Futures Rebound From Worst Market Rout In Three Months

One of the ironic consequences of yesterday’s sharp, 0DTE-driven 1.5% selloff which was the biggest for the S&P since Sept 26 and which snapped a 9-day winning streak, is that with the market hitting the most overbought level in years earlier in the day, the liquidation reset the Relative Strength Indicator of the S&P back below 70, and thus no longer in overbought territory, which paradoxically has made a gradual year-end meltup even more likely once traders realize that nothing substantial has changed, the Fed has still pivoted dovish and that much of the technical overhang that prevented a move even higher may now be gone.

This is how overbought we were before the dump.

And now thanks to that 90 minute 0DTE puke, SPX is no longer overbought pic.twitter.com/V7ydsVqXOW

— zerohedge (@zerohedge) December 21, 2023

And sure enough, this morning we find that US futures are already well in the green, rebounding from Wednesday’s dump as the spotlight returns to – what else – prospective interest rate cuts from the Federal Reserve and other central banks, even as the market ignores warnings from those very same central banks’ officials that risk has risen too far, too fast. While Europe’s Stoxx 600 index dropped, tracking the weak Thursday close on Wall Street, futures for the S&P 500 and the Nasdaq 100 climbed more than 0.5% as of 7:50am ET, poised to recover from a bout of selling that saw them notch their worst declines in weeks. At the same time, the dollar resumed its slide against other Group-of-10 currencies, while Treasury 10-year yields — down more than 40 basis points this month — held just off five-month lows. Oil had risen earlier in the session, only to slump to session low after Angola announced that it was leaving OPEC+. US econ data includes 3Q final GDP, jobless claims, the Dec Philly Fed business outlook (8:30am), November leading index (10am) and December Kansas City Fed manufacturing activity (11am).

In premarket trading, Boeing shares rose 1.8% as China is said to approve the first 787 jet delivery since April 2021. Cryptocurrency-exposed stocks rose as Bitcoin once again rebounded from yesterday’s dump and rose above $44,000. Among the bigger movers were Coinbase +2.2%, Riot Platforms +3.3%, Cipher Mining +6.8%, TeraWulf +8.2%, Bit Digital +6.3% and others. Here are some other notable premarket movers:

BlackBerry US-listed shares fall 3.7% after the security software company’s forecast for fourth-quarter revenue fell short of the average analyst estimate.
Micron shares rise 5.9% after the company forecasted adjusted revenue for the second quarter that topped the average analyst estimate. Analysts note that pricing is recovering across the chipmaker’s product suite.
Salesforce shares rise 2.2% after Morgan Stanley upgrades to overweight from equal-weight, saying that the stock continues to trade at a discount to its large cap software peers.

Turning back to yesterday’s rout and following up on our note from yesterday, prevailing consensus is that the stock tumble was the immediate result of ODTE, options, noting that hefty “put” volumes likely led option holders to dump the underlying equities.

But immediately the narrative turned to damage control, with many (i.e., the bulls) arguing that the broader picture of slowing inflation and rate-cut bets should allow markets to rally further, to wit: “If you look at tightening cycles through history, once the market buys into the belief that the Fed’s done, you do see a pretty sharp rally in bonds,” said Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management. “Rallies from the relief the Fed is no longer a big headwind can last a while.”

Further to that point, Citi strategists told clients to buying pullbacks, adding investors should “expect volatility ahead, but with an eventual Fed pivot as a north star.”

Meanwhile, indicating that there is total messaging confusion over at the Fed, on Wednesday’s Philly Fed President Patrick Harker added to the rate-cut conviction Wednesday, saying it’s important that interest rates head lower, though he cautioned the central bank should not move too fast and not “right away.” In doing so, he refuted much of the attempts to walk back the dovish pivot from Fed speakers earlier in the week, and thereby only encouraged continued buying.

Looking ahead, traders will assess fresh economic data, including US GDP and jobless claims figures, due later Thursday, with the latter expected to have ticked up slightly from the previous week. Nike earnings should provide insights on the state of US consumers. Then Friday brings UK GDP data, US consumer sentiment and so-called core personal-consumption expenditures price index —  the Fed’s preferred inflation gauge.

