Futures Slide As VIX Jumps And Oil Rally Accelerates; Bond Rout Fizzles

A torrid rally that pushed US stocks higher on 5 of the past 6 days appeared set to end, as US index futures drifted lower on Wednesday while bond markets stabilized from a historic rout driven by an increasingly hawkish tilt from the Federal Reserve took a breather after record losses. Contracts on the Nasdaq 100 were down 0.5% at 7:15 am in New York, while S&P 500 and Dow futures fell 0.4%; European bourses were also pressured sending the Euro Stoxx 50 -0.6%, with the exception of the FTSE 100 +0.4% amid crude action. Asia stocks closed higher, led by Nikkei 225’s 3% advance. The dollar rose to session highs amid hawkish Fed rhetoric and the USD/JPY continues to climb. Bonds bounce as risk wobbles and bulls pounce, but sellers remain prevalent; 10-year Treasury yield fell to about 2.37%, after hitting its highest since May 2019 on Tuesday and rising as high as 2.42% overnight.

After sliding to session lows, around 22.7 yesterday, the VIX has reversed the entire Tuesday move and was last seen just shy of 24.

Meanwhile, crude oil continued its grind higher as broader sentiment slips, with WTI up 2% to $111.72 and Brent rising as high as $119 and after dipping below $113 yesterday amid growing speculation Europe will not be united enough to impose broader sanctions on Russia.

US-listed Chinese stocks gained in premarket trading as recent share buyback announcements from Xiaomi and Alibaba Group boosted appetite for the sector  while Tencent’s results — showing that revenue grew at the slowest pace since its 2004 listing — were a drag. The group has been rebounding since last week following a pledge from China to stabilize financial markets. Online retailer Poshmark, meanwhile, tumbled more than 7% after giving a softer-than-expected forecast for the first quarter.  Bank stocks are lower in premarket trading as the U.S. 10-year Treasury yield falls to about 2.36%, after hitting its highest since May 2019 on Tuesday. Other notable movers include:

GameStop (GME US) jumped 12% in premarket trading after Chairman Ryan Cohen boosted his stake in the video-game retailer. Some other so-called meme stocks also rose.
Forge Global (FRGE US) shares rise 12%, extending yesterday’s 60% gain after its trading debut following the completion of its combination with a special purpose acquisition entity led by Blythe Masters.
HealthEquity (HQY US) analysts were generally upbeat on the healthcare savings account provider’s 4Q results and said that guidance for 2023 may be slightly disappointing, but also seems conservative in the current environment. Shares rose 2.5% in U.S. after-hours trading on Tuesday.
Adobe (ADBE US) analysts cut their price targets on the design software maker, flagging concerns over growth. The shares fell 2.7% in U.S. after-hours trading on Tuesday after Adobe’s second-quarter forecast came in shy of estimates.

U.S. equities rose 1.1% on Tuesday despite indications from Fed Chair Jerome Powell that the central bank could raise interest rates more aggressively this year. According to some, technology stocks, which generally underperform when rates are higher, have also rallied as strategists suggest the hawkish pivot could be priced in; others say the rally has just been another gamma and delta unclench, which coupled with CTAs turning bullish, has unleashed a mechanical buying spree which however is about to end and go into reverse.

“What the market is telling you is that the economy can accommodate the rise in interest rates and I think the market has digested the hawkish Fed already,” Janet Mui, head of market analysis at Brewin Dolphin, said on Bloomberg TV. “So unless we see a much sharper and faster selloff in bonds, we don’t think the market will be selling off because of the rise in bond yields.” (Spoiler alert: oh yes we will).

“We are positive for equities for this year,” Seema Shah, Principal Global Investors chief strategist, said on Bloomberg Television. While the market may be more challenged in 2023 and recession risks are rising, “we still think the U.S. economy is pretty good fundamentally,” she said.

Bonds are taking the brunt of central-bank calls for tougher action to curb inflation as investors hold up stocks as an inflation hedge, spurring the S&P 500 to rally in five of the last six sessions. Investors have fled from bonds as the Fed promises higher rates to tame rampant inflation and the war on Ukraine drives commodity prices up 26% this year.  

