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Should You Invest in Draftkings Stock?

Draftkings stock is new to the markets and could do well for investors. The sports betting industry is growing as more states legalize it.
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In May of 2018, New Jersey won a landmark court case in the Supreme Court. This victory repealed a long-standing ban on states’ rights to legalize sports gambling. Since then, the floodgates have been open for states to legalize sports betting. This has given rise to Draftkings stock and other investments. In just two short years since this decision, more than $20 billion has already been bet with the U.S. sportsbook.

If you’re a big sports fan then you’ve most likely heard about DraftKings thanks to their aggressive ads. If not, DraftKings is an online sports gambling company. Thanks to the ease of use of their app and frequent promotions, they have built up a solid user base. This begs the question: should you invest in a hot, young company that’s in an exciting, freshly legal industry?

Let’s take a look at a few reasons why you should consider investing in Draftkings stock…

NOTE: I’m not a financial advisor and am just offering information and commentary. Please do your own due diligence before making any decisions. I also own a small position in Draftkings.

Draftkings Stock Still Run by its founders

Draftkings was founded in 2012 by Jason Robins, Matt Kalish, and Paul Liberman. These three are all still involved in the company.

In general, founder-led companies tend to have a better track record for success. If you look at some of today’s most successful public companies, they are almost all founder-led. For instance, there is Facebook and Zuckerberg, Netflix and Hastings and Amazon and Bezos (until just recently).

These men have dedicated the past eight years of their lives building DraftKings into what it is today and will want to continue their success. Since sports betting was just legalized two years ago, they will likely have a huge second wind. This could push Draftkings stock higher.

Sports Gambling is an Industry on the Rise

Let’s compare the sports gambling industry to another up-and-coming industry, marijuana.

Marijuana used to be known as “the devil’s lettuce” and smoking it was a serious offense that could land you years in jail. Now, it’s legal in close to 20 states and you can find hemp and CBD products in your local grocery store. On top of that, legal cannabis is expected to generate $43 billion by 2025. It’s a growing industry and here are some of the top U.S. marijuana stocks.

On that same note, gambling used to be associated with mobsters and money laundering. Now, companies like Draftkings make it fun and harmless to bet a few bucks on your favorite sports teams. The stigma surrounding Draftkings stock and the entire sports gambling industry is shifting. Already, in just two years, 20 states have rushed to legalize sports betting. States where sports gambling is legal, like New Jersey, are generating tens of millions in tax dollars.

Online Sports Betting has a Distinct Edge

It’s important to note the difference between in-person betting and online betting. Most states choose to legalize both but some states will choose to legalize one and not the other. In total, more than 20 states have legalized sports betting. Of these, 18 have legalized in-person betting compared to just 14 for online betting.

Yet, when it comes to where people prefer to do their betting, the internet is by far the more popular choice. According to Sports Betting Dime, more than 80% of the total bets placed in New Jersey in 2019 were placed online. When it comes to online gambling, Draftkings is in more states than any other operator.

Draftkings Stock Earnings

So far, I’ve discussed a lot of external factors about the industry. Sure, sports betting may be on the rise but will Draftkings stock and the company benefit?

Draftkings went public via a SPAC merger with the Diamond Eagle Acquisition Corporation in late June of 2020. If you’re not familiar, a special purpose acquisition company, SPAC, or “blank check company” is a company with no actual business. Instead, their main goal is to buy another business that’s already thriving.

Since DraftKings has only been public for about one year, there isn’t a lot of financial data to view. Additionally, most of their time as a public company was during 2020, when live sports were canceled. As you might imagine, canceling live sports for a company like DraftKings is like banning the consumption of chicken for a company like KFC.

Despite this mild hiccup, DraftKings still grew their revenue by 90% from 2019 to 2020. That said, they also posted a whopping loss of $1.23 billion for 2020.

Evaluating their performance so far is like trying to evaluate the potential of a first-round draft pick who sat out his rookie year with a torn ACL. It’s hard to draw any concrete conclusions because they haven’t really been given an opportunity.

Drafting Stock Prediction, Should You Invest in Draftkings?

At the end of the day, Draftkings is an exciting young company in an industry that has amazing potential to grow. Although, I’d be doing a disservice to not bring up a few of the risks associated with their business, so here they are:

  • Competition – Draftkings and Fanduel are the Uber and Lyft of their industry. These two will likely be in a cutthroat fight over the coming years.
  • Societal pushback – Gambling is addictive and Draftkings makes it incredibly accessible. They tend to treat gambling like much more like a video game, not a risky practice that has consequences. This could lead to increased scrutiny and regulation.
  • Future variants of COVID-19 – Another wave of COVID could crush DraftKings stock.
  • Gambling laws are complex – Each state has their own rules and essentially acts as its own market. For DraftKings, this means high costs and potential lawsuits.

There are definitely plenty of risks associated with Draftkings stock. However, like their slogan says, “life is more fun with skin in the game.”

I hope that you’ve found this article valuable when it comes to getting a better idea of whether or not you should invest in Draftkings stock. If you’re interested in more investing opportunities, consider subscribing to Liberty Through Wealth below. It’s a free e-letter that’s packed with investing insight from market experts.

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Stocks

What is volatility index (VIX)?

The Chicago Board Options Exchange’s (CBOE) Volatility Index is commonly known as the VIX. It is a popular measure of stock market volatility.
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The Chicago Board Options Exchange’s (CBOE) Volatility Index (INDEXCBOE: VIX) is commonly known as the VIX, which is also its ticker symbol. It is a popular measure of the stock market’s expectation of volatility based on options activity in the S&P 500 index (SPX).

