Month: April 2022

Not a day seems to pass any more without some Fed speaker “surprising” markets with some uber-hawkish comment out of left field, and after Brainard on Tuesday, the FOMC Minutes (which laid out the details of the Fed’s $1 trillion a year balance sheet runoff) on Wednesday, this morning its was the turn of St Louis Fed President James Bullard – who as a reminder was the sole dissented in the latest FOMC meeting, demanding a 50bps hike instead of 25bps – who was of course hawkish, and said monetary policy benchmarks using “generous assumptions” suggest that the Fed may need to raise interest rates to about 3.5% to counter inflation that’s running far too high. In other words another 300-325 bps of hikes.

Bullard cited a version of the Taylor Rule  to come up with his estimate for how high rates should go.

“One concludes that the current policy rate is too low by about 300 basis points, according to this calculation,” Bullard said Thursday in prepared remarks at the University of Missouri. That could suggest, by that measure, the Fed is “behind the curve,” he said, pointing out what has been patently obvious for a long, long time to anyone… but the Fed.

The Fed raised its benchmark overnight rate by 25 basis points last month to a target range of 0.25% to 0.5%. Meanwhile inflation is at 8% and about to hit double digits. The last time inflation was here, the Fed’s overnight rate was over 12%.

It is unclear if the Fed will be able to hike to 3.5% before the economic implodes, but Bullard will certainly get his wish for one or more 50bps rate hikes on the way there. Yesterday’s FOMC minutes revealed that “many” officials had been of the same mind and only opted for the smaller increase out of caution in light of Russia’s invasion of Ukraine. The minutes also showed that many of them also noted that one or more half-point hikes could be appropriate going forward to counter the hottest inflation in four decades.

Markets have already incorporated Fed tightening into their pricing, with the 2-year Treasury yield trading at around 2.45%, or 1 percentage point below what might be needed, Bullard said. It has also led to a yield curve inversion suggesting the next recession is coming.

“This suggests the Fed is not as far ‘behind the curve,’ although it would  still have to raise the policy rate to ratify the forward guidance,”  Bullard said, whistling past the graveyard and ignoring the elephant in the room, namely that as shown in the chart below, the Fed will hike to just over 3% before the next recession hits in late 2023 and the Fed has to start cutting again.

Bullard said he expects growth of “a slower but still robust 2.8% pace in 2022,” despite a weak first quarter and impact from the Russian invasion of Ukraine. He said the unemployment rate may fall below 3% this year.

“The expansion is not ‘old’ and can continue for a long time,” he said, clearly disagreeing with Morgan Stanley which is warning that we have just a few more month left in the end-cycle before the next recession

And while the market knows better than to listen to Bullard – or anyone else from the Fed – it had no choice, and the latest round of hawkish commentary pushed S&P futures near session lows and back to red for the day.

By Michael Every of Rabobank

Yesterday’s Fed minutes showed the gloves are off. The FOMC was close to a 50bp hike last month, only the war stopped them, but it won’t stop them ahead. Moreover, QT starts in May at a pace of $60bn a month for Treasuries and $35bn for MBS. As Philip Marey puts it here, “The minutes show an FOMC that realizes it is far behind the curve and desperate to catch up. The Fed is now front-loading and likely to take big steps in tightening monetary policy at the May meeting. However, as the economic outlook is deteriorating they may already be too late. The recent inversions of the yield curve suggest that this hiking cycle is going to end prematurely and could very well be followed by another recession.”

Former Fed president Dudley stated to CNBC that the FOMC needs to “inflict more losses” in stocks (and bonds) in order to rein in soaring inflation: “If stocks don’t fall, the Fed needs to force them.” Which at least shows us that Wall Street is indeed what the Fed sees as the actual economy. US 2-year yields managed to end down almost 13bp from their intraday highs and 4bp on the session at 2.47%, showing they seem to be pricing for the recession in advance; US 10s fell less intraday and closed the session higher at 2.60%.

By contrast, China threw in the towel: “All departments should study contingency policy plans in response to changes in the situation and roll out measures conducive to the stability of market expectations in a timely way,” the cabinet said. That will mean rate cuts as the Fed is hiking: 16bp to go until US and Chinese bond yields sustainably cross-over, which could happen within this week given current daily volatility. As stock and bond flows into China have already dried up, how long can CNY then pretend it is not soft pegged to the dollar again? Yet a weaker CNY would be inflationary, hitting Chinese consumers and/or firms.

Yet Chinese stimulus will force the Fed to keep going. Beijing has two choices: follow academics arguing that ‘Revitalizing Consumption Remains a Major Challenge to the Chinese Economy’ and for giving out 1,000 digital CNY per person ($157) to spend within a limited period – the kind of stimulus that won’t solve structural problems, as we saw in the US, or make CNY more stable; or, as Bloomberg extolls, and is far more likely, to build more (unneeded) infrastructure, with a $2.2 trillion a plan laid out – and then watch global commodity prices soar.

Even if the Fed tightening cycle is nasty, brutish, and short, markets also have to deal with the Pentagon confirming the Hobbesian war in Ukraine could last for years: that means persistent supply-chain and supply-side disruption. To underline the point, US Secretary of State Blinken just stated: “What is success, what is victory? It’s holding on to the sovereignty and independence of their country. And there is no scenario by which over time that will not happen.” So, Ukraine will win –over time– despite nuclear-armed Russia seeing this as an existential battle it cannot lose.

On which, we just saw a further escalation in Western sanctions against Russia, with the likes of Sberbank and Alfa-Bank dragged in, the children of Putin and Lavrov targeted, and US investment into Russia banned; and Russia just had to pay sovereign debt in roubles as a result of existing dollar sanctions – but which in many ways is a gift to it. None of these measures will change the military dynamic on the ground in the direction Blinken wants. And the next major phase of fighting is expected to begin in around five days.

