Neil's Morning Update - 12/1/21
Seeking Alpha Analyst Since 2013
Managing Partner of Sethi Associates, Ltd., a family owned investment manager specializing in investments in real estate, public markets, and venture capital with a current focus on esports investments. You can view my LinkedIn profile here. https://www.linkedin.com/in/neil-sethi-31204051. Started the blog at the request of friends who wanted an easier way to follow my thoughts on the markets and economic data, and now I share the articles on Seeking Alpha. Feedback always welcome!
Neil's Morning Update - 12/1/21
Please excuse typos. Mornings are tilted more international, evenings more U.S. Continuing to try to make this more digestible for those who are not as familiar with the markets, lingo, etc. Feel free to leave your thoughts in the comments section, they are appreciated. Also, I don't discuss crypto extensively as I don't consider myself knowledgeable enough to talk intelligently on the subject (and there are plenty of other sources for that). Remember, this is a free blog I put out to try to help people get information, so keep that in mind.
A small glossary.
SPX = S&P 500
Naz = Nasdaq Composite
NDX = Nasdaq 100 (100 largest stocks in the Naz)
RUT = Russell 2000 (smaller stocks)
DMA = Daily Moving Average (the moving average over the given time period (20, 50, 100, 200 days normally)).
MACD = Moving Average Convergence Divergence (basically a trend indicator)
RSI = 14-day Relative Strength Index (basically what it sounds like)
BBG = Bloomberg
WSJ = Wall Street Journal
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After a volatile day in global markets (if you need a refresher, see last evening's summary), as we approach the open of equity trade in NY, stocks are bouncing back after their second 90% down volume day (NYSE) in three sessions (which, as we've discussed is often good for a bounce). Also, as we noted last night, the first of the month has generally been favorable this year. This is despite a continued sharp rise in shorter-term bond yields and more curve flattening (the 5-30's curve is now the flattest since March 2020).
The flattening Treasury yield curve “doesn’t suggest imminent doom for the equity market in and of itself,” Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., said on Bloomberg Television. “Alarm bells go off in terms of recession” when the curve gets closer to inverting, she said.
Perhaps boosting sentiment is continued support for the idea that cases of the new Omicron variant have been milder than other variants. In that vein, travel stocks and carmakers led a broad-based gain in the Stoxx Europe 600 index, all but wiping out Tuesday’s decline that capped only the third monthly loss for the benchmark this year. MSCI Inc.’s Asia-Pacific share index jumped the most since mid-October, and emerging-market stocks snapped three days of declines. In the US, small caps, which have seen the worst of the selling the last week, are leading up over 2% while the SPX and NDX are up around 1.3%.
Here's the SPX futures this morning. 20-DMA remains overhead. Also, as of now, we are on our third day of lower highs.
In U.S. corporate news (Argus):
salesforce.com (CRM 266.00, -18.96): -6.7% after issuing downside EPS guidance for fiscal Q4 and downside revenue guidance for fiscal Q1 and FY23. The company beat EPS estimates and promoted Bret Taylor to Vice Chair and Co-CEO. Merck (MRK 76.50, +1.59): +2.1% after an FDA advisory panel narrowly endorsed the company's COVID-19 oral antiviral. Hewlett Packard Enterprise (HPE 14.19, -0.16): -1.1% despite beating EPS estimates and providing in-line guidance. DoorDash (DASH 185.00, +6.23): +3.5% after the stock was upgraded to Buy from Hold at Gordon Haskett.
Asia
Major Equity indices in the Asia-Pacific region ended Wednesday on a mostly higher note. Japan's Nikkei: +0.4% Hong Kong's Hang Seng: +0.8% China's Shanghai Composite: +0.4% India's Sensex: +1.1% South Korea's Kospi: +2.1% Australia's ASX All Ordinaries: -0.4%.
Argus - In news, China's Vice Premier Liu said that the country's 2021 GDP growth will be above target. Press reports from South Korea indicate that the country's government is being lobbied to increase tax and R&D subsidies to the semiconductor industry.
