Neil's Morning Update - 12/17/21
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 - 12/17/21
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). As are reminder, this is a free blog I put out to try to help people get information, so no editors, etc.
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)
Also, on my charts, the lines are 20-DMA (green), 21-DEMA (red), 50-DMA (purple), 100-DMA (BLUE), 200-DMA (brown)
Source abbreviations: BBG = Bloomberg; WSJ = Wall Street Journal; RTRS = Reuters; SA = Seeking Alpha; HR = Heisenberg Report
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Global equity markets are falling again this morning led again by growth shares. In the US, NDX indicated down around one percent, SPX around seven tenths and RUT around six tenths. As a reminder, today is a big options expiration. We also get the S&P Dow Jones Indices quarterly rebalance effective after the markets close today, so there could definitely be some extra volatility today and Monday.
Here's a good depiction of what many investors are concerned with (removal of central bank liquidity that has helped (some would say is completely responsible for) the move higher in equities the last 20 months).
Here's the SPX futures this morning. Looking like it wants to test the 50-DMA and uptrend area. Daily technicals back to negative.
In U.S. corporate news (Argus):
FedEx (FDX 252.40, +13.88): +5.8% after beating top and bottom-line estimates, guiding FY22 EPS above consensus, and authorizing a new $5 billion share repurchase program. Oracle (ORCL 98.88, -4.34): -4.2% after The Wall Street Journal reported that the company is in discussions to acquire Cerner (CERN 94.00, +14.51, +18.3%) for potentially $30 billion. Rivian (RIVN 10 0.50, -8.37): -7.7% after missing EPS estimates. U.S. Steel (X 22.28, -1.17): -5.0% after guiding Q4 adjusted EBITDA below consensus, citing a seasonal year-end slowdown in order entry activity. Johnson & Johnson (JNJ 170.00, -3.01): -1.7% after the CDC confirmed it expressed a clinical preference for individuals to receive an mRNA COVID-19 vaccine over J&N's vaccine due to rare blood clot issues.
Asia
Major equity indices in the Asia-Pacific region ended the week on a mostly lower note. Japan's Nikkei: -1.8% (+0.4% for the week) Hong Kong's Hang Seng: -1.2% (-3.4% for the week) China's Shanghai Composite: -1.2% (-0.9% for the week) India's Sensex: -1.5% (-3.0% for the week) South Korea's Kospi: +0.4% (+0.3% for the week) Australia's ASX All Ordinaries: +0.1% (+0.2% for the week).
In news, reports from Japan indicate that bond issuance planned for FY22 will be down sharply from issuance of JPY43.6 trln in FY21. The Bank of Japan made no changes to its policy stance but reduced the amount of emergency purchases. Bank of Japan Governor Kuroda said that commercial paper and corporate bond purchases will return to a pre-pandemic level (more below).
Australia and the U.K. signed a $13.3 bln free trade deal.
In economic data, November China foreign investment came in around expectations while Singapore trade data beat.
China's November FDI 15.9% yr/yr (expected 16.0%; last 17.8%)
Singapore's November trade surplus SGD6.245 bln (last surplus of SGD5.909 bln). November non-oil exports 1.1% m/m (expected 0.2%; last 4.1%); 24.2% yr/yr (expected 17.3%; last 17.8%)
New Zealand's December NBNZ Own Activity 11.8% (last 15.0%) and December ANZ Business Confidence -23.2 (last -16.4)
And a number of central bank decisions in Asia with Russia hiking rates 1%, Turkey intervening in the foreign currency markets to prop up the Lira, and Japan extending support. More on Japan from BBG.
The Bank of Japan ended the second year of the pandemic in a very different place to other major central banks.
While the Federal Reserve and the Bank of England this week took aggressive steps to pull back from crisis aid, Governor Haruhiko Kuroda and his board slow walked it, extending assistance to struggling smaller businesses for another six months and paring back help for bigger firms from April.
In a press briefing after the decision, Kuroda acknowledged that his central banking peers were moving at a faster pace, but rejected the idea that those moves would influence the BOJ. After years of massive monetary aid that’s failed to spur faster inflation in Japan, a widening policy gap leaves the governor with a lot of unfinished business as he heads into the final stretch of his tenure.
In Japan, a far weaker price pulse is enabling the BOJ to continue its pandemic support and stick to a generally more cautious national view over Covid and its omicron variant.
The BOJ said it will keep in place until the end of September incentives that encourage banks to lend to smaller businesses hurt by the pandemic using funds provided by the central bank. The lending facility had been scheduled to finish at the end of March.
At the same time, reflecting the more favorable funding environment for bigger companies, the BOJ said it will gradually lower its holdings of corporate bonds and commercial paper back to pre-pandemic levels of around 5 trillion yen ($44 billion), starting from April. Kuroda said that the draw-down of corporate debt would take about five years to play out.
As Chinese authorities instruct Evergrande to pay workers first. Consider this a model for other restructurings. Can't have uprisings in front of the Olympics or Party Congress next year. BBG.