In Europe, the Stoxx 600 Index slipped after five straight days of gains, their longest winning streak since November. The Euro Stoxx 50 dropped as much as 0.7% before steadying. Stoxx 600 is down 0.2% with real estate, banks and utilities the weakest sectors while energy and healthcare stocks outperformed. Here are some of the biggest European movers today:

BP shares gain as much as 4.2% after Morgan Stanley maintains attractive view on Europe’s energy sector. Firm upgrades BP to one of its “two key overweight rated shares” alongside Shell, which rose as much as 3.8%.
Metrovacesa rises as much as 19% after FCC Inmobiliaria offered to buy up to 36.4m shares in the real-estate company for EU7.80 apiece in cash, representing a premium of 20.2% against the last close.
Aker Horizons and REC Silicon gain as much as 11% and 12%, respectively, after Aker Horizons agreed to sell its stake in REC Silicon to Hanwha. Pareto says “transaction adds to Aker Horizons track record of value creation and provides liquidity at a favorable time.”
Fila shares jump as much as 11%, the most since November 2020, after Banca Akros raised the price target on the art materials company, saying the full-year results released Tuesday were “good.”
Shares in tech investor Prosus slip as much as 5.1% in Amsterdam after Tencent reports that revenue grew at the slowest pace since the Chinese online giant’s 2004 listing in Hong Kong. Prosus holds Naspers’s 29% stake in Tencent.

Earlier in the session, Asian stocks rose for a second day as Chinese tech shares extended a rally on prospects of more buybacks and as continued yen weakness boosted stocks in Japan. The MSCI Asia Pacific Index climbed as much as 1.4% to its highest since March 3, led by the consumer discretionary and tech sectors. Alibaba was among the top contributors to the benchmark’s gains. Investors are expecting Tencent to follow Alibaba and Xiaomi in announcing share-repurchase plans after it released earnings late Wednesday. The recent global equity rebound has come despite the Federal Reserve’s signal of higher rates to quell the hottest inflation in decades, taking many investors by surprise. While some are attributing the gains to expectations that companies will be able to pass on rising costs to consumers, others are warning that markets may be underestimating inflation risks.

“I wouldn’t have thought that the rebound is particularly sustainable,” said Kyle Rodda, an analyst at IG Markets Ltd. “For whatever reason, investors have put extra risk on their plate. It doesn’t really make too much sense to me on the basis that the rally that we’re seeing at the moment is in areas of market that really should be moving lower on the basis of real yield.”

Japan’s Nikkei 225 and Topix indexes led a broad advance in Asian equity gauges on Wednesday, followed by the Hang Seng Index. The Topix posted a seventh straight daily gain, its longest winning streak since September, as the yen continued to weaken against a dollar amid rising Treasury yields. “Fed officials keep saying that the U.S. economy will stay strong regardless of its monetary tightening, which is helping ease market unrest over the global economic cycle,” said Shogo Maekawa, a strategist at JPMorgan Asset Management Ltd. in Tokyo.

A gauge of Chinese tech stocks listed in Hong Kong jumped more than 2%, adding to its 5.4% surge in the previous session. The MSCI Asia Pacific Index is now up close to 2% this week, following a 4.1% jump last week. “The market may be expecting potentially another sort of Fed policy error and reversal of policies,” Martin Hennecke, Asia investment director of St. James’s Place Wealth Management, told Bloomberg Television, noting how traders were already pricing over two interest-rate cuts for 2023 and 2024 following a series of hikes. “But one more really important point to me, which I think really most of the investing public still really hasn’t got this point is, an inflation risk, in my view, is still massively underestimated, particularly at the longer end.”

Australian markets rose with the S&P/ASX 200 index rising 0.5% to close at 7,377.90 in a rally led by tech stocks and banks. All sectors gained, except for materials. Uniti was the top performer amid reports that Macquarie and PSP have made an offer to buy the company for about $2.5 billion. F&P Healthcare was the biggest laggard after its full-year operating revenue forecast missed analysts’ expectations. In New Zealand, the S&P/NZX 50 index fell 1.2% to 12,061.00

In FX, the Bloomberg dollar spot rises back into the green. SEK and AUD are the strongest G-10 performers. CHF and JPY underperformed. the yen weakened as the Bank of Japan’s accommodative policy stood in contrast to the tighter stance adopted by the Federal Reserve. The yen slid to the lowest since February 2016 while 10-year Treasury yields climbed as much as three basis points after rising nine basis points on Tuesday. USD/JPY rose as much as 0.5% to 121.41, highest since Feb. 1, 2016.

