Author: admin

By Michael Every of Rabobank

“How do you defuse a time bomb? Help, I need answers really qui…”

Yesterday saw US tech stocks tumble. Some of the biggest names took a big dip, and Bitcoin, the apparent wave of the future, receded nearly 20% from its recent peak. One pities the blue-chip CFO having to think about marking that crypto asset to market on their balance sheet: no firm would ever do something so rash in such volatile times, would they?

Meanwhile, US 10-year yields surged again to 1.39%, retracing, and then deciding that, no, they had been right earlier, to stand at 1.37% at time of writing. It’s almost as if the prospect of higher borrowing costs is negatively correlated with the performance of firms who base both their businesses and CEOs on Hooli/Gavin Belson from TV’s ‘Silicon Valley’ (“What is Hooli? Excellent question. Hooli isn’t just another high-tech company. Hooli isn’t just about software. Hooli, Hooli is about people. Hooli is about innovative technology that, makes a difference. Transforming the world as we know it. Making the world, a better place, through minimal message oriented transport layers.”) It’s also almost as if Bitcoin might be correlated with one ‘Belson’, who had just put crypto on his CFO’s balance sheet, saying that the price of said asset “seems high”. Or perhaps, more likely but less-well reported, with the US Treasury Secretary repeating that most of the activity that takes place in it is “extremely inefficient” and “illicit”. Tech tock, tech tock, tech tock(?)

What’s interesting is that the USD also sold off. So, briefly, nobody seemed to want to hold anything: not stocks, not bonds, not Bitcoin, and not the dollar. They are instead moving into commodities as the safest place to be, which is about as low-tech –and dystopian– a future as one can imagine. (I refer readers back to my previous Mad Max references of mohawked brokers in bondage masks and studded leather hotpants all screaming “Gasoline!” at each other.)

That means one wants to own AUD, for example. And Australians themselves still only want to own houses, of course. It’s boom-a-rama in that sector, with the ABC news last night underlining how even rural areas in Tasmania just saw sales prices rise 40% in 6 months. The RBA could arguably save themselves a lot of money by just publishing the daily paper property supplement ‘Domain’ instead of their reports focusing on the Aussie ‘macro economy’.

The problem –and it is a problem—remains that this is not the basis for a sustainable recovery, just a frenetic short-term scramble. Everyone, with Australia at the vanguard on housing, has painted themselves into a corner with this latest leg in a decades-long ‘boom’. What we have begotten is a series of global Hoolis, and housing now unaffordable everywhere to at least half the overall population, and the vast majority of the young, and to a mortgage debt-load so heavy that any rate increases –which Aussie markets are now actively pricing for!–  will bring the whole thing tumbling down.

Unless wages magically turn up to save the day. On which note, the ABC news last night, as just one example, was talking about how despite the unemployment rate in Australia nearly being back to the pre-Covid normal, vast numbers of people are still on the ‘JobKeeper’ scheme that ends on 28 March; and, separately, it explained how a government employer wage subsidy for younger workers was seeing a serious financial incentive put in place to fire full-time staff earning AUD75,000 (in their example) and replacing them with three youngsters all earning AUD25,000. Sticking with tech(ish) retorts: very wage pressure; so salaries; many money – you’d have to sew eight of them together into a human centi-aussie-pede to afford a single Aussie house at a level which would allow borrowing rates to rise again in the future.

Of course, this dilemma is true everywhere to varying degrees. As Bloomberg reports solemnly today: “US Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell appear wary of signs of froth in financial markets, even as they press ahead with economic stimulus measures that are elevating the euphoria.” Indeed, just a few weeks after two IMF officials warned of a “sense of complacency” permeating markets, Yellen told CNBC TV viewers yesterday that there “may be sectors where we should be very careful.” Was she referring to stocks, bonds, crypto, and the dollar?

Was ANY of what is now unfolding anything but entirely predictable? We are all very much Keynesians again now. Yet Keynes spoke of the need to “euthanize the rentier” via low interest rates: we have eulogised them that way!

Bloomberg then goes on to bewail that “the US has fewer regulatory tools to head off asset bubbles and excessive leverage than many other countries.” Back to tech analogies: do the regulatory tools to stop such rentier-eulogising appear from the sky, like the Black Slab in ‘2001’, for primitive markets to gather round and jabber at, before then ascending to a higher level of evolutionary development? Or are they ultra-complex manmade things that only a few Gavin Belsons of this world can understand?

It’s not rocket science. We all know what happens when you don’t juice the system;  and we all know what happens when you juice the system the way we are. Logically, the only way to prevent what we see today would be de facto credit rationing – which used to be the norm in capitalist economies under Bretton Woods, until the neoliberal reforms that built our present, wobbly global structure. For example, you could slash rates to zero, but cap the overall level of borrowing in a given sector, like mortgages, which given supply and demand for funds would then mean households would pay a higher price for money. (China tries some similar things today in its own way.)

Would that create a whole new set of problems? Sure! First, the current bubble would burst. But that’s going to happen anyway – or society will, with a lag. Second, a lot of international capital flows wouldn’t be needed – so de facto deglobalisation. So one can see why this is therefore ignored. But fewer and fewer voters seem to like this globalisation – and what other *logical* answer is there?

Today we hear from the Fed’s Powell at his semi-annual testimony to Congress – and I am sure nothing at all that I have mentioned above will be spoken of. We can expect something more Belson-esque –“What those in dying business sectors call failure, we in tech know to be pre-greatness” — or else that ‘teching’ sound in the background is going to be followed by a very, very loud bang even more quickly than would otherwise be the case.