China Evergrande Group is prioritizing payments to migrant workers and suppliers as regulators urge the cash-strapped developer to head off any risk of social unrest, according to people familiar with the matter.
Authorities are particularly focused on making sure payrolls are met before the Lunar New Year holidays starting Feb. 1, when thousands of migrant construction workers are due to reunite with their families, the people said, asking not to be named discussing private conversations. Evergrande had 163,119 employees as of June 30 and indirectly supports the livelihoods of many more through its vendors.
And they expand their use of "golden shares" to have an interest in key companies.
BEIJING, Dec 16 (Reuters) - The Chinese government has been expanding its practice of taking minority stakes in private companies beyond those specializing in online news and content to firms possessing large amounts of key data, two people with knowledge of the matter said.
It has made a de facto special management stake or "golden share" arrangement with Full Truck Alliance Co Ltd (YMM.N), a Chinese platform arranging trucking services, according to one of the people.
Troubled Didi Global Inc (DIDI.N) has also been in talks about a golden share for its core ride-hailing business, a third source with direct knowledge of the matter said.
Seeking influence, Beijing began taking golden shares in private online media companies - usually about 1% of a firm - some five years ago. The stakes are bought by government-backed funds or companies which gain a board seat and/or veto rights for key business decisions.
As US passes legislation targeting companies relying on labor from Xinjiang and adds more entities to its "banned" list. BBG.
The Biden administration ratcheted up pressure on Beijing over its treatment of ethnic and religious minorities, as U.S. lawmakers passed a bill targeting companies that rely on forced labor from the Xinjiang region of China.
The administration on Thursday added 34 entities in China, including 11 research institutes within the Academy of Military Medical Sciences, to its banned entity list, saying they are part of a network that misuses biometric surveillance technology to track and repress ethnic and religious minorities. American companies need a license to do business with those on the Commerce Department’s entity list.
Later in the day, the Treasury Department announced that U.S. investors would be prohibited from investing in eight Chinese technology companies, including DJI Technology Co. Ltd., Cloudwalk Technology Co. LT-A and Yitu Limited.
“Today’s action highlights how private firms in China’s defense and surveillance technology sectors are actively cooperating with the government’s efforts to repress members of ethnic and religious minority groups,” Brian Nelson, an undersecretary for Terrorism and Financial Intelligence, said in a statement accompanying the Treasury list.
A U.S. official said China had a documented history of exploiting DNA collection and biometric facial recognition for mass surveillance of all residents ages 12 to 65 of Xinjiang, a predominantly Muslim region, enabling mass detention and unlawful persecution.
The wave of penalties arrived before Senate approval on Thursday of legislation that would ban goods made in Xinjiang from being shipped to the U.S. unless companies can prove that they’ve not been made with forced labor. The bill, which now goes to President Joe Biden for his signature, had broad bipartisan support in the normally polarized Congress.
Europe
As of 8 am Eastern, major European indices trade on a mostly lower note while the U.K.'s FTSE (+0.3%) outperforms. STOXX Europe 600: -0.7% (-0.5% week-to-date) Germany's DAX: -0.8% (-0.7% week-to-date) U.K.'s FTSE 100: +0.3% (-0.2% week-to-date) France's CAC 40: -1.0% (-1.0% week-to-date) Italy's FTSE MIB: -1.2% (-1.0% week-to-date) Spain's IBEX 35: -0.7% (-0.5% week-to-date).
In news, Bank of France Governor Villeroy de Galhau said that he thinks the eurozone economy is approaching an inflationary peak. Bundesbank expects that German inflation will reach 3.6% in 2022, slowing to 2.2% in 2023. Bank of England Chief Economist Pill said that more rate hikes are expected from the BoE - “The time has come to take away emergency stimulus." UK's conservative party lost a seat that had voted solidly in their camp for 20+ years to the Liberals overnight dealing another blow to Boris Johnson.
In economic data, November EU CPI and German PPI came in a little less hot than expected while German business sentiment fell sharply in the service sector. UK retail sales beat.
Eurozone's November CPI 0.4% m/m (expected 0.5%; last 0.8%); 4.9% yr/yr, as expected (last 4.9%). November Core CPI 0.0% m/m (expected 0.1%; last 0.1%); 2.6% yr/yr, as expected (last 2.6%). October Construction Output 1.56% m/m (last 1.02%)
In November, the highest contribution to the annual euro area inflation rate came from energy (+2.57 percentage points, pp), followed by services (+1.16 pp), non-energy industrial goods (+0.64 pp) and food, alcohol & tobacco (+0.49 pp).
Germany's December ifo Business Climate Index 94.7 (expected 95.3; last 96.6). December Current Assessment 96.9 (expected 97.5; last 99.0) and December Business Expectations 92.6 (expected 93.5; last 94.2). November PPI 0.8% m/m (expected 1.4%; last 3.8%); 19.2% yr/yr (expected 19.9%; last 18.4%).