San Francisco Fed President Mary Daly said Tuesday that it was time to remove policy accommodation, while St. Louis Fed President James Bullard and Cleveland’s Loretta Mester favored a speedier pace of rate increases. “The yen is imploding right before our eyes,” said Amir Anvarzadeh, a Japan equities strategist at Asymmetric Advisors. BOJ’s policies are totally misaligned now with other central banks, he said.

In rates, benchmark 10-year Treasury yields slipped to 2.37% after surging to highs unseen since mid-2019. Yields advanced across the front-end and belly of the curve, unwinding a portion of this week’s losses, with S&P 500 futures under pressure following European stocks. US yields are richer by 3bp-4bp across belly of the curve, steepening 5s30s spread by nearly 3bp on the day; 10-year richer by 1.6bp at 2.37% with gilts outperforming by additional basis point in the sector. Gilts outperformed, with the U.K. curve bull-steepening, as BOE rate-hike expectations ease. Focal points of U.S. session include Fed Chair Powell remarks and 20-year bond reopening.  Treasury coupon auctions resume with $16b 20-year reopening at 1pm ET; WI yield at around 2.720% is cheapest since 20Y sales resumed in May 2020 and ~32bp higher than February’s, which stopped on the screws

In commodities, oil pushed higher Wednesday on the risk of fresh curbs on Russia. West Texas Intermediate topped $111 a barrel while Brent futures rose toward $119 a barrel. The benchmark traded near $130 a barrel in early March after sanctions were imposed on Russia.  Base metals trade well; LME nickel rises as much as 5.5%, up for the first time since trading reopened on March 16. Spot gold rises roughly $9 to trade near $1,930/oz.

Bitcoin is modestly pressured this morning, but lies within yesterday’s parameters and hasn’t strayed too far from the weeks peak just yet.

To the day ahead now, and central bank speakers will include Fed Chair Powell, BoE Governor Bailey, the Fed’s Daly and Bullard and the ECB’s Nagel and Visco. Data releases include UK CPI for February, along with the advance Euro Area consumer confidence reading for March, as well as US new home sales for February. Finally, UK Chancellor Sunak will be delivering the Spring Statement.

Market Snapshot

S&P 500 futures down 0.2% to 4,496.00
STOXX Europe 600 little changed at 459.10
MXAP up 1.2% to 181.44
MXAPJ up 0.7% to 591.15
Nikkei up 3.0% to 28,040.16
Topix up 2.3% to 1,978.70
Hang Seng Index up 1.2% to 22,154.08
Shanghai Composite up 0.3% to 3,271.03
Sensex down 0.5% to 57,714.07
Australia S&P/ASX 200 up 0.5% to 7,377.87
Kospi up 0.9% to 2,735.05
Brent Futures up 1.1% to $116.80/bbl
Gold spot up 0.0% to $1,921.76
U.S. Dollar Index little changed at 98.56
German 10Y yield little changed at 0.50%
Euro little changed at $1.1019

Top Overnight News from Bloomberg

Global equity markets climbed Wednesday, with investors expanding their search for hedges as the Federal Reserve’s strengthened resolve to clamp down on inflation drove bonds toward record losses.
Bonds extended steep losses on the Federal Reserve’s strengthened resolve to clamp down on inflation.
Federal Reserve hawks and doves are joining Jerome Powell’s call to get going on raising interest rates to curb high inflation. Even erstwhile doves like San Francisco Fed President Mary Daly now backs robust action
The global economy likely won’t be able to avoid a recession without a resumption of Russian energy exports this year, according to a study by Federal Reserve Bank of Dallas economists
Losses in global bond markets have marked a milestone as central banks including the Federal Reserve look to tighten policy to combat surging inflation. The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt, has fallen 11% from a high in early 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008
Oil ticked higher ahead of a flurry of high-level diplomatic activity over the month-old war in Ukraine that may see fresh curbs on Russia
Argentina’s central bank raised its benchmark rate Tuesday for the third time this year as inflation continues to speed up
U.S. President Joe Biden, who’s traveling to Europe for the NATO meeting, said further sanctions on Russia will be announced during his trip. European Union members Germany and Hungary sought to put the brakes on a potential embargo on Russian oil
The U.S. and U.K. reached a deal to ease tariffs on British steel and aluminum, resolving a longstanding irritant as the nations work to strengthen trade and integration

