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Authored by Bill Blain via MorningPorridge.com,

“Believe whatever you want about equities, but in bonds there is truth..”

The Stock Market Rollercoaster will continue a while longer, but a decisive divergence point is coming! Corporate debt is likely to crack on rising rates, price distortion, forgotten risk metrics, and rising defaults. It will signal the perilous financial health of some sectors – bursting the current bubble violently. Anyone for the last few choc-ices?

 

Meanwhile, back to the Unreal World, let me introduce you to a new Blain’s market mantra:  If you are looking for truth in markets, in bonds there are fewer lies.

 

Aren’t we having fun in the equity market. Up, Down, Shake it all about. Amazon down 15% one day and up 13% the next. Facebook among the most volatile stocks on the block. Around the globe investors wake up wondering if it’s a risk on or off day, wholly uncertain what they believe about equity market uncertainty… The question is why…?

Dinnae fash! (translation: worry not….) But it’s Boy Scout time – as in Be Prepared.

Unfortunately, an uncomfortable and deeply painful truth about corporate debt defaults are coming our way… What is likely to happen very soon is a widening divergence between corporate bonds and equity markets. As it happens it will be a big sell signal.

• When the bond market is working properly then bond prices tell us important things about the economy, but also truths about how well a company is doing in terms of its balance sheet and ability to pay.

• In contrast… Equity prices just tell us what everyone else thinks… In periods when everyone is prepared to believe seven impossible things before breakfast (a period we are now slipping out of), then every fantabulous, masterful equity stories seem investible.

When it comes to equities…. I’m afraid they aren’t really that complex. Successful companies succeed on the back of great ideas, visionary management, strong corporate governance, and, most importantly, access to properly priced capital reflecting just how innovative, profitable and successful it is going to be…

At least, that was how it was supposed to work.

In the past capital was properly priced and acted as proper check on good vs stupid ideas. As a result the world was generally a happier place, and stockbroking was what we gave the idiot children of the upper middle classes who were too thick for even the clergy to do in financial markets. They would spend all day telling their “clients” which stocks to buy and sell.. Writing their scripts was the clever part.

If you listen to the pundits on last week’s rollercoaster stock market ride they are saying things like: “looking for bargains”, “attractive prices at these almost distressed levels”, “there are certainly value spots”.. and the classic “buy-to-dip opportunities are increasingly short-lived because everyone is looking for value when cheaper levels occur.”

Hah! Many in the market genuinely believe the stock market is going higher because… well why? Because stocks are cheap? Remember… the value of stocks is entirely based on what the market, as the great big voting machine it is, is telling you they are worth.

Bond prices are based on the reality of who can and can’t repay principal and interest. If even the Financial Times has noticed problems in the corporate bond – then it must be a fact: Investors brace for turbulence in US corporate bond market. The reason we are in for trouble is that large parts of the markets now implicitly believe companies don’t go bust – because for the last 12 years of monetary experimentation, distortion and insanely low interest rates have kept all those companies that should have failed and tumbled into default… sort of solvent. There are two things to worry about here:

• There are fewer and fewer old bond dogs like me around who remember what the credit markets are actually about: who will and won’t pay. (Look around your trading floor – who was there 14 years ago when credit last puked?)

• The last 14 years has seen a massive shift in credit risk from banks (the SELL side) to investment managers (the BUY side). Banks used to have whole floors of highly trained, highly motivated credit analysts examing their clients. Modern investment managers outsource and maybe have a couple of junior analysts covering the entire junk universe.

In short – the holders of corporate debt don’t necessarily understand the risk metrics of credit.

Today’s equity market is a properly confused business… everyone wondering what is good, bad or indifferent in terms of what they will be worth short, medium and long-term. As companies haven’t been going bust at normal rates since 2008 (when QE, monetary experimentation and Zero rates begain), then it’s been easy to believe that a company that has been building out its business for the last 10-years but still hasn’t made a penny of profit will ultimately be worth billions because of the position its built and the clients it’s acquired.

Not if the cheap capital that has sustained them this far suddenly were to dry up.. because… say interest rates rise or bond markets widen?

This is where the divergence will happen. Equities continue to believe growing companies will tick upside. Bond markets are waking up to the reality a tidal wave of defaults is likely coming as rates normalise and QE programmes wind down. Even the rating agencies – who remarkably failed to spot the looming sub-prime crisis in 2007, happily giving AAA ratings to any poke of worthless mortgage – agree defaults will rise this year.

Some equity analysts see it coming as well, but generally hedge the firms they’ve got their BUY recommendations on by noting cash on balance sheet, “strong capitalisation” and ease of access to bond markets (a comment that should have any investors reaching for a hard hat.)

Generally, discount most things a SELL-Side analyst says. Their business – whatever the regulations say – is to support investment banks’ fee gathering process. When 59 out of 59 Amazon analysts are saying BUY – they are saying buy so that investors in their funds will be reassured and give them more money to manage (generating more fees), or that their buy recommendation will secure some lucrative investment banking mandate. (There are a couple of important rules in winning investment banking business… be the biggest (ie no corporate treasurer ever lost their job for giving JP Morgan or Goldman Sachs their business – even though they handled so mand deals no one was special.) An obvious rule was don’t expect to win debt or M&A business if your stock pickers were saying it’s a SELL Stock.)