The VIX is a financial benchmark operating in real-time. It gives investors an indication of volatility expectations in the market for the coming 30 days.

CBOE and Goldman Sachs updated the VIX Index in 2003. This incorporated a new way to measure expected volatility based on the S&P 500 Index.

Often alluded to as the ‘fear gauge’ on Bloomberg TV, CNBC, and CNN/Money, the VIX is regularly mentioned in the media and discussed among financial professionals.

What is volatility?

Volatility is extreme price fluctuations in the market. Volatile markets are often the most profitable, making them attractive to traders. However, volatility also increases risk.

For instance, the potential for particularly sharp retracements dissuades some traders from taking part in an extremely volatile market because the risk for losses is high.

The VIX offers a window into the state of volatility in the markets, which can help investors gauge the level of fear, risk, or stress in the market.

Having an idea of the volatility in relation to a steady market helps investors in their investment decisions.

Traders use the VIX to help turn their understanding of volatility to their advantage.


Introduced in 1993, the VIX is now the leading benchmark for US stock market volatility.


How is the VIX calculated?

In 2014, the VIX was enhanced once again to include a series of SPX Weeklys. A third of all SPX options traded are Weeklys, at close to 350k contracts a day. This update ensured a new level of precision in matching the 30-day timeframe the VIX represents.

The CBOE Volatility Index is calculated using standard SPX options and weekly SPX options with Friday expirations.

The reason for Friday Options is to act as a barometer. SPX Options expire on the third Friday of each month, while the Weekly SPX Options expire on the remaining Fridays.

These SPX options with Friday expirations are weighted to yield a constant maturity 30-day measure of the expected volatility of the S&P 500 Index.

Only SPX options with more than 23 days and less than 37 days to the Friday SPX expiration are used in the calculation.

The VIX is calculated by using the midpoint of the real-time bid/ask quotations of SPX options. With this knowledge, it considers the level of volatility in the upcoming 30 days. That makes the VIX a forward-looking measure rather than historical.

VIX Index values are often described as indicative or spot values. That’s because they are based on intraday snapshots of SPX option bid/ask quotes. These are captured every 15-seconds.

The CBOE calculates the VIX Index values between set times.

  • CBOE Global Trading Hours (GTH) Session: 3:15 a.m. ET and 9:15 a.m. ET
  • CBOE Regular Trading Hours (RTH) Session: 9:30 a.m. ET and 4:15 p.m. ET

The CBOE VIX White Paper sets out its VIX Index formula calculation and details its history.

VIX Index Calculation

How is the VIX Index used?

Traders find the VIX Index helpful in managing risk, which helps guide their investment decisions.

Historically, a high VIX reflects increased investor fear, and a low VIX suggests contentment. For this reason, it can be a useful tool in predicting bull and bear cycles.

As can be seen in this historical chart, the VIX traded above 80 in 2008 when market fear went parabolic.

VIX Volatity Index Chart All time
VIX Volatility Index Chart – Source: Yahoo Finance

Investors begin to worry when the VIX is approaching or trading above 20. Below 20 is less concerning.

For much of 2019, the VIX traded below 15. Market fear then shot up around March 2020 as the Covid-19 pandemic was making itself known. At this point, the VIX once again briefly exceeded 80. However, for most of 2020, it traded around the 20-mark.

VIX Volatility Index
VIX Volatility Index 5-year chart – Source: Yahoo Finance

CBOE: Master of volatility

The VIX Index is not the only CBOE volatility index. The CBOE also calculates volatility over 9-day, 3-month, 6-month, and 1-year periods, among others:

  1. The CBOE Short Term Volatility Index (VIX9DSM), reflecting the 9-day expected volatility of the S&P 500 Index.
  2. CBOE S&P 500 3-Month Volatility Index (VIX3MSM)
  3. The CBOE S&P 500 6-Month Volatility Index (VIX6MSM)
  4. The CBOE S&P 500 1-Year Volatility Index (VIX1YSM)
  5. The Nasdaq-100 Volatility Index (VXNSM)
  6. CBOE DJIA Volatility Index (VXDSM)
  7. The CBOE Russell 2000 Volatility Index (RVXSM)

Can you buy the VIX?

The S&P 500 Index and other stock market indices are made up of a portfolio of stocks. Therefore the price of the index is based on the return percentage of each constituent.

For instance, an index containing three stocks would work like this. If Stock A has risen 25%, Stock B has risen 15%, and Stock C has risen 20%, the index price would be up 20%, or (25 + 15 + 20)/3.

But the price of the VIX Index varies on a constantly changing portfolio of SPX options. These change on a minute-by-minute basis, so it can’t be bought by stock market investors or traders.

Nevertheless, the VIX Index settlement process is tradable, and those interested can buy Volatility Derivatives.

Although the prices of Volatility Derivatives are linked to SPX options, individually, their valuations expire at various points along the term structure. Therefore, these reflect constantly changing portfolios of SPX options.

Plus, investors and traders have no way of knowing which SPX calls and puts will be out-of-the-money on a future date. But SPX options expiry dates are known, along with the VIX Index formula for a given date, so that traders can estimate the price of the VIX Index. This helps drive VIX futures and options prices.

Buying VIX Futures and Options

VIX Futures are traded on the CBOE Futures Exchange (CFE), while VIX options are traded on the CBOE Options. Both standard and weekly Volatility Derivatives can be bought on either exchange.