Indeed, Reuters quotes Benn Steil, international economics director for the Council on Foreign Relations think tank in New York, saying:

“We are at the point where we have to take some pain. The initial batches of sanctions were crafted as much to not hurt us in the West as much as they were to hurt Russia.”

Yet is there any appetite for that in the US, alongside Fed hikes, ahead of November’s mid-term elections? Kid gloves, perhaps?

In the EU, the gloves are off… but against each other. MEP Guy Verhofstadt just vented: “You know why your strategy doesn’t work? Because progressive packages of sanctions with an autocrat doesn’t work. That works with a democracy, with democrats who have a public opinion, a real public opinion. In Russia, there is no longer a real public opinion.” He’s wrong: Russian public opinion broadly supports the war – but that actually makes his next point even stronger.

“The reality is it doesn’t work because the fifth package is, what, coal? It’s ridiculous. This is only 3% of imports from Russia. SWIFT, the ban, ridiculous. More than 50% of the financial institutions are still outside the ban. And the oligarchs,…will escape, finally, the sanctions, or lose a little bit of their money. You need to tackle the 6,000 people around Putin…

It’s time to change your strategy. It’s time to have an extra European Council as fast as possible, and to go for the full package of sanctions immediately, so that you can really make a difference. All the rest will not work. All the rest will prolong the war. [To Germany:] I expect leadership. Leading by example, and not dragging their feet as we see it today.”

As the EU talks about decoupling from Russian energy at its own pace —which is NOT how wars are fought— Reuters reports China’s SOE refineries, while honoring existing Russian oil contracts, are avoiding new ones despite steep discounts, to avoid being seen supporting Moscow; and as the US warns fellow Quad member India not to buy more Russian oil, India points out that when it followed sanctions against Iran, the US looked the other way while China consistently broke them “because markets”.

The time for muddling through is coming to an end. On rates, it’s true. On realpolitik, the demand is also for real action – and at a real cost. Just as money is no longer going to be completely free, neither are our geostrategic options. The logic is still either a full sanctions package –including energy– which will rock the economy and markets, or a prolonged war, which will rock the economy and markets. Gloves off, or towel thrown in, it ends up the same.

Indeed, time to take the gloves off or throw in the towel on all policies:

• There are more warnings about the pressure global commodity trading houses are under given huge price increases, higher volatility, margin calls, and sanctions. If we see state aid there as a result, does it come with the same kind of overarching regulation it did in other sectors, especially at a time of geopolitical tensions and ‘commodities as weapons’?

• On which, South Korea’s president-elect is asking for the US to return nuclear bombers and submarines to his country. So much for the peace attempts of his predecessor: and China will be thrilled.

• Canada announced it is to ban foreign purchases of residential property for two years to try to keep a lid on already insane prices.

• In a political stunt, Texas governor Abbot is apparently to bus illegal immigrants coming across the border from his state to Washington DC: which won’t be cheap with rising diesel prices.

Just days after cyclist Emily Bridges was prohibited from taking part at the National Omnium Championships last weekend, British Prime Minister Boris Johnson declared that he feels it’s “sensible” that biological males shouldn’t be allowed to compete in women’s sports – wading into a controversial issue that has many produced strong feelings among both liberals and conservatives.

Bridges, the above-mentioned cyclist, is 21, and began hormone treatment last year. They had been given the all-clear to race by British Cycling before being overruled by the Union Cycliste Internationale (UCI), the international governing body of the sport.

“I don’t think that biological males should be competing in female sporting events. And maybe that’s a controversial thing… but it just seems to me to be sensible,” BoJo said.

“That doesn’t mean that I’m not immensely sympathetic to people who want to change gender, to transition. It’s vital that we give people the maximum possible love and support in making those decisions.

“But these are complex issues and I don’t think they can be solved with one swift, easy piece of legislation. It takes a lot of thought to get this right.”

Johnson added that he wished for women to be able to have their own spaces in publicly accessible environments, such as toilets and changing rooms.

“I also happen to think that women should have spaces — whether it is in hospitals or prisons or changing rooms or wherever — which are dedicated to women,” the broadcaster also reports the Conservative Party head as saying.

BoJo made the comments during an interview with Sky News Sports.

NEW – UK PM Boris Johnson says biological males should not compete in female sporting events.pic.twitter.com/WSMyZ8Bwy3

— Disclose.tv (@disclosetv) April 6, 2022

The PM’s comments are a notably strident break from the rest of his party. Recently, Chancellor of the Exchequer, Rishi Sunak refused to define exactly what a woman was live on air when questioned by a journalist (much to some of his fellow conservatives’ chagrin). Labour chief Keir Starmer has employed a similar dodge.

Now @RishiSunak cannot describe what a woman is. @Keir_Starmer doesn’t know what a woman is.

A woman doesn’t and never has had a Penis!! Grow a backbone & stop denying a biological fact!

— Lady of the house (@SusanHarris80) March 30, 2022

That’s not to say that BoJo’s comments won’t elicit some backlash from the trans lobby – they almost definitely will. In the days since being barred from the NOC, Bridges shared their experience of being “harassed and demonized” for being trans.

Via SchiffGold.com,

Federal Reserve Governor Lael Brainard sounded a hawkish tone on Tuesday, promising to ramp up the inflation fight. As Peter Schiff put it in his podcast, the uber-dove started talking like a super-hawk. But the Fed members aren’t really going to be able to follow through on this inflation fight. In reality, they aren’t hawks. They’re chickenhawks.