My warnings on the coming bond crisis have been simple:

• First, there is zero liquidity in corporate bonds. Central Banks have been backstopping bonds with QE programmes – which are ending. The sell-side, the banks, don’t make markets anymore – capital regulation and the transfer of risk to the BUY-side (investment managers), means leading bond deals is just a fee business for them.. The biggest dealers are now firms like Citadel Securities which commoditises trading through programmes like buying RobinHood’s retail orderflow. When a bond crash comes the market will set like concrete.

• Second, is the underlying market. Interest rates and inflation are rising. That’s bad for bonds – NSS. Central banks told us inflation was going to be “transitory” last year. Now they don’t use the word. Same thing is likely for folk who think bonds will rise a couple of basis points to a new long-term stability. The economics – like Friday’s US employment numbers – highlight stronger economic growth with serious supply chain and labour pressure on inflation – and the need for central banks to act by tightening aggressively, or letting inflation soar – which is lose/lose for bonds.

• Third, corporate defaults are going to rise. That’s simple logic – for the past 12 years a growing number of profitless, cash strapped companies have skirted the bankruptcy courts only through insanely low interest rates and the ready availability of cheap money – even the deepest, darkest depths of the junk bond market have been able to find bond market funds tight spreads to treasuries. 12 years of QE and monetary experimentation leaves a vast numbers of zombie firms to be decapitated (which I believe is SOP with an Infestation of the Living Dead…)

Since 2008, (the opening salvo of the Global Financial Crisis 2007-2031), there has been a feeding frenzy in corporate bonds as low rates and insatiable demand allowed any junk companies unfettered market access. What did they do with the trillions of dollars of debt they raised? Did they spend it on new plant and equipment, or creating new jobs and markets? nope. Most of it has been spent buying back equity (share-buy-backs) which pushed up the stock price and, and coincidently, management bonuses!

This year, rising rates, chronic illiquidity and rising defaults is likely to trigger at least a storm in corporate bonds as the most exposed companies are shown as Zombies… and that’s the point the Equity market might just spot which firms are swimming without any pants at all… Seen it all before…

Putin snoozing, ratings cratering, and a token Uyghur to insult the intelligence of anyone still watching with at least two brain cells – this year’s 2022 Winter Olympics is shaping up to be an absolute disaster.

Viewership for Friday’s Opening Ceremony was a dismal 16 million, as NBC faces what Yahoo!sports‘ Dan Wetzel called a “cataclysmic loss” of audience – a record low exceeding the previous record of 20.1 million viewers for 1988’s Calgary games. It was 43% below the 2018 games’ opening ceremony in South Korea which had 28.3 million viewers.

It comes on the heels of Thursday’s ratings disaster that saw just 7.7 million people tune in, dramatically below same-night audiences of 2018 (16 million) and 2014 from Russia (20.02 million).

NBC said the 16 million is a “total audience delivery” and includes all of its networks and streaming. The television-only average audience was below 14 million for the day, per the preliminary data released by the network. -Yahoo!

As Deadline noted, just “8.7 million tuned in on NBC in primetime [to] see the pre-taped Mike Tirico and Savannah Guthrie-led coverage of the propaganda-heavy spectacle put on by Chinese President Xi Jinping and filmmaker Zhang Yimou.”

The Opening Ceremony was so boring that Russian President Vladimir Putin decided to ‘rest his eyes’ during the Ukrainian team’s entrance.

Putin fell asleep during the opening ceremony of the Olympics. pic.twitter.com/Eplkr6QThd

— MRCTV (@mrctv) February 4, 2022

As Yahoo notes, however, ratings do tend to increase over the first week. That said, several countries are currently staging a “diplomatic boycott” of the Games over China’s treatment of Uyghurs, an ethnic minority group of Muslims who live in the northwest of the country.

While denying any abuse, China continues to deny the United Nations from sending human rights officials to observe the region.

Anti-Covid measures are also putting a damper on enthusiasm, making life inside its “closed loop” a ‘near joyless experience for the athletes,’ according to the report.

It didn’t help that China used cross country skier Dinigeer Yilamujiang – who China’s state run media claimed has Uyghur heritage – was paraded out as one of the cauldron lighters during the Opening Ceremony, drawing sharp rebuke.

It was a disturbing and dispiriting moment, a young athlete and an iconic moment in every Olympics used as a propaganda prop to cover up a campaign of slavery, torture, forced abortions and internment in reeducation camps. It did nothing to build good feelings toward the competition.

As such, rather than a celebration, this feels, and looks, like a grind of hardship, isolation and suspicion. -Yahoo!

The hashtag #GenocideGames began trending in recent days.

UN Ambassador Linda Thomas-Greenfield said it was a stunt designed “by the Chinese to distract us from the real issue here… that Uyghurs are being tortured, and Uyghurs are the victims of human rights violations.”

UN Ambassador Linda Thomas-Greenfield on China featuring a Uyghur athlete in the opening ceremony of the Olympics: “This is an effort by the Chinese to distract us from the real issue here… that Uyghurs are being tortured, and Uyghurs are the victims of human rights violations” pic.twitter.com/ji2RgBVIvO

— Aaron Rupar (@atrupar) February 6, 2022

Adding to China’s woes, US-born figure skater Zhu Yi, competing for china, fell hard during her first combination attempt on Saturday, and later stumbled on a triple loop attempt – resulting in the hashtag #ZhuYiFellOver, which had over 230 million views by Sunday afternoon before it was taken down by Chinese social media website, Weibo. 

According to the report, China’s restrictions on the event has turned into a nightmare for NBC – which is paying $7.75 billion to the OIC to broadcast the Olympics through 2032.

