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Wednesday, August 10, 2022


Futures Rebound As Hopes Of Imminent Recession Spark “Bad News Is Good News” Reversal

Courtesy of ZeroHedge View original post here.

In a world where bad news is good news, and where the looming recession means an end to rate hikes and a start to easing, it didn't take algos long to bid stocks up as treasury yields tumbled after comments by Jerome Powell and dismal PMI data in Europe justified fears that a global downturn is now just a matter of when, not if. After initially sliding more than 1% late on Wednesday, futures rebounded and recovered all losses and were last trading near Wednesday's session highs, up 0.7% or 27 point to 3,790, while Nasdaq futs were up 0.9% at 11,375 as of 715am ET.

10Y yield initially dumped below 3.10% – near a two week low, after trading at 3.50% one week ago –  before bouncing modestly, while the Dollar pushed higher as the euro tumbled after after a series of very poor European PMI prints confirmed that Europe's runaway inflation is pushing the continent into a stagflationary recession, which in turn sent the yield on German 10-year bonds slumping as much as 21 basis points, poised for the biggest two-day decline since November 2011. US 10-year rates traded near a two-week low.

In premarket trading, US-listed Chinese stocks climbed  as bullish sentiment around the group continues to grow amid calls from strategists and fund managers that Beijing’s regulatory crackdowns are easing. JPMorgan Asset Management became the latest to voice its support for Chinese tech shares, saying “the worst is over” when it comes to regulatory crackdowns. Here are some other notable premarket movers:

  • KB Home (KBH US) shares climb 4.7% in premarket trading after the homebuilder reported earnings per share and revenue for the second quarter that beat the average analyst estimate.
  • US-listed shares of Chinese electric-vehicle makers rallied in premarket trading after Chinese state television reported that the government may extend tax exemptions on electric-car purchases.
  • Li Auto (LI US) +6%, Xpeng (XPEV US) +5.3% and Nio (NIO US) +2.6% in premarket trading.
  • Cryptocurrency-exposed stocks rebounded in premarket trading as Bitcoin recovered to remain over the closely watched $20,000 level.
  • Coinbase (COIN US) +3%, Riot Blockchain (RIOT US) +3.7%, Marathon Digital (MARA US) +4.4%, Block (SQ US) +0.7%.
  • EBay (EBAY US) shares decline 2.1% in premarket trading as Morgan Stanley assumed coverage of the stock with a recommendation of underweight and a price target of $36, the lowest on Wall Street.
  • Energy companies slide in US premarket trading as oil eases anew amid concerns of slowing global growth.
  • Exxon Mobil (XOM US) -1%, Chevron (CVX US) -1.1%, Imperial Petroleum (IMPP US) -3.1%, Camber Energy (CEI US) -2.4%.
  • Westinghouse Air Brake (WAB US) and AGCO (AGCO US) shares may be in focus as Morgan Stanley cuts them to equal-weight and resumes coverage of Cummins (CMI US) at equal-weight in a note trimming its PTs across most of its machinery and construction coverage.

On Wednesday, in the first day of his Congressional testimony, Powell accepted that steep rate increases could trigger a US recession, and said the task of engineering a soft economic landing is “very challenging” (day two follows). Policy makers are taking drastic steps to cool inflation at a four-decade high and the Fed chair repeated his resolve to get consumer price growth back down to the 2% target.

“Market optimism couldn’t survive Jerome Powell’s testimony yesterday, but most of the negative pricing is certainly done by now,” said Ipek Ozkardeskaya, a senior analyst at Swissquote.

“The reaffirmation of the Fed’s commitment to bringing inflation down and that recession is a risk are adding to growth worries, which is the dominant fear again,” said Esty Dwek, chief investment officer at Flowbank.

Traders are now debating how far the Fed will stretch its rate cycle in the face of an economic downturn. Money markets indicate diminished odds the central bank will raise rates beyond year-end, and rising odds of a rate cut from May 2023. The Federal Reserve “is well served by keeping some hawkishness there,” Steven Major, global head of fixed income research at HSBC Holdings Plc, said in an interview with Bloomberg Television. “Because if they appear that they’ve reached the peak, then financial conditions will loosen and the policy won’t work. So they need a couple more months of this.”