So goes Bitcoin, so goes Tesla.

At least that was the manta on Tuesday morning as Tesla shares plunged in the pre-market session, extending yesterday’s ugly losses and falling below the level where Tesla was included into the S&P 500. In addition to Tesla plunging, Bitcoin was also down about 15% heading into the cash open on Tuesday and a newly announced SPAC deal for Lucid Motors had pulled back more than 40% from highs it made just days ago.

This means that everyone who chased the S&P 500 trade, in addition to anyone who admittedly has been buying over the last 2-3 trading days *cough* Cathie Wood on CNBC last week *cough* is now in the red.

Hilariously, Tesla bull Cathie Wood was actually predicting a market turnaround for the NASDAQ last week. She joined CNBC’s Scott Wapner and warned of the increasing risk of a stock market correction if rates continue to “sharply” rise. 

Around the 3:30 minute mark of the CNBC video, Wood told Wapner, “I do believe if rates were to take a sharp turn up, that we would see a valuation reset and our portfolios would be prime candidates for that valuation reset of course.”

 

Wood went on to say:

“Now one of the things that I found interesting over the last really 20 years is that the S&P’s P/E ratio tends to peak out in the 20 to 25 times range of forward earnings. And I think the reason for that is most portfolio managers and maybe quantitative research researchers are looking at normalized nominal GDP growth in the 4-5% range, which is where long-term interest rates should be normalized. We actually think normalized GDP growth is probably closer to 3%.”

She continued: 

“Now, if you think that’s where long-term interest rates should stabilize, if you think of 20 to 25 times that’s one over four to five percent growth, so it’s the inverse of the growth rate, the nominal GDP growth. And that’s where it seems to be peaking out. We think it’s there, longer term. I agree there will be a valuation reset. There will be fear.”

Recall, in the world of Tesla, things don’t seem to be going particularly well. Less than a day ago we noted that Tesla had just stopped selling the base model version of its Model Y without explanation. 

And even the pro-Tesla lemmings over at electrek had to admit yesterday that the company’s broader pricing and configurator changes are “becoming hard to follow”. At the moment, the only Model Y available is the $48,990 long range all wheel drive version. 

Additionally, last week, Edmunds released a bombshell, claiming that “every single Tesla” they tested didn’t meet its EPA estimated range. This list included the 2020 Model Y Performance, which had a range of 263 miles versus a claimed range of 291 miles.

But we think worth noting even further is a relationship between Tesla and China that looks like it could be under stress. China plays a key role in the automaker’s plans to expand in coming years and Musk’s ability to continually kiss the ass of the CCP in exchange for sweetheart deals and the right to do business in the country will be paramount. For those unfamiliar with that dynamic, we suggest reading our piece from January 2021 called “Elon Musk’s Chinese Fairy Tale Will Eventually Come To An End”.

Global stocks, US equity futures and cryptocurrencies all tumbled on Tuesday as the recent surge in inflation, bond yields and commodity prices continued to hammer technology shares while investors awaited fresh reassurance from U.S. Federal Reserve Chair Jerome Powell on the path for monetary policy in United States.

The MSCI world equity index fell 0.1% to fresh two-week lows, having earlier risen on gains in commodity-heavy equity indexes in Asia. After rising during the Asian session, S&P 500 futures also fell once Europen came online, and were last down 0.4%.

Nasdaq futures tumbled as much as 2%, and were last down 1.4% a day after the tech-heavy gauge posted its longest losing streak in four months. Heavyweight tech stocks slid premarket, with Apple -2.7%, Amazon -2.4%, Tesla -7.5%, Alphabet -1.6%. Tesla crashed 6% in pre-market trading, sliding below the $695 level at which it entered the S&P500.  Tesla shares were set to plunge into the red for the year, hit by a fall of bitcoin, in which the electric carmaker recently invested $1.5 billion.

Adding to the risk off mood, Bitcoin resumed its recent plunge, plunging as much as 17% below $46,000, down over $12,000 from recent highs after a bout of volatility highlighted lingering doubts about the durability of the token’s rally.

“The prospect of a less dovish tone from central banks, sparked by rising inflation, is causing stock traders to reduce their exposure to equities, especially overbought sectors like tech,” said Pierre Veyret, analyst at ActivTrades in London. Another concern among investors is that broad benchmarks have already priced in much of the prospective global recovery spurred by vaccines and U.S. stimulus. Alongside rising inflation, another is that central banks may eventually start reconsidering emergency programs that have supported global markets.

Europe’s Stoxx 600 was down -0.8%, sliding as much as 1.6% earlier, with Tech stocks leading losses. European tech stocks were on set for their worst day in four months, down 2.7%, and the worst-performing index in Europe, as chip-equipment makers plunged  amid market rotation out of more expensive sectors. Pandemic winners also dive. The index fell as much as 3.9% to a three-week low, the steepest intraday drop since Oct. 26. Chip- equipment makers, which have benefited amid a global shortage of semiconductors and are among the best-performing tech stocks in Europe this year, declined sharply: BE Semi -7.2%, ASMI -6.1%, ASML -3.4%. On the other end, mall operators, office landlords and events companies rose in Europe on increasing optimism about the prospects for reopening the Covid-hit economy following news that Germany mulled loosening the rules for easing lockdown restrictions. That followed the U.K. having set out an aim to gradually ease restrictions in stages over the next four months.

