Category: zerohedge

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Would you hire a money manager that manages your wealth on false assumptions?  

It seems like a bad idea, but many people unknowingly opt for such a management style in their retirement plans.

Target Maturity Funds are one of the fastest-growing mutual fund sectors of the last decade. These passive strategies are most popular in 401k and other retirement plans with limited options and long investment time horizons.

Wall Street nicknames them “set ‘em and forget ‘em” funds because their strategy purportedly adjusts risk lower as you age. At first blush, such a strategy makes sense as risk tolerance is often a function of age. However, the purveyors of these funds fail to disclose that measuring risk is a function of the prices and valuations of assets.

Changing asset allocations based solely on the calendar is playing roulette with your financial well-being.

What Are Target Funds

Target Funds are passive mutual funds run by basic algorithms. The funds slowly allocate away from stocks and toward bonds based on a target future date. For example, a fund with a 2050 target date will initially invest heavily in stocks, with the remainder in fixed income assets. As the fund ages, it reduces equity exposure leaning more toward fixed income.

The table below shows how the Vanguard family of Target funds transition from 90/10 allocation of stocks to fixed income to 50/50 as they reach the target date.  

Unreliable Assumptions

Target date funds are based on one simple thesis- as we age, we should reduce financial risks.

There is sound logic to lessening financial risk as you age. First, there are fewer years of future income and investment gains to make up for potential investment losses with each passing day. Second, for those entering or already in retirement, the stability of wealth to cover current and future living expense is critical. 

Target funds fail in their complete lack of consideration for measuring risk. Equities, for example, are inherently riskier when fundamental valuations are above average and recent performance has been strong. Conversely, they are less risky at low valuations with beaten-down share prices.

To better understand the problem with allocating based solely on a future date, we start with the graph below. The chart makes it appear as though the S&P 500 is a reliable growth machine. Why not have a strategy that relies on the trend continuing?

Unfortunately, for us mere mortals, with 10-30 year investing time frames, we best zoom in on the graph in shorter time horizons. 

Shown below is the same graph but annotated differently. The red lines represent extended periods where the index had negative returns. The red bars quantify how long those periods lasted.

Stocks rise over very long periods, but shorter periods often see long periods of consolidation with no upward progress.  If you were unfortunate to start investing in 1929, it was not until 1954 till you saw prices back at 1929s levels. But for those that started investing in 1951 or 1981, the equity market trend was primarily upward.

The start and end dates of your investment time horizon matter greatly. Blindly allocating to equities based on age and failing to account for market risks is a recipe for failure.

Who can predict the future?

Quite often we hear investors state the future is unpredictable. Accordingly, they claim equities offer much better historical returns than bonds. As such, why not roll the dice on history and go all-in on equities.

No one can tell you with any certainty what stocks will do tomorrow or next month. However, looking further into the future, market returns become easier to forecast. The graph below shows stock returns become increasingly dependent on valuations as the investment horizon increases.

The next graph shows 10-year rolling returns on the S&P 500. The simple takeaway is that returns are cyclical.

Periods in which equities are overpriced with high valuations are followed by periods with lower returns. Conversely, periods when stocks are cheap, are often followed by periods of strong returns.

To better stress the point, the following graph compares ten-year forward annualized returns to 10-year prior annualized returns. Quite often, the two lines mirror each other. For example, for the ten years ending March of 2009, the market returned -6% annually. The annual return for the next ten years was over +14%. 

Valuations As Predictors

Now we focus on fundamental valuations, or how much investors are willing to pay for future earnings.

The following graph shows when valuations are low, forward returns tend to be higher and vice versa.

To further illuminate the strong correlation between valuation and returns, we present the same graph above but with the right-hand Y-axis (returns) in inverse order. Again, the higher the valuation, the lower the returns in the following ten years.

Summary

In almost all cases, aversion to risk should increase with age. The problem is that target funds do not assess risk, just your supposed tolerance to risk. There have been multiple times in history when valuations and prior returns were well above average. At these times, a 30-year-old with a passive equity-based strategy should have reduced their equity exposure. Conversely, there are times in history when prices and valuations were so beaten down that a 70-year-old should have had high exposure to equities. 

We picked on equities in this article, but the same logic applies equally to bonds and most other asset classes.

Today, valuations stand at extreme highs. We should expect annualized equity returns of zero or even below zero based on the regression of historical returns and valuations. If your wealth is actively managed, current high exposure to equities is fine. The advice assumes you or your manager is aware of the risks and ready to act if necessary.

Most 401ks offer their participants many alternatives alongside target funds. For those that elect to take passive strategies, like target funds, we strongly advise that you assess your risk profile and that of the markets and invest accordingly.

NBC News – which was forced to apologize in 2012 for deceptively editing the 911 phone call of George Zimmerman in the Trayvon Martin case to make him sound racist – has done it again.

Following the fatal shooting of 16-year-old black girl Ma’Khia Bryant, who was about to stab another black girl, by a Columbus, Ohio police officer, tensions were high as a flood of leftist journalists and ‘blue-checks’ on Twitter falsely reported that Bryant was unarmed.

Media vs bodycam pic.twitter.com/IYtlQELyhq

— Peace Promoter Poso (@JackPosobiec) April 21, 2021

Less than a day later, bodycam footage revealed that Bryant was clearly wielding a knife – and about to stab the other black teen when she was shot.

NBC News, however, continued peddling the ‘unarmed’ lie with a deceptive edit of the 911 call to remove a reference to the attempted stabbing, as well as the video – which NBC stops right before it’s apparent the teen is holding a knife.

In stark contrast, CBS Evening News showed the important part of the 911 call. “These grown girls over here trying to fight us, trying to stab us,” the caller says.
They also slow down the video and zoom in on the knife in the attacker’s hand. pic.twitter.com/izvXaUH6Ki

— Nicholas Fondacaro (@NickFondacaro) April 22, 2021

Here’s what NBC News didn’t show:

Why is NBC intentionally trying to inflame racial tension?

I mean I get that a dying televisual media needs to keep boomers glued to the screen according to the only mode of political-emotional discourse they know: all politics has to be a movie. And that we’ve rendered much of the rest of our populace functionally illiterate. But still.

