Live Markets: The power of unloved bonds

Pentair

29/09/2022 17:46

* 
      Main U.S. indexes slide: Nasdaq down ~3%
    

        * 
      All S&P 500 sectors red: cons disc weakest group
    

        * 
      Dollar down; bitcoin up; gold, crude little changed
    

        * 
      U.S. 10-Year Treasury yield rises to ~3.76%
    

  
       Sept 29 - Welcome to the home for real-time coverage of
markets brought to you by Reuters reporters. You can share your
thoughts with us at 
    THE POWER OF UNLOVED BONDS (1230 EDT/1630 GMT) 
    The unprecedented rise in bond yields this year has prompted
global non-bank investors to cut their debt holdings to just 17%
of their overall allocation to fixed income, equities and cash,
the lowest since 2008, according JPMorgan. 
    Bond prices have plunged since the start of 2021, and
consequently, "effectively 14 years of previous bond overweights
have been already erased," the analysts wrote. 
    "The 250bp YTD rise in the Global Agg bond index yield that
took place in a period of nine months, represents the steepest
and largest rise in the history of the index, exceeding the bond
yield rise of 1994," they said.
    Allocation to cash, in contrast, has risen to its highest
since 2012, and that to equities has declined less sharply than
to bonds. 
    Non-bank investors include households, corporations, pension
funds, insurers, endowments and sovereign wealth funds.
    JPMorgan's analysts said there were two key implications
from this low allocation to bonds. The first is that for stocks
to stage a sustained bull rally, there would have to be a bull
run in bonds.
    Secondly, investors are now under less pressure to offload
more of their equity holdings to keep their portfolios balanced,
in light of the steep drop in the value of bonds, they said.
    Either way, JPMorgan's analysts said they believed there
wasn't so much scope for large downward moves in either stocks
or bonds, given investors' cash buffers.
    "Outside any interplay between equity and bond allocations,
a backdrop of high cash allocations provides in our opinion a
backstop to both equities and bonds, likely limiting any further
downside from here," they said.
   (Alun John)
    *****
    FED'S BIG HIKE PLAN TO PROVOKE A HARD LANDING-LAVORGNA (1155
EDT/1555 GMT)
    The Federal Reserve's unprecedented plans to hike interest
rates as the U.S. economy slows have one clear outcome, in the
thinking of economist Joe LaVorgna: A hard landing is coming!
    The Fed's hiking of its policy rate by 300 basis points so
far this year is the largest tightening since the six months
ended in March 1981 and the second-largest on record, says
LaVorgna, chief U.S. economist at SMBC Nikko Securities in New
York.
    This historic increase in rates is taking place as the Fed
accelerates its balance sheet reduction, a double-whammy for
growth and financial markets, he said in a note on Wednesday.
    The shift from quantitative easing to quantitative
tightening poses a substantial headwind to financial asset
prices, LaVorgna said. The current balance sheet run-off is
twice the pace of the 24 months ending in September 2019, when
the Fed's securities holdings decreased by $663 billion.
    "While many investors have focused on the level of real
rates and the fact they are still negative, it is the change in
interest rates that matters more," he said in the note.
    "This is evident from the housing market where activity has
collapsed despite the fact that mortgage rates are below the
inflation rate," he added.
    (Herbert Lash)
    *****    
    THURSDAY'S INDICATORS: TELL ME SOMETHING I DON'T KNOW (1115
EDT/1515 GMT)
    Data released on Thursday sang a familiar refrain: first,
the labor market is tight. And last, and by a common definition,
the United States economy was in recession during the first half
of the year.    
    The number of U.S. workers filing first time applications
for unemployment benefits  USJOB=ECI  unexpectedly dropped by
7.7% last week to 193,000, according to the Labor Department.
 urn:newsml:reuters.com:*:nL1N30Z2FW
    The number landed below the 200,000 mark for the first time
since early May, sinking beneath the lower end of a range
associated with healthy labor market churn.
    So the takeaway would appear to be the labor market is still
