o/n; 2yy vs 1.52%; Miracle on ICE (nat gas edition?); ECB less likely hikely; a couple stock jockeys views ...
Good morning.
Now that the Olympics are over, we can fully devote our attention TO the war and its impact on markets…today IS the anniversary of “Miracle on Ice” — more on that in a minute…but first, here’s what happened
WHILE YOU SLEPT
The Treasury curve has pivoted flatter around little-changed intermediates as solid EU/UK data and hawkish comments from Fed Governor Bowman clash with the still-evolving news out of Ukraine. DXY is modestly lower (-0.14%) while front WTI futures are higher (+3.5%). Asian stocks were all lower (NKY -1.7%, Hang Seng -2.7%), EU and UK share markets are now little changed while ES futures are showing -0.3% here at 6:45am. Our overnight US rates flows saw a 'tale of two halves' where our Asian trade was dominated by Treasury buying that flipped to selling during Europe's AM hours as stocks recovered their earlier losses. Overnight Treasury volume was decent at ~140% of average overall……US News: US offers limited initial response to Russia as it weighs stiffer sanctions NYT Fiscal stimulus is turning into a fiscal drag- a big headwind for US growth WSJ Rents reach 'insane' levels across the US, with no end in sight SA The next affordable city is already too expensive SFGate The exodus from bond funds is mitigating the stock market's sell-off WSJ SOFR leads to race to replace Libor as interest rate benchmark WSJ Fed Governor Bowman open to 50bp hike in March: "I will be watching the data closely to judge the appropriate size of an increase at the March meeting" WSJ Tech begins to raise its dividend game FT Frackers push into once-dead shale patches as Oil nears $100/bl WSJ
And for some MORE of the news you can use » IGMs Press Picks for today (22 FEB) to help weed thru the noise (some of which can be found over here at Finviz).
To say much more here / now given likelihood of facts changing several times before lunch, would be a mistake…2yr auction at 1pm today. Here’s a weekly visual and I find it interesting that we’re steady at / around 1.52%
A pause that refreshes (bearish move higher) OR perhaps enough is enough? Refer to what was sent this past weekend for MY view (siding with Lacy Hunt, Gurevich).
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Here are a few more links / things which hit MY inbox and which may be of some interest IF you have your trades (and stops) loaded up AND are looking for a distraction
This from DB,
… I can't pretend to be a geopolitical expert but it seems that the next point of interest will be what sanctions the West puts on Russia after this news and whether the US/UK response is coordinated with the EU one. Europe has more to lose economically so this will be very interesting. Most countries have come out overnight and have said they will be placing sanctions on Russian imminently. Also we will be watching carefully to see what Russian military involvement is in the newly recognised regions.
Even before Putin's address moves were big yesterday, especially for Russian markets. The MOEX Russia equity index (-10.50%) suffered its worst day since March 2014 during the Crimean annexation, and that comes on top of declines of more than -3% on each of Thursday and Friday. Furthermore, Russia’s 10yr bonds were up a massive +79bps in their biggest daily move higher since December 2014. This volatility also saw Russia’s finance ministry cancel today’s government bond auction that had been planned.
The negative headlines incrementally grew yesterday and meant that any optimism yesterday morning about a potential Putin-Biden summit was swiftly knocked back, not least as a Kremlin spokesman said that there were “no concrete plans” for a leaders’ summit. And matters escalated further just after midday in London as Russia claimed they’d destroyed two Ukrainian military vehicles on Russian territory, with five Ukrainian soldiers killed, whereas Ukraine’s military said these border violation claims were fake.
The main action took place in Europe as the STOXX 600 fell -1.30% to its lowest level since early October. It was a broad-based decline and every single sector in the index moved lower on the day, albeit with cyclical sectors underperforming in particular. Other indices in Europe including the DAX (-2.07%), the CAC 40 (-2.04%) and the FTSE 100 (-0.39%) all lost ground as well, with those indices in Eastern Europe seeing outsized declines in particular.
Sovereign bonds struggled to gain much flight to quality benefit, with yields on 10yr bunds (+1.5bps), OATs (+3.2bps) and gilts (+3.0bps) all moving higher, albeit closing before the worst news of the day. Notably, there was yet another widening in peripheral spreads, with the gap between both Italian and Spanish 10yr yields over German bunds reaching their widest closing levels since June 2020, at 170bps and 104bps respectively. And similar moves were seen in credit too, with Itraxx Crossover widening +6.7bps to 352bps, its widest since November 2020, and Itraxx Main was +1.1bps wider at 72bps, the widest since June 2020.
