Connect with us

Bonds

The Laws Of Mean Reversion Have Begun Their Summer Offensive

The Laws Of Mean Reversion Have Begun Their Summer Offensive

Authored by Bill Blain via MorningPorridge.com,

“When valuations are extreme,…

Published

on

The Laws Of Mean Reversion Have Begun Their Summer Offensive

Authored by Bill Blain via MorningPorridge.com,

“When valuations are extreme, “Mean Reversion” towards historical norms is likely. Once value stocks turn, the recovery can be fast and intense.”

We’re officially in a bear market, but markets are still massively overvalued. The laws of Mean Reversion are immutable – some stocks are going lower. Inflation, Bond Markets and Confidence are all flashing danger signals.

It was messy out there y’day! Stocks prices down and bond yields up! It’s officially a US Stock Bear Market! 20% down this year. Ouch!

There is little to suggest it won’t be much the same today. Recessionary indicators are nailed on. When all around are losing their heads….. and all that. The whole market feels like it’s going to hell in the proverbial handbasket – which is exactly as predicted.

Get over it. Hard Hats on. Hunker down. This is what happens in markets. They get over-exuberant, they rise, they fall. Get used to it. Remember… things are never as bad as you fear, but seldom as good as you hope.

The reality is the Laws of Mean Reversion have begun their long-awaited offensive! Their strategic objectives are simple: push back stocks to sane levels in line with long-term market average valuations, and re-establish bond yields at the optimal level to discount the most efficient allocation of capital across the economy. That’s the way the economy should work – but hasn’t since 2009.

Mean Reversion makes sense. For the last 13 years, monetary experimentation has led us to this corrective moment. It’s created a massive imbalance in the Force of markets (yep, ok.. only joshing about the Force, but you get the drift.) By distorting all financial asset prices through ultra low interest rates, an imbalance in the Force was created. That is now going to be rectified. Unfortunately… it will hurt. Consequences. Consequences.

Ultra-low interest rates (NIRP and ZIRP) and QE led the whole financial economy to binge on chaotic mispriced financial assets. The chaos spawned a host of insane valuations and fantabulous get-rich-quick schemes on the back of easy money. Some day we shall laugh at the madness of Buttcon, Crypto, NFTs and SPACs.. but today, they are being crushed. There is massive pain still to come in Tech valuations.

Prices are going to correct further.

The trigger has been inflation. The reality is inflationary pressures are still rising vertically. The immediate stresses are exogenous: the war in Ukraine is set to ensure Energy and Food dislocations remain long-term, while China looks certain to continue lockdowns and thus broken supply chains remain the norm. The second derivative of these exogenous inflation shocks is organised labour is getting ready for a second half of industrial strife and double-digit wage demands… Their demands will be fuelled by the massive rise in income inquality we’ve seen develop since 2009.

The bottom line is this inflation and all its consequences are probably unstoppable.

So….  Ask yourself a very simple question: How will the Fed hiking 75 bp (which has been well-briefed after last week’s CPI shocker) tomorrow, and The Bank of England raising rates by 50 bp on Thursday, actually help?

The inflationary genie is already out the bottle! Trying to stop inflation now will be like catching a 1000 ton boulder rolling down a hill, even as it builds momentum with every bounce..  It might be better to see where it stops and then repair the damage?

This morning everyone is watching the stock markets for clues on what happens next. If you are, you are looking in the wrong place. Bonds are far more important at time like this. 

When bond markets break, they break big, and they break fast. They could trigger a one-way liquidity crisis across all financial assets with massive consequences for banks and markets. Perversely, because the US treasury market is so big, and notionally so liquid, it tends to disguise bond market weakness elsewhere.

This is where this Morning’s Porridge gets deeper and more philosophical. This is where we need to have a deeper series of discussion about the Virtuous Sovereign Trinity: the relationship between Confidence, Bond Yields and Currency. Call it VST. (VST is my theory a nation will remain in broad balance while it can maintain confidence in the management of its economy, the stability of its currency, and keep its bond yields under control.)

But, if any of the three legs crack – if confidence evaporates because of political expediency, or the currency tumbles on the back of economic distress, or the bond yield rises creating a funding crisis, any of these can destabilise the whole VST and the economy, leading to the kind of Sovereign crashes now spreading in the EM markets – Sri Lanka is just the first – which could well become systemic as they spread.

One of my fears is the VST will crack in Southern Europe, forcing the ECB to re-embark on a massive QE programme to shore up Italy and Spain debt – leading to yet longer-term distortion. Europe is a “Speshul” case when it comes to the relationship between sovereign credit, currency and confidence. I predict it will be tested in coming months.. all of which will act to Russia’s advantage in Ukraine.

Unfortunately, there isn’t time to fully explain how VST, bond market weakness, (particularly in corporate bonds), and a spate of sovereign crises are now a rising risk, but be aware how the rising inflation tide, concurrent political confidence and currencies will impact economic stability as the correction that’s under way deepens.

This week’s higher interest rates this week will further spook markets, crush upside expectations, and go a long way to cut frothy financial asset valuations – which may have been Central Banks’ plan all along – a managed inflationary period to address the debt loads taken on through QE and then the pandemic. As usual.. plans seldom survive contact with reality.

Higher interest rates this week are unlikely to do much to address the inflationary path – it’s here, it’s already burrowed deep into the economy. Eradicating inflation at this stage, following the pandemic/war endemic shocks is not only challenging, but probably impossible – everyone will want made good, but as corporate earnings take a tumble on falling consumer spending.. not everyone will get a pay rise.