suffering from a supply/demand imbalance. 
    With about two unfilled positions for every unemployed
American, employers are loathe to hand out pink slips, a
situation which would appear to imply upward wage pressure - a
harbinger of systemic hot core inflation - is still alive and
kicking.
    "The labor market remains very tight, and the claims data do
not show any signs that slack is emerging," writes Thomas
Simons, money market economist at Jefferies. "If anything, the
recent claims data suggest that the labor market is tightening
up even more."
    Indeed. Market participants are in a topsy-turvy "good news
is bad news" mode. Robust labor market data shows the Fed's
interest rate hikes, designed to lasso inflation by dampening
demand, have yet to kick in. This could, in turn, prompt Powell
& Co to dial up their hawkish policy game. 
    The four-week moving average  USJOBA=ECI , which irons out
weekly volatility, dropped to 207,000, extending a downward
trend that began in mid-August.
    Ongoing claims  USJOBN=ECI , reported on a one-week lag,
edged down 2% to 1.347 million.
    The Commerce Department took its third and final swing at
second-quarter GDP  USGDPF=ECI , reiterating its prior reading -
in the April-June period, the U.S. economy shrank by 0.6% on a
quarterly annualized basis.
    Peeking under the hood, the most welcome news came from
consumer spending growth, which accounts for nearly 70% of U.S.
economic activity, was upwardly revised to 2% from 1.3%. 
    Among other contributors, private inventories and fixed
investment - which includes residential construction and
infrastructure - detracted 1.9 and 0.9 percentage points (ppt)
from the topline, respectively. 
    Robust exports added 1.5 ppt to the plus column, edging out
the 1.4 ppt contribution from consumer expenditures as the
biggest contributor. 
    The series was also revised back to the last quarter of
2016, which revealed a substantially more robust recovery from
the pandemic recession, the steepest and most abrupt economic
plunge in U.S. history.
    "Looking ahead, we expect positive but below-potential
growth in the second half of the year," says Rubeela Farooqi,
chief U.S. economist at High Frequency Economics. "But there are
substantial downside risks, from a rapid pace of Fed rate
hikes." 
    Wall Street was tanking in morning trading, forfeiting
Wednesday's solid gains and then some.
    Every sector and asset class was deep read, with consumer
discretionary  .SPLRCD  and chips  .SOX  plummeting further than
most.
    (Stephen Culp)
    *****
    STORM STOCKS TO WATCH IN IAN'S AFTERMATH (1040 EDT/1440 GMT)
    Jefferies issued a research note late Wednesday summarizing
the impact of Hurricane Ian on its multi-industrials coverage.
    More than 2.4 million homes and businesses in Florida were
without power early on Thursday, and Ian is expected to produce
strong winds, heavy rains and storm surge, including in Georgia
and the Carolinas, the U.S. National Hurricane Center said.
 urn:newsml:reuters.com:*:nL1N3100AP
    Jefferies called Generac Holdings Inc  GNRC.N  a "storm
stock," saying it should see some increased demand as power
disruptions increase awareness of generators. The company
typically sees a demand bump 6-12 months following a major
event. This was illustrated in Texas following Winter Storm Uri
in 2021, when Generac saw an approximate 3x increase in the
number of in-home consultations, the analysts wrote.
    Evoqua Water Technologies Corp's  AQUA.N  mobile fleet will
see increased demand as extreme weather events disrupt the water
supply. "This is especially true for slower moving hurricanes,
which tend to deliver more water and thus require more clean-up
work associated with wastewater," Jefferies said.
    There will also be higher demand for water removal,
Jefferies said, highlighting that Xylem Inc's  XYL.N  dewatering
business accelerated over the course of two quarters following
Hurricane Sandy.
    With respect to HVAC (heating, ventilation, and air
conditioning), A.O. Smith  AOS.N  could see more demand for
water heaters damaged by flooding, Jefferies said, adding that
Watsco Inc  WSO.N  has a significant HVAC distribution footprint
in Florida.
    When it comes to pool repair, Hayward Holdings Inc  HAYW.N 
and Pentair PLC  PNR.N  could see more demand for equipment and
