Futures Recover From Wednesday Rout As Yields, VIX Stabilize

Tyler Durden's Photo
by Tyler Durden
Thursday, Jan 20, 2022 - 12:51 PM

Whereas the stock plunge on Tuesday could be blamed on surging rates, the repeat tumble on Wednesday took place as Treasury yields dropped sharply, so with markets at a loss how to read rate signals, so far this morning S&P e-mini futures have rebounded by 23 points ot 0.5% from yesterday's low just above 4,500 - a key support level according to JPMorgan - as volatility eased and global bond yields appear to have stabilize for now, and hours after China's latest easing measure when Beijing lowered mortgage lending benchmark rates on Thursday as monetary authorities step up efforts to prop up the slowing economy. 10Y Treasuries rose from session lows, last trading at 1.84%, European stocks fluctuated as the dollar index was little changed and crude oil slipped after a three-day rally as gold held around a two-month high.

China's cut to the one-year and five-year loan prime rates (LPR) which lowered the one-year LPR by 10 basis points to 3.70% from 3.80% - the second consecutive monthly cut - and the five-year LPR by 5 basis points to 4.60% from 4.65%, its first cut since April 2020....

... followed surprise cuts by China's central bank on Monday to its short- and medium-term lending rates, and came days after the central bank's vice governor flagged more moves ahead. China's central bank "should hurry up, make our operations forward-looking, move ahead of the market curve, and respond to the general concerns of the market in a timely manner," People's Bank of China Vice Governor Liu Guoqiang said on Tuesday, heightening market expectations for more stimulus.

So as China goes all-in on easing the economy again, western markets are enjoying some of the benefits from the stabilization and seeking a bottom in the recent rout which has pushed the Nasdaq to the worst annual start since 2008.

“There is a certain will to buy a dip in U.S. indices, yet the aggressive hawkish Federal Reserve pricing doesn’t allow the appetite to get restored,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “Strong earnings are the only hope for the equity bulls in the short-run.” Investors awaited data including unemployment claims and Netflix earnings.

The dominant theme for markets remains prospective Fed rate hikes and the possible reduction of its holdings in Treasuries starting later in 2022. The withdrawal of outsized stimulus threatens to inject more volatility across a range of assets.

“The focus of the rates market is still very much on the Fed and the anticipated dual-pronged attack of interest rate rises and balance sheet reduction, all of which we would expect to keep uncertainty levels elevated and volatility bubbling along over the coming weeks/months,” Simon Ballard, chief economist at First Abu Dhabi Bank, wrote in a note.

In premarket trading, automakers and energy companies held declines as crude oil slipped from a seven-year high. Alcoa rose 2.3% after the aluminum producer predicted rising demand and warned that any conflict between Russia and Ukraine could deepen the existing supply constraints for the metal. Other notable premarket movers:

  • Ford (F US) drops 2.4% in premarket trading after Jefferies downgrades the automaker to hold from buy with limited scope seen for positive surprises.
  • Advanced Micro Devices (AMD US) and NXP Semiconductors (NXPI US) both cut to neutral from overweight at Piper Sandler in note, with downside risks seen for both stocks. AMD slips 1.3% in premarket, NXPI unchanged.
  • Casper Sleep (CSPR US) shares jump 12% in U.S. premarket trading, after the mattress retailer said that stockholders approved its merger with Durational.
  • Silvergate Capital (SI US) gains 0.8% in premarket following Goldman Sachs analyst William Nance’s upgrade to buy from neutral.
  • American Homes (AMH US) is down 4.9% in premarket after launching a stock sale via BofA, JPMorgan, Citi, Morgan Stanley.
  • KemPharm (KMPH US) gained 4.6% postmarket after the biopharma company said it’s decided to make KP1077, a treatment for idiopathic hypersomnia, its next lead development candidate.

Investors now await U.S. data including unemployment claims and Netflix earnings after the close. The reporting season so far has been a little bit rocky, and investors need to monitor commentary from companies about price and wage pressures, Rebecca Felton, RiverFront Investment Group senior market strategist, said on Bloomberg Television.