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were positive as the regional bourses took impetus from Europe and the US where stocks gained despite the continued upside in yields and lack of fresh developments on the Ukrainian front. ASX 200 was led higher by tech and financials but with upside capped by weakness in miners. Nikkei 225 surged on ongoing currency weakness and reclaimed the 28,000 level. Hang Seng and Shanghai Comp. were underpinned as tech stocks gained including Xiaomi post-earnings and buyback announcement, while ZTE surged as much as 60% on a favourable court ruling

Top Asian News

Tencent Posts Slowest Growth as China’s Crackdown Bites
ZTE Shares Soar After U.S. Court Agrees to End Probation
Japan Market Watchdog Files Criminal Charges Against SMBC Nikko
Malaysia, Singapore Pledge to Work Toward Full Travel Resumption

European bourses are pressured, Euro Stoxx 50 -0.6%, with the exception of the FTSE 100 +0.3% amid crude action. US futures remain softer, ES -0.3%, but haven’t slipped much further amid the above pressure in Europe as Russia-Ukraine tensions remain elevated. Spanish PM Sanchez says they are to reach an agreement with truckers this week. Following strike action against rising fuel prices. China has found one black box of the Boeing (BA) 737 China Eastern jet crashed earlier in the week, according to a CAAC official, black box is “severely damaged”, unsure if it is the flight data or cockpit voice recorder. Weather conditions along the flight path of the China Eastern plane that crashed did not pose a danger to the craft and air controllers maintained normal communication with jet and before rapid descent.

Top European News

U.K. Inflation Rises More Than Expected to New 30-Year High
Germany Sticks With Debt-Sale Plan Despite Massive Spending Push
Sunak Plans Cost-of-Living Help, Pledges to ‘Stand By’ Britons
U.K. Government Said Closer to Approving Cobham’s Ultra Deal

Fixed Income:

Bonds bounce as risk wobbles and bulls pounce, but sellers remain prevalent.
US Treasuries also wary of looming 20 year supply that could need concession to draw decent demand.
Gilts take strong UK inflation data largely in stride, but Spring Statement may highlight strained fiscal situation.
Italian Treasury has commenced marketing a new 2030 CCTeu bond, via Reuters citing lead managers

FX:

USD bounces as Fed officials line up behind bigger 50 bp hikes and Russian Foreign Minister Lavrov lambasts EU and NATO; DXY tops 98.700 vs a sub-98.500 low.
Sterling deflated despite stronger than expected UK inflation data as risk sentiment sours ahead of Spring Statement, Cable closer to 1.3200 compared to almost 1.3300 at one stage and EUR/GBP holding above 0.8300.
Yen regains some composure after latest collapse as global bond yields relapse, USD/JPY probing 121.00 having topped out near 121.41.
Euro slips as crude rebounds and Russia-Ukraine rift rages on, EUR/USD circa 1.1000 after another fade into 1.1050.
Hawkish rhetoric underpins Swedish Crown and Czech Koruna.
Riksbank’s Breman says that given high inflation, rates might need to be raised earlier and bond purchases can be unwound at a faster pace, important not to wait too long to take action.
Czech Central Bank Deputy Governor says rates may peak “well above 5%” (vs current 4.5%).

