U.S. stock index futures staged a modest bounce on Friday, recovering a portion of losses from Thursday's rout after late news of a planned meeting between U.S. and Russian officials "late next week" spurred hopes of a diplomatic solution to the Ukraine standoff, signaling an upbeat end to a week in which investors shunned risky assets on geopolitical and tightening monetary policy concerns. Nasdaq 100 futures were up 0.7%, while S&P 500 futures rose 0.5% by 7:15 a.m. in New York with traders bracing for a potentially volatile session due to option expirations. Both indexes are headed for a second straight week of declines with investors nervous about Moscow’s military buildup near Ukraine and prospects of sharp Federal Reserve rate hikes. Treasury yields were unchanged at 1.97%, gold and the dollar were flat and bitcoin traded just above 40,000 after plunging about 10% on Thursday.
In the latest geopolitical developments, Russian Foreign Minister Sergei Lavrov agreed to meet U.S. Secretary of State Antony Blinken for talks in Europe next week; German Chancellor Olaf Scholz will host virtual talks with his Group of Seven counterparts. President Joe Biden has warned the probability of an invasion of Ukraine is still “very high,” although Russia has repeatedly denied it plans to do so.
“The market has got to grapple with the uncertainty in Ukraine and also this trade-off between the urgency to raise interest rates and the effect of that on growth,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs Group Inc. “Our feeling is that we’re still going to see economic activity continuing through the course of this year so the pullback in markets is really about an adjustment to the cost of capital; it’s not going to turn into a bear market that’s reflective of a recession,” Oppenheimer said on Bloomberg TV.
The recent geopolitical gyrations “have taught us that we are likely to remain in this off-and-on tunnel, whipped around by news, hope and surprise actions,” said Wai Ho Leong, a strategist at Modular Asset Management in Singapore. “It will be like this until there is a fundamental breakthrough in the talks.”
Bets on a sharper Federal Reserve interest-rate liftoff in March have eased somewhat in light of Ukraine tension. But investors continue to be vexed by the question of how markets will cope as stimulus ebbs.
“Despite the recent volatility, it’s important to remember that we are still in an environment of robust economic and earnings growth, and in our base case we expect upside for equity markets over the balance of the year,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note.
In notable pre-market moves, shares of streaming-video platform Roku slumped 23% after its sales forecast fell short of estimates due to supply chain disruptions and weak advertising trends. Although the U.S. quarterly earnings season has been broadly better than expected, results from technology-related firms have underwhelmed, and any companies missing even slightly have been greatly punished. Here are some other notable premarket movers:
- Inspirato (ISPO US) eases 6.1% in premarket trading a day after speculative investors drove the stock up 648%.
- Redfin Corp. (RDFN US) shares drop 25% in premarket trading after the real estate technology company forecast a net loss for the first quarter of $115m to $122m. At least three analysts cut their price targets and don’t expect performance improvement in 1H.
- Avita Medical Inc. (RCEL US) shares climbed 4% postmarket Thursday after the U.S. and Australian medical company said the U.S. Food and Drug Administration granted its premarket approval application for a cell-harvesting device used for burn victims.
- Doma Holdings (DOMA US) shares dropped 22% in extended trading after the real estate technology company projected a wider-than-expected Ebitda loss for 2022.
- Cognex (CGNX US) shares jumped 10% in postmarket trading after the maker of machine vision products forecast first-quarter revenue above the average analyst estimate.
- Exelixis (EXEL US) shares rose 1.7% in postmarket trading after the company reported earnings per share for the fourth quarter that beat the average analyst estimate.
- Shockwave Medical (SWAV US) gained 9% in postmarket trading after the devicemaker forecast 2022 revenue that beat the highest analyst estimate. Fourth-quarter earnings and sales also topped consensus forecasts.
- Shake Shack (SHAK US) shares dropped 11% in extended trading after the company gave a quarterly revenue forecast that missed analysts’ estimates.
- Appian (APPN US) shares gained 13% in extended trading on Thursday, after the application software company reported fourth-quarter results that beat expectations and gave a full- year forecast that is ahead of the consensus view.
