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Is Omicron a Dud? Investors and Traders Think So – Focus Now On Growing China Stimulus

Stocks Soar On Optimism Omicron Is A Dud…

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This article was originally published by Zero Hedge

Stocks Soar On Optimism Omicron Is A Dud As Traders Focus On Growing China Stimulus

U.S. index futures rallied, led by gains for Nasdaq 100 contracts, amid waning omicron worries and a booster shot of Chinese stimulus lifted world stock markets and oil on Tuesday and left traders offloading safe-haven currencies and bonds for the second day in a row. Emini S&P futures were up 61 point to 4,650.75 or about 120 points higher then where Gartman said “stocks are headed lower” some 24 hours ago. Nasdaq futures were up 1.8% and Dow futures rose 1% in premarket trading. In fact, futures are now just 50 points away from where they were below the Black Friday Omicron panic plunge.

The FTSEurofirst 300 index was on track for its first back-to-back run of plus 1% gains since February while Asia saw record bounces from some of China’s biggest firms such as Alibaba which soared by the most since its 2019 listing in Hong Kong, leading a rebound in Chinese tech stocks, as bargain hunters piled in amid improved sentiment following Beijing’s move to bolster the economy. The MSCI Asia Pacific Index climbed 1.7% while Japan’s Topix index closed 2.2% higher. The VIX dropped for a second day, sliding below 24, but remained above this year’s average.

The risk-on mood also helped the dollar climb against safe haven currencies such as the Japanese yen, , which had lost 0.6% overnight, as the confidence-sensitive Australian dollar also found buyers. Safe-haven government bonds went the other way with yields  up 2.5% on Germany’s benchmark 10-year Bund after falling to a three-month low on Monday.

Reports in South Africa said Omicron cases there had only shown mild symptoms and the top U.S. infectious disease official, Anthony Fauci, told CNN “it does not look like there’s a great degree of severity” so far. “Good news relating to the severity of Omicron should be taken with a pinch of salt. Faster transmission could offset the benefits of milder symptoms,” researchers at ING said in a note. “More broadly, it is still early days, even if markets are starting to display Omicron fatigue.”

There are signs of “a fragile improvement in market mood,” said Ipek Ozkardeskaya, senior analyst at Swissquote. Still, “no headline addresses the major concern of the week: the rising U.S. inflation, which is a big threat to the investor mood, as the U.S. CPI data is due Friday, and the expectation is an advance to a strong 6.7%,” Ozkardeskaya wrote in a report. “We could see wild mood swings into the second half of the week.”

The gains also came after China’s central bank on Monday injected its second shot of stimulus since July by cutting the RRR – or the amount of cash that banks must hold in reserve. Then on Tuesday, the PBOC said that the Interest rate for relending to support rural sector and smaller firms will be cut by 0.25 percentage point, effective from today, with 3-mo, 6-mo and 1-yr relending rates will be cut to 1.7%1.9% and 2%.

After pretending it would let the economy falter for months, Beijing is finally firmly in pro-growth mode with the Politburo stating that stability is the top priority ahead of next year’s Communist Party congress. Premier Li Keqiang also said China has room for a variety of monetary policy tools after yesterday’s reserve ratio cut. As a result, the beaten down financial and property stocks were the biggest winners amid the change in tone from policy makers. In Hong Kong, Alibaba Group Holding Ltd. soared by the most since its 2019 listing. Global markets are also getting a lift from the easing policy pivot in world’s second-largest economy which we first flagged more than a weeks ago.

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In the premarket, Intel shares rose 7.7% in premarket trading after the chipmaker confirmed a WSJ report that it plans to float a minority stake in its Mobileye self-driving car business by the middle of next year. Alibaba jumped as much as 5.4% in U.S. premarket trading Tuesday, adding to a 10% rally on Monday as with Chinese tech stocks rebound. Alibaba’s climb in the U.S. comes after its shares posted their biggest gain since June 2017 on Monday.

Cruise operators and airline stocks are trading higher for a second session as investors assess the severity of the omicron virus variant. American Airlines was among the notable outperformers after naming President Robert Isom to replace retiring CEO Doug Parker. AAL rose 3% in premarket trading, while UAL climbs 2.6% and JBLU jumps 2.7%; other gainers include: ALK +2.6%, DAL+2.3%, LUV +2.4%, Royal Caribbean and Norwegian Cruise added 3.3%, while Carnival increased 3.1% in premarket trading. Casino operators also rebounded, led by Las Vegas Sands +3.5%, Wynn Resorts +2.7%, MGM Resorts +2.3% after Hong Kong’s Carrie Lam said the city will prioritize quarantine-free travel for business people when its border with mainland China reopens.

In Europe every industry sector rose, led by tech and mining companies, to push the Stoxx 600 Index to a 2% gain led by technology, mining and consumer companies. AstraZeneca was an outliker, falling 2% in London after the company agreed to pay Ionis Pharmaceuticals as much as $3.6 billion to gain rights to a promising medicine for a rare disease. European e-commerce stocks that benefited from increased demand during pandemic-related lockdowns rose in Europe on Tuesday, with many outperforming the benchmark Stoxx 600’s biggest gain since March. Among the names were Allegro +6.3%, Moonpig +5.3%, Global Fashion Group +5.3%, Asos +5.1%, Zalando +4.6%, THG +3.7%, Boozt +3.3%, Ocado +2.4%, Boohoo +1.9%. “As concerns grow over rising case numbers, we expect some people will prefer to shop online again to limit their visits to stores,” Fraser McKevitt, head of retail and consumer insight at Kantar, says in emailed comments.