NBC is doing almost all it can but its reporters and crews are stuck in the “closed loop.” That eliminates live shots with mountains or historic buildings as backdrops as well as stories about the culture, architecture and people of China that can make the Olympics about more than just sport.

Host Mike Tirico broadcast from a set designed like a mountain chalet, but that could have been in Breckenridge, not Beijing. And Tirico, the face of the broadcast, will be leaving in the coming days to anchor NBC’s coverage of the Super Bowl, which due to the lengthening of the NFL season has spilled into the Olympic calendar and further siphoned off interest and outside media coverage.

Meanwhile, most of NBC’s play-by-play broadcasters are calling the Games remotely from studios in Connecticut rather than risk China’s COVID policies. Yahoo!

As Just the News notes, a recent Morning Consult poll of 2,000 American adults found that 65% have a lack of interest in the events, 57% said they have no interest in athletes, and 40% said it was because China was hosting.

Authored by Paul Joseph Watson via Summit News,

Ottawa police have threatened to arrest anyone providing the Freedom Convoy with gas and diesel cans after they initially blocked trucks with fuel tanks coming to the aid of the protesters.

Authorities announced that anyone providing “material support” to the demonstrators would be subject to arrest from midnight last night.

Asked whether “material support” included necessities like food and water, a police spokesperson told Fox News that the announcement “relates to hazardous materials that represent a public safety or fire hazard.”

Videos soon emerged of people being arrested and police seizing fuel from protesters.

Footage provided to Rebel News shows Ottawa police attempting to arrest someone for bringing fuel to the convoy before the midnight sate of emergency goes into effect https://t.co/XQqZr4vN0X for more. pic.twitter.com/F9hHsh24jp

— Mauricio (@_m2pacheco) February 7, 2022

A citizen journalist sent me this video that seems to show police seizing fuel from truckers. More reports to come — I’m on the streets right now.#TruckerConvoy https://t.co/8hpC710hZK pic.twitter.com/5PEwZcTRq6

— Lincoln Jay (@lincolnmjay) February 6, 2022

Police had previously barricaded key crossing points throughout the area and closed numerous roads in a bid to halt the delivery of trucks with tanks full of fuel reaching the convoy.

Earlier on Sunday, Mayor Jim Watson declared a state of emergency and claimed that the protesters, whose primary activity is honking their horns, posed a “serious danger and threat to the safety and security of residents.”

Authorities and the media have attempted to demonize the truckers as potentially violent extremists, with provocateurs even attempting to pull stupid stunts in an effort to smear their character.

The truckers have been 100% peaceful. So Trudeau’s feds are working around the clock to manufacture an incident to justify a violent state response. pic.twitter.com/lNFPGaFtv7

— Ezra Levant 🍁 (@ezralevant) February 6, 2022

As we highlighted last week, authorities have still refused to rule out using the military against the protesters.

The truckers say they won’t leave until vaccine mandates that dictate truckers returning to Canada from the U.S. quarantine once they arrive at home have been lifted.

Meanwhile, the same leftists who for months have vowed to make life unlivable for the unvaccinated are now crying over horns being honked.

pic.twitter.com/rWtAy7g6aG

— Paul Joseph Watson (@PrisonPlanet) February 7, 2022

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U.S. index futures swung around in a volatile, illiquid overnight session, and at last check were flat despite traders’ concerns about growing fireworks in the European bond market where Italian and Greek bond plunged amid fears of ECB rate hikes as soon as October, while waiting for Thursday’s key CPI data and further corporate earnings. S&P 500 futures were up 2 points or 0.05%, Nasdaq futures were up 26 points or 0.18% and Dow futures were up fractionally as markets now expect more than five quarter-point Federal Reserve interest-rate hikes in 2022 to keep inflation on check following a strong U.S. jobs report. Treasury yields and the dollar were stable, while the euro snapped a six-day strengthening run. WTI crude fell after last week’s rally. Chinese shares climbed on their return from a weeklong holiday. Bitcoin extended its recovery surge.

In the premarket, Peloton was in focus, soaring 27% on reports it’s evaluating interest from potential suitors including Amazon and Nike. That’s a relief for investors in the one-time pandemic darling, which has lost more than 80% since its January 2021 high thanks to easing restrictions and, Mr. Big’s heart attack. But the breather might not last long as sellside analysts warn that regulators will probably crank up the resistance hard on any deal that involves Big Tech. Other notable premarket movers:

• Alibaba (BABA US) declined 4% in U.S. premarket trading after Citigroup analysts saw its additional American depositary share registration in the U.S. as a sign that SoftBank Group Corp. may intend to sell part of its stake.
• Cryptocurrency-exposed stocks rise in premarket trading Monday as Bitcoin gains for a fifth straight day to climb back above the $42,000 level. Hive Blockchain (HIVE CN) +6.5%, Bit Digital (BTBT US) +6.5%, Hut 8 Mining (HUT CN) +6%.
• Snowflake (SNOW US) gains 3.8% in premarket trading after Morgan Stanley upgraded to overweight, citing a pullback in the stock and saying the software solutions provider is executing ahead of plan.
• Iveric bio(ISEE US) has a “blockbuster opportunity” in the field of geographic atrophy (GA), Morgan Stanley writes in a note as it initiates coverage with an overweight recommendation and a $25 price target.
• Shares of airlines jump in premarket trading after Spirit Airlines and Frontier Group announced a definitive merger agreement whereby Frontier will buy Spirit at an implied value of $25.83 per share

“We continue to be more focused on what growth is going to do rather than rates and believe investors are still too optimistic, particularly as it relates to consumption,” Morgan Stanley strategists led by Michael Wilson write. “Exacerbating that risk is the fact that inventories are now rising rapidly,” they add, keeping a “defensive Posture.”

