Futures Tumble Ahead Of The Fed Amid Growing Hedge Fund Forced Liquidation Fears
US equity futures tumbled and European share indexes fell on Wednesday as investors once again turned “cautious” about COVID-19 and bubble valuations, with the Fed meeting and tech giants’ earnings also due later. At the same time, some of the most widely held hedge fund stocks were hammered amid growing concerns that hedge funds short the soaring “most-shorted” will have to dump their longs in forced liquidations to provide interim capital as described earlier.
S&P 500 contracts sank 1%, with the deepest losses in the small-cap futures. Nasdaq 100 Index futures outperformed following a strong sales report from Microsoft while other giga- tech companies including Apple, Facebook and Tesla are all due to report after the close today. Meanwhile, GameStop continued its meteoric rise after Elon Musk tweeted about the company, and even following reports that Citron and Melvin had closed their shorts, the stock was still up a whopping 65% from Tuesday’s close.
“There’s been a bit of a shift of tone in markets in the last few days,” said Catherine Doyle, investment specialist at Newton Investment Management. “Markets are starting to worry about COVID again,” she added, highlighting in particular the Brazilian and South African variants of the virus.
The MSCI world equity index having fallen around 1% since it hit a new all-time high on Jan. 21. Following a weak Asian session in which shares were hurt by profit-taking, European indexes also retreated, with the STOXX 600 down 0.8%, London’s FTSE 100 was down 0.7% while Germany’s DAX was down 1%. The Stoxx Europe 600 Index declined as the European Union and AstraZeneca disagreed over whether a planned call to resolve vaccine delivery delays would take place. The euro fell after a European Central Bank official said it has the necessary tools to avoid any further strengthening of the currency.
Earlier in the session, Asian stocks fell for a second day as investors took a breather following the regional benchmark’s ascent to another record high on Monday. The MSCI Asia Pacific Index headed for its biggest two-day decline in more than a month as traders evaluated a series of earnings reports while also seeking more clarity on the timeline for U.S. stimulus. Equity benchmarks in India, Vietnam and the Philippines were among the biggest losers. The Philippine Stock Exchange Index capped its eighth drop in nine sessions amid concern fourth quarter GDP data due Thursday may be weaker than estimated. Stocks rose in Japan and Singapore. Stocks were also lower in South Korea, which reported its most new virus cases in almost two weeks. Global cases surpassed 100 million. Materials was the worst performing sector on the regional benchmark followed by communication services as heavyweights Tencent Holdings and SoftBank declined. A gauge of industrials climbed as Nidec extended gains to hit another record. The Federal Reserve is expected to maintain its aggressive support for the U.S. economy when it concludes a two-day meeting on Wednesday
In rates, Treasuries erased declines in early U.S. trading as stock futures fell, pushing 10-year note’s yield below 1.03% to weekly low. Focus is on FOMC statement at 2pm ET and corporate new-issue calendar headed bymulti-tranche 7-Eleven deal. Treasury yields remain within a basis point of Tuesday’s closing levels, outperforming gilts while keeping pace with bunds. With Euro Stoxx 50 down 1.3% amid vaccine delivery delays, S&P 500 E- mini futures are lower by more than 1% at session lows.
In FX, the dollar rose against most Group-of-10 peers ahead of the Fed meeting while risk-sensitive currencies headed by the Swedish krona led declines along with the euro. The common currency fell to a day low of $1.2119 after ECB policy maker Klaas Knot said the institution had tools to counter its recent appreciation. The pound erased gains after touching the highest since May 2018; hedge funds and real money names keep adding pound topside in both the cash and options markets. Australia’s dollar fell to a session low in European trading after slipping from a session high following a report that showed headline inflation remained below the central bank’s target.