“We do believe stocks can continue to go higher even as the Fed changes policy,” she said, adding corporate profits will still likely beat estimates.

In Europe, gains in the travel and media industries outweighed declines for carmakers and energy companies pushing pulling the Stoxx 600 Index up 0.15% after dropping as much as 0.5%. French semiconductor company Soitec sank 16%, the most in almost two years, after the executive committee at the French semiconductor company released a letter criticizing the board for an “incomprehensible” choice of new chief executive. Alstom SA fell after sales missed estimates. Citigroup has asked London staff to come into the office at least three days a week after the U.K. government ended a work-from-home requirement, with Goldman also telling staff to return.

European Central Bank President Christine Lagarde said the ECB has “every reason” not to respond as forcefully as the Fed to soaring consumer prices. The central bank has come under pressure to act, but officials say an interest-rate increase is highly unlikely this year since the current bout of inflation is driven by supply shocks and a spike in energy costs.

Stocks in Asia climbed, ending a five-day slump, as sentiment was boosted by a decline in Treasury yields from recent highs and a cut in China’s lending rates. The MSCI Asia Pacific Index rose as much as 1.1%, driven by consumer-discretionary and communication-services shares. Hong Kong’s Hang Seng Index had its best day since July 2020, leading regional benchmarks, and China stocks rose after banks cut borrowing costs, a move set to benefit struggling property developers. The 10-year U.S. Treasury yield fell to 1.84%, as traders appeared calmer about the Federal Reserve’s next policy move. Prospects of faster-than-expected tightening hammered Asian equities this week, driving the MSCI Asia Pacific Index into negative territory for the year. “Equity adjustments to higher inflation are driven by higher input costs, interest rates, and higher selling prices,” DBS Bank Strategist Joanne Goh wrote in a note. “Consumer staples goods, which have lower pricing power, would be most affected by rising material costs.” Tencent and Alibaba were among the biggest contributors to the regional measure’s gain Thursday, as China’s internet regulator denied reports of drafting deals-related rules.

Japanese equities closed higher, after a volatile morning session following Wednesday’s selloff, as the market remained wary over Covid-19 infections and U.S. interest-rate hikes. Electronics makers and service providers were the biggest boosts to the Topix, which rose 1%. The benchmark swung between a gain of as much as 1.4% and loss of 0.6% Thursday. Fast Retailing and Sony were the largest contributors to a 1.1% rise in the Nikkei 225, which similarly fluctuated. “Speculation over U.S. rate hikes, inflation concerns spurred by rising oil prices and worry over corporate earnings are things weighing on sentiment,” said Takashi Ito, an equity market strategist at Nomura Securities. Still, “the drop in U.S. equities has softened, and the current situation isn’t likely to develop into any prolonged global stock rout.” Stocks rose in Hong Kong and China after Chinese lenders lowered borrowing costs for a second straight month. U.S. shares fell overnight, with the Nasdaq Composite entering a correction, as investors assessed outlooks for earnings growth amid the potential for monetary policy tightening.

Australian stocks also edged higher, with the S&P/ASX 200 index rising 0.1% to close at 7,342.40, recovering from an earlier loss of as much as 0.5% as miners surged. Northern Star was the top performer after it maintained its full-year gold production forecast and issued a 2Q update. Kelsian Group was the worst performer, falling for a third day. Investors also assessed jobs data. Australia’s unemployment rate tumbled to a 13-year low in December, potentially setting the stage for the Reserve Bank to scrap its bond-buying program and bring forward interest-rate increases. In New Zealand, the S&P/NZX 50 index fell 0.9% to 12,497.10, notching its lowest close since June.

