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Futures Drop With Traders On Edge Over Hawkish Central Banks

Tyler Durden's Photo
by Tyler Durden
Friday, Apr 22, 2022 - 11:49 AM

US equity futures extended their Thursday losses, and were slightly lower on Friday morning as investors fretted over the latest hawkish remarks from Jerome "Crash Stonks" Powell. Nasdaq 100 futs were down 0.1% by at 7:15a.m. EDT after the underlying gauge slumped 2% on Thursday after Powell outlined his most aggressive approach yet to taming inflation, potentially endorsing two or more half percentage-point interest-rate increases, which prompted the market to price in more than six 25bps rate hike by the end of July and 10 hikes by the end of 2022. Shorter-dated Treasury yields surged. The dollar rose to the highest level since July 2020 amid losses for the British pound with data showing the U.K.’s cost-of-living crisis is hampering consumer spending.

The overnight weakness pushed both S&P 500 futures lower by about 0.2% after cash closed down 1.5% Thursday, although trade was muted and range-bound.

The fears over rising rates have been particularly damaging for frothy growth and technology parts of the market amid concerns about the squeeze on their future earnings. 

“The problem for the equity market and particularly those rate sensitive long duration stocks is they are simply not valued appropriately for that new regime,” said Roger Lee, head of U.K. equity strategy at Investec. “Investors have been so heavily concentrated in those ‘growth’ parts of the market that the unwind and repositioning as this new rate environment sinks in could take months, if not years.” 

“Equities are really torn between these two forces right now and the first one is that earnings are actually pretty good,” Anastasia Amoroso, chief investment strategist at iCapital Securities LLC, said on Bloomberg Television. But “anytime equities rally it seems like the Fed officials are coming in with more and more hawkish talk,” she said.

Powell on Thursday cited minutes from last month’s policy meeting that said many officials had noted “one or more” 50 basis-point hikes could be appropriate to curb the hottest inflation in four decades. Investors are now betting on half-point increases in May, June and possibly July.

“The unknown is Powell’s ability to deliver the needed finesse without completely derailing the recovery, while not falling short of the required magnitude to anchor inflation,” Ian Lyngen, head of interest rate strategy at BMO Capital Markets, wrote in a note.

In premarket trading, Gap sank 13% after lowering its quarterly sales growth guidance and saying Old Navy President and CEO Nancy Green will leave the business this week. Snap shares dipped 3% following mixed results from the social-media company; Q1 revenue missed while adjusted Ebitda beat expectations amid strong user growth. Chindata shares, on the other hand, surged 12% after Bloomberg reported that the Chinese data center company backed by private equity firm Bain Capital had received preliminary takeover interest from other firms in the industry. Here are some other notable premarket movers:

  • SVB Financial (SIVB US) rallied 9% in postmarket trading after reporting earnings per share for the first quarter that beat the average analyst estimate. Its net interest margin also topped analyst expectations for the three months ended March 31.
  • Spire Global (SPIR US) gained 5.7% in postmarket as coverage starts with an outperform rating and $4 price target at Raymond James, which touts the the satellite-imaging and data company’s potential for “rapid” annual recurring revenue growth.
  • Boston Beer (SAM US) fell 3% postmarket after first- quarter results missed estimates, hurt by shipment volume decreases in Truly Hard Seltzer, Twisted Tea, Angry Orchard, and Dogfish Head brands, partially offset by increases in its Samuel Adams brand.
  • Globus Medical (GMED US) tumbled 11% in postmarket trading after the company reported preliminary net sales for the first quarter of about $230.5 million, compared to consensus estimates of $236.1 million, and said CEO Dave Demski resigns.
  • Qualtrics (XM US) shares gained 4.4% in extended trading on Thursday after the software company reported first-quarter revenue that beat expectations. It also gave a second-quarter revenue forecast that beat the average analyst estimate.

U.S. equities were hammered this week as the first-quarter earnings season began with some high profile misses, including from Netflix. Earnings-per-share growth is tracking down 11% in U.S., according to Barclays strategist Emmanuel Cau, but overall beats are above average so far. That said,  U.S. equities have remained rather resilient in the face of increasingly hawkish signals from the Fed and ECB, thanks to hopes for another solid earnings season but those are becoming increasingly frayed. At the same time, traders are mindful of the inevitable risk repricing, especially after Powell outlined his most aggressive approach yet to taming inflation, potentially endorsing two or more half percentage-point rate increases.