Brainard said the Fed would raise rates methodically and shrink its balance sheet at a “considerably” more rapid pace than it did during the previous cycle.

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19,” she said.

Brainard’s comments were reminiscent of Jerome Powell’s tough talk the week following the Fed’s first interest rate hike in the so-called fight against inflation.

Peter said there is nothing hawkish about anybody at the Fed, but many people on the Federal Reserve board are pretending to be hawkish.

They can’t actually be hawks, so, they’re chickenhawks. But they don’t want to acknowledge the pretense, so they have to put on a good show. The markets don’t really understand that these guys are bluffing, and so when they talk tough, the markets pay attention.”

Brainard’s tough talk spooked the bond market. There was intense selling and yields spiked. Stocks also sold off. But Peter said there is even more selling to come.

Yields are still much too low given the reality of A. how bad inflation already is and B. how much higher the Fed is going to have to raise interest rates to actually do something about inflation.”

Brainard threw down the gauntlet by quoting former Fed chair Paul Volker. As you may remember, Volker pushed interest rates to 20% in the early 80s to rein in inflation. Brainard basically said that runaway inflation is now the greatest threat to the economy and ultimately to employment. If the Fed wants to maximize employment, it has to ensure to there isn’t runaway inflation. Of course, even admitting the possibility of runaway inflation is a very dangerous reality for bond investors to face.

Brainard said, “inflation is much too high and subject to upside risks.”

She didn’t just say inflation is ‘too high.’ She said ‘it’s much too high.’ And of course, that is an understatement because it is really much too high. But to hear Brainard admit that it’s much too high is significant. And then she also said that the risks are to the upside. Not only is it much too high, the risk is that it’s going to get even higher. So, that is a big admission on the part of the vice-chair nominee.”

But it was the commitment to shrink the balance sheet “rapidly” that really spooked the markets. As Peter put it, those are fighting words. But is there really any fight in the Fed?

If the Fed were as committed to fighting inflation as Brainard is pretending they are, why wait until May? This is just the beginning of April. Why wait another month, month-and-a-half? Start shrinking the balance sheet right now. If the Fed was committed to fighting the ‘much too high’ inflation, why did they continue to grow their balance sheet after they acknowledged that inflation wasn’t transitory? In fact, if the Fed really were serious about fighting inflation, interest rates wouldn’t still be at one-quarter of one percent.”

Now the Fed is talking about 50 basis point rate hikes in upcoming meetings. But it is so far behind the inflation curve; it should be raising rates right now – not at some point in the future.

At the rate inflation is accelerating, the Fed risks falling further and further behind the curve while it’s waiting to fight this inflation monster that it already acknowledges is too big. So, start fighting it now. Raise rates aggressively right now. Start shrinking your balance sheet right now. Of course, the Fed is not doing any of that. The Fed just wants to talk about doing that because it hopes it can talk about it instead of actually doing it because it really can’t.”

That doesn’t mean the central bank won’t get the process started.

They may very well have to follow through initially with some 50 basis point rate hikes. They may have to start shrinking their balance sheet. But soon after they start, they’re going to stop. The more aggressive the Fed gets in this inflation fight, either just talking about it or actually doing it, the quicker that fight is going to end. Because they’re not going to win the fight against inflation. Inflation is not going down. It’s the economy that’s going down. It’s the market that’s going to go down. And the minute that happens, well, the Fed is going to abandon its pretend inflation fight and have a whole new fight to try to prop up the stock market and prop up the economy.”

The policymakers at the Fed insist the economy is strong enough to handle the tightening monetary policy. But Peter said the economy is not stronger than it was during the post-2008 recovery.

It’s just a bigger bubble. It only appears stronger to the Fed that doesn’t understand that this artificial strength is purely a function of all this monetary heroin that the Fed has injected into the economy. Now they’re threatening to remove it, and they think somehow the economy is going to stay high as a kite if they take away the drugs that are the reason it’s high. It won’t happen.”

In this podcast, Peter also talks about why the Fed can’t “rapidly” reduce its balance sheet and how sanctions created a bottom and a bull market for the ruble.

Last week saw just 166k Americans file for first time jobless benefits – that is the lowest level since the week after Thanksgiving in 1968 (which is typically a seasonal dip)…

Source: Bloomberg

..and apart from that one print, the labor market has never been tighter (according to the Labor Department’s claims data) in its 55 year history.

New York, DC, and Arkansas saw the biggest falls in claims while Tennessee, Hawaii, and Wisonsin saw the biggest increase…

On the other hand, continuing jobless claims spiked last week from 1.506mm (lowest since Jan 1970) to 1.523mm

Notably this new series includes massive historical revisions…

But still, that doesn’t affect the latest record low print.

Get back to work Mr.Powell (oh and while we are at it, Mr.Schumer, why do we need to extend the moratorium on student loan repayment if everything is this awesome?)

Authored by Paul Joseph Watson via Summit News,

A viral tweet that remains unchecked by “fact checkers” claims to show a Russian-operated ‘mobile crematorium’ in Mariupol, but the image is taken from an 8-year-old YouTube video.

Whoops.

The tweet was posted by news outlet NEXTA, which boasts nearly a million followers on Twitter. The tweet has received over 7,000 retweets and almost 11,000 likes.

“Mobile crematoria in #Mariupol,” states the tweet.

“Mayor of Mariupol Vadim Boychenko said today that #Russian mobile crematoria have started operating in the city.”

“According to him, tens of thousands of people could have died in Mariupol and the cremation, “covering up the traces of crimes”.

Mobile crematoria in #Mariupol

Mayor of Mariupol Vadim Boychenko said today that #Russian mobile crematoria have started operating in the city.