European equities reverse opening gains, with the Euro Stoxx 50 dipping into the red having initially rallied 0.8%, while the Stoxx Europe 600 Index was little changed, with basic resources outperforming on stronger iron ore prices. Italy’s FTSE MIB lags, dropping more than 1.5%. Utilities were trading lower, dragged down by Enel, after Fitch cut its debt rating while real estate and energy are the worst performing sectors. Strategists from JPMorgan reiterated upside ahead for the region’s stocks on a positive macro-economic backdrop, strong earnings and cheaper relative valuations. Here are some of the biggest European movers today:

• Konecranes shares rise as much as 9% on a Reuters report from late Friday, saying the EU is close to clearing the company’s deal with Cargotec.
• Kone shares are up 5%
• Adevinta, Rightmove and Schibsted rise after UBS upgraded all three to buy from neutral, saying that the European online classifieds sector is trading at an attractive entry point.
• Faurecia gains as much as 3.6% in Paris trading after the French car-parts supplier set out financial targets after taking control of German rival Hella.
• H&M rises as much as 3% after local Swedish business daily Dagens Industri named the shares its pick of the week in an article, seeing a buying opportunity for the fashion retailer.
• Reckitt climbs as much as 2.4% after Bloomberg reported that the British consumer-goods company is weighing options for its infant nutrition unit, including a potential sale.
• Tobii rises as much as 21% after the firm said it is negotiations with Sony to provide its eye-tracking technology in the next PlayStation VR headset.

Asian equities slipped following their best weekly rally in five months, as traders eyed key U.S. inflation data due later this week for more clues on the Federal Reserve’s plan to raise interest rates. Chinese stocks rallied as the market reopened after a week-long holiday. The MSCI Asia Pacific Index fell as much as 0.5%, dragged by losses in technology shares. Stocks fell in South Korea, Japan and Hong Kong, while the mainland’s CSI 300 Index surged 1.5% in catch-up trade after the Lunar New Year break. Read: China Stocks Climb Most in Two Months in Holiday Catch-Up Trade Bonds dropped after a strong U.S. jobs report Friday increased bets of tighter monetary policy, and as traders look ahead this week to U.S. consumer-price figures expected to show the biggest rise since 1982. Decisions are also due from several Asian central banks. “Rising bond yields will remain a key theme into the trading session,” said Jun Rong Yeap, a market strategist at IG Asia. “The week ahead will bring focus to a series of central banks’ decisions in the region in the likes of India, Thailand and Indonesia, all seemingly set to hold their accommodative policies in place for now.” Alibaba Group was the single-largest drag on the regional benchmark Monday, falling 4.5% after registering one billion American depositary shares that hadn’t been registered before. This suggested to Citi that SoftBank may intend to sell some of its Alibaba shares.

Japanese equities fell, slipping after their best weekly gain since mid-October, with electronics and chemical makers the biggest drags on the Topix. Auto makers also weighed on the benchmark, which fell 0.2%. Olympus and Fast Retailing were the largest contributors to a 0.3% loss in the Nikkei 225.

Australia’s equity benchmark recovered from its initial decline to close little changed after the government said it will allow double-vaccinated visa holders to enter the country from Feb. 21, ending about two years of strict border controls. The S&P/ASX 200 Index pared earlier declines as much as 1% to close 0.1% lower with materials stocks contributing the most toward the gauge’s move. GrainCorp was among the top gainers on the gauge after the company forecast underlying profit for the full year of A$235 million to A$280 million, beating analyst estimates.  Magellan was the worst performer the company announced founder Hamish Douglass would take a medical leave of absence from the asset manager, which is grappling with fund outflows and a tumbling stock price. In New Zealand, the S&P/NZX 50 index fell 0.5% to 12,279.56

India’s key stock indexes posted their biggest slump in two weeks as investors turned cautious ahead of the central bank’s monetary policy announcement on Thursday and an extended sell off by foreign funds.  The S&P BSE Sensex fell 1.8% to 57,621.19 in Mumbai, while the NSE Nifty 50 Index dropped 1.7%. The key gauges fell for the third straight day, posting their biggest drop since Jan. 24. All but three of the 19 sector sub-indexes compiled by BSE Ltd. slipped, led by finance companies.  “We expect that the markets will continue to remain volatile on the back of the recent interest rate movements globally,” according to Naveen Kulkarni, chief investment officer, at Axis Securities. He expects most emerging markets to witness outflows of foreign funds, leading to currency depreciation in the short term. The Reserve Bank of India’s monetary-policy panel will meet Feb. 8-10, starting a day later than initially scheduled. The decision will be announced on Thursday.  The change was made as the nation mourns the death of celebrated singer Lata Mangeshkar. Banks in Mumbai bond and currency markets were shut Monday.  HDFC Bank contributed the most to the Sensex’s decline, falling 3.7%, its biggest drop since April 30. Out of 30 shares in the Sensex index, five rose and 25 fell. State Bank of India, which reported December quarter earnings ahead of analysts’ expectations over the weekend, rose 0.6%.  