In Europe, the Stoxx 50 slumped 1.5% while the Stoxx 600 Index was down 1.2%, pressured by disappointing quarterly earnings from Gucci-owner Kering and SAP. FTSE 100 outperformed, dropping 0.5%. Energy, travel and retailers are the worst-performing sectors. Here are the biggest European premarket movers:

  • Essity rises as much as 15%, the most since its 2017 IPO and the biggest gainer on the Stoxx 600, on earnings analysts say show Essity’s pricing efforts to offset cost inflation are proving effective.
  • Renault jumps as much as 8.3% after a Bloomberg News report that the company is considering selling part of its Nissan Motor stake. The auto maker also published “solid” 1Q numbers.
  • HomeServe jumps as much as 13% after disclosing it has received a number of proposals from Brookfield. Analysts note the increased probability of a bid, while not ruling out counteroffers.
  • Holcim shares gain as much as 6.2% after the cement maker reported what Jefferies called a “massive beat” on first-quarter earnings, helped by strong volumes in North America.
  • Bureau Veritas shares rise as much as 5.9%. The testing and inspection firm’s 1Q update looks strong, with organic growth well ahead of expectations, RBC says.
  • European technology stocks slide as much as 2.4%, underperforming declines for the broader index, with rate-hike fears and an earnings miss by index heavyweight SAP weighing
  • Logitech down as much as 6.4%; SAP as much as 4.5% on “disappointing” earnings
  • Kering shares slump as much as 7% as investors focused on the 1Q sales miss of the fashion conglomerate’s crucial Gucci brand in spite of beats elsewhere across the business.
  • Anglo American falls as much as 3.6%, as the stock was cut to sector perform at RBC, with the broker saying that the miner’s “poor” 1Q and guidance will impact the investment case.
  • Ferrari drops as much as 3.3% in Milan after the sports-car maker issued a recall for 2,222 of its vehicles in China as there may be some problem with the brakes.

Earlier in the session, Asian stocks declined after Federal Reserve Chair Jerome Powell outlined an aggressive approach to monetary tightening, weighing on market sentiment. The MSCI Asia Pacific Index fell as much as 1.6% Friday to the lowest level in a month. Technology shares were the biggest drags as Treasury yields resumed their ascent, hurting costlier growth stocks. Japanese equities led losses in the region following the Fed’s hawkish comments. A 50 basis-point interest rate increase “will be on the table” for next month’s policy meeting, Powell said Thursday. He also backed a series of half-point hikes ahead and said the Fed is committed to raising rates “expeditiously” to tame inflation. Powell Hardens Hawkish Pivot Toward Half-Point Fed Rate Hikes Chinese stocks stabilized, with the CSI 300 Index snapping a five-day losing streak, after regulators urged funds to boost their equity investments. Technology shares, however, took a hit from ongoing U.S. delisting concerns. The Hang Seng Tech Index eked out a small gain after falling the previous three sessions. Asian markets have been jittery this week amid the prospect of global monetary tightening, as well as growth risks in China stemming from stringent Covid lockdowns and supply chain disruptions. The Asian stock benchmark has slid more than 2% this week, poised for a third weekly decline. Asian central banks “will be raising rates at a more gradual pace compared with the Fed,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management in a Bloomberg TV interview. “Cash return across Asia is still going to be pretty low. That will continue to fuel demand for income investments.”

In FX, euro extends decline as traders price in 50 bps of ECB rate hikes by September. Curves have a flattening bias. Bunds and USTs bear-flatten, U.S. short end cheapens 6-8 bps, underperforming bunds by ~2bps. Gilts bull-flatten but ranges are relatively narrow. Peripheral spreads tighten, led by short-end Portugal.