According to him, tens of thousands of people could have died in Mariupol and the cremation, “covering up the traces of crimes”. pic.twitter.com/mVj6dC3xK4

— NEXTA (@nexta_tv) April 6, 2022

Except a simple reverse image search reveals the ‘mobile crematorium’ to be a screenshot from an 8-year-old YouTube video.

An image from an 8 year old YouTube video is being shared, starting yesterday, as if it’s a current photo of a mobile crematorium being used by Russia to hide causalities

Compare screen shot form video and the image going wildly viral. pic.twitter.com/odUt6wz9IU

— Cernovich (@Cernovich) April 7, 2022

“are we going to talk about the fact that this photo is a screenshot from a 2013 video of the demonstration of the in-50.1, a waste disposal machine?” https://t.co/gsZ0yzBgeP https://t.co/bRsIx8NpBY pic.twitter.com/XXnUaNmJyt

— Russians With Attitude (@RWApodcast) April 6, 2022

when will they get banned for disinformation? https://t.co/IhO0cWskmD pic.twitter.com/lm5Y5aYrBd

— Socialism Train (@socialismtrain) April 7, 2022

Much vaunted “fact checkers” are yet to comment on the issue, and Twitter hasn’t placed a ‘warning label’ on the tweet letting users know it is fake news.

Twitter users pointed out that this is recycled propaganda, since the same debunked claim about “mobile crematoriums” was made at the start of the war.

This is the 2nd time they’ve run this fake story. This “mobile crematoria” nonsense was done at the beginning of the war, right around the time of “Snake Island.”

They’ve run out of propaganda, so they’re recycling it now. https://t.co/S5FhP8T6Ud

— Rosie’s Mariupol Mystery (@DarnelSugarfoo) April 7, 2022

The tweet emerged at the same time Ukrainian authorities in Mariupol started claiming that Russian troops are “burning the bodies of tens of thousands of civilians” as part of a “new Auschwitz.”

Seizing on the outrage sparked by alleged war crimes in Bucha, Mariupol City Council said, “Russian mobile crematoriums have been launched” in the city.

Mariupol’s Mayor called his city the ‘new Auschwitz’ as he claimed Russian troops are burning the bodies of ‘tens of thousands’ of bodies to cover up the scale of the civilian massacre https://t.co/bJ56FLuZvK

— LBC News (@LBCNews) April 6, 2022

“The world has not seen the scale of the tragedy in Mariupol since the existence of Nazis concentration camps,” claimed Mayor of Mariupol Vadim Boychenko.

There have been innumerable fake news incidents either staged entirely or fabricated by Ukrainian officials which have gone unchecked by “fact checkers” since the start of the war.

They include the ‘Ghost of Kiev’ farce, the supposed ‘slaughter’ of Ukrainian soldiers on Snake Island and the ‘attack’ on a Holocaust memorial in Kiev that never happened.

* * *

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Now at over half-a-dozen rounds to talks in, Ukraine and Russia seem no closer to achieving an end to the crisis at the negotiating table from when they first started – but possibly for some involved, that kind of stalling could be precisely the point.

At Istanbul talks from last week, the Russian side initially said it got a “clearly articulated position” from the Ukrainians, based chiefly in Kiev offering neutrality on NATO, and non-aligned, non-nuclear status. S&P futures jumped on the Kremlin revealing that Ukraine had presented a new draft agreement the day prior – but then dumped on Russian Foreign Minister Sergey Lavrov in a series of fresh Thursday statements further revealing that “provisions in draft agreements presented to Russian negotiators by Ukraine on Wednesday differ from those outlined at the talks in Istanbul late last month,” according to Interfax. 

Lavrov charged that Ukraine is seeking to “draw out and undermine talks” – something the Ukrainian side has in the recent past accused Moscow of doing. He claimed that Washington is pushing Zelensky to continue fighting. Here are his words as presented in state media:

“Yesterday the Ukrainian side presented its draft agreements to our negotiators which showed a clear departure from key provisions which were committed to at the meeting in Istanbul on 29 March. These provisions, moreover, were fixed in the document signed by David Arakhamia, the head of the Ukrainian delegation,” Lavrov said in a video address Thursday.

The Russian top diplomat then quickly called the new, divergent proposals that Moscow reviewed “unacceptable” – rejecting them outright. He explained they proposed to discuss the status of Crimea and Donbas – the latter where Russian forces currently appear to be concentrating most of their military efforts. Specifically he pointed out that future security guarantees for Ukraine excludes Russian control over Crimea and Sevastopol.

Yesterday, Lavrov suggested the West is using “hysteria” over war crimes allegations to hinder any progress at the negotiating table…

Lavrov: “Peace Talks with Ukraine not progressing was fast as we would’ve wanted. West trying hard to derail it by sparking a hysteria over “war crimes.” It’s their call. Russia is ready for whatever.” pic.twitter.com/NknxDQ4IPW

— Joseph C. Okechukwu (@jcokechukwu) April 6, 2022

Lavrov went on to say in the Thursday comments that Russia will prepare and promote its own proposals at the next round of Ukraine talks which are said to be “dragging along” but with a “long road ahead”. 

U.S. index futures edged higher, along with European shares, after the sharpest two-day drop in almost a month, as investors digested Federal Reserve’s hawkish path and were jerked higher by a fleeting moment of Ukraine ceasefire hope when Emini futures initially spiked to session highs on the following Reuters headline:

• RUSSIAN FOREIGN MINISTER SAYS UKRAINE PRESENTED A NEW DRAFT AGREEMENT TO RUSSIA ON WEDNESDAY – IFX

… only to reverse the entire move two minutes later when the following headline hit:

• LAVROV: UKRAINE PROPOSALS ON CRIMEA, DONBAS UNACCEPTABLE: IFX

Mini hiccup aside, S&P futures were about 0.1% higher at 4,481 while Nasdaq futures gained 0.5% to 14,574, signaling an end to a selloff in the underlying index that erased $850 billion in market value over two days.  Ten-year Treasury yields were flat around 2.61%, the dollar extended its rally to a sixth day, the longest streak in almost 10 months, and oil rebounded from yestereday’s IEA reserve release-driven plunge.