European stocks were lower, catching down to the Thursday US rout, with the Stoxx 600 losing 0.5%. Real estate, tech and personal goods sectors — all of which are underperforming, with basic resources the only industry managing to gain ground. Among individual stock movers, Vodafone Group Plc jumped more than 2% in London after Bloomberg reported Swisscom AG is weighing an offer for the firm’s Italian business. Here are some of the other most notable movers:

Commerzbank rises as much as 3.3% after the German bank intends to launch a €600m share buyback in early January after securing approval from the European Central Bank
Cementir rises as much as 4% and hits a three-month high after Stifel maintained its buy rating on the concrete and cement producer and raised its price target to €13.50 from €10
Aixtron shares increase up to 1.7% and is the best performing semiconductor-related stock in Europe after US memory chip firm Micron rose following a strong revenue forecast
Sydbank rises as much as 1.3% after the bank boosted its net income guidance for the full year; it now sees net income DKK3.20 billion to DKK3.35 billion vs. estimate of DKK3.19 billion
Norsk Hydro declines up to 4.4% after the aluminum company warned it will book impairments against several mining and refining assets because of weak alumina and bauxite markets
Philips shares drop as much as 2.7% after the Dutch medical device maker issued a voluntary recall notification for its Panorama 1.0T HFO magnetic resonance imaging system
Smart Metering Systems falls as much as 6.8% after shareholder PrimeStone and its founders said they intend to vote against the takeover offer tabled by KKR due to the price

Earlier in the session, Asian stocks snapped a two-day winning streak, following Wall Street lower, as Japanese benchmarks lost their momentum from a central bank decision-led rally. The MSCI Asia Pacific Index fell as much as 0.7%, heading for its lowest close in a week, as tech and consumer discretionary shares declined. Toyota Motor was among the biggest drags after its subsidiary’s offices were raided over a safety scandal and the automaker recalled 1 million cars in the US.

Hang Seng and Shanghai Comp started in the green with the former initially conforming to the broader risk tone before ebbing lower with Tech and Energy among its biggest losers. Mainland China was supported following a hefty PBoC liquidity operation via 7 and 14-day reverse repos.
Japan’s Nikkei 225 slipped at the open and underperformed throughout the session, and consumer-geared sectors were among the worst performers, whilst JPY dynamics did not help the index.
Australia’s ASX 200 saw the deepest losses in its Tech and Gold sectors, and the index briefly fell under 7,500.

The Bloomberg Dollar Spot Index is down 0.2%. The Japanese yen is the best performer among the G-10 currencies, rising 0.4% versus the greenback.

In rates, Treasuries initially fell across the curve, with US 10-year yields rising 4bp to 3.88%, before recovering much of the loss and trading at 3.85% last in an extremely illiquid market. Bunds and gilts are little changed after paring earlier gains. In European rates, Italian bonds outperform, spurred by additional pricing of ECB easing and sending the 10-year yield to a 16-month low. US session focus includes weekly jobs data, GDP and $20 billion 5-year TIPS reopening at 1pm.

In commodities, oil prices are lower, with WTI falling 0.4% to trade near $73.90, after Angola announced it would withdraw from OPEC+ as many had already expected. Spot gold adds 0.1%.

Looking to the day ahead, data releases from the US include the final Q3 GDP, initial jobless claims, December Philadelphia Fed business outlook (8:30am), November leading index (10am) and December Kansas City Fed manufacturing activity (11am). Meanwhile from central banks, we’ll hear from the ECB’s Lane. Finally, today’s earnings releases include Nike.

Market Snapshot

S&P 500 futures up 0.6% to 4,777.00
MXAP down 0.4% to 164.47
MXAPJ down 0.2% to 513.84
Nikkei down 1.6% to 33,140.47
Topix down 1.0% to 2,325.98
Hang Seng Index little changed at 16,621.13
Shanghai Composite up 0.6% to 2,918.72
Sensex up 0.5% to 70,827.87
Australia S&P/ASX 200 down 0.4% to 7,504.12
Kospi down 0.5% to 2,600.02
STOXX Europe 600 down 0.3% to 476.45
German 10Y yield little changed at 1.96%
Euro little changed at $1.0943
Brent Futures up 0.3% to $79.90/bbl
Gold spot up 0.2% to $2,036.37
US Dollar Index little changed at 102.38