Asian equities advanced, on track for their best day in more than three months, following China’s latest moves to bolster growth in the world’s second-largest economy.  The MSCI Asia Pacific Index rose as much as 1.8%, poised for its biggest gain since Aug. 24. Consumer-discretionary firms contributed most to the market’s climb, led by Alibaba as bargain hunters snapped up recently rattled Chinese tech stocks. Benchmarks in Hong Kong and Japan led broad gains around the region.  China’s central bank said it will cut the amount of cash most banks must keep in reserve from Dec. 15, providing a liquidity boost. Meanwhile the Communist Party’s Politburo signaled an easing of curbs on the battered real-estate sector. “Anxiety over the Chinese economy is abating thanks to the cut in the banks’ reserve ratio and a partial easing of real-estate regulations,” said Hiroshi Namioka, chief strategist at T&D Asset Management Co. Plus, “an overall risk-on mood is being created as people turn increasingly optimistic about any impact from the omicron, leading to higher U.S. equities and long-term yields.”  Financials and industrials also boosted the region’s key equity gauge Tuesday as investors looked toward reopening prospects. The day’s rebound marks a sharp turnaround following weeks of declines since mid-November. U.S. equities overnight rebounded from Friday’s selloff after reports that cases of the omicron variant have been relatively mild.

Japanese equities rose by the most in over a month, as investors were cheered by reports of Chinese policy makers moving to support the nation’s economy and that global omicron virus cases have been relatively mild. Electronics makers and telecoms were the biggest boosts to the Topix, which gained 2.2%, the most since Nov. 1. SoftBank Group and Tokyo Electron were the largest contributors to a 1.9% rise in the Nikkei 225. The yen extended its loss against the dollar after weakening 0.6% overnight. U.S. stocks climbed Monday after news from South Africa that showed hospitals haven’t been overwhelmed by the latest wave of Covid cases. Meanwhile, China President Xi Jinping oversaw a meeting of the Communist Party’s Politburo on Monday that concluded with a signal of an easing in curbs on real estate. “Cyclical stocks, China-linked names and automakers that had been sold on a stronger yen will likely be bought up following China’s change in policy stance,” said Hideyuki Ishiguro, a strategist at Nomura Asset Management in Tokyo. “This will alleviate worry over a slowdown in the Chinese economy.”

India’s benchmark equity index bounced back from a three-month low on optimism that the global economic recovery may be able to withstand risks associated with the omicron virus variant.  The S&P BSE Sensex climbed 1.6% to 57,633.65, in Mumbai, while the NSE Nifty 50 Index also advanced by a similar magnitude. ICICI Bank Ltd. provided the biggest boost to both the gauges with a 3.5% gain. Out of the 30 shares in the Sensex, 29 rose and one fell. All 19 industry sub-indexes compiled by BSE Ltd. gained, led by a measure of metals companies. The uncertainty from the omicron variant, along with expectations of rapid tapering by the U.S. Federal Reserve have tested the risk appetite of investors in the previous two sessions in India. However, markets across Asia advanced Tuesday after China pledged measures to support slowing economic growth. “Indian markets mirrored the sharp buoyancy in global indices on the back of short-covering by market participants. The rally was backed by a sharp upsurge in banking and metal stocks, which had taken a severe hammering in recent sessions,” Shrikant Chouhan, head of equity research at Kotak Securities Ltd. wrote in a note.  Australia’s central bank — at its monetary policy meeting Tuesday — left its key interest rate unchanged and said that while the strain is a source of uncertainty, it’s not expected to derail the recovery. Reserve Bank of India will announce its rate decision on Wednesday. 

In FX, the Dollar Spot Index inched lower as commodity currencies led gains among Group-of-10 peers. The volatility skew for the Bloomberg Dollar Spot Index shows bullish bets on the greenback over the one-month tenor stand near their lowest since August. This may change as soon as next week after Friday’s CPI report. The euro reversed an Asia session gain to touch a December low of $1.1254 in early European hours. Bunds and Italian bonds slumped, led by the belly after ECB’s Holzmann yesterday said rate hikes are possible while still buying debt. Money markets continue to price the first 10bps rate hike in December 2022 but October pricing jumps to 7.5bps from 6bps on Monday.

The pound was steady against the dollar, trailing other risk-sensitive currencies, with focus on next week’s Bank of England meeting and how officials will assess the threat of the omicron strain. The Norwegian krone and the Canadian dollar advanced amid rising oil prices and before the Bank of Canada meeting Wednesday. Australian bond yields extended gains and the Aussie dollar advanced versus all of its G-10 peers as central bank optimism that omicron won’t disrupt the economic recovery underscored bets on sooner-than-expected rate hikes. Australia’s central bank left monetary settings unchanged, citing uncertainties from omicron, while highlighting positive signs in the labor market and broader economy. Finally, the yen fell a second day after easing concern over the coronavirus omicron variant

In rates, Treasuries were narrowly mixed with the front-end lagging ahead of today’s 3-year auction. Treasury 2-year yields were cheaper by 2.2bp on the day, flattening 2s10s spread by 1.8bp and unwinding portion of Monday’s steepening move; 10-year yields around 1.436%, slightly cheaper on the day. Bunds lag by 1.3bp after ECB’s Holzmann says rate hikes are possible while still buying debt — BTP’s cheapen 2.5bp vs. Treasuries in 10-year sector. U.S. TSY auctions resume with $54b 3-year note sale at 1pm ET, before $36b 10- and $22b 30-year Wednesday and Thursday; the WI 3-year around 0.973% is above auction stops since Feb. 2020 and ~22bp cheaper than November’s sale, which tailed the WI by 1bp.

In commodities, crude futures extended Asia’s gains with WTI up about 3% near $71.50. Natural gas futures rise on talk of fresh Russian sanctions. Spot gold is choppy near $1,780/oz. Base metals are well bid given the broader risk-on tone: most of the complex rises over 1% with LME zinc outperforming. 

Looking at today’s calendar, we have trade balance data for October at 8:30 a.m, while the EIA short-term energy outlook is published at 12:00 p.m. The US sells $54 billion of 3-year notes at 1:00 p.m. Biden and Putin talk from 10:00 a.m. Jeffrey Gundlach hosts his Total Return webcast from 4:15 p.m. Autozone Inc. and Toll Brothers Inc. report results.