Commodities:

Crude benchmarks continue to grind higher, perhaps drawing some geopolitical premia. as broader sentiment slips.
Currently, WTI resides north of USD 111/bbl (vs low 108.38/bbl whilst Brent breached USD 118/bbl in recent trade.
US Energy Inventory Data (bbls): Crude -4.3mln (exp. +0.1mln), Cushing +0.6mln, Gasoline -0.6mln (exp. -2.0 mln), Distillate -0.8mln (exp. -1.4mln)
Black Sea crude exports face a prolonged outage as repairs may take as long as two months with the outage at 1mln bpd, according to Energy Intel’s Bakr.
Kazakhstan’s Energy Ministry says they are working on alternative supply route for oil exports, following CPC damage.
Belgium PM Croo says the EU needs to make a combined effort to secure large quantities of gas, to avoid competition for bilateral deals, suggesting a solidarity mechanism and a ceiling on gas prices, according to the FT.
Trafigura CFO says if the futures market situation does not normalise, there will be an impact on physical trade.
Nigeria increases its Bonny crude OSP for April to +USD 2.02bbl vs. dated Brent, increases Qua Iboe OSP to +USD 2.37bbl vs. dated Brent.
Spot gold/silver are underpinned from haven-flows and in-spite of the USDs bid.
LME Nickel hits 15% limit up.

US Event Calendar

7am: March MBA Mortgage Applications, prior -1.2%
10am: Feb. New Home Sales MoM, est. 1.1%, prior -4.5%
10am: Feb. New Home Sales, est. 810,000, prior 801,000

Central Bank Speakers

8am: Powell Takes Part in BIS Panel on Innovation
11:45am: Fed’s Daly Takes Part in Bloomberg Event
3pm: Fed’s Bullard Discusses the Economic Outlook
9:05pm: Fed’s Bullard Discusses the Economic Outlook

DB’s Jim Reid concludes the overnight wrap

It’s been more of the same for markets over the last 24 hours, with the bond selloff continuing as investors price in an increasingly aggressive monetary policy response to deal with inflation. Perhaps the most impressive landmark of the day though was that the S&P 500 (+1.13%) closed above levels seen on February 10th, the closing level the day before the US warned that Russia would likely soon invade Ukraine which immediately precipitated a sharp sell-off. More on that in today’s CoTD later as the move has now pretty much followed the historical geo-political playbook almost to the letter.

Back to yesterday and staring with bonds, we saw the 2yr Treasury yield rise another +4.9bps to 2.16%, which along with a +1.5bps move this morning brings its gains since the start of the month to a massive +75bps. For a sense of how unusual that is, the moves currently put the 2yr yield on track for its largest monthly increase since April 2004. To be fair, the start of the month did mark peak pessimism on the Fed’s ability to move aggressively given the geopolitical turmoil, so it might be an unflattering starting point, but since then we’ve seen a complete about turn and then some, with the policy rate being priced in by the December meeting moving up almost 100bps over the last 3 weeks alone.

Those moves have come amidst a steady drumbeat of hawkish commentary from a number of Fed officials, which themselves followed Fed Chair Powell’s speech the previous day that turbocharged these moves. For instance, St Louis Fed President Bullard (who voted for a 50bps hike at the last meeting) said that he wanted to get policy into restrictive territory this year, and cited the 1994 soft landing after a tightening cycle as a good analogy for the present. But it was more than just the Committee’s resident hawk that was arguing for aggressively tighter Fed policy this year, ardent dove President Daly wants policy at or perhaps above neutral this year as well, as inflation was far too high and calls for potentially restrictive policy. President Mester later joined the chorus, preferring hikes to be front loaded to leave optionality for a faster or slower pace later in the year. She explicitly did not rule out +50bp hikes, and wants policy in restrictive territory by 2023.

With all that said and done, Fed funds futures were pricing the most aggressive pace of tightening so far, with a further 190bps worth of hikes priced by the December meeting (on top of the 25bps from last week). Given there’s only 6 meetings left until the end of the year, that pricing is consistent with at least 1 move of more than 25bps, and futures were also pricing a 70% chance of a 50bp move at the next meeting in early May. In turn, that was enough to send Treasury yields up to their highest levels of this cycle so far, with the 10yr yield up +9.3bps to 2.38% and at 2.40% as I type in the Asian session. However, the curve’s slope reversed a bit, with the 2s10s seeing a steepening of +4.2bps to 21.2bps, coming off its lows for this cycle we saw earlier in the session (13.5bps).

