latter can be a tailwind rather than a headwind as in the U.S., Feifei Li, partner and CIO of equity strategies at Research Affiliates, said on Bloomberg Television.

European equity indexes are again under pressure, rounding off a miserable week, and set for the worst monthly decline since October 2020 as corporate earnings failed to lift the mood except in the retail sector. The Euro Stoxx 50 dropped over 1.5%, DAX underperforming at the margin. Autos, tech and banks are the weakest Stoxx 600 sectors; only retailers are in the green. Hennes & Mauritz shares climbed on a profit beat, while technology stocks continued to underperform. Here are some of the biggest European movers today:

  • LVMH shares rise as much as 5.8% after analysts praised the French conglomerate’s full-year results, with several noting improved performance at even minor brands such as Celine.
  • Signify gains as much as 15% after saying it expects to grow in 2022 even as the supply chain problems that caused its “worst ever” quarter continue.
  • H&M climbs as much as 7.4% after posting a strong margin in 4Q which impressed analysts. Analysts also lauded the Swedish retailer’s buyback announcement and target to double sales by 2030.
  • Stora Enso rises as much as 6.2% on 4Q earnings with the CEO noting paper capacity closures have helped boost its pricing power, contributing to a turnaround in the unprofitable business.
  • SCA gains as much as 5.5% in Stockholm, the most since May 2020, after reporting better-than-expected Ebitda earnings and announcing a SEK3.25/share dividend -- higher than analysts had estimated.
  • AutoStore rises as much as 18% after a German court halts Ocado’s case against the company. Ocado drops as much as 8.1%.
  • Henkel slides as much as 10% after the company’s forecast for organic revenue growth of 2% to 4% in 2022 was seen as cautious.
  • Wartsila falls as much as 9% after posting 4Q earnings that analysts say showed strong order intake overshadowed by lagging margins.
  • Alstom drops as much as 7.3% after Exane BNP Paribas downgrades to neutral, citing risk that the company might resort to raising equity financing to forestall a possible credit-rating cut.

Earlier in the session, Asian stocks rose after slumping to their lowest since November 2020, with Japan and Australia leading the rebound as turbulence over the highly anticipated U.S. monetary tightening eased.  The MSCI Asia Pacific Index climbed as much as 1% on Friday following a 2.7% slide the day before. Industrials and consumer-discretionary names provided the biggest boosts to the measure. Japan’s Nikkei 225 Stock Average was among the best performers in the region after enduring its worst daily drop in seven months.  “It’s undeniable that stock markets last year -- as well as the real economy -- were supported by continued monetary easing, considering which, more share-price correction could be anticipated,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management in Tokyo. Even so, “stocks fell too much yesterday.” The Asian benchmark is down almost 5% this week, and set to cap its biggest such drop since February last year. Federal Reserve Chair Jerome Powell said the central bank was ready to raise interest rates in March and didn’t rule out moving at every meeting to tackle inflation, triggering a broad selloff in global equities Thursday.  Japan’s Topix and Australia’s S&P/ASX 200 gained after slipping into technical correction earlier this week. South Korea’s Kospi also added almost 2% after sliding into a bear market Thursday. Meanwhile, Chinese shares extended a rout of nearly $1.2 trillion this month.

Japanese equities rose, trimming their worst weekly loss in two months, as some observers saw the selloff on concerns over higher U.S. interest rates as having gone too far. Electronics and auto makers were the biggest boosts to the Topix, which rose 1.9%, paring its weekly decline to 2.6%. Fast Retailing and Shin-Etsu Chemical were the largest contributors to a 2.1% rise in the Nikkei 225. The yen was little changed after weakening 1.3% against the dollar over the previous two sessions. “Looking at the technical indicators like RSI, you can see that Japanese equities have been oversold,” said Nobuhiko Kuramochi, a market strategist at Mizuho Securities. “Shares have fallen too much considering the not-bad corporate earnings and also when compared with U.S. equities.” U.S. futures rallied in Asian trading hours, after a volatile cash session that ended in losses as investors continued to reprice assets on the Fed’s pivot to tighter policy. Apple provided a post-market lift with record quarterly sales that sailed past Wall Street estimates.