In FX, the Bloomberg Dollar Spot Index rose and the greenback advanced against all of its Group-of-10 peers apart from the yen. The pound was the worst performer and approached $1.29, the lowest in 17 months against the dollar and underperforming all of its G-10 peers, after data showed U.K. retail sales plunged more than forecast in March. Gilts outperformed with Bank of England Governor Andrew Bailey due to speak later. The volume of goods sold in stores and online dropped 1.4% after falling 0.5% in February. Economists had expected a decline of 0.3%. U.K. PMI for both services and the whole economy fell to a three-month low in April, while consumer confidence sank to its lowest since the recession in 2008. The euro fell to trade around $1.08 and European bonds outperformed Treasuries. The Kiwi and Aussie fell under weight of leveraged selling to underperform major peers, according to Asia-based FX traders. The yen gained on a report that Japanese Finance Minister Shunichi Suzuki discussed the possibility of coordinated currency intervention with U.S. Treasury Secretary Janet Yellen. Japanese government bonds edged lower. Japan’s key consumer prices advanced in March at the fastest pace in more than two years, complicating the central bank’s communication of its easy policy stance given a further acceleration is expected in April.

Perhaps most importantly, the Chinese Yuan has its worst week since the August 2015 devaluation.

In rates, the Treasury curve bear flattened as 2-year yields rose by 7bps while long-end yields by around 1bp. Futures are off the lows however, with bunds and gilts outperforming over the London session. 10-year TSY yields trade around 2.92%, cheaper by 2bp on the day and lagging bunds by 2bp, gilts by 4bp; extension of bear-flattening move tightens 2s10s, 5s30s spreads by ~4bp and ~1bp. Weakness during Asia session was led by Aussie bonds, where 10-year yield reached highest level since 2014.

In commodities, WTI drifts 2.1% lower to trade around the $101 level. Spot gold falls roughly $10 to trade around $1,942/oz. Most base metals trade in the red. 

Looking to the day ahead now, data releases include the global flash PMIs for April and UK retail sales for March. Central bank speakers include ECB President Lagarde and BoE Governor Bailey. Finally, earnings releases include Verizon Communications and American Express.

Market Snapshot

  • S&P 500 futures down 0.1% to 4,386.00
  • STOXX Europe 600 down 0.8% to 457.90
  • MXAP down 1.0% to 169.68
  • MXAPJ down 1.1% to 559.97
  • Nikkei down 1.6% to 27,105.26
  • Topix down 1.2% to 1,905.15
  • Hang Seng Index down 0.2% to 20,638.52
  • Shanghai Composite up 0.2% to 3,086.92
  • Sensex down 1.1% to 57,289.28
  • Australia S&P/ASX 200 down 1.6% to 7,473.28
  • Kospi down 0.9% to 2,704.71
  • German 10Y yield little changed at 0.95%
  • Euro down 0.4% to $1.0794
  • Brent Futures down 1.8% to $106.35/bbl
  • Gold spot down 0.3% to $1,946.54
  • U.S. Dollar Index up 0.41% to 100.99

Top Overnight News from Bloomberg

  • ECB Governing Council member Robert Holzmann says it’s crucial that asset purchases come to an end as soon as possible in order to start “visible” interest rate increases, according to comments made to Die Presse newspaper
  • Economic momentum in the euro area unexpectedly picked up in April, with a rebound in services following the end of Covid restrictions making up for stalling manufacturing. A composite gauge for both sectors jumped to a seventh-month high, according to a PMI survey. The increase to 55.8 from 54.9 in March compares to an estimate of 53.9
  • Global bonds added to this year’s epic rout as traders brace for the most aggressive Federal Reserve interest-rate hikes in 40 years and the likelihood most global central banks will also tighten.
  • India is expected to raise policy rates by the most among major central banks in the region as it seeks to tackle a surge in inflation, according to swaps pricing. The Reserve Bank of India is seen raising its policy rate by around 275 basis points by end 2023 based on front-end swaps, according to a BofA Securities note
  • China’s central bank governor stressed the importance of keeping inflation under control in two separate speeches released Friday and pledged more targeted support for small businesses, reinforcing policy makers’ cautious approach to monetary stimulus
  • French President Emmanuel Macron led his rival Marine Le Pen 55.5% to 44.5% ahead of the run-off presidential election set for April 24, according to a polling average calculated by Bloomberg on April 22. The gap between them has narrowed from the 12.0 percentage points recorded on April 20
  • Applying the sustainable debt format to governments is raising thorny challenges, from just how ambitious to make the targets to the democratic quandary of committing to goals a future administration might disagree with

A more detailed look at global markets courtesy of newsquawk

Asia Pac stocks were negative on spillover selling from Wall St with risk sentiment sapped amid higher yields and hawkish central bank commentary. ASX 200 declined as tech suffered from higher yields and with miners subdued by OZ Mineral's weak output. Nikkei 225 underperformed as the optimism from incoming relief faded on the hawkish central bank views. Hang Seng and Shanghai Comp weakened amid large losses in Hong Kong's tech stocks and with sentiment not helped by the US adding another 17 firms to its SEC list for possible delisting.