Market Snapshot

  • S&P 500 futures up 1.3% to 4,650
  • STOXX Europe 600 up 1.7% to 476.71
  • MXAP up 1.7% to 193.18
  • MXAPJ up 1.7% to 627.71
  • Nikkei up 1.9% to 28,455.60
  • Topix up 2.2% to 1,989.85
  • Hang Seng Index up 2.7% to 23,983.66
  • Shanghai Composite up 0.2% to 3,595.09
  • Sensex up 1.6% to 57,657.07
  • Australia S&P/ASX 200 up 0.9% to 7,313.90
  • Kospi up 0.6% to 2,991.72
  • Brent Futures up 2.3% to $74.73/bbl
  • Gold spot up 0.0% to $1,778.95
  • U.S. Dollar Index little changed at 96.36
  • German 10Y yield little changed at -0.36%
  • Euro down 0.2% to $1.1268

Top Overnight News from Bloomberg

  • The ECB said its supervision arm will focus its scrutiny in the coming three years on risks that lenders face from a potential spike in bad loans and their search for higher returns
  • Hungary’s central bank is nowhere close to stopping a monetary tightening campaign that will make the country’s real interest rates the highest in central Europe, Deputy Governor Barnabas Virag said
  • The U.S. and European allies are weighing sanctions targeting Russia’s biggest banks and the country’s ability to convert rubles for dollars and other foreign currencies should President Vladimir Putin invade Ukraine, according to people familiar with the matter
  • China’s exports and imports grew faster than expected in November, with both hitting records as external demand surged ahead of the year-end holidays and domestic production rebounded on an easing power crunch.
  • Some China Evergrande Group bondholders have not received overdue coupon payments after the end of a month-long grace period, putting the world’s most indebted property developer on the brink of its first default on offshore notes
  • U.K. house prices hit a record in November, with values over the past three months rising at their fastest pace for 15 years, according to mortgage lender Halifax

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded mostly positive following the heightened risk appetite among global peers, including in the US, where the DJIA posted its best performance since March and all sectors in the S&P 500 finished positive. Omicron concerns abated throughout the session and resulted in notable outperformance across travel and leisure stocks, while the region also took its opportunity to digest the PBoC’s recent RRR cut announcement and mostly better than expected Chinese trade data. The ASX 200 (+1.0%) was positive with broad gains across its sectors aside from utilities and with momentum helped after a lack of surprises at the RBA policy decision – which refrained from any policy tweaks. Nikkei 225 (+1.9%) outperformed and regained a firm footing above the 28k level as exporters benefitted from a weaker currency, and with the advances led by SoftBank which atoned for the recent declines in its portfolio companies. The Hang Seng (+2.7%) and Shanghai Comp. (+0.2%) were both initially lifted in early trade after the announcement of the PBoC’s RRR cut, which is said to likely calm markets amid increasing developer risks, although the mainland bourse then gave back its gains after the PBoC continued to drain liquidity in its daily open market operations. Furthermore, reports that the PBoC lowered its relending rate by 25bps for agricultural and small companies also failed to boost the mainland as this is viewed as a more targeted supportive measure. Finally, 10yr JGBs declined and re-approached the key psychological 152.00 level on spillover selling from USTs as stocks gained and Omicron fears abated. The results of the latest 30yr JGB auction were mixed with higher accepted prices and lower yield offset by a weaker b/c and wider tail in price.

Top Asian News

  • Asian Stocks Set for Best Day in 3 Months as China Tech Rebounds
  • Alibaba Jumps Most Since H.K. Listing as China Tech Rebounds
  • Malaysia Court Dismisses Najib’s Plea, SRC Verdict Due Wednesday
  • LG Energy Seeks Up to 12.75t Won IPO, Biggest in Korea

European stocks have conformed to the risk appetite seen across global peers (Euro Stoxx 50 +2.5%; Stoxx 600 +2.0%), which initially emanated from Wall Street, before seeping into APAC and reverberating in Europe. There is no clear catalyst behind the gains, although desks have been attributing the optimism to receding fears regarding the Omicron variant – with no recorded deaths thus far. That being said, some of the key tail risks to markets have not subsided, with liquidity also expected to be more anemic in the run-up to next week’s risk-packed docket before year end. Nonetheless, US equity futures are grinding higher with the NQ (+1.9%) in the lead, closely followed by the RTY (+1.7%), whilst the ES (+1.3%) and YM (+1.0%) see slightly less pronounced gains. Back in Europe, Euro-bourses see broad-based upside but the UK’s FTSE 100 (+1.1%) and the Swiss SMI (+0.7%) are capped by underperformance in the defensive sectors – with Healthcare and Food & Beverages towards the bottom of the bunch. Sectors are overall in the green with a clear and firm pro-cyclical bias. Tech leads the gains following its recent underperformance, with Basic Resources also among the winners as base metals post decent gains. In terms of individual movers GSK (+0.5%) remains supported after pre-clinical data demonstrate the potential for monoclonal antibody Sotrovimab to be effective against the latest variant, Omicron, plus all other variants of concern defined to date by the WHO. As a reminder, the co. last week said its COVID treatment Sotrovimab retains its activity against the Omicron variant. British American Tobacco (+2.1%) is firmer followed by a positive trading update alongside Babcock (+5.2%) and Ferguson (+4.0%). On the downside, AstraZeneca (-1.7%) resides towards the foot of the Stoxx 600 amid a downgrade at Jefferies, alongside the broader anti-defensive narrative. Looking at analysts’ commentary, Barclays suggests that the Fed is unlikely to over-deliver on the rate hikes that are already priced in, with the bank unphased by the recent Powell pivot and Omicron resurgence. Barclays maintains its positive view on 2022 equities and upgraded its European small caps to overweight on improving fundamentals but oversold performance, and downgraded Momentum to market-weight.