A final settlement value for VIX futures and VIX options is revealed on the morning of their expiration date (usually a Wednesday). This is calculated through a Special Opening Quotation (“SOQ”) of the VIX Index.

However, the SOQ of the VIX Index differs from the calculation of the VIX Index at all other times.

The SOQ calculation uses SPX options or SPXW (warrant) options from a single expiration of 30 calendar days in the future. But it does not account for the interruption of volatility calculated with near-term and next-term options.

The strike range of an SOQ calculation also differs from that of the VIX Index calculation at other times.

To determine the strike range of the SOQ calculation, options with consecutive strikes do not have to have zero bid prices, which they do in calculating the VIX Index at other times.

CBOE Options uses an algorithm to detect the call with the highest strike and the put with the lowest strike to be used in the SOQ calculation.

Where’s the value?

  • The CBOE VIX operates in real-time showing market expectations for volatility in the next 30 days.
  • Traders and investors use the VIX as an indication of risk, fear, and stress in the market. It helps their trading decisions.
  • It is possible to trade the VIX using derivatives. Standard and weekly Volatility Derivatives can be bought as Options and Futures.

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Economics

Fed Urged To Fire Officials Over “Pandemic Profiteering”

Fed Urged To Fire Officials Over "Pandemic Profiteering"

Two weeks ago, Fed Presidents Robert Kaplan and Eric Rosengren (and to a lesser, though still notable extent, Fed Chair Powell himself) were ‘outed’ for their multi-million-dollar stock

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Fed Urged To Fire Officials Over "Pandemic Profiteering"

Two weeks ago, Fed Presidents Robert Kaplan and Eric Rosengren (and to a lesser, though still notable extent, Fed Chair Powell himself) were 'outed' for their multi-million-dollar stock and bond trades, sparking widespread outrage, bolstering claims that not only is the market rigged and manipulated by the Fed but that it is rigged directly for the benefit of Fed members like Kaplan and Rosengren who - whether they intended or not - benefited monetarily from their own decisions and their inside information that nobody else was privy to..

While none of the transactions appears to violate the Fed's code of conduct, CNBC reported, municipal bonds are an asset class that are far more niche that stocks or ETFs. 

Officials “should be careful to avoid any dealings or other conduct that might convey even an appearance of conflict between their personal interests, the interests of the system, and the public interest," the Fed's code of conduct says.

It was such 'bad optics' that less than two days after the widespread public fury at this grotesque discovery, the presidents of the Federal Reserve banks of Boston and Dallas said they would sell their individual stock holdings by Sept. 30 amid "ethics concerns", and invest the proceeds in diversified index funds or hold them in cash.

While we are sure the Fed officials hoped this would satisfy the ignorant masses... it has not. And as The Wall Street Journal reports, two advocacy groups and a former Fed adviser have said that The Fed should fire at least one (and perhaps both) of the Fed officials over their "pandemic profiteering trading conduct."

Better Markets, a group that pushes for tighter financial regulation; the left-leaning Center for Popular Democracy’s Fed Up campaign; and Andrew Levin, a former top Federal Reserve staff member and now a professor at Dartmouth College, are calling for the Fed to take action against Messrs. Kaplan and Rosengren.

“It’s time for the Fed to do what leaders are supposed to do:  Lead by example,” Better Markets president and chief executive officer Dennis Kelleher wrote in a letter sent to Fed Chairman Jerome Powell Tuesday.

Messrs. Kaplan and Rosengren, both should resign or be fired “for having lost the confidence and trust of the American people and, one would think, the Chairman of the U.S. central bank,” Mr. Kelleher said.

As The Fed is about to shift policy regimes into a taper of its unprecedented fre-money-gasm-machines, Mr. Kelleher added:

“This is no time for the American people to lose confidence and trust in the Fed, which must be above reproach, not set the lowest bar for ethical and legal conduct,”

Some Fed watchers say the trading raises questions about who policy was designed to help.

“There are a lot of reasons that working people are right to wonder if the Fed has their best interests in mind,” said Benjamin Dulchin, campaign director for Fed Up.

“These trades are only the most obvious reason, but it makes it harder for the Fed to do its job,” Mr. Dulchin said, adding if he were Mr. Kaplan or Mr. Rosengren, “I would resign.”

There is, however, one man supportive of Kaplan - his predecessor at the Dallas Fed, Rich Fisher, who shrugged off the million-dollar trades as nothing, noting that in fact, Kaplan was "talking against his own book..."

But, 'Dick', actions speak louder than words eh? And now that he has been shamed into cutting all market exposure, who cares whether he is hawkish or dovish - he's made his!

Source: NorthmanTrader
Tyler Durden Wed, 09/22/2021 - 08:25

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Bonds

Futures Bounce On Evergrande Reprieve With Fed Looming

Futures Bounce On Evergrande Reprieve With Fed Looming

Despite today’s looming hawkish FOMC meeting in which Powell is widely expected to unveil that tapering is set to begin as soon as November and where the Fed’s dot plot may signal one…

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Futures Bounce On Evergrande Reprieve With Fed Looming

Despite today's looming hawkish FOMC meeting in which Powell is widely expected to unveil that tapering is set to begin as soon as November and where the Fed's dot plot may signal one rate hike in 2022, futures climbed as investor concerns over China's Evergrande eased after the property developer negotiated a domestic bond payment deal. Commodities rallied while the dollar was steady.

Contracts on the S&P 500 and Nasdaq 100 flipped from losses to gains as China’s central bank boosted liquidity when it injected a gross 120BN in yuan, the most since January...