Markets are showing signs of recovery after a selloff brought on by hawkish Fed minutes in which the central bank laid out a long-awaited plan to shrink their balance sheet by about $95BN per month or more than $1 trillion a year while raising interest rates “expeditiously” to counter the hottest inflation in four decades.

“The FOMC minutes gave the clarity that every investors was looking for,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “The US 2-10 year spread is back in the positive after having slipped below zero, but the recession threat is real, keeping the investor mood sour as the Fed pulls back support.”

“The Fed delivered what most market watchers were looking for, with details around the pace and composition of the balance sheet runoff,” said Janus Henderson global bond PM Jason England. Along with recent hawkish comments from Fed officials, the minutes showed “the Fed has pivoted from a gradual approach to tightening monetary policy to now moving more rapidly toward a neutral stance,” he said.

In premarket trading, HP shares were up 13% after Warren Buffett’s Berkshire Hathaway bought an 11% stake worth $4.2 billion in the laptop maker valued at more than $4.2 billion. SoFi shares declined 5.1% in premarket after the fintech firm gave new guidance as the U.S. government extended the pause on student-loan payments. Other notable premarket overs include:

• Levi Strauss & Co. (LEVI US) gains 5.5% in premarket trading after it said revenue during the most recent quarter increased 22% to $1.6 billion. Wells Fargo said comments about a strong first quarter and good momentum in March should help dispel investor concerns, at least in the near term.
• Wayfair (W US) falls 4.4% in premarket trading after Wells Fargo downgrades to underweight from equal weight in sector note turning more cautious on housing-impacted retailers.
• SoFi (SOFI US) drops 5.1% in premarket trading as Morgan Stanley cuts its 2022 Ebitda estimate by $42m to $100m after the fintech firm gave new guidance as the U.S. government extended the pause on student-loan payments.
• Sprinklr’s fourth- quarter results were a positive, though the most impressive point was the software company’s guidance, Barclays analysts led by Raimo Lenschow write in a note. The shares rose 4.7% in postmarket trading on Wednesday.
• Vapotherm (VAPO US) falls 23% in premarket trading after the respiratory-device company reported preliminary quarterly revenue that fell short of analysts’ estimates and withdrew its annual guidance.

In Europe, the Stoxx 600 added 0.7%, boosted by a rally in shares of Atlantia SpA, the billionaire Benettons’ highway and airport group. Atlantia added 10% in Italian trading after a non-binding bid from Global Infrastructure Partners and Brookfield Asset Management Inc. European healthcare and chemical stocks outperformed, while energy and miners declined. IBEX outperformed, adding 1.5%, FTSE 100 lags, dropping 0.1%. Health care, chemicals and travel are the strongest performing sectors. The energy sector was in the red, dragging the U.K.’s benchmark FTSE 100 down, as Shell’s $4-$5BN hit from its withdrawal from Russia weighed on oil producers. The statement from the London-based giant shows that, despite a surge in oil and gas prices, Russia’s invasion of Ukraine has upended the supermajors’ plans and left them scrambling to adapt to historic shifts in energy markets. Here are the most notable European premarket movers:

• Atlantia shares rise as much as 12%, extending yesterday’s gains, after a Bloomberg report that the motorway and airport company could become the target of a bidding war.
• Electrolux advances as much as 5.8% after announcing a positive non- recurring item of $70.5m in 1Q.
• Euronav shares gain as much as 12% on news of a potential stock-for-stock combination with Frontline to create a tanker company with a market capitalization of more than $4.2b.
• Daetwyler shares jump as much as 6% after it announced the acquisition of U.S. electrical connector seals company QSR, with Baader saying the deal may benefit earnings from day one.
• 888 shares surge as much as 31% after the gambling company announced a share placement to pay for its now-cheaper acquisition of William Hill’s international assets, with analysts reacting positively.
• Verbio shares surge to a record high after Hauck & Aufhauser lifts its PT on the biodiesel manufacturer by almost 33% ahead of what the broker expects to be “another outstanding quarter.”
• European basic resources and energy shares decline, lagging all other sectors, as commodity prices start to pull back, with Anglo American, Rio Tinto and Glencore all posting declines.
• PageGroup and other staffing companies fall after Jefferies lowers EPS estimates across the sector and takes a “more risk-off approach” in note, downgrading PageGroup in the process.
• Countryside shares sank as the home developer forecast a decline in profit after conducting a review of its business following a dispute with an activist investor.
• TI Fluid Systems falls as much as 12% after Jefferies downgraded the automotive parts maker to hold from buy, saying conditions faced by the company are among the most difficult in its coverage.

Earlier in the session, Asian stocks slid to a three-week low as traders feared a rapid rise in U.S. interest rates and aggressive scale-back of the Federal Reserve’s bond holdings could stymie growth and hurt earnings. The MSCI Asia Pacific Index lost as much as 1.4% on Thursday, with tech shares leading the losses in many countries, after minutes of the Fed’s March meeting showed plans to shrink its balance sheet by more than $1 trillion a year. The fall came after the Asian benchmark slumped 1.5% on Wednesday following similarly hawkish comments from Fed Governor Lael Brainard. Worries that hawkish policy tightening by the Fed may cool the world’s largest economy or even tip it into a recession are hitting equities broadly across Asia. Stocks in China also buckled, even as the state council renewed its pledge to use monetary policy tools at an “appropriate time” and consider other measures to boost consumption, according to the readout from a meeting of the State Council chaired by Premier Li Keqiang on Wednesday.