Top European News

  • U.K. House Prices Post Strongest Quarterly Increase Since 2006
  • Republicans’ Pecresse Ties With Le Pen in French Poll
  • Ferguson 1Q U.S. Organic Revenue Beats Estimates
  • EU Aims to Unveil Green Rules for Gas, Nuclear Projects Dec. 22

In FX, although the Buck remains bid on bullish US fundamentals and the index is finding plenty of underlying buying interest/support into 96.000, the overall market mood is constructive enough to help riskier currencies outperform, and shrug off another dovish RBA policy meeting in the case of the Aussie. Instead, Aud/Usd and Aud/Nzd are gaining more ground on the coattails of iron ore prices and favourable tradewinds, as Chinese imports surged beyond expectations and outpaced exports that also beat consensus to leave the surplus somewhat short of the mark. The headline pair reached 0.7101 before running into resistance and 1.2 bn option expiry interest at the 0.7100 strike, while the cross has breached 1.0450 convincingly to expose 1.0500 ahead of NZ Q3 manufacturing sales on Wednesday and following RBNZ Assistant Governor Hawkseby sticking to a considered line on further rate normalisation overnight. He also said the Kiwi is in a broad range of where it is expected to be and that a higher currency in the short-term will help us achieve objectives more quickly. Nzd/Usd is still rotating around 0.6750, while the Loonie is latching on to the latest leg up in WTI over Usd 71/brl to test offers protecting 1.2700 vs its US rival in advance of Canadian and US trade data, Ivey PMIs and tomorrow’s BoC, with the DXY fading following a fleeting breach of Monday’s peak within 96.447-168 confines, Note also, 1.1 bn option expiries reside between 1.2750-55 in Usd/Cad and could cap recovery rallies. Elsewhere, the Scandinavian Crowns continue to rebound from recent lows against the Euro, and Brent’s bounce to the brink of Usd 75/brl is helping the Nok probe 10.2000 rather than a somewhat mixed Norges Bank regional network survey, while the Sek is lagging circa 10.2400 amidst Riksbank concerns over the lack of liquidity and transparency in Sweden’s corporate bond market that needs to be addressed.

  • CHF/GBP/EUR/JPY – The G10 laggards to varying degrees, with the Franc trying to pare losses from sub-0.9250 vs the Dollar and more successfully against the Euro from almost 1.0450 towards 1.0400, while the Pound is holding mostly above 1.3250 in Cable terms and Eur/Gbp is pivoting 0.8500 as the single currency remains under the psychological 1.1300 level vs the Greenback irrespective of supportive Eurozone macro impulses via better than forecast German industrial output and ZEW economic sentiment over bleak current conditions. Similarly, the Yen remains weak on risk and rate/yield dynamics and Usd/Jpy is now firmer within a loftier 113.40-74 range before a raft of Japanese releases including Q3 GDP revisions and October’s current account balance.
  • EM – More easing in China, but resilience or even ongoing strength in the Cny and Cnh in wake of the PBoC shaving 25 bp off the relending rate for agricultural and small companies, according to sources in the Securities Times that also suggests in tune with the China Daily that an LPR cut may be in the offing. Conversely, weakness in the Rub awaiting the call between Putin and Biden and the Zar on the back of SA GDP missing already low-key expectations, but the Try is nursing some declines in what could be reasonably described as intervention fashion.

In commodities, WTI and Brent front-month futures are firmer on the session, buoyed by the risk appetite across the markets. From a fundamental standpoint, the benchmarks remain underpinned by the lack of progress in Iranian nuclear talks coupled with the OSP hike seen by Saudi Aramco over the weekend for Asia and US customers – typically a reflection of firmer demand. The morning also saw some reports suggesting Yemen Houthis fired several ballistic missiles and 25 armed drones on Saudi Arabia, including Aramco facilities in Jeddah, but details remain light. Aside from that, the morning’s newsflow has been on the quiet side, with the macro environment currently dictating price action. WTI Jan is back on a USD 71/bbl handle (vs low 69.50/bbl) while Brent Feb topped USD 75.00/bbl (vs low USD 73.20/bbl). In terms of bank forecasts, Citi sees a dramatic fall in energy prices from Q4 2021 to Q4 2022 averages – with Brent seen at USD 62/bbl (from USD 79/bbl) and WTI seen at USD 59/bbl (from USD 75/bbl). Over to metals, spot gold and silver move in tandem with the Buck featuring the former around USD 1,780/oz and caged below that cluster of DMAs which today sees the 50, 100 and 200 at USD 1,793/oz, USD 1,790/oz and USD 1,791/oz respectively. Elsewhere LME copper takes impetus from the broader risk appetite, with prices back north of USD 9,500/t and extending on gains, with the Chinese trade data also supportive for the base metal complex. Overnight, Dalian iron ore futures gained focus as prices were bolstered by the recent liquidity action taken by the PBoC coupled with more sanguine commentary surrounding the Chinese housing market, according to some analysts.

US Event Calendar

  • 8:30am: 3Q Unit Labor Costs, est. 8.3%, prior 8.3%
  • 8:30am: 3Q Nonfarm Productivity, est. -4.9%, prior -5.0%
  • 8:30am: Oct. Trade Balance, est. -$66.8b, prior -$80.9b
  • 3pm: Oct. Consumer Credit, est. $25b, prior $29.9b

DB’s Jim Reid concludes the overnight wrap

It’s with much trepidation that I take an hour off work this morning to visit my 4-year old twins’ nativity play. They are by far the youngest in their Reception year and given they were premature, in reality there are technically older kids in the nursery year. As such my expectations were always well managed when the parts were being doled out that they wouldn’t be competing for the blockbuster roles such as Joseph! These expectations were met as they have been cast as “presents”. So I think they have to sit there with a bow around them and try to remember some of the words in the songs they have been given to sing. Success would be for them not to have a fight mid-performance as they do most evenings when I see them. Only when you have identical twins can you witness such love and hatred displayed within the space of a few seconds.

Markets have been swinging between love and hate over the last 10 days with the former winning out yesterday as investors’ concerns eased around the Omicron variant. Obviously we’re still awaiting definitive data on a number of points, but more generally the suggestions that it could be less likely to cause severe disease has injected some optimism back into markets after the recent selloffs. As a result, we saw a decent bounceback among the major equity indices on both sides of the Atlantic, an advance for oil prices following 6 successive weekly declines, and investors even moved to marginally bring forward the likely timing of central bank rate hikes.

We’ll start with equities, where risk appetite only increased as the day went on, with the S&P 500 (+1.17%) posting a broad-based advance that saw over 85% of the index’s members advancing. Europe also put in a strong performance, with the STOXX 600 up +1.3%, whilst many indices saw their biggest advances in months. That included the UK’s FTSE 100 (+1.5%), Spain’s IBEX 35 (+2.4%), and Italy’s FTSE MIB (+2.2%), which, outside of last Wednesday, were the best daily performances since July. European tech shares lagged the broader rally, with the STOXX Technology index down -0.33%, though US tech shares gained steam after the European close, with the Nasdaq up +0.93%, trailing the S&P by a more modest amount.