The result is Strife and Tension. Rising domestic political tensions across the west ahead of the US and UK electoral cycles? Nasty. Ouch. Do you think Putin and Xi might have planned this way, or did they just get extraordinarily lucky? Think about the VST. But, I distract myself…

Back to this morning’s topic: Mean Reversion:

If there is one theme on where stock markets are now going.. its Mean Reversion. As I warned a few months ago, it was time to refamiliarize yourself with the Crash of 29 and the wasted decade that followed. Where are markets going?

At this point recall Warren Buffet’s stock market capitalisation to GDP rules – the Buffet Indicator. His dictum was the US equity market is overvalued at 90% of GDP. Today, the value of US stocks is about $40 trillion while GDP is $25 trillion = 163%.

The 90% fair value number is subjective. We should factor in just how low interest rates still are, which makes stocks look better relative value to bonds. Let’s say the Buffet Indicator of fair value in a low interest environment is 110% – in which case stocks are still overvalued by around 30%.

Funnilly enough, my base case is the stock market still has a 30% correction to come. That won’t impact every stock equally. Many value stocks look buyable. Some others have much further to fall as economic common sense breaks out. Many stocks may already be close to fair value. Guess which side of value Tesla lies?

Tyler Durden Tue, 06/14/2022 - 08:06

Read More

Continue Reading

Economics

August data shows UK automotive sector heading for a “cliff-edge” in 2023

With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly…

Published

on

With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly towards the tail end of the yield curve (details of which were reported on Invezz here).

Car manufacturing is a key industry in the UK. Recently, it registered a turnover of roughly £67 billion, provided direct employment to 182,000 people, and a total of nearly 800,000 jobs across the entire automotive supply chain, while contributing to 10% of exports.

Just after midnight GMT, data on fresh car production for the month of August was released by the Society of Motor Manufacturers and Traders Limited (SMMT).

Strong annual growth but monthly decline

Car production in the UK surged 34% year-over-year settling at just under 50,000 units. This marked the fourth consecutive month of positive growth on an annual basis.

However, twelve months ago, production was heavily dampened by a plethora of supply chain bottlenecks, work stoppages on account of the pandemic, and a worldwide shortage of microchips. The August 2021 output of 37,246 units was the lowest recorded August volume since way back in 1956.

Although the improvement in output is a good sign, equally it is on the back of a heavily depressed performance.

Source: SMMT

To place the latest data in its proper context, production is still 45.9% below August 2019 levels of 92,158 units, showing just how far adrift the industry is from the pre-pandemic period.

Since July, production in the sector fell 14%.

The fact that the UK is facing a deep economic malaise becomes even more evident when we look at full-year numbers for 2020 and 2021.

In 2020, total output came in at 920,928 units, while 2021 was even lower at 859,575. The last time that the UK automotive sector produced less than one million cars in a calendar year was 1986.  

Unfortunately, 2022 has seen only 511,106 units produced thus far, a 13.3% decline compared to January to August 2021.

In contrast, the 5-year pre-pandemic average for January to August output from 2014 – 2019 stands well above this mark at 1,030,527 units.

With car manufacturers tending to pass price rises on to consumers, demand was dampened by surging costs of semiconductors, logistics and raw materials.

The SMMT noted,

The sector is now on course to produce fewer than a million cars for the third consecutive year.

Ian Henry, managing director of AutoAnalysis concurred with the SMMT’s analysis,

It is expected that by the end of this year car production will reach 825,000, compared to 850,000 a year ago, but that’s 35% down on 2019 and a whopping 50% on the high figure of 2017.

Sector challenges

Other than the obvious fact that the UK’s economic atmosphere is in hot water, the automotive industry (including component manufacturers) has been struggling to stave off the high energy costs of doing business.

In a survey, 69% of respondents flagged energy costs as a key concern. Estimates suggest that the sector’s collective energy expenditure has gone up by 33% in the last 12 months reaching over £300 million, forcing several operations to become unviable.

Although the government enacted measures to cap the price of energy and ease obstacles to additional production, Mike Hawes, the CEO of SMMT, said,

This is a short-term fix, however, and to avoid a cliff-edge in six months’ time, it must be backed by a full package of measures that will sustain the sector.

Due to the meteoric rise in costs across the automotive supply chain, 13% of respondents were cutting shifts, 9% chose to downsize their workforce and 41% postponed further investments.

Bleak outlook

Uncertainties around Brexit and the EU trade deal are yet to be resolved.

Moreover, the energy crisis is poised to get even more acute unless Russia withdraws from the conflict, or international leaders ease restrictions on Moscow. Last week, I discussed the evolving energy crisis here

With global central banks expected to tighten till at least the end of the year, demand is likely to be squeezed further pressurizing British car manufacturers.

Electric vehicles made up 71% of car exports from the UK in August, but robust growth in the sector looks challenging in the near term, in the absence of widespread charging infrastructure, high electricity prices and globally low consumer confidence.

Although energy subsidies could provide some relief in the immediate future, the industry will remain in dire straits while investments stay low and the shortage in human capital persists, particularly amid the push for EVs.

Given the prevailing macroeconomic environment, and severe market backlash to Truss’s mini-budget (which I discussed in an earlier article), the sector is unlikely to turn the corner any time soon.