Here are some of the biggest European movers today:

• Chip stocks fall on Tuesday, weighing on the Stoxx Tech Index, reflecting declines across U.S. semiconductor peers late Monday, as market rotation out of more expensive stocks and sectors gathers pace.
• Covestro shares jump as much as 3.4% before erasing gain in Frankfurt; Commerzbank says the company published a “strong” 1Q outlook, but a cautious view on 2Q to 4Q, leaving upside to consensus.
• U.K. domestically oriented stocks gained on Tuesday as travel and entertainment shares surged after Prime Minister Boris Johnson announced plans to reopen the economy.
• KPN shares tumble as much as 10%, their biggest one-day drop since June 2016, as America Movil sells around EU2.2b of bonds exchangeable into shares in the Dutch phone company.
• Adyen shares drop as much as 4.5% to a two-week low of EU2,056, after a pre-IPO investor sells shares in the payments firm.

Earlier in the session, Asian stocks rose clearly unaware of the shitstorm that was about to be unleashed by European traders, with equity benchmarks in Thailand and Hong Kong the biggest gainers in the region. The SET Index jumped as much as 2%, with tourism and leisure stocks rallying the most on the gauge amid optimism over the arrival of Covid-19 vaccines and relaxation of pandemic-led restrictions. Casino operators Galaxy Entertainment Group and Sands China surged to be among the top gainers on the Hang Seng Index, after Macau reopened to quarantine-free travel from mainland China. Energy was the top-performing sector in Asia as oil surged toward $63 a barrel. Investment banks and traders predicting the market will tighten further and push prices higher. Technology was the worst performer. The MSCI Asia Pacific Index headed for its first gain in four sessions, with equity benchmarks in Australia and Singapore also rising. Stocks were lower in South Korea and Malaysia, while Japanese markets were shut for a holiday.

India stocks ended little changed, after swinging between gains and losses several times in the session. The S&P BSE Sensex closed marginally higher at 49,751.41 in Mumbai, while the NSE Nifty 50 Index added 0.2%. Both gauges had retreated more than 4% through Monday from record highs on Feb. 15. Reliance Industries Ltd. gave the biggest boost to both measures after saying it plans to spin off its oil-to-chemicals operation into an independent unit. A gauge of metal companies was the top performer among the 19 sector indexes compiled by BSE Ltd

Rising inflation bets spurred by the global economic recovery have hammered stocks in the past week. The level of angst was also reflected in various equity volatility gauges which rose to multi-week highs, while on bond markets German and U.S. yields moved in different directions, even though both remained just below the highs hit on Monday. 

After being knocked off from eight-month high by European Central Bank chief Christine Lagarde signalling discomfort with the recent surge in yields, 10-year Bund yields resumed their upward trend and were last at -0.297%.

In rates, Treasuries steadied on Tuesday, below Monday’s one-year high of 1.394% and were last at 1.360%. Yields were cheaper by ~1bp across long-end of the curve, steepening 5s30s by ~2bp after the 5s30s touched the highest level in more than six years. A wider bear-steepening move in under way in bunds, which trade 4bp cheaper vs Treasuries. The curve steepened, pivoting around a little-changed 10-year sector. Month-end re-balancing flows are moving into focus as traders anticipate rotation into bonds. Auction cycle begins with 2-year notes, while Fed Chair Powell delivers semi-annual monetary policy report.  Most peripheral and semi-core spreads widen to Germany; Italy outperforms, tightening ~1bps at the long end

Traders will be waiting to hear from Fed Chair Jerome Powell when he testifies to the Senate Banking Committee on Tuesday and the House Financial Services panel the following day. He’s expected to be reassuring on the central bank’s dovish stance when he gives his congressional testimony at 1500 GMT in Washington, and to play down the risk of inflation despite the size of President Joe Biden’s $1.9 trillion coronavirus relief proposal.

“Fed Chair Jay Powell will be torn today,” ING analysts led by Padhraic Garveywrote in a anote. “A bit of inflation is a good thing; it’s what the Fed has wanted. But too much anticipation of it is not good, as it tightens policy prematurely.”

“If there were already any expectations that Powell could try to calm down rates, then (Lagarde’s remarks) have just further cemented them,” said Giuseppe Sersale, strategist and fund manager at Anthilia in Milan.

In currency markets, the dollar briefly dropped to its lowest since Jan. 13 before advancing against most G-10 peers, with traders waiting to see if Powell will address the selloff in Treasuries. The pound led G-10 gains, nearing $1.41 as investors digested the U.K.’s plan to open up the economy. The Canadian dollar outperformed most peers as oil prices continued their ascent.  The dollar index was up 0.1% at 90.137, with the euro flat at $1.215.

Commodity prices strengthened again with Copper extending gains, while WTI crude rose toward $63 a barrel. Oil prices jumped by more than $1 at one point, underpinned by optimism over COVID-19 vaccine rollouts and lower output as U.S. supplies were slow to return after a deep freeze in Texas shut in crude production last week. Brent crude was last up 0.7% at $65.7 a barrel after earlier hitting a fresh 13-month high of $66.79, while U.S. crude rose 0.8% to $62.17 a barrel.

“Oil has been caught up in the broader commodities move higher, with a weaker USD proving constructive for the complex,” ING strategists led by Warren Patterson said in a note. “Meanwhile, there is also a growing view that the oil market is looking increasingly tight over the remainder of the year”.

Copper prices meanwhile hit a 9-1/2-year high as tight supply and solid demand from top consumer China boosted sentiment.

To the day ahead, and the highlight will be the aforementioned appearance of Fed Chair Powell before the Senate Banking Committee. Otherwise, data releases from Europe include UK unemployment for December and the final Euro Area CPI reading for January, while from the US there’s the Conference Board’s consumer confidence indicator for February, the Richmond Fed’s manufacturing index for February and the FHFA house price index or December. Lastly, earnings releases include Home Depot, Medtronic and Intuit.