There is a busy slate today, with expected data include mortgage applications and durable goods orders. Abbott, Boeing, AT&T, Facebook, Tesla and Apple are reporting earnings. The FOMC decision and briefing by Chair Jerome Powell are scheduled for 2pm
- S&P 500 futures down 0.2% to 3,835.50
- STOXX Europe 600 up 0.1% to 408.15
- MXAP down 0.3% to 211.93
- MXAPJ down 0.6% to 712.08
- Nikkei up 0.3% to 28,635.21
- Topix up 0.7% to 1,860.07
- Hang Seng Index down 0.3% to 29,297.53
- Shanghai Composite up 0.1% to 3,573.34
- Sensex down 1.9% to 47,427.63
- Australia S&P/ASX 200 down 0.7% to 6,780.57
- Kospi down 0.6% to 3,122.56
- German 10Y yield fell 0.3 bps to -0.536%
- Euro down 0.3% to $1.2127
- Italian 10Y yield fell 3.1 bps to 0.536%
- Spanish 10Y yield fell 0.9 bps to 0.064%
- Brent futures up 0.8% to $56.35/bbl
- Gold spot down 0.2% to $1,847.12
- U.S. Dollar Index up 0.2% to 90.37
Top Overnight News from Bloomberg
- The resignation of Italian Prime Minister Giuseppe Conte has sparked a fresh round of back-room plotting and negotiating as the pandemic rages and the economy tanks. Conte is a survivor, but he has no political party of his own as he tries to recruit a new, broader coalition anchored around himself. He offers investors stability, and that’s an outcome that bond traders have craved
- Sanofi agreed to produce more than 125 million doses of BioNTech SE and Pfizer Inc.’s coronavirus vaccine for the European Union in an unusual collaboration to speed vaccination efforts
- Senate Majority Leader Chuck Schumer said he’s ready to start moving on a Democrat-only Covid-19 relief plan as soon as next week if Republicans continue to reject President Joe Biden’s $1.9 trillion proposal
- European Central Bank policy makers have agreed to look deeper into the euro’s appreciation against the dollar since the start of the pandemic, focusing on whether it’s driven by differences in stimulus policies compared with the U.S., according to officials familiar with the matter
- Australia’s consumer prices rose faster than forecast in the final three months of last year as the government amended funding to various stimulus programs amid an economy regaining momentum
- The U.S. must take “aggressive” steps to combat China’s “unfair” trade practices while also investing to bring manufacturing back to the country, said Gina Raimondo, President Joe Biden’s nominee for Commerce secretary
- Global coronavirus cases surpassed 100 million, according to data compiled by Johns Hopkins University. U.S. President Joe Biden announced a push to purchase more doses of vaccines and get them more quickly to the states. Pfizer Inc. will be able to supply the U.S. with 200 million doses two months sooner than previously forecast, according to its top executive
- The resignation of Italian Prime Minister Giuseppe Conte has sparked a fresh round of back-room plotting and negotiating as the pandemic rages and the economy tanks
A quick look at global markets courtesy of Newsquawk
Asian equities traded mixed and attempted to shrug off the weak handover from the US where there was a slight negative bias amid pre-FOMC caution and ongoing doubts regarding President Biden’s USD 1.9tln stimulus proposal, although participants also reflected on earnings and a late boost was seen in Nasdaq 100 futures after-hours due to strong results from Microsoft which beat on both its top and bottom lines. ASX 200 (-0.7%) was led lower by weakness across the mining-related sectors and as yesterday’s regional losses caught up with the index on return from its holiday closure, while Nikkei 225 (+0.3%) was kept afloat by recent conducive currency moves but with upside capped amid expectations for an extension to the state of emergency in areas still seeing a high number of infections. KOSPI (-0.2%) swung between gains and losses as early strength in the local tech giants petered out including Samsung Electronics which is planning to increase FY21 chip capex by 20% Y/Y to KRW 35tln and with LG Display turning south despite posting a profit of KRW 620.9bln vs prev. loss KRW 1.8tln Y/Y. Hang Seng (-0.3%) and Shanghai Comp. (+0.1%) were indecisive after another substantial liquidity drain by the PBoC, as well as continued US-China tensions with President Biden’s Commerce Secretary nominee vowing to use the full tool kit to protect US networks from companies such as Huawei and ZTE, while FTSE Russell is mulling whether to eject more Chinese firms from key index listings. However, there were some encouraging developments including a jump in Chinese Industrial Profits for December which grew by 20.1% Y/Y and with Alibaba lifted by recent comments from the PBoC Governor who suggested Ant Group’s mammoth IPO could be revived after its issues are resolved. Finally, 10yr JGBs were lacklustre with price action stalling beneath the psychological 152.00 level as Japanese stocks remained in the green and following similar indecisive trade in T-notes, but with downside cushioned by the BoJ’s presence in the JGB market today for a relatively reserved JPY 600bln total.