Top Asian News

  • China’s Oil Demand Is Tumbling the Most Since Wuhan Lockdown
  • China’s Plunging Markets Trigger Capital Flight, State Support
  • Japan Deems Russia’s Occupation of Disputed Islands ‘Illegal’
  • A $26 Billion Bond Trade Loved by Banks Faces India Scrutiny
  • Mainland China Investors Buy Net HK$3.28B Via Stock Connect

European bourses are pressured across the board, Euro Stoxx 50 -1.8%, following APAC/Wall St. pressure amid hawkish Central Bank rhetoric. The FTSE 100 is the relative outperformer, but still negative, given favourable currency dynamics given broad USD strength and weak Retail Sales. Stateside, futures are modestly softer after spending much of the APAC session near the unchanged mark, ES -0.4%, moving in sympathy with EZ action and pre-PMIs. Note, today is the last day of potential Fed speak before the  blackout period for May's gathering commences; no Fed officials scheduled.

Top European News

  • Credit Suisse, SocGen May See Trading Drop as War Upends Markets
  • Ferrari Recalls Over 2,000 Cars in China on Brake Risk
  • Ghosn Faces Arrest Warrant in French Probe
  • French Football Club Olympique Lyonnais Said to Get Six Bids
  • U.K. Economic Outlook Dims as Confidence and Sales Falter

FX

  • Sterling slides to bottom of G10 pile as UK retail sales data misses consensus by a distance and two out of three preliminary PMIs fall short of expectations, Cable hits new 2022 low circa 1.2865, EUR/GBP approaches 0.8400.
  • Non-US Dollars decline amidst general risk aversion and other bearish factors; AUD/USD hovering just above 0.7300, NZD/USD sube-0.6700 and USD/CAD over 1.2675 ahead of Canadian consumption and producer price data.
  • Euro fades irrespective of mostly stronger than forecast flash Eurozone PMIs as ECB President Lagarde tones down hawkish vibes, EUR/USD probes 1.0800.
  • Yen holds up better than other majors after more concerted effort by Japan’s Finance Minister to curb rapid moves via confirmation that he is in close contact with US Treasury Secretary about currency developments, USD/JPY capped below 129.00.
  • Yuan set for weakest week since devaluation seven years ago with PBoC Governor Li pledging policy stimulus for the real economy that is suffering from Covid contagion; USD/CNH through 6.5250.
  • ECB President Lagarde told policymakers to refrain from airing dissenting views on decisions for several days, according to Reuters sources.
  • Japanese Finance Minister Suzuki said he confirmed with US Treasury Secretary Yellen that US and Japan will communicate closely on FX and discussed with Yellen the recent market developments, in particular, USD/JPY moves, while he explained to Yellen recent JPY declines are rapid, according to Reuters.
  • Japanese Finance Minister Suzuki and US Treasury Secretary Yellen likely discussed coordinated currency intervention during bilateral talks, according to TBS News citing a Japanese government source which noted the US side sounded as if it will consider the idea of joint FX intervention positively.

Fixed Income

  • Bonds on track to rack up more weekly losses with Bunds down to 153.10 at worst, Gilts hitting 117.22 and 10 year T-note 118-08.
  • Benchmark yields still targeting or touching psychological levels, like 1.0% in Germany, 2.0% and 3.0% in the UK and US respectively.
  • Curves retain flatter bias and debt could yet derive traction from pre-weekend position squaring plus asset reallocation as equities dump.