Fixed income trades heavy with losses led by peripheral bonds which tumbled on Monday following weakness on Friday. Short-dated Italian bonds snapped almost 10bps wider to Germany, while 10y Greek spreads blow out ~20bps, helped by hawkish comments from ECB’s Knot. iTraxx Crossover widens ~17bps. Bunds bear-steepen, cheaper by 4bps at the back end. Gilts and Treasuries are calm, relatively speaking. Euribor futures drop 4-5 ticks across the red pack, money markets wager on 27bps of hikes in September.

In FX, the Bloomberg Dollar Spot Index was a tad higher as the dollar traded mixed versus its Group-of-10 peers; AUD and CAD are the strongest performers in G-10 FX, NOK and EUR underperform. The euro snapped six days of gains while the move in the common currency’s skew has been steep and a retreat for bullish wagers could be due after investors added longs in spot and options markets alike last week, after European peripheral bonds extended their declines and underperformance vs the core as markets bet on more tightening after ECB’s Knot said rate hikes are possible as soon as the fourth quarter. Australia’s dollar and sovereign yields advanced on announcement that the nation will allow double-vaccinated visa holders to enter the country from Feb. 21. A strong ex-inflation retail sales print underpinned the moves. Japan’s benchmark 10-year yield rose to the highest in six years as the Bank of Japan refrained from conducting an unscheduled bond purchase operation to stem the recent rise in yields.

In commodities, crude benchmarks are pressured, perhaps taking impetus from broader sentiment; however, we remain elevated in the broader picture and geopols continue to dominate. Overnight, Brent tested but failed to successfully surpass USD 94.00/bbl with WTI falling ~1.3% before stabilizing close to $91. Focus on Macron/Putin talks today, though the Kremlin has downplayed the chance of a ‘breakthrough’ while Iranian talks are to recommence Tuesday. Spot gold/silver are contained and remain near multiple DMAs while base metals benefit from the return of China. Marathon’s Galveston Bay Refinery (593k bpd) and Valero’s Texas City refinery (225k bpd) were knocked out of production due to a power outage on Friday amid severe cold weather, according to Reuters. Saudi Arabia raised oil prices for customers in Asia, US and Europe, according to Bloomberg. Indian government is to express serious concern over crude oil price volatility; government to take up this topic with oil producing nations/groups, via Reuters. Gazprom says it does not intend to hold spot gas sales sessions on its electronic platform this week, via Reuters. Turkey lifted its ban on importing scrap metals from Lebanon, according to Reuters. Base metals are mixed; LME copper falls 0.6% while LME aluminum gains 0.8%. Spot gold rises roughly $3 to trade near $1,811/oz.

Expected data on Wednesday include consumer credit, while Amgen, Hasbro, Loews and Take-Two are among companies reporting results.

Market Snapshot

• S&P 500 futures down 0.2% to 4,481.50
• STOXX Europe 600 little changed at 462.60
• MXAP little changed at 187.71
• MXAPJ down 0.1% to 614.38
• Nikkei down 0.7% to 27,248.87
• Topix down 0.2% to 1,925.99
• Hang Seng Index little changed at 24,579.55
• Shanghai Composite up 2.0% to 3,429.58
• Sensex down 1.7% to 57,660.26
• Australia S&P/ASX 200 down 0.1% to 7,110.85
• Kospi down 0.2% to 2,745.06
• German 10Y yield little changed at 0.22%
• Euro down 0.3% to $1.1420
• Brent Futures down 1.2% to $92.19/bbl
• Gold spot up 0.2% to $1,812.36
• U.S. Dollar Index up 0.11% to 95.59

Top Overnight News from Bloomberg

• French President Emmanuel Macron meets Russian President Vladimir Putin on Monday as Western leaders continue their push to deter any moves against Ukraine. Kremlin spokesman Dmitry Peskov said the talks will be “substantive and quite prolonged,” but he doesn’t expect a breakthrough
• Boris Johnson promised his Conservative Party an overhaul of his top team as he strives to keep his job after a series of gaffes and scandals. Two rapid appointments over the weekend may already be too late
• Currency analysts downplayed China’s move on Monday to set the yuan reference rate with the biggest weakening bias versus forecasts, saying it was simply a recalibration following the weeklong Lunar New year holiday
• The global stockpile of negative-yielding bonds has dropped to the lowest in more than six years after nearly $3 trillion was wiped out in just two days last week
• Fidelity International Ltd. and abrdn Plc are among the firms avoiding Asian local debt and favoring bonds elsewhere in the developing world on the view that the region will take longer to start tightening monetary policy. Bond managers are turning lukewarm on Asian debt on speculation the region will be the last in emerging markets to start raising rates

A more detailed look at global markets courtesy of Newsquawk

Asian stocks were mixed amid recent increases in global yields and after the blowout NFP data stoked bets for a more aggressive Fed rate hike in March, while geopolitical concerns also lingered. ASX 200 (-0.1%) was dragged lower by weakness in real estate, healthcare and financials although finished off its lows amid resilience in the commodity-related sectors and stronger than expected quarterly Retail Trade data. Nikkei 225 (-0.7%) suffered as Japan plans an extension of COVID-19 measures for Tokyo and other areas. Hang Seng (U/C) and Shanghai Comp. (+2.0%) were varied as Hong Kong stocks took a back seat to the outperformance in the mainland which re-opened for the first time since the Lunar New Year, while Chinese Caixin Services and Composite PMIs slowed but remained in expansion territory

Top Asian News

• Hong Kong Braces for Curbs as Cases Double Every Three Days
• H.K. Sees Record Cases; Australia Reopening: Virus Update
• Hysan to Buy 25% Stake in Henderson Land’s Project for HK$3.05b
• Taiwan FX Trading Punishment on Deutsche Bank Lifted: Reuters

Core European bourses are choppy and mixed overall, Euro Stoxx 50 -0.1%, though the periphery is pressured on domestic debt downside; FTSE MIB -1.6%. Sectors are mixed overall though Basic Resources outperform on base metals while Energy/Utilities pulls-back given benchmark pricing and Friday’s upside. Stateside, US futures are pressured but have also been choppy/rangebound for the most part, RTY lags.