In economic data, Australia's Manufacturing PMI was in expansionary territory for the 18th month in a row although GDP contracted in 3Q while Japan's Manufacturing PM I reached its highest level since January 2018. China's Caixin Manufacturing PMI fell into contraction for the first time in three months. S Korean trade beat
China's November Caixin Manufacturing PMI 49.9 (expected 50.5; last 50.6)
Japan's November Manufacturing PMI 54.5 (last 54.2) and Q3 Capital Spending 1.2% yr/yr (last 5.3%)
South Korea's November trade surplus $3.09 bln (last surplus of $1.78 bln). November Imports 43.6% yr/yr (expected 40.5%; last 37.7%) and November Exports 32.1% yr/yr (expected 27.7%; last 24.1%). November Nikkei Manufacturing PMI 50.9 (last 50.2)
India's November Markit Manufacturing PMI 57.6 (expected 55.1; last 55.9)
Australia's Q3 GDP -1.9% qtr/qtr (expected -2.7%; last 0.7%); 3.9% yr/yr (expected 3.0%; last 9.5%). November Manufacturing PMI 59.2 (last 58.2) and November Commodity Prices 36.2% yr/yr (last 42.8%)
Commenting on the latest survey results, Jingyi Pan, Economics Associate Director at IHS Markit, said: “Improvements in the COVID-19 situation, both domestically and in the region, enabled Australia’s manufacturing sector to expand faster in November. “That said, supply chain issues affected foreign demand, inventory building efforts and contributed to a significant rise in work outstanding for Australian manufacturers. Business sentiment likewise was affected by these supply issues. “Once again, the accumulation of supply chain issues may be linked to reopening-related surge in demand and it will be worth monitoring whether these clear in the short- to medium-term, especially in the context of price pressures. On the flip side, overall growth momentum only improved, helping to provide some relief from supply concerns
New Zealand's October Building Consents -2.0% m/m (last -2.0%)
And in all the excitement over the Moderna CEO's comments, etc., yesterday morning, I missed putting in the BBG article about the Chinese PMI's. Here was what was supposed to be included yesterday.
China’s factory sentiment improved in November after a power crunch subsided and price pressures eased, helping to underpin an economy that’s being hit by a property slump.
The official manufacturing purchasing managers index rose to 50.1, the first time in three months it exceeded the 50 mark that signals an expansion in production. The non-manufacturing gauge, which measures activity in the construction and services sectors, fell slightly to 52.3. Both measures beat economists’ expectations.
November usually sees a seasonal rebound as there are more working days compared to October when China closes for a week-long national holiday. Energy shortages, which ravaged factory production in September and October, also eased during the month as coal producers boosted output and inventories rose.
“China’s manufacturing outlook remains stable as China maintains its advantage in global manufacturing supply chain amidst the ongoing disruptions and shortages,” said Liu Peiqian, China economist at NatWest Group Plc. “However, the pace of growth may normalize in coming quarters as the demand outlook softens.”
Despite the improvement in the overall PMI, the data highlighted that demand both at home and abroad remained sluggish. While the index for new export orders rose to 48.5, it’s remained in contraction territory for seven months. New orders only improved slightly to 49.4 from 48.8.
The PMI survey showed a pickup in construction to 59.1 from 56.9, which suggests “activity seems to be reactivated, thanks to government relaxation measures supporting property projects,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd.
What Bloomberg Economics Says...
“The beat relative to consensus expectations reduces the urgency for policy makers to turn up support. Even so, downward pressures on the economy remain strong, and the emergence of the omicron variant is adding uncertainties to the global economy.”
-- Chang Shu, chief Asia economist
And China will ban variable interest entities, "closing a loophole long used by the country’s technology industry to raise capital from overseas investors." BBG.
China is planning to ban companies from going public on foreign stock markets through variable interest entities, according to people familiar with the matter, closing a loophole long used by the country’s technology industry to raise capital from overseas investors.