The post August data shows UK automotive sector heading for a “cliff-edge” in 2023 appeared first on Invezz.

Read More

Continue Reading

Bonds

Stocks Slide, Ugly Mood Returns As Traders Ask ‘Did Anything Change’

Stocks Slide, Ugly Mood Returns As Traders Ask ‘Did Anything Change’

The brief post-BOE euphoria has worn off, and risk-off sentiment returned…

Published

on

Stocks Slide, Ugly Mood Returns As Traders Ask 'Did Anything Change'

The brief post-BOE euphoria has worn off, and risk-off sentiment returned to markets as concern about inflation and the global economy overshadowed the Bank of England’s desperate attempt to restore calm by restarting QE, exacerbated by more hawkish central bank talk and defiance by British PM Liz Truss's tax plan (which has been slammed from the IMF all the way to the White House). Treasuries resumed their slide with UK gilts, while US equity futures fell as European stocks extended a selloff that’s caused valuations to drop to their lowest since 2012. As of 730am, emini S&P futures slid 0.7% to 3704, recovering from losses as big as 1.5% earlier.

The dollar rose and Treasuries resumed their slump as investors focused on expectations the Federal Reserve will continue to deliver aggressive interest-rate hikes. The pound snapped a two-day gain and UK gilt yields rose as Prime Minister Liz Truss defended a giant package of unfunded tax cuts that sent markets into turmoil.

“Other than the dollar, there are not many assets that are trading constructively,” said Julia Raiskin, Asia-Pacific head of markets for Citigroup Inc. “The markets are very pessimistic. Investors are fairly on the sidelines.”

In premarket trading, US-listed Chinese stocks drop in premarket trading, following in the footsteps of Hong Kong- listed peers as the Hang Seng Tech Index erased almost all gains since a March nadir. Alibaba (BABA US) -3%, Nio (NIO US) -2.9%, Baidu (BIDU US) -2.4%, Pinduoduo (PDD US) -2.6%, JD.com (JD US) -2.4%. Bank stocks also slumped after snapping a six-day losing streak the day earlier. Here are other notable premarket movers:

  • Coinbase falls 2.5% in premarket trading after Wells Fargo starts coverage at underweight, with operating results set to remain under pressure. Bakkt (BKKT US) and Riot Blockchain (RIOT US) are both initiated at equal-weight, with Riot declining 3% in premarket trading.
  • Altus Power (AMPS US) slumped 16% in premarket trading after the company’s secondary offering priced at $11.50 per share, below Wednesday’s record close of $14.23.
  • First Solar (FSLR US) gained 1.3% in premarket trading after Evercore ISI analyst Sean Morgan raised the recommendation to outperform from inline, saying the company is poised to benefit from the Inflation Reduction Act.
  • Apple (AAPL US) shares were down 2.6% in premarket trading, set to extend Wednesday’s decline, as BofA Global Research cut the recommendation on the stock to neutral from buy.

European stocks bounced off session lows amid heightened risk-off mood. Euro Stoxx 50 slumped as much as 1.2%. Autos, retailers and real estate are the worst performing sectors as all slump. European miners rose after news that the London Metal Exchange is launching a discussion paper that marks the first step toward a potential ban on new supplies of Russian metal.  Porsche AG rose as much as 5.2% as its shares started trading in Frankfurt after parent Volkswagen AG set the final listing price for the sports-car maker at the upper limit of its offer range. Here are some other notable European movers:

  • Accor shares jumped as much as 8.1%, before paring gains, after the French hospitality company raised FY22 Ebitda guidance to a level which analysts said was above consensus estimates.
  • Rational rose as much as 16% after the German kitchen appliances manufacturer raised its sales and Ebit guidance, citing improvements in the supply chain picture.
  • Capricorn Energy shares rose as much as 8.9% to 261p amid a proposed merger with NewMed Energy that’s expected to deliver total value to Capricorn shareholders of 271 pence per share.
  • H&M shares dropped as much as 7.2%, heading for the lowest close since September 2004, after it reported 3Q results that missed estimates and highlighted “very negative” market conditions.
  • Next fell as much as 10% after the UK high street retailer cut its FY guidance, citing the cost of living crisis and saying the devaluation of the pound is set to prolong inflationary pressures.
  • Colruyt shares plunged 24%, the most intraday on record, after it said the consolidated net result for FY22/23, ex. one-offs, is expected to decrease considerably compared with last year.
  • Ubisoft shares fell after the video-game company pushed back its Skull & Bones title to March 2023 from November, despite maintaining FY guidance. Analysts say the decision raises concern.
  • Wacker Chemie shares dropped as much as 7.8% after Stifel cut its price target, saying lower silicone and polysilicon prices hit sentiment.
  • Hornbach shares dropped as much as 7% after it published its latest 2Q report. The home improvement retailer posted a worse-than expected Ebit decline y/y, Warburg said.
  • European auto stocks fell and were among the worst performing subgroups on the wider market, with Volkswagen and its parent Porsche Automobil Holding SE leading declines.

European bond yields also rose as investors digested the latest inflation data and commentary from European Central Bank officials. Euro-area economic confidence dropped to the lowest since 2020.

Investors are contending with threats posed by discordant moves from central banks over the past few days, with Fed officials adamant on further monetary tightening, the BOE unveiling a £65 billion ($71 billion) plan to support government debt and authorities in Asia trying to prop up weakening currencies.