Top European News

• Var Energi Valued at $9.1 Billion in Rare Big Energy Listing
• U.K. House Prices Rise at Slowest Pace Since June, Halifax Says
• Ajax Shares Fall as Director Overmars Leaves Club Over Messages
• Housebuilder Taylor Wimpey Promotes Operations Head Daly as CEO

In FX, the dollar retains bulk of its stellar BLS labour report gains, but eases from best levels Loonie gets over Canadian LFS jobs release disappointment with aid from WTI crude holding a firm line. Aussie underpinned by iron ore prices, record retail sales data and plans to reopen international borders from February 21st. Euro hands back some ECB inspired upside, but even higher EGB yields should provide traction. Yuan undermined by PBoC setting a weak onshore fix, soft Chinese Caixin PMIs and more angst with the US over compliance to terms of Phase One trade deal. Turkish President Erdogan tested positive for COVID-19, according to Reuters. South Africa’s Eskom announced that loadshedding was suspended from Sunday evening amid a sufficient recovery in generation capacity, according to Reuters.

In commodities, crude benchmarks are pressured, perhaps taking impetus from broader sentiment; however, we remain elevated in the broader picture and geopols continue to dominate. Overnight, Brent tested but failed to successfully surpass USD 94.00/bbl. Focus on Macron/Putin talks today, though the Kremlin has downplayed the chance of a ‘breakthrough’ while Iranian talks are to recommence Tuesday. Spot gold/silver are contained and remain near multiple DMAs while base metals benefit from the return of China. Marathon’s Galveston Bay Refinery (593k bpd) and Valero’s Texas City refinery (225k bpd) were knocked out of production due to a power outage on Friday amid severe cold weather, according to Reuters. Saudi Arabia raised oil prices for customers in Asia, US and Europe, according to Bloomberg. Indian government is to express serious concern over crude oil price volatility; government to take up this topic with oil producing nations/groups, via Reuters. Gazprom says it does not intend to hold spot gas sales sessions on its electronic platform this week, via Reuters. Turkey lifted its ban on importing scrap metals from Lebanon, according to Reuters.

US Event Calendar

• 3pm: Dec. Consumer Credit, est. $25b, prior $40b

DB’s Jim Reid concludes the overnight wrap

After a week for the ages that we’ll fully review in the second half of this note, this week should be calmer until of course US CPI comes along on Thursday. What made last week so fascinating was the rare interplay between macro and micro. Not only did the rates world shake and reverberate (2yr bunds +35.9bps and the worse week since 2008), but on successive days we saw the biggest market cap fall in history for any company (Meta), followed by the biggest rise ever (Amazon). We have 83 S&P 500 companies reporting this week but no Goliath sized ones, so it’ll be a more normal week for earnings. The macro and micro last week was enough to push the Russian/Ukraine tensions into the background but they are clearly still there so we have to watch out for that as well.

Over the weekend ECB governor Knott (a hawk) became the first ECB official to endorse a 2022 hike by suggesting that he expects a hike around Q4 and another in Spring 2023, and that they are most likely to be in 25bps increments. He also suggests bond purchases should end as soon as possible and that Euro Area inflation will remain above 4% all this year. There will be excitement about the comments in markets today but pricing is already above 50bps before year-end so as the ECB catch up with the market, will the market now go another step further?

When the dust settles we will soon move on to US CPI on Thursday. In terms of what to look out for, note that 8 of the last 10 CPI releases have seen the monthly headline figure come in above the consensus estimate on Bloomberg. Our US economists are projecting that monthly headline CPI growth will slow to +0.36% in January, with core inflation also slowing to +0.36%. However, this would still push YoY readings to 7.2% and 5.8% (consensus at 7.3% and 5.9%) respectively the highest since 1982 for both. There are plenty of wildcards in the release but we’ll be watching rents/OER most as this makes up around 40% of core and around a third of the headline number. Since last summer it’s been clear from our models that this was going to continue going up and up and given its weight it’s very difficult for inflation to mean revert without it also doing so. It’s showing no sign of this at the moment and likely won’t for several months at least.

Otherwise it’s a fairly quiet week on the data front, though it’ll be worth looking out for the University of Michigan’s consumer sentiment index for February on Friday. January saw the measure fall to its lowest level in a decade, whilst longer-term inflation expectations have been picking up as well, so one to keep an eye on. Elsewhere, we’ve got the UK’s GDP release for Q4 coming out on Friday as well.

