Futures Rebound As Markets Fade Hawkish Fed Surprise

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by Tyler Durden
Thursday, Jun 17, 2021 - 07:03 AM

Well, the Fed blinked: with virtually nobody expecting a hawkish surprise from Powell on Wednesday, the Fed chair shocked the world and sparked a bond rout and dollar surge when he unveiled that the median Fed dot now showed not one but two rate hikes in 2023...

... confirming that inflation is indeed non-transitory (at least until we get another major deflationary burst). And yet, despite the 4th largest bond selloff in 5Y TSYs since 2011...

... futures have already largely recovered from any residual surprise and the Emini rebounded from an overnight slump, even was European and Asian markets all traded lower on concerns what the newly-hawkish Fed means for risk assets. S&P 500 futures were down just 0.3%, trading at 4,200 after dropping as low as 4,183 earlier and down from 4,230 before the FOMC announcement.

Why the lack of more pain? Because, as Swissquote analyst Ipek Ozkardeskaya said, monetary tightening “should not be a massive problem for the stock markets” because the economic recovery will compensate for higher funding costs and reduced liquidity. The “Fed won’t pull away the rug from under investors’ feet rapidly,” she said. “But given the actual circumstances, investors will be increasingly craving for inflation and reflation friendly stocks.”

On Wednesday, Jerome Powell acknowledged the risks of inflation and said officials had begun a discussion about scaling back bond purchases. Policy makers’ dot plot showed they anticipate two rate increases by the end of 2023, a faster-than-expected pace of tightening. This marked a turning point in the Fed’s communication to global markets, which had so far been ultra-dovish.

“We’ve gotten to a point that has everyone feeling slightly less comfortable in assuming that the Fed is going to be able to be as patient for as long as they would like,” Michelle Girard, Natwest Markets co-head of global economics and chief U.S. economist, said on Bloomberg Television.

The Fed's surprising hawkishness also ended Europe’s record rally, with the Stoxx 600 Index falling from an all time high the first time in 10 days. Emerging markets and commodities were lower, while bank shares advanced. The Bloomberg Dollar Spot Index rose for a fifth day.

  • Miner Freeport-McMoran Inc. declined in premarket New York trading. Here are some other notable U.S. movers today:
  • CureVac (CVAC) plunges 43% as analysts cut price targets after the biotech firm disclosed that its mRNA-based Covid vaccine fell short in a study.
  • Kratos Defense & Security Solutions (KTOS) climbs 3.7% premarket trading after Ark Funds disclosed a share purchase.
  • Retail trader-favorite stocks climb in premarket trading after meme stocks broadly slipped Wednesday. Workhorse (WKHS) gains 0.7%, while Naked Brand (NAKD) advances 1.2% and Clover Health (CLOV) climbs 0.5%.
  • Satsuma Pharmaceuticals (STSA) jumps 10% after surging post-market Wednesday, following positive pharmacokinetic, tolerability and safety results from a Phase 1 trial of STS101.

In Europe, the Stoxx 600 Index dropped 0.4% as declines for utilities and basic-resources companies outweighed gains in the banking industry. CureVac slumped as much as 52% in Germany after its Covid-19 vaccine trial fell short of the high efficacy bar set by other messenger RNA shots.

Here are some of the biggest European movers today:

  • European travel shares outperform after a Telegraph report saying the U.K. is considering opening up amber list countries to people who have had both Covid-19 vaccine jabs.
  • EasyJet gains as much as 5%, Ryanair +3.4%, Wizz Air +2%, Jet2 +4.2%, TUI +3.2%
  • BBVA jumps as much as 3.6%, best-performing stock on the Stoxx 600 Banks Index. The message from the lender’s CFO at a sell-side analysts meeting “had quite an upbeat tone, even more optimistic than durinq 1Q earnings,” according to Deutsche Bank.
  • Trainline rises as much as 11%, the most since Nov. 9, after a trading update showed a ticket sale rebound. JPMorgan said “recovery is on track,” though lowered its price target.
  • Orphazyme soars as much as 25% following a spike in the U.S., where ADRs remain volatile after the biotech caught the attention of retail traders ahead of a key regulatory decision date for its drug with CytRx Corp.
  • Halma drops as much as 4.8% to end a strong run for the health and safety sensor maker’s shares, which hit a record high this week.
  • Berenberg says that while there are few better long-term investments, “valuation remains a hurdle.”
  • Nel slips as much as 5.3% after Arctic downgraded to hold from buy, and lowered its price target on the basis of higher long-term interest rates and expansion of the green investment universe.