“The central bank is in a very difficult position right now,” Julie Biel, Kayne Anderson Rudnick portfolio manager and senior research analyst, said of the BOE in an interview with Bloomberg TV. “Everyone has been a little bit backed into a corner in seeing the volatility and market reaction.”

Former Bank of England Governor Mark Carney accused the UK government of “undercutting” the nation’s economic institutions, and said that its fiscal plans were to blame for the drop in the pound and bonds. Simon Wolfson, the boss of Next Plc and a Conservative peer, also appeared to blame the Tory government for a crash in the currency and a worsening outlook for UK inflation, which the company cited as it lowered guidance for sales and profits.

Separately, the European Commission announced an eighth package of sanctions that would include a price cap on Russia’s oil exports as Russia vowed to go ahead with the annexation of the parts of Ukraine that its troops currently control after UN-condemned votes, putting the Kremlin on a fresh collision course with the US and its allies.

Earlier in the session, Asian stocks pared earlier gains spurred by the Bank of England’s unlimited bond-buying plan, as sentiment again turned cautious with fears over a global recession. The MSCI Asia Pacific Index was up 0.2%, having earlier gained as much as 1.2%. Benchmarks in Australia and Japan outperformed, while South Korea’s market closed almost flat. Gauges in Hong Kong and China ended in the red with tech stocks sliding near the lowest since to a sector index was introduced in 2020. Hang Seng Tech Index Slides Toward Lowest Since 2020 Inception The key Asian equity benchmark slumped Wednesday to its lowest since April 2020 on concerns over the Federal Reserve’s ongoing rate hikes. While the the UK central bank’s intervention to avert a crash in the gilt market helped calm investor nerves briefly, few saw the rally as a signal for a full-fledged rebound. 

“We remain very cautious on the markets and would exercise a degree of patience,” Kerry Craig, a global market strategist at JPMorgan Asset Management, said in an interview with Bloomberg TV. Central bank moves, inflation and “the looming risk of recession” need to be monitored, he said. Down almost 12% in September, the MSCI Asian benchmark is set to post its worst monthly performance since the pandemic-triggered crash in March 2020. An index of Asia Pacific stocks excluding Japan is on course for its fifth-straight quarterly loss, its longest losing streak in 21 years.

Japanese equities rose, rebounding along with global peers as investors assessed the Bank of England’s move to buy government bonds. More than 1,100 Topix stocks traded without rights to the next dividend. The Topix rose 0.7% to close at 1,868.80, while the Nikkei advanced 0.9% to 26,422.05. Out of 2,169 stocks in the Topix, 1,854 rose and 271 fell, while 44 were unchanged. “Though there is still a strong uncertainty in the US and UK markets over the rise in long-term interest rates, for now there is a sense of relief in the markets as government bond yields in the UK settled down due to the unlimited purchase plan,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management.

In Australia, the S&P/ASX 200 index rose 1.4% to close at 6,555.00, boosted by gains in mining shares and banks.  In New Zealand, the S&P/NZX 50 index rose 0.7% to 11,200.04

Stocks in India declined for a seventh straight day in the longest losing streak since February, tracking a selloff across global markets amid worries over possible recession.  The S&P BSE Sensex gave up an advance of as much as 1% to end 0.3% lower at 56,409.96 in Mumbai. The NSE Nifty 50 Index slipped 0.2% as both indexes posted their longest stretch of declines in seven months. The key gauges have dropped more than 5% each this month and are on track to record their worst monthly performance since the pandemic led crash of March 2020. Ten of the 19 sector sub-indexes compiled by BSE Ltd. declined Thursday led by the utilities gauge which has lost 11% for the month, making it the worst sectoral performer.

In FX, the Bloomberg Dollar Spot Index first rose then fell, as Treasuries slumped to unwind some of the previous day’s swift rally. The euro fell as much as 1% to $0.9636, before paring losses. It’s significantly more costly to hedge against euro price swings compared to a week ago, as traders bet on wider ranges with risks skewed to the downside. The pound erased losses amid month-end flows, after earlier falling by as much 1.2% to $1.0763. UK bonds extended losses after Prime Minister Liz Truss defended her new government’s giant fiscal package of unfunded tax cuts, which have tipped markets into chaos. Commodity currencies led declines among G-10 peers.  Onshore yuan eked out the first gain in nine days following a stern PBOC warning against “one-sided” speculation, but offshore yuan weakened 0.4%

In rates, Treasuries pared Wednesday’s gains with yields cheaper by up to 11bp across the 5-year tenor into early US session, with the belly’s underperformance helped by a large block sale in 5-year note futures. Treasury 10-year yields near highs of the day at around 3.83%, outperforming bunds and gilts by 3.5bp and 4.5bp in the sector; belly-led losses cheapens 2s5s30s Treasuries fly by 7bp on the day. Moves follow a more aggressive bear flattening move in gilts, wit front-end yields are cheaper by 20bp on the day. US session focus on GDP and Fed speakers throughout the day.   Bunds, Italian bonds dropped and money markets raised ECB tightening bets after German state CPIs rose in September while euro-area economic confidence dropped to 93.7 in September, the lowest since 2020. UK 10-year bonds decline after Truss doubled down on her economic package;

In commodities, Brent rebounded from earlier lows, to trade near $89.50 following reports of OPEC+ considering production cuts. Spot gold falls roughly $12 to trade near $1,648/oz. Bitcoin is under modest pressure but lies within narrow ranges of less than USD 500 at present and well within recent parameters as such.