Market Snapshot

• S&P 500 futures down 0.3% to 3,860.50
• SXXP Index down 1.2%
• MXAP up 0.1% to 216.65
• MXAPJ up 0.3% to 725.81
• Nikkei up 0.5% to 30,156.03
• Topix up 0.5% to 1,938.35
• Hang Seng Index up 1.0% to 30,632.64
• Shanghai Composite down 0.2% to 3,636.36
• Sensex little changed at 49,720.21
• Australia S&P/ASX 200 up 0.9% to 6,839.17
• German 10Y yield up 4 bps to -0.30%
• Euro little changed at $1.2155
• Kospi down 0.3% to 3,070.09
• Brent futures up 1.2% to $66.03/bbl
• Gold spot down 0.2% to $1,806.15
• U.S. Dollar Index up 0.1% to 90.14

Top Overnight News from Bloomberg

• The U.K.’s finance minister Rishi Sunak is set to spend billions of pounds in extra support for the economy over the next four months, as pandemic curbs pushed unemployment to its highest level in almost five years
• Copper rose to the highest level in over nine years as a rally in industrial metals showed little sign of abating amid a global recovery from the pandemic
• European Central Bank President Christine Lagarde said her institution is “closely monitoring” the market for government bonds, in a sign that she might act to prevent rising yields undermining the economic recovery from the pandemic
• Oil extended gains near $62 a barrel with investment banks and traders predicting the market will tighten further and push prices higher
• Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn. The Bloomberg Commodity Spot Index, which tracks price movements for 23 raw materials, rose 1.6% on Monday to its highest since March 2013
• In Brazil, investors unloaded everything from state- run companies to bonds and the currency after President Jair Bolsonaro ousted the head of oil giant Petrobras, sparking worries of government meddling and a break with his administration’s market-friendly pledges
• Japan is planning to lift the state of emergency in places outside the Tokyo metropolitan area earlier than planned, with falling numbers of coronavirus cases easing the strain on hospitals, the Asahi newspaper reported Tuesday
• U.S. deaths passed the 500,000 mark on Monday. Global deaths related to Covid-19 have surpassed 2.46 million, with the U.S. leading all countries with more than twice the number recorded by the next closest, Brazil, according to Bloomberg’s virus tracker

A quick look at global markets courtesy of Newsquawk

Asian equity markets eventually traded mostly positive after weathering the initial choppy price action following on from the mostly negative lead from Wall St where sentiment was pressured amid underperformance in tech and continued increases in yields as US money markets brought forward bets of a Fed rate increase and priced in a 70% chance of a 25bps hike by end-2022. ASX 200 (+0.9%) shrugged off the early tech-led declines and found support from strength in the commodity-related sectors especially energy stocks after oil prices continued to rally and as financials benefitted from the rising yield environment. KOSPI (-0.1%) lagged its peers in a resumption of this year’s consolidation above the 3,000 level and with a miss on earnings from drug manufacturer Celltrion weighing on other domestic pharmaceutical heavyweights. Hang Seng (+1.6%) and Shanghai Comp. (+0.4%) began indecisive following a tepid liquidity effort by the PBoC which injected a net CNY 10bln, while US-China tensions continued to linger as US House Speaker Pelosi suggested all options are on the table in holding China accountable for human rights abuses and State Department spokesman stated that recent comments by China Foreign Minister Wang Yi reflected the continued pattern of Beijing averting the blame. However, Chinese markets then gained with Hong Kong leading the advances as the Chinese oil majors reacted to further upside in crude prices and with HSBC leading the banks amid its earnings release in which it reported a decline in FY net and revenue but announced a resumption of its interim dividend. As a reminder, Japanese markets were closed in observance of the Emperor’s Birthday holiday.

Top Asian News

• China Must Reform Hong Kong Election Rules, Carrie Lam Says
• Axiata Tower Unit Stake Sale Is Said to Stall After Myanmar Coup
• Japan Seen Ending Virus Emergency Early Outside Tokyo Region
• HSBC’s Asia Bankers Do Better Than Peers as Bonus Pool Cut 20%

European equities kicked off the session with mild gains across the board, but the momentum then reversed and major bourses now trade notably lower (Euro Stoxx 50 -1.4%) following on from a mixed APAC handover. US equity futures have also given up overnight gains, with the tech-led NQ (-1.8%) again the underperformer during early European trade – as traders and investors seemingly rotate out of “stay at home” tech stocks and into more commodity and recovery-driven names. Meanwhile in Europe, UK’s FTSE 100 cash (-0.8%) was initially resilient, and remains comparatively so to a degree, after UK PM Johnson provided recovery stocks with a boost as he unveiled a roadmap out of lockdown – with the ‘finish-line’ currently on June 21st. This announcement has seen a surge in airline bookings, with easyJet (+8.2%) reporting that summer flight bookings rose 337% W/W and holiday bookings surged 630%. In turn, assisting regional airlines with impetus as IAG (+6%) and Ryanair (+4.3%) cheer the light at the of the tunnel, whilst EU airliners Lufthansa (+7%) and Air France-KLM (+5%) are dragged higher in tandem – note, this would also be bullish for the energy complex amid higher jet fuel demand. As such, the gains across the oil complex has also translated to gains among the FTSE 100’s oil giants Shell (+1.7%) and BP (+2.8%), whilst the extended rally in base metals, namely copper, has again bolstered UK miners – with index heavyweights Rio Tinto (+1.7%) and BHP (+3%) reaping rewards. The performances mentioned above is reflected in the regional sectors, with Travel & Leisure topping the charts, closely followed by Oil & Gas, Basic Resources and Banks. The latter is supported by the overall higher yield environment, whilst HSBC (-1.3%) conformed to the broader sentiment after topping FY/Q4 pretax and FY CET1 ratio forecasts and announced a dividend. However, the group downgraded the language surrounding its ROTE target. Tech is the notable laggard in tandem with the performance in NQ futures, with healthcare also residing towards the bottom of the pile. In terms of movers, the top gainers in the region consists of the most-hit pandemic stocks including the likes of Cineworld (+11%), airliners, aircraft manufacturers and hotel names, with the other side of the spectrum is comprised of the COVID-beneficiaries including Ocado (-5%) and Delivery Hero (-4%).

