January 21, 2022January 21, 2022 by The Daily Shot Editor: Lev Borodovsky

Rate hikes are better for stocks than rate cuts over a one-year horizon

The Daily Shot: 21-Jan-22
• Equities
• Alternatives
• Credit
• Rates
• Energy
• Commodities
• Cryptocurrency
• Emerging Markets
• China
• Asia – Pacific
• The Eurozone
• Europe
• The United Kingdom
• The United States
• Global Developments
• Food for Thought

Equities

1. Treasury yields declined on Thursday, which gave stocks temporary reprieve, …

… but some equity investors are becoming spooked by the headlines coming out of Eastern Europe.

Source: @WSJ Read full article

Source: AP News Read full article

Russian US-dollar bonds have sold off sharply, …

… and credit default swaps spreads have widened, as the risk of a military conflict increases.

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2. The Dow and the Nasdaq 100 dipped below the 200-day moving average.

The Nasdaq 100 entered correction territory.

To make matters worse for Nasdaq, the results from Netflix sent the stock down by 20% after the close.

Source: Reuters Read full article

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3. The selloff in small caps continued. Here is the 10-year relative performance.

• Technicals suggest that small-cap stocks are oversold (2 charts).

• Here is a look at the difference in sector weights in the S&P 600 (small-caps) vs. S&P 500.

Source: MRB Partners

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4. The Dow Jones momentum index hit a multi-year low.

Here is the month-to-date performance for key equity factors.

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5. Next, we have some sector updates.

• Defensive sectors:

– Healthcare:

– Utilities:

– Consumer staples:

• Cyclical sectors:

– Consumer discretionary:

– Housing:

– Metals & Mining:

– Semiconductors:

By the way, semiconductor weakness is pressuring Taiwan’s stocks.

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6. Fund managers are long “late” cyclicals.

Source: BofA Global Research

7. Market correlations haven’t exploded the way they often do in a sharp selloff, with cross-sector correlations remaining below average.

The VIX curve has not yet fully inverted as it tends to do during market corrections.

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8. Over a one-year horizon, rate hikes have been better for the S&P 500 than rate cuts.

Source: Denise Chisholm; Fidelity Investments

9. Share buyback activity keeps surging.

Source: BofA Global Research; @MikeZaccardi

10. Inverse ETF volumes reached a record high, pointing to unease in the market.

Source: SentimenTrader

11. Hedge funds continue to cut net equity exposure.

Source: Evercore ISI Research

Alternatives

1. Dry powder across private asset classes continues to march upwards.

Source: J.P. Morgan Asset Management

2. Global private equity transactions surged last year.

Source: S&P Global Market Intelligence

• The growth in private equity mega-funds has been driven by record-setting fundraising activity.

Source: PitchBook

• Private equity funds still have massive amounts of dry powder (committed, but unallocated capital).

Source: PitchBook

• Public pensions have been boosting allocations to private equity.

Source: @WSJ Read full article

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3. US venture capital firms have already raised about $12.8 billion across 15 funds in the first week of this year.

Source: PitchBook Read full article

US VC deal value surged over the past year.

Source: PitchBook

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4. The number of unicorns (private startups valued at over $1 billion) has increased significantly last year.

Source: PitchBook

Credit

Investment-grade corporate bonds sharply underperformed Treasuries this week.

Rates

1. Treasury yield increases were been driven by real rates this month.

2. The Treasury curve has been flattening.

And fund managers see more of that ahead.

Source: BofA Global Research

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3. Institutional fund managers continue to cut portfolio duration.

Source: Evercore ISI Research

4. Foreign holdings of Treasury notes and bonds hit another record high.

Source: Oxford Economics

5. Will the Fed skip a rate hike after announcing balance sheet runoff?

Source: Danske Bank

Energy

1. US oil inventories have stabilized, and gasoline inventories are recovering.

2. Cold weather in the Midwest and Northeast sent propane demand to record highs.

3. Real oil prices are still relatively subdued.

Source: Bain & Company

4. Most of the US oil production growth has occurred in the Permian shale basin.

Source: CreditSights

Commodities

1. Bloomberg’s broad commodity index is nearing record highs, …

… as oil and industrial metals surge.

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2. Fund managers are very long commodities.

Source: BofA Global Research

3. Iron ore continues to rebound.

4. US orange juice futures hit a multi-year high.

5. Brazil’s drought has been boosting soybean prices.

Source: @kannbwx

But US soy product output has risen substantially.

Source: @kannbwx

Cryptocurrency

1. It’s an ugly day in the crypto market …

… as bitcoin dips below $40k, breaking support.

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2. Uniswap, a decentralized platform that facilitates the trading of tokens on the Ethereum network, has seen a surge in transaction volume over the past few months.

Source: @MessariCrypto

3. Bitcoin’s realized volatility continues to fall, approaching lows last seen in March 2021. It’s been a frustrating market for crypto vol traders.