— Matthew J. Peterson (@docMJP) April 21, 2021

After unexpectedly plunging in February (exaggerated by weather conditions), analysts expected existing home sales to continue to slide in March as affordability (inventories and rates) squeeze the marginal panic-buyer at record high prices. And just as we warned earlier, existing home sales were worse than expected, tumbling 3.7% MoM (for the second straight month)…

Source: Bloomberg

And while sales are up over 12% YoY, the recent plunge in SAAR sales have been dramatic, tumbling to 7-month lows…

Source: Bloomberg

This should not have been a huge surprise as Christophe Barraud warned earlier. Housing affordability has been under pressure since January. On one hand, mortgage rates started rebounding with the 30-year recently hitting the highest level since June 2020 in late March.

On the other hand, prices kept climbing at a quick rate (amid demand, distribution, and construction costs). The median selling price jumped 17.2% from a year ago to $329,100 in March, the highest in records back to 1999.

There were 1.07 million homes for sale last month, down more than 28% from a year earlier.

“We know that home prices have been rising, mortgage rates inching higher, housing affordability becoming much more challenging, however I would say the softening sales activity is not due to demand going away,” Lawrence Yun, NAR’s chief economist, said on a call with reporters.

“Demand remains strong, it is simply the severe lack of supply that is holding back sales conditions,” Yun said.

All regions posted sales declines in March, led by an 8% decrease in the West and a 2.9% drop in the South.

After the reported Russian troop build-up along Ukraine’s border which thrust the half-decade long Donbass conflict back into media headlines late last month, the Kremlin this week has been conducting major naval and aerial military drills on the southern coast of Crimea and in the Black Sea.

Amid threats and counter-threats between Moscow and NATO, which also witnessed a rare overture from Biden for a bilateral summit with Putin to be held over the summer, Russia’s defense minister on Thursday announced the close of the drills and ordered the additional troops back to the their permanent bases. 

Speculation has been rampant and the actual numbers of additional Russian troops near Ukraine has differed wildly – from claims of multiple tens of thousands to 100,000 – and all the way up to fantastical projections of 150,000. It remains unclear to what degree Russia will fully draw down these ‘extra’ forces near Ukraine’s border and in Crimea. 

Russia’s position all along has been that the initially reported “build-up” which was considered a severe “threat” to Ukrainian sovereignty (as Kiev accused Moscow of preparing an offensive) was in reality related to regularly scheduled military exercises in the region. 

“I consider the goals of the snap check of readiness fulfilled,” Defense Minister Shoigu announced Thursday. “The troops have shown their defense capability and I decided to complete the drills in the South and Western military districts.”

Are we finally witnessing rapid de-escalation? Or is it just the calm before the storm?

Here’s more from the AP:

The Russian Defence Ministry said the manoeuvrs in Crimea involved more than 60 ships, over 10,000 troops, around 200 aircraft and about 1,200 military vehicles.

The exercise featured the landing of more than 2,000 paratroopers and 60 military vehicles on Thursday. Fighter jets covered the airborne operation.

Shoigu flew in a helicopter over the Opuk firing range in Crimea to oversee the exercise. He later declared the drills over, but ordered the military to stand ready to respond to any “adverse developments” during NATO’s Defender Europe 2021 exercise.

Russian Defense Ministry releases video of snap military exercises in Crimea involving more than 10K troops, showing off not only coastal defenses but landing capabilities. https://t.co/Zz3DBmQAps pic.twitter.com/tSVjShcyg7

— Lucian Kim (@Lucian_Kim) April 22, 2021

Earlier this week Ukrainian Foreign Minister Dmytro Kuleba informed Western allies that the “continued” Russian troop mustering was “expected to reach a combined force of over 120,000 troops” in about a week.

He argued that sanctions on Moscow must be ratcheted up – this even after Biden’s last Thursday sanctions rollout targeting Russian officials and companies over the SolarWinds hack and alleged election interference. 

The second largest Swiss bank has been a veritable volcano of bad news in the past month, and today was no different: in the bank’s earnings call, Credit Suisse Group announced it was raising $2 billion from investors in the form of convertible notes, while also suspending its share buyback and cut the dividend – news which sent the stock tumbling as much as 7%…

… while also warning of even more pain from the Archegos collapse and cutting the hedge fund unit at the center of that particular fiasco as embattled CEO Thomas Gottstein seeks to recover from one of the most turbulent periods in the bank’s recent history.

The bank said the convertibles notes were sold to core shareholders, institutional investors and high net worth individuals and will help bring the bank’s CET1 ratio nearer its target 13%. That number had dropped to 12.2% at the end of the first quarter. In addition to the enforcement proceedings, Credit Suisse said that the Swiss regulator has told it to hold more capital to guard against losses by taking a more conservative view of its risk. The bank increased its assets weighted according to risk for both Archegos and Greensill. But while the capital raise came after Finma raised the bank’s capital requirements, Gottstein said the decision was the bank’s own… because clearly Credit Suisse is on top of all internal risk management.

“This was not as a reaction to any request by Finma or any other regulator,” Gottstein said on a call with analysts. “It was our proactive view that, together with the board, we decided to issue these two mandatories and that will really help us also against any possible market weakness over the coming months.”

Additionally, Credit Suisse, which said it has exited about 97% of its exposure to Archegos – yet it’s that 3% that remains problematic as the nominal value of its exposure to Archegos keeps rising and late last night hit $20BN –  said it expects a 600 million-franc ($654 million) loss in the second quarter, taking the total hit from the collapse to about $5.5 billion. In response, it’s cutting about a third of its exposure in the prime business catering to hedge fund clients, while strengthening capital with the sale of notes converting into shares.

The CEO did disclose that the bank has “good visibility for a large portion of the remaining positions” and that there are “three more distinct positions which we will work through in the next months and quarters. We are not planning to do any form of step-in. We are very clearly focused on getting the cash back to our investors.”

It was unclear which stocks those three positions represent.