The big question now is whether all this prospective Fed tightening will push the economy into recession or whether policymakers can achieve the much sought-after “soft landing” that avoids one. Readers will know that my favourite cycle indicator is the 2s10s, with an inversion of this curve having preceded every US recession in the last 70 years, and that’s already flattened to its lowest levels of this cycle as mentioned. However, as I examined in my chart of the day yesterday (link here), the Fed have long preferred measures like the spread between the 18m forward 3m yield and the 3m yield, which is the steepest on record in data going back to 1996. So depending which metric you look at we’re either the closest or the furthest away from a recession we’ve been all cycle! Please let me know if you’re not on Chart of the Day and want to be on it.

That trend of yields hitting multi-year highs was seen in Europe as well yesterday, with the 10yr bund yield (+3.7bps) surpassing 0.5% for the first time since 2018, as those on 10yr gilts (+7.0bps), OATs (+3.5bps) and BTPs (+1.4bps) reached fresh highs of their own. In fact, the amount of negative-yielding debt continues to dry up, with one of the few remaining being the 2yr bund yield (+5.1bps) at -0.25%, and even there it’s closer to positive territory than at any time since 2015.

For more idea of the ECB’s future plans, look no further than DB’s latest podcast, where our Chief European economist Mark Wall discusses how their new guidance has taken them closer to exiting asset purchases. Whether they step through the exit and raise policy rates before year-end (as we expect) will depend on the data, both on inflation and financial conditions. Click here to listen.

On Ukraine, there weren’t many headlines that seemed to suggest material progress on the battlefield or at the negotiation table. The US and European allies will impose additional sanctions on Russia following this week’s EU summit, while Germany is resisting an embargo on Russian oil. Oil put in a subdued performance, with Brent futures falling -0.12% to $115.48/bbl. However, oil prices have erased losses in Asia with Brent futures rising +1.55% to trade at $117.27/bbl as I type. Meanwhile European natural gas prices bounced back from their steep declines on Monday to gain +2.54% yesterday.

Overnight in Asia, equity markets are fairly bouyant. The broad rally across the region is being led by the Nikkei (+2.75%), as Japan has fully lifted the COVID quasi-emergency measures in 18 prefectures amid a declining trend in fresh Covid cases. Meanwhile, the Hang Seng (+1.73%) is advancing, as tech stocks climb. Shares of Xiaomi jumped +6.3% after Q4 sales and earnings beat analysts’ projections, and with the firm announcing a HK$10 billion ($1.28 billion) stock buyback programme yesterday. Mainland Chinese stocks are slightly lagging this morning with the Shanghai Composite trading down -0.14% and CSI (-0.08%) also fractionally lower. Meanwhile, the Kospi (+0.44%) is trading up. Moving on, futures on the S&P 500 (+0.13%), Nasdaq (+0.06%) and DAX (+0.67%) are in positive territory.

In spite of the prospect of more aggressive monetary tightening, equities took this in their stride and posted solid gains yesterday, with the S&P 500 (+1.13%) and the STOXX 600 (+0.85%) both advancing. For the S&P, that actually takes the index to its highest closing level since February 9, two days before the US warned about a potential Russian invasion of Ukraine that led to the first severe ructions in global markets as a result. Furthermore, its YTD losses are now “only” at -5.34%, having been more than -12% after the close on the Monday of last week. Tech stocks led the outperformance, with the NASDAQ seeing a +1.95% gain, whilst the FANG+ index’s advance of +3.65% now brings its gains since the Monday of last week to more than 20%.

Looking ahead, one of the highlights in the UK today will be Chancellor Sunak’s Spring Statement before the House of Commons. Our UK economist put out a preview of the event (link here), and expects it to be light on new spending with very few major policy announcements expected. One thing to keep an eye on will be any potential cut in fuel duty, which has been floated in the press given the major rise in oil prices over recent weeks. This comes as Sunak should have the advantage of stronger fiscal forecasts, and yesterday the public finance data for January confirmed that borrowing so far this financial year was running beneath the OBR’s forecasts back in October, potentially offering the government some wiggle room.

To the day ahead now, and central bank speakers will include Fed Chair Powell, BoE Governor Bailey, the Fed’s Daly and Bullard and the ECB’s Nagel and Visco. Data releases include UK CPI for February, along with the advance Euro Area consumer confidence reading for March, as well as US new home sales for February. Finally, UK Chancellor Sunak will be delivering the Spring Statement.