European equities traded flat having erased earlier losses of more than 1%. Real estate, autos and banks are the weakest Stoxx 600 sectors; travel is a rare bright spot. European energy stocks slipped for a second session with crude prices under pressure as concerns over a global economic slowdown intensified. The Stoxx 600 Energy index falls as much as 1.9%; TotalEnergies and Shell the biggest drags on the index on Thursday, with wind- turbine firm Vestas and Italy’s Eni also slipping.  Here are some of the biggest European movers today:

  • Aroundtown stock drops as much as 11% after being cut to underweight from neutral at JPMorgan, which also lowered its PT to EU3.6 from EU6 due to excessive downside exposure for the German landlord.
  • Vantage Towers falls as much as 7.6% after Morgan Stanley cut the stock to equal-weight from overweight, saying the shares have outperformed despite challenges in its outlook.
  • Saipem trims losses after declining as much as 21% following the announcement of a EU2b capital increase on Wednesday; Italy’s Consob warns of volatility in the stock when the rights issue starts.
  • Rheinmetall falls as much as 6.3% after HSBC downgraded the German automotive and defense group to hold from buy due to it being temporarily held back by its automotive division
  • Naked Wines slumps as much as 40% after the online wine merchant forecast fiscal 2023 sales of £345m-£375m. The midpoint of the guidance is ~10% lower than what Jefferies analysts had been expecting.
  • Intertek falls as much as 4.1% after Deutsche Bank cuts the stock to sell, saying many structural trends that underpinned growth for testing and inspection companies are reversing. Eurofins gains as much as 4.2% on an upgrade to hold.
  • Atos gains as much as 11% after a report that Thales has the support of the French state in its effort to buy French tech company’s cybersecurity business.
  • Ubisoft rises as much as 2.5% before paring gains, as Deutsche Bank initiates coverage with a buy rating, saying there’s “good scope” to beat revenue and margins expectations for fiscal 2024 and 2025.

As noted above, the latest let of European PMIs were dismal, dropping across the board and all (except the UK) missing expectations:

  • Euro Area Composite PMI (June, Flash): 51.9, consensus 54.0, last 54.8.


    • Euro Area Manufacturing PMI (June, Flash): 52.0,  consensus 53.8, last 54.6.
    • Euro Area Services PMI (June, Flash): 52.8, consensus 55.5, last 56.1.
  • Germany Composite PMI (June, Flash): 51.3, consensus 53.0, last 53.7.
  • France Composite PMI (June, Flash): 52.8, consensus 55.9, last 57.0.
  • UK Composite PMI (June, Flash): 53.1, consensus 52.4, last 53.1.

Earlier in the session, Asian stocks edged higher, with an improving outlook in China offering support even as the prospect of a global downturn weighed on some export-reliant markets. The MSCI Asia Pacific Index was up 0.2% with China’s internet giants and automakers contributing to the gains. South Korea and Taiwan, the two tech-heavy markets that have seen foreigners flee amid rising global rates, fell more than 1%. Traders digested Federal Reserve Chair Jerome Powell’s Wednesday comments that steep rate increases could trigger a US recession. China stocks were the region’s best performers, extending a recent trend, as President Xi Jinping pledged to meet economic targets for the year. 

Hong Kong stocks gained after a report that the city’s incoming leader is working on a strategy to reopen its borders. Japanese stocks were little changed. “We’re sort of in a bottoming out phase here in Asia, where China is going to eventually support us again,” Robeco Asia-Pacific Chief Investment Officer Arnout van Rijn said in a Bloomberg TV interview. “The rest of Asia, with its better macroeconomic policies and lower interest rates, should at least outperform a weaker global market.” The Fed’s recent rate hike and comments have been especially hard on growth shares, with a gauge of Asia’s tech stocks falling to its lowest level since September 2020. China’s stocks have outperformed the broader region amid hopes for continued fiscal and monetary support.

Japanese equities struggled for direction as investors worried over Federal Reserve Chair Jerome Powell’s comments on the risks of a recession. The Topix closed down les than 0.1% at 1,851.74, while the Nikkei advanced 0.1% to 26,171.25. Out of 2,170 shares in the index, 1,295 rose and 775 fell, while 100 were unchanged. “We’re in a very difficult phase,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management. “The market is still focused on what will happen to prices in the US and whether the economy can cope with a larger interest rate hike.” 

