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REFILE-LIVE MARKETS-Fat tails and inflation freak-outs

05/11/2021 16:38
REFILE-LIVE MARKETS-Fat tails and inflation freak-outs

Fixes typo in paragraph 5 of post FAT TAILS AND INFLATION FREAK-OUTS

Major U.S. indexes off lows, but all red again in late trade

Energy biggest S&P sector loser; materials only gainer, edge up

Dollar, gold ~flat, crude up

U.S. 10-Year Treasury yield ~1.62%

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Investors are keenly awaiting Wednesday's April consumer price index data to see if it validates the Federal Reserve's messaging on inflation, or forces its hand. Core CPI is expected to have risen 0.3% since March and 2.3% from a year earlier, which would be the biggest jump since before the coronavirus changed everything.

The market's current obsession with the risk of rising inflation defies the Fed's insistence that a likely increase as growth recovers will be transitory and may be overlooking the structural factors that kept prices, and wages, in check for years before COVID-19, and that have not gone away.

Jim Caron, Head of Global Macro Strategies for the Global Fixed Income Team at Morgan Stanley Investment Management, said that the pandemic interrupted a secular disinflation trend driven by demographics - the elderly and baby boomers saving more and spending less - the rapid growth in technology and globalization (at least until recently,) and the steady rise in productivity. The pandemic itself has even accelerated some of these trends.

The U.S. economy has recovered from the depths of the pandemic recession. GDP was about $19.09 trillion at the end of the first quarter of 2021, versus $19.01 trillion a year earlier, even while millions remain unemployed.

"In fact, we created $80 billion more in GDP with 8.5 million less workers," Caron said.

It's debatable whether actual inflation will rise as much as the current market betting for it to average about 2.5% over the next 10 years, based on 10-year U.S. Treasury Inflation Protected Securities breakeven inflation, which is the highest since 2013.

"So I would say that the secular forces that were putting us in a disinflationary position prior to the pandemic haven't all vanished. Things have changed but I think the tails are fat on both sides," Caron said.

(Alden Bentley)



The prospect of surging U.S. budget and trade deficits could cause a collapse in the dollar and be the real cause of a lasting spike in inflation, economists at Natixis say.

Five factors are typically needed to quicken the pace of inflation, and at present only two - money supply and commodity prices - are soaring, said Joseph LaVorgna, chief economist for the Americas at Natixis in New York.

Still missing are rapid credit expansion, soaring wage pressures and unmoored inflation expectations to cause meaningful and lasting inflation, he said in a research note.

Rising U.S. budget and trade deficits could amount to about 25% of gross domestic product this year because of fiscal stimulus and cause the dollar to plunge, LaVorgna said.

The U.S. budget deficit alone this year could widen to about 20% of GDP if spending on infrastructure and social welfare is fully approved at a planned $4.1 billion, LaVorgna said.

The rising likelihood that the United States has ongoing double-digit deficits relative to GDP is troubling as it could cause the dollar to collapse and dislodge inflation expectations, he said.

"This is a risk we are closely monitoring," LaVorgna said.

(Herbert Lash)



Tech stocks led outflows across 11 sectors last week, marking the biggest selling from the sector since early January, as investors continued to rotate from growth to value, according to BofA Global Research.

BofA said in a research note that its clients overall were small net buyers of U.S. stock during the week, reversing after three weeks of selling. However, the buying was almost completely in ETFs, while investors mostly sold individual stocks. Inflows into ETFs were led by the healthcare sector.

And while investors decisively sold individual tech stocks, they were passive buyers in tech ETFs.

One fund that decisively did not benefit from investors renewed interest in tech ETFs is Cathie Wood's Ark Innovation ARKK.P. That ETF saw almost $800 million in estimated net outflows last week, the biggest weekly drop ever for the ETF, according to Refinitiv data.

The S&P 500 technology index .SPLRCT is off around 0.2% on Tuesday, but it is up around 4% YTD, compared to the S&P 500's near-11% gain during in 2021.

(Noel Randewich)



Retailers are among some of the biggest percentage decliners in the S&P 500 on Tuesday, led by a more than 14% tumble in HanesBrands HBI.N, and following falls in the broader market tied to worries over rising inflation.

The drop in HanesBrands' stock followed its disappointing outlook, while the S&P 500 .SPX is down 1.1%. nASA025IZnFWN2MY0KJ HanesBrands also unveiled a three-year growth plan.

More retailers are expected to report results in the coming weeks, including Casper Sleep CSPR.N this week, and Macy's M.N, Home Depot HD.N and Target TGT.N next week.