... and investors mulled a vaguely-worded statement from the troubled developer about an interest payment.  S&P 500 E-minis were up 23.0 points, or 0.53%, at 7:30 a.m. ET. Dow E-minis were up 199 points, or 0.60%, and Nasdaq 100 E-minis were up 44.00 points, or 0.29%.

Among individual stocks, Fedex fell 5.8% after the delivery company cut its profit outlook on higher costs and stalled growth in shipments. Morgan Stanley says it sees the company’s 1Q issues getting “tougher from here.” Commodity-linked oil and metal stocks led gains in premarket trade, while a slight rise in Treasury yields supported major banks. However, most sectors were nursing steep losses in recent sessions. Here are some of the biggest U.S. movers:

  • Adobe (ADBE US) down 3.1% after 3Q update disappointed the high expectations of investors, though the broader picture still looks solid, Morgan Stanley said in a note
  • Freeport McMoRan (FCX US), Cleveland- Cliffs (CLF US), Alcoa (AA US) and U.S. Steel (X US) up 2%-3% premarket, following the path of global peers as iron ore prices in China rallied
  • Aethlon Medical (AEMD US) and Exela Technologies (XELAU US) advance along with other retail traders’ favorites in the U.S. premarket session. Aethlon jumps 21%; Exela up 8.3%
  • Other so-called meme stocks also rise: ContextLogic +1%; Clover Health +0.9%; Naked Brand +0.9%; AMC +0.5%
  • ReWalk Robotics slumps 18% in U.S. premarket trading, a day after nearly doubling in value
  • Stitch Fix (SFIX US) rises 15.7% in light volume after the personal styling company’s 4Q profit and sales blew past analysts’ expectations
  • Hyatt Hotels (H US) seen opening lower after the company launches a seven-million-share stock offering
  • Summit Therapeutics (SMMT US) shares fell as much as 17% in Tuesday extended trading after it said the FDA doesn’t agree with the change to the primary endpoint that has been implemented in the ongoing Phase III Ri-CoDIFy studies when combining the studies
  • Marin Software (MRIN US) surged more than 75% Tuesday postmarket after signing a new revenue-sharing agreement with Google to develop its enterprise technology platforms and software products

The S&P 500 had fallen for 10 of the past 12 sessions since hitting a record high, as fears of an Evergrande default exacerbated seasonally weak trends and saw investors pull out of stocks trading at lofty valuations. The Nasdaq fell the least among its peers in recent sessions, as investors pivoted back into big technology names that had proven resilient through the pandemic.

Focus now turns to the Fed's decision, due at 2 p.m. ET where officials are expected to signal a start to scaling down monthly bond purchases (see our preview here).  The Fed meeting comes after a period of market volatility stoked by Evergrande’s woes. China’s wider property-sector curbs are also feeding into concerns about a slowdown in the economic recovery from the pandemic.

“Chair Jerome Powell could hint at the tapering approaching shortly,” said Sébastien Barbé, a strategist at Credit Agricole CIB. “However, given the current uncertainty factors (China property market, Covid, pace of global slowdown), the Fed should remain cautious when it comes to withdrawing liquidity support.”

Meanwhile, confirming what Ray Dalio said that the taper will just bring more QE, Governing Council member Madis Muller said the  European Central Bank may boost its regular asset purchases once the pandemic-era emergency stimulus comes to an end.

“Dovish signals could unwind some of the greenback’s gains while offering relief to stock markets,” Han Tan, chief market analyst at Exinity Group, wrote in emailed comments. A “hawkish shift would jolt markets, potentially pushing Treasury yields and the dollar past the upper bound of recent ranges, while gold and equities would sell off hunting down the next levels of support.”

China avoided a major selloff as trading resumed following a holiday, after the country’s central bank boosted its injection of short-term cash into the financial system. MSCI’s Asia-Pacific index declined for a third day, dragged lower by Japan.

Stocks were also higher in Europe. Basic resources - which bounced from a seven month low - and energy were among the leading gainers in the Stoxx Europe 600 index as commodity prices steadied after Beijing moved to contain fears of a spiraling debt crisis. Entain Plc rose more than 7%, extending Tuesday’s gain as it confirmed it received a takeover proposal from DraftKings Inc. Peer Flutter Entertainment Plc climbed after settling a legal dispute.  Here are some of the biggest European movers today:

  • Entain shares jump as much as 11% after DraftKings Inc. offered to acquire the U.K. gambling company for about $22.4 billion.
  • Vivendi rises as much as 3.1% in Paris, after Tuesday’s spinoff of Universal Music Group.
  • Legrand climbs as much as 2.1% after Exane BNP Paribas upgrades to outperform and raises PT to a Street-high of EU135.
  • Orpea shares falls as much as 2.9%, after delivering 1H results that Jefferies (buy) says were a “touch” below consensus.
  • Bechtle slides as much as 5.1% after Metzler downgrades to hold from buy, saying persistent supply chain problems seem to be weighing on growth.
  • Sopra Steria drops as much as 4.1% after Stifel initiates coverage with a sell, citing caution on company’s M&A strategy

Despite the Evergrande announcement, Asian stocks headed for their longest losing streak in more than a month amid continued China-related concerns, with traders also eying policy decisions from major central banks. The MSCI Asia Pacific Index dropped as much as 0.7% in its third day of declines, with TSMC and Keyence the biggest drags. China’s CSI 300 tumbled as much as 1.9% as the local market reopened following a two-day holiday. However, the gauge came off lows after an Evergrande unit said it will make a bond interest payment and as China’s central bank boosted liquidity.  Taiwan’s equity benchmark led losses in Asia on Wednesday, dragged by TSMC after a two-day holiday, while markets in Hong Kong and South Korea were closed. Key stock gauges in Australia, Indonesia and Vietnam rose

“A liquidity injection from the People’s Bank of China accompanied the Evergrande announcement, which only served to bolster sentiment further,” according to DailyFX’s Thomas Westwater and Daniel Dubrovsky. “For now, it appears that market-wide contagion risk linked to a potential Evergrande collapse is off the table.”