Earnings season is past the peak but will continue to be busy, with a further 83 companies in the S&P 500 and 89 in the Stoxx 600 reporting. Among the highlights to look out for will be Pfizer, BP and BNP Paribas tomorrow. Then on Wednesday, we’ll hear from Disney, L’Oréal, GlaxoSmithKline, Uber and Toyota. Finally on Thursday, there’s reports from The Coca-Cola Company, PepsiCo, AstraZeneca, Philip Morris International, Linde, Siemens, Unilever, Crédit Agricole, Société Générale, Twitter and Credit Suisse. See the day-by-day calendar for more on the week ahead.

Asian markets are a bit softer to start the week. The Nikkei (-0.84%), Kospi (-0.43%) and Hang Seng (-0.31%) are down. China has reopened after last week’s Lunar NY holiday and both the Shanghai Composite (+1.91%) and the CSI (+1.62%) are catching up. Equity futures in the US point towards a steady start with contracts on the S&P 500 (+0.08%) and Nasdaq (+0.13%) slightly higher.

In terms of economic data, China’s services sector activity dipped to 5-month lows as the Caixin services PMI edged down to +51.4 from 53.1 in December as a rise in local Covid-19 cases coupled with restrictive measures hit consumer sentiment.

Looking back on last week, the main story was the historic sell off in sovereign yields at the end of the week. Hawkish communications from the ECB and BoE, along with much stronger-than-expected employment data in the US, drove advanced economy sovereign bond yields to their highest post-pandemic levels.

Recapping region-by-region. The ECB left policy unchanged, though tilted their communications in a much more hawkish direction. President Lagarde noted that near-term risks to inflation were tilted to the upside and did not repeat her previous remarks that a 2022 hike was unlikely. The week ended with the market fully pricing liftoff in July, with an 86% probability of liftoff happening in June, and 5 full (10bps) hikes through 2022. 2yr bund yields increased +35.9bps (+8.4bps Friday), their largest weekly increase since April 2008, while 10yr bunds increased +25.0bps (+6.2bps Friday), their largest weekly increase since June 2015. Notably, 5yr bunds were the latest tenor to cross into positive territory, closing above 0 for the first time since May 2018 after increasing +35.3bps this week (+9.1bps Friday), the largest weekly increase since January 2011.

In the UK, the BoE raised the Bank Rate +25bps to 0.5% and began the passive unwind of its securities portfolio. Notably, four MPC officials dissented, instead favouring a +50bps hike. The BoE also upgraded their inflation forecasts to have CPI peaking around 7.25% in April. The market has now priced in 5 additional Bank Rate increases (25bps) through 2022. 2yr gilts increased +29.4bps this week (+11.8bps Friday), their largest weekly increase since September 2017 and 10yr gilts increased +16.7bps (+4.3bps Friday).

Treasury yields increased following the hawkish pivots from central banks across the Atlantic, albeit in smaller magnitudes. It took Friday’s employment report to really get Treasuries to join the sell-off. US nonfarm payrolls increased by +467k in January, and the prior two months were revised +709k higher, while average hourly earnings increased +0.7%, month-on-month. There was a big BLS population adjustment but the report was strong adjusting for that. This data came as FOMC officials were warning beforehand that the employment data was more than likely to surprise to the downside but would not impact the path for policy. With employment remaining robust through the worst of the Omicron wave, markets meaningfully increased the probability the FOMC would raise its policy rate by +50bps, rather than 25, at its March meeting. At the end of the week a +140% chance of a +25bp move in March was priced, while 5.3 25bps hikes were priced through the year.

2yr treasury yields climbed +16.7bps (+11.4bps Friday) and 10yr yields increased +13.9bps (+7.8bps Friday). Real 10yr yields increased +18.9bps (+7.5bps Friday) to -0.50%, the highest level since June 2020, while real 30yr yields moved into positive territory for the first time since last May, closing the week at 0.04%, after increasing +20.2bps (+6.1bps Friday).

Onto risk markets, and the S&P 500 impressively gained +1.55% (+0.52% Friday) after a week where ECB liftoff was moved to June, half the BoE wanted to hike +50bps, the Fed pricing moved toward a +50bp liftoff, and the 6th biggest company in the US lost a third of its market value. European stocks underperformed, given the sharper repricing of monetary policy expectations, with the STOXX 600 down -0.73% (-1.38% Friday), the DAX -1.43% (-1.75% Friday), and the CAC -0.21% (-0.77% Friday).

In the S&P 500, all but three sectors were higher on the week. Mega-cap tech earnings were the main focus, with sentiment breaking both ways. Meta decreased -21.42% (-0.28% Friday) following earnings that portended slowing subscriber growth and increasing streaming competition from other social media sites. Supporting sentiment, Alphabet had a strong earnings release and announced a 20-for-1 stock split, seeing their shares +7.46% higher on the week (+0.14% Friday), while Amazon shares climbed +9.49% (+13.54% Friday) on reports that they’d be raising the price of US Prime memberships and that their investment in electric carmaker Rivian was performing well. So a wild ride.

In terms of credit, after holding in well in the sell-off of two weeks ago, the asset class lagged equities last week, especially in Europe after the rates shock. Itraxx Main was +5.5bps wider on the week (+2.7bps Friday), while Xover was +29.2bps wider (+14.2bps Friday). In the US, IG CDX was +2.6bps wider (+1.3bps Friday) while HY widened +12.6bp (+9.5bp Friday). Year-to-date US HY CDX is +63bps wider and IG CDX is +14bps wider, while ITraxx Xover is +73bps wider and Main is +17bps wider. Cash index spreads were more varied last week, given $IG spreads were actually unchanged over the course of the last week, while €IG spreads were +8bps wider (+7bps Friday) and £IG spreads were +14bps (+8bps Friday). High yield spreads were somewhat similar with $HY spreads just 5bps wider on the week, while €HY spreads were +12bps wider and £HY spreads were +16bps wider. Ash indices tend to lag in fast moves.