Indian shares rose to mark their third day of gains in four after a retreat in crude oil prices eased concerns about vehicle demand in Asia’s third-biggest economy. Maruti Suzuki India Ltd. and Mahindra & Mahindra Ltd. were among the top gainers on the S&P BSE Sensex, which climbed 0.9% to close at 52,265.72 in Mumbai. The NSE Nifty 50 Index rose by an equal measure. Both indexes have risen for three of four sessions this week. All but two of the 19 sub-sector gauges compiled by BSE Ltd. advanced, led by auto companies.  Regional peers were mixed after Federal Reserve Chair Jerome Powell acknowledged the risk of a recession. West Texas Intermediate sank toward $104 a barrel after closing at a six-week low on Wednesday. Tata Consultancy contributed the most to the Sensex’s gains, increasing 2.7%. Out of 30 shares in the index, 27 rose and 3 fell.

In rates, Treasury futures traded above Wednesday’s highs after tracking steeper gains for bunds sparked by weaker-than-expected euro-zone growth data, before fading much of the move. US yields richer by 3bp-5bp across the curve led by belly, richening the 2s5s10s fly by 3.5bp on the day; 10-year richer by ~3bp at 3.125% vs 16bp slide for German 10-year, widening spread ot ~165bp. Elevated recession risk put German 10-year yields on track for their biggest decline in more than three months. US auctions include $18b 5-year TIPS reopening at 1pm ET; ahead of the sale 5-year breakeven inflation is ~2.75%, near lowest level since January. Focal points of US session include Fed Chair Powell’s second day of congressional testimony and manufacturing survey data. Bunds futures rally, trading over a 300 tick range in high volumes before stalling close to 148.00. Yield curves bull steepen aggressively. German 2y yields crater over 20bps near 0.82%, trading 10bps richer to gilts and ~15bps richer to USTs. Peripheral spreads widen with short-end Portugal underperforming.

In FX, Bloomberg dollar spot index rose 0.3% as the EUR tumbled on poor PMI data. The yen extended its rise as comments from an ex-policy official spurred bets that the Bank of Japan may intervene to halt the currency’s slide. Japan’s currency gained as much as 0.8% after Takehiko Nakao, the former head of foreign exchange policy at the finance ministry, said the possibility of the authorities intervening directly in foreign-exchange markets can’t be ruled out. Sterling eased against a broadly stronger dollar as a slide in global share prices prompted investors to sell riskier assets. Markets await UK PMI data, which is expected to show a drop in manufacturing and services sectors, adding to signs of a slowing economy.

In commodities, oil dipped initially in early trading before paring the entire loss, Brent crude back above $111 a barrel. Most base metals are trade lower: LME copper drops ~2%, LME tin underperforms declining over 8%. Spot gold drifts lower near $1,830/oz.

Bitcoin is firmer overall but continues to pivot the USD 20k mark and has struggled to gain any real traction during brief forays either side.

Looking to the day ahead now, and the main data highlight will be the rest of the flash PMIs for June, along with the US weekly initial jobless claims, the Q1 current account balance, and the Kansas City Fed’s manufacturing activity for June. From central banks, Fed Chair Powell will be speaking before the House Financial Services Committee, the ECB will publish their Economic Bulletin, and we’ll hear from the ECB’s Nagel and Villeroy. Finally, EU leaders will be meeting in Brussels.

Market Snapshot

  • S&P 500 futures down 0.2% to 3,755.75
  • STOXX Europe 600 down 1.2% to 401.04
  • MXAP up 0.1% to 156.60
  • MXAPJ up 0.2% to 519.03
  • Nikkei little changed at 26,171.25
  • Topix little changed at 1,851.74
  • Hang Seng Index up 1.3% to 21,273.87
  • Shanghai Composite up 1.6% to 3,320.15
  • Sensex up 0.7% to 52,208.76
  • Australia S&P/ASX 200 up 0.3% to 6,528.45
  • Kospi down 1.2% to 2,314.32
  • German 10Y yield little changed at 1.47%
  • Euro down 0.6% to $1.0503
  • Brent Futures down 1.7% to $109.80/bbl
  • Gold spot down 0.2% to $1,834.49
  • U.S. Dollar Index up 0.46% to 104.67