In Australia, the S&P/ASX 200 index rose 2.2% to 6,988.10 at the close in Sydney, bouncing back after slipping into a technical correction on Thursday. The benchmark gained for its first session in five as miners and banks rallied, trimming its weekly slide to 2.6%. Champion Iron was a top performer after its 3Q results. Newcrest was one of the worst performers after its 2Q production report, and as gold extended declines. In New Zealand, the S&P/NZX 50 index fell 1.6% to 11,852.15.

India’s benchmark index edged lower on Friday to extend its decline to a second consecutive week as investors grapple with volatility created by the U.S. Federal Reserve’s rate-hike plan. The S&P BSE Sensex fell 0.1% to 57,200.23 in Mumbai on Friday, erasing gains of as much as 1.4% earlier in the session. The NSE Nifty 50 Index ended flat. For the week, the key gauges ended with declines of 3.1% and 2.9%, respectively.  All but five of the 19 sector sub-indexes compiled by BSE Ltd. climbed on Friday, led by a measure of health-care companies. BSE’s mid- and small-sized companies’ indexes outperformed the benchmark by rising 1% and 1.1%. “Selling pressure has now cooled off, markets will now focus on local triggers such as expectations from the budget,” said Prashant Tapse, an analyst with Mumbai-based Mehta Equities.  Investors will also monitor corporate-earnings reports for the December quarter to gauge demand and inflation outlook. Of the 21 Nifty 50 companies that have announced results so far, 12 either met or exceeded expectations, eight missed, while one can’t be compared.  Kotak Mahindra Bank continued the strong earnings run by lenders, reporting fiscal third-quarter profit ahead of the consensus view, while Dr. Reddy’s Laboratories missed the consensus estimate.  ICICI Bank contributed the most to the Sensex’s decline, falling 1.6%. Out of 30 shares in the Sensex index, 14 rose and 16 fell.

In rates, bonds trade poorly again with gilts and USTs bear steepening, cheapening 3-3.5bps across the back end. Treasuries are weaker, same as most European bond markets, with stock markets under pressure globally and S&P 500 futures lower but inside weekly range. Treasury yields are cheaper by 4bp-5bp from intermediate to long-end sectors, 10-year around 1.84%, inside weekly range; though front-end outperforms, 2-year yield reaches YTD high 1.22%, steepening 2s10s by ~1bp. Gilts underperformed as traders price in a more aggressive path of rate hikes from the BOE. Treasury curve is steeper for first day in four, lifting spreads from multimonth lows. Globally in 10-year sector, gilts lag Treasuries by 0.5bp while bunds outperform slightly. Bunds bear flatten with 5s30s near 52bps after two block trades but subsequently recover above 54bps. IG dollar issuance slate empty so far; Procter & Gamble priced a $1.85b two-tranche offering Thursday, the first since Wednesday’s Fed meeting.

In FX, Bloomberg Dollar Spot pushes to best levels for the week. Scandies and commodity currencies suffer the most. The Bloomberg Dollar Spot Index was set for a fifth straight day of gains, the longest streak since November, and near its strongest level in 17 months as the greenback was steady or higher against all of its Group-of-10 peers. The euro steadied near a European session low of $1.1121 while risk-sensitive Australian and Scandinavian currencies led the decline. Sweden’s krona sank, despite data showing the Nordic nation’s economy grew more than expected in the final quarter of 2021, fueling speculation that the central bank could soon start to take its foot off the stimulus pedal. Australia’s dollar dropped to the lowest level in 18 months as the Reserve Bank of Australia lags behind many of its peers in signaling monetary tightening. Treasuries sold off, led by the belly; Bunds also traded lower, yet outperformed Treasuries, and Germany’s 5s30s curve flattened to 52bps after two futures blocks traded. Italian government bonds underperformed with the nation’s parliament voting twice on Friday to elect a new president, as the lack of progress after four days of inconclusive ballots adds to pressure to end a process that’s left the country in limbo.

In commodities, Crude futures hold a narrow range, just shy of Asia’s best levels. WTI trades either side of $87, Brent just shy of a $90-handle. Spot gold drops near Thursday’s lows, close to $1,791/oz. Base metals are under pressure; LME copper underperforms peers, dropping over 1.5%.