Greater optimism about the new variant proved supportive for oil prices too, with Brent crude (+4.58%) and WTI (+4.87%) posting gains after a run of 6 consecutive weekly declines, having also been supported by Saudi Arabia’s move to raise oil prices to Asia and the US in January. Oil prices are up another 1% this morning. However, there was a big decline in US natural gas futures (-11.50%) yesterday, the worst daily performance since January 2019, as the mild weather outlook has served to dampen demand.

Over in sovereign bond markets there was a fresh selloff in US Treasuries, and a steepening of the yield curve, as the optimism about Omicron led investors to bring forward their expectations of future rate hikes. Yields moved higher across the curve, with those on 10yr yields up +9.1bps to 1.43%, as both real yields and inflation breakevens moved higher on the day, whilst the 2s10s curve managed to steepen +4.7bps to 79.9bps. 10yr yields are up another +1.4bps this morning. Near-term, the first Fed rate hike is again fully priced by the June FOMC meeting. Over in Europe, yields were lower, with those on 10yr bunds (-0.1bps), OATs (-0.4bps) and BTPs (-3.8bps) all declining, though the greater risk appetite was reflected in the narrowing of peripheral spreads, with the gap between Italian and Spanish yields over bunds both tightening by the close.

Overnight in Asia stocks are all trading up with the Nikkei (+2.09%), Hang Seng (+1.62%), CSI (+0.51%), KOSPI (+0.47%) and Shanghai Composite (+0.12%) all stronger. China’s RRR cut yesterday is certainly helping sentiment. On the data front, China’s trade balance for November came in at $71.72 bn (consensus $83.60 bn and $84.54 bn previously), lower than expected as imports grew at +31.7% year-on-year against +21.5% consensus. Exports (+22%) were slightly higher than expected.

Elsewhere the Reserve Bank of Australia held its benchmark interest rate unchanged while cautioning that price pressures remain subdued in Australia compared with other economies as the RBA expects it to reach 2.5% by 2023. Our economists put out a note suggesting that if you squint, the RBA commentary was slightly hawkish though. See more here if you’d like their review. Elsewhere futures are pointing to a positive start in the US and Europe with the S&P 500 (+0.34%) and DAX (+0.38%) contracts trading in the green.

Looking ahead, one of the important events today will be the scheduled video call between US President Biden and Russian President Putin. The Biden administration, in concert with European allies, is reportedly weighing whether to bring economic tools to bear against Russia in response to the recent flare up on the Ukrainian border. Measures being considered included sanctions against President Putin’s inner circle, energy producers, and banks, as well as the more drastic option of denying Russian access to US-run international payments system, SWIFT. The Ruble depreciated -0.66% against the US dollar after having appreciated +0.50% in the morning before the headlines.

In terms of other developments on the pandemic, the global case count has been moving higher for 7 consecutive weeks now, and we got fresh news of tougher restrictions in New York City yesterday. They’re set to place a vaccine mandate on private sector workers from December 27, whilst indoor dining and entertainment will be requiring those aged 12 and over to be fully vaccinated, and those aged 5-11 to have one dose. Here in the UK, over 50k confirmed cases were reported yesterday once again, and the average number of cases over the last week now stands up +9% on the week before.

Turning to Germany, the main news yesterday was that the Greens became the final party of the incoming traffic-light coalition to approve the negotiated agreement, with 86% of members in favour. That follows similar moves by the SPD and the FDP, and today the parties are set to formally sign the deal, with Olaf Scholz set to become chancellor tomorrow in a Bundestag vote, which will also bring an end to Chancellor Merkel’s 16-year tenure. For a run down on what to expect from the new government, our research colleagues in Germany have put together a guide on the various policy areas (link here). Staying on Germany, data also showed yesterday that factory orders fell by a much larger-than-expected -6.9% in October (vs. -0.3% expected), with the decline driven by a -13.1% fall in foreign orders, contrary to domestic orders which actually expanded +3.4%.

To the day ahead now, and data highlights include German industrial production for October and the ZEW survey for December, along with the US trade balance for October. Otherwise, US President Biden and Russian President Putin will be holding a video call.

Tyler Durden Tue, 12/07/2021 – 07:59

Author: Tyler Durden

Economics

M2 and Nominal GDP Update: still growing rapidly

I am fascinated by the fact that these days hardly anyone is talking about the very rapid growth in both M2 and nominal GDP. Both suggest that inflation…

I am fascinated by the fact that these days hardly anyone is talking about the very rapid growth in both M2 and nominal GDP. Both suggest that inflation is alive and well, and very likely to continue.
The big news this week was that the Fed is doing its best to avoid an aggressive tightening of monetary policy. Which makes it strange that the market sold off on the news that the Fed plans to accelerate (ever so slightly) its tapering of asset purchases while also planning to begin to lift short-term interest rates (in gingerly fashion) in about two months. As I’ve been arguing for awhile, the threat of tight money is a problem that still lies well into the future; it’s certainly something to worry about, but not for now. Monetary policy today is still extremely accommodative, and almost certainly the culprit behind our inflation problem. 
Today the Fed said that they plan to start raising short-term rates in early March. The bond market expects the Fed will ratchet up rates by 25 bps at a time until reaching a “terminal rate” for their Fed funds target of about 2.5% in about 3-4 years’ time. In my book, that hardly rates as tight money. Actual tightening involves a significant rise in the real Fed funds rate (e.g., to at least 3%). It also involves a flattening or inversion of the Treasury yield curve, which is still moderately steep. We’re not even close to those conditions, and the Fed has virtually assured us they are unlikely to slam on the monetary brakes anytime soon. 
Most observers these days argue that inflation is the result of too much demand (fueled by government stimulus payments) and not enough supply (e.g., Covid-related supply bottlenecks). Hardly anyone talks about the unprecedentedly rapid growth of money, aside from me and a handful of other economists (e.g., Steve Hanke, John Cochrane, Ed Yardeni, and Brian Wesbury). Moreover, I’d wager that the great majority of the population doesn’t understand that supply and demand shocks can only affect the prices of some goods and services, but not the overall price level. If all, or nearly all prices rise, that is a clear-cut sign of an excess of money relative to the demand for it. That is how inflation works.

