- Main US indexes up; Nasdaq ahead
- All Major S&P Sectors Are Green: Technology Leaders
- The Euro STOXX 600 index closes up around 0.5%
- Dollar down slightly; gold ~ flat; crude, bitcoin rise
- The 10-year US Treasury yield drops to ~1.84%
DON’T BE AFRAID OF FEDERAL HIKES (1209 EST/1709 GMT)
As equities got off to a slow start to the year, largely due to inflation concerns and the Federal Reserve’s planned tightening of monetary policy to combat rising prices, Scott Wren, senior strategist for Global Markets at the Wells Fargo Investment Institute (WFII) notes that investors shouldn’t be rattled by rising rates.
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Wren points out that the S&P 500 (.SPX) is still down less than 5% from its January 3 high and has not seen a significant pullback in the past 18 months, having not touched its average 200-day rolling since June 2020, which could compound recent downside volatility for many market participants.
But even though the Fed is largely expected to start raising rates at its March meeting, Wren points out that equities can react positively to a rate hike cycle, with the median return of 30% for the S&P 500 over the five rate hike cycles starting in 1989. .
Additionally, neither of these periods posted negative returns and although there was volatility as the central bank braced the market for a rate hike, the overall performance was good.
Wren notes that a question among investors is whether the Fed will be too aggressive, leaving the target fed funds rate too high, especially as many expect inflation to slow and growth to slow. in the second half of the year, which remains a risk, while WFII expects the Fed to hike rates four times this year.
UNEMPLOYMENT BENEFITS, DOOR SALES, PHILLY FED: FASTEN YOUR SEAT BELTS (11145 EST/1645 GMT)
The data released on Thursday was equivalent to the illumination of the seatbelt panel during cross-country flight, along with the assurance that the turbulence should soon subside.
The number of US workers filing first claims for unemployment insurance (USJOB=ECI) defied expectations last week by jumping 24% to 286,000, the highest level in three months. Read more
Analysts had expected claims to move the other way, losing 10,000 to 220,000.
“The increase in claims reflects both an increase in layoffs due to the surge in Omicron business as well as a further increase in large seasonal adjustment factors,” writes Nancy Vanden Houten, chief U.S. economist at Oxford Economics, who expects “claims to return towards the 200k level once the Omicron wave passes.”
Even with last week’s surprise jump, initial claims remain near the upper end of the range associated with healthy labor market rotation.
Claims in progress (USJOBN=ECI), reported with a one-week delay, also rose more than expected, rising 5.4% to 1.635 million – a level that is still below the pre-pandemic level of approximately 1.7 million.
Separately, US used home sales (USEHS=ECI) fell 4.6% in the final month of 2021 to a seasonally adjusted annual rate (SAAR) of 6.18 million, according to the National Association of Realtors (NAR). Read more
While demand remains robust, the inventory of homes on the market remains depleted, falling to a record high of 1.8 months of supply from 2.1 months in November.
Single-detached homes on the market are even scarcer, falling to 1.7 months of supply.
“December saw sales pull back, but the pullback was more a sign of supply constraints than an indication of weakening housing demand,” tweeted Lawrence Yun, chief economist at NAR.
Wednesday’s report from the Mortgage Bankers Association, showing an increase in loan applications for home purchases even as interest rates rise, suggests that potential buyers are eager to sign the contract before rates don’t climb any further.
“The anticipation of higher mortgage rates could give home sales a boost in the coming months, but tight inventory and high prices will remain a constraint for buyers,” said Rubeela Farooqi, chief economist at the United States at High Frequency Economics.
Better economic news came from the Philadelphia Federal Reserve, which showed manufacturing activity was growing at a faster pace than economists expected.
The Philly Fed Business Index (USPFDB=ECI) jumped 7.8 points to 23.2, beating the consensus of 20 peers.
The rise was fueled by new orders and shipments, but the stock was held back by slower shipping times and employment.
Perhaps the worst news in the report is the 6.4 point rise in prices paid, suggesting that while supply chain issues may be easing, the resulting inflation is still at its peak. .