Top Asian News
- Retail Army Helps Sri Lanka Stocks Skyrocket to World’s Best
- Cathay Pacific Proposes Issue of HKD Convertible Bonds Due 2026
- Turkey’s Long-Unloved Debt Is Starting to Win Over Investors
European stocks kicked off the mid-week session in an indecisive mid-week manner before extending on losses (Euro Stoxx 50 -1.4%) as the region initially picked the tentative APAC tone in the run-up to the FOMC policy announcement and presser (full preview available in the Newsquawk Research Suite). US equity futures also remain on standby with the NQ (U/C) initially outperforming on the back of Microsoft’s numbers (+2.5%, pre-market) amid a number of COVID-related tailwinds including a surge in PC sales and increased cloud services revenue. Back to Europe, sectors are mixed with a slight defensive bias, with Real Estate outperforming as Unibail-Rodamco (+13%) and Klepierre (+12%) gain with some citing easing fears of a third national lockdown in France. Meanwhile, Telecoms are propped up alongside reports that Vodafone (+2%), Telefonica (+3%) and Three are partnering to build and share mobile masts to boost 4G coverage in rural areas, whilst sources stated Vodafone is reportedly looking into different options for their Ghanaian business with a view to reorganise the unit and reduce its debt. The broader IT sector meanwhile is softer on the day with pre-market losses in AMD (-2%) also weighing on chip names. In terms of individual movers, LVMH (+0.7%) holds onto opening gains after reported robust COVID-influenced numbers whilst topping revenue forecasts. Evotec meanwhile (+2%) opened higher by some 30% following reports that Reddit-stricken Melvin Capital is closing its short positions amid the suffering caused by Gamestop (+85% pre-market), although GME trimmed pre-market gains after CNBC reported that Melvin Capital has closed their Gamestop positions. Elsewhere, the quarterly production update by Fresnillo (-8%) was not well received despite an improve in gold production as guidance underwhelmed.
Top European News
- European Economy Lags Peers as Vaccine Mess Deepens Slump
- Astra Pushes Back as EU Warnings Over Vaccine Delay Escalate
- ECB’s Knot Says Tools Are Available to Counter Euro Strength
- EDF’s Hinkley Nuclear Plant Hits Delays, Cost Overruns
In FX, The Dollar is flat to a tad firmer across the board in the run up to the FOMC amidst little expectation of anything major in terms of policy moves or fresh guidance beyond the inevitable updated assessment of the economic situation and outlook since the prior meeting, plus anything Fed chair Powell reveals in the press conference via text or during the Q&A (full preview of the event available in the Research Suite). However, durable goods in the interim often has the potential to surprise and could provide the Buck and index with another test of resilience after the latter extended its run of consecutive closes above 90.000 on Tuesday to 9 trading sessions, and just carved out a firmer 90.432 intraday high vs 90.119 at one stage, albeit with a big helping hand from the Euro.
- EUR/CAD/NZD/AUD – Latest reports regarding the ECB expressing consternation about Greenback weakness in relation to the Euro given relative US-Eurozone and Fed-ECB economic conditions and policy stances, were largely taken in stride, but comments direct from the GC’s mouth via Knot have been taken seriously as said the Bank has the means to counter Euro strength, including further easing – see 9.13GMT post on the Headline Feed for more. In response, Eur/Usd retreated further from circa 1.2170 peaks to trough around 1.2119, while Eur/Gbp recoiled to a fresh January low under the previous 0.8830 base from last Thursday. Elsewhere, the Loonie is also languishing near the bottom of the G10 ranks along with the Aussie and Kiwi that have failed to glean any lasting traction from firmer than forecast CPI or the fact that the Aud/Nzd cross remains top heavy above 1.0700. Usd/Cad is back on the 1.2700 handle, Aud/Usd under 0.7750 and Nzd/Usd sub-0.7250 all awaiting the FOMC, though the latter also has NZ trade data to digest.
