2022.04.04 Weekly Note

No better than neutral, at best…

With recent action being Quarter-end flows driven, I am more focused on market context and newsflow for today and keeping it light on trade ideas.

There has been a lot of news to digest this weekend which has been dominated by a few major themes and a largely negative tone for the global economy. This comes after some fairly resilient risk sentiment, particularly the US where there is perhaps some valid reasons for US resilience; for example, relatively strong economy amid the crisis while possibly benefiting from ‘TINA’ with Europe in crisis and Asia seeing significant slowing.

The recent rally in US equities however has been rather suspect since the mid-March lows and a WSJ’ “Stock-Market Rebound Sits on a Shaky Foundation” article also makes similar observations:

• unusual sell-off and rebound — extreme selloffs beget extreme rallies;
• biggest losers turned into biggest winners;
• shifting/souring sentiment;
• fundamentals moving in wrong direction.

NEWSFLOW

US

• Inflation Weighed on Consumer Spending Growth in February (WSJ) Consumer prices rose 0.6% on the month and 6.4% on the year, a new 40-year peak as measured by the department’s PCE price index, the Federal Reserve’s preferred gauge.
• US manufacturing sector slows in March; input prices surge — ISM (Reuters) Factory activity fell to a reading of 57.1 last month from 58.6 in February, forward-looking new orders sub-index fell to 53.8 last month from 61.7 in February. Customer inventories have remained extremely lean for more than 60 months. Supplier deliveries dipped to a still-high reading of 65.4 from 66.1 in February. That kept inflation at the factory gate very hot. The survey’s measure of prices paid by manufacturers increased to a reading of 87.1 from 75.6 in February.
• Wage Gains Show Signs of Slowing (WSJ) Wages continued to grow in March, but pace has cooled slightly over the past few months, suggesting employers are feeling less pressure to offer pay increases as more people return to the workforce, which could ease inflation pressures.
• DWS CIO’s Big Inflation Fear: ‘We All Begin to Make Bad Decisions’ (Bloomberg) It’s not just the damage that high inflation does to consumer purchasing power that worries David Bianco, CIO for the Americas at DWS Group, an investment firm with more than $1 trillion under management. It’s also the bad decisions that distorted price signals inspire throughout the economy. He says the S&P 500 potentially will fall back to the neighborhood of 4,000 in the near term a drop of about 11% from current levels before it rebounds back to record highs.
• Economists Seek Recession Clues in the Yield Curve (WSJ) Wall Street’s favored 2s10s flashes a slump signal but Fed gauge 3m2y doesn’t. Similar signals coming out of Eurodollar futures market — short-term rates in three years and four years were lower than expected rates in two years.
• N.Y. Fed’s Williams says could begin trimming balance sheet as soon as May (CNBC) to address inflation risks that have become “particularly acute,” Inflation running at 6.5%, more than triple the Fed’s 2% target, is the central bank’s “greatest challenge,”
• The Fed Has Made a U.S. Recession Inevitable, Powell has it wrong and far too optimistic about chances of a soft landing — Bill Dudley (Bloomberg) Powell has made two ambitious assertions about the central bank’s management of the economy. In his latest news conference, he said that the Fed’s new, more inflation-tolerant monetary policy framework bears no responsibility for the recent sharp surge in consumer prices. Then, the following week, he cited three historical examples — the tightening cycles of 1964, 1984 and 1993 — as evidence that the Fed can achieve a “soft landing,” slowing growth and curbing inflation without precipitating a recession. I disagree with both. The Fed’s application of its framework has left it behind the curve in controlling inflation. This, in turn, has made a hard landing virtually inevitable.
• Rate Hikes Raise the Odds of a Downturn. And the Fed’s Record Isn’t All That Great (Barrons) Guiding the economy to a safe landing amid mounting turbulence would be one of the greatest policy maneuvers in the central bank’s recent history. “This is the biggest disconnect, historically, between current Fed policy and their goals of price stability,” says Stephen Roach, a former chief economist at Morgan Stanley now a senior fellow and lecturer at Yale University. “I can’t think of any time when they have been faced with the type of tightening they have to contemplate in the current environment where they’ve been able to sidestep a recession.”
• Mortgage rates zoom past 4.5% (MarketWatch)“We’re at rates that we thought we might see at the end of the year, and here we are, at end of March, already seeing that that kind of a jump,” said Michael Fratantoni, chief economist for the Mortgage Bankers Association. “Given the speed of the increase we’re still not quite settled on whether this is volatility and you will see rates moving in both directions, or whether this is just a level shift and we will stay here at the higher level,” he said.
• One ETF to Watch for Signs That the Fed Will Change Its Mind on Multiple Hikes (Bloomberg) iShares ETF CMBS mired in second-worst drawdown ever. Even after just one increase to target Fed funds rate, credit markets are signaling that it is “highly suspect” that the Central bank will llift rates by the equivalent of 7 hikes this year, let alone 8 or 9 (25bps) hikes some economists are predicting. “Economists are looking at economic data, they’re not looking at credit risk,” McDonald said. “And at the end of the day, as we’ve seen over the last 10 years, credit risk will veto the Fed, will veto the economists. That’s why you have to spend more time looking at credit risk and not listening to economists. We are seeing a corresponding surge in muni credit risk in some of the large U.S. cities. NYC spread vs. Austin and Miami widening a lot.”
• Senators Eye $10 Billion Covid-19 Deal Ahead of Possible Resurgence (WSJ) Top U.S. health officials are closely monitoring the Omicron BA. 2 variant, which has triggered a surge in cases in parts of Europe and Asia and now represents more than half of new Covid cases in the U.S. Mr. Biden acknowledged Wednesday that cases were rising and warned that without more federal dollars, another wave could lead to testing shortages similar to those experienced during the winter’s Omicron wave.
• Biden says U.S. turning corner on COVID, but experts are worried that BA.2 is pushing cases higher in 15 states (MarketWatch) Study confirms Ivermectin is not effective COVID treatment and UK numbers climb 7% in a week
• U.S. lawmakers close to agreeing on $10 billion in funding for next phase of the COVID-19 battle, as death toll tops 980,000 (MarketWatch) Cases in England are at a pandemic high, and Shanghai forges ahead with testing program. U.S. lawmakers moved close to agreeing on a bipartisan compromise to provide a fresh $10 billion to combat COVID-19 on Thursday, a deal that could set up final congressional approval next week. At the same time, the more transmissible omicron variant BA.2 has been spreading quickly in the U.S. and abroad.
• Dominance of Tech Stocks in S&P 500 Is Set to Shrink Next Year (Bloomberg) S&P Dow Jones and MSCI announced revisions in a joint that will reclassify sectors of some major shares. Payment processing companies currently classified as technology firms are pointed to join the Financial sector while other tech names providing outsourcing/HR support will be classified as Industrial stocks. “This will have a major impact on sector ETFs that have heft exposure to these companies.”
• Bond ETFs Revel in Record Flows Amid Worst Performance in Years (Bloomberg) TLT, BND lured billions in March despite big selloff Investors likely had to rebuild bond exposure after plunge. An unprecedented $4.8 billion flooded into the $20 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) as the ETF sank 5.6%, according to data compiled by Bloomberg. It was a similar story for the $83 billion Vanguard Total Bond Market ETF (BND), which absorbed $3.1 billion last month amid a 2.9% dive.