Top Overnight News

European stocks slipped, following losses in the US and Asia as traders dial back optimism over possible Federal Reserve interest-rate cuts and trim positions before the long Christmas weekend.
Citigroup Inc. has decided to exit the distressed-debt trading business, the latest retrenchment in Chief Executive Officer Jane Fraser’s effort to reshape the firm in pursuit of higher returns.
Europe’s biggest asset manager is shorting the pound on the conviction that the Bank of England will start cutting interest rates in the first half of 2024.
This year’s hottest derivatives trade, and perhaps also its most divisive, stole the limelight one final time for 2023 as market watchers cast zero-day options as the villains behind Wednesday’s rally-ending slump in US equities.
The frenzied adoration of South Korean retail traders for everything EV battery-related has sparked a meteoric rally of one cathode producer, making it the world’s best-performing stock this year.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mostly lower as the downbeat sentiment from Wall Street reverberated despite a lack of major catalysts to spark the global equity selloff, although Mainland Chinese markets eventually eked out gains. ASX 200 saw the deepest losses in its Tech and Gold sectors, and the index briefly fell under 7,500. Nikkei 225 slipped at the open and underperformed throughout the session, and consumer-geared sectors were among the worst performers, whilst JPY dynamics did not help the index.  Hang Seng and Shanghai Comp started in the green with the former initially conforming to the broader risk tone before ebbing lower with Tech and Energy among its biggest losers. Mainland China was supported following a hefty PBoC liquidity operation via 7 and 14-day reverse repos.

Top Asian News

Japanese government raises FY23/24 GDP growth forecast to +1.6% (prev. +1.3%); raises FY24/25 forecast to 1.3% (prev. 1.2%), according to Reuters citing the Cabinet Office.
Japanese PM Kishida’s Cabinet set to approve draft budget for fiscal year starting April that will reduce spending for the first time in 12 years, according to Nikkei. Japan’s fiscal 2024 proposal calls for JPY 1tln in reserves for programs to ease the burden of inflation and promote wage hikes.
Japanese unions reportedly target over JPY 1,600/hr minimum wage by 2035, according to NHK.
Analysts cited by Chinese Securities Journal see room for moderate “downward movement in the follow-up LPR”.
PBoC injected CNY 195bln through 7-day reverse repos at 1.80% and CNY 226bln via 14-day reverse repos at 1.95%; both rates maintained.
South Korea to relax capital gains tax threshold for large shareholders, says capital gains tax for listed shares will hit those holding more than KRW 5bln starting 2024, according to the Finance Ministry.
Japanese FX Diplomat Kanda says if Japan is not attractive as an investment decision, it is natural for the JPY to weaken
China’s MOFCOM says the US is abusing export control measures
China’s large banks are to cut deposit rates on Friday, via Guangzhou Daily; China’s major commercial banks to cut time deposits on Friday, via Reuters citing sources; 1yr & 2yr expected to be cut by 10bp & 20bp respectively, 3yr & 5yr by 25bp
China’s Ministry of Finance says it is adjusting the import tax for some goods; adjusting import/export tariffs from January 1st. Products include ethylene and propylene. To cut export tariffs on high-purity aluminium.
China bans exports of some rare-earth processing technologies, via Bloomberg

European bourses, Eurostoxx50 (-0.5%), posts significant losses as the region reacts to the late doors Wall St. selloff. Marked underperformance in the AEX (-0.7%), hampered by heavyweight Philips (-2.1%). European sectors have a negative bias; Autos lag hampered by WSJ reports that the Biden administration is mulling raising tariffs on EVs. US Equity Futures are firmer, NQ (+0.7%), across the board attempting to reverse some of the hefty losses seen in yesterday’s session; Chip names extend gains post-Micron earnings; MU (+6.5%), NVDA (+1.3%), AMD (+1.0%)

Top European news

ECB’s de Guindos “Once we see inflation is clearly converging in a stable manner to our target of 2%, monetary policy might then start to ease. But it’s still too early for that to happen. The data have been favourable but still not enough for us to change our monetary policy. It’s therefore too early to talk about a cut in interest rates.”
JPMorgan says the risk of Turkey pivoting from orthodox monetary policy moves is not significant