For CEO Gottstein, who is battling to rescue his short tenure as chief executive officer after Credit Suisse was hit harder than any other competitor by the collapse of Archegos just weeks after the bank found itself at the center of the Greensill scandal too, the double whammy wiped out a year of profit and left Gottstein fighting to demonstrate to incoming Chairman Antonio Horta-Osorio that he’s of the right mettle to carry the bank through the volatility which has left investors nursing losses and questioning its strategy and controls.

Yet as Gottstein stays, most of his lieutenants are out: gone are investment banking head Brian Chin and Chief Risk Officer Lara Warner, along with a raft of other senior executives including equities head Paul Galietto and the co-heads of the prime brokerage business. Asset management head Eric Varvel is also being replaced in that role by ex-UBS Group AG veteran Ulrich Koerner.

As part of his hope to preserve his job, the CEO plans to reduce risk at the investment bank, including cutting about $35 billion of leverage exposure at the prime brokerage unit — which services its hedge fund clients, Gottstein said in an interview with Bloomberg Television. That’s about a third of its total exposure, although it was unclear how many clients the move will affect and whether the hedge funds will be forced to close out positions.

Here are the full highlights of Gottstein’s interview with Bloomberg’s Francine Lacqua.

• Credit Suisse Group AG’s placement of mandatory convertible notes raised almost $2 billion and has helped “take the capital discussion off the table,”
• “We have conditional capital; that’s the best way for us to raise the equity with a short 6-month maturity. It was important for us to get to get to 13% CET1 ratio which on a pro-forma basis we now have.”
• “With Archegos we are down to the last 3%; We have exited the positions to a large extent.”
• “We’ve taken action in our risk organization, we have taken management changes so we have done quite a lot, still some work to do in the second and third quarter but we have taken a lot of measures.”
• In prime brokerage business Gottstein says “our plan is to reduce leverage exposure by $35 billion by the end of the second quarter.”
• With Greensill, “We have brought back $5.4 billion in terms of cash out of the original $10 billion, we have good visibility for a large portion of the remaining positions. There are 3 more distinct positions which we will work through in the next months and quarters. We are not planning to do any form of step-in. We are very clearly focused on getting the cash back to our investors.”
• “If you look at our provision for credit losses it has been a very strong 10-11 years so I don’t think we have a DNA problem in terms of risk.”
• “We’ve taken action in our risk organization we have taken management changes so we have done quite a lot, still some work to do in the second and third quarter but we have taken a lot of measures.”

To summarize, here are five key takeaways from the Credit Suisse Q1 earnings from Goldman…

• Archegos: Loss scaled up to US$5 bn (previous: US$4.4 bn), and a 3% residual position remains.
• Supply-chain finance funds: of the US$ 10bn of funds, held by CS clients: ~54c/$ has been reclaimed by CS, with ~48c/$ paid back to investors. CS expects this number to rise meaningfully and indicated it does not see recourse to its capital.
• IB: (1) RWA for IB will be flat on Q4-20 (Q1-21: US$99 bn, Q4-20: US$88 bn), implying a cut of US$11 bn; (2) Leverage exposure cut of US$35 bn, driven mostly by cutting PB balances by 1/3; (3) broad review of IB operations is underway, and expected to continue through 2021.
• Strategic review: A comprehensive review is underway across the group but with a focus on prime brokerage operations. The incoming Chairman (to start on May 1st) is expected to lead the review.
• Outlook: 2Q-21 expectation is for a slowdown in IB, and an impact from Archegos. WM businesses should benefit from better recurring commissions and fees reflecting higher AuMs whilst NII should be stable. The bank did not see meaningful flows since the beginning of the quarter.

… and Bloomberg:

• The performance numbers took a back seat as investors got the surprise of a $2 billion capital raising to make up for the Archegos hedge-fund collapse. The shares fell as much as 6%
• CEO Thomas Gottstein said it was the right thing to do, to get capital concern off the table as an issue, even if the price level wasn’t particularly appealing
• Gottstein held back on details of the bank’s risk-management review, saying he wants to wait until investigations by regulators are complete. He did point to disclosure for family offices and the bank’s absolute limits for clients as areas that need to be looked at
• The Swiss lender also was cautious on the outlook for the investment bank, as it expects less market activity and it aims to shrink its prime-brokerage division
• On the other pending issue, the Greensill funds, the bank said more time is needed to determine how much money can

“Although capital has been mainly addressed, we still see questions remaining in terms of strategy and risk management,” JPMorgan Chase & Co. analysts wrote in a note to investors. “Capital has been clearly the main focus.” JPMorgan analysts Kian Abouhossein and Amit Ranjan previously said that the total impact for Credit Suisse from both Archegos and Greensill could add up to $8.7 billion.

For the first time in two years, Bitcoin’s “dominance” of the crypto-space has fallen back to 50% as altcoins see a sudden resurgence in popularity…

Source

“BTC dominance 51.6%. The magic starts when 50% breaks,” popular Twitter account CryptoBull summarized last week.

Ethereum has been the biggest gainer during this recent run, having now recovered all of the plunge losses from the weekend and rallied to a new record high

Source: Bloomberg

That pushed Ethereum’s market cap above that of Exxon Mobil, Intel, and Coca-Cola…

Source

As CoinTelegraph reports, the recent Berlin update has laid the groundwork for the much bigger London hard fork, which will activate EIP-1559. The controversial change will overhaul Ethereum’s existing fee structure, but experts have stated that the new base fee mechanism would not provide a long-term solution for Ethereum’ scalability problems.

Whatever the reason behind Bitfinex’s margin markets shifts favoring bears, there’s no indicator better than the 20% ETH price increase that took place over the previous four days. 

On a side note, Bear Traps Report’s Larry MacDonald notes that a billionaire VC told him this week to “pay attention – ETH/BTC about to make an epic breakout. I think Ethereum is the world’s most interesting trade right now.”

Bitcoin continue to languish, unable to catch a bid after the weekend’s liquidation.

Source: Bloomberg

Bitcoin may be under some pressure after a report by The Guardian that Morten Friis, the head of the UK bank NatWest’s risk committee, revealed that the bank will refuse service to business customers that accept cryptocurrency payments.