In Europe, the Stoxx 600 Index was up 0.2% though energy shares fell with oil. Personal-care, and food & beverage stocks outperformed, while travel & leisure and technology led declines. CAC 40 outperforms, adding 0.3%, DAX lags, dropping 0.1%. Personal care, food & beverages and real estate are the strongest performing sectors. Orion Oyj and Teleperformance shares rallied, while Allianz SE slumped and Hermes International dropped the most since 2016. The French state will inject about 2.1 billion euros ($2.4 billion) into Electricite de France SA as the combination of reactor shutdowns and a government power-price cap batters the utility’s finances. Here are some of the biggest European movers today:
- Orion Oyj shares soar as much as 26%, most ever intraday, after the Finnish company’s collaboration partner Bayer estimated that peak global sales of the Nubeqa prostate-cancer drug could exceed EU3b, up from the previous estimate of EU1b. Bayer shares also gain, rising as much as 3.1% in Frankfurt.
- Teleperformance jumps as much as 8.5%, the most since April 2020, after it reported adjusted Ebita ahead of analyst estimates, in what Morgan Stanley called a “solid beat,” while SocGen upgraded the stock to buy from hold.
- Ubisoft rises as much as 6.3% with analysts noting potential for uplift potential M&A approach were to materialize, while downside for stock looks limited after recent weakness.
- Gerresheimer gains as much as 4.6%, rebounding from Thursday’s initial losses following 4Q earnings report, with some analysts seeing a promising outlook despite “mixed” results.
- Hermes falls as much as 8.4%, the most since Sept. 2016, after the French luxury-goods company reported a bigger-than- expected decline in sales at its crucial leather-goods division.
- EDF declines as much as 5.2% after the French utility posted FY earnings, disclosed details on its outlook and action plan. Analysts flag that guidance for FY22 Ebitda implies further downside risk to current consensus, while visibility remains low.
- Allianz drops as much as 1.8% as the insurer said it will take a 3.7 billion-euro charge tied to its hedge funds that collapsed at the start of the pandemic, and said more expenses are coming from the multiple lawsuits and regulatory probes spurred by the implosions.
- Storytel falls as much as 23% to the lowest level since January 2019 after the Swedish audio book streaming company’s founder and CEO said he was leaving and following what DNB said was disappointing guidance.
Asian stocks fell as sentiment was eroded by renewed worries over China’s regulatory crackdown on industries, amid lingering tensions surrounding Russia and the Ukraine. The MSCI Asia Pacific Index slid as much as 0.9%, dragged down by a slump in consumer-discretionary shares. Meituan led declines for the sector, plunging 15% after China issued new guidelines asking food-delivery platforms to cut fees for restaurants. Hong Kong was the region’s worst performer. “The government is trying to lower the burden of rising living costs and break monopolies via all of its regulatory actions so far,” said Justin Tang, the head of Asian Research at United First Partner. “Such initiatives will put investors on the alert once again, even as a peak in regulation has been achieved.” Russia, Ukraine-Exposed Stocks Pare Losses as U.S. Accepts Talks Asia’s benchmark is extending this year’s losses to about 2% following a 3.4% drop in 2021. The market’s mood has recently been dominated by uncertainty surrounding Ukraine and the prospective pace of U.S. monetary policy tightening. “Market folks don’t want to take on risk,”said Kazuhiro Miyake, a strategist at Rheos Capital Works in Tokyo. Still, if geopolitical tensions ease and inflation is contained, stocks may stage a turnaround in mid-March, he added.
Japanese equities fell, capping their first weekly loss since January, as investors continued to watch the developing standoff between Russia and Ukraine. Stocks pared declines to close far off their lows Friday however, and U.S. futures climbed after the State Department said Russian and American officials agreed to meet next week in Europe. Separately, growth in Japan’s consumer prices excluding fresh food slowed to 0.2% in January from a year earlier, compared with 0.5% in the previous month, according to ministry of internal affairs data. Electronics makers and banks were the biggest drags on the Topix, which fell 0.4%, paring an earlier drop of 1.3%. Tokyo Electron and Fanuc were the largest contributors to a 0.4% loss in the Nikkei 225, which had fallen as much as 1.6% earlier. The yen weakened 0.2% against the dollar after gaining 0.5% Thursday. The Topix shed 2% on the week, while the Nikkei 225 lost 2.1%.