In rates, Treasuries trade near day’s highs as U.S. trading begins after erasing Asia-session losses, with futures near top of Wednesday’s range. The Treasury curve bull-flattened and the U.S. notes outperformed German and U.K. benchmarks with yields richer by 2bp to 3bp across the curve, spreads within 1bp of Wednesday’s closing levels; 10-year yield near 1.84% outperforms bunds and gilts by 2bp and 1bp. Peripheral spreads tighten at the margin. Bank issuance expected to continue following Wednesday’s jumbo Goldman Sachs deal, which saw swap spreads tighten, adding support for Treasuries. Treasury sells $16b 10-year TIPS new issue at 1pm ET.      

In FX, the Bloomberg Dollar Spot Index was little changed as most Group-of-10 peers consolidated while AUD topped the G-10 after Australia’s unemployment rate tumbled to a 13-year low. The Australian dollar touched its strongest level this week after the December jobless rate fell to a 13-year low, beating expectations. Short-end yields climbed amid bets on an early end to RBA’s bond buying. The euro traded in a narrow range around $1.1350; euro-dollar one-week implied volatility, which now captures the next Federal Reserve meeting, rises by as much as 118 basis points to touch 6.16%, the highest since Jan. 7; the relative premium rises above parity for the first time since mid-December and stands around 72 basis points as of 7am London. The pound edged higher against the dollar as Wednesday’s comments from Bank of England Governor Andrew Bailey failed to derail market positioning for monetary tightening and sterling resilience. Money markets are close to fully pricing a 25bps hike next month. Norway’s krone was little changed even as the central bank said it’s on track to raise borrowing costs in March, citing a continued upswing in the oil-rich economy and signaling less worry over the resurgent virus. The yen steadied after Wednesday’s advance as traders sought clarity on the direction of the greenback. Benchmark 10-year JGB yields were little changed.

In commodities, crude futures are in the red; March WTI off 0.5% near $85.30, Brent back below $88. Spot gold holds a narrow range close to the top of Wednesday’s sharp rally near $1,840/oz. Base metals trade well, lead by LME nickel.

Looking at the day ahead, data releases from the US include the weekly initial jobless claims, December’s existing home sales, and the Philadelphia Fed’s business outlook for January. Meanwhile in Europe, there’s Germany’s PPI for December and the final Euro Area CPI reading for December. From central banks, the ECB will be publishing the minutes from their December meeting. Finally, earnings releases include Netflix, Union Pacific and American Airlines Group.

Market Snapshot

  • S&P 500 futures up 0.4% to 4,540.75
  • STOXX Europe 600 down 0.2% to 480.02
  • MXAP up 1.1% to 193.34
  • MXAPJ up 1.2% to 636.48
  • Nikkei up 1.1% to 27,772.93
  • Topix up 1.0% to 1,938.53
  • Hang Seng Index up 3.4% to 24,952.35
  • Shanghai Composite little changed at 3,555.06
  • Sensex down 1.1% to 59,457.79
  • Australia S&P/ASX 200 up 0.1% to 7,342.39
  • Kospi up 0.7% to 2,862.68
  • Brent Futures down 0.8% to $87.76/bbl
  • Gold spot down 0.1% to $1,839.41
  • U.S. Dollar Index little changed at 95.52
  • German 10Y yield little changed at -0.02%
  • Euro little changed at $1.1349
  • Brent Futures down 0.7% to $87.80/bbl

Top Overnight News from Bloomberg

  • The European Central Bank has “every reason” not to respond as forcefully as the Federal Reserve to soaring consumer prices, according to President Christine Lagarde
  • Britain’s acute cost-of- living crunch will hit in April, instantly stretching household and company budgets and penalizing the poorest households, many of which have already been most impacted by Covid-19
  • President Joe Biden said he thinks Vladimir Putin doesn’t want a full- blown war but will “move in” on Ukraine after amassing 100,000 troops on its border, part of an extraordinarily blunt assessment of Russian intentions and the West’s likely response
  • A record-breaking rally in Chinese property bonds petered out on Thursday amid growing investor doubt over how much a reported plan to allow developers greater access to funds from presold homes will benefit distressed firms
  • Near-record food costs risk climbing further as surging oil prices boost the appeal of turning more agricultural commodities into biofuels
  • Turkey is set to pause its cycle of interest-rate cuts Thursday after a sliding currency and rising global energy prices pushed consumer inflation to its highest level since the beginning of President Recep Tayyip Erdogan’s rule