This backdrop of rising geopolitical risk and tightening financial conditions led to a further reappraisal of the likelihood of ECB rate hikes in 2022 yesterday. By the close, overnight index swaps were pricing in just 36bps worth of ECB hikes by the December meeting, which is the lowest amount since their much more hawkish than anticipated meeting at the start of the month. Bear in mind that after the last meeting and the US CPI report, over 50bps worth of hikes had been priced by year-end, which implied a potential end to negative rates given their -0.5% deposit rate. So these darkening clouds over the outlook have made investors quite a bit more cautious as to whether central banks will follow through on some of their more hawkish rhetoric over recent days…
Also catching my eyes this morning is a view on stocks - Goldilocks via BBG - that there,
… seems to be between 5% and 10% downside over a period of about three weeks, depending on the country and sector. With geopolitics notoriously hard to trade, Goldman strategists are basing their calculations on the recent sensitivity of global markets to the ruble, according to a note Monday. In their worst-case scenario, a 10% decline in the Russian currency would push U.S. stocks another 6% lower from Friday’s close, with a couple of percentage points more weakness seen in Europe and Japan. Meanwhile, oil would jump 13% and 10-year Treasury yields would fall almost 30 basis points, they said. The Goldman projections chime with comments Monday from Deutsche Bank strategist Jim Reid, who suggested typical geopolitical selloffs in the S&P 500 Index are around 6% to 8% on average in magnitude. It takes around three weeks for stocks to reach a bottom and another three to recover from prior levels, he said, citing an analysis from the bank’s strategy team.
If that’s ALL she wrote, well, that doesn’t seem all that bad. Or is it just me?
Since we’re on the topic of stocks, some words from one of Wall St’s more vocal bears,
… Amid Rising Tensions, It’s Time to Return to the Fundamentals
With markets trading more defensively, investors need to decide if the risk off message is due to slowing growth or the Russia/Ukraine tensions. It's probably a bit of both but we highlight the rising correlation of equity returns vs. fundamentals and the growing risk to earnings.…A return to the fundamentals... as we've been advocating for the past several weeks, we think it's time to return focus to the fundamentals, which should be the main drivers of equity returns over the coming months. The Fed and rates have stolen the show as of late, but ultimately we think earnings growth will matter most during 1H 2022. On this score, the correlations between S&P 500 price versus EPS, Sales, and operating margin are all now in significant positive territory. A similar story is evident with respect to earnings revisions breadth.
...this is important with respect to our Ice thesis... because we expect these indicators that are currently highly correlated vs. equity returns to further slow in the coming months. Our Leading Earnings Indicator is predicting a meaningful deceleration in EPS growth in the coming months. Further, the slowing EPS revisions breadth trend we have been calling for is now in gear. We expect this dynamic to continue at least through 1Q reporting season as companies in aggregate begin to lower the bar on out year earnings expectations amid high costs and to some extent slower than anticipated demand.
Slowing revenue growth historically leads to lower margins... Sales are continuing to grow but the pace of this growth peaked for much of the market in 2H21. As forward growth slows and rolls over, this historically has meant the pace of margin expansion slows as well. However, this historical relationship has become disconnected in 2022 as bottom-up forecasts continue to project margin expansion even in the face of slowing sales growth. In our view, either sales growth forecasts will need to rise from already high levels or margin (and EPS) forecasts will need to come down.
The ratio of negative to positive guidance is the highest it has been since mid 2019... with more companies tempering expectations for the first quarter. Over half of the negative guidance we have seen thus far has come from Tech and Industrials companies.
MSs note goes on to detail some TECHNICALS (think 2018 analog and a MARCH TROUGH)
… Exhibit 1 shows a price analog versus 4Q 2018 that's holding up well. If we were to get some signs of a de-escalation in Russia/Ukraine tensions, it seems like a quick 5% rally is not out of the question. However, uncertainty is high here, and this would simply work off the oversold condition. Our experience with such analogs is that they eventually break down as the past is never a perfect prologue. Nevertheless, it's worth watching until it does.
The bottom line for us is that we really don't have a strong view on the Russia/Ukraine situation. We think a lot of bad news is priced at this point. Signs of de-escalation could lead to a relief rally in the near term given the lack of hard evidence for our Ice thesis. However, risk of tensions escalating is elevated and come March, the Fed will actually begin to tighten policy as opposed to just talking about it. This will come just as the data begins to roll over with respect to growth...more specifically, decelerating earnings revisions and more acknowledgements from companies that demand may be slower than anticipated as supply comes on line and costs remain an issue…
THAT is more than a lot to mull over before jumping TO a conclusion.
We’ve got 2yr auction today, 5s tomorrow and 7s Thursday … I offered a limited amount of sellside observations this past weekend but did add a few a/v links for your info-tainment. A couple bond bears (Bianco and Bassman) and a couple bond bulls (Gurevich, Lacy Hunt) and a tie-breaker recap of last weeks ReSale Tales from none other than EPBMacro. I hope you had time to dive in to all the arguments and it helps focus on markets AFTER the latest episode of the Miracle on Ice …
In closing, given that today’s THE anniversary of US Olympic Hockey team pulling off one of, if not THE greatest upsets in all of sports (perhaps we’ll defeat Russians again today?), well, enjoy
… that’s all for now. Off to the day job…