In FX, the Bloomberg Dollar Spot Index rose for a fifth consecutive day to its highest level since mid-April and the greenback advanced against most of its Group-of-10 peers, after the Federal Reserve provided a further boost to bullish sentiment on the dollar and revived demand for long gamma exposure. On the other end, the euro fell to a two- month low of $1.1936 after ECB chief economist Philip Lane signaled that policy makers may not have all the data they need by September to start shifting policy away from the current ultra-loose stance; he also said the central bank doesn’t have a fixed volume approach to PEPP. Norway’s krone advanced against the Swedish krona after Norges Bank signaled a faster pace of tightening than many had expected; Governor Oystein Olsen said the path indicates a 0.25% rate hike each of the coming four quarteres. The Swiss franc was among the worst G-10 performers; the nation’s central bank kept up its ultra-expansive monetary-policy stance aimed at thwarting any appreciation of the franc and insisted that any nascent inflation pressures it’s seeing won’t endure. Australian and New Zealand dollars bounced back on strong local economic data after the greenback surged overnight on the hawkish turn by the Federal Reserve; sovereign bonds slumped in both countries. The yen fluctuated after touching an 11-week low of 110.82 per dollar following Wednesday’s hawkish Fed policy meeting; Japanese bonds fell.

In rates, after yields spiked following the Fed shock, Treasury yields pared some of their increase with the 10Y last trading at 1.55%. Sovereign bond yields in Europe and Asia rose, and European stocks snapped their nine-day rising streak.

In commodities, copper fell 2.2% in London to the lowest in two months. The rally in metals has stalled in recent weeks and copper has retreated from last month’s record as concerns about cost pressures spurred expectations stimulus that had been supporting the global recovery would be scaled back. Copper producer Freeport-McMoran was 2.2% lower in premarket trading.

Looking at the day ahead now, and data highlights include the weekly initial jobless claims from the US, as well as the Conference Board’s leading index for May and the Philadelphia Fed’s business outlook index for June. Central bank speakers include the ECB’s Villeroy, Lane, Elderson and Visco, and there are a number of rates decisions from around the world, including in Indonesia, Turkey, Norway, Switzerland and Egypt.

Market Snapshot

  • S&P 500 futures down 0.4% to 4,205.75
  • STOXX Europe 600 down 0.4% to 458.04
  • MXAP down 0.7% to 207.94
  • MXAPJ down 0.5% to 696.64
  • Nikkei down 0.9% to 29,018.33
  • Topix down 0.6% to 1,963.57
  • Hang Seng Index up 0.4% to 28,558.59
  • Shanghai Composite up 0.2% to 3,525.60
  • Sensex down 0.4% to 52,311.38
  • Australia S&P/ASX 200 down 0.4% to 7,359.04
  • Kospi down 0.4% to 3,264.96
  • Brent Futures down 0.5% to $74.05/bbl
  • Gold spot down 0.2% to $1,807.85
  • U.S. Dollar Index up 0.56% to 91.64
  • German 10Y yield rose 0.8bps to -0.164%
  • Euro down 0.4% to $1.1952
  • Brent Futures down 0.5% to $74.05/bbl

Top Overnight News from Bloomberg

  • Bank of England Chief Economist Andy Haldane says in an interview in the Spectator magazine that the U.K. economy may be close to pre-Covid levels of output
  • The yuan’s exchange rate versus the dollar fell the most in nearly three months in offshore markets Wednesday, after the Fed’s announcement; a forum backed by the Chinese central bank released a statement urging corporates to hedge against yuan volatility, after a state-run paper said the currency could start to decline
  • China is resorting to increasingly forceful measures to contain risks to the financial system, in moves that threaten to undermine President Xi Jinping’s pledge to give markets greater freedom
  • The pound’s popularity in cross-border payments tumbled to its lowest level in more than a decade as the U.K. navigates the post-Brexit landscape, while the euro edged out the dollar for the top spot last month
  • Global food inflation concerns are receding as rains ease dry conditions across major growing areas and prices of everything from soybeans to corn and palm oil slide on optimism over improved supplies
  • Turkey’s central bank is expected to keep interest rates unchanged for a third month, as a weak lira and global commodity prices continue to cloud the nation’s inflation outlook