A more detailed look at global markets courtesy of Newsquawk


  • US President Biden said he thinks Russian President Putin does not want a full-blown war but thinks Putin will test the West. Furthermore, Biden added that Putin has never seen sanctions like the ones he has promised, while he added that Ukraine joining NATO in the new term is not likely. (Newswires)
  • US senior administration official said no option has been taken off the table in terms of sanctions on Russia and the US is prepared to look at sanctions on the largest financial institutions in Russia if there is a Ukraine invasion. Furthermore, the official stated that any move by Russian military to acquire land in Ukraine will merit a severe economic response and the White House also warned that if any Russian military move across the Ukrainian border, it will be met with a swift, severe and united response from US and its allies, while it added that any Russian aggression short of military action will be met with a decisive, reciprocal and united response. (Newswires)
  • Russia's Kremlin notes there have been some positive signals on NATO's willingness to discuss some security issues with Russia but they are not fundamentally important to Russia; doesn't rule out a conversation between President Putin and US President Biden at some stage. (Newswires)
  • Chinese military said a US warship entered waters near the Paracel Islands without permission, while Chinese forces followed the US ship and warned it to leave. Furthermore, China's military demanded that the US immediately stop such provocations or it will bear serious consequences of unforeseen events. (Newswires)
  • Russia, Iran, and China will hold joint naval drills on Friday, according to ISNA. (Newswires)
  • North Korea's Politburo meeting on Wednesday which was presided over by leader Kim, called for reconsidering trust building measures due to US hostile policy and ordered to examine a restart of all temporarily suspended activities.


  • Asian equity markets eventually traded mostly higher but with price action choppy after US bourses waned.
  • ASX 200 (+0.1%) lacked firm direction.
  • Nikkei 225 (+1.1%) was choppy on FX fluctuations and positive domestic trade data.
  • Hang Seng (+3.4%) and Shanghai Comp. (U/C) benefited from PBoC LPR action in APAC hours.

Top Asian News

  • Asia Stocks Snap Rout as China Cuts Lending Rates, Yields Slip
  • Fintech Giant Kakao Pay’s Top Execs Quit After Investor Revolt
  • BHP Holders Set to Back Single Listing as Miner Mulls M&A
  • Bank Indonesia Sends First Hints of Policy Normalization

European Trade

  • Major bourses in Europe are softer, Euro Stoxx 50 -0.2%, in an indecisive morning as initial post-PBoC upside fizzled out with catalysts/drivers minimal.
  • US equity futures are firmer, ES +0.4%, picking back up from yesterday's pressure with the NQ +0.7% outperforms amid a pull-back in yields
  • European sectors are mixed with Travel & Leisure modestly outperforming while Oil & Gas and Banking benchmarks lagging given crude and yield action respectively.

Top European News

  • Valneva Soars After Vaccine Update; Bryan Garnier Says Buy Stock
  • Turkey May Spend $3.8 Billion to Boost State Banks’ Capital
  • Unilever CEO Misses Out on Advil Just as He May Need It
  • Asia Stocks Snap Rout as China Cuts Lending Rates, Yields Slip


  • Dollar drifts alongside Treasury yields after solid 20 year auction and ahead of jobless claims, Philly Fed and existing home sales.
  • Aussie rules G10 roost as upbeat jobs data leads to more hawkish and aggressive RBA rate and QE expectations.
  • Pound retains post UK inflation momentum but wary about further political upheaval, Norwegian Crown slips as Norges Bank sticks to tightening in March script and USD/TRY moves lower on an unchanged CBRT decision which emphasises the aim of prioritising the TRY.
  • However, Yuan remains firm after PBoC sets near 4 year high CNY midpoint fix and trims Chinese LPRs.