Looking to the day ahead now, and data releases include German CPI for September, Italian PPI for August, and UK mortgage approvals for August (the calm before the storm). We’ll also get the weekly initial jobless claims from the US, as well as the third estimate of Q2 GDP. From central banks, we’ll also hear from an array of speakers, including ECB Vice President de Guindos, and the ECB’s Simkus, Panetta, Centeno, Villeroy, Knot, Elderson, Rehn, Vasle, Kazaks, Muller and Lane. In addition, there’ll be remarks from the Fed’s Bullard, Mester and Daly, as well as BoE Deputy Governor Ramsden and the BoE’s Tenreyro.

Market Snapshot

  • S&P 500 futures down 1.1% to 3,692.25
  • MXAP up 0.2% to 139.97
  • MXAPJ little changed at 453.71
  • Nikkei up 0.9% to 26,422.05
  • Topix up 0.7% to 1,868.80
  • Hang Seng Index down 0.5% to 17,165.87
  • Shanghai Composite down 0.1% to 3,041.21
  • Sensex down 0.3% to 56,446.56
  • Australia S&P/ASX 200 up 1.4% to 6,554.97
  • Kospi little changed at 2,170.93
  • STOXX Europe 600 down 1.6% to 383.23
  • German 10Y yield little changed at 2.23%
  • Euro down 0.9% to $0.9650
  • Brent Futures down 1.2% to $88.23/bbl
  • Brent Futures down 1.2% to $88.23/bbl
  • Gold spot down 0.9% to $1,644.68
  • U.S. Dollar Index up 0.92% to 113.64

Top Overnight News from Bloomberg

  • Britain is in a self-inflicted financial crisis that threatens to accelerate the economy’s dive into recession -- and the country’s new prime minister is coming under intense pressure to blink
  • The ECB should opt for a “big” increase in interest rates in October, according to Governing Council member Martins Kazaks, who said in an interview that subsequent hikes are likely to be smaller. His Baltic counterparts Gediminas Simkus and Madis Muller also indicated they’d back significant moves, while Mario Centeno of Portugal called for a “measured and balanced” approach
  • The ECB must ensure pay pressures don’t get out of control in its efforts to keep expectations stable, according to Governing Council member Olli Rehn
  • The Riksbank believes it is very important that monetary policy continues to act for inflation to fall back and stabilize at the target of 2% within a reasonable time perspective, the Swedish central bank says in minutes from its latest monetary policy meeting
  • Japan’s capital markets suffered the biggest foreign outflow in three months last week as growing fears of a global downturn fueled a search for liquidity
  • China’s economy stabilized in the current quarter, and the final three months of the year will be key to the nation’s economic recovery, Premier Li Keqiang said
  • As doubts grow over whether Xi Jinping still prioritizes expanding China’s economy over other goals, he’s tipped to appoint a new economic adviser who’s vowed to put growth first
  • OPEC+ has begun discussions about making an oil-output cut when it meets next week, a delegate said

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded higher as the region took impetus from the rally on Wall St where risk sentiment was buoyed and yields retreated following the BoE's announcement to resume Gilt purchases. ASX 200 outperformed in which the commodity-related sectors led the broad advances across industries following the recent upside in energy and metal prices, while firm monthly CPI data did little to dent risk sentiment. Nikkei 225 was also positive but with gains initially capped as more than half of the stocks traded ex-dividend. Hang Seng and Shanghai Comp were also firmer with the Hong Kong benchmark spearheaded by tech and energy stocks, while the mainland also digested reports that the PBoC is setting up a more than CNY 200bln re-lending facility quota for equipment upgrades which aims to expand market demand in the manufacturing sector.

Top Asian News

  • PBoC injected CNY 105bln via 7-day reverse repos with the rate kept at 2.00% and injects CNY 77bln via 14-day reverse repos with the rate kept at 2.15% for a CNY 180bln net injection.
  • Chinese President Xi told Japanese PM Kishida that they attach great importance to the development of China-Japan relations and he is willing to work with Kishida to build relations, while Kishida told Xi that bilateral relations are currently facing many issues and challenges but he hopes to build constructive and stable relations to boost peace and prosperity, in messages to mark 50 years of diplomatic relations.
  • Hong Kong’s Worst Trading Debut in 2022 Sends EV Maker Down 34%
  • US’s Harris Goes to DMZ Hours After North Korea Missile Launch
  • Japan’s First Bond to Help Ocean Planned by Major Seafood Firm
  • Best HK IPO Quarter in Year Ends With Disaster Debut: ECM Watch
  • Yuan Bears Bet China Is Powerless to Fight the Mighty Dollar
  • China Vows to Speed Up Delayed Homes With Special Loans

European stocks are experiencing another bleak session thus far as the overnight gains in futures dissipated heading into the cash open. Sectors are in a sea of red with no clear theme. Autos kicked off the day as the outperformer as the Porsche AG IPO occurred at a premium to the guided price of EUR 82.50/shr. US equity futures are also trading with losses across the board, with relatively broad-based downside of 1.3-1.5% seen across the front-month contracts.