There are other reasons to think the recent stock market selloff is overdone, if not premature. Credit spreads—which measure actual stresses in the economy—are still relatively low. Swap spreads—which are a good indicator of liquidity—are very low. Together, these spreads tell us that liquidity is abundant, economic stresses are low, and the outlook for corporate profits—and by inference the economy—is healthy. Ironically, the main problem for now is that the Fed is not prepared—yet—to do anything that might slow the rate of inflation or threaten the economy for the foreseeable future. They’d rather lay the blame for inflation on Congress than take the heat themselves. And don’t forget that Powell is up for renomination soon. 
Chart #1
Chart #1 shows the growth of currency in circulation, which represents about 10% of the M2 measure of money. After surging at 20% annualized rates in Q2/20, the growth of currency has slowed to about a 5% annualized rate, which is somewhat slower than its long-term trend growth of about 6.6% per year. As I’ve explained before, the supply of currency is always equal to the demand for currency, which means that currency growth is not contributing to our recent inflation problem. Currency growth was quite rapid last year because the demand for currency was very strong, fueled by all the uncertainties of the Covid threat. But the fact that currency growth has since slowed significantly since then suggests that precautionary demand has faded: this is arguably a good leading indicator that the demand for money balances in checking accounts and bank savings account is also softening or beginning to soften. In the absence of any slowing in the growth of M2, any reduction in the demand for money in the system is precisely what fuels a rise in the general price level. If the Fed does nothing in response, such as raising short-term interest rates and draining reserves from the banking system, inflation is very likely to continue
Chart #2
Chart #2 shows the growth of the M2 monetary aggregate. Here again we see explosive growth in Q2/20 and a subsequently slower—but still quite rapid—rate of growth which continues to this day. For the past year or so, M2 growth has been averaging about 12-13%. That is twice as fast as its long-term trend rate of growth, and it shows no sign of slowing, even though the Fed has been tapering its purchases of securities (to be fair, tapering does nothing to reduce inflation). This is good evidence that M2 is growing because banks are lending money by the bushel, which is the only way the money supply can expand. The public’s apparent demand for loans is thus strong, and that is symptomatic of a decline in the demand for money. 
 
Chart #3
Chart #3 shows the growth of M2 less currency, which is equivalent to all the money that has been supplied by the banking system via lending operations. It’s important to remember that the Fed cannot create money directly; the Fed only has the power to limit bank lending by limiting bank reserves, and to influence the public’s demand for money via increasing or decreasing the overnight lending rate. Again we see the same pattern: explosive growth of M2 in Q2/20 followed by a slower (but still rapid) 13-14% pace since then that shows no signs of slowing (as of the recently-released data for December ’21). The growth of money on deposit in our banks is growing at more than twice its historical rate, and that has been the case for the past 18 months. Needless to say, this is nothing short of extraordinary. And it is the stuff of which inflation is made.
Chart #4
Chart #4 shows that the M2 money supply is now equal to about 90% of the economy’s nominal GDP. Since the latter is roughly equivalent to national income, this means that the average person or entity today is holding almost one year’s worth of his annual income in a bank deposit of some sort. This is a level that was only exceeded in Q2/20, at the height of the Covid panic, and it is far above any level we have seen for many decades. People have effectively stockpiled an unprecedented amount of money in bank accounts and savings accounts that pay almost no interest! On its face, this would suggest that the demand for money (non-interest bearing money) has been intense. But will that demand remain strong? The fact that inflation has surged in the past year is good evidence that money demand is already declining: people are trying to get rid of unwanted money by spending it, and that is what is driving higher inflation.
Chart #5
Real GDP grew by a very healthy 5.5% in 2021, but 85% of that growth came from inventory rebuilding—so we are very unlikely to see another such number. The general price level rose by 5.9%, which means that nominal GDP grew by a whopping 11.7%, which is not surprising since the M2 money supply rose by 13.1%. As Chart #5 shows, both M2 and nominal GDP have a strong tendency to grow by about the same rate over longer periods. When they diverge from this trend it’s due to a change in the public’s desire for money balances. Referring back to Chart #4, we see that money demand grew by about 1.6% last year, but most of that increase happened in Q1/21 when Covid uncertainty was still raging. Money demand has been steady for the past 9 months. If M2 continues to grow at a 13% annual rate, as it has for the past year, then nominal GDP growth is very likely to continue grow at double-digit rates. And since the economy is very unlikely to sustain a 5% growth rate for much longer, inflation is going to be at least 7-10% for as long as M2 growth remains at current levels. 
An important note: it is going to be many months before the Fed adopts policies (e.g., draining reserves and lifting the Fed funds rate to a level at least equal to inflation) that will slow the growth of money by increasing the public’s desire to hold money. Banks have been the source of the explosion in M2 growth, and the only thing that will change this for the better are policies designed to make holding money more attractive; banks need to be less willing to lend to the public and the public needs to be less willing to borrow. Much higher short-term interest rates are thus the cure for our inflation blues. But we won’t be seeing them for a long time.
Chart #6
Chart #6 shows how increases in housing prices tend to lead inflation by about 18 months. Housing prices have been rising at a 15-20% annual rate for the past year or so, and that is very likely to add substantially to consumer price inflation for at least the next year. Owner’s equivalent rent comprises about 25% of the CPI.
Chart #7
Chart #7 compares the real yield on the Fed funds rate (blue line) to the slope of the Treasury yield curve (red line). Note that every recession (gray bars), with the exception of the last one, has been preceded by a significant increase in real yields and a flattening or inversion of the yield curve. Both of those conditions are highly indicative of “tight money.” We won’t see anything like that until at least next year, given the Fed’s obvious desire to avoid shocking the bond market and/or risking another recession.

Chart #8
Chart #8 compares the growth of nominal GDP (blue line) with two different long-term trend lines. (Note that the chart uses a semi-log y-axis, which shows constant rates of growth as straight lines.) The economy grew by 3.1% per year[ on average from 1966 through 2007. Since 2009, it has grown by about 2.1% on average. Unless policies become more growth friendly, we are thus unlikely to see GDP exceed 2% on a sustained basis. That again highlights the fact that 13% M2 growth, if it continues, will likely result in sustained inflation of 10% or more this year.  
All eyes should be glued to the growth of M2, which is released around the end of the third week of every month.
Chart #9

Chart #9 compares the growth of the personal consumption deflators for services and durable goods. Of interest is the explosive growth in durable goods prices. 