Friis made the bank’s position known during Wednesday’s shareholder event, stating:

“We have no appetite for dealing with customers, whether taking them on as new clients or having an ongoing relationship with people, whose main business is backed by an exchange for cryptocurrencies, or otherwise transacting in cryptocurrencies as their main activity.”

Friis’ comments echo similar sentiments recently attributed to HSBC, another U.K. bank, that used identical statements in announcing its decision to bar customers from buying MicroStrategy stock. 

And that underperformance has pushed ETH to its highest relative to BTC since August 2018…

Source: Bloomberg

Meanwhile, not all altcoins are up as DOGEcoin is now down over 40% from its record highs …

Source

Time for a Musk meme to save the world?

Authored by Christophe Barraud,

Later this morning, the National Association of Realtors (NAR) will release the US Existing Home Sales (EHS) for March. According to the Bloomberg consensus, EHS should decrease by 1.1% MoM to 6.15 million SAAR. It would be the lowest level since August 2020.

EHS will decline more than expected because of technical and fundamental factors:

• Buyers signed contracts in February (and to a lesser extent in January) for most March sales. Therefore, March EHS were still affected by adverse weather conditions.

• A larger fall than forecasted would be coherent with the trend in Pending Home Sales (PHS).

• Local/state reports show that, on a YoY basis, sales rose at a faster pace in March (non-seasonally adjusted: NSA) due to calendar and positive base effects. Ajusting for these biases, it resulted in a drop on a MoM basis (seasonally adjusted: SA).

• Demand was dampened by a deterioration of housing affordability amid higher mortgage rates and prices.

• Lack of supply kept weighting on housing transactions.

1. Data construction implies that March figures were still affected by adverse weather conditions

Most of economists never looked at the construction of EHS data which explains a large part of miscalculation. According to the Census Bureau, “the majority of transactions are reported when the sales contract is closed. Most transactions usually involve a mortgage which takes 30-60 days to close. Therefore, an existing home sale (closing) most likely involves a sales contract that was signed a month or two prior.” In other words, most buyers placed their offers in February (and to a lesser extent in January), when weather conditions were unfavorable.

2. A decrease in Existing Home Sales would be coherent with the trend in Pending Home Sales

As the National Association of Realtors (NAR) noted, “The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two.” Therefore, it would be coherent if EHS catch up downward with PHS. However, note that EHS are unlikely to drop as much as PHS (down 10.6% MoM in February).

3. After seasonal adjustment, local/state reports confirm that sales fell in March

On a YoY basis, local/state figures suggest that national existing home sales (non-seasonally adjusted: NSA) are likely to have advanced again in March (9th straight rise). In addition, the pace of increase (NSA) was higher than in February (+8.7% YoY). This is not susprising given the positive base effect (EHS were weak in March 2020). The calendar effect was also supportive with one more business day in March 2021 compared to March 2020. Using my sample of local/state data and a seasonal adjustment factor higher than last year (less favorable), I expect March EHS to decline at a faster pace than anticipated by the consensus (-1.1%e MoM).

4. Demand was dampened by a deterioration of housing affordability

Housing affordability has been under pressure since January. On one hand, mortgage rates started rebounding with the 30-year recently hitting the highest level since June 2020 in late March.

On the other hand, prices kept climbing at a quick rate. In its February report, the NAR showed that “The median existing-home price for all housing types in February was $313,000, up 15.8% from February 2020 ($270,400), as prices rose in every region. February’s national price jump marks 108 straight months of year-over-year gains.” More recently, Redfin highlighted that, in March 2021, “The national median home-sale price hit a record high of $353,000, up 17% from 2020, a record high rate of growth.“

5. Lack of supply kept weighting on housing transactions

One of the recent development related to the the housing market has been the collapse in inventory, which pushed prices upward. My sample of local/state reports also pointed to a YoY fall in inventory that was larger than in February (-29.5% YoY). Note that several areas experienced a decline of more than 50%, such as in Minnesota (-54.8% YoY). This pattern was cited as a dampening factor on sales.

After tumbling to pandemic lows the previous week, thanks to a collapse in California claims (that suggested fraud/systemic issues and not economic improvements), analysts expected some give back last week, but they were wrong as the number of Americans filing for first time jobless claims plunged to 547k – a new pandemic low.

Source: Bloomberg

Texas and New York saw the biggest drops in claimants as Virginia and Inidiana saw the biggest rise…

Unfortunately, the number of Americans on some form of jobless benefits rose back above 17 million…

Source: Bloomberg

Maybe they don’t want a job when being paid for couch-sitting pays so well?

Just yesterday, we wrote about how it appeared the love affair between China and Elon Musk was starting to fizzle out in a big way. 

Among other things, we pointed out what appeared to be an ongoing wave of criticism of Musk and Tesla being engineered by Chinese state media. That “wave” doesn’t look like it’s going to stop anytime soon.

Later in the day on Wednesday, state run media outlet the Global Times joined the fray, publishing an article characterizing Tesla’s response to its quality issues this week as a “blunder” and using the chance to shame Tesla and use them as an example for other foreign firms that may want to do business in China. 

“US electric carmaker Tesla is under serious fire in China in what could be the biggest public relations crisis for the otherwise highly popular company in the Chinese market,” the piece said. “The blunder was created by the company itself and could have been avoided.”

The piece is referring to Tesla reportedly “lashing out” against a protestor at this week’s Shanghai Auto Show, who jumped onto the roof of a Tesla and called the quality of the company’s brakes into question. Tesla responded by calling the woman’s demands “unreasonable”. 

The Global Times writes: “The response quickly elicited criticism from the Chinese public and various authorities in China, where many called the statement arrogant and overbearing. The simmering pressure of public opinion eventually made Tesla bow its head, with an apology letter, in which it vowed to respect consumers and abide by laws and regulations. The apology marked a 180-degree turn from its initial response; however, it may have been too late, as criticism continues to fly in.“

Then, the piece alludes to Tesla potentially losing business in the country – a statement worth noting due to the Global Times’ ties to the CCP. “Clearly, the way the car owner protested was inappropriate and even illegal. That is why she has been put under police detention for five days. However, the arrogant and overbearing stance the company exhibited in front of the public is repugnant and unacceptable, which could inflict serious damage on its reputation and customer base in the Chinese market,” the piece concluded. 