Crypto markets were rangebound in which Bitcoin traded both sides of the 37,000 level. Russia's government drafted a roadmap for cryptocurrency regulation, according to RBC.

To the day ahead now, and data releases include Germany’s Q4 GDP, US personal income and personal spending for December, as well as the Q4 employment cost index and the University of Michigan’s final consumer sentiment index for January. Earnings releases include Chevron and Caterpillar.

Market Snapshot

  • S&P 500 futures up 0.1% to 4,323.75
  • STOXX Europe 600 down 1.0% to 465.51
  • MXAP up 0.5% to 182.48
  • MXAPJ little changed at 597.31
  • Nikkei up 2.1% to 26,717.34
  • Topix up 1.9% to 1,876.89
  • Hang Seng Index down 1.1% to 23,550.08
  • Shanghai Composite down 1.0% to 3,361.44
  • Sensex down 0.1% to 57,197.94
  • Australia S&P/ASX 200 up 2.2% to 6,988.14
  • Kospi up 1.9% to 2,663.34
  • Brent Futures up 0.4% to $89.71/bbl
  • Gold spot down 0.3% to $1,792.52
  • U.S. Dollar Index up 0.13% to 97.38
  • German 10Y yield little changed at -0.05%
  • Euro down 0.1% to $1.1132

Top Overnight News from Bloomberg

  • The euro-area economy kicked off 2022 on a weak footing, with pandemic restrictions taking a toll on confidence and growing fears that Germany may be on the brink of a recession for the second time since the crisis began. A sentiment gauge by the European Commission fell to 112.7 in January, the lowest in nine months, driven by declines in most sectors and among consumers. Employment expectations dropped for a second month
  • Germany’s economy shrank 0.7% in the fourth quarter with consumers spooked by another wave of Covid-19 infections and factories reeling from supply-chain problems.
  • Russian Foreign Minister Sergei Lavrov said on Friday that the American proposal to defuse tensions with Ukraine contained “rational elements,” even though some key points were ignored
  • A U.K. government probe into alleged rule-breaking parties in Boris Johnson’s office during the pandemic could be stripped of key details at the request of police, potentially handing the prime minister a boost as he tries to persuade his Conservatives not to mount a leadership challenge
  • Governor Haruhiko Kuroda said the Bank of Japan won’t be switching its bond yield target until inflation rises high enough to warrant exit talks
  • Seven straight jumps in the so- called “fear gauge” for the S&P 500 is a signal that it may be time to wager against volatility, if history is any guide. Only 10 times in the past two decades has the Cboe Volatility Index - - better known as the VIX -- risen for that many trading sessions in a row

A more detailed look at global markets courtesy of Newsquawk

Asian stocks eventually traded mixed although China lagged ahead of holiday closures next week. ASX 200 (+2.2%) was lifted back up from correction territory. Nikkei 225 (+2.1%) gained on a weaker currency and with corporate results driving the biggest movers. KOSPI (+1.9%) was boosted by earnings including from the world's second-largest memory chipmaker SK Hynix. Hang Seng (-1.1%%) and Shanghai Comp. (-0.9%) lagged with a non-committal tone in the mainland ahead of the Lunar New Year holiday closures and with Hong Kong pressured by losses in blue chip tech and health care

Top Asian News

  • Asia Stocks Rise, Still Head for Worst Week Since February
  • Kuroda Hints No Chance of Switching Yield Target Until Exit
  • China Fintech PingPong Said to Mull $1 Billion Hong Kong IPO
  • Biogen Sells Bioepis Stake for $2.3 Billion to Samsung Biologics