Chart #10

Chart #10 shows the behavior of the three main components of the PCE deflator since 1995. I chose that date because it marks the debut of China as a major source of cheap durable goods for the world. As the chart shows, all prices are now on the rise, with durables leading the way after decades of falling, and services prices (which are strongly correlated to wage and salary growth) now beginning to accelerate. 
This is the very definition of true inflation: when nearly all prices rise, not just a few.
Chart #11
Chart #12

Finally, Charts #11 and #12 recap the status of swap and credit spreads. They tell us that liquidity is abundant nearly everywhere, and that the outlook for corporate profits is healthy. We are very unlikely to be on the cusp of another recession. That’s the good news.
The bad news is that sustained inflation of 7-10% will cause significant problems in the months and years to come. Inflation will be a boon to federal government finances, but it will be the bane of the rest of the economy, because inflation is essentially a hidden tax that all holders of money end up paying the government. Over time that will work to sap the economy of its energy, resulting in slower economic growth. 

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Economics

A Market Green Light or No?

Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s…

Was “selling the rumor” responsible for the recent weakness? … how are traders sizing up Wednesday’s Fed release? … what’s important in today’s market

Wall Street traders often front-run major events that are likely to move the markets.

It’s the old adage of “buy the rumor, sell the news” (though in reverse).

Is that what’s been happening with the market weakness over the last few weeks? Have traders been bailing on stocks based on the rumor of what the Fed will do, preparing to buy back stocks after the fact?

Our technical experts, John Jagerson and Wade Hansen of Strategic Trader believe that’s what’s been happening.

From their Wednesday update:

Traders like to be ahead of the curve by both buying before the news is confirmed and then taking their profits off the table once the news is official.

The opposite phenomenon frequently occurs as well; traders sell their stocks before the news is confirmed and then buy back into their previous positions once the news is official.

While there isn’t an old saying that goes, “Sell the rumor; buy the news,” we think that is what has been happening in the stock market.

Traders have been worried for the past two weeks that the Federal Open Market Committee (FOMC) might signal the following things in today’s Monetary Policy statement:

  • More than four rate hikes this year…
  • An individual rate hike larger than a 0.25%…
  • An accelerated tapering of its bond-purchase program…
  • And a dramatic reduction of its $9-trillion balance sheet this year.

This worry has caused traders to sell into the rumor… or the worry, in this case.

As you know, the Federal Reserve released its policy statement on Wednesday.

How did it impact these fears? And what does that mean for a market rebound?

Let’s find out.

***Is Wall Street “buying” the news now?

For newer readers, John and Wade are the analysts behind Strategic Trader. This premier trading service combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.

In their Wednesday update, they dove into the details of the Fed’s policy statement. They identified language that speaks directly to the fears that have been weighing on Wall Street traders.

From the update:

The FOMC just released its statement, and here’s what it said:

  • It will likely start raising rates in March.
  • “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
  • It is not planning on more than four rate hikes in 2022, but it’s not taking the option off the table.
  • “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
  • It will be accelerating its tapering… slightly.
  • “The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.”
  • It has no plans to start dramatically reducing its balance sheet.
  • “The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”

John and Wade sum up by saying they believe that this statement should ease Wall Street’s worries.

Now, that doesn’t automatically mean these traders will push stocks higher. Rather, it just removes this overhang from the market. But traders are still highly sensitive to economic data and earnings.

***On that note, we’re beginning to see a pattern of Wall Street shrugging off strong earnings, focusing on weaker guidance

Take Tesla.

On Wednesday, this market darling reported strong fourth-quarter results that included a record number of vehicle deliveries.

Adjusted earnings came in at $2.52 per share versus the forecast of $2.36 per share. Revenue rose 65% year over year in the quarter, while automotive revenue totaled $15.97 billion, up 71%.

Great quarter, right? Deserving of a nice pop in the share price?

Nope. Wall Street decided to focus on the potential for problems in the months ahead.

Tesla sold off 5% after hours on Wednesday. And the pressure continued yesterday, with the stock ending the day down 12%.

Here’s CityIndex explaining why:

Tesla warned its ability to meet its ambitious target to grow deliveries this year will depend on the availability of equipment, maintaining operational efficiency and ‘stability in the supply chain’.

It is that last factor that markets fear the most.

Tesla has so far proved to be far more resilient to the supply constraints hampering the global automotive market compared to its rivals, but the company is not immune and warned supply chain issues are ‘likely to continue through 2022’.

***It was similar with Netflix’s earnings last week

The streaming giant beat on its bottom line and was in-line with revenue expectations. But shares plummeted in after-hours trading based on fears of slowing subscriber growth.

From The New York Times:

Netflix added 8.3 million subscribers in the fourth quarter, raising its worldwide subscriber base to 222 million, but the company said on Thursday that it expected growth to slow in the opening months of 2022.

That news, in the company’s earnings release, prompted the stock to drop nearly 20 percent in after-hours trading.

Netflix ended up falling more than 30% over ensuing trading sessions and remains down 26% as I write.

Chart showing NFLX still down 26% after last week's selloffSource: StockCharts.com

Now, compare Tesla and Netflix to Apple, which released earnings yesterday after the bell.

The world’s most valuable company smashed its revenue record, also topping earnings of $30 billion for the first time.

Most importantly, CEO Tim Cook said that the supply chain challenges are improving. Though Apple hasn’t given formal guidance since the beginning of the pandemic, here were Cook’s comments:

What we expect for the March quarter is solid year-over-year revenue growth.

And we expect supply constraints in the March quarter to be less than they were in the December quarter.

Bottom-line, Apple’s growth story remains intact. So, its share price is benefitting, up 6% as I write.

This all points toward a reality of today’s market…

What matters now is growth.

Can a company continue to grow despite inflation, a rising rate environment, and the threat of a slowing economy?

If so, Wall Street will reward it. If not, watch out.

***Looking at growth on a macro level, we received encouraging GDP news yesterday

Gross Domestic Product grew at a 6.9% annualized pace in the fourth quarter. That’s much higher than the 5.5% estimate.