Japanese equities fell for a second day amid global concern over China’s real-estate sector, as the Bank of Japan held its key stimulus tools in place while flagging pressures on the economy. Electronics makers were the biggest drag on the Topix, which declined 1%. Daikin and Fanuc were the largest contributors to a 0.7% loss in the Nikkei 225. The BOJ had been expected to maintain its policy levers ahead of next week’s key ruling party election. Traders are keenly awaiting the Federal Reserve’s decision due later for clues on the U.S. central banks plan for tapering stimulus. “Markets for some time have been convinced that the BOJ has reached the end of the line on normalization and will remain in a holding pattern on policy until at least April 2023 when Governor Kuroda is scheduled to leave,” UOB economist Alvin Liew wrote in a note. “Attention for the BOJ will now likely shift to dealing with the long-term climate change issues.”

In the despotic lockdown regime that is Australia, the S&P/ASX 200 index rose 0.3% to close at 7,296.90, reversing an early decline in a rally led by mining and energy stocks. Banks closed lower for the fourth day in a row. Champion Iron was among the top performers after it was upgraded at Citi. IAG was among the worst performers after an earthquake caused damage to buildings in Melbourne. In New Zealand, the S&P/NZX 50 index rose 0.3% to 13,215.80

In FX, commodity currencies rallied as concerns about China Evergrande Group’s debt troubles eased as China’s central bank boosted liquidity and investors reviewed a statement from the troubled developer about an interest payment. Overnight implied volatility on the pound climbed to the highest since March ahead of Bank of England’s meeting on Thursday. The British pound weakened after Business Secretary Kwasi Kwarteng warnedthat people should prepare for longer-term high energy prices amid a natural-gas shortage that sent power costs soaring. Several U.K. power firms have stopped taking in new clients as small energy suppliers struggle to meet their previous commitments to sell supplies at lower prices.

Overnight volatility in the euro rises above 10% for the first time since July ahead of the Federal Reserve’s monetary policy decision announcement. The Aussie jumped as much as 0.5% as iron-ore prices rebounded. Spot surged through option-related selling at 0.7240 before topping out near 0.7265 strikes expiring Wednesday, according to Asia- based FX traders.  Elsewhere, the yen weakened and commodity-linked currencies such as the Australian dollar pushed higher.

In rates, the dollar weakened against most of its Group-of-10 peers. Treasury futures were under modest pressure in early U.S. trading, leaving yields cheaper by ~1.5bp from belly to long-end of the curve. The 10-year yield was at ~1.336% steepening the 2s10s curve by ~1bp as the front-end was little changed. Improved risk appetite weighed; with stock futures have recovering much of Tuesday’s losses as Evergrande concerns subside. Focal point for Wednesday’s session is FOMC rate decision at 2pm ET.   FOMC is expected to suggest it will start scaling back asset purchases later this year, while its quarterly summary of economic projections reveals policy makers’ expectations for the fed funds target in coming years in the dot-plot update; eurodollar positions have emerged recently that anticipate a hawkish shift

Bitcoin dropped briefly below $40,000 for the first time since August amid rising criticism from regulators, before rallying as the mood in global markets improved.

In commodities, Iron ore halted its collapse and metals steadied. Oil advanced for a second day. Bitcoin slid below $40,000 for the first time since early August before rebounding back above $42,000.  

To the day ahead now, and the main highlight will be the aforementioned Federal Reserve decision and Chair Powell’s subsequent press conference. Otherwise on the data side, we’ll get US existing home sales for August, and the European Commission’s advance consumer confidence reading for the Euro Area in September.

Market Snapshot

  • S&P 500 futures up 0.4% to 4,362.25
  • STOXX Europe 600 up 0.5% to 461.19
  • MXAP down 0.7% to 199.29
  • MXAPJ down 0.4% to 638.39
  • Nikkei down 0.7% to 29,639.40
  • Topix down 1.0% to 2,043.55
  • Hang Seng Index up 0.5% to 24,221.54
  • Shanghai Composite up 0.4% to 3,628.49
  • Sensex little changed at 59,046.84
  • Australia S&P/ASX 200 up 0.3% to 7,296.94
  • Kospi up 0.3% to 3,140.51
  • Brent Futures up 1.5% to $75.47/bbl
  • Gold spot up 0.0% to $1,775.15
  • U.S. Dollar Index little changed at 93.26
  • German 10Y yield rose 0.6 bps to -0.319%
  • Euro little changed at $1.1725

Top Overnight News from Bloomberg

  • What would it take to knock the U.S. recovery off course and send Federal Reserve policy makers back to the drawing board? Not much — and there are plenty of candidates to deliver the blow
  • The European Central Bank will discuss boosting its regular asset purchases once the pandemic-era emergency stimulus comes to an end, but any such increase is uncertain, Governing Council member Madis Muller said
  • Investors seeking hints about how Beijing plans to deal with China Evergrande Group’s debt crisis are training their cross hairs on the central bank’s liquidity management