- GBP/CHF/JPY – Cable marginally extended post-Brexit transition highs before fading when the Dollar got its indirect ECB boost and held then retained grip of the 1.3700 handle due to supportive Eur/Gbp moves as noted above rather than anything UK specific. Similarly, the Franc and Yen are mainly taking cues from elsewhere, and the Buck more so than risk sentiment that is souring again, with Usd/Chf continuing to meet resistance/offers into 0.8900 and Usd/Jpy keeping further distance from 104.00 in advance of key Japanese data to end the month starting with retail sales after the Fed.
In commodities, WTI and Brent front month futures eked modest gains initially in early European hours but prices remain contained within ranges seen since mid-Jan. Despite the disparities across stocks and a downside bias to sentiment, crude prices remain underpinned by last night’s Private Inventory data which showed headline crude posting a sizeable surprise draw of 5.3mln bbl vs forecasts for a modest 0.4mln bbl build; however, as the selling pressure has intensified WTI and Brent are now marginally lower on the session. Participants will now be looking to the more widely-followed EIA release whereby headline crude is expected at a 0.4mln bbl build. More broadly, the crude market will be eyeing the COVID-related developments in light of the new variants and logistical hurdles. Desks are flagging potential demand implications from the localised lockdowns in China, with the government also poised to discourage travel over the upcoming Lunar New Year holiday – “passenger trips during the holiday period to be down 40% from 2019 levels”, according to ING citing the Chinese transport ministry. WTI trades on either side of USD 53/bbl and Brent sees itself just north of USD 56/bbl, with both contracts within USD 0.30-0.40/bbl parameters at the time of writing. Elsewhere spot gold and silver remain within relatively narrow bands ahead of the FOMC policy announcement, with the former on either side of USD 1845/oz and the latter back below USD 25.5/oz. LME copper prices meanwhile are modestly softer amid the indecision seen across markets coupled with Dollar strength, whilst Goldman Sachs raised their 3-,6-and 12-month copper price forecasts to USD 8,500/t, USD 9,000/t and USD 10,000/t respectively. Finally, zinc prices overnight hit over 2-month lows amid higher inventories.
US Event calendar
- 8:30am: Durable Goods Orders, est. 1.0%, prior 1.0%; Durables Ex Transportation, est. 0.5%, prior 0.4%
- 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.5%, prior 0.5%; Cap Goods Ship Nondef Ex Air, est. 0.6%, prior 0.5%
- 2pm: FOMC Rate Decision (Upper Bound), est. 0.25%, prior 0.25%
DB’s Jim Reid concludes the overnight wrap
Today is the busiest on this week’s calendar, with a raft of important tech earnings as well as the Federal Reserve decision later on. And with some financial assets currently trading at what many are describing as bubble territory, there’ll be heightened attention on these releases to see whether these current valuations are justified. Indeed, in our latest monthly survey, the most popular area for where people thought there was a bubble (apart from Bitcoin) was in US tech equities, with a mean score of 7.9 on a scale from 0-10.