Plus, consumer spending, which makes up more than two-thirds of GDP, climbed 3.3% for the quarter.

So, there are positives here (despite today’s massive inflation number…but that’s no surprise anymore).

Just make sure any trade you’re considering is similarly rooted in fundamental strength – which means growth.

Returning to John and Wade, they believe some short-term bullish trades are setting up.

They’re not pulling the trigger yet. Instead, they’re giving the market a few more days to digest recent news. But they’re feeling cautiously bullish.

I’ll give them the final word:

What matters most is not whether the Fed will raise the overnight rate in March and then again in the second quarter – traders are already pricing that in. What is important is whether the underlying fundamentals are still positive…

We don’t want to fall into the trap of ignoring the bad news in favor of the good, which is why we are recommending patience before adding more risk to the portfolio.

However, it’s essential to be aware of the solid prospects the market still has in the near term to rally and provide easy profits.

So, for now, we don’t recommend making any changes to our trades. Still, we think the likelihood of new opportunities and some profitable exits over the next few days is high.

Have a good evening,

Jeff Remsburg

The post A Market Green Light or No? appeared first on InvestorPlace.


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Economics

All The Curves, From Supply To Demand To Yield

Technically speaking, the rebound from the 2020 recession wasn’t strictly a supply shock. That was a huge part of it, no doubt, but a near-concurrent…

Technically speaking, the rebound from the 2020 recession wasn’t strictly a supply shock. That was a huge part of it, no doubt, but a near-concurrent demand shock, if you will, also materialized. The combination of the two left the public bewildered, believing it an actual inflationary impasse which could only be further passed on into this year.

Consumer prices did rise, of course, and they still are rising, though not because of (monetary) inflation. Rather, the first half of 2021 was an anomaly rather easily explained by simple, small “e” economics.

The first part of it, supply, that was all the impediments imposed by both non-economic (lockdowns, reconfiguring product lines) and economic (money and credit) factors which left the supply curve far more inelastic. This simply means suppliers and producers (along with shippers) are less responsive to changes in demand.

Sketching supply inelasticity out like any middle-schooler might upon their very first introduction to economics, the basics of it would look something like this:

It must be noted that these changes were applied globally and not just to or in the United States. Various national parts of the global economy were affected by them differently and to different degrees, by and large this was a universal phenomenon.

What then followed the evolution of supply inelasticity was the demand “shock” in the form of various government interventions; again, not just domestic US, all over the world. Those originating from the American government were the most pronounced, therefore created the biggest bounce to the right for the demand curve. Others followed to lesser extents.

The combined result is somewhat surprising considering how much the economy has been described, repeatedly, especially in America, as red hot and dangerously overheating. On the contrary, supply inelasticity means that most of the effect is illusory in terms of price whereas overall output doesn’t necessarily increase much at all.

Though these drawings are admittedly cartoonish, they aren’t very far off the actual data. Look at GDP or Industrial Production all over the world. Prices went up, especially here, but output not so much.

This has been excused as difficulties sourcing raw materials and whatnot, but that’s baked right into the inelasticity of the supply curve! And while others blame a purported labor shortage, it’s far more easily and readily explained by producers who aren’t producing nearly as much therefore aren’t as willing to pay market clearing wages (or even hire more workers).

Either way, as the supply curve shifts back more elastic, prices begin to come down as output actually rises…only if all things are equal (ceteris paribus). We know, however, they are not equal.

Even as the supply side twists slowly back toward its long run stable state, unless there’s (actual) monetary expansion behind the demand shift, demand won’t stay toward the right, either. Instead, it’s going to migrate back to the left toward its own long run stable state.

Depending upon other factors, output might rise again but much more slowly or in more limited fashion than it otherwise could have, all the while prices descend in the direction of their own starting equilibrium (assuming there is such a thing, or that there is one which could be stable).

Viola, there’s yesterday’s generally ugly GDP figures along with the PCE numbers (monthly) published today. The general supply curve is becoming less elastic (pumping out massive inventory into the supply chain) while the effect of the previous government interventions (including Uncle Sam) fade further and further into the past.

Prices haven’t yet backed off, though they have started to exhibit the general tendency toward deceleration (not all at once, therefore three camel humps that I’m told can’t describe a camel at all). In some places, though, we’re seeing perhaps the beginning stages of outright reversion (like China’s producer prices or US services prices).

The biggest macro problem is that the private economy’s actual state is obscured underneath this “inflation.” Labor shortage, red hot, etc. Because the mainstream treats each and every outbreak of consumer price acceleration as the same thing, especially those times when it is due to something other than money (true inflation), it can only result in mass confusion.

In fact, at some point, the bottleneck of forced price increases actually inhibits the demand curve staying to the right; prices rise faster than the economy’s ability to maintain even the same levels of demand (because it’s not caused by monetary expansion). Thus, what we saw in yesterday’s GDP along with today’s Personal Income and particularly consumer spending:

Even though the labor market has likewise struggled to recover (consist with the low changes in output) despite the artificially-fueled spendy frenzy, incomes have been rising though nowhere near enough to absorb the equally artificial increase in the general price level.

As such, private economy labor falls further and further behind (fails to catch all the way back up) exacerbating the demand curve shift back left.

Economists (capital “E”), however, they all believe (without evidence, only regressions) such interventions as last year’s massive helicopters produce lasting effects – a more durable perhaps permanent move in the (aggregate) demand curve out to the right. Furthermore, after the extreme price changes last year, most (Larry Summers!) are more worried that the curve had been pushed too far to the right and will remain too far out that way.

This group now includes the FOMC whose members then add psychological hokum to their even more primitive curve graphics thereby manufacturing the hawkish double-taper, triple-maybe-quadruple rate hikes for 2022 all the while real markets reject all these things.

True economics, the lack of money impulse, and now more upon more data all bely these mainstream interpretations. It’s only a “growth scare” in the context of merely assuming those first, that Economists and central bankers employing standard DSGE assumptions have anything worthwhile to say about the situation.

Rather than “growth scare”, the actual situation appears to be nothing more than the other side of last year’s double anomalies. One supply. One demand. None monetary.




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