RUSSIA-UKRAINE

• Russia hits key Ukrainian oil facilities in Odesa and Kremenchuk (AlJazeera) Russian attacks have destroyed an oil refinery in the central Poltava region and struck “critical infrastructure” on Saturday, near the key port city of Odesa.
• Ukraine says 410 bodies found near Kyiv, witnesses traumatised (Reuters) After Russia withdrew from some areas around Kyiv, the mayor in Bucha, a liberated town 37 km (23 miles) northwest of the capital, said that 300 residents had been killed by Russian forces while Chechen fighters controlled the area.
• New Reports of War Crimes Emerge as Russians Retreat From Kyiv Area (WSJ) Ukrainians were finding “people with hands tied behind their back and decapitated… kids who were killed and tortured,” Ukrainian President Volodymyr Zelensky said in an interview that aired Sunday on CBS.
• U.N. chief calls for independent probe of civilian deaths in Ukrainian town (Reuters) “I am deeply shocked by the images of civilians killed in Bucha, Ukraine,” Guterres said, joining Western officials in expressing outrage. “It is essential that an independent investigation leads to effective accountability.” The Russian defense ministry denied that Russian forces killed civilians in Bucha, saying that videos and photographs of bodies were “yet another provocation” by the Ukrainian government.
• Germany says West to agree more sanctions on Russia after Bucha killings (Reuters) “Putin and his supporters will feel the consequences” of their actions, German Chancellor Olaf Scholz said. German Defence Minister Christine Lambrecht said the European Union should talk about ending Russian gas imports. The United States said that those responsible for any war crimes must be held responsible, Britain said it was stepping up its sanctions and France condemned “massive abuses” by Russian forces in Ukraine.
• Chinese Buyers Given Flexibility to Pay in Yuan for Russian Oil (Bloomberg) Offering payments in Yuan opens the door to purchase Oil without going through the international banking systemet, which has cut off several large Russian banks from using SWIFT. Russia has also offered an alternative payment system for Indian rupee-denominated purchases.
• Russia Offers Discounts on Oil to India, One of Putin’s Few Fuel Buyers (Bloomberg) India’s intake has been very small for many many years (not among top10 buyers of Russian Oil, so refineries are not configured to buy a lot of Russian oil.