Among other big decliners in retail on Tuesday are Ulta Beauty ULTA.O, down 4.4%%; L Brands LB.N, down 4.6%; and Gap Inc GPS.N, down 2.8%.

The SPDR S&P Retail ETF XRT.P is sliding around 2.2% on the day.

(Caroline Valetkevitch)



BMO Capital Markets has bumped up its 2021 targets for the S&P 500 and earnings growth.

Chief Investment Strategist Brian Belski said in a report on Tuesday he now expects 2021 S&P 500 EPS to reach $190, up 8.6% from his previous target of $175. As a result, BMO is raising its 2021 S&P 500 .SPX target to 4,500 from 4,200.

The new target is about 8% higher than the S&P 500 at midday on Tuesday, with the benchmark tumbling almost 1% as investors worry that rising inflation could push the Federal Reserve to tighten monetary policy faster than expected.

Belski said the upgraded EPS target was the result of a Q1 earnings season that soundly beat expectations.

"It has become quite clear to us that our original 2021 EPS is likely too low despite being on the higher end of forecasts among strategists when we initiated it back in November. This has become particularly true as of late as analysts continue to raise annual EPS estimates for companies," Belski wrote.

In the same report, BMO upgraded the energy sector to "market weight" from "underweight", saying forecasts for oil prices have improved as the economy recovers from the pandemic. BMO also downgraded consumer staples to "underweight" from "market weight", pointing to rising commodity prices that could hurt companies earnings.

(Noel Randewich)



Well inflation may be the dog that doesn't bark, but it sure can bite.

The pan-European STOXX 600 had its worst day since December, losing about 2.1% as traders fear inflation is actually getting real.

In the grand scheme of things though, European equities are just about 10 points from yesterday's record high of 446.2 points.

While one would expect tech to get the worst hit, the sector's losses were bang in line with the broader market and it's the travel and leisure segment which lies in a pool of red.

The index lost 5.9%, dragged down by British Airways-owner IAG ICAG.L, down 7.4%. Investors didn't exactly welcome its plans to $1 billion through a convertible bond to strengthen its balance sheet.

As noted by Josh Mahony at IG, there seems to be more depth to negative sentiment than just selling growth stocks as government bond yields tick up.

"While yesterday’s US selloff was geared heavily towards those high P/E growth names, today has seen traders take on a more indiscriminate risk-off approach", he wrote in his closing note.

(Julien Ponthus)



Saira Malik, CIO, Head of Global Equities at Nuveen, is out this week with some thoughts on emerging markets.

According to Malik, though global equities may appear overvalued historically, relative valuations appear to favor emerging markets. In fact, she says EM equities are currently trading at a 25% discount compared with their historical relationship to U.S. equities.

Malik says a number of important tailwinds reinforce this point including strong growth in China, a weaker U.S. dollar, possible geopolitical improvements, and a widening growth gap with EM earnings per share 10% higher than in the U.S.

Her bottom line is that although several EM countries continue to struggle with the pandemic, she is optimistic that the global economy will eventually follow a similar path to recovery as the U.S.

As a result, she believes "this is a good time for investors to consider evaluating their exposure to emerging market equities given their solid prospects."

(Terence Gabriel)



Nearly 300 miles off the southeast tip of South America and with a population of just 2,563, the Falkland Islands has just got its first ever sovereign credit rating. nL1N2MX2MH

The territory, which is also claimed by Argentina as the Malvinas, had almost no debt until last year, but now it wants to tap borrowing markets to fund improvements to its main port in Stanley (population 2115).

It makes sense. Fishing is half of the Falklands $300 million-a-year economy and there are hopes that oil and gas exploration and tourism which had been driving 11% a year growth, and also rely on boats, will power it going forward.

So what rating does such a remote part of the world deserve? A respectable 'investment grade' A+ according to S&P. That puts it in line with both China and Japan and though it is two notches below Britain's score, it is 12 notches above Argentina's CCC+ after it suffered a record ninth sovereign default last year.

(Marc Jones)



Data released on Tuesday added to growing evidence that a worker shortage is standing in the way of the labor market's recovery.

The Labor Department released its March Job Openings and Labor Turnover Survey (JOLTS) USJOLT=ECI, which gauges labor market churn. nAQN045BS5 nL1N2MY1CL

The report showed job openings reached 8.123 million in March - a record high - handily outpacing new hires. This, along with a drop in layoffs/discharges, suggest a tightening labor market.

Job quits inched higher. The quit rate is seen as a yardstick of consumer expectations, as workers are unlikely to walk away from a gig in times of economic uncertainty.

With demand booming as the economy reopens, the worker shortage, combined with an ongoing supply drought, appear destined to culminate in spiking inflation, which the Fed is quick to reassure will be only temporary.