Top Overnight News from Bloomberg

  • Germany elevated the risk level in its national gas emergency plan to the second-highest “alarm” phase, following steep cuts in supplies from Russia.
  • India’s central bank appears to have ramped up intervention in the forwards market to slow the rupee’s decline and preserve its hard-earned reserves.
  • Russia faces yet another bond payment test this week, with just days remaining before it potentially slides into its first foreign default in a century.
  • India’s central bank appears to have ramped up intervention in the forwards market to slow the rupee’s decline and preserve its hard-earned reserves.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were mostly positive after risk appetite slightly improved from the uninspiring lead from Wall St where stocks were choppy as tailwinds from lower oil prices and softer yields were offset by recession fears. ASX 200 was led higher by strength in real estate and consumer stocks, while Manufacturing PMI data remained in a firm expansion. Nikkei 225 swung between gains and losses with the index hampered by currency inflows. Hang Seng and Shanghai Comp. were kept afloat with auto manufacturers lifted after China’s cabinet pledged to boost the auto industry, while markets also shrugged off initial cautiousness brought on by COVID concerns after Shenzhen required PCR tests for anyone entering a public venue.

Top Asian News

  • China's Shenzhen is to require PCR tests for anyone entering a public venue, according to Bloomberg.
  • US State Department warned about reconsidering travel to China due to COVID lockdown risks, according to Reuters.
  • Former Japanese FX chief Nakao said continuing with YCC has many negative effects and that it is clear monetary policy is playing a role in the weak JPY, according to Bloomberg.

European bourses are pressured overall, but well off lows going into the US session, Euro Stoxx 50 -0.2%; pressure was seen post-PMIs which missed expectations and featured pessimistic internal commentary. The sectoral breakdown is mixed as such while individual movers are affected by numerous broker moves. Stateside, futures are now firmer on the session, ES +0.4%, having shrugged off the French/German/EZ flash-PMI induced risk move ahead of Powell's second day of testimony.

Top European News

  • Majority of economists expect the ECB to hike the deposit rate by 25bps in July and 50bps in September, while the Deposit Rate is seen at 0.75% at year-end (prev. 0.25%) and there is a median 34% (prev. 30%) chance of a recession in 12 months, according to a Reuters poll.
  • Bulgarian Turmoil Deepens as Premier Loses Confidence Vote
  • Norway Steps Up Action With First Half-Point Hike Since 2002
  • Hedge Fund Trader Shah Struck Cum-Ex Trades With DekaBank
  • UK June Flash Services PMI 53.4; Est 52.9


  • Poor preliminary Eurozone PMIs pull rug from under Euro; EUR/USD sub-1.0500 at worst, EUR/JPY under 142.00 vs almost 144.00 peak and EUR/GBP probes 0.8600 from circa 0.8641.
  • Buck benefits indirectly alongside Yen as risk aversion intensifies on heightened recession anxiety; DXY towards top end of 104.780-050 range, USD/JPY vice-versa between 136.25-135.12 parameters.
  • Pound pares some declines with assistance of solid UK services PMI, Cable keeps tabs on 1.2200 handle.
  • Franc makes way for rebounding Dollar, Loonie, Aussie and Kiwi bear brunt of ongoing losses in underlying commodities; USD/CHF back above 0.9650 from sub-0.9600, USD/CAD hovering under 1.3000, AUD/USD capped into 0.6900 and NZD/USD around 0.6250.
  • Norwegian Crown underpinned by bigger than expected 50bp Norges Bank hike and loftier rate path with caveats, EUR/NOK pivots 10.4800 vs near 10.5300 peak and 10.4400 trough.