CHINA

• China Expands Digital Yuan Trials to More Cities (Bloomberg) PBOC: market’s response in pilot cities and Winter Olympic venues has been good, and user and transaction scales have both been growing steadily.
• Entire Shanghai Placed Under Lockdown (Bloomberg) City reported more than 6,300 new Covid infections Friday, Eastern half of city remains under tight restrictions
• China crushed Covid. But Covid Zero could crush China (Bloomberg) China’s Covid Zero strategy has been drastic and effective, saving lives and keeping the economy on track. But a new wave of virus cases is highlighting the growing costs of that approach — authorities are fighting to curb the spread of the Omicron variant among a population that lacks natural immunity and only has access to home-grown vaccines that are less effective than global alternatives. In the worse-case scenario of omicron spreading out of control, Hong Kong’s experience suggests the fatality rate on the mainland could reach 50,000 a day. China’s determination to avoid that outcome would likely entail a national lockdown that would potentially slow economic growth to 1.6% this year and send shock waves through the world economy. Among the likely implications: lower commodity prices, and a more gradual pace of Federal Reserve interest-rate hikes.
• Shanghai’s Workers Sleep on Floors to Keep Factories Going Amid Covid-19 Lockdown (WSJ) Some of its biggest plants have kept humming by adopting a bubblelike environment, with some workers saying they slept on the factory floor. Assembly workers of many Chinese manufacturing giants often live in dormitories on or near factory campuses with amenities such as canteens and stores. The community-style setup offers an advantage to companies when it comes to creating bubble environments that would be near-impossible in other parts of the world.
• Tesla unable to restart Shanghai production on Monday (Reuters) Tesla has notified workers and suppliers that production at its Shanghai factory will not resume on Monday as it had hoped, according to an internal notice
• Stocks Suspended; Home Sales Slump Deepens: Evergrande Update (Bloomberg) Recent Covid outbreaks coupled with auditor changes are forcing dozens of Hong Kong-listed firms to postpone their earnings. Meanwhile, China’s home sales slump deepened in March, keeping pressure on cash-strapped builders even as policy makers vow to support the property market.
• Hong Kong Trading Halts Freeze $15 Billion After Earnings Delays (Bloomberg) Trading in 33 Hong Kong-listed stocks was halted on Friday after a number of firms missed a deadline to report annual results in a move that’s expected to affect some $15 billion worth of shares. Troubled Chinese developers Sunac China Holdings Ltd. and Shimao Group Holdings Ltd. among the stocks suspended. China Aoyuan Group Ltd. said publishing unaudited results at this stage could “potentially be misleading to the shareholders and potential investors.” This year’s number so far compares with 57 for 2021 and at least nine for 2020.
• Hong Kong ETFs Lure Record $4.4 Billion on Stock Rebound Bet (Bloomberg) Equities in Hong Kong bounced back from historic lows in March, Some 60 equity ETFs tracking the city’s indexes added $4.4 billion since end-February, the most in monthly data compiled by Bloomberg going back to 2000.
• China Weighs Giving U.S. Full Access to Audits of Most Firms (Bloomberg) Some SOEs, data-sensitive private firms face delisting. SEC chief doubts imminent deal with the CSRC on audit talks.
• Citi raises its forecast for China’s GDP growth (CNBC) “Given the strong start of the year and the anticipated government support, we revise up our growth forecast from 4.7% to 5.0% for 2022,” The new forecast is closer to the official GDP target of around 5.5% announced in early March.
• As the pandemic enters its 3rd year, more Chinese people say they’d rather save than spend (CNBC) PBOC survey respondents said they were more inclined to save in the first quarter rose to 54.7% — the most on record since the third quarter of 2002, according to data accessed through Wind Information. Appetite for stock investing was the lowest among the three investment categories listed, and the share of respondents wanting to buy stocks falling to 16.2% in the first quarter — down from 17.3% in the previous quarter, survey data showed.
• China: Shanghai hospital struggles with Covid infections (BBC) Authorities in Shanghai are struggling to deal with a suspected wave of Covid infections at a large hospital for the elderly, in a sign of how serious the outbreak is in China’s biggest city. Shanghai has not declared any new Covid deaths in the city since the outbreak of the latest wave of the virus. But the BBC has spoken to people working at the Donghai Elderly Care Hospital in the city’s eastern Pudong area who have described a dire situation and desperate attempts to help dozens of elderly patients, some of whom have died.