Tomorrow's CPI report from the Labor Department will provide further inflation clues.

The outlook of small businesses owners grew more optimistic in April, but their inability to fill job openings reached a record high.

The National Federation of Independent Businesses' (NFIB) Small Business Optimism Index USOPIN=ECI gained 1.6 points to a reading of 99.8 in April, the highest level since the presidential election, with eight of the 10 components improving.

"Business owners now are responding to the huge progress on defeating Covid and the subsequent reopening of the economy," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "On the downside, we're baffled by the seven-point drop in the economic expectations index, which stands at a depressed -15. That looks far too gloomy."

Echoing Friday's disappointing employment report NFIB survey respondents also suggests a labor shortage.

"Finding qualified employees remains the biggest challenge for small businesses and is slowing economic growth," says Bill Dunkelberg, chief economist at NFIB. "Owners are raising compensation, offering bonuses and benefits to attract the right employees."

It should be noted that the NFIB is a politically active membership organization, and "the NFIB membership - or at least, the members who respond to the survey - skews heavily Republican," as Shepherdson points out.

Investors are in a selling mood in morning trading. All three major U.S. stock indexes are down more than 1%.

(Stephen Culp)



Coinbase Global Inc COIN.O, the platform for trading cryptocurrencies, could tumble further after it releases results on Thursday as the company comes up short on future profit expectations, warns New Constructs in a research note.

Coinbase, which is trading around $285 a share, is unlikely to report news from its first-quarter results that would justify owning shares at current levels, said David Trainer, chief executive of New Constructs.

Coinbase's valuation implies it will exceed the combined revenue of New York Stock Exchange operator Intercontinental Exchange Inc ICE.N and Nasdaq Inc NDAQ.O, Trainer said.

Investors should expect the stock, down more than 30% from its peak of $429.54 on April 14 - Coinbase's first date of trading as a public company - to continue to underperform further and its share price could fall to $100.

Coinbase is not likely to fulfil the profit expectations baked into the stock's current valuation of $58 billion. Rising competition should reduce Coinbase’s market share and pricing power as revenue and profits at the company taper off, according to New Constructs.

"We believe the stock has more downside risk ahead," Trainer said.

(Herbert Lash)



Major U.S. indexes took stinging opening hits on Tuesday, amid concerns over lofty valuations and inflation. .N

Of note, the NYSE's opening tick of -2,086 was the most negative since a -2,098 reading on June 11 of last year.

In the wake of this, the indexes are off their early lows established in the first 1 to 10 minutes or so of the session, and trying to make a comeback.

However, even with the recovery attempts, the S&P 500 growth .IGX/S&P 500 value .IVX ratio is on track for an 11th straight down day, which is longest such streak since a 12-day run of losses in September 2017.

Nearly all major S&P sectors are red, with utilities .SPLRCU and tech .SPLRCT among those taking the biggest hits. Materials .SPLRCM are the sole gainer. This as the U.S. 10-Year Treasury yield US10YT=RR pops up to the 1.63% area.

Here is where markets stand early on Tuesday:

(Terence Gabriel)



Since their April highs, Nasdaq .IXIC, .NDX, NQcv1 nL1N2M20YQ and tech-laden indexes nL1N2MN157, have come under increasing downside pressure.

In fact, CME e-mini Nasdaq 100 futures NQcv1 are now down around 7% from their April 16 record close and April 29 record intraday high, in just 17 and 8 trading days. nL1N2MX0YC

This in the wake of a noticeable momentum lag:

Indeed, with the mid-April futures' high, the weekly RSI failed to muster enough strength to reclaim the 70.00 overbought threshold. With this, it formed its third lower peak vs its early January high, which of course was well below its August 2020 peak. Thus, a protracted momentum divergence was in place.

With this week's slide, the futures are once again threatening a close below the 20-week moving average, which now resides around 13,300. The futures have recorded 56 straight weekly closes above this moving average, which is the longest such run since a 61-week streak from late 2016 to early 2018.

Additionally, the futures are violating the weekly support line from the March 2020 trough, which also now resides around 13,300.

Holding below these barriers, which are now resistance, while the weekly RSI threatens to fall into oversold territory, can keep the futures on the back foot, with the March trough, at 12,194.75, potentially the next big test.

Meanwhile, based on Tuesday's across the board premarket futures weakness, and now rising volatility measures .VIX, .VXN, the recent performance rift among various indexes may be about to be resolved with them all headed into a valley, together. nL1N2MT14J nL1N2MM1F5

(Terence Gabriel)



(Terence Gabriel is a Reuters market analyst. The views expressed are his own)