Source: Skew Read full article

4. Russia’s central bank suggested that lawmakers implement a crypto ban on domestic institutions.

Source: CoinDesk Read full article

Emerging Markets

1. Rising Treasury yields and a stronger dollar have been negative for capital flows to EM.

Source: MRB Partners

2. Global trade growth has been associated with narrowing EM debt spreads.

Source: MRB Partners

3. Vietnam’s exports continue to surge, boosted by the US (some rotation out of China).

Source: @WSJ Read full article

4. Russia’s F/X reserves hit another record high.

5. Ukraine’s central bank unexpectedly hiked rates by 100 bps.

China

1. Economists continue to downgrade their forecasts for China’s growth this year.

2. Equities have closely followed movements in the credit cycle (2 charts).

Source: Alpine Macro

Source: BCA Research

But don’t expect a surge in the credit impulse given weak liquidity conditions and declining corporate profits, according to BCA Research.

Source: BCA Research

• It appears that stock prices have already factored in a substantial earnings contraction.

Source: Alpine Macro

• Mainland investors have been buying up shares in Hong Kong.

h/t @johnchenghc

• China’s tech stocks are now outperforming US peers.

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3. A rise in infrastructure spending could reverse the fiscal drag.

Source: Alpine Macro

Source: Alpine Macro

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4. Here is the composition of China’s current account surplus.

Source: @RobinBrooksIIF

5. Mainland firms are taking over in Hong Kong.

Source: Bloomberg Read full article

Asia – Pacific

1. South Korea’s exports continue to come off the peak.

2. Japan’s core consumer prices remain in deflation.

3. It’s been a rough week for Australia’s stocks.

The Eurozone

1. French manufacturing confidence is approaching the 2018 peak.

However, service-sector demand has deteriorated.

Source: Pantheon Macroeconomics

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2. Is the market pricing for ECB rate hikes too aggressive?

Source: Nordea Markets

3. Fund managers are very bullish on euro-area stocks.

Source: BofA Global Research

Europe

1. Poland’s consumer confidence continues to sink.

2. Here are the latest CPI figures across the EU.

Source: Eurostat Read full article

3. Who is verifying online news?

Source: @DigitalEU Read full article

The United Kingdom

1. Consumer confidence slumped this month.

2. Retail sales tumbled in December.

Source: FX Street Read full article

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3. Real wage growth has stalled.

Source: Gavekal Research

4. Finally, we have regional changes in in-person spending.

Source: @financialtimes Read full article

The United States

1. The Philly Fed’s January manufacturing report was much better than what we saw from the NY Fed.

But the index measuring employee workweek declined sharply.

• Delivery bottlenecks remain severe but are off the peak.

• Input prices are rising quickly, …

… and manufacturers expect sharper price increases ahead.

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2. Initial jobless claims are at 2019 levels (they were below 2019 levels in December).

Continuing claims started the year at multi-year lows.

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3. Despite disappointing December retail sales, US overall holiday sales saw the highest year-over-year gains in decades.

Source: Wells Fargo Securities

4. The Evercore ISI limousine company survey points to increased work-from-home activity in recent weeks.

Source: Evercore ISI Research

5. Next, we have some updates on the housing market.

• Existing home sales did not see the typical seasonal jump in December.

But for the full year, sales reached a 15-year high (2 charts).

• Housing inventories tumbled to multi-decade lows, …

… pushing prices higher.

Source: Wells Fargo Securities

• Housing affordability continues to deteriorate.

Source: Mizuho Securities USA

• Home remodeling activity slowed last year.

Source: The Daily Feather

• The number of homes under construction is at the highest level in decades, …

Source: @jeffsparshott

… massively outpacing completions (as supply and labor shortages persist).

Source: @LizAnnSonders

• Construction equipment prices have been surging.

Source: Evercore ISI Research

• This chart shows the ratio of new vs. existing home inventories.

Source: Pantheon Macroeconomics

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6. The Oxford Economics US Recovery Tracker continues to trend lower.

Source: @GregDaco, @OxfordEconomics

7. State spending surged last year, …

Source: @citylab Read full article

… as tax receipts hit multi-year highs.

Source: Evercore ISI Research

Global Developments

1. The US rate differential vs. other economies suggests that the dollar should be stronger.

Source: Capital Economics

2. Commodity currencies tend to follow China’s demand for imports.

Source: Alpine Macro

3. How have different currencies performed this month (vs. USD)?

Source: Wells Fargo Securities

4. Global risk appetite has deteriorated.

Source: @WilliamsonChris, @IHSMarkit Read full article

5. Unemployment rates in the US, euro area, and Japan are nearing all-time lows. At the same time, a tight labor supply is contributing to rising wages.

Source: RBA

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Food for Thought

1. Employed but not at work due to illness:

Source: @WSJ Read full article

2. Skills that companies are focused on developing:

Source: McKinsey Read full article

3. The latest generation of GE wind turbines, in perspective:

Source: Cornerstone Macro

4. US military budget by year:

Source: @stephensemler

5. Updated figures on US foreign-born immigration:

Source: @crampell Read full article

5. Drug overdose rates between April 2020 and April 2021 (driven by fentanyl):

Source: @financialtimes Read full article

6. Global GDP growth coming from free economies:

Source: Bloomberg Read full article

7. Revising inflation forecasts:

Source: OECD Read full article

8. Changes in US spending patterns:

Source: @axios Read full article

9. Blood type distribution by country:

Source: Statista

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Have a great weekend!