India’s benchmark index posted its second week of declines after tensions on the Ukraine-Russia border and the prospects of higher U.S. interest rates led to volatile trading. The S&P BSE Sensex ended the week 0.6% lower. The measure closed 0.1% down at 57,832.97, after swinging between gains and losses several times throughout the session in Mumbai on Friday. The NSE Nifty 50 Index dropped 0.2%. Reliance Industries Ltd. declined 0.8% and was the biggest drag on key indexes. All but two of the 19 sector sub-indexes compiled by BSE Ltd. fell, led by a gauge of realty stocks. U.S. and Russian officials agreed to meet next week to discuss Ukraine, helping ease the price of crude oil, a major import for India. Minutes of the U.S. Federal Reserve meeting showed that officials plan to start raising rates soon. “We have observed that volatility in the market will persist till the announcement of the first rate hike by the Fed, post which it is likely to settle down and flows in equities resume,” Mitul Shah, head of research at Reliance Securities, wrote in a note
Australian stocks plunged the most in three weeks, with the S&P/ASX 200 index falling 1% to close at 7,221.70, posting its worst session since Jan. 27 amid Ukraine tensions and concerns over U.S. central bank policy. All sectors declined. QBE Insurance was the worst performer after its full-year results. Magellan was the biggest gainer after reporting an increase in 1H adjusted net and saying it’s considering a share buyback. In New Zealand, the S&P/NZX 50 index fell 0.9% to 12,141.89.
In FX, the Bloomberg dollar spot index trades flat while JPY and NOK are the weakest performers in G-10 FX, NZD and SEK outperform. Leveraged funds pared bullish bets on Japan’s currency after the U.S. State Department announced that Secretary of State Antony Blinken and Russia Foreign Minister Sergei Lavrov will hold talks over Ukraine next week. Risk- sensitive currencies such as the Australian dollar were among the biggest gainers as U.S. equity futures advanced. Still, fluctuations in currencies and bonds were limited as traders avoided taking large positions before the three-day weekend in the U.S.
In rates, treasury futures traded off the worst levels of the Asia session, although yields remain slightly cheaper across the curve. U.S. stock futures hold gains after report of planned talks between Russia and the U.S. over Ukraine. U.S. yields were cheaper by as much as 1bp across front-end of the curve, flattening 2s10s by around 0.5bp; 10-year yields around 1.96%, little changed vs Thursday’s close, reached 1.993% during Asia session. Gilts outperform by ~3bp in 10-year sector, bunds by ~1bp. In front-end swaps, expectation of 50bp Fed rate hike in March continues to erode, with around 33bp priced in, equivalent to 1.3x hikes. Bunds gain, having given up earlier declines as the curve bull-flattens. German 10-year bonds outperform Treasuries but underperform gilts.
In commodities, oil fell while stocks mostly advance along with futures as the prospect of talks between the U.S. and Russia next week lifted sentiment. WTI drifts 1.9% lower to trade around $90 level. Brent falls 1.7% to ~$91. Spot gold falls roughly $6 to trade near $1,893/oz. Most base metals trade in the green; LME zinc rises 0.8%, outperforming peers. LME aluminum lags.
Looking at the day ahead, data releases include UK retail sales for January, US existing home sales for January, and the Euro Area’s advance consumer confidence reading for February. Central bank speakers include the Fed’s Evans, Waller, Williams and Brainard, as well as the ECB’s Vasle and Panetta. Finally, earnings releases include Deere & Company.