Yesterday, we wrote about how commentary by a CCTV broadcaster called for an investigation into Tesla’s brake failures following the incident. 

The CCTV commentary “said the regulator could invite third-party testing agencies that both the customer and Tesla can trust to test the vehicles,” according to a Reuters report on Tuesday. At the same time, it has been reported that one of China’s largest insurers has temporarily stopped providing services for new Tesla owners after the incident.

Additionally this week, China’s Xinhua News Agency has said that Tesla’s apology for its poor service “lacks basic sincerity,” according to a Wednesday report by Bloomberg. Tesla “didn’t give a ‘substantive’ response to the customer’s complaints and public concerns, and the apology letter was no more than crisis management,” the news agency reportedly said. 

Xinhua also pointed out that Tesla has a “natural advantage” of being able to look into the causes of its car accidents and that it should use it to win customers’ trust with modesty. This is as opposed to what it did with such data this week, when Elon Musk (likely prematurely) Tweeted out that data from a fatal wreck in Houston said that Autopilot was not engaged at the time of the accident. “Tesla should reflect on, and tackle its problems at the roots,” Bloomberg reported that Xinhua said.

Meanwhile, a separate report from Bloomberg notes that China’s State Administration for Market Regulation asked its local departments to ensure “legitimate rights” of consumers after the outburst at the Shanghai Auto Show. 

CNBC’s Eunice Yoon also reported during the day Wednesday that China’s state media warned Tesla for the second day in a row against “arrogance”. 

Sounds like things are going great over there. To quote Elon Musk’s own words, “China rocks”.

U.S. index futures traded flat on Thursday morning, rebounding from some early weakness ahead of today’s ECB meeting, as investors assessed earnings from companies, including Southwest Airlines and AT&T, while awaiting weekly jobless claims data for clues on the pace of recovery in the U.S. labor market. Treasury yields steadied near a five-week low.

At 7:30 a.m. ET, Dow e-minis were down 15 points, or 0.04%, S&P 500 e-minis were down 5 points, or 0.11%, and Nasdaq 100 e-minis were down 22 points, or 0.16%.

On Wednesday, Wall Street’s main indexes closed higher, recovering from a two-day decline in the previous session with value stocks gaining about 1.1%. Shares of AT&T gained 1% in premarket trading after the company’s wireless subscriber additions trounced analysts’ estimates. read more. Southwest Airlines posted a smaller-than-expected quarterly adjusted loss and forecast lower cash burn in the second quarter. The airline’s shares, however, fell 1.7%.

The recent Russell 2000 underperformance signaled the rotation toward growth-friendly cyclical stocks was slowing. Notably, the benchmark U.S. 10-year yield fell below its 50-day moving average for the first time since November.

With earnings season in its prime, Q1 earnings have surprised to the upside, with S&P 500 showing a 5% revenue surprise and 38% earnings surprise across 83 earnings reports, according to Saxo Bank. Among closely-watched reports, results from chipmaker Intel Corp. are due Thursday. The chipmaker is expected to post a drop in first-quarter revenue later in the day, with analysts looking forward to updates on its U.S. manufacturing plants and chips for automakers amid a global microchip supply shortage. Its shares rose 0.3% in premarket trading.

“While certainly investors have priced in a lot in terms of normalization in certain segments of the market, I still think that there is room to run,” Erin Browne, PIMCO multi-asset strategies portfolio manager, said on Bloomberg TV.

As vaccination rates rise and pandemic-weary citizens embracing more freedoms to drive growth in some major economies, MSCI’s broadest global gauge of stocks was up 0.3%, trading within 1% of its all-time closing high after a recent mini sell-off. However, concerns are mounting that a flare-up in coronavirus cases could derail the global growth rebound after investors piled into trades that benefit from re-opening economies.

“The summer earnings season will further test the trajectory of the recovery, but until then, vaccines rollout and economic reopening will be the main triggers for a further upside leg in this bull run,” Amundi Chief Investment Officer Pascal Blanque said in a note to clients.

In Europe, broad market indexes posted stronger gains with the Stoxx Europe 600 up 0.5%, bolstered by upbeat earnings from Volvo and Nestle ahead of the European Central Bank holding a policy meeting. Sales at the Swiss food giant grew more than twice the rate analysts expected amid a return to dining out.

“Markets are currently a tale of three Vs – standing at a crossroads of virus evolution, vaccination rates and v-shaped recoveries,” Societe General cross-asset strategist Alain Bokobza wrote in a note to clients. “Our overall stance is unchanged, i.e., no exuberance yet. Credit risk remains under control, so risk assets should continue to ride high… Stick to risk for now.”

Asian stocks rebounded from their biggest two-day drop in a month as investors appeared to look past surging virus cases around the world and focus on an economic recovery. Japanese shares led gains, recovering from being the worst performers in the region for two straight days after the BOJ reassured investors that it will be there to buy ETFs if the market drops. Electronics makers were the biggest boost to the Topix index, which rose 1.8%. The recent slump in shares prompted the Bank of Japan to step in and buy exchange-traded funds for the first time since March on Wednesday. Stocks in India rose after initial declines, shrugging off the country’s grim distinction of posting the world’s biggest one-day jump in coronavirus cases.

However, sentiment was down in China as some companies announced weak first-quarter earnings. The benchmark CSI 300 index dropped 0.2%, with Great Wall Motor and Wens Foodstuffs among the worst performers on the gauge. The MSCI Asia Pacific Index tracked the rise in U.S. shares to climb 0.9%, poised for its biggest gain in three weeks, with industrial shares among the outperformers as investors flocked back to cyclical stocks. While the virus resurgence and inflation are a concern, “we are recommending to investors that they should look at this period as a transitory one, focus more on equities than fixed income and focus on Covid-19, which generally speaking is moving in the right direction,” Stefan Hofer, chief investment strategist at LGT Bank AG, told Bloomberg Television

In Australia, stocks advanced, led by technology and health shares. The S&P/ASX 200 index shrugged off a wobbly start to close 0.8% higher to 7,055.40, marking its best session since April 8. The benchmark index was boosted by health and technology stocks. Megaport was the top performer after its monthly recurring revenue rose 7.9% q/q. Redbubble was the worst performer after its 3Q update missed expectations. In New Zealand, the S&P/NZX 50 index rose 0.3% to 12,577.48.