European bourses have conformed to the downbeat APAC handover with losses in the region extending following the cash open, Euro Stoxx 50 -1.7%. Sectors were mixed with Tech and Banking names the laggards while Personal/Household Goods and Retail outperformer following LVMH and H&M respectively; since then, performance has deteriorated though the above skew remains intact. US futures are moving in tandem with European-peers; however, magnitudes are more contained as the ES is only modestly negative and NQ continues to cling onto positive territory following Apple earnings. Apple Inc (AAPL) Q1 2022 (USD): EPS 2.10 (exp. 1.89), Revenue 123.95bln (exp. 118.66bln), iPhone: 71.63 bln (exp. 68.34bln), iPad: 7.25bln (exp. 8.18bln), Mac: 10.85bln (exp. 9.51bln), Services:  19.52bln (exp. 18.61 bln), according to Businesswire. +3.5% in the pre-market, trimming from gains in excess of 5.0% earlier

Top European News

  • German Economy Contracted Amid Tighter Virus Curbs, Supply Snags
  • H&M CEO Sets Target to Double Retailer’s Sales by 2030
  • Telia Sells Tower Stake for $582 Million, Cuts Costs
  • U.K. ‘Partygate’ Probe May Be Watered Down at Police Request

In FX, buck bull run continues as DXY takes out another July 2020 high to leave just 97.500 in front of key Fib resistance. Aussie feels the heat of Greenback strength more than others amidst risk-off positioning and caution ahead of next week’s RBA policy meeting. Kiwi also lagging and Loonie losing crude support after the BoC’s hawkish hold midweek. Euro and Yen reliant on some hefty option expiry interest to provide protection from Dollar domination. BoJ Governor Kurdoa if times come to debate the exit of policy, then targeting  shorter maturity JGBs could become an option; at this stage its premature to raise yield target or take steps to steepen yield curve.

In commodities, WTI and Brent are consolidating somewhat after yesterday's choppy price action, but remain towards the lowend
of a circa. USD 1.00/bbl range. Focus remains firmly on geopols as Russia is set to speak with French and German officials on Friday, though rhetoric, remains relatively familiar. Spot gold and silver are pressured as the yellow metal loses the 100-DMA, and drops to circa. USD 1780/oz as the USD rallies, and ahead of inflation data while LME copper follows the equity downside.

In Geopolitics:

  • US President Biden reaffirmed in call with Ukraine's President the readiness of US to respond decisively if Russia further invades Ukraine, according to Reuters.
  • Russian Foreign Minister Lavrov says Russia is analysing NATO and US proposals and will decide on how to respond to them, via Reuters; additionally, Lavrov will speaking with German Foreign Minister Baerbock on Friday, via Ifx.
  • Russia's Kremlin says President Putin's talks with Chinese President Xi will give attention to security in Europe and Russia-US dialoged, according to Reuters; Kremlin does not rule out that Putin will provide some assessments on response to Russian proposals.
  • US requested a public UN Security Council meeting for Monday to discuss the build up of Russian forces on Ukraine border, according to Reuters citing diplomats.
  • US bipartisan group of Senators have reportedly been meeting to create legislation that would dramatically increase presence of US military aid for Ukraine, according to Reuters sources.
  • Lithuania and Germany are in discussions to increase the presence of the German military, given current events, according to Reuters

US Event Calendar

  • 8:30am: 4Q Employment Cost Index, est. 1.2%, prior 1.3%
  • 8:30am: Dec. Personal Income, est. 0.5%, prior 0.4%
    • Dec. PCE Core Deflator YoY, est. 4.8%, prior 4.7%; PCE Core Deflator MoM, est. 0.5%, prior 0.5%
    • Dec. PCE Deflator YoY, est. 5.8%, prior 5.7%; PCE Deflator MoM, est. 0.4%, prior 0.6%
  • 8:30am: Dec. Personal Spending, est. -0.6%, prior 0.6%; Real Personal Spending, est. -1.1%, prior 0%
  • 10am: Jan. U. of Mich. Sentiment, est. 68.8, prior 68.8
    • Current Conditions, est. 73.2, prior 73.2; Expectations, est. 65.9, prior 65.9
    • 1 Yr Inflation, est. 4.9%, prior 4.9%; U. of Mich. 5-10 Yr Inflation, prior 3.1%