Central Banks

  • Norges Bank Key Policy Rate (June-MPR): 1.25% vs. Exp. 1.00% (Prev. 0.75%); points to a 25bps hike in August (interim meeting). Click here for full details, reaction and newsquawk analysis.
  • Norges Bank Governor Bache says cannot rule out increasing rates by more than 25bps in future meetings.
  • NBH keeps its one-week deposit rate unchanged at 7.25%

Fixed Income

  • Bunds and OATs front-run latest broad and big bond bounce as PMI miss consensus by some distance.
  • Gilts and US Treasuries tag along with a lag post-solid UK services PMI and pre-US jobless claims, PMIs and Fed Chair Powell part 2.
  • Bunds reach 147.89 from 144.81 low, Gilts 113.36 vs 111.93 and 10 year T-note 117-16 compared to 116-25+.
  • Italy raises EUR 9.45bln with the BTP Italia bond, via Reuters.


  • Crude complex remains pressured with specific newsflow limited and focused on known themes, WTI/Brent -0.5% having benefitted from the recent pick up in broader sentiment; note, the EIA release has been delayed.
  • Private US Energy Inventory Data (bbls): Crude +5.7mln (exp. -0.6mln), Gasoline +1.2mln (exp. -0.5mln), Distillates -1.7mln (exp. +0.3mln), Cushing -0.4mln.
  • US EIA said product releases scheduled this week will be delayed due to system issues, while it added the nat gas storage report will be released as scheduled on June 23rd but all other releases will be delayed, according to Reuters.
  • Germany reportedly fears that a planned 'maintenance' shutdown of the Nordstream 1 pipeline could be used by Russia to shut off gas supplies completely to Germany which would threaten its efforts to build stores ahead of winter, according to FT.
  • Germany declares Phase Two of Emergency Gas Plan due to supply cuts from Russia and high prices.
  • Spot gold is back below the DMAs it briefly surmounted yesterday, downside in wake of post-PMI USD upside.

US event Calendar

  • 08:30: June Initial Jobless Claims, est. 226,000, prior 229,000
  • 08:30: June Continuing Claims, est. 1.32m, prior 1.31m
  • 08:30: 1Q Current Account Balance, est. -$275b, prior -$217.9b
  • 09:45: June S&P Global US Services PMI, est. 53.2, prior 53.4
  • 09:45: June S&P Global US Manufacturing PM, est. 56.0, prior 57.0
  • 11:00: June Kansas City Fed Manf. Activity, est. 12, prior 23

Central Bank Speakers

  • 10:00: Powell Testifies Before House Financial Services Panel

DB's Jim Reid concludes the overnight wrap

It’s been another eventful 24 hours in markets, with recession fears making a prominent return after Fed Chair Powell made some of his most pessimistic comments to date on whether the Fed would be able to successfully engineer a soft landing. Appearing before the Senate Banking Committee as part of the Fed’s semiannual Monetary Policy Report to Congress, Powell said that a recession was “a possibility”, whilst the soft landing the Fed is seeking will be “very challenging”, which is a long way from what the Fed were saying at the start of the year. Similarly, Powell said that the Fed “know we need to have restrictive policy, and that’s where we’re headed”, which is in line with what the Report itself said last week, in that the FOMC’s price stability commitment was “unconditional”. So a further reiteration that the Fed are prepared to keep hiking rates to bring down inflation, and an acknowledgement that there could well be a bumpy ride as they do so.

However, even as Powell emphasised the Fed’s willingness to deal with inflation, those growing fears of a recession meant that Fed funds futures became more doubtful on the Fed’s ability to take policy into restrictive territory. For instance, the rate priced in by the December meeting actually came down -10.5bps yesterday, and since early last week we’ve seen nearly a full 25bp hike taken out of market pricing. The expected terminal rate also came down, with futures only seeing a peak of 3.61% in April 2023 before subsequent cuts.

With investors becoming increasingly sceptical about the Fed taking policy far into restrictive territory, sovereign bonds rallied strongly yesterday, with yields on 10yr Treasuries down -11.9bps to 3.16%. That was driven by a decline in both real rates and inflation breakevens, and interestingly, the 10yr breakeven fell to its lowest level since Russia’s invasion of Ukraine began in late February yesterday, closing at 2.54%. In terms of the curve’s slope, the 2s10s steepened +2.2bps to 9.4bps, so still pretty close to inversion territory that has traditionally been a leading indicator of a recession. Meanwhile, if you look at the Fed’s preferred yield curve indicator that Powell has cited of the near-term forward spread (which looks at the 18m forward 3m yield minus the current 3m yield), that came down by -18.9bps yesterday to 176bps, which is the lowest it’s been in over 3 months, even if it still remains some way out of inversion territory.