Top European News

• BlackRock Strategists Debut OW Call on U.K. Stocks, Lift Europe
• French Have a $146 Billion Savings War Chest From Covid Crisis
• Aviva Sells French Arm for $3.9 Billion in Key Deal for CEO
• Sunak Plans More Covid Aid for U.K. as Unemployment Climbs

In FX, the Dollar has lost a bit more of its yield advantage, but not all attraction as a safe-haven it seems given that the index has regained some composure after a more pronounced pull-back from recent recovery highs. The DXY is holding around 90.000 within a 89.941-90.194 range ahead of US housing data, consumer confidence, regional Fed surveys, Discount Rate meeting minutes, the first semi-annual testimony from chair Powell and the Usd 60 bn 2 year note auction that could set the tone for this week’s issuance remit. Note also, the Greenback is getting a boost from another abrupt and sustained reversal in crypto currencies like Bitcoin that is back below the Usd 50k mark and has been down to Usd 45k vs its new circa Usd 58.5k record peak.

• GBP/EUR/NOK/CAD – Relative G10 outperformers, or at least displaying some resilience in face of the Buck bounce, as Sterling eyes 1.4100 in wake of UK PM Johnson’s 4 step plan to reopen the nation, and the Euro finds support around 1.2150 where technical levels form a cluster with hefty option expiry interest (50 DMA at 1.2154 today, 50% Fib of the fall from 1.2349 in January to 1.1952 current m-t-day low at 1.2151 and 1.6 bn at the 1.2155 strike). Meanwhile, further upside in oil, with WTI touching Usd 63/brl and Brent above Usd 66.75 at one stage is helping the Norwegian Crown to pare losses between 10.3425-10.2825 parameters against the Euro and keeping the Loonie anchored to 1.2600 vs its US counterpart in advance of comments from BoC Governor Macklem.
• NZD/AUD – Both off best levels as broad risk sentiment sours, but the Kiwi has unwound declines vs the Aussie from around 1.0827 following weaker than forecast NZ retail sales and another boost for the latter via base metals. Hence, Nzd/Usd is holding firmer on the 0.7300 handle than Aud/Usd in relation to 0.7900 before construction work done, wages, RBNZ policy meeting and press conference.
• JPY/CHF/SEK – The Yen could not maintain momentum through 105.00 overnight, perhaps due to the lack of Japanese participation on the Emperor’s Birthday market holiday, but the Franc is underperforming again and back beneath 0.9000 with little support from mildly less deflationary Swiss producer and import prices on a y/y basis. Indeed, Eur/Chf is firmly above 1.0900 and has nudged 1.0949 in keeping with upside in Eur/Sek after recent approaches towards 10.0000 failed to breach the round number and the cross retraces amidst more dovish-leaning Riksbank remarks (Bremen latest) and a rise in Swedish unemployment.

In commodities, WTI and Brent front month futures have given up intraday gains as sentiment across the market deteriorated during early European trade. WTI now resides closer to USD 62/bbl (vs high USD 63/bbl) and Brent has relinquished its USD 66/bbl handle (vs high USD 66.79/bbl). However looking at the bigger picture, the complex remains elevated by underlying fundamentals still being present such as OPEC+ support and vaccination progress. Moreover, production in the oil-pumping state of Texas is returning at a slower pace than previously anticipated. In turn, due to this weather event and Texas producing just under half of all US oil, a distortion in this week’s inventory and production figure may be seen. On the demand side, UK PM Johnson announced the UK’s roadmap for lifting restrictions against COVID moving ahead. This announcement translates into a bullish prospect for jet fuel demand, as within the plan it highlights the opening of holidays and ability to travel abroad in the Summer. Both the supply and demand factors could be regarded as the driving force behind the firmer price action overnight, whilst sentiment took helm in early hours. Notable tail-risks on the table surrounds the UK lockdown plan, which is data driven and hence, if the figures are not favourable it could see a change to the roadmap moving forward. Also, the OPEC+ confab is next week (JMMC on the 3rd and OPEC+ on the 4th), and participations will pay close attention to the sentiment between Saudi Arabia & Russia. With the COVID outlook looking increasingly favourable, the conservative Saudi Arabia and hawkish Russia may clash heads, again, thus a clear downside risk is present heading into the policy-setting meeting. Elsewhere, precious metals seem to be influenced by Buck, with spot gold relatively contained just above USD 1800/oz and spot silver resides around USD 27.85/oz (vs high USD 27.94/oz) . Turning to base metals, LME copper remains above USD 9,000/t but trades off best levels and edging closer to session lows as the firming Dollar and destination sentiment weigh on the recovery-driven metal. More on copper, Chile’s state-owned Codelco, the world’s largest copper producer, states the recent spike in the price of the red metal could increase miner’s costs. Lastly, Dalian iron ore futures fell 2% after top steel-producing city Tangshan issued a second-level pollution alert forcing mills to curb production.