DB's Jim Reid concludes the overnight wrap

What a week we’ve had. Yesterday saw another market whipsaw as markets continued to try to digest the aftermath of Chair Powell’s press conference. In particular, there was growing speculation that the Fed would embark on back-to-back hikes in order to get inflation under control, with Fed funds futures now pricing 2 full hikes over the next two meetings in March and May, in line with our US econ team’s updated call. Assuming this is realised, then this would be a much faster pace of hikes than anything seen over the last cycle, when the initial hike in December 2015 wasn’t followed by another for an entire year, and the fastest things got was a consistent quarterly pace when the Fed hiked 4 times in 2018. This time, we almost have 4 hikes priced between March and September alone. Of course however, it’s worth noting that today they face a very different set of circumstances, since the last hiking cycle actually began with inflation beneath the Fed’s target, and was a pre-emptive one given their belief that inflation would rise from that point. By contrast, this cycle of rate hikes is set to begin with inflation at levels not seen since the early 1980s, with the Fed seeking to regain credibility after consistently underestimating inflation over the last year. As we’ve highlighted in our work over the last 6-9 months this is a very, very, very different cycle to the last one and we should therefore expect different inflation and Fed outcomes. We repeat a few slides on this in the chart book so feel free to dip in.

These growing expectations of near-term hikes supported the more policy-sensitive 2yr Treasury yield, which rose a further +3.8bps to a fresh post-pandemic high after the previous day’s massive +13.3bps advance. And the number of hikes priced for 2022 as a whole actually rose to a new high of its own at 4.8 hikes. However, a -6.4bps decline in the 10yr yield to 1.80% meant that there was a further flattening of the yield curve, with the 2s10s down to its flattest level in over a year, at just 60.9bps. This is only adding to the late-cycle signals we’ve been discussing of late, particularly when you consider that the yield curve historically tends to flatten in the year after the Fed begins hiking rates, so an inversion over the next 12 months would be no surprise on a historic basis followed perhaps by a 2024 recession? See the chart book for more on this. Indeed, some parts of the curve are even closer to inverting than the 2s10s, with the 5s10s slope at just 14.1bps yesterday, which is the flattest it’s been since the initial market panic about Covid back in March 2020.

The implications of this hawkish push could also be seen in FX markets, where the dollar index strengthened +0.81% to levels not seen in over 18 months. Conversely though, the Fed’s more aggressive posture on inflation significantly hurt precious metals, with gold (-1.22%) falling by more than -1% for a second consecutive session.

Transatlantic equity performance was a mixed bag yesterday. The STOXX 600 fell -1.47% immediately after the European open, just as US futures were pointing to additional losses on top of the previous day’s. However, sentiment turned into the European afternoon, with the major indices on both sides of the Atlantic moving into positive territory, leaving the STOXX 600 +0.65% higher. True to recent form though, the S&P 500 reversed course after the European optimists called it a day, drifting lower to end the day at -0.54%. Sector performance was fairly split, with five sectors in the red: discretionary (-2.27%) and real estate (-1.75%), industrials (-0.93%), financials (-0.92%), and tech (-0.69%). Energy (+1.24%) was again the outperformer, but didn’t do enough to drag the entire index into the green. Tesla was a big driver of the discretionary drawdown. After bouncing around following its earnings release the evening before, Tesla declined -11.55% yesterday on the back of potential supply chain issues, and to a 3-month low. The NASDAQ underperformed the S&P, declining -1.40%, bringing it -16.84% below its all-time high. The Russell 2000 of small caps (-2.29%) fell into “bear market” territory and is now down -20.94% from its highs in early November. The Vix index of volatility closed modestly lower (-1.37ppts) for the first time in almost two weeks, but remained elevated at 30.59.

Apple reported fourth quarter earnings after the close. Like other goods manufactures, they continued to be besot by supply chain issues, but that did not stop them from beating sales and earnings estimates, posting their best quarter of revenues ever. The stock was more than +5% higher in after-hours trading following the release. Prior to this they were down around -10% YTD. This has helped the S&P 500 (+0.7%) and Nasdaq (+1.1%) futures rebound as we hit the last day of a tough and very volatile week.