The ban, intended in part to address concerns over data security, is among changes included in a new draft of China’s overseas listing rules that may be finalized as soon as this month, said the people, asking not to be identified discussing private information. Companies using the so-called VIE structure would still be allowed to pursue initial public offerings in Hong Kong, subject to regulatory approval, the people said.
The China Securities Regulatory Commission said on its website Wednesday that a media report about banning the overseas listings of companies using the VIE structure is not true, without giving further details.
Companies currently listed in the U.S. and Hong Kong that use VIEs would need to make adjustments so their ownership structures are more transparent in regulatory reviews, especially in sectors off limits for foreign investment, the people said. It’s unclear if that would mean a revamp of shareholders or, more drastically, a delisting of the most sensitive firms -- moves that could revive fears of a decoupling between China and the U.S. in areas like technology. Details of the proposed rules are still being discussed and could change.
The overhaul would represent one of Beijing’s biggest steps to crack down on overseas listings following the New York IPO of ride-hailing giant Didi Global Inc., which proceeded despite regulatory concerns. Authorities have since moved swiftly to halt the flood of firms seeking to go public in the U.S., shuttering a path that’s generated billions of dollars for technology firms and their Wall Street backers.
Europe
As of 8 am Eastern, major European indices trade on a firmly higher note. STOXX Europe 600: +1.3% Germany's DAX: +1.8% U.K.'s FTSE 100: +1.6% France's CAC 40: +1.8% Italy's FTSE MIB: +1.9% Spain's IBEX 35: +1.8%.
Argus - In news, Germany's incoming Chancellor Scholz said that action will have to be taken if inflation does not ease and that high inflation over the long run will not be tolerated. German real estate company Adler announced a sale of its EUR800 mln property portfolio.
In economic data, Manufacturing PMI readings from major economies remained in expansionary territory, though they were mixed relative to expectations. German retail sales for October missed estimates.
Eurozone's November Manufacturing PMI 58.4 (expected 58.6; last 58.6)
Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said: “A strong headline PMI reading masks just how tough business conditions are for manufacturers at the moment. Although demand remains strong, as witnessed by a further solid improvement in new order inflows, supply chains continue to deteriorate at a worrying rate. Shortages of inputs have restricted production growth so far in the fourth quarter to the weakest seen over the past year and a half. “Especially subdued production was again seen in Germany, France and Austria in November, albeit offset by strong performances seen in Italy, Ireland and the Netherlands, which helped lift the overall pace of production growth slightly during the month. “A record rise in inventories meanwhile reflected increased efforts by manufacturers to build safety stocks, in turn driven by fears of ongoing shortages of inputs in coming months. “With demand once again outstripping supply, November saw a continuing sellers’ market, pushing prices charged for manufactured goods higher at a rate surpassing anything previously recorded in almost two decades. Higher factory gate prices suggest consumer inflation has further to rise. “Looking ahead, rising COVID-19 infection rates cast a darkening cloud over the near-term outlook, threatening to further disrupt supply chains while at the same time diverting spending from consumer services to consumer goods again, therefore worsening the imbalance of supply and demand.”
Germany's November Manufacturing PMI 57.4 (expected 57.6; last 57.6). October Retail Sales -0.3% m/m (expected 1.0%; last -1.9%); -2.9% yr/yr (expected -2.0%; last -0.6%)
U.K.'s November Manufacturing PMI 58.1 (expected 58.2; last 58.2). November Nationwide HPI 0.9% m/m (expected 0.5%; last 0.7%); 10.0% yr/yr (expected 9.3%; last 9.9%)
France's November Manufacturing PMI 55.9 (expected 54.6; last 54.6)
Italy's November Manufacturing PMI 62.8 (expected 61.1; last 61.1)
Spain's November Manufacturing PMI 57.1 (expected 57.9; last 57.4)
Swiss November procure.ch PMI 62.5 (expected 6 4.4; last 65.4). November CPI 0.0% m/m (expected -0.1%; last 0.3%); 1.5% yr/yr (expected 1.4%; last 1.2%)
Turkey Manufacturing PMI (NOV): 52.0 (prev 51.2)
As Greece imposes a monthly fine on the unvaccinated. BBG.