US Event Calendar

• 9am: Dec. S&P/Case-Shiller US HPI YoY, prior 9.49%
• 9am: Dec. S&P CS Composite-20 YoY, est. 9.90%, prior 9.08%
• 9am: Dec. FHFA House Price Index MoM, est. 1.0%, prior 1.0%
• 9am: 4Q House Price Purchase Index QoQ, prior 3.1%
• 10am: Feb. Conf. Board Consumer Confidence, est. 90.0, prior 89.3;
• 10am: Feb. Richmond Fed Index, est. 16, prior 14

DB’s Jim Reid concludes the overnight wrap

Yesterday had more twists than your average Shakespearian drama in what was a pretty topsy-turvy day for global markets. Equities sold off again on the back of continued concerns over inflationary pressures, while sovereign bonds swung between gains and losses with yields around 3bps higher in the US but around 3bps lower across Europe. Meanwhile, commodities hit 7-year highs, Bitcoin traded in a 17% range, and Tesla (-8.52%) technically tipped into a bear market.

Looking at the moves in more depth, all of the major equity indices on both sides of the Atlantic lost ground, with the S&P 500 (-0.77%) experiencing its 5th consecutive decline and the VIX index of volatility rising +1.40pts to its highest level in nearly 3 weeks. As it happens, the last time the S&P saw that many straight moves lower was exactly a year ago during the last week of February 2020, when global markets saw their first major pandemic-led sell-off. Europe’s STOXX 600 (-0.44%) outperformed, in part due to its smaller exposure to Technology companies. The tech-heavy NASDAQ composite fell -2.46% in its worst day so far this month with some of its largest names seeing heavy losses, namely Tesla (-8.52%), Apple (-2.98%) and Microsoft (-2.68%). Tesla is now only up c.1% YTD having been nearly +25% less than a month ago.

Tesla and Bitcoin are increasingly tied together and the latter had a crazy day, trading down -16.53% at one point before closing -4.21% in its worst daily performance this month. It’s not clear if the moves were prompted by a delayed reaction to an Elon Musk tweet on Saturday in which he said that the bitcoin did “seem high”. Bitcoin prices are down a further -10.54% this morning to $49,145 and are approaching yesterday’s lows again.

The risk-off sentiment has come to a halt in Asia this morning though with the Hang Seng (+1.67%), Shanghai Comp (+0.59%), Kospi (+0.27%), Asx (+0.86%) and India’s Nifty (+1.14%) all up. Japanese markets are closed for a holiday. Futures on the S&P 500 are also up +0.54% and European ones are pointing to a positive open too. Yields are fairly flat.

Back to yesterday and it was another strong day for oil prices with WTI up +3.80% and Brent crude gaining +3.70% to finish over $65/bll, this helped the energy sector continue to outperform (S&P Energy +3.46%) and fuel the cyclical rotation trade. The strength in oil prices followed news of accelerating drawdowns of global inventories and improving demand conditions. WTI (+1.62%) and Brent (+1.82%) continue to climb this morning with Brent crude trading at $66.43, the highest since November 2018. Elsewhere, copper advanced further (+1.64%) yesterday to its highest level in nearly a decade. In fact, the Bloomberg Commodity Spot Index also rose +1.64% to reach its highest level since March 2013, on the back of the move in industrial metals and the jump in oil prices.

For sovereign bond markets, it was a much more divergent performance, with Europe seeing a reasonable decline in yields whilst those on 10yr Treasuries actually rose +2.9bps to 1.365%. That was beneath its intraday high of 1.393% though, but still marked its highest closing level in nearly a year. Today, all eyes will be on Fed Chair Powell, who’s testifying before the Senate Banking Committee when delivering the semiannual monetary policy report to Congress. According to our US economists, Powell is likely to reiterate his messages that a “patiently accommodative” monetary policy is important, and that the US is still “very far” from a strong labour market. Real yields have continued to climb ahead of his appearance, however, with 10yr real yields hitting a 3-month high yesterday of -0.79%.

I did a CoTD showing real yields back over 200 years and highlighted that the only time real yields are negative for any period of time are around episodes of high debt. Given today’s debt levels, it’s likely real yields will stay ultra low for as far as the eye can see even if we’re seeing some cyclical pressure now. If real yields got anywhere close to long-term norms, debt sustainability would be seriously questioned and hence the Fed would likely step in well before. Financial repression and QE will likely be alive and well for the rest of most of our careers. See the piece here.

Over in Europe, yields were on track to hit their highest in months as well, but swung round mid-session to move lower following comments from ECB President Lagarde. Notably, she said that the ECB were “closely monitoring the evolution of longer-term nominal bond yields”, which isn’t generally a phrase you’d use when you welcomed the recent rise. Given that 10yr Bunds are still -0.34% it’s a remarkable situation that one can be getting uncomfortable with the move. Anyway, yields fell in direct response, with those on 10yr bunds (-3.4bps), OATs (-3.6bps) and BTPs (-2.6bps) all ending the day lower. Gilts (-1.9bps) continued to underperform bonds elsewhere however, with the spread between their 10yr yields over bunds widening to their biggest level in nearly a year.

Elsewhere, news that President Bolsonaro fired the head of Petrobras – a state-run oil company – roiled markets there, as investors took the move as a sign that some of the Brazilian President’s market-friendly initiatives may be rolled back. Brazilian markets saw their worst day since the autumn, as the Ibovespa index lost -4.87%, with state-run companies leading the declines. It was the biggest loss for the equity index since October of last year and Petrobras, the third-largest component of the index, finished the day down -21.19%. Meanwhile, the Brazilian 10yr yield rose +18.0bps to close at its highest level since late-March.