Overnight in Asia, equity markets are also recovering some of their recent losses with the Nikkei rebounding (+2.17%), after falling nearly -3% in the previous session, followed by the Kospi (+1.44%). Meanwhile, the Shanghai Composite (+0.05%) and CSI (0.08%) are trading flattish as we type. On the other hand, the Hang Seng (-0.94%) is extending its recent losses this morning ahead of the release of Hong Kong’s Q4 GDP report scheduled in a few hours.

Early morning data showed consumer prices in Tokyo fell to +0.5% y/y in January from +0.8% in December while the core CPI inflation (+0.2% y/y) in January failed to exceed market expectations (+0.3%) after increasing +0.5% last month. Elsewhere, South Korea’s industrial output surprisingly advanced +4.3% m/m in December against economist expectations of -0.3%. It follows November’s upwardly revised +5.3% increase.

Back in Europe, sovereign bond yields rose for the most part, having been closed at the time of Chair Powell’s press conference the previous day. Those on 10yr bunds (+1.6bps), OATs (+0.7bps) and gilts (+3.1bps) all moved higher, and that rise in gilt yields comes ahead of next week’s Bank of England decision, where overnight index swaps are now pricing in a 94% chance of another rate hike, which is also our UK economist’s expectation.

One factor supporting sentiment yesterday was a decent set of economic data, with the US economy growing by an annualised rate of +6.9% in Q4 2021 (vs. +5.5% expected). That’s the fastest quarterly pace since Q3 2020 when the economy rebounded sharply from the various lockdowns, and left growth for the full year 2021 at +5.7%, the fastest since 1984. Meanwhile, the weekly initial jobless claims for the week through January 22 subsided to 260k (vs. 265k expected), ending a run of 3 consecutive weekly increases.

To the day ahead now, and data releases include Germany’s Q4 GDP, US personal income and personal spending for December, as well as the Q4 employment cost index and the University of Michigan’s final consumer sentiment index for January. Earnings releases include Chevron and Caterpillar.

 

Tyler Durden Fri, 01/28/2022 - 08:07

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What Is Volatility in Finance? Definition, Calculation & Examples

What Is Volatility in Simple Terms? Volatility is the degree to which a security (or an index, or the market at large) varies in price or value over the course of a particular period of time. Volatility refers to the frequency with which a security change

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More volatile securities come with more risk, but they may also produce more substantial returns. 

Jerry Zhang via Unsplash; Canva

What Is Volatility in Simple Terms?

Volatility is the degree to which a security (or an index, or the market at large) varies in price or value over the course of a particular period of time. Volatility refers to the frequency with which a security changes in price and the severity with which it changes in price. Typically, the more volatile a security is, the riskier of an investment it is. That being said, more volatile securities may also offer more substantial potential returns.

Risk-tolerant investors interested in growth tend to like volatile securities and markets because of their higher potential upside, whereas risk-averse investors who prefer modest-but-stable returns and lower risk tend to steer clear of highly volatile investments.

What Causes Volatility in the Market?

When it comes to the market as a whole, volatility is often related to macroeconomic factors rather than industry or company-specific issues. These can include things like abnormally high or low inflation, interest rate hikes, geopolitical events like international conflict, economic recessions, supply-chain issues, and even so-called forces majeures like environmental catastrophes or viral outbreaks like the COVID-19 pandemic. In many cases, a combination of these types of factors may be the catalyst for market-wide volatility.

During periods of market-wide volatility, risk-averse investors tend to move their money toward safer, more stable securities like precious metals, government bonds, or shares of preferred stock, depending on individual risk tolerance.

What Causes Volatility in Particular Stocks?

Individual stocks can experience volatility independent of the market at large. Some stocks are known to be more volatile than others, and generally, the higher a stock’s trading volume is, the more volatile it is likely to be. Well-known companies that are constantly in the public eye (think Tesla, Amazon, Meta, etc.), have a large market cap, and experience huge daily trading volume are naturally more volatile than lesser-known stocks that don’t have as public a persona and aren’t as often discussed in the media.

Individual stocks can also experience short-term volatility around certain events. The release of a new product, the hiring, firing, or retirement of an executive, or the buzz surrounding an upcoming earnings call can all send a stock’s price for a tailspin until things have settled down.

How Can Investors Benefit From Volatility?