In FX, the Dollar Spot Index inched up while most Group-of-10 currencies consolidated recent ranges; The euro was slightly higher against the dollar before the ECB meeting, with no changes expected to the central bank’s plans to accelerate asset purchases until June to rekindle growth. The New Zealand dollar was the worst G-10 performer; it declined as much as 0.6% amid concern about a flare-up in virus infections in some countries

In rates, Treasuries were little changed after paring Asia-session gains that pushed 5- and 10-year yields below 50-DMAs. U.S. 10-year yields around 1.56% keep pace with bunds while gilts marginally outperform; with Euro Stoxx 50 higher by 0.7%, S&P 500 futures are little changed near top of Wednesday’s range. European sovereign bonds edged higher and the euro traded in a 30-pips range before the ECB decision, which isn’t expected to send it off on a wild ride, though any sign of momentum could be telling as to its medium-term bias

Meanwhile, oil added to losses with an increase in U.S. crude inventories compounding concerns around a choppy global demand recovery.

Looking at the day ahead now, the ECB meeting and presser will be the highlight. In addition, there are a number of US data releases, including the weekly initial jobless claims, existing home sales for March, the Chicago Fed national activity index for April and the Kansas City Fed manufacturing index for April too. Separately, we’ll get the advance Euro Area consumer confidence reading for April. Finally, earnings releases today include Intel, AT&T, Danaher and Union Pacific.

Market Snapshot

• S&P 500 futures little changed at 4,161.00
• Stoxx Europe 600 rose 0.5% to 438.83
• MXAP up 0.9% to 207.23
• MXAPJ up 0.4% to 692.60
• Nikkei up 2.4% to 29,188.17
• Topix up 1.8% to 1,922.50
• Hang Seng Index up 0.5% to 28,755.34
• Shanghai Composite down 0.2% to 3,465.11
• Sensex up 0.6% to 47,993.63
• Australia S&P/ASX 200 up 0.8% to 7,055.45
• Kospi up 0.2% to 3,177.52
• Brent Futures down 0.6% to $64.95/bbl
• Gold spot down 0.2% to $1,789.79
• U.S. Dollar Index little changed at 91.182
• German 10Y yield fell 0.9 bps to -0.271%
• Euro little changed at $1.2027

Top Overnight News from Bloomberg

• ECB President Christine Lagarde will be pressured to reveal how much longer the euro area will need intensified support on Thursday, after she and her colleagues hold their policy meeting
• The EU’s commissioner for financial services said the bloc isn’t under any pressure to help London financial firms access the market and warned there won’t be any decisions soon while Britain plots different rules for the industry

A quick look at global news from Newsquawk

Asia-Pac stocks traded mixed as the region struggled to maintain the momentum from the US where the major indices snapped a 2-day losing streak led by advances in small caps which resulted in the Russell 2000 finishing higher by more than 2%, and cyclicals were also favoured with materials, energy, financials and industrials the outperformers in the S&P 500. ASX 200 (+0.8%) was marginally higher with the index kept afloat by strength in gold miners and real estate although gains were capped amid China-related tensions after Australia cancelled the Victoria State MOU and framework agreement with China regarding the Silk Road economic belt that was signed in 2018, while China was said to strongly oppose the cancellation and warned that the action is bound to further deteriorate bilateral relations. Nikkei 225 (+2.4%) outperformed and reclaimed the 29k level with the index largely unfazed by a mixed currency and potential state of emergency declarations for four prefectures which the government will reportedly decide on this Friday. Hang Seng (+0.5%) and Shanghai Comp. (-0.2%) both initially opened higher but then briefly pared all their gains amid ongoing concerns of tighter regulation and continued overhang from US-China tension after the US Senate Foreign Relations Committee backed the Strategic Competition Act of 2021 to send the bill to a full vote at the Senate, while a bipartisan group of lawmakers also proposed legislation calling for USD 100bln in science funding to keep US competitive with China and other nations. Finally, 10yr JGBs were higher and resumed its gradual approach towards a 2-month high amid the eventual upside in T-note futures in the aftermath of a solid 20yr auction stateside, although the gains were only marginal amid the outperformance of Japanese stocks and lack of BoJ purchases in the market today.

Top Asian News

• China’s SAIC to Form $770 Million Auto Investment Fund With CICC
• Hyundai First-Quarter Profit Jumps on Luxury Car, SUV Demand
• Japan’s Nidec Replaces CEO as It Targets Booming EV Market
• SK’s Battery Materials Unit Sees a Shortage for EV Component

Equities in Europe trade with comfortable gains across the board (Euro Stoxx 50 +0.9%) as sentiment picked up from a mixed APAC handover and as earnings season kicks into gear with traders now eyeing the ECB’s decision and presser later. State-side, US equity futures trade sideways awaiting catalysts whilst the RTY experiences mild underperformance. Back to Europe, the general direction across bourses remains positive but individual performances vary – largely due to a slew of large-cap earnings in the EU pre-market. The AEX (+1.3%) and SMI (+1.1%) stand as the top performers with the former feeling second winds from ASML (+2.9%) earnings. Meanwhile, the latter is buoyed by Nestle’s (+3.6%) performance post-earnings, in turn offsetting pressure from Credit Suisse (-5.6%) whose shares plumb the depths amid substantial US hedge fund-related costs coupled with probes by the Swiss and US watchdogs regarding the Archegos situation. Credit Suisse noted that they have exited 97% of the related position, with a CHF 600mln impact seen in Q2. Thus, Europe sees its financial sectors as the current laggard, whilst the upside sees Food & Beverages, closely followed by Tech. The broader sectors however do not portray an overarching theme. In terms of individual movers, AstraZeneca (+1.1%) has shrugged off reports that the EU is said to be getting ready to launch legal proceedings against AstraZeneca over complaints it failed to deliver on its pledges. On the flip side, Aggreko (-2.4%) is pressured as Liontrust Asset Management (12% stake) is reportedly intending to oppose the GBP 2.3bln takeover deal by a consortium involving TDR and I Squared, according to sources. Meanwhile, earnings-related movers include the likes of Volvo (+3.5%), SAP (+1.5%), Hermes (+3%), Renault (-2%) and Orange (-2%).