FX

DXY is in consolidation mode amid quieter trade; the index is contained between 102.25-45.
EUR meanders around the unchanged mark against the Dollar and marginally firmer against the Pound.
GBP holds a slight negative bias against the Dollar post-borrowing figures, though trade is secured between a tight range of 1.2651-1.2613.
The Yen is the G10 best performer vs. the Dollar as the gap continues to close on the pre-BoJ announcement level of 142.65.
PBoC set USD/CNY mid-point at 7.1012 vs exp. 7.1401 (prev. 7.0966)

Fixed Income

USTs are incrementally firmer but around 5 ticks shy of the WTD 112.31+ best, despite a poor 20yr auction.
Gilts are once again the standout outperformer in a continuation of Wednesday’s CPI-driven dovish move.
Bunds retain an underlying bid though with overall action contained as attention turns to ECB’s Lane.

Commodities

WTI and Brent display contained and rangebound action and well within yesterday’s parameters as newsflow remains light; market participants await developments in the Red Sea.
Note, crude benchmarks have most recently come under some modest pressure and have tilted incrementally into the red, despite a lack of fresh fundamental drivers.
Dutch TTF remains bid as Red Sea concerns continue and we await any update on Wednesday’s reporting of a corridor being formed.
Spot Gold is around unchanged on the session, in sympathy with a lacklustre Dollar and Base Metals trade with little direction.
Global crude steel output +3.3% Y/Y to 145.5mln tonnes, China +0.4% to 76.1mln tonnes, according to Worldsteel.

Geopolitics

The Biden administration is reportedly mulling raising tariffs on some Chinese goods, including EVs, WSJ sources said, in an attempt to bolster US clean energy against cheaper Chinese exports. Other targets for potential tariff-rate increases are Chinese solar products and EV battery packs, sources added.
US Senator Rubio calls on the Biden administration to sanction Chinese chip designer Brite Semiconductor following the Reuters report that Brite offers chip design services to at least six Chinese military suppliers and is part-owned by SMIC.
US Central Command says rocket fired at Al Assad Air Base in Iraq on Dec. 20, with no injuries or damage caused, according to Reuters.
North Korea’s Kim said the recent ICBM launch showed North Korea’s strategy not to hesitate even a nuclear attack when the enemy provokes it with nukes, according to KCNA.
Russian and Chinese militaries held strategic consultations in Beijing on Dec 20th, according to the Chinese Defence Ministry. The two sides had an in-depth exchange of views on the international and regional security situation and relations between the two militaries.
Chinese Finance Ministry said China will suspend some tariff cuts on imports from Taiwan from Jan 1st 2024, according to Reuters.
India’s Basmati rice exports could be impacted if challenges around the Red Sea persist, via Reuters citing sources

US Event Calendar

08:30: 3Q GDP Annualized QoQ, est. 5.2%, prior 5.2%
3Q Personal Consumption, est. 3.6%, prior 3.6%
3Q GDP Price Index, est. 3.6%, prior 3.6%
3Q Core PCE Price Index QoQ, est. 2.3%, prior 2.3%

08:30: Dec. Initial Jobless Claims, est. 215,000, prior 202,000
Dec. Continuing Claims, est. 1.88m, prior 1.88m

08:30: Dec. Philadelphia Fed Business Outl, est. -3.0, prior -5.9
10:00: Nov. Leading Index, est. -0.5%, prior -0.8%
11:00: Dec. Kansas City Fed Manf. Activity, est. -4, prior -2

DB’s Henry Allen concludes the overnight wrap

I’m going on my Christmas leave tomorrow, so this will be the last edition of the EMR in 2023. Many thanks for all your support and interactions over the last 12 months, and wishing you and your families a very merry Christmas and a happy new year. We’ll be back again in 2024.

After an astonishing melt-up over recent weeks, markets suddenly shifted gear late in the US session yesterday, with the S&P 500 (-1.47%) posting its biggest daily decline since September. Indeed, just 19 companies in the entire index were higher on the day, which is the lowest number since March at the height of the banking turmoil, so this was an incredibly broad-based decline. The turnaround happened around 90 minutes before the US close, and although there wasn’t an obvious catalyst that was responsible, we had just seen the fastest advance for the S&P 500 in over 3 years, so maintaining that momentum was always likely to prove difficult.