There are many ways investors can incorporate volatility into their trading strategies, but all involve risk. An average, buy-and-hold value investor could identify a few stocks they like, keep an eye on price movements and volatility, then buy into each stock when its price seems relatively low (i.e., when it approaches an established support level) so they stand to gain more when the stock’s price goes back up in the longer term.

More active, shorter-term investors (like day traders and swing traders) use volatility to make buy and sell decisions much more frequently. Day traders aim to buy low and sell high multiple times over the course of a single day, and swing traders do the same over the course of days or weeks.

Options traders who simply want to bet on volatility but aren’t sure if the price of a stock will go up or down may buy straddles (at-the-money put and call options for the same stock that expire at the same time) so that they can profit off of price movement in any direction.

How Is Volatility Measured?

There are a number of ways to measure and interpret volatility, but most commonly, investors use standard deviation to determine how much a stock’s price is likely to change on any given day.

What Is Standard Deviation?

Standard deviation tells us how much a stock’s price was likely to change on any given day (in either direction—positive or negative) over a particular period.

How Do You Calculate the Standard Deviation of a Stock’s Price?

  1. To calculate standard deviation, first choose a time period (e.g., 10 days).
  2. Take an average of a stock’s closing prices for that period.
  3. Calculate the difference between each day’s closing price and the stock’s average closing price for that time period.
  4. Square each of these differences.
  5. Add the squared differences up.
  6. Divide this sum by the number of data points in the set (e.g., if the time period is 10 days, divide the sum by 10).
  7. Take the square root of the result to find the stock’s standard deviation for the period in question.

The resulting number will be in dollars and cents, so comparing standard deviation between two stocks can’t tell you how volatile they are in comparison to one another because different stocks have different average prices. For instance, if stock A has an average price of $200, and stock B has an average price of $100, a standard deviation of $5 would be a lot more significant in stock B than stock A.

To compare standard deviations between stocks, use the same time time period to calculate a standard deviation for each stock, then divide that stock’s standard deviation by its average price over the period in question. The resulting figures are percentages and can thus be compared to one another more meaningfully.

Standard Deviation Calculation Example: Acme Adhesives

Let’s say we want to find the standard deviation of the stock price of a fictional company called Acme Adhesives over the course of a particular five-day trading week. Let’s assume the stock closed at $19, $22, $21.50, $23, and $24 that week.

First, let’s find the average closing price for the week.

Average = (19 + 22 +21.50 + 23 + 24) / 5
Average = 109.5 / 5
Average = 21.9

Next, we need to find the difference between each closing price and the average closing price for the five-day period in question.

19 – 21.9 = -2.9
22 – 21.9 = 0.1
21.5 – 21.9 = -0.4
23 – 21.9 = 1.1
24 – 21.9 = 2.1

Next, we need to square each of these differences.

(-2.9) * (-2.9) = 8.41
0.1 * 0.1 = 0.01
(-0.4) * (-0.4) = 0.16
1.1 * 1.1 = 1.21
2.1 * 2.1 = 4.41

Next, we need to add these squared differences up.

8.41 + 0.01 + 0.16 + 1.21 + 4.41 = 14.2

Next, we need to divide this sum by the number of data points in the set (i.e., the number of days we’re looking at)

14.2 / 5 = 2.84

Finally, we need to take the square root of this result.

Square Root of 2.84 = 1.69

So, the standard deviation of Acme Adhesives’ stock price for the five-day period in question is $1.69. If we divide this by the stock’s average price for the time period ($21.90), we get 0.077, which tells us that the stock’s price was likely to deviate from its mean by about 8% each day during that period.

What Is the Volatility Index (VIX)?

The volatility index, or VIX, is an index created by the Chicago Board Options Exchange designed to track implied market volatility based on price changes in S&P 500 index options with upcoming expiration dates.

Analysts look to the VIX as a measure of fear and uncertainty in the investment community because it represents the market’s volatility expectations for the next month or so. Because the S&P 500 tracks 500 of the biggest U.S. stocks by float-adjusted market capitalization, it is thought to be a good representation of the American stock market, and subsequently, the VIX is thought to be a good representation of the American stock market’s short-term volatility expectations. 

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