Top European News

• Hedge Fund IPM of Sweden Is Set to Close Amid Pandemic Losses
• SAP CEO Says Cloud Unit Had ‘Blowout Quarter’ in Turnaround
• Alphawave to Raise $500 million in Rare London Semiconductor IPO
• Commercial-Property Loan Defaults Surge 44% on U.K. Lockdown

In FX, Not quite all change in the major pecking order, but the tables have turned for the Franc and Kiwi, as Usd/Chf retreats through 0.9150 from yesterday’s high just shy of 0.9200 and Nzd/Usd lets go of the 0.7200 handle again. Encouraging Swiss trade data revealing a significantly wider surplus swelled by key watch exports may be helping the Franc leverage more from the latest bout of Greenback weakness, while the Kiwi looks somewhat taken aback by a marked change in direction in Aud/Nzd cross flows from sub-1.0750 lows to the upper 1.0700 area in wake of a rise in NAB business sentiment that is helping the Aussie deflect further angst with China over the cancellation of the Silk Road MOU and framework agreement. Indeed, Aud/Usd is holding near 0.7750 as attention turns to preliminary PMIs.

• DXY – The Dollar index has succumbed to more selling pressure after running out of steam into 91.500 on Wednesday and then relenting to the Loonie’s post-BoC resurgence, but underlying bids ahead of recent lows are helping to keep the DXY contained between 90.999-91.204 bounds in the run up to this week’s first real batch of US data in the form of jobless claims and existing home sales.
• EUR/JPY/CAD/GBP – Having survived several rigorous tests of the 1.2000 level, the Euro found 1.2050 vs the Buck almost as impregnable and is now hovering around 1.2025 awaiting the ECB, albeit without much aspiration for anything meaningful in terms of policy insight to trade off. However, the post-meeting press conference and Q&A always hold potential for something unexpected – full preview of the event available in the Research Suite and to be posted on the Headline Feed before 12.45BST. Elsewhere, the Yen seems to be in a quandary in advance of Japanese CPI given hefty option expiry interest at the 108.00 strike (1.6 bn) and bigger expiries between 108.30-40 (2.6 bn), but key technical resistance at 107.77 (38.2% Fib retracement of the move from 110.97 to 102.59) still proving too tough to scale. Meanwhile, the Loonie has lost a bit of its aforementioned BoC inspired gusto and is straddling 1.2500 in the absence of further impetus that is highly unlikely to come via Canadian new home prices today, and Sterling is fading as well following a test of 1.3950 vs the Greenback, though should derive more independent impetus from UK retail sales and flash PMIs on Friday if not public finances, while the below-forecast CBI metric failed to induce any action.
• SCANDI/EM – The Nok has recouped a chunk of its midweek losses to retest offers into 10.0000, and perhaps with the aid of an improvement in Norwegian Q1 industrial sentiment, but the Try has depreciated further through 8.3500 at one stage vs the Usd with no assistance from a fall in Turkish consumer confidence or reports that US President Biden plans to officially acknowledge the Armenian genocide and likely exacerbate already fractious relations between NATO nations. Moreover, the Lira still has CBRT minutes to come. Conversely, the Cnh/Cny and Rub continue to contend quite well with heightened China/US-Australia and Russia/US/EU etc strains circa 6.4900 and 76.2100.

In commodities, WTI and Brent front month future are again choppy but within a tighter range than seen in recent days, with the former on either side of 61/bbl (60.61-61.27/bbl range) and the latter oscillating around USD 65/bbl (64.58-65.26/bbl). The complex continues to balance the scales with the demand side of the equation weighing rising cases vs vaccinations – with energy consultancy firm FGE forecasting the Indian COVID outbreak to hit 500k BPD in oil demand in May. Meanwhile, the supply side tackles OPEC+, Libyan and Iranian supply developments – with Petro-Logistics suggesting Iranian exports remain elevated at 500k BPD thus far in April and may not hit 2020 lows as JCPOA talks continue – with the US said to be mulling lifting some oil-related sanctions. Tensions with Russia are also eyed as drills are underway, with over 40 warships and 20 support vessels in military drills in the Black Sea, and north of 10,000 partaking in drills in Crimea. Turning to OPEC+, there remains a lack of official communication from the secretariat on whether an OPEC+ meeting will follow next week’s JMMC. If an OPEC+ meeting is to go ahead, then the door remains open for a potential tweak to the output quotas set through July in wake of the COVID developments and some limited vaccine rollouts in light of rare blood clot reports. Russia has remarked that next week’s meeting will likely focus more on current market dynamics, intimating just a JMMC meeting, whilst some also suggested that it will be difficult to carry out two meetings during the Islamic period of Ramadan. Elsewhere, spot gold and silver have been moving with firming Dollar, with the former waning off its 1,797/oz intraday peak to reside at session lows, whilst spot silver failed to sustain an upside breach of USD 26.50/oz overnight. Over to base metals, LME copper is relatively flat but still in close proximity to USD 9,500/t, whilst Shanghai copper overnight dipped with trader citing consolidation following the recent rise. Chinese steel futures hit record highs with some pointing to expectations of robust demand.

US Event Calendar

• 8:30am: April Initial Jobless Claims, est. 610,000, prior 576,000; Continuing Claims, est. 3.6m, prior 3.73m
• 8:30am: March Chicago Fed Nat Activity Index, est. 1.25, prior -1.09
• 10am: March Existing Home Sales MoM, est. -1.8%, prior -6.6%
• 10am: March Leading Index, est. 1.0%, prior 0.2%
• 10am: March Home Resales with Condos, est. 6.11m, prior 6.22m
• 11am: April Kansas City Fed Manf. Activity, est. 28, prior 26

DB’s Jim Reid concludes the overnight wrap

Welcome to Earth Day which will no doubt get more focus over the years ahead as we go through a green revolution. The main market highlight to look forward to is the ECB meeting which we’ll preview below.