- S&P 500 futures were up 0.5% to 4,396.75
- STOXX Europe 600 up 0.1% to 465.11
- MXAP down 0.7% to 189.06
- MXAPJ down 0.7% to 622.57
- Nikkei down 0.4% to 27,122.07
- Topix down 0.4% to 1,924.31
- Hang Seng Index down 1.9% to 24,327.71
- Shanghai Composite up 0.7% to 3,490.76
- Sensex little changed at 57,863.63
- Australia S&P/ASX 200 down 1.0% to 7,221.72
- Kospi little changed at 2,744.52
- German 10Y yield little changed at 0.22%
- Euro little changed at $1.1369
- Brent Futures down 1.6% to $91.52/bbl
- Brent Futures down 1.6% to $91.52/bbl
- Gold spot down 0.2% to $1,894.05
- U.S. Dollar Index little changed at 95.78
Top Overnight News from Bloomberg
- The Senate cleared a three-week funding bill on a 65 to 27 vote, averting a U.S. government shutdown that loomed after Feb. 18 and giving lawmakers more time to finish a full-year spending plan
- Just when investors were sensing that China’s policy crackdown on its tech sector was nearly over, new guidelines were issued that ask food-delivery platforms to reduce fees to ease the burden on restaurants and shops
- Hong Kong is working on plans to test its 7.5 million residents and get its Covid Zero strategy on track, despite spiraling cases, business closures and a backlash against its policy decisions
A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded with a mild downside bias but off worst levels amid confirmation of a meeting between the US Secretary of State and Russian Foreign Minister late next week. ASX 200 continued to be pressured by its tech and healthcare sectors, albeit gold miners saw a decent outperformance. Nikkei 225 saw losses across energy names but the recent weakening in the Yen kept the index underpinned. Hang Seng was pressured by EV names and some oil giants. Shanghai Comp. narrowly outperformed as hopes of monetary policy easing supports the index.
Top Asian News
- Japan’s Slower Inflation Offers BOJ Support For Stimulus Stance
- China Wipes $26 Billion Off Meituan’s Value With New Fee Policy
- Singapore Raises Wealth Taxes, GST to Recover From Covid Hit
- Support for Japan’s Kishida Slides as Virus Deaths Hit Record
European bourses are contained around the unchanged mark, Euro Stoxx 50 +0.2%, as an initially positive open on geopolitical developments waned as we await further drivers. US futures are deriving greater upside from the reported meeting of US-Russian officials today and next week; however, focus turns to Fed's Williams & Brainard Sectors are mixed with upside performance on the back of equity specifics in the pre-market while Energy Names lag amid EDF updates and given benchmark pricing.
Top European News
- ECB’s Kazimir Backs End of QE in August, Flexibility on Hikes
- U.K. Retail Sales Rise 1.9% M/m in Jan.; Est. +1.2%
- France to Inject $2.4 Billion Into EDF With Profit Set to Slump
- Macquarie Said to Bid for Stake in National Grid’s Gas Unit
In fixed Income, core debt retains a decent underlying bid awaiting any positive news or progress from US-Russian dialogue. Gilts shrug off robust UK sales data as the next BoE hike is discounted already. Bunds respect near term resistance and support in the form or a 50% Fib retracement level at 165.61.
- Greenback grinding awaiting more geopolitical developments and talks between top level Russian and US officials rather than data or Fed speakers, with the DXY hovering sub-96.00.
- Kiwi continues to outperform on the 0.6700 handle pre-RBNZ amidst some speculation of a double consensus 50 bp OCR hike.
- Aussie up in slipstream and acknowledging further Yuan appreciation instead of dovish RBA rhetoric and another slump in iron ore prices.
- Sterling supported by solid UK consumption data, but confined by big option expiries alongside Euro and Yen - Eur/Gbp at 0.8350 strike, Eur/Usd either side of 1.1345-90 and Usd/Jpy from 114.70-15.
- Rouble firm as Ukraine Defence Chief sees low risk of large scale Russian invasion.
- Swedish Crown aloft as inflation tops expectations
In commodities, WTI and Brent have experienced a marked pullback amid the constructive geopolitical updates, causing the benchmarks to erode all of the week's upside and approach last week's troughs. Focus in Brent, for instance, now turns to the USD 90.00/bbl mark and levels just above the handle. Iron ore saw another session of pain with the futures lower by over 5% in early trade in a continuation of China’s crackdown on rising raw material prices. Spot Gold briefly eclipsed USD 1900/oz but has failed to retain the handle amid USD upside and the waning of geopolitical-premia. US officials spoke to Saudi regarding market pressures given the geopolitics with Russia, according to Reuters. China NDRC issues rules to promote steady industrial growth; will ensure supply and stabilise prices of key raw materials, including iron ore and fertilisers.