Equities put in a mixed performance against this backdrop, with the S&P 500 oscillating between gains and losses before ending the day down -0.13%. Energy stocks were a major laggard after oil prices fell to a one-month low, with Brent crude down -2.54% over yesterday’s session to close at $111.74/bbl. And this morning those losses have accelerated further, with Brent crude down -2.52% to trade at $108.92/bbl, which is now -13% beneath its intraday peak above $125/bbl seen last week. Over in Europe the tone was even more negative, with the major indices including the STOXX 600 (-0.70%) and the DAX (-1.11%) all seeing noticeable declines. That coincided with growing fears on the energy side, and Germany’s economy minister Habeck said yesterday that “we must assume that Putin is ready to reduce the gas flow further”. Natural gas futures in Europe (+1.28%) hit a 3-month high against that backdrop, and this is only set to become more of an issue as we move closer towards the colder months of the year.

Staying on Europe, there was a similar rally in sovereign bonds to the US, with yields on 10yr bunds (-13.6bps) coming down from their post-2014 high on Tuesday. That was echoed elsewhere, whilst a fresh narrowing in peripheral spreads saw the gap between Italian 10yr yields over bunds reach their tightest in nearly a month, with a -2.0bps move to 191bps. Over in credit though, growing fears of a recession led to a widening in spreads, and iTraxx Crossover widened +15.4bps after 3 consecutive moves tighter.

Overnight in Asia, equities are similarly struggling to gain traction in light of those warnings about a US recession. Both the Nikkei (-0.33%) and the Kospi (-0.84%) have moved lower for a second consecutive session, although Chinese equities have put in a stronger performance, with the Shanghai Composite (+0.58%) and the CSI (+0.49%) both trading in positive territory with the Hang Seng (+0.96%) maintaining its morning gains. Outside of Asia, US equity futures have continued to move between gains and losses, but contracts on the S&P 500 (-0.23%) and NASDAQ 100 (-0.25%) are both pointing lower this morning.

Moving on to economic data, it’s an eventful day ahead as we get the flash PMIs for June. But we’ve already had the numbers out of Japan, where the services PMI hit its highest since October 2013 at 54.2, whilst the composite reading also accelerated to 53.2, which is the highest since November. The numbers from Australia showed a modest decline in June however, with the flash composite PMI down three-tenths on May’s reading to a 5-month low of 52.6.

Here in the UK, the main news yesterday came from the May CPI reading, where annual inflation rose to +9.1% in line with expectations. That’s the highest rate since March 1982, although core CPI did fall a bit more than expected to 5.9% (vs. 6.0% expected). Staying on the UK, there’s a couple of important political contests taking place in the form of two by-elections to the House of Commons as well. Both are in seats that had been won by the Conservatives at the last election, but where opposition parties are making a challenge, and represent an important test for Prime Minister Johnson’s authority, not least since he saw 41% of his party’s MPs vote no confidence in him at the start of the month. The one in Wakefield will be of particular interest, since that is a so-called “Red Wall” seat that Labour held for the entire post-war period before Johnson’s Conservatives gained it at the 2019 election. So an important bellwether as we move closer to the next election.

Looking at yesterday’s other data, the European Commission’s preliminary consumer confidence indicator for the Euro Area in June unexpectedly fell to -23.6 (vs. -20.5 expected), which is its lowest level since April 2020 at the height of the initial wave of the Covid pandemic. Separately, we saw Canadian CPI surprise on the upside, with the annual number coming in at +7.7% in May (vs. +7.3% expected), which is the fastest since 1983.

To the day ahead now, and the main data highlight will be the rest of the flash PMIs for June, along with the US weekly initial jobless claims, the Q1 current account balance, and the Kansas City Fed’s manufacturing activity for June. From central banks, Fed Chair Powell will be speaking before the House Financial Services Committee, the ECB will publish their Economic Bulletin, and we’ll hear from the ECB’s Nagel and Villeroy. Finally, EU leaders will be meeting in Brussels.

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