OTHER GLOBAL NEWS

• Global Manufacturing Rebound Falters as War Takes Its Toll (Bloomberg) Eurozone PMI slides to 14-month low on inflation, war. South Korea and Vietnam see biggest drops. Manufacturing resurgence in Europe and Asia softened in March as factories saw worsening supply shortages and soaring costs after Russia’s invasion of Ukraine. Slowdown in Asia has potential knock-on effects for the rest of the global economy. The region is the world’s top manufacturing base, and its exports ranging from energy to food are critical in augmenting supplies and tamping down prices in nations beginning to emerge from the pandemic. In a warning sign for global demand given its status as a weather vane for trade, South Korean new export orders fell by their quickest pace since July 2020. Input price inflation hit a three-month high.
• Ukraine war to halve global trade growth, warns WTO (BBC) WTO cuts global trade growth forecast for this year from 4.7% growth to 2.5% due to “the impact of the war and related policies”. “my worry is that we have a food crisis that is brewing”. “I’m truly worried about looming hunger, particularly in poor countries that can least afford it. “Work being done by the African Development Bank now shows that in many countries, food prices are rising by 20% to 50% already,”
• Ukraine war fueling global economic downturn as growth projections slide (UNnews) With inflation on the rise and developing countries already weighed down by a $1 trillion debt burden to pay back to creditors, the UN body decried the inadequate financial measures already taken to help them withstand exchange rate instability, rising interest rates and soaring food and fuel prices. “Conditions are worsening for everybody”, “there is a rapidly worsening outlook for the world’s economy and to think that this year, the year after two years of crisis with COVID-19, the average rate of growth of the world economy will be 2.6 per cent, down from 5.5 per cent last year, and down from the projections that were made in the last quarter of 2021”.
• Russia Shock Will Hit Emerging Markets Hard (WSJ) Even before Russia’s invasion the World Bank warned EM economies at risk of hard economic landing. EM debt risen to 50year high ~176% of GDP. Uncomfortably high debt levels could lead to a wave of EM debt defaults that could have important spillover effects on world economy.
• Mexico Cuts Growth Forecast for 2022 as Inflation Spikes (Bloomberg) Latin America’s second-largest economy to grow 3.4% this year. Finance Ministry releases its preliminary budget plan for 2023. Inflation is expected to slow to 5.5% by the end of the year, according to the proposal, after having reached 7.3% in February. The Finance Ministry also sees the Mexican crude basket at $92.9 per barrel in 2022 and $61.1 in 2023.
• Eurozone Inflation Soars to 7.5%, Raising Pressure on ECB (WSJ) Mostly driven by Energy and Food prices, national figures suggest current rate of inflation could be even higher — Germany’s for March was the highest since 1981, while Spain’s was highest since May 1985.
• OPEC+ Refuses to Deviate From Gradual Oil Output Hikes (Bloomberg) OPEC+ shows little sign of heeding consumers calls for more oil — at previous meeting in early March, the group hurried through in just 13 minutes without discussing the Russia-Ukraine crisis that was dominating global commodities markets. As OPEC disregarded US requests to pump more, IEA led the first coordinated release of oil from its members’ emergency stockpiles in over a decade in an attempt to push prices lower.
• Russia’s cost of living soars by more than 14% (BBC) The value of the currency has dropped about 22% this year, and this has pushed up the cost of importing goods.
• Millions of Brits plunged into fuel poverty on Friday as household energy bills surge (CNBC) Energy bills in Britain are set to surge from Friday, after the country’s energy regulator increased its price cap by a record-breaking 54%. The number of English households in fuel poverty will double to 5 million from April 1, new research warned on Friday.
• Lebanese fearful as fuel and wheat shortage deepens (AlJazeera) “We struggle to get gas, and we’re already paying so much for food, medicine, and tuition. [Now] all our salaries are going just to the necessities, and sometimes it’s not even enough so I have to [take out money] from my savings.” Up to 90 percent of Lebanon’s wheat and cooking oil imports come from Ukraine and Russia, as well as a large proportion of grain imports.
• Sri Lanka imposes curfew amid food, fuel and power shortage protests (BBC) A 36-hour curfew has been announced in Sri Lanka as a state of emergency is enforced amid violent protests against food and fuel shortages. The move is aimed at stopping new protests — two days after crowds were accused of setting vehicles ablaze near the president’s private residence. The military has since been deployed and now has the power to arrest suspects without warrants. Sri Lanka is in the midst of a major economic crisis. It is caused in part by a lack of foreign currency, which is used to pay for fuel imports. Faced with power cuts lasting half a day or more, and a lack of fuel and essential food and medicines, public anger has reached a new high in the island nation of 22 million.
• UN: Afghans need $4.4bn to have enough to eat (AlJazeera) The head of the United Nations has said that Afghanistan needs $4.4bn to avoid a food crisis in the country, as he launched the UN aid office’s biggest-ever funding drive for a single country. UN Secretary-General Antonio Guterres said on Thursday that some Afghans have resorted to “selling their children and their body parts” to get money for food, and that nearly all Afghans do not have enough food to eat.