parts, while Pool Corp  POOL.O  cited 1-2 points of revenue
growth following the Texas storm, according to Jefferies.
    Ian's wrath will certainly be felt across a wide variety of
sectors in the coming weeks as the damages are assessed.
 urn:newsml:reuters.com:*:nL1N30Z1RN
    Lance Tupper 
    *****     
    U.S. STOCKS: THE RED TIDE COMES BACK IN (0946 EDT/1346 GMT)
    U.S. stocks are lower early on Thursday as worries of a
global economic downturn from aggressive central bank rate hikes
and risks of potential contagion from a turmoil in UK markets is
once again turning investors risk averse.  .N 
    With this, the main U.S. indexes are down 1.5% or more, with
the Nasdaq  .IXIC  taking the biggest hit. Small-caps  .RUT ,
FANGs  .NYFANG  and chips  .SOX  are even weaker.
    All S&P 500  .SPX  sectors are red with consumer
discretionary  .SPLRCD  off the most. Defensive groups are
seeing the smallest declines.
    Meanwhile, after taking a big hit on Wednesday, the U.S.
10-Year Treasury yield  US10YT=RR  is trying to find its
footing. It is up from a close of around 3.71% to around 3.80%.
    That said, after rising to around 3.87% earlier, it has so
far stalled well shy of Wednesday's 4.0190% high. Traders are
eying action vs last week's close at 3.6970% for signs weekly
momentum may finally be cracking - click here:  urn:newsml:reuters.com:*:nL1N30X1PF
    Here is a snapshot of where markets stood shortly after the
open:
    (Terence Gabriel)
    *****
    NASDAQ COMPOSITE: WHEEZING, BUT TRYING TO CATCH ITS
"BREADTH?" (0900 EDT/1300 GMT)
    In a testament to just how weak the Nasdaq  .IXIC  has been,
on Monday of this week, the Nasdaq McClellan Oscillator (McOsc),
a breadth/momentum measure based on the raw data for net
advancing issues, plunged to an all-time low.
    That said, the total number of issues traded over time has
not been constant, and with the advent of decimal pricing in
2001, the number of unchanged issues has fallen.  
    We can create a normalized, or ratio-adjusted (RA) McOsc, by
dividing net advancing issues by the total number of advances
plus declines. Therefore, it allows us to better compare
readings over a long period of time, and assess historically
overbought or oversold levels.
    On Monday, the RA-McOsc, plunged to -98.3, which was the
14th lowest reading in its history using Refinitiv data back to
mid-1995:
    There have now been a total of 6,841 trading days (tds) over
this time frame, so although not the lowest reading ever as
logged by the raw data version of the indicator, it still showed
an eye-popping degree of weakness, while potentially signaling a
market at, or near, washed-out levels.  urn:newsml:reuters.com:*:nL1N30Z0TA
    Monday's reading was the lowest since a -102.4 reading on
March 16, 2020, which was just five trading days ahead of the
Nasdaq's March 23, 2020 pandemic crash low. The all-time low
reading for this measure occurred at -123.8 on March 12, 2020,
seven trading days ahead of the low for that swoon.
    Additionally, of note, Monday's reading was essentially
equal to the Dec. 24, 2018, reading of -98.7, which marked the
day of the Nasdaq's low for that decline.
    The measure has improved by vaulting to -35.86 as of
Wednesday close. That said, ideally, bulls want to see a
"breadth-thrust" develop to add confidence in the sustainability
of a turn. 
    Looking back from 2009 to 2020, RA-McOsc thrusts back above
+80 developed in the wake of major lows in 2009, 2010, 2011,
2016, 2018 and 2020.
    In the event the Nasdaq does end below Monday's 10,802.922
close, traders will eye the RA-McOsc to see how it behaves. It
formed a bullish convergence into the March 2020 market trough,
as well as the more recent June low.  urn:newsml:reuters.com:*:nL1N30Y0PJ  urn:newsml:reuters.com:*:nL1N30X0SY
    (Terence Gabriel)
    *****
    FOR THURSDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300
GMT - CLICK HERE:  urn:newsml:reuters.com:*:nL8N31034R 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
IXICMcOsc09292022    https://tmsnrt.rs/3E09vd5
Earlytrade09292022    https://tmsnrt.rs/3LQbKSh
Jobless claims    https://tmsnrt.rs/3SEX2Qj
GDP    https://tmsnrt.rs/3BUG49J
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Terence Gabriel and Lance Tupper are Reuters market analysts.
The views expressed are their own)