A quick look at global markets courtesy of Newsquawk

Asian equity markets traded mixed as caution lingered ahead of upcoming risk events including the FOMC, with participants also digesting the latest Evergrande developments and China’s return to the market from the Mid-Autumn Festival. ASX 200 (+0.3%) was positive with the index led higher by the energy sector after a rebound in oil prices and as tech also outperformed, but with gains capped by weakness in the largest-weighted financials sector including Westpac which was forced to scrap the sale of its Pacific businesses after failing to secure regulatory approval. Nikkei 225 (-0.7%) was subdued amid the lack of fireworks from the BoJ announcement to keep policy settings unchanged and ahead of the upcoming holiday closure with the index only briefly supported by favourable currency outflows. Shanghai Comp. (+0.4%) was initially pressured on return from the long-weekend and with Hong Kong markets closed, but pared losses with risk appetite supported by news that Evergrande’s main unit Hengda Real Estate will make coupon payments due tomorrow, although other sources noted this is referring to the onshore bond payments valued around USD 36mln and that there was no mention of the offshore bond payments valued at USD 83.5mln which are also due tomorrow. Meanwhile, the PBoC facilitated liquidity through a CNY 120bln injection and provided no surprises in keeping its 1-year and 5-year Loan Prime Rates unchanged for the 17th consecutive month at 3.85% and 4.65%, respectively. Finally, 10yr JGBs were flat amid the absence of any major surprises from the BoJ policy announcement and following the choppy trade in T-notes which were briefly pressured in a knee-jerk reaction to the news that Evergrande’s unit will satisfy its coupon obligations tomorrow, but then faded most of the losses as cautiousness prevailed.

Top Asian News

  • Gold Steady as Traders Await Outcome of Fed Policy Meeting
  • Evergrande Filing on Yuan Bond Interest Leaves Analysts Guessing
  • Singapore Category E COE Price Rises to Highest Since April 2014
  • Asian Stocks Fall for Third Day as Focus Turns to Central Banks

European equities (Stoxx 600 +0.5%) trade on a firmer footing in the wake of an encouraging APAC handover. Focus overnight was on the return of Chinese participants from the Mid-Autumn Festival and news that Evergrande’s main unit, Hengda Real Estate will make coupon payments due tomorrow; however, we await indication as to whether they will meet Thursday’s offshore payment deadline as well. Furthermore, the PBoC facilitated liquidity through a CNY 120bln injection whilst keeping its 1-year and 5-year Loan Prime Rates unchanged (as expected). Note, despite gaining yesterday and today, thus far, the Stoxx 600 is still lower to the tune of 0.7% on the week. Stateside, futures are also trading on a firmer footing ahead of today’s FOMC policy announcement, at which, market participants will be eyeing any clues for when the taper will begin and digesting the latest dot plot forecasts. Furthermore, the US House voted to pass the bill to fund the government through to December 3rd and suspend the debt limit to end-2022, although this will likely be blocked by Senate Republicans. Back to Europe, sectors are mostly firmer with outperformance in Basic Resources and Oil & Gas amid upside in the metals and energy complex. Elsewhere, Travel & Leisure is faring well amid further upside in Entain (+6.1%) with the Co. noting it rejected an earlier approach from DraftKings at GBP 25/shr with the new offer standing at GBP 28/shr. Additionally for the sector, Flutter Entertainment (+4.1%) are trading higher after settling the legal dispute between the Co. and Commonwealth of Kentucky. Elsewhere, in terms of deal flow, Iliad announced that it is to acquire UPC Poland for around USD 1.8bln.

Top European News

  • Energy Cost Spike Gets on EU Ministers’ Green Deal Agenda
  • Travel Startup HomeToGo Gains in Frankfurt Debut After SPAC Deal
  • London Stock Exchange to Shut Down CurveGlobal Exchange
  • EU Banks Expected to Add Capital for Climate Risk, EBA Says

In FX, trade remains volatile as this week’s deluge of global Central Bank policy meetings continues to unfold amidst fluctuations in broad risk sentiment from relatively pronounced aversion at various stages to a measured and cautious pick-up in appetite more recently. Hence, the tide is currently turning in favour of activity, cyclical and commodity currencies, albeit tentatively in the run up to the Fed, with the Kiwi and Aussie trying to regroup on the 0.7000 handle and 0.7350 axis against their US counterpart, and the latter also striving to shrug off negative domestic impulses like a further decline below zero in Westpac’s leading index and an earthquake near Melbourne. Next up for Nzd/Usd and Aud/Usd, beyond the FOMC, trade data and preliminary PMIs respectively.