Top European News

  • UK PM Truss says the fiscal statement (i.e. mini-Budget) is the correct plan.
  • UK Chief Secretary to the Treasury says the growth plan will get the economy growing, one of the reasons growth plans included tax cuts was to alleviate the household burden. BoE intervention has had the desired effect. Disagrees with the IMF's remarks.
  • US President Biden's administration was reportedly alarmed by the market turmoil caused by the UK's economic program and is seeking ways to encourage PM Truss's team to dial back its tax cuts, according to Bloomberg.
  • France is reportedly considering proposals for up to two hour power cuts for parts of the country on a rotating basis, via Reuters sources; additionally, telecom names have highlighted power issues with the German and Swedish gov'ts.
  • German Network Regulator says recent gas consumption by households is too high to remain sustainable, via Reuters; gas savings of 20% are required to avoid an emergency.
  • German gov't could make a "low three-digit billion amount" available for the gas price break, discussion of EUR 150-200bln, via Handelsblatt citing gov't circles; will reportedly be announced today.
  • Europe Gas Eases With Traders Weighing Impact of Pipeline Blasts
  • Rational Jumps After Boosting Sales Guidance Above Consensus
  • Truss Says UK Tax Cuts Are the ‘Right Plan’ Amid Market Rout
  • German Economy Seen Shrinking Next Year Due to Energy Crisis
  • Profligate Government to Blame for Pound Drop, Says Wolfson

FX

  • USD has regained some poise after a mid-week pullback; though, the DXY remains off earlier 113.79 highs and thus shy of the YTD/WTD peak at 114.78.
  • Yuan has derived pronounced support from Reuters reports that China's state banks have been told to stock up for intervention offshore, sending USD/CNH to 7.1437 from circa. 7.20 pre-release.
  • Cable managed to 'recover' to a test of 1.09 but failed to breach the level with multiple BoE speakers in focus later.
  • EUR/USD moving at the whim of broader USD action and failing to glean any real traction from multiple speakers and German state/Spanish mainland CPI data.

Fixed Income

  • Core benchmarks are pressured across the board in a modest pullback of the pronounced BoE-induced 'recovery' seen yesterday, with numerous speakers due and the second BoE operation.
  • Specifically, Bund lies towards the bottom of a 200 tick range while Gilts are holding onto the 95.00 handle with the associated yield lifting further above 4.0%.
  • Stateside, USTs are similarly at the lower-end of parameters ahead of data and numerous speakers while the curve flattens further

Central Banks

  • ECB's Simkus says his choice of hike for October is 75bp, says 50bp would be the minimum, via Bloomberg. A 100bp hike would be too much at this point.
  • ECB's Centeno says decisions must be measured and balanced, still far from the neutral rate, via Bloomberg.
  • ECB's Rehn says prospect of recession in Euro Area is likely.
  • ECB's Vasle says current hike pace is "appropriate" response to inflation; expects to raise rates at the next several meetings.
  • ECB's de Cos says so far there is no clear evidence of de-anchoring of inflation expectations. Based on current models, median terminal rate value is at 2.25-2.5% (significant uncertainty).
  • ECB's Kazaks says 75bp will likely be appropriate for October, via Bloomberg.
  • PBoC says they are to add more loans to ensure property delivery when required, via Reuters.
  • China's state banks have reportedly been told to stock up for Yuan intervention offshore, according to Reuters sources, in a bid to defend the weakening Yuan.. State banks were asked to asked offshore branches, such as those in Hong Kong, New York and London, to review holding of the CNH to ensure dollar reserves are ready to be deployed.
  • RBI likely selling USD via state-run banks around 81.92-81.93 levels, according to traders cited by Reuters
  • NBH hikes one-week deposit rate by 125bp, to 13.00%.
  • Turkish President Erdogan says interest rates need to come down further; CBRT needs to lower rates at the next meeting, via Reuters.

Geopolitics

  • Japanese Chief Cabinet Secretary Matsuno said North Korea's multiple missile launches are unacceptable and Japan will maintain close contact with allies including the US to monitor and deal with North Korea, according to Reuters.
  • Turkish President Erdogan said Turkey will increase its military presence in northern Cyprus, according to Sky News Arabia.
  • EU Official expects an agreement on the next Russian sanctions package, or at least major parts of this, before the EU Summit next week. Expects the discussion to focus on referendums, possible annexation, nuclear threat and Nord Stream.
  • Russian State Duma representatives have received invitations to the Kremlin for Friday, September 30th at 13:00BST, via Ria.
  • Russian Kremlin says the ceremony on incorporating new territories will occur on Friday, September 30th - President Putin will speak.

US Event Calendar

  • 08:30: Sept. Initial Jobless Claims, est. 215,000, prior 213,000
  • 08:30: Sept. Continuing Claims, est. 1.39m, prior 1.38m
  • 08:30: 2Q GDP Annualized QoQ, est. -0.6%, prior -0.6%
  • 08:30: 2Q PCE Core QoQ, est. 4.4%, prior 4.4%
  • 08:30: 2Q Personal Consumption, est. 1.5%, prior 1.5%
  • 08:30: 2Q GDP Price Index, est. 8.9%, prior 8.9%

Central Bank Speakers

  • 09:30: Fed’s Bullard Discusses Economic Outlook
  • 13:00: Fed’s Mester and ECB’s Lane Take Part in Policy Panel
  • 16:45: Fed’s Mary Daly Speaks at Boise State University

DB's Jim Reid concludes the overnight wrap

How could you have earned a 42% return yesterday from a AA-rated investment? Simple. At anytime between 8-11am all you had to do was buy 40yr Gilts before the BoE effectively restarted QE only days before QT was suppose to start (it’s been postponed until October 31st - ironically Halloween). The buying operation is aimed at restoring liquidity to a broken long end market and is temporary but it’s another stunning development to a stunning year. I’ve always felt that this debt supercycle would end up with central banks doing QE even if interest rates were positive. The reason being is that the economy can be growing and seeing inflation at a point when investors baulk at funding all the debt. I appreciate this BoE operation is slightly different and I would have never have guessed the series of events that got us here but it might not be the last time a central bank buys government bonds when not at the zero bound given how much debt there is and how much there's likely to be going forward.