“The Fed is telling us that the party is over. It is saying it will take away the punch bowl,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “This will have a serious impact on all risk assets.” Fujito saw tech shares with rich valuations as the most vulnerable, adding that investors will be trying to seek shelter in utilities and defensive stocks. The MSCI Asia Pacific Information Technology Index fell about 2%.  Benchmarks in Japan and South Korea underperformed other Asian peers, while gauges in Australia and India posted smaller declines on Thursday.   For April, the MSCI Asia is now down more than 2% on top of a slump of almost 7% last quarter — the most since the first three months of 2020 — amid concern about the war in Ukraine, higher rates and inflation. 

Japanese equities fell by the most in almost four weeks, deepening declines in tandem with U.S. peers amid concerns over the Federal Reserve’s plans to tighten monetary policy. Electronics makers and service providers were the biggest drags the Topix, which dropped 1.6%, in its third day of decline. Tokyo Electron and Fast Retailing were the largest contributors to a 1.7% loss in the Nikkei 225.  Minutes from the latest Federal Reserve meeting showed the U.S. central bank is prepared to raise rates sharply and reduce its balance sheet to cool the economy.

Indian stocks dropped with peers across Asia as the weekly expiry of derivative contracts weighed on the market.  The S&P BSE Sensex slipped for a third session, dropping 1% to 59,034.95, its biggest fall since March 21. The NSE Nifty 50 Index slipped 0.9%. HDFC Bank retreated 2.2%, while Reliance Industries declined 1.8%. Seventeen of 30 shares on the Sensex traded lower.  Fifteen of 19 sectoral sub-indexes compiled by BSE Ltd. declined, led by a gauge of oil & gas stocks. The Fed’s plan to prune its near $9 trillion balance sheet, which was swollen by pandemic-era bond purchases, points to more volatility in global markets. Locally, the nation’s central bank will likely raise its inflation outlook to reflect costlier oil while leaving borrowing costs steady in its policy decision on Friday. “U.S. Fed’s hawkish stance has raised concerns of steeper interest rate hikes going ahead,” Kotak Securities analyst Shrikant Chouhan said. He sees volatility in global crude oil prices leading to profit taking in Reliance Industries and other energy stocks.

The S&P/ASX 200 index fell 0.6% to close at 7,442.80, retreating alongside global peers after the Federal Reserve outlined plans to trim its balance sheet by more than $1 trillion a year while raising interest rates. Life360 was the biggest laggard as tech stocks dropped. Magellan Financial was the top performer after its funds under management update showed a slowdown in net outflows. In New Zealand, the S&P/NZX 50 index was little changed at 12,075.91

In FX, the Bloomberg dollar spot index is near flat, handing back earlier gains that saw it at a three-week high. RUB leads gains in EMFX.

In rates, the treasuries curve extends steepening counter-trend as front-end and belly yields retreat further from Wednesday’s YTD highs while long-end cheapens slightly. Yields richer by up to 3bp across front-end of the curve, steepening 2s10s by ~3bp with 10-year little changed near 2.60%; bunds and gilts keep pace. Bund, Treasury and gilt curves all bull steepen.

Meanwhile commodity markets continue to be whipsawed by disruptions sparked by Russia’s war in Ukraine and efforts to curb raw-material costs. WTI crude climbed toward $98 a barrel, paring a slump that was triggered by the International Energy Agency’s decision to deploy 60 million barrels from emergency stockpiles. WTI added 1.4% to trade near $98. Brent rises 1.5% to over $102. Most base metals trade in the red; LME nickel falls 2.3%, underperforming peers. Spot gold is little changed at $1,926/oz.

Raw materials could surge by as much 40% — taking them far into record territory — should investors boost their allocation to commodities at a time of rising inflation, according to JPMorgan.

In crypto, bitcoin is pressured and towards the low-end of a range that continues to drift from the USD 45k mark. Meta (FB) is exploring a virtual currency for the metaverse, according to the FT.

U.S. economic data slate includes initial jobless claims (8:30am) and February consumer credit (3pm). Fed speakers scheduled include Bullard (9am) and Bostic (2pm). U.S. session highlights include speech and Q&A by St. Louis Fed’s Bullard –who dissented from March FOMC decision in favor of a bigger rate increase — at 9am ET.  Other central bank speakers include Bostic and Evans, as well as the BoE’s Pill. We’ll also get the minutes from the ECB’s March meeting, along with remarks from the Fed’s Bullard,

Market Snapshot

S&P 500 futures little changed at 4,476.75

MXAP down 1.4% to 176.33

MXAPJ down 1.4% to 584.33

Nikkei down 1.7% to 26,888.57

Topix down 1.6% to 1,892.90

Hang Seng Index down 1.2% to 21,808.98

Shanghai Composite down 1.4% to 3,236.70

Sensex down 0.7% to 59,191.33

Australia S&P/ASX 200 down 0.6% to 7,442.83

Kospi down 1.4% to 2,695.86

Brent Futures little changed at $101.14/bbl

Gold spot up 0.1% to $1,928.10

U.S. Dollar Index little changed at 99.69

 

 