On the pandemic, studies added to a growing body of evidence that the vaccination programmes are beginning to have an impact. One in Scotland published yesterday, albeit not peer-reviewed yet, found that the AstraZeneca/Oxford vaccine reduced hospital admissions by 94% with a single dose 4-6 weeks after vaccination, while the Pfizer/BioNTech vaccine led to an 85% reduction. On top of this, a separate analysis from Public Health England found that a single dose of the Pfizer vaccine reduced the risk of catching infection by 85% after the second dose.

These positive announcements yesterday coincided with Prime Minister Johnson’s moves to outline the roadmap out of the English lockdown, which will begin to be eased from March 8, at which point schools would be reopened. However, it was a fairly cautious path overall and the stay-at-home message will remain until March 29, at which point people will be able to gather in groups of up to 6 or 2 separate households outdoors. Golf will return on this date – a bit later than I’d hoped. Furthermore, it won’t be until April 12 at the earliest that non-essential retail and gyms could reopen, along with outdoor hospitality, while indoor mixing between households will have to wait until May 17 at the earliest. As we said at the top, all social restrictions are hoped to be abandoned by June 21st just as the nights slowly start to get darker again!!

Elsewhere in Europe, the direction of travel seemed to be towards tougher restrictions, with Italy announcing an extension of travel curbs between regions until March 27, and authorities in France announced a lockdown for the next two weekends in Nice. Separately, Bloomberg reported that the German government were considering a further €50bn in debt spending, or around 1.5% of GDP, with the report saying that finance minister Scholz would propose suspending the constitutional debt brake for a third year. Speaking of Germany, the Ifo’s latest business climate indicator rose to a stronger-than-expected 92.4 in February (vs. 90.5 expected). That’s a 4-month high and was supported by the expectations measure coming in at 94.2, which also beat expectations for a 91.7 reading.

In the US, the FDA announced that drugmakers would not have to undergo large efficacy trials on booster shots to combat the variants, if needed, and that they would instead be based on immunogenicity studies, where researchers give vaccines to people and then conduct lab tests to measure the immune response. This is similar to how the annual flu vaccine is tested and produced. Also on vaccines, Moderna got positive feedback from the US government to get more doses of its Covid-19 vaccine from each individual vial it produces. This could expand supplies, which continues to trail demand dramatically. In terms of restrictions, New York continues to ease curbs on businesses as theatres will be allowed to reopen in mid-March with reduced capacity. Meanwhile in Asia, Japan is planning to end the state of emergency in six prefectures including Osaka and Kyoto at the end of the month, a week earlier than planned.

To the day ahead, and the highlight will be the aforementioned appearance of Fed Chair Powell before the Senate Banking Committee. Otherwise, data releases from Europe include UK unemployment for December and the final Euro Area CPI reading for January, while from the US there’s the Conference Board’s consumer confidence indicator for February, the Richmond Fed’s manufacturing index for February and the FHFA house price index or December. Lastly, earnings releases include Home Depot, Medtronic and Intuit.

Authored by One River Asset Management CIO Eric Peters, who is up about $2 billion on his massive and pioneering purchase of bitcoin last year.

Anecdote

“Faith, cynicism, skepticism,” said the CIO.

“The faithful believe in something, cynics believe in nothing, skeptics find the balance,” he continued.

“Western society was built on a foundation of healthy skepticism, and this is quite clearly being lost. It is easiest to observe in Washington which makes sense because the political costs of polarization in today’s world are declining,” he said.

“We increasingly see that as people are drawn toward the cynical and faithful wings of the distribution, the cynics develop their own faith, and the faithful develop their own cynicism. And these passions amplify the tribal conflicts that divide us,” he said.

“This is beginning to manifest in markets, which we are taught should be immune, rational. Having capital at risk forces one to be sober when considering the possible future states of the world, probabilities, market prices, risk versus reward,” he explained.

“But then you see GameStop and the January 6th insurrection. They were the same phenomenon, the same pathology, manifesting in different ways, and each will have lasting consequences, tattooed in ink.”

Shorting stocks will never be quite the same.

And the radicalization of political protest has entered a new realm.

“People don’t want to find common ground, they want to fight. People want to destroy the opposing premise. Go to a Reddit board and see what happens to someone who questions Tesla’s valuation,” he said.

“This is spilling over into financial markets more broadly, in ways that fatten the bullish and bearish tails and will increase the frequency of wild outcomes,” he said.

“Markets are beginning to take a new shape – driven by the amplification of faith and cynicism. It is ultimately terrible for society, but vital to see clearly if you must navigate markets. And we’re already starting to see things happen that not long ago were unimaginable.”

In a new note out of Goldman’s Christian Mueller-Glissmann, the strategist looks at the impact of inflation on balanced portfolios, and writes that even as US inflation expectations have fully recovered and investors are moving from fading deflation risk to pricing an inflation overshoot (which in moderation is good since “higher inflation matters critically for balanced portfolios, which tend to perform best when growth accelerates but inflation pressures are limited”) so far the rise in inflation expectations “has not been a headwind for 60/40 portfolios as investors mostly faded deflation risk”.

But with inflation expectations and real rates both rising sharply higher, the drag from bonds and pressure for higher equity allocations increases, also as bond yields remain close to the zero lower bound. And with higher and rising inflation the risk of rate shocks is higher, with Goldman warning that equities and bonds have often declined together in real terms (eventually).

Looking at the historical record, we find that the S&P 500 has been very positively correlated with US 10-year breakeven inflation and negatively with US10-year TIPS (or Real) yields .