- Fed's Mester (2022 voter) reiterated support for a March hike. She said it will be appropriate to hike Fed Fund at a faster pace than after the GFC and can hasten H2 tightening pace if inflation doesn't ease. She expects inflation above 2% and noted that risks tilted to the upside. She supports selling some MBS at some point during the balance sheet reduction process and suggested the pace will be data-driven.
- ECB's Kazmir backs QE end in August; is flexible on rate hikes, but says more data is needed to determine whether a 2022 rate rise is appropriate.
- ECB's Vasle favours a quicker adjustment of monetary policy.
- RBA's Harper said financial markets are misguided in thinking the RBA will follow the Fed when raising interest rates, and added that the RBA has good reasons to wait, via a WSJ interview
US Event Calendar
- 10am: Jan. Existing Home Sales MoM, est. -1.3%, prior -4.6%
- 10am: Jan. Leading Index, est. 0.2%, prior 0.8%
- 10am: Jan. Home Resales with Condos, est. 6.1m, prior 6.18m
- 10:45am: Fed’s Evans and Waller take Part in Policy Panel
- 11am: Fed’s Williams Discusses Economic Outlook
- 1:30pm: Fed’s Brainard speaks on CBDC at Booth Forum
DB's Jim Reid concludes the overnight wrap
Survival is the name of the game here in the south of England today. We could be set for the biggest storm since 1990 if the upper end of the wind speed forecasts are correct. This could be a rare weekend where I'm glad I'm not able to play golf given I'm on crutches. If you're looking for something to distract you from either the weather or from markets/newsflow you can do worse than watch the film CODA that we saw last weekend (Apple+ TV). It was one of the most enjoyable films I've seen in a while. Funny, heartwarming and nicely sentimental.
It seems it will be preferable watching a film to watching the news this weekend as geopolitics continues to be on a knife edge. This led to a sizeable risk-off in markets yesterday, with multiple asset classes reacting to the growing perception that a conflict in Ukraine could be imminent. However an olive branch has been handed out this morning as Russian Foreign Minister Lavrov and US Secretary of State Blinken have agreed to meet late next week for talks. The US have said they’ll meet as long as there is no prior invasion. This may help avoid a de-risking ahead of the weekend as without it I suspect that few traders would have wanted to go home too long. S&P 500 (+0.73%) and DAX (+0.58%) futures are both up and Treasury yields have risen 1-2bps across the curve.
Prior to this the continued tensions proved very bad news for risk assets yesterday, with equities tumbling. The S&P 500 was down -2.12% in a broad-based decline that saw 431 companies in the index move lower on the day, with the sectors with the highest concentration of mega cap names leading the declines, with the FANG+ -3.10% lower, and the NASDAQ down -2.88%. Small caps were not spared, with the Russell 2000 lower by -2.46%. Those figures make it the second worst day of the year for the S&P 500, and the third worst for both the NASDAQ and Russell 2000. Meanwhile, the Dow had its worst day of the year, falling -1.78%. That helped the VIX index of volatility to gain +3.75pts to 28.04pts following two successive declines, and Bloomberg’s index of US financial conditions closed at the third tightest levels of the year so far. Europe closed before the last leg of the sell-off, but with the STOXX 600 down -0.69% as bourses across the continent all lost ground.
Let's walk through the geopolitical developments that came before the slightly more positive news this morning. The mood was very jittery all day yesterday, with Ukraine’s military saying not long after the European open that a kindergarten in Luhansk had been hit by separatist shelling, with two civilians concussed. Then in the European afternoon, US President Biden said that the probability of an invasion was “very high”, and that “Every indication we have is that they are prepared to go into Ukraine”, adding that a “false-flag” operation that would give Russia an excuse to invade was underway. In Brussels, we then also had NATO’s Secretary General Stoltenberg and US Defence Secretary Austin both saying that they didn’t see signs of Russia withdrawing troops. On the Russian side, they moved to expel the Deputy Chief of Mission, the number 2 official, from the US Embassy, and at the United Nations they restated their claims that “war crimes” had been committed by Ukraine. Russian officials continued to deny that an invasion was planned let alone underway.