Tonight after the close, we’ll hear from Apple, Tesla and Facebook, all of which have surged to new highs since the pandemic, with Tesla up by more than 12-fold since its recent lows back in March. They come on the back of Microsoft yesterday, who reported fiscal Q2 sales rose 17%, above consensus estimates. The stock rose just under +4% after hours, as the cloud-computing division rose over 50% as the firm reported more corporate clients shifting to online productivity tools and teleconferencing software. Meanwhile GameStop, which has been propelled by Reddit users seeking to take on Wall Street shorts, rose a further +90.1% yesterday, with the stock having risen more than 5-fold in the space of just 2 weeks. Why can’t the stocks I own do that! After hours Elon Musk tweeted a link to a r/wallstreetbets thread on the company and typed “Gamestonk”. In response the shares went up another +68.2% at one point after hours before settling +41.4%. In effect that tweet from Musk added c.$7bn to the market cap in around 30mins. These are not normal times and while the r/wallstreetbets thing is fascinating to watch, I can’t help but think that this is unlikely to end well for someone. As I’ve been saying in recent weeks, this isn’t likely to be a low vol dull year. There’s enough bubbling up, if you pardon the pun, to create a lot of market noise down the line.
Today’s other big highlight will be the first Federal Reserve meeting of 2021, as well as Chair Powell’s subsequent press conference, though whether there’ll be much to report is another matter. According to our US economists (link here), there shouldn’t be any material changes to the policy settings and message from the Fed, following their move to adopt outcome-based forward guidance for asset purchases in December. Furthermore, they expect the statement to be untouched, aside from acknowledging a recent softening in the data. The big question will be over any timetable for tapering asset purchases, but Powell is likely to adopt a dovish tone on this, and reiterate that it’s premature to contemplate this given the challenging near-term outlook and remaining uncertainties.
Ahead of all this, US equities dropped slightly from their record highs, with the S&P 500 (-0.15%), the NASDAQ (-0.07%) and the small-cap Russell 2000 (-0.68%) all dipping. The topline moves were pretty subdued on the whole however, as investors awaited the events mentioned above and with stimulus talks treading water. There continues to be a good deal of dispersion under the surfacewith Energy (-2.12%) and Transportation (-1.50%) weighing on the S&P, as more defensive industry groups like Food & Staples (+1.45%) tried to pull the broad index back into positive territory. Europe saw a stronger performance, though that can be explained by them missing out on the previous day’s rebound after the close. The STOXX 600 (+0.63%), the DAX (+1.66%) and the CAC 40 (+0.93%) all saw sizeable moves upward.
Staying on Europe, Italian Prime Minister Conte resigned yesterday as expected, meaning that President Mattarella will now start consultations with the leaders of the parliamentary groups so as to put together a new government. Reports have suggested that Conte is seeking to put together a new coalition, with Bloomberg reporting officials saying this could be a broader alliance that includes pro-European centrists and unaffiliated lawmakers. Whether Conte is reappointed will depend upon his ability to forge a new majority, since Mattarella is unlikely to give the green light to a minority government. As a reminder, our European economists continue to see the risks of an early election as limited, since a number of the governing parties would stand to lose out from fresh polls.
Markets have taken the Italian instability in their stride, with the spread of yields between 10yr Italian BTPs and German bunds falling a further -4.7bps yesterday to 1.18%. And although this spread is above the 4-year low of 1.05% reached at the beginning of the month, it’s still below the levels seen through much of 2020, so it’s worth keeping these moves in context. Sovereign bond yields rose in most other countries however, with yields on 10yr Treasuries rising +0.5bps to 1.035%, as those on 10yr bunds (+1.7bps), OATs (+1.3bps) and gilts (+0.3bps) also moved higher.
Going back to politics, the US Senate swore in its members into former President Trump’s impeachment trial, which will begin the week of February 8. A vote to declare the impeachment trial as unconstitutional, on the basis that Mr Trump is no longer in office, was voted down 55-45. While five Republicans joined the 50 Democrats on this process vote, it looks unlikely that 67 senators vote for conviction in the end. The most market-relevant thing to keep an eye on in all of this is if any ill-will from this process spills over into the Senate’s stimulus negotiations and derails the pandemic relief. Possibly anticipating this, Senate Majority Leader Schumer yesterday said that Democrats should be prepared to start moving on President Biden’s Covid-19 relief bill in a unilateral way through budget reconciliation if Republicans continue to reject working on the $1.9 trillion plan. Not all of the plan would be able to get through the budget process, including any minimum wage changes and the additional $160bn funding to the states for vaccine rollout efforts. Bipartisanship may not be totally out of the question as 16 Senators from both parties are readying a counterproposal to the Biden plan, which lawmakers expect to be able to unveil by the end of the week.