A quick look at global markets courtesy of Newsquawk

Asian equity markets traded mostly lower with risk appetite subdued in reaction to the FOMC where the Fed kept rates and QE unchanged as expected but caught markets off guard with hawkish Fed dot plots where median projections were for a rate lift off and total 50bps hike in 2023. ASX 200 (-0.4%) was led lower by the mining related sectors after underlying commodity prices succumbed to the pressure from a stronger USD and amid heavy losses in Whitehaven Coal after it downgraded its FY production again, but with downside in the index stemmed following blockbuster employment data and with financials underpinned by the rise in global yields. Nikkei 225 (-0.9%) underperformed in the aftermath of the FOMC amid a mixed currency and although Japan is reportedly set lo lift the state of emergency for nine prefectures, nearly all of them including Tokyo and Osaka will be subject to quasi-restrictions, while KOSPI (-0.4%) also weakened amid a pullback from record highs. Hang Seng (+0.1%) and Shanghai Comp. (+0.2%) were choppy amid lingering US-China tensions as Treasury Secretary Yellen reiterated the US is looking at a full range of tools to push back against China's practices that harm US national security but added that she would be worried about a complete technological decoupling from China. Participants also got to digest the latest activity data from China in which Industrial Production and Retail Sales missed expectations but still registered respectable growth of 8.8% and 12.4%, respectively. Finally, 10yr JGBs were lower on spillover selling from T-notes and with yields in the region boosted which saw gains of around 10bps in the Aussie 10yr and 13bps in its Kiwi counterpart, while focus for Japan turns to the BoJ which begins its 2-day policy meeting today.

Top Asian News

  • Fed Ripples Hit Hardest in Asia as Rates Outlook Shifts
  • Huarong Puts Multiple Units On Sale in Major Downsizing Push
  • Hedge Funds Push Deeper Into Private Equity’s Turf in Asia
  • Japan to End Tokyo Virus Emergency About a Month Before Olympics

Europe bourse trade mostly lower in the aftermath of the hawkish Fed announcement yesterday, albeit losses in the region are marginal (Euro Stoxx 50 -0.2%). US equity futures meanwhile hold onto a bulk of the post-FOMC losses with marginal underperformance seen in the tech-laden NQ amid the rates environment. Back to Europe, sectors are mostly lower with no real theme nor bias. Banks outperform amid favourable yields, in turn pressuring Tech towards the bottom of the bunch. Travel & Leisure names see tailwinds amid reports that the UK may allow fully vaccinated people to travel to amber list countries without needing to quarantine. Basic Resources are the clear underperformers on the back of the continuing decline in base metal prices. As such, the IBEX (+0.2%) nursed its initial losses on the back of a strong performance in its heavyweight sectors – the Banks and Travel & Leisure names, whilst the FTSE 100 (-0.5%) narrowly underperforms the region as gains in the banking sector fails to offset losses in the mining names. In terms of individual movers, Airbus (+1.3%) is firmer as the UK and US reached an accord on the Airbus/Boeing (-0.4%) dispute whereby the sides will not impose tariffs related to this dispute for five years, in a deal that seemingly echoes that made between the US and the EU.

Top European News

  • Lane Plays Down Importance of September Meeting for ECB Shift
  • Coronavirus Is Spreading Rapidly in England, Study Finds (1)
  • U.S., U.K. Reach Boeing-Airbus Truce Following EU Agreement
  • Santander’s Botin Sees Spain’s 2021 Rebound ‘Off The Charts'

In FX, the Dollar index is as good a proxy as any for gauging currency market perceptions and general sentiment in wake of the June FOMC meeting that threw few surprises in terms of policy settings, but was accompanied by more upbeat SEP forecasts, dot plots bringing forward rate hike projections and ended with Fed chair Powell announcing that the eagerly awaited and much hyped talk about when to talk about tapering has now officially started. In response, the DXY shot up through 91.000 having struggled to break free from restraints around the 90.500 level for several sessions and has subsequently extended beyond Wednesday’s best (91.408) to 91.840, so far, while firmly breaching technical resistance in the form of the 200 DMA (91.511) in the process. Ahead, jobless claims and the Philly Fed survey provide the first post-FOMC macro releases as the process of weighing substantial progress towards employment and inflation targets begins in earnest.