With geopolitical risk very much the dominant market theme right now, it’s worth highlighting a chart from a table from our equity strategists that I borrowed for my chart of the day earlier this week. It shows the declines in the S&P 500 around geopolitical events, and shows that typically the selloffs have been short-lived (the median selloff was -5.7%), with a duration of around 3 weeks to reach a bottom and another 3 weeks to recovery from their prior levels. Another pattern is that ultimately, the underlying economic context tends to dominate, so if you believe the template, much might depend on what you thought momentum was before the sell-off. Here’s a link to my chart of the day as well as Binky’s original piece (link here).
One of the effects of developments in Ukraine has been to make investors more cautious about the prospects of aggressive central bank action to tackle inflation. Immediately after the very strong CPI report from the US last week (+7.5% year-on-year), Fed funds futures were basically fully pricing in a 50bp move in March at the intraday peak. But since the Ukraine situation escalated last Friday, that’s almost continuously fallen back, with futures only seeing a 38% chance of a 50bp move next month. It’s a similar story for other central banks, with overnight index swaps for the next BoE meeting now “only” showing a 50% of a 50bp move, down from an intraday peak above 90% last week. It’s been a more subdued story for the ECB, who aren’t expected to hike for some months yet, but even there the amount of hikes being priced by year-end has fallen to 42bps, having been above 50bps just a week earlier.
The diminished odds of aggressive central bank action benefited sovereign bonds, and yields on 10yr Treasuries moved back beneath 2%, with a -7.5bps move to 1.96% (1.977% in Asia). The decline was almost entirely driven by lower real rates, which fell -6.2bps, and there was a flattening in the 2s10s yield curve by -2.2bps to 49.1bps, although that’s still above its recent intraday low beneath 40bps last week. As with equities, it was much the same story in Europe, and yields on 10yr bunds (-4.5bps), OATs (-4.6bps) and BTPs (-7.5bps) all declined as investors moved into safer assets.
Later in the session we also had some Fedspeak from St Louis Fed President Bullard and Cleveland Fed President Mester (both of whom are voters on the FOMC this year). Bullard stuck to his hawkish pronouncements of late, repeating his view that he wanted 100bps of rate hikes by July 1, and he also said that there was too much emphasis on the idea that inflation would ease, with the risk being that it won’t. Later on, Mester hit similar notes to recent comments, signaling that the Fed should raise rates in March followed by rate hikes in subsequent months. She went on to preserve optionality for the pace of hikes during the second half of the year, outlining the pace of rate hikes can be faster if inflation stays stubbornly high, or it can slow down if inflation moderates.
Looking at yesterday’s data, the US weekly initial jobless claims for the week through February 12 came in at 248k (vs. 218k expected), unexpectedly ending a run of 3 consecutive weekly declines. In addition, housing starts underwhelmed in January at an annualised rate of 1.638m (vs. 1.695m expected), marking their first decline in 4 months, but building permits outperformed at an annualised 1.899m (vs. 1.750m expected), the highest since 2006. Finally, the Philadelphia Fed’s manufacturing business outlook survey fell to 16.0 (vs. 20.0 expected).
Early morning data has showed that Japan’s national CPI inflation for January came in at +0.5% y/y down from +0.8% in December and lower than the +0.6% y/y expected. Additionally, growth in core consumer prices slowed to +0.2% y/y in Jan from +0.5% increase in December. Today’s soft inflation numbers do suggest that the BOJ’s stance on accommodative monetary policy won’t change despite global inflationary pressures.
To the day ahead now, and data releases include UK retail sales for January, US existing home sales for January, and the Euro Area’s advance consumer confidence reading for February. Central bank speakers include the Fed’s Evans, Waller, Williams and Brainard, as well as the ECB’s Vasle and Panetta. Finally, earnings releases include Deere & Company.