Top Overnight News from Bloomberg

• ECB President Christine Lagarde said she tested positive for Covid-19, adding that her symptoms are “reasonably mild” and that there won’t be any impact on the operations of her institution
• Surging U.S. real yields suggest bond traders believe the Federal Reserve can get a grip on inflation, but are likely to put further pressure on stocks and precious metals
• German Economy Minister Robert Habeck said the nation has already cut its reliance on Russian coal by at least half in the past month and won’t stand in the way of a European Union ban on imports of the fuel from the country
• In the days after the Ukraine war began, the ruble’s collapse was a potent symbol of Russia’s newfound financial isolation. Now, the ruble has surged all the way back to where it was before Putin invaded Ukraine
• Hungary kept its effective key interest rate unchanged at the highest level in the European Union after the forint plunged on the bloc’s announcement that it is triggering a process that may block the country’s aid funds
• China signaled it will step up monetary stimulus for the economy, acknowledging that domestic and global risks are now bigger than previously expected
• Bank of Japan board member Asahi Noguchi says it’s vital to continue with monetary easing as it will take some time before the possibility of shrinking stimulus comes into sight.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded lower throughout most of the session as the downbeat mood reverberated from Wall Street. ASX 200 was dragged lower by its tech sector following a similar sectoral performance in the West. Nikkei 225 was hit by losses across its energy, mining and manufacturing names. KOSPI conformed to the global losses whilst Samsung Electronics (-0.3%) failed to benefit from better-thanexpected prelim earnings. Hang Seng and Shanghai Comp were choppy and initially swung between gains and losses before stabilising in the red. Samsung Electronics (005930 KS) – Prelim Q1 (KRW) Revenue 77tln (exp. 75.7tln), Operating Profit 14.1tln (exp. 13.3tln), via Reuters

Top Asian News

• Suspected Chinese Hackers Collect Intel From India’s Grid
• SoftBank Tripled Share Buybacks to $1 Billion in March
• Thailand Mulls Easing Covid Test Rules for Overseas Visitors
• Japan to Release 15m Barrels From Oil Reserves: Kyodo

European bourses are firmer across the board and back in proximity to post-cash open levels after initial strength waned in choppy price action, Euro Stoxx 50 +0.7%. US futures have been relatively in-fitting with European peers, though the NQ, +0.5%, is the modest outperformer as yields take a breather from their recent surge. China’s Shanghai City is to cap the load factor of international flights by foreign airlines at 40% (prev. 75%), according to Reuters sources; effective from April 11th until month-end.

Top European News

• Turkey Transfers Khashoggi Case to Saudi Arabia to Improve Ties
• Shunned Oil Piling Up Off China as Virus Outbreak Worsens
• EU Full Ban on Russia Coal to Be Delayed Until Mid-August: Rtrs
• Yellen Says U.S. Would Use Sanctions If China Invaded Taiwan

FX:

• Greenback sets marginal new YTD best after hawkish FOMC minutes reveal tight call between 25 bp and 50 bp lift-off plus large cap balance sheet reduction, DXY up to 99.823, thus far.
• Albeit, the DXY has waned from best levels and turns flat ahead of the arrival of US participants as yields continue to pare
• Euro eyeing option expiries for support ahead of ECB minutes following loss of 1.0900 handle vs Dollar; EUR/USD down below Fib at 1.0895.
• Aussie unwinds more RBA inspired upside as trade surplus narrows on zero export balance; AUD/USD around 0.7475 vs circa 0.7661 only yesterday.
• Yen benefits from retreat in yields rather than BoJ rhetoric reaffirming ultra easy policy and merits of a weaker currency, USD/JPY capped below 124.00.

Commodities:

• Crude benchmarks consolidate near WTD lows after reserve release pressure; specifically, near lows of USD 95.43/bbl and USD 100.13/bbl for WTI and Brent.
• Updates elsewhere have been slim, and focused on China’s Shanghai City from a demand-side perspective amidst ongoing Ukraine-Russia developments; albeit, nothing fundamentally new in terms of negotiations.
• China is to strictly control new production capacity in the oil refining industry, according to the industry ministry
• Gas flows via Yamal-Europe pipeline resume westward, according to Gascade data.
• Spot gold/silver are contained and the yellow metal is once again capped by USD 1930/oz and LME Copper has failed to benefit from the equity pickup.

US Event Calendar

• 08:30: April Initial Jobless Claims, est. 200,000, prior 202,000; Continuing Claims, est. 1.3m, prior 1.31m
• 15:00: Feb. Consumer Credit, est. $18.1b, prior $6.84b

Central Bank Speakers

• 09:00: Fed’s Bullard Discusses the Economy and Monetary Policy
• 14:00: Fed’s Bostic and Evans Discuss Inclusive Employment
• 16:05: cancelled: Fed’s Williams Makes Closing Remarks

DB’s Henry Allen concludes the overnight wrap

We might be less than a week into Q2, but based on how markets are performing it’s shaping up to be very similar to Q1 thus far, with yesterday seeing another bond selloff and significant declines for global equities as markets gear up for the fastest monetary tightening we’ve seen in decades. Indeed, it seems to be progressively dawning on investors that this cycle of hikes is going to be very different to the one we saw from 2015, when even at its fastest in 2018, the Fed still only hiked rates by 100bps in a single year. As Jim has written, if we could erase the post-GFC cycle from people’s memory banks, there’s a case that markets would be pricing 300-400bps this year given where inflation is right now, not least given we saw hikes on that scale in the late-80s and from 1994 with inflation at much lower levels than it is at the minute.

Given the rapid expected tightening (as well as the negative shock of Russia’s invasion of Ukraine), it’s worth noting that DB Research’s new World Outlook came out on Tuesday, (link here), where we downgraded our global growth forecasts and are now forecasting a US recession by the end of next year as our baseline. We also got a look into the Fed’s outlook yesterday with the release of the March FOMC minutes, where it looks like they would have hiked by 50bps in March were it not for the Russian invasion, and they are ready to entertain 50bps hikes going forward. The markets got the message, and upgraded the probability of a 50bp hike at the next meeting in early May to 85%.