  • CHF/NOK/BRL - Also looking for direction and independent impetus from latest Central Bank guidance, but getting mixed messages as the SNB stood pat and effectively delivered a repeat statement on FX interventions having retained a highly valued classification for the Franc. However, the Norges Bank nailed down September as the month to raise its depo rate and the path was adjusted accordingly, with Governor Olsen subsequently underscoring that this might result in 2 hikes before the end of 2021 followed by 1 per quarter through H1 next year. Meanwhile, the BCB stuck to its 75 bp consecutive meeting tightening trend last night and indicated that it plans to make it 4 in a row after a tweak to the language regarding normalisation to remove the word ‘partial’ (in view of the unwinding already undertaken to lift the SELIC closer to neutral). Usd/Chf is hovering around 0.9135, Eur/Nok circa 10.1600 and Usd/Brl closed above 5.0500 compared to just under 5.0000 at one stage pre-Fed and BCB.
  • NZD/AUD - The Kiwi and Aussie have both been trying hard to swim against the tide with assistance coming via significantly stronger than expected data in the form of Q1 GDP and May jobs respectively, but Nzd/Usd has faded from a fraction above 0.7100 to test support/underlying bids around 0.7050 and Aud/Usd is skirting 0.7600 compared to 0.7646, with dovish comments from RBA Governor Lowe taking some shine off the outstanding labour report.
  • CAD/EUR - No such props for the Loonie or Euro to lean on, so both are making way or yielding to the almost universal Greenback revival, as Usd/Cad rebounds over 1.2300 and Eur/Usd recoils to sub-1.1950 lows to leave hefty option expiry interest between 1.2000-1.1985 (1.7 bn) behind, barring a major change in trend.

In commodities, WTI and Brent front-month futures have been clambering off their post-Fed lows with the former back on a USD 72/bbl handle (vs low 71.33/bbl) and the latter within reaching distance of the USD 74.50/bbl mark (vs low 73.55/bbl). Fundamentals for the oil complex remain bullish as demand is expected to surge in the summer whilst the taps will remain controlled by OPEC+ on the supply side. Sticking with supply, an Iranian deal seems more out of reach than what had initially been expected, with the outstanding sticking points likely to take negotiations past the domestic elections on June 18th and closer to the expiry date of the IAEA/Iran agreement on June 24th – although the agency has been hinting at a possible extension to the monitoring deal. Nonetheless, desks have noted that the return of Iranian oil has been priced into the markets, but a deal remains in the balance. In terms of metals, spot gold and silver remain suppressed by the rampant Dollar and elevated yields, with the yellow metal probing USD 1,800/oz to the downside ahead of its 100 DMA at USD 1,795/oz. Spot silver drifts meanwhile dipped under USD 27/oz. In terms of base metals, LME copper remains under pressure with the 3M back under USD 9,500/t amid the firmer Buck, mild risk aversion, and the ongoing China crackdown against unfavourable prices. Finally, steel-making raw materials in China consolidated overnight following the hefty losses in the prior session.

US Event Calendar

  • 8:30am: June Initial Jobless Claims, est. 360,000, prior 376,000;  Continuing Claims, est. 3.43m, prior 3.5m
  • 8:30am: June Philadelphia Fed Business Outl, est. 31.0, prior 31.5
  • 10am: May Leading Index, est. 1.3%, prior 1.6%