Greek Prime Minister Kyriakos Mitsotakis announced mandatory Covid-19 vaccination for all Greeks above 60 years of age before a cabinet meeting in Athens on Tuesday, in an effort to tackle the new omicron variation threat ahead of the festive season.
Those who refuse to get vaccinated will have to pay a monthly fine of 100 euros ($114) for each month they don’t get jabbed, starting on Jan. 16, according to Mitsotakis. The penalty will be imposed by the tax authorities directly to those who haven’t been inoculated and the funds collected will be given to Greek hospitals fighting the pandemic.
“It is not a punishment,” Mitsotakis said. “I would say it is a health fee.”
In Greece, only 60,000 among the 580,000 unvaccinated people over 60 years old received the vaccine in November. Greece’s vaccination ratio in this age group is around 83% compared to Portugal’s 98%, Mitsotakis said.
Those people must be the first to be protected, as they are often the ones who go to the hospital when it’s too late, further aggravating their situation and preventing the hospitalization of people with other serious diseases, the premier said.
“Experts estimate that the importance of the vaccine in a 70-year-old person is equivalent to 34 vaccinations of younger ones in terms of public health,” according to Mitsotakis.
And Turkey's central bank steps in to support the crumbling Lira. WSJ.
ISTANBUL—Turkey’s central bank moved Wednesday to prop up the country’s collapsing currency, selling foreign reserves after the lira reached new lows following comments by President Recep Tayyip Erdogan in defense of his unorthodox economic policies.
The lira rebounded after the bank said it was taking action to address “unhealthy price formations in exchange rates.” The free-falling lira has heaped economic pressure on ordinary Turkish people, who are struggling with rising prices of food, fuel, medicine and other essential goods.
The intervention demonstrates that Turkish officials view the collapsing lira as a potential source of broader economic and political problems. Protests have erupted in Turkish cities in recent days, with demonstrators calling on Mr. Erdogan to resign. But the bank has limited ammunition to engineer a full-scale recovery in the lira without a change in policy from Mr. Ergodan, who has tried to fight soaring inflation with cuts in interest rates—a course most economists say will make the problem worse.
“We’ve reached a point that they recognize we’re on the brink of a systemic problem and if they can’t raise rates, they use foreign currency intervention,” said Timothy Ash, an emerging-markets strategist at BlueBay Asset Management.
And some ECB policymakers look to push off decision on bond buying program.
FRANKFURT, Dec 1 (Reuters) - A growing number of European Central Bank governors are considering delaying part of a decision on the ECB's stimulus plans as the outlook has been muddied by a new coronavirus variant and mounting price pressures, sources said.
The ECB's Governing Council will meet on Dec. 16 to decide whether to end its emergency bond purchases in March and how much debt to buy after that date in an effort to stabilise inflation in the euro zone at 2%.
With policymakers gathering for a seminar on Wednesday, three sources on or close the ECB's policy-making Governing Council said there was agreement on ending the Pandemic Emergency Purchase Programme in March, as repeatedly signalled by President Christine Lagarde.
But some governors would favour leaving a decision on bond purchases after March to the ECB's following policy meeting on Feb. 3, when more will be known about the impact of the Omicron variant and the outlook for inflation, the sources added.
They were likely to face some resistance from the ECB's Executive Board, which has guided for a decision in December and may be wary of upsetting bond investors looking for reassurance.
Commodities/Currencies/Bonds
Bonds - As noted, yields rising in a bear flattening (shorter yields rising more than longer ones) with the 2-year yield moving up seven basis points to 0.6%, and 10-year up four basis points to 1.48%. This puts the 2-year towards the top and the 10-year yield the bottom of the recent ranges.
Dollar (DXY) - Down for a fourth day despite the move higher in yields. Currently at $95.85. Remains in intermediate-term uptrend. Daily technicals have turned negative.
VIX - Falling as we anticipated but remains above lows on Monday. Currently at 23.75.