OPEC+ agreed to a further output increase of +400k barrels per day in March broadly as expected, though production figures are bound by suppliers that are struggling to meet their quotas. All in, crude futures were +3.60% this week (+2.37% Friday).

Spotify CEO Daniel Ek has apologized to the company’s employees in an internal memo where he said he “strongly” opposes Joe Rogan’s use of the ‘n-word’, but that “silencing Joe isn’t the answer.”

Ek added in the memo to staff obtained by the Hollywood Reporter that “cancelling voices is a slippery slope”, and clarified that Rogan himself had decided to delete the 70+ episodes removed from the streaming service on Friday due to the use of ‘the n-word’ or other offensive content. Many of the other episodes removed from Rogan’s massive catalogue were taken down not long after Rogan signed his deal with Spotify.

The decision to keep Rogan’s show on the platform was made to “elevate all types of creators”, Ek claimed (although, as we and others have explained, the show is a major moneymaker for the service, commanding a minimum ad buy of $1M with other sign-on perks including requiring advertisers to also buy ads on other Spotify podcasts.

“I want to make one point very clear – I do not believe that silencing Joe is the answer,” Ek wrote.

“We should have clear lines around content and take action when they are crossed, but canceling voices is a slippery slope.”

To try and paper over the anger from some Spotify customers, Ek said Spotify would be committing to an “incremental investment of $100 million for the licensing, development, and marketing of music (artists and songwriters) and audio content from historically marginalized groups” to boost creators from underrepresented backgrounds.

“While some might want us to pursue a different path, I believe that more speech on more issues can be highly effective in improving the status quo and enhancing the conversation altogether,” Ek said.

Rogan issued an apology of his own on Saturday – his second such apology video in the span of a week – when he frankly told his audience that the compilation video of him saying the ‘n-word’ looked “f**king horrible”, even to him. He apologized unreservedly and said that he had changed his view on use of the ‘n-word’ and hadn’t uttered it at all “in years”.

Of course, while Ek acknowledged that some employees might not be happy with the company’s decision, he hoped they could all move forward together. Of course, letting go of Rogan would likely mean that Spotify would have to let go of more than a few members of its staff as well.

Read the full letter below:

Spotify Team,

There are no words I can say to adequately convey how deeply sorry I am for the way The Joe Rogan Experience controversy continues to impact each of you. Not only are some of Joe Rogan’s comments incredibly hurtful – I want to make clear that they do not represent the values of this company. I know this situation leaves many of you feeling drained, frustrated and unheard.

I think it’s important you’re aware that we’ve had conversations with Joe and his team about some of the content in his show, including his history of using some racially insensitive language. Following these discussions and his own reflections, he chose to remove a number of episodes from Spotify. He also issued his own apology over the weekend.

While I strongly condemn what Joe has said and I agree with his decision to remove past episodes from our platform, I realize some will want more. And I want to make one point very clear – I do not believe that silencing Joe is the answer. We should have clear lines around content and take action when they are crossed, but canceling voices is a slippery slope. Looking at the issue more broadly, it’s critical thinking and open debate that powers real and necessary progress.

Another criticism that I continue to hear from many of you is that it’s not just about The Joe Rogan Experience on Spotify; it comes down to our direct relationship with him. In last week’s Town Hall, I outlined to you that we are not the publisher of JRE. But perception due to our exclusive license implies otherwise. So I’ve been wrestling with how this perception squares with our values.

If we believe in having an open platform as a core value of the company, then we must also believe in elevating all types of creators, including those from underrepresented communities and a diversity of backgrounds. We’ve been doing a great deal of work in this area already but I think we can do even more. So I am committing to an incremental investment of $100 million for the licensing, development, and marketing of music (artists and songwriters) and audio content from historically marginalized groups. This will dramatically increase our efforts in these areas. While some might want us to pursue a different path, I believe that more speech on more issues can be highly effective in improving the status quo and enhancing the conversation altogether.

I deeply regret that you are carrying so much of this burden. I also want to be transparent in setting the expectation that in order to achieve our goal of becoming the global audio platform, these kinds of disputes will be inevitable. For me, I come back to centering on our mission of unlocking the potential of human creativity and enabling more than a billion people to enjoy the work of what we think will be more than 50 million creators. That mission makes these clashes worth the effort.

I’ve told you several times over the last week, but I think it’s critical we listen carefully to one another and consider how we can and should do better. I’ve spent this time having lots of conversations with people inside and outside of Spotify – some have been supportive while others have been incredibly hard, but all of them have made me think.

One of the things I am thinking about is what additional steps we can take to further balance creator expression with user safety. I’ve asked our teams to expand the number of outside experts we consult with on these efforts and look forward to sharing more details.

Your passion for this company and our mission has made a difference in the lives of so many listeners and creators around the world. I hope you won’t lose sight of that. It’s that ability to focus and improve Spotify even on some of our toughest days that has helped us build the platform we have. We have a clear opportunity to learn and grow together from this challenge and I am ready to meet it head on.

I know it is difficult to have these conversations play out so publicly, and I continue to encourage you to reach out to your leaders, your HR partners or me directly if you need support or resources for yourself or your team.

* * *

Source: The Hollywood Reporter