Commodities

  • WTI and Brent are pressured in tandem with broader price action, USD strength and sources pointing to a China demand shock.
  • China is said to face the biggest oil demand shock since early 2020, according to Bloomberg sources.
  • Currently, WTI and Brent have recovered marginally from session lows of USD 101.22/bbl and USD 105.80/bbl, respectively.
  • Spot gold and silver are also hindered on the USD move, yellow metal continues to fall away from the USD 1950/oz mark (low, USD 1941/oz; high USD 1955.60/oz).

US Event Calendar

  • 09:45: April S&P Global US Composite PMI, est. 57.9, prior 57.7
  • 09:45: April S&P Global US Services PMI, est. 58.0, prior 58.0
  • 09:45: April S&P Global US Manufacturing PM, est. 58.0, prior 58.8

DB's Jim Reid concludes the overnight wrap

Happy Friday. I'm already longingly looking forward to Monday as my wife is having her first weekend away without any of us since we had children. I've been left a full handwritten list of things I need to do to successfully solo look after 3 rowdy kids and a wayward dog. I genuinely don't think she believes I can do it without incident. If I were to allow unlimited TV, and an endless supply of tomato ketchup and mayonnaise then it would be an absolute doddle. I'll start off with good intentions tonight and then see how quickly I resort to the easy route at the weekend.

Central bankers are finding there is no easy route at the moment and yesterday was another day of rising hike expectations. There was a full lineup of central bank speakers with most of the heavy hitters coming in after Europe went home. Having said that, the damage in global rates markets was done long before Chair Powell joined President Lagarde on an IMF panel.

With the Fed’s May FOMC communications blackout set to start tomorrow, Powell stayed true to the recent Fed line, saying many FOMC participants favoured one or more +50bp moves, noting that it would be appropriate to move relatively quickly, and that he wanted to get policy rates to neutral. In that vein, he said there was some merit in front-loading the policy tightening given the historically tight labour market and upside risks to already runaway inflation.

President Lagarde drew a distinction between the different economic realities of Europe and the US, but she did not rule out an increase to the ECB’s policy rate as early as the July meeting. Recall, our European econ team’s base case is the ECB will lift rates by +25bps in September, after finishing net APP purchases in the third quarter. Lagarde also noted that the ECB doesn’t target any specific level of the euro, but are watching FX dynamics.

Even before Powell and Lagarde had started speaking, the sizeable bond sell-off came as other central bank speakers endorsed hawkish policies. President Daly, who skews dovish, remarked earlier in the day that a couple of +50bp hikes were likely, while President Bullard, speaking at the same time as Powell, wouldn’t rule out a +75bp hike. The market kept a +50bp hike for May fully priced, and this morning is pricing +151bps of tightening over the next three meetings, so equivalent to just over three consecutive +50bp hikes. When all was said and done, Fed funds futures moved to price in an additional +14.3bps worth of tightening over 2022 yesterday, thus bringing the total amount of hikes priced for the rest of the year to 240bps, which is the highest to date, and this morning they’ve added a further 6bps. Given the 25bp hike we saw last month, if realised that would imply 271bps over the year as a whole, so beating out the 250bps of tightening back in 1994. Futures also became more aggressive on the 2023 profile as well, as they moved to price in a 3% Fed Funds rate as early as March 2023, which is the first time they’ve closed at that level.

The prospect of more aggressive rate hikes led to a significant selloff in Treasuries, with the 10yr yield up by +7.8bps to 2.91%, after trading as high as 2.95% intraday, with a further +3.3bps move this morning back up to 2.94%. Those moves were seen across the curve, though the front end saw the biggest moves higher as further rate hikes were priced in, meaning that the 2s10s flattened -2.7bps on the day to 22.3bps. Real yields led the bulk of the move earlier in the day, but breakevens took the mantle after an exceptionally strong 5yr TIPS auction showed there is strong latent demand for investor protection against inflation, driving 5yr breakevens to +3.64% and 10yr breakevens to 3.04%, the highest levels on record for each.