  • WTI and Brent front month futures are choppy intraday; WTI & Brent pivot USD 85.50/bbl and USD 88/bbl respectively.
  • Spot gold and silver trade horizontally, but retain the gains derived in yesterday's session.
  • LME copper remains supported and is nearing USD 10k/t to the upside once more.
  • Kiruk-Ceyhan oil pipeline (150k BPD) has now returned to full capacity, according to Reuters citing a KRG source. (Newswires)

US Event Calendar

  • 8:30am: Jan. Initial Jobless Claims, est. 225,000, prior 230,000; Continuing Claims, est. 1.56m, prior 1.56m
  • 8:30am: Jan. Philadelphia Fed Business Outl, est. 19.0, prior 15.4
  • 10am: Dec. Existing Home Sales MoM, est. -0.5%, prior 1.9%; Home Resales with Condos, est. 6.42m, prior 6.46m

DB's Jim Reid concludes the overnight wrap

We're having more operations in my family at the moment than a WWII army general. One of my twins is having two grommets inserted today and the other twin has to have the same procedure soon and I'm leaning towards fresh knee surgery in 10 days time. My wife is the only one holding us all together currently! Talking of which she has already left for the hospital (first time up earlier than me in 11 years of knowing her) and has just WhatsApp-ed to say that I need to put Maisie's hair in a plait before I drop her and one of her brothers off at school given her absence. I didn't have the guts to say that I've no idea how to do this, so I've just spent 5 minutes on YouTube looking into it. So apologies if the EMR is a bit later than it could have been but I had to find out how to plait at 5am.

Sentiment has weaved in and out of positive/negative territory like the most tangled of hairstyles over the last 24 hours but the US session was ultimately defined by the S&P 500 nose diving in the last 45 minutes of trading to end the day down -0.97%. The tech sector was amongst the biggest laggards again (-1.37%) and the bigger tech companies in the discretionary sector (-1.81%) encouraged bigger declines there. Financials (-1.65%) also declined on the back of a flattening yield curve, even if the narrative around financial earnings released yesterday painted a slightly more positive picture than earlier reporters. The S&P is now -5.50% below its peak reached to start the year, while the NASDAQ’s -1.15% decline brings it -10.69% below its all-time high and into correction territory. Tech stocks taking a hit from higher discount rates makes intuitive sense, and the last time the Nasdaq had a -10% correction was February 2021, when real 10yr rates had also sold off around 50bps. Next week we see a slew of tech earnings which have the ability to magnify or reverse the move. Netflix is up today.

Sovereign yields have proved much quieter over the last 24 hours. The treasury yield curve bull flattened, with 10yr yields down a modest -0.9bps to 1.86%, while 2yr yields increased +1.5bps. Policy expectations for this year were left unchanged, the market is still pricing in 4 Fed rate hikes this year, having priced in 1 full additional hike to start the year. Our US economists flag that the risk from here is for even tighter rate policy, see more here.

In Europe it was a very different story however, particularly in the UK where data showed yet another upside surprise on inflation. The latest numbers put CPI inflation at +5.4% in December (vs. +5.2% expected), which marked the fastest pace of inflation since 1992, having surpassed the more recent peaks in both 2008 and 2011. In response, investors moved to dial up the probability of further hikes from the Bank of England, and overnight index swaps are now fully pricing in a 25bp rate hike from the Bank of England at their meeting in 2 weeks’ time, which is in line with our UK economist’s call. As a result, gilt yields rose across the curve as well, with the 10yr yield up +3.9ps to 1.25%, the highest in almost 3 years.

This pattern of higher yields was echoed elsewhere in Europe, where there was a significant milestone reached as yields on 10yr bunds traded in positive territory during the European morning for the first time since May 2019. They did fall back throughout the day, but in closing +0.7bps higher at -0.02%, it still marked the nearest to positive territory that they’d closed since that time. Otherwise on the continent, yields on French OATs (+1.3bps) hit their highest level since April 2019, those on 10yr BTPs (+2.2bps) hit their highest level since June 2020, whilst equities outperformed the US as the STOXX 600 advanced +0.23%.