Crude (/CL) - After getting hammered again yesterday, bouncing back mildly up a little over 2%, off the highs, as OPEC meeting is ongoing (latest headlines less than bullish on increasing surplus and no hint as to a pause in the scheduled output increase). Currently at $67.70 WTI. Daily technicals remain negative.
And the OPEC+ joint technical committee is meeting now (full committee meeting tomorrow). They have initially reported that they see a worsening surplus in 1Q22. They have said they will not discuss the scheduled 400kbd increase for January leaving that for the full meeting tomorrow.
LONDON (Reuters) - OPEC+ sees the oil surplus worsening to 2 million barrels per day (bpd) in January, 3.4 million bpd in February and 3.8 million bpd in March next year, an internal report seen by Reuters showed.
“Generally, the impact of Omicron seems to be jet-fuel related for now, particularly in Africa and Europe,” the report said.
“Transportation fuel demand within Europe might be also affected,” it added.
And we talked about the negative gamma flows that likely exacerbated the crude selloff. Goldman out with a note this morning in that regard noting current prices impute a massive 7mbd fall in demand.
Nat Gas (/NG) - Continues to sell off now that it's broken major support, now slicing through the $4.50 level. Down another -3%. Currently at $4.42. Nothing really to support until the 200-DMA which is way down at $3.87. Daily technicals back to negative, and its intermediate term is broken.
Gold (/GC) - Bouncing this morning up almost 1% but running into a lot of resistance. Currently at $1790. Daily technicals remain negative.
Copper (/HG) - Down a bit this morning but remaining above yesterday's lows. Daily technicals tilt negative. Lots of lines on this one as it is settling into a trading range. In longer term uptrend.
US Data
So far this morning we've gotten the ADP Employment Change report for November and the weekly MBA Mortgage Applications Index. Headlines are below. I'll have an update out on ADP which came in just above estimates.
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US ADP Employment Change Nov: 534K (est 525K; prev 571K; prevR 570K)
Mortgage apps fell on a big drop in refi's (down -15% w/w and -41% y/y) as mortgage rates increased. Purchases though rose another 5% and are down only -8% against very difficult comps from last year.
US MBA Mortgage Applications Nov 26: -7.2% (prev 1.8%)
- MBA 30 Year Mortgage Rate 26 Nov: 3.31% (prev 3.24%)
“Mortgage rates rose for the third week in a row, reducing the refinance incentive for many borrowers. The 30-year fixed rate hit 3.31 percent – the highest since this April – and led to refinance applications falling more than 14 percent. Over the past three weeks, rates are up 15 basis points and refinance activity has declined over 18 percent,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Despite higher mortgage rates, purchase applications had a strong week, mostly driven by a 6 percent increase in conventional loan applications. Conventional loans tend to be larger than government loans, and this was evident in the average loan amount, which increased to $414,700 – the highest since February 2021. As home-price appreciation continues at a double-digit pace, buyers of newer, pricier homes continue to dominate purchase activity, while the share of first-time buyer activity remains depressed.”
Later we'll get the ISM Manufacturing Index for November, Construction Spending for October, the Fed's Beige Book for December, EIA weekly inventories report, and the final IHS Markit Manufacturing PMI for November.
Misc.
Random stuff:
And a BBG story that made it into the Congressional questioning of Powell yesterday so I have to note it.
In the past two quarters, U.S. corporations outside of the finance industry posted their fattest margins since 1950 -- one reason why stock markets keep hitting all-time highs.
On earnings calls, plenty of executives complained about the squeeze from rising costs of labor as well as materials. But overall, profits were up 37% from a year earlier, according to data out last week from the Commerce Department.
Businesses have been paying out more cash to their employees too, with total compensation up 12% in the last quarter from a year earlier. That’s partly because millions of Americans went back to work -- but also because many got a raise when they did so. Hourly earnings broadly kept up with the fast-rising cost of living, and in some low-pay industries like leisure and hospitality they comfortably outpaced it.