It's becoming clearer the extent to which Tuesday's rout at the long-end was exacerbated by collateral calls on LDIs (liability driven investments) that pension funds have typically used in some size in recent years. With these swaps moving so far out of the money, the risk was that investors would have to sell liquid assets to meet margin calls. If they didn't have this (which a lot don't), then obviously there would have been huge liquidity events. To understand the fears that were around over the last 48 hours, Sky News’ economics editor Ed Conway said yesterday that “I am told there were a swathe of pension funds that … would have essentially collapsed by this afternoon”. Whether that's true, we'll never know but it shows the level of fear.

Overall, this isn't quite monetising debt in the purest sense but at the end of the day we have seen fresh central bank buying of debt after unfunded tax cuts pushed up yields dramatically. Despite the BoE’s insistence that these are targeted, temporary purchases designed to ease market dysfunction, global pricing reacted as if they were launching a new QE program to ease financial conditions. Global equities increased, with the S&P 500 (+1.97%) breaking a run of 6 consecutive losses and global bond yields fell across the curve.

In yield terms, 30yr gilts had been trading above 5% prior to the BoE’s announcement, but afterwards they staged a stunning turnaround to fall by an astonishing -105.9bps yesterday. That was easily the largest decline in the 30 years of available Bloomberg data, with the next two closest being a -39.7bps and -30.5bps decline in 1997 and 2009, respectively. It was also the largest absolute daily yield move in the 30yr, with the next two closest being Monday and Tuesday’s sell-offs. The decline takes 30yrs back to 3.92%, which is still above the c.3.5% level prior to the fiscal announcement last Friday but more within normal market reaction levels. Yields on 10yr gilts were down by a smaller -49.8bps, although that reflected the BoE only purchasing gilts with a residual maturity of more than 20 years. Sterling also managed to strengthen for a second day running, with a +1.45% gain against the US Dollar. But that overall performance hides some incredible intraday swings, with sterling moving sharply higher immediately after the BoE’s announcement before tumbling by -2.74% over the subsequent hour and a half before paring back those losses once again. It is down -0.75% in Asia as I type. Remember that markets are still pricing in around +150bps worth of hikes by the next BoE meeting on November 3, and implied sterling-dollar volatility for the next month remains at levels we’ve only previously seen around the GFC, the Covid pandemic and Brexit in the 21st century, so we certainly haven’t heard the end of the UK’s turmoil just yet.

That intervention from the BoE helped sovereign bonds across the world. Indeed, yields on 10yr US Treasuries had been trading just above 4% immediately prior to the intervention, before reversing course to close -21.0bps lower on the day at 3.71%, which is their biggest move lower since the wild intraday swings we had in March 2020 when the Fed was stepping in to buy Treasuries and MBS in unlimited size; sound familiar? Those gains came as investors moved to downgrade the likelihood that the Fed would be pursuing aggressive policy into next year, with the rate priced in for December 2023 coming down by -23.3bps. This morning in Asia, yields on 10yr USTs (+3.6bps) have edged higher again to 3.77% as we type. In terms of the Fed, we did hear from Atlanta Fed President Bostic, who said he favoured another 125bps of hikes this year, but Chair Powell didn’t comment on policy in an appearance at a Community Banking Research Conference.

Over at the ECB, we heard from an array of speakers yesterday, including President Lagarde who said that the ECB would “continue hiking rates in the next several meetings”. Multiple speakers separately endorsed another 75bps hike next month as well, including Latvia’s Kazaks who said that “I would side with 75 basis points”, Austria’s Holzmann who said that “I think 75 would be a good guess”, and Slovakia’s Kazimir who said that 75bps was “a good candidate to continue and keep tightening.” However, sovereign bonds still rallied across the continent, with yields on 10yr bunds (-11.1bps), OATs (-11.8bps) and BTPs (-22.2bps) all down significantly.

When it came to equities, yesterday also finally brought a reprieve from the heavy selling over recent days, which had taken a number of major indices to their lowest levels since late-2020. As mentioned at the top, the S&P 500 (+1.97%) ended its run of 6 consecutive declines with a strong advance that took the index back into positive territory for the week. Despite the rally, the Vix managed to finish above 30 again, as it has every day this week. Indeed, the Vix has finished above 30 on nearly 19% of trading days this year, which is the fourth most in the last 20 years, behind just the crisis years of 2008, 2009, and 2020. The count hides how skewed the distribution is as in ten of those years, the Vix never once finished the trading day above 30. Yesterday's equity rally was less extreme in Europe, with the STOXX 600 (+0.30%), the DAX (+0.36%) and the FTSE 100 (+0.30%) seeing modest gains.