The losses came as part of a broader risk-off move, and yesterday’s selloff saw investors grow even more confident about the chances of rate cuts from the Fed in 2024. In fact, futures are now pricing a 92% chance of a cut by March, along with 152bps of cuts in total by the December 2024 meeting. That’s equivalent to more than six 25bp rate cuts next year, which is normally the sort of pace of you see around a recession, and is a more aggressive pace than the dot plot last week, which only signalled three cuts. So there’s a clear divergence between the Fed’s own signals and market pricing, which has remained even as several officials have actively pushed back on the reaction since the FOMC last week.

With growing expectations of rate cuts, the 10yr Treasury yield fell another -8.4bps yesterday to 3.85%, which is its lowest level since July. And the more policy-rate-sensitive 2yr yield was down -10.8bps to 4.33%, its lowest since May. But the bond rally had already been clear earlier in the session thanks to some fresh downside surprises on inflation yesterday. In particular, the UK CPI print showed headline CPI falling to +3.9% in November (vs. +4.3% expected), which was beneath every economist’s estimate on Bloomberg. Core CPI also fell back to +5.1% (vs. +5.6% expected), so the details also looked very positive as well. In turn, that led investors to ramp up the chance of rate cuts from the Bank of England next year and led to a strong outperformance for UK gilts. For instance, the 10yr gilt yield ended the day -12.5bps lower at 3.52%, which is its lowest level since early April. And at the front end, the 2yr gilt yield fell -17.3bps to 4.06%, which is its lowest since May.

That narrative of falling inflation then got further support from the German PPI release, which showed that PPI was at -7.9% year-on-year in November (vs. -7.5% expected). That helped 10yr bund yields (-4.6bps) to close beneath 2% for the first time since December 2022, and those moves were echoed elsewhere, with yields on 10yr OATs (-4.6bps) at their lowest since January, and yields on 10yr BTPs (-4.0bps) at their lowest since December 2022 as well.

Before the late selloff, we had actually had another round of positive US data yesterday. That included the Conference Board’s consumer confidence measure, which was back up to a 5-month high of 110.7 (vs. 104.5 expected), whilst the monthly improvement was actually the strongest since March 2021. The details were also positive, with the present situation and the expectations components both moving higher, and there was more optimism about the labour market too. For example, the share saying jobs were plentiful moved up to a 5-month high of 40.7%, and the share saying they were hard to get fell back to 13.2%. There were also more positive signs from the US housing market, with existing home sales inching up from their 13-year low to an annualised rate of 3.82m (vs. 3.78m expected) in November.

Nevertheless, the S&P 500 (-1.47%) still lost substantial ground yesterday, meaning the index closed -2.05% beneath its all-time high from January 2022. Within the S&P 500, FedEx was a major underperformer (-12.05%) after disappointing results the previous evening, which showed declines in air freight and cargo volumes in the quarter ending November 30. Otherwise, small-cap stocks underperformed, with the Russell 2000 down -1.89%. However, earlier in the day in Europe, the STOXX 600 (+0.19%) closed at a 23-month high before the US selloff, and the FTSE 100 (+1.02%) was one of the biggest outperformers after the UK inflation release.

Overnight in Asia, equities have put in a more divergent performance. On the one hand, the Nikkei (-1.62%) and the KOSPI (-0.79%) have both lost ground, but there have been gains for the CSI 300 (+0.82%), the Shanghai Comp (+0.42%), and the Hang Seng (+0.11%). Looking forward, there’s also been a recovery in futures on the S&P 500, which are up +0.34% currently. And there’s been a slight bounceback in the 10yr Treasury yield as well, which is up +1.8bps this morning to 3.87%.

To the day ahead now, and data releases from the US include the weekly initial jobless claims, the third estimate of Q3 GDP, and the Conference Board’s leading index for November. Meanwhile from central banks, we’ll hear from the ECB’s Lane. Finally, today’s earnings releases include Nike.