Viewed that way, it looks like everyone’s coming out ahead, and so much for the great zero-sum struggle between labor and capital. At Deere & Co., for example -- the tractor maker that’s seen the highest-profile strike of the pandemic -- workers held out to get a 10% raise, yet the company is still expected to earn even more next year than the record profit it posted Wednesday.
But that rosy scenario doesn’t apply everywhere, nor is there any guarantee it will last.
Most U.S. workers, unlike the ones at Deere, aren’t in unions, which means they probably have less bargaining power. Superstar tech firms may be raking in cash, but many small businesses -– restaurants, say -- are struggling to stay afloat as their costs rise. Incomes are beating inflation for now, but that race isn’t over yet.
As with the latest FHFA home price survey (in yesterday's reports), Fannie/Freddie limits are now nearly $1M in some areas (for most of us it will be $647,200). BBG.
Fannie Mae and Freddie Mac climbed after their regulator announced that the mortgage giants will be able to back loans worth nearly $1 million in some of the most expensive U.S. housing markets.
Reflecting the surge in home prices during the Covid-19 pandemic, Fannie and Freddie will be able to buy loans of $970,800 in areas including San Francisco, Los Angeles and New York, the Federal Housing Finance Agency announced Tuesday. The increased loan limits apply to single-family residences.
Fannie and Freddie don’t make mortgages. They buy them from lenders, wrap them into securities and guarantee repayment of principal and interest to investors. The federal government took control of the companies during the 2008 financial crisis and bailed them out as mortgage defaults mounted.
In other parts of the country, loan limits will increase to $647,200 next year from $548,250 in 2021, the FHFA said. The changes are aimed at making it more affordable for Americans to purchase homes.
And Cyber Monday missed estimates (as did Black Friday) due to inventory issues and earlier ordering. BBG.
Final sales for Cyber Monday fell short of estimates and didn’t surpass last year’s record as lackluster sales and scarce inventory kept shoppers from breaking out their credit cards during the start of the holiday shopping season.
U.S. shoppers spent $10.7 billion on Cyber Monday, according to Adobe Inc., less than the $10.8 billion a year earlier and missing Adobe’s estimate of $11.3 billion. But Adobe said that it still remains the biggest shopping day of the year. Consumers spent $12 million per minute as the clocked ticked on the final sales of the day.
“It reaffirms that many consumers had fulfilled their shopping urge earlier in the season,” said Vivek Pandya, lead analyst at Adobe Digital Insights. U.S. online spending from Nov. 1 through Nov. 28 rose 13.6% from a year ago to $99.1 billion. The total for November and December combined is set to reach $207 billion, up 10% from last year’s pandemic-fueled record, Adobe said.
And Iran's continued nuclear enrichment activities could imperil talks according to senior diplomats. WSJ.
VIENNA—Senior European diplomats warned on Tuesday that negotiations to revive nuclear talks could be terminated if Iran moved to produce weapons-grade nuclear fuel.
“It would seriously imperil the process” if Iran did something “as provocative as going to 90% enrichment,” said a senior diplomat from the three Western European nations that are participating in the talks—Britain, France and Germany.
“You cannot enrich to weapons grade and say that you are seeking a return to an agreement whose goal is to ensure the exclusively peaceful nature of Iran’s nuclear program,” a second senior diplomat from the so-called E3 European nations said.
The warning came on the second day of the latest round of talks in Vienna aimed at restoring the 2015 nuclear deal, which lifted most international sanctions on Iran in exchange for tight but temporary restrictions on Iran’s nuclear program.
The European diplomats said it wasn’t yet clear if Iran’s negotiating team, participating in its first round of talks under new hard-line President Ebrahim Raisi, was serious about reaching an agreement. They said Iran needed to negotiate substantively in the next few days.
Iran has now accumulated a stockpile of enriched uranium more than 11 times the limits set by the 2015 accord and, as of Nov. 6, has produced 17.7 kilograms of 60% enriched uranium, according to the United Nations atomic agency.
To see more content, including summaries of most major U.S. economic reports and my morning and nightly updates go to Cbus Neil's Blog Posts for more recent or Sethi Associates for the full history.
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