As Goldman observes, over the past two decades with inflation anchored and surprises skewed to the downside, equities have generally digested higher bond yields well. At least this was the case outside of negative rate shocks, when bond yields increased too fast, e.g., the US ‘taper tantrum’ in May 2013. But with rising inflation the potential for surprises and overshoot increases – there are three distinct “inflation phases” investors have to keep an eye on (not to be confused with the three catalysts listed by Morgan Stanley which would hint at an imminent yield blast off). We list them below:

1. Rising inflation expectations due to fading deflation risk.

Last year real yields declined as breakeven inflation recovered from low levels and nominal bond yields were anchored close to the zero lower bound. As a result, breakeven inflation and real rates have moved in opposite directions, which has seldom been the case (chart 12 below). This new real rate regime has been supported by very dovish central bank policies and guidance during the COVID-19 recovery. And as Goldman notes, “breakeven inflation has been closely linked to growth expectations” (actually, what it’s even more closely linked to is the price of oil). It was similar post the GFC: real yields declined as investors faded deflation risk and nominal rates were anchored.

Fading deflation risk boosted equities last year while the bond sell-off has been mild. In particular, valuations for structural growth stocks, e.g., US Tech, have increased as their long-term growth expectations were stable but lower bond yields reduced their cost of equity; as a result, equity duration increased, in particular in the US. But this regime exacerbates both positive and negative growth shocks. For example, with inflation expectations falling faster than nominal bond yields at the zero lower bound during the COVID-19 growth shock, real yields increased sharply, further weighing on equities.

2. Early inflation overshoot and risk of rate shocks.

As markets shift from fading deflation risk to pricing an inflation overshoot, the drag from bonds on 60/40 portfolios increases. Nominal rates have been anchored so far as inflation expectations have mainly retraced earlier declines but stayed below central bank targets. However, US 10-year breakeven inflation has been closely linked to realized inflation and a continued inflation pick-up, even if due to base effects, might drive an overshoot. As inflation, both expectations and realized, rises above central bank targets, upward pressure on nominal bond yields increases. Since the late 1990s inflation expectations have been range bound and negatively skewed (Exhibit 14). With higher inflation, breakevens might break out of that range and become more positively skewed. Bond term premia are likely to increase and bonds become a larger drag in balanced portfolios (Exhibit 15). From low levels equities should digest higher yields with better growth and as long as increases are gradual, pointing to larger equity/smaller bond allocations.

After the “friendly” real rate regime during the COVID-19 recovery, changes in real yields will matter more. Higher real yields might weigh on equities, especially long duration growth stocks, unless they come along with better growth. Historically,real yields were often linked to an actual or perceived shift in central bank or fiscal policy. Rising US 10-year TIPS yields were mostly linked to the Fed fund rate hiking cycles (Exhibit 16). In recent years, with policy rates near the effective lower bound and more QE, real yields also increased with hawkish central bank guidance – examples include the US ‘taper tantrum’ in May 2013. Goldman expects most central banks to lean dovish early in the recovery, as is often the case, especially with the Fed’s new AIT policy. To that point, that bank’s rates team thinks real rates will start to increase gradually alongside breakeven inflation, supported by the COVID-19 recovery and larger US fiscal stimulus. Higher real rates due to expectations for more expansive fiscal policy, e.g., like after the election of Trump in 2016, should be digested well by equities if they support growth. Still, the risk of real rate shocks increases in case of hawkish central bank surprises or negative inflation/ growth shocks.

3. Larger inflation surprises drive higher risk premia across assets

Eventually, higher inflation results in “larger surprises”, which weighs more on both equities and bonds. Since the 1990s there has been less pressure for central banks to fight inflation but before that, with higher levels, inflation surprises and volatility were much higher (Exhibit 18). While central banks might allow for an initial overshoot they would likely have to tighten policy to bring inflation under control eventually. Whether central banks and governments will allow larger overshoots than in the last three decades is ultimately a political decision. But even then longer-dated bonds might reprice inflation risk. Bond investors suffer losses in real terms in the event of unanticipated inflation and bond term premia tend to increase with inflation surprises– this might be exacerbated by the supply/demand picture for bonds (Exhibit 19).

Large inflation surprises, either positive or negative, historically put upward pressure on the Equity Risk Premium (Exhibit 20). However, equities, or at least certain companies, might provide an inflation hedge if they have pricing power, stable input costs and can protect profit margins. The source of inflation will matter – whether it is cost push or demand pull, wage inflation or commodities, etc. Historically, post WW2, dividends increased with inflation although that ratio has dropped below 1 since 1990 (Exhibit 21).

* * *

With these three phases in mind, how should one trade it?

Well, during most bond bear markets equities have outperformed bonds and delivered positive real returns, especially in recent years, as the following Goldman chart shows. With reflation accelerating, the pressure for higher equity and lower bond allocations in balanced portfolios increases (also with less of a buffer from bonds during ‘risk off’). However, this increases vulnerability to deflation or negative inflation surprises and also,eventually, to bond yields and inflation increasing too much.

Before the late 1990s there were several periods when equities and bonds fell together – during those, often real rates increased (more than breakeven inflation) or inflation was very high.

High and rising inflation – like now – often forced central bank tightening and deleveraging, which increased recession risk and macro volatility. However, now that central banks have pledged not rate hikes for years, the real question is what do they do next: do they pretend inflation does not exist (likely), or will they simply shut off the bond market’s last remaining signaling pathway, the long-end, and engage Yield Curve Control which the BOJ has been “testing” for the past five years.