It was much the same story in Europe, where the chatter around an ECB rate hike as soon as July stepped up a gear, echoing what we saw from the Fed six months ago where the timing of an initial rate hike was increasingly brought forward. First, we heard from Vice President de Guindos, who was asked if a July liftoff was possible, and said that “It will depend on the data we see in June. From today’s perspective, July is possible and September, or later, is also possible.” In addition, Belgian central bank governor Wunsch said that policy rates could even move into positive territory this year, saying that market pricing “to me is on the low side of what might be required to get inflation under control”. Overnight index swaps reacted accordingly, and the amount of tightening priced in by overnight index swaps for December’s meeting closed above 75bps for the first time, so implying at least 3 full 25bp moves. Looking at the July meeting specifically, +21.5bps of tightening were priced in by the close yesterday, an increase of +7.1bps on the day, with +47.4bps priced in by September, a +12.6bp increase. So we’re close to two +25bp hikes being priced in for each of July and September.

That shift in expectations meant that the European bond selloff echoed the US, with yields on 10yr bunds (+9.1bps), OATs (+6.8bps) and BTPs (+9.8bps) all moving higher on the day. The most significant moves were seen in the UK however, where 2yr gilt yields surged by +16.9bps after Catherine Mann of the MPC suggested that rates could move by more than 25bps. That saw overnight index swaps increase the implied probability of a 50bp move at the May meeting up to 58.7%, with 167bps worth of further tightening priced for the rest of the year, on top of the 50bps we’ve already had so far.

European stocks largely advanced before the magnitude of tighter central bank comms weighed on the market, with the STOXX 600 increasing +0.32%. The DAX (+0.98%) and CAC 40 (+1.36%) outperformed broader European equities. In the US, meanwhile, stocks took a turn for the worse in the New York afternoon following the day’s central bank speak. The S&P 500 fell -1.48% as every sector was lower. Indeed, only stalwart defensive sectors staples (-0.11%) and real estate (-0.63%) avoided declines of greater than 1%. Tech stocks intuitively underperformed on the tighter policy path; the Nasdaq fell -2.07% and FANG+ shares were -2.79% lower.

Those themes have been echoed overnight in Asia, where equities are mostly lower this morning. The Nikkei (-1.89%) is leading losses across the region, with the Hang Seng (-0.70%) and the Kospi (-1.06%) also falling. Mainland Chinese stocks are experiencing a more mixed performance however, with the Shanghai Composite (-0.07%) fractionally lower while the CSI (+0.12%) is up after China’s securities regulator urged institutional investors to buy more domestic stocks. Looking forward, US equity futures are pointing to further losses, with contracts on the S&P 500 (-0.27%) and Nasdaq 100 (-0.18%) both lower.

We’ve also started to see the flash PMIs for April come in overnight, with the numbers from Australia and Japan mostly seeing an improvement on March’s performance. Japan’s composite PMI rose to 50.9 (vs. 50.4 in March), whilst Australia’s composite PMI was up to 56.2 (vs. 55.1 in March), so it’ll be interesting to see if that’s replicated in Europe and the US too. Staying on that data theme, Japan’s CPI rose to +1.2% year-on-year in March as expected, marking its fastest pace since October 2018.

Elsewhere, we’re just 2 days away from the French presidential election run-off on Sunday, which is set to be closely watched by investors. That said, the perceived chances of a surprise victory for Marine Le Pen have fallen in recent days given the polls have moved in President Macron’s favour, with the most recent numbers all putting his margin of victory outside the standard margin of error, with Politico’s average giving him a 10-point lead. The prospect of another Macron victory has made investors increasingly relaxed about the outcome, and the spread of French 10yr yields over bunds narrowed by -2.2bps yesterday to 45.7bps, which is their tightest level so far this month. Furthermore, the CAC 40 (+1.36%) outperformed the other European equity indices as highlighted above. In terms of yesterday’s polls, they had Macron up by 57.5-42.5 (Ipsos), 56-44 (Opinionway), 55.5-44.5 (Ifop) and 53-47 (Odoxa).

On the data side, the weekly initial jobless claims from the US came in at 184k in the week through April 16 (vs. 180k expected). And over in Europe, the final March CPI reading for the Euro Area was revised down to +7.4% (vs. flash +7.5%), albeit still a record since the single currency’s formation, whilst the European Commission’s advance consumer confidence reading for April unexpectedly rose to -16.9 (vs. -20.0 expected), recovering somewhat from its recent low in March.

To the day ahead now, and data releases include the global flash PMIs for April and UK retail sales for March. Central bank speakers include ECB President Lagarde and BoE Governor Bailey. Finally, earnings releases include Verizon Communications and American Express.

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