The main force driving the recent shift from central banks has been the continued persistence of inflation, and developments in commodity markets yesterday suggested there’d be little respite on that front anytime soon. Oil prices continued to advance higher, with Brent Crude up +1.06% to $88.44/bbl, and WTI up +1.79% to $86.96/bbl, which in both cases puts them at their highest levels since 2014, whilst WTI’s gains means that its YTD performance now stands just below +15% after less than 3 weeks of 2022 so far.

Asian markets are stronger overnight after a reduction in Chinese borrowing costs coupled with Japan’s double-digit export growth. The Shanghai Composite (+0.30%) and CSI (+1.11%) are both up after the PBOC cut its one-year loan prime rate (LPR) by 10bps to +3.7% to while the five-year LPR – which is a reference rate for mortgages, was cut by 5bps from +4.65% to +4.6%, the first time since April 2020, as part of the efforts to shore up the economy. Regulators also seem to be easing access to cash for property developers from pre-sold properties in a sign that the authorities want to limit the recent property sector woes.

Elsewhere, the Nikkei (+1.21%) is trading higher after exports in Japan increased for the 10th consecutive month, growing faster than expected (+17.5% y/y) in December (vs +15.9% market expectations) as supply bottlenecks continued to ease in the final quarter of 2021. Although it did follow a +20.5% rise in November. Separately, the Hang Seng (+2.33%) is edging higher, breaking a five-day losing run as China’s easing measures improved investor risk appetite. Meanwhile, the Kospi (+0.49%) is holding in better.

Following on from this, equity futures are indicating a positive start in the DM world with contracts on the S&P 500 (+0.43%) and DAX (+0.27%) pointing higher.

President Biden held his second press conference since taking office at around the US close last night. It came at a crucial juncture for his administration, as he tried to rally support for his social spending agenda, particularly among recalcitrant members of his own party. The presser covered a range of topics, domestic and foreign. The main takeaway was some capitulation on the build back better bill, which Biden admitted would likely need to be broken into smaller chunks to pass, and his hawkish tone on the recent tensions with Russia. He believes Russia will "move in" on Ukraine in some form or another.

Here in the UK there were plenty of political headlines yesterday as Prime Minister Johnson remained under significant pressure from his own MPs following revelations of parties taking place in Downing Street during the lockdowns. Notably, one Conservative MP in a marginal constituency actually defected to the Labour Party, which is the first direct MP defection from the Conservatives to Labour or vice versa in 15 years, and yesterday the Telegraph reported that 11 Conservative MPs had submitted a letter of no confidence in Johnson’s leadership that morning. We don’t know how many have been submitted in total given the letters remain confidential, but a total of 54 are required (or 15% of Conservative MPs) to trigger a formal vote among all Conservative MPs, in which a defeat would mark the end of Johnson’s leadership.

The political developments came as there were further moves to ease Covid restrictions by the government in England, who said that they were no longer asking people to work from home if able to. In addition, they said that from January 27, there’d no longer be a legal requirement to wear face coverings, and that the NHS Covid pass would only be voluntary. So a reversal of the “Plan B” restrictions that had been put in place at the end of last year, which is occurring as the number of Covid-19 hospitalisations in England fell to a 2-week low yesterday, and the number of patients in a mechanical ventilator bed fell to its lowest since July.

To the day ahead now, and data releases from the US include the weekly initial jobless claims, December’s existing home sales, and the Philadelphia Fed’s business outlook for January. Meanwhile in Europe, there’s Germany’s PPI for December and the final Euro Area CPI reading for December. From central banks, the ECB will be publishing the minutes from their December meeting. Finally, earnings releases include Netflix, Union Pacific and American Airlines Group.