The other big takeaway from the minutes were details around QT, which they signalled would start in May, in line with recent Fed speakers. The FOMC noted the balance sheet would rundown at a pace of $60bn Treasuries and $35bn MBS a month once QT hits terminal velocity, which should be by July if the minutes are to be believed. Markets digested the news, with Treasury yields more or less in line with their pre-minute levels into the close after declining modestly in the New York afternoon. With the pace of the runoff now set, the focus will turn to who buys the securities with the Fed stepping away and when the Fed has to stop QT.

Alongside the minutes, remarks from a number of officials yesterday helped to reiterate the point that policy will become tighter this year. Philadelphia Fed President Harker said that he expected “a series of deliberate, methodical hikes as the year continues”, whilst on the question of whether to move by 50bps, Richmond Fed President Barkin said that the FOMC “could certainly do that again if it is necessary to prevent inflation expectations from unanchoring”.

With all said and done, sovereign bond yields moved up to fresh highs on both sides of the Atlantic, with those on 10yr Treasuries up +5.1bps to 2.598%, which was its highest closing level since 2019, albeit some way beneath its intraday high of 2.656% shortly before noon in London, and this morning they have fallen a further -1.5bps to 2.583%. That increase yesterday was entirely driven by a rise in real yields, which rose +7.3bps to -0.24%, their highest level since March 2020, whilst a rally at the short end of the curve meant the 2s10s slope steepened for a 3rd day running, heading up to 12.2bps by the close. Those declines in shorter-dated yields came as futures actually took out a bit of Fed tightening from 2022, modestly reducing the expected number of additional hikes this year from 220bps in the previous session to 217bps by the close.

Over in Europe there were similar moves, with sovereign bond yields reaching fresh highs before paring back some of that increase towards the close. Yields on 10yr bunds (+3.3bps), OATs (+3.1bps) and BTPs (+3.8ps) all closed at multi-year records, although a key difference with US Treasuries were that the rise in European yields yesterday were driven by higher inflation expectations rather than real rates. In fact the 10yr German breakeven hit 2.81%, its highest in the data series that starts back in 2009, whilst the Italian 10yr breakeven hit 2.63%, its highest since 2008.

As on Tuesday, the selloff in bonds went hand in hand with further declines in equities, and by the close the S&P 500 (-0.97%) and Europe’s STOXX 600 (-1.53%) had both lost ground as well, with cyclical sectors leading the declines. Tech stocks in particular were an underperformer once again, and the NASDAQ (-2.22%) and the FANG+ index (-3.46%) both struggled again, bringing their declines over the last 2 sessions to -4.43% and -6.63% respectively. Amidst the equity declines, the VIX index of volatility rose +1.1pts yesterday to 22.1pts, taking it up to its highest level in 2 weeks.

Overnight in Asia, equities have very much followed that retreat on Wall Street as monetary tightening remained in focus. Among the main indices, the Nikkei (-2.00%) is leading the moves lower, whilst the Kospi (-1.42%), Hang Seng (-1.04%), Shanghai Composite (-0.99%), and the CSI (-0.78%) are also trading in negative territory. Separately, we heard from China’s State Council yesterday that they would use monetary policy at an “appropriate time”, as they acknowledged downward pressures on the economy. Looking forward, stock futures in the US are pointing to further declines today, with contracts on the S&P 500 (-0.37%) and Nasdaq 100 (-0.33%) both lower following those Fed minutes.

In terms of the latest on Ukraine, the EU continued to edge towards a fresh sanctions package, although that wasn’t finalised yesterday as had initially been suggested, with Reuters reporting that technical issues needed to be addressed like whether the ban on Russian coal would affect existing contracts. The report said that diplomats were optimistic about achieving a compromise today, so we could potentially see some news on that later, whilst in his speech to the European Parliament yesterday, European Council President Charles Michel also said that “I believe that measures on oil and even on gas will also be needed sooner or later.” Otherwise on sanctions, the US imposed further measures, including full blocking sanctions on Sberbank and Alfa Bank, along with a prohibition on new investment in Russia.

The various decisions came amidst a further decline in oil prices yesterday, with Brent crude down -5.22% to $101.07/bbl, its lowest closing level in 3 weeks. That was supported by confirmation that the International Energy Agency would release 60m barrels of crude, on top of the Biden Administration’s release from the Strategic Petroleum Reserve. Brent has recovered somewhat this morning however, up +1.85% to $102.94/bbl.

Turning to the French presidential election, we’re now just 3 days away from the first round on Sunday, and the polls have continued to tighten between President Macron and his main challenger Marine Le Pen. Yesterday’s polls for the second round runoff put Macron ahead of Le Pen by 54%-46% (Ipsos), 53-47% (Opinionway), and 52.5%-47.5% (Ifop), which are all much tighter than the 66%-34% margin in the 2017 election. French assets have continued to underperform against this backdrop, with the CAC 40 equity index (-2.21%) seeing a weaker performance than the broader STOXX 600 (-1.53%) for a 6th consecutive session.

On yesterday’s data, the Euro Area PPI reading for February came in at a year-on-year rate of +31.4% (vs. 31.6% expected), which is the fastest pace since the formation of the single currency. Separately, German factory orders contracted by a larger than expected -2.2% in February (vs. -0.3% expected).

To the day ahead now, and data releases include German industrial production and Euro Area retail sales for February, along with the weekly initial jobless claims from the US. Meanwhile from central banks, we’ll get the minutes from the ECB’s March meeting, along with remarks from the Fed’s Bullard, Bostic and Evans, as well as the BoE’s Pill.