Before we get there, global equities stabilised yesterday following their bumpy start to the week, though investor doubts about the recovery continued to linger given the recent major spike in Covid cases across a number of key regions. By the close of trade, the S&P 500 had recovered +0.93% and Europe’s STOXX 600 was up +0.65%, but in both cases they still hadn’t quite recovered to their record highs. It was a fairly broad-based advance, with cyclical sectors including materials (+1.87%), energy (+1.48%) and semiconductors (+2.28%) among the leading industries in the S&P. The Dow Jones (+0.93%) matched the S&P’s gain while the small-cap Russell 2000 (+2.35%) outperformed on the day after underperforming in the early part of the week. The FANG+ index (+0.29%) underperformed thanks to Netflix (-7.40%) seeing its worst daily performance since November. The move lower for the streaming service came after their earnings release the previous day reported that the number of new customers fell well short of expectations.

For sovereign bonds, the performance was rather muted on either side of the Atlantic, with yields on 10yr US Treasuries falling back -0.3bp. Bunds (0.0bps), OATs (-0.3bps) and gilts (+0.9bps) were similarly dull, while BTPs (-2.6bps) rallied slightly. But precious metals had another decent performance as concerns about the economic recovery picked up, with gold prices (+0.85%) reaching their highest level in almost 2 months at just under $1800/oz, and silver (+2.82%) having its best daily performance in over a month. Elsewhere in commodities, WTI (-1.75%) and Brent (-1.88%) both fell back even as some European countries announced Covid-19 restrictions would be easing in the coming weeks. The US dollar index fell slightly (-0.14%) for its 7th daily loss in the last 8 sessions and is now on track for its third weekly decline in a row – the first time that would have occurred since December if the dollar does not rally into the weekend.

Overnight in Asia, markets are following Wall Street’s lead with the Nikkei (+2.04%) outperforming while the Hang Seng (+0.46%) and Kospi (+0.39%) are also up. However, the Shanghai Comp (-0.05%) is trading a touch lower. Futures on the S&P 500 (-0.16%) are also trading lower while yields on 10y USTs are down -2.4bps to 1.533%. European futures are pointing to a positive open though with those on the Stoxx 50 up as much as +0.56%. In other news, Bloomberg reported that the SEC is exploring how to increase transparency for the types of derivative bets that sank Archegos Capital. The report also added that the SEC is also under pressure from Capitol Hill to shed more light on who’s shorting public companies after the GameStop frenzy.

Looking ahead, one of the main highlights today will be the ECB’s latest monetary policy decision and President Lagarde’s subsequent press conference. In contrast to the sharp rise that took place at the start of the year, longer-term nominal bond yields have been broadly stable since the March meeting, and our economists write in their preview (link here) that a change in the policy stance is unlikely. Meanwhile a decision on whether or not to maintain the new faster pace of PEPP purchases will be made after a joint assessment of financing conditions and the outlook for inflation at the Council meeting on 10 June. However, it’s unclear at this point whether they’ll maintain the higher pace of PEPP purchases beyond June. It’s also worth mentioning that the ECB’s Strategy Review is continuing, which they’ll conclude internally in June and publish in September, and our chief European economist Mark Wall has just released a podcast in which he offers his preliminary assessment of the landing zone for the review. You can find that here.

In terms of the latest on the pandemic, the German Bundestag voted in support of the government’s proposed law that would enable them to take greater control of the pandemic response, having failed to reach an agreement with the states. The measures would see new restrictions imposed in areas with more than 100 cases per 100k people over 3 consecutive days. These would include a 10pm to 5am curfew, while nonessential shops would be open by appointment only and would close altogether if the cases went above 150. Furthermore, in-person teaching would close if cases rise above 165. In other European countries, many indicated they would soon be easing restrictions following the recent wave. In France, a government spokesman said that travel restrictions between regions would be eased on May 3 and schools would reopen in the coming weeks. Greece is planning on easing most restriction during the first week of May as well, while Poland’s health minister said that some of the nation’s curbs would be eased in 11 of the 16 regions from Monday. Finally in the UK, there was further good news on case numbers as the 7-day reported average fell to 2,463, its lowest since early September when the number of tests were less than a third of their current levels. In the US, President Biden has called on employers to utilise a tax credit provision in the recent stimulus bill to give workers paid leave to get vaccinated. This comes as the Biden administration met its goal of 200mn shots in the first 100 days yesterday and 90% of all Americans now live within 5 miles of somewhere they can get inoculated. Elsewhere, the situation in India has continued to worsen with the country recording 314,835 new cases over the past 24 hours, according to Indian Health Ministry data. This is the highest number of daily cases seen by any country since the pandemic began.

Looking at yesterday’s data, the UK CPI reading for March rose by less than expected to +0.7% (vs. +0.8% expected), which marks the second month running that inflation has surprised to the downside. Nevertheless, core inflation was in line with consensus at +1.1%. We also got the CPI release from Canada, where base effects helped inflation rise to +2.2% in March (vs. +2.3% expected), up from +1.1% in February. Staying on Canada, the central bank there struck a hawkish tone yesterday, with a reduction in the weekly pace of government bond purchases to C$3bn from C$4bn. Furthermore, they brought forward their estimate of when economic slack would be absorbed to the second half of 2022, having not seen it until 2023 before, which is significant since they’re committed to holding the policy rate at the effective lower bound until that point. Unsurprisingly, the Canadian dollar was the strongest-performing G10 currency yesterday, gaining +0.90% against the US dollar in its best daily performance since last June.

To the day ahead now, and the aforementioned ECB meeting is likely to be the highlight. In addition, there are a number of US data releases, including the weekly initial jobless claims, existing home sales for March, the Chicago Fed national activity index for April and the Kansas City Fed manufacturing index for April too. Separately, we’ll get the advance Euro Area consumer confidence reading for April. Finally, earnings releases today include Intel, AT&T, Danaher and Union Pacific.