  • DXY/CHF/EUR/CAD - Notwithstanding the overall improvement in market tone noted above, or another major change in mood and direction, the Dollar index appears to have found a base just ahead of 93.000 and ceiling a similar distance away from 93.500, as it meanders inside those extremes awaiting US existing home sales that are scheduled for release before the main Fed events (policy statement, SEP and post-meeting press conference from chair Powell). Indeed, the Franc, Euro and Loonie have all recoiled into tighter bands vs the Greenback, between 0.9250-26, 1.1739-17 and 1.2831-1.2770, but with the former still retaining an underlying bid more evident in the Eur/Chf cross that is consolidating under 1.0850 and will undoubtedly be acknowledged by the SNB tomorrow. Meanwhile, Eur/Usd has hardly reacted to latest ECB commentary from Muller underpinning that the APP is likely to be boosted once the PEPP envelope is closed, though Usd/Cad is eyeing a firm rebound in oil prices in conjunction with hefty option expiry interest at the 1.2750 strike (1.8 bn) that may prevent the headline pair from revisiting w-t-d lows not far beneath the half round number.
  • GBP/JPY - The major laggards, as Sterling slips slightly further beneath 1.3650 against the Buck to a fresh weekly low and Eur/Gbp rebounds from circa 0.8574 to top 0.8600 on FOMC day and T-1 to super BoE Thursday. Elsewhere, the Yen has lost momentum after peaking around 109.12 and still not garnering sufficient impetus to test 109.00 via an unchanged BoJ in terms of all policy settings and guidance, as Governor Kuroda trotted out the no hesitation to loosen the reins if required line for the umpteenth time. However, Usd/Jpy is holding around 109.61 and some distance from 1.1 bn option expiries rolling off between 109.85-110.00 at the NY cut.
  • SCANDI/EM - Brent’s revival to Usd 75.50+/brl from sub-Usd 73.50 only yesterday has given the Nok another fillip pending confirmation of a Norges Bank hike tomorrow, while the Zar has regained some poise with the aid of firmer than forecast SA headline and core CPI alongside a degree of retracement following Wednesday’s breakdown of talks on a pay deal for engineering workers that prompted the union to call a strike from early October. Similarly, the Cnh and Cny by default have regrouped amidst reports that the CCP is finalising details to restructure Evergrande into 3 separate entities under a plan that will see the Chinese Government take control.

In commodities, WTI and Brent are firmer this morning though once again fresh newsflow for the complex has been relatively slim and largely consisting of gas-related commentary; as such, the benchmarks are taking their cue from the broader risk tone (see equity section). The improvement in sentiment today has brought WTI and Brent back in proximity to being unchanged on the week so far as a whole; however, the complex will be dictated directly by the EIA weekly inventory first and then indirectly, but perhaps more pertinently, by today’s FOMC. On the weekly inventories, last nights private release was a larger than expected draw for the headline and distillate components, though the Cushing draw was beneath expectations; for today, consensus is a headline draw pf 2.44mln. Moving to metals where the return of China has seen a resurgence for base metals with LME copper posting upside of nearly 3.0%, for instance. Albeit there is no fresh newsflow for the complex as such, so it remains to be seen how lasting this resurgence will be. Finally, spot gold and silver are firmer but with the magnitude once again favouring silver over the yellow metal.

US Event Calendar

  • 10am: Aug. Existing Home Sales MoM, est. -1.7%, prior 2.0%
  • 2pm: Sept. FOMC Rate Decision (Lower Boun, est. 0%, prior 0%

DB's Jim Reid concludes the overnight wrap

All eyes firmly on China this morning as it reopens following a 2-day holiday. As expected the indices there have opened lower but the scale of the declines are being softened by the PBoC increasing its short term cash injections into the economy. They’ve added a net CNY 90bn into the system. On Evergrande, we’ve also seen some positive headlines as the property developers’ main unit Hengda Real Estate Group has said that it will make coupon payment for an onshore bond tomorrow. However, the exchange filing said that the interest payment “has been resolved via negotiations with bondholders off the clearing house”. This is all a bit vague and doesn’t mention the dollar bond at this stage. Meanwhile, Bloomberg has reported that Chinese authorities have begun to lay the groundwork for a potential restructuring that could be one of the country’s biggest, assembling accounting and legal experts to examine the finances of the group. All this follows news from Bloomberg yesterday that Evergrande missed interest payments that had been due on Monday to at least two banks. In terms of markets the CSI (-1.11%), Shanghai Comp (-0.29%) and Shenzhen Comp (-0.53%) are all lower but have pared back deeper losses from the open.

We did a flash poll in the CoTD yesterday (link here) and after over 700 responses in a couple of hours we found only 8% who we thought Evergrande would still be impacting financial markets significantly in a month’s time. 24% thought it would be slightly impacting. The other 68% thought limited or no impact. So the world is relatively relaxed about contagion risk for now. The bigger risk might be the knock on impact of weaker Chinese growth. So that’s one to watch even if you’re sanguine on the systemic threat. Craig Nicol in my credit team did a good note yesterday (link here) looking at the contagion risk to the broader HY market. I thought he summed it up nicely as to why we all need to care one way or another in saying that “Evergrande is the largest corporate, in the largest sector, of the second largest economy in the world”. For context AT&T is the largest corporate borrower in the US market and VW the largest in Europe.

Turning back to other Asian markets now and the Nikkei (-0.65%) is down but the Hang Seng (+0.51%) and Asx (+0.58%) are up. South Korean markets continue to remain closed for a holiday. Elsewhere, yields on 10y USTs are trading flattish while futures on the S&P 500 are up +0.10% and those on the Stoxx 50 are up +0.21%. Crude oil prices are also up c.+1% this morning. In other news, the Bank of Japan policy announcement overnight was a non-event as the central bank maintained its yield curve target while keeping the policy rate and asset purchases plan unchanged. The central bank also unveiled more details of its green lending program and said that it would immediately start accepting applications and would begin making the loans in December.

The relatively calm Asian session follows a stabilisation in markets yesterday following their rout on Monday as investors looked forward to the outcome of the Fed’s meeting later today. That said, it was hardly a resounding performance, with the S&P 500 unable to hold on to its intraday gains and ending just worse than unchanged after the -1.70% decline the previous day as investors remained vigilant as to the array of risks that continue to pile up on the horizon.