Overnight in Asia markets are mostly trading higher with the Nikkei (+0.25%), Hang Seng (+0.15%) and Shanghai Comp (+0.32%) all up. An exception to this pattern is the Kospi (-0.16%). Futures on the S&P 500 are down -0.17% while those on the Nasdaq are up +0.49% ahead of today’s big tech earnings and aided by Microsoft’s strong earnings report mentioned above. In other Asia related news, the PBoC governor Yi Gang said at the virtual WEF yesterday that the country’s monetary policy will continue to “prop up the economy,” with officials remaining mindful of risks, such as a rising macro leverage ratio and higher non-performing loans. The PBoC has withdrawn c. $27bn in liquidity from market this week with $15bn of it being withdrawn today. So in light of this, these comments were a relief to some worried by this recent action.
On the coronavirus, matters escalated in the ongoing row between the EU and AstraZeneca following the news that vaccine deliveries would be delayed, amidst calls for export controls on vaccines from a number of senior figures. Indeed, in a speech yesterday, Commission Preisdent von der Leyen said “Europe invested billions to help develop the world’s first Covid-19 vaccines. … And now, the companies must deliver. They must honour their obligations.” On top of this, the German health ministry pushed back against reports that the AstraZeneca vaccine only had an efficacy of 8% among the over-65s, something reported in the Handelsblatt newspaper, and which AstraZeneca themselves have called “completely incorrect”. There was lots of talk about it being a misread on the % of participants in the trail from this age group rather than efficacy. Given how widely this story has been distributed it shows how potential misinformation can spread quickly in this digital world. Read an incredibly interesting interview with the AstraZeneca CEO here for more background.
On the more positive side, the European Medicines Agency ED Cooke signaled that Pfizer is expected to increase vaccine deliveries to EU countries in April, with production at more sites coming online over the next two months. Elsewhere the US government has also said that it intends order 100mn more doses each of Pfizer Inc. and Moderna Inc.’s coronavirus vaccines, and at least temporarily speed up shipments to states to about 10mn doses a week ( a +16% increase from the current weekly pace). This comes as an executive from Pfizer said that it will be able to supply the US with 200mn doses two months sooner than previously forecast. Meanwhile, overnight news is suggesting that the UK government will introduce a limited hotel quarantine system for passengers arriving from the highest-risk countries, and is likely to apply to arrivals from countries with new forms of the virus, such as South Africa and Brazil. So a watered down version of what was expected to be a mandatory requirement for all international travelers. On the other side of the world, Kyodo has reported that Japan is considering extending its state of emergency beyond Feb 7 to until the end of February.
In terms of yesterday’s data, the US Conference Board’s consumer confidence reading came in roughly in line with expectations in January, with a rise to 89.3 (vs. 89.0 expected). However, there was a divergence between the present situation and the expectations readings, with the present situation number falling to an 8-month low of 84.4, while the expectations number rose to a 3-month high of 92.5. Meanwhile in the UK, the unemployment rate for the three months to November rose to 5.0% (vs. 5.1% expected), its highest level in over 4 years. While the total number of hours worked continued to rise, now standing at around 7% below pre-pandemic levels, the redundancy rate also moved higher, still standing above its peak around the global financial crisis. Finally, the IMF revised up their global growth forecast for 2021 to +5.5% (vs. 5.2% back in October), and left their 2022 forecast unchanged at +4.2%.
To the day ahead now, and the aforementioned Federal Reserve decision will likely be the main highlight. We’ll also hear from the ECB’s Lane and Villeroy. Otherwise, data releases include French consumer confidence for January, as well as preliminary US data for December on durable goods orders and nondefence capital goods orders ex air. Earnings releases include Apple, Tesla, Facebook, AT&T, Abbott Laboratories and Boeing.
Wed, 01/27/2021 – 08:05