DB's Jim Reid concludes the overnight wrap

If 0 was that you thought current US inflation was totally transitory and that 100 meant that we were likely to see very high inflation down the road then prior to last night’s FOMC the Fed seemed to be at around a 5. After the meeting they have perhaps pushed that up to somewhere between 10-20. This was as hawkish as they could have possibly gone at this stage within realistic expectations. To be fair their position makes more sense now. As I wrote in my CoTD (link here) yesterday “What makes the Fed so special?”. The chart showed that we have now started a global hiking cycle and one that is often started by the Fed through history. However this time round until last night the Fed had told us that they weren’t hiking for at least 30 months even though the US has arguably had the most stimulative monetary and fiscal policy in the world (and it’s most on record), has an output gap that will close in the next few quarters and has some of the worst current inflation numbers in the world - a position normally exclusively reserved for EM countries. So surely last night’s meeting just gets the Fed back to a small acknowledgment that the risks are there. It was very odd that they had previously been so co-ordinated on the ultra dovish side. A reminder of our inflation piece from last week (link here) where we laid out the case that the Fed was at risk of making a big policy error.

In terms of the top-line details, the fed funds rate and bond purchases were left unchanged as expected. The most hawkish development was the dot plot now showing the 2023 median dot pricing in 2 rate hikes (25bps), compared to 0 hikes last meeting. Moreover in March, 11 of 18 governors wanted to keep rates at near 0 through 2023 with only 6 pricing in more than one hike, however yesterday only 5 wanted to keep rates at near 0 through 2023 while 8 governors projected 3 or more hikes. Somewhat accordingly the Fed lowered its unemployment projection for 2022 to 3.8% from 3.9%, while keeping 2021 and 2023 rates at 4.5% and 3.5% respectively. While the Fed rose their core PCE forecasts for 2022 to 2.1% from 2.0% while 2023’s projection remained at 2.1%.

During the ensuing press conference, Fed Chair Powell acknowledged that “talking about talking” about tapering has occurred and so the term will likely be put back in the cupboard until the next crisis. On the all-important topic of inflation Mr Powell said “shifts in demand can be large and rapid, and bottlenecks, hiring difficulties and other constraints could continue to limit how quickly supply can adjust -- raising the possibility that inflation could turn out to be higher and more persistent than we expect.” While not a full turn away from “transitory”, it was a clear signal that the Fed is open to the idea that some aspects of the recent price increases can be more permanent. For a full recap, see our US economists’ note here. They maintain their view on the timeline for a tapering signal later this summer with an official announcement by year-end. However risks now lean to earlier rather than later if inflation expectations continue to surprise to the upside.

Markets reacted strongly with US Treasuries selling off sharply as 10yr yields rose +8.3bps overall on the day after jumping nearly +11bps in the hour following the FOMC announcement. This was the largest one day rise in the benchmark yield in just over 3 months. The rise was driven by real yields increasing 15.1bps - the largest move since 25 Feb. 10yr inflation expectations dropped -6.5bps to a two month low of 2.32% in what could be seen as a slight acknowledgment from markets that the Fed would not get as far behind the curve as they thought before. The 5yr real yields rose +19.3bp - also the largest one day move since 25 Feb. The US dollar index, which was largely unchanged prior to the FOMC release, rose +0.65%, with the index now up +1.66% since the late May lows.

With the hawkish turn by the Fed, our FX strategists have closed out their long EUR over USD trade. A key reasoning of their dollar negative view was a persistently dovish Fed that remained purposefully behind the curve and intentionally depressed interest rate volatility. See here for the short note.

Lastly, risk markets sold off following the Fed release, but were able to recoup much of those losses by the end of the session. The S&P 500 was down -0.3% ahead of the FOMC, before falling to as much as -1.04% during Mr Powell’s presser. However markets recovered in the last hour of trading to end down -0.54% on the day overall. It was a broad based selloff with 80% of the index declining in what was actually the second largest pullback for the index in the last month. Only 4 industries of the 24 GICS level 2 industry groups ended the day higher – banks (+0.22%) and industries that include some of the largest S&P 500 members namely tech hardware (+0.16%) led by Apple, retailing (+0.24%) led by Amazon, and autos (+0.71%) led by Tesla. Those large tech stocks actually helped the NASDAQ to outperform slightly, falling ‘only’ -0.24% yesterday after being -1.20% at the immediate post FOMC lows.