One of these is in US politics and legislators seem no closer to resolving the various issues surrounding a potential government shutdown at the end of the month, along with a potential debt ceiling crisis in October, which is another flashing alert on the dashboard for investors that’s further contributing to weaker sentiment right now.

Looking ahead now, today’s main highlight will be the latest Federal Reserve decision along with Chair Powell’s subsequent press conference, with the policy decision out at 19:00 London time. Markets have been on edge for any clues about when the Fed might begin to taper asset purchases, but concern about tapering actually being announced at this meeting has dissipated over recent weeks, particularly after the most recent nonfarm payrolls in August came in at just +235k, and the monthly CPI print also came in beneath consensus expectations for the first time since November. In terms of what to expect, our US economists write in their preview (link here) that they see the statement adopting Chair Powell’s language that a reduction in the pace of asset purchases is appropriate “this year”, so long as the economy remains on track. They see Powell maintaining optionality about the exact timing of that announcement, but they think that the message will effectively be that the bar to pushing the announcement beyond November is relatively high in the absence of any material downside surprises. This meeting also sees the release of the FOMC’s latest economic projections and the dot plot, where they expect there’ll be an upward drift in the dots that raises the number of rate hikes in 2023 to 3, followed by another 3 increases in 2024.

Back to yesterday, and as mentioned US equity markets fell for a second straight day after being unable to hold on to earlier gains, with the S&P 500 slightly lower (-0.08%). High-growth industries outperformed with biotech (+0.38%) and semiconductors (+0.18%) leading the NASDAQ (+0.22%) slightly higher, however the Dow Jones (-0.15%) also struggled. Europe saw a much stronger performance though as much of the US decline came after Europe had closed. The STOXX 600 gained +1.00% to erase most of Monday’s losses, with almost every sector in the index ending the day in positive territory.

With risk sentiment improving for much of the day yesterday, US Treasuries sold off slightly and by the close of trade yields on 10yr Treasuries were up +1.2bps to 1.3226%, thanks to a +1.8bps increase in real yields. However, sovereign bonds in Europe told a different story as yields on 10yr bunds (-0.3bps), OATs (-0.3bps) and BTPs (-1.9bps) moved lower. Other safe havens including gold (+0.59%) and silver (+1.02%) also benefited, but this wasn’t reflected across commodities more broadly, with Bloomberg’s Commodity Spot Index (-0.30%) losing ground for a 4th consecutive session.

Democratic Party leaders plan to vote on the Senate-approved $500bn bipartisan infrastructure bill next Monday, even with no resolution to the $3.5tr budget reconciliation measure that encompasses the remainder of the Biden Administration’s economic agenda. Democrats continue to work on the reconciliation measure but have turned their attention to the debt ceiling and government funding bills.Congress has fewer than two weeks before the current budget expires – on Oct 1 – to fund the government and raise the debt ceiling. Republicans yesterday noted that the Democrats could raise the ceiling on their own through the reconciliation process, with many saying that they would not be offering their support to any funding bill. Democrats continue to push for a bipartisan bill to raise the debt ceiling, pointing to their votes during the Trump administration. If Democrats are forced to tie the debt ceiling and funding bills to budget reconciliation, it could limit how much of the $3.5 trillion bill survives the last minute negotiations between progressives and moderates. More to come over the next 10 days.

Staying on the US, there was an important announcement in President Biden’s speech at the UN General Assembly, as he said that he would work with Congress to double US funding to poorer nations to deal with climate change. That comes as UK Prime Minister Johnson (with the UK hosting the COP26 summit in less than 6 weeks’ time) has been lobbying other world leaders to find the $100bn per year that developed economies pledged by 2020 to support developing countries as they reduce their emissions and deal with climate change.

In Germany, there are just 4 days to go now until the federal election, and a Forsa poll out yesterday showed a slight narrowing in the race, with the centre-left SPD remaining on 25%, but the CDU/CSU gained a point on last week to 22%, which puts them within the +/- 2.5 point margin of error. That narrowing has been seen in Politico’s Poll of Polls as well, with the race having tightened from a 5-point SPD lead over the CDU/CSU last week to a 3-point one now.

Turning to the pandemic, Johnson & Johnson reported that their booster shot given 8 weeks after the first offered 100% protection against severe disease, 94% protection against symptomatic Covid in the US, and 75% against symptomatic Covid globally. Speaking of boosters, Bloomberg reported that the FDA was expected to decide as soon as today on a recommendation for Pfizer’s booster vaccine. That follows an FDA advisory panel rejecting a booster for all adults last Friday, restricting the recommendation to those over-65 and other high-risk categories. Staying with the US and vaccines, President Biden announced that the US was ordering 500mn doses of the Pfizer vaccine to be exported to the rest of the world.

On the data front, there were some strong US housing releases for August, with housing starts up by an annualised 1.615m (vs. 1.55m expected), and building permits up by 1.728m (vs. 1.6m expected). Separately, the OECD released their Interim Economic Outlook, which saw them upgrade their inflation expectations for the G20 this year to +3.7% (up +0.2ppts from May) and for 2022 to +3.9% (up +0.5ppts from May). Their global growth forecast saw little change at +5.7% in 2021 (down a tenth) and +4.5% for 2022 (up a tenth).

To the day ahead now, and the main highlight will be the aforementioned Federal Reserve decision and Chair Powell’s subsequent press conference. Otherwise on the data side, we’ll get US existing home sales for August, and the European Commission’s advance consumer confidence reading for the Euro Area in September.

Tyler Durden Wed, 09/22/2021 - 08:05

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