“The rise in the Philly Fed index is a pleasant surprise after the fall in the Empire State index,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“On the supply side, unfilled orders rebounded but failed to reverse the full decline in December, while the less volatile lead times index fell to a low in four months,” Shepherdson added. “The pressures on the supply chain remain intense, but they do not appear to be worsening further.”
As Shepherdson points out, the report contrasts sharply with Tuesday’s Empire State printout, which showed New York manufacturing plunging into contractionary territory for the first time since June 2020.
A Philly Fed/Empire State reading above zero indicates increased activity over the previous month.
Wall Street is in recovery mode by late morning. All three major US indices are significantly higher, with the tech-laden Nasdaq (.IXIC) enjoying a comfortable lead.
EUROPEAN BANKS: HIGH EXPECTATIONS BEFORE Q4 (1011 EST/1511 GMT)
Betting on the recovery of European banks has proven a very popular and lucrative trade, with the sector’s index having doubled since the vaccine breakthrough in November 2020, and then most of the world’s central banks entering a tightening cycle.
The consensus “buy” rating on the sector seems here to stay unless a dramatic and unpleasant trend emerges from earnings season.
Most banks listed on the pan-European STOXX are expected to report Q4 2021 results in February and the outlook is quite good.
The broader financial sector as defined by Refinitiv is expected to post earnings up 61.9% year-over-year, even more than the STOXX 600 average of 48.6%.
In a note released today, Citi analysts provided clients with a rather long list of reasons to believe in European lenders:
1) The Fed will raise rates this year and the ECB is expected to follow suit from 2023.
2) The direction of movement of returns is upwards
3) Rotation to value stocks should provide a boost
4) Banks are trading at a discount both to their own historical average and to the wider market
5) Return on tangible equity increases towards the cost of capital
6) Dividends and redemptions are up
Here is the latest Refinitiv data for the various sectors of the STOXX 600:
US EQUITIES ARE BACK IN FIRST TRADE (0957 EST / 1457 GMT)
Major Wall Street indexes were higher on Thursday as results from American Airlines and Travelers maintained positive momentum for the fourth-quarter earnings season, a day after the tech-heavy Nasdaq index fell. plunged into corrective territory.
This, like the 10-year US Treasury yield, has now deflated in the 1.8300% zone after hitting a high of 1.9020% on Wednesday. With that, growth (.IGX) is seeing its best day against value (.IVX) in over a month.
Indeed, technology (.SPLRCT) and FANG (.NYFANG) are among the most successful at the beginning. Netflix, a member of the NYFANG index, will release its results after the close.
Meanwhile, as the Nasdaq Composite (.IXIC) attempts to rally, it faces resistance at its 200-day moving average, which now sits at around 14,750.
Here is where the markets are at the start of the trade:
S&P 500: ENOUGH? (0900 EST/1400 GMT)
In the 11 trading days since its record close on Jan. 3, the S&P 500 Index (.SPX) is down 5.5%. Read more
Meanwhile, the 5-day moving average of the CBOE equity put-to-call (P/C) ratio, which can be seen as a contrarian measure of sentiment, hit 59% on Wednesday, its highest level in a reading 59.2% on May 14 of last year. This top took place just after the SPX had completed a 4% drop, albeit in this case, over just three trading days:
So far in premarket trading on Thursday, stock index futures are higher and the P/C measure is down 58%.
It should be noted that since hitting a low of 40.2% in June 2020, the P/C metric has oscillated between readings high of 30% and low of 60%. If this trend is to continue, then the metric could now signal that market sentiment may have become bearish enough. If so, the SPX may have found, or could be very close to, one form or another.
However, it should also be noted that for about 20 years, from 2000 to 2020, the measurement range was mostly between 50% and 90%. It was only after the COVID crash that the P/C measurement range fell to levels similar to those that led to the peak of the tech bubble in 2000.
Therefore, traders will watch to see if the P/C metric should swing down or below 40%. Read more
A break well above the 60% low zone, however, can signal panic. The metric peaked at 105% on March 17, 2020, in what turned out to be a more than 30% collapse in the S&P 500.
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Terence Gabriel is a market analyst at Reuters. Opinions expressed are his own.
Our standards: The Thomson Reuters Trust Principles.