In Asia, the Hang Seng (+1.05%) is leading gains, rebounding from recent steep losses with the Kospi (+1.01%), the CSI (+0.50%), the Shanghai Composite (+0.24%) and the Nikkei (+0.25%) are trading higher. Stock futures in the US are pointing to a slightly more negative start though with contracts on the S&P 500 (-0.11%) and NASDAQ 100 (-0.22%) both in the red. As we go to print, the Swedish media is reporting that coast guards have found a fourth leak on the Nord Stream pipeline. What worries me is that if this can be done to this pipeline what stops it being done to a fully working pipeline.

Elsewhere, the People’s Bank of China (PBOC) stepped up its efforts to limit FX weakness by warning banks against betting on the yuan, after its rapid decline against the US dollar this week which pushed the Chinese currency to as high as 7.25 yesterday. Indeed, the US dollar index (+0.59%) at 113.27 is trending upwards this morning, after hitting a fresh two-decade peak yesterday before pulling back.

There wasn’t much in the way of data yesterday, although US pending home sales for August were down -2.0% (vs. -1.5% expected). With the exception of April 2020 during the lockdowns, that takes them to their lowest level in over a decade. In the meantime, the US goods trade deficit for August narrowed to $87.3bn (vs. $89.0bn expected), which is its smallest level since October 2021.

To the day ahead now, and data releases include German CPI for September, Italian PPI for August, and UK mortgage approvals for August (the calm before the storm). We’ll also get the weekly initial jobless claims from the US, as well as the third estimate of Q2 GDP. From central banks, we’ll also hear from an array of speakers, including ECB Vice President de Guindos, and the ECB’s Simkus, Panetta, Centeno, Villeroy, Knot, Elderson, Rehn, Vasle, Kazaks, Muller and Lane. In addition, there’ll be remarks from the Fed’s Bullard, Mester and Daly, as well as BoE Deputy Governor Ramsden and the BoE’s Tenreyro.

Tyler Durden Thu, 09/29/2022 - 08:08

Read More

Continue Reading

Spread & Containment

Mish’s Daily: Step Back to the Monthly Chart on Transportation

Last Friday, I spoke on Women of Wall Street Twitter Spaces and Fox Business’s Making Money with Charles Payne to talk about a key monthly moving average.What…

Published

on

Last Friday, I spoke on Women of Wall Street Twitter Spaces and Fox Business's Making Money with Charles Payne to talk about a key monthly moving average.

What makes this moving average so important right now is that three of the Economic Modern Family members are testing it. The three members, Granddad Russell 2000 (IWM), Grandma Retail (XRT) and Transportation (IYT), well deserve their status as what Stanley Druckenmiller calls the "inside" of the U.S. economy. In fact, the components of the modern family were put together before we heard Druckenmiller's viewpoint. We have observed how predictive they all are in helping us see in advance the next big market direction. Hence, these "inside" indicators -- right now -- are all sitting just above a 6–7-year business cycle low.

For the purposes of this daily and because we have featured this sector a lot lately, the chart of IYT is a perfect example of this moving average and what to watch for. Except for the brief blip in 2011 when the government shut down, and then again during the pandemic, IYT has sat above the dark blue line for 11 years. Currently, that line sits at the 195 area. The same is true with IWM and XRT, both marginally holding their monthly MAs.

So, watch IYT to either hold, and begin a rally possibly back closer to 220, or for IYT to fail 195, in which case we see the whole market selling off further.

To note, the other family members, such as Sister Semiconductors (SMH) and Prodigal Son Regional Banks (KRE) are still sitting well above the monthly MA. Big Brother Biotechnology (IBB), however, is now trading below it. And not in the family, but still notable, is the REIT sector (IYR), also sitting below it. SPY has the same MA, only that one sits at 310 (a long way off).

Incidentally, junk bonds broke down under this moving average in November 2021. The market has been slow to take junk bond's hint.

For more information on how to invest profitably in sectors like biotech, please reach out to Rob Quinn, our Chief Strategy Consultant, by clicking here.

Mish's Upcoming Seminars

ChartCon 2022: October 7-8th, Seattle (FULLY VIRTUAL EVENT). Join me and 16 other elite market experts for live trading rooms, fireside chats, and panel discussions. Learn more here.

The Money Show: Join me and many wonderful speakers at the Money Show in Orlando, beginning October 30th running thru November 1st; spend Halloween with us!

Get your copy of Plant Your Money Tree: A Guide to Growing Your Wealth and a special bonus here.


Follow Mish on Twitter @marketminute for stock picks and more. Follow Mish on Instagram (mishschneider) for daily morning videos. To see updated media clips, click here.

Mish in the Media

A business cycle is about 6-7 years - where are the indices now and what should you watch for? Mish discusses this question in this appearance on Fox's Making Money with Charles Payne.


ETF Summary

  • S&P 500 (SPY): Testing the previous low; 362 support, 370 resistance.
  • Russell 2000 (IWM): Broke the June low of 165.18; 162 support, 170 resistance.
  • Dow (DIA): Broke June low -289 support, 298 resistance.
  • Nasdaq (QQQ): Testing the June low;269 support, 280 resistance.
  • KRE (Regional Banks): Relative outperformer; 57 support, 61 resistance.
  • SMH (Semiconductors): 187 support, 194 resistance.
  • IYT (Transportation): 196 support, 200 resistance.
  • IBB (Biotechnology): 112 support, 118 resistance.
  • XRT (Retail): 55 support, 60 resistance.


Mish Schneider

MarketGauge.com

Director of Trading Research and Education

Read More

Continue Reading

Trending