LAST WEEK’S ACTION

Difficult to comment on whether we are seeing hints of potential risk-off coming into April with most of the action being EOQ flows driven. Nevertheless Equities are hinting a bearish reversal while hovering around prior week highs; treasury futures continues to see selling pressure in the front-end while the longer-end saw a strong push off the lows; Commodities mostly selling off giving back most of March gains while Natural Gas traded to new highs for the year; JPY reversed sharply after some extended selling last month.

EQUITIES

Last week’s Equity index performances looks like a reflection of rebalancing flows — e.g. India and Brazil markets possibly attracting the bulk of EM fund flows, Spain benefiting from being more disconnected from the Ukraine crisis in Europe, while China and Hong Kong markets benefiting from simply being cheap for longer-term bets.

Indices reversed from the highs into the weekend signalling indecision and sentiment is notably more defensive with strong performances in Utilities and Real-estate while Growth are showing some resilience.

MSCI World was held in by the 20 and 50wma’s as well as the 61.8fib, looks poised to test last week’s low this week around the 38.2fib of the recent range.

RATES

Current (Orange) vs Curve as at March 15th (Purple)

US yield curve now flashing stronger warning signs with front-end yields surging higher since mid-March and inverting against 10 and 30 year yields.

Pivots in above ratios are also pointing to risk-aversion. I’ve gone Long TLT last Monday in the mid-129’s and it’s off to a great start so far expecting some safe-haven risk-off bid and the yield curve inversion trend to continue as the recession narrative gets affirmed by the slowing economic data.

COMMODITIES

Bloomberg commodity index has been consolidating above a key technical level. Though I do expect some risk-off to seep into markets, I believe commodities will maintain their high prices due to the persistence of supply and geopolitical pressures, while slowing demand concerns should do little to affect the ongoing supply tightness. While Crude Oil trades below the 100 handle, I like long WTI on dips though it would be treated more as a range trade than a trending one.

FX

Most mean reversions in G10FX, AsiaFX couldn’t hold the rallies and continues to look weak, strength in EMFX continued as it seems to benefit from the news of Russia pulling away from Kyiv.

I’ve gone into long USDSEK USDHUF and USDPLN just earlier to start the week as risk-off proxy as 1) I’m not sure about the usual major high-beta’s AUD CAD or even NZD, while ZAR and MXN has been performing well amid the geopolitical uncertainties; and 2) I see the increasing Russia sanctions continuing to maintain negative economic pressure on economies nearer the crisis.

Given the potential risk-aversion signs and the turn in news sentiment, it looks reasonably foreseeable that risk appetite will be no better than neutral, at best, this week.

That’s it for this week’s entry. Have a great week!