Overnight in Asia markets are trading mixed with the Hang Seng (+0.28%) and Shanghai Comp (+0.17%) up while the Nikkei (-1.11%), Kospi (-0.38%) and India’s Nifty (-0.36%) are all down. Futures on the S&P 500 (-0.36%) and Stoxx 50 (-0.39%) are also trading lower. In fx, the New Zealand dollar is up as much as +0.53% against the greenback after its Q1 2021 GDP beat at +1.6% qoq (vs. +0.5% qoq expected) have increased the likelihood of faster rate hikes by the RBNZ. The Australian dollar is also up +0.22% this morning after better than expected gains in employment. The gains for these currencies are despite the US dollar index being up +0.27% in early trade today after yesterday’s +0.65% gain.

Ahead of the Fed, markets in Europe advanced once again as the STOXX 600 (+0.23%) rose for a 9th successive session, which is the longest such run for the index since October 2017. If we get a 10th day in the green today, that would be the longest stretch of gains all the way back to 2006, so quite a milestone potentially. And sovereign bonds also made gains as well, with yields on 10yr bunds (-1.8bps), OATs (-1.3bps) and BTPs (-1.0bps) all moving lower.

One notable data point out of Europe yesterday (which echoes the broader inflation debate elsewhere) was the UK CPI reading, which surprised to the upside at +2.1% (vs. +1.8% expected), whilst core inflation saw an even bigger upside surprise at +2.0% (vs. +1.5% expected). Some of the areas of upward pressure included clothing, second-hand cars and restaurants/hotels, and the report meant that CPI was above the BoE’s 2% target for the first time in almost two years.

Earlier in the day, President Biden met Russian President Putin for the first time since the former entered office. The meeting was proposed by Mr Biden in an attempt to stabilise relations between the two governments. Tensions had been rising since Russian attempts to interfere with US elections, but were brought to a head in recent weeks following cyberattacks on key industries in the US and Europe. The Presidents held separate press conferences following the summit. Mr Biden indicated that the US would hold Russia accountable for any cyberattacks originating in Russia, and warned Mr Putin that the US would respond “in a cyber way” if targeted by hackers. Mr Putin, whose press conference came first, announced that the countries’ respective ambassadors would be allowed to return to Washington and Moscow, which sent the Ruble nearly 0.5% higher at the time, however all gains were given back when the USD rallied in the afternoon following the aforementioned FOMC announcement.

On the pandemic, the UK reported a further 9,055 cases yesterday, which is the highest number of since February 25, and will only add to concerns about the spread of the delta variant. That said, there might be some initial signs that case growth has begun to slow, with the average number of cases over the last week “only” up +32%, relative to +66% over the week before. So perhaps the high prevalence of antibodies in the population is helping to blunt the increase, though we’ll have to wait and see if this continues as to whether the full unlocking will occur on July 19 as hoped for. Meanwhile, ahead of the summer holiday season, the UK is planning to allow fully vaccinated people to travel to amber-list countries without having to quarantine on their return, the Daily Telegraph has reported. In Asia, the Japanese government has recommended ending a state of emergency for Tokyo, Osaka and other regions as planned on June 20. Nonetheless, some restrictions are likely to remain till July 11 with bars and restaurants to continue to close by 8pm. Elsewhere, CureVac reported that its vaccine was only 47% effective based on a preliminary analysis of a large study. This is well short of other mRNA shots like those from Pfizer/ BioNTech and Moderna though the spread of different variants of the virus would have played a role in lower efficacy for CureVac.

Looking at yesterday’s other data, China’s economic performance surprised to the downside in yesterday’s releases, with retail sales seeing year-on-year growth of +12.4% (vs. +14.0% expected), while industrial production was up +8.8% year-on-year (vs. +9.2% expected). And elsewhere, US housing starts and building permits for May came in softer than expected too, with housing starts at an annualised rate of 1.572m (vs. 1.630m expected), and building permits at an annualised +1.681m (vs. 1.730m expected).

To the day ahead now, and data highlights include the weekly initial jobless claims from the US, as well as the Conference Board’s leading index for May and the Philadelphia Fed’s business outlook index for June. Central bank speakers include the ECB’s Villeroy, Lane, Elderson and Visco, and there are a number of rates decisions from around the world, including in Indonesia, Turkey, Norway, Switzerland and Egypt.