FRANKFURT – German managers expressed less optimism again in December as Europe’s most populous country continues to grapple with the coronavirus. Germany’s Ifo Institute reported the sixth straight decline in its headline business climate index, which fell to 94.7 points versus the market estimate of 95.3 and November’s upwardly revised reading of 96.6.
According to the results of Ifo's monthly survey of business leaders, the expectations component of the index dropped to 92.6 to miss the estimate of 93.6 and last month’s mark of 94.2, The current assessment component fell 96.7, which was below the forecast of 97.5 and the 99.0 reading in November.
Ifo's index for German manufacturing rose this month after falling five times in a row, the institute noted, explaining that the climb was due to more optimistic expectations. But the business climate “nosedived” for the service sector, Ifo said. “The deteriorating pandemic situation is hitting consumer-related service providers and retailers hard.” “The German economy isn’t getting any presents this year.”
“Today’s Ifo index gives a first impression of how the current fourth wave of the pandemic could hurt the German economy, and this impression is not very promising,” wrote Carsten Brzeski, head of macroeconomics at ING. “Despite a strong start to the fourth quarter in terms of industrial activity, ongoing supply chain frictions, higher inflation in general, and higher energy and commodity prices in particular, do not bode well for the short-term outlook for the German economy.”
Regardless of the current difficulties, the outlook is bright, ING’s Brzeski said. “Previous government stimulus plus the new government's impressive investment policies will unfold in 2022, leading to a stellar growth performance. As soon as global supply chain frictions start to abate and the fourth wave of the pandemic is behind us, industrial production will strongly rebound, private consumption will start to pick up and investment will flourish, with the German economy staging an impressive comeback as Europe's growth champion in 2022.”
U.K.'s November Retail Sales 1.4% m/m (expected 0.8%; last 1.1%); 4.7% yr/yr (expected 4.2%; last -1.5%). November Core Retail Sales 1.1% m/m (expected 0.8%; last 2.0%); 2.7% yr/yr (expected 2.4%; last -2.1%)
Spain's October trade deficit EUR3.40 bln (last deficit of EUR2.40 bln
As flatter yield curves are not just in the US.
Commodities/Currencies/Bonds
Bonds - Longer yields are falling flattening the curve further. 2-year bond yield flat at 0.62%, while the 10-year is down three basis points to 1.4%.
As Goldman pulls forward their estimate for the first rate hike by the Fed to March (as a reminder they pulled it forward from mid-2023 to mid-2022 end of October). They expect inflation prints to remain elevated through March (which I agree with on a y/y basis at least). "The leadership will surely want to show that it is responding in some way at the March meeting, though this could be either a rate hike or a hint in the statement that a hike is coming at the next meeting in May.” They also expect a late 2022 start to balance sheet runoff. I'm sure I'll have thoughts on all that as we get closer (likely not ones that are equity positive longer term if 2018 is any indication). “Balance sheet runoff… began last cycle when normalization of the funds rate was ‘well under way,’ which meant four hikes then but might mean three this cycle because the FOMC’s neutral rate estimate is now lower.” Personally, I think there's basically zero chance the Fed initiates balance sheet runoff in advance of the elections next year.
TD, who had been an outlier, resisting moving their first rate hike into 2022, jumped in with both feet yesterday, saying they see raises in June, September, and December with QT starting in March 2023.
And I missed noting this in the press conference wrap-up but Powell dismissed the "policy mistake" narrative of the low 10-year yield instead blaming it on foreign demand. BBG.
Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.
While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.
“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.
This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”
Dollar (DXY) - After falling below the 20-DMA and the uptrend line that stretches back around 6 weeks, trying to stabilize. Currently at $96.09. Remains in intermediate-term uptrend. Daily technicals now firmly negative.
VIX - Trades higher this morning (reminder today is options expiration). At 22.08.
Crude (/CL) - Softening on all of the Covid headlines, back down to the 200-DMA. Currently at $70.99 WTI. Daily technicals continue to tilt positive.
As a little surprisingly global airline capacity is growing.
As India's gasoline demand reaches pre-pandemic levels.
And Chinese demand heats up with a preference for cheaper Iranian barrels (which they of course don't call Iranian barrels (often called "Oman" or "Malaysian" imports). It should fall back though until after the Olympics in February. BBG.
China ramped up its buying of cheap Iranian crude last month after independent refiners were granted additional import quotas for 2021.
The nation imported almost 18 million barrels in November, equivalent to about 600,000 barrels a day, according to market intelligence firm Kpler. That’s up almost 40% from October and the biggest volume since August. Flows may be limited in the coming months, however, in part due to a broader crackdown on independent refiners and reduced demand resulting from virus restrictions.
China’s independent refiners, known as teapots, were set for a buying spree before the end of the year as they sought to use new import allocations they received in mid-October. That put Russian ESPO oil from the Far East, which usually takes less than a week to be shipped, and Iranian crude stored on ships off China and around Singapore and Malaysia in the spotlight.
The import figures from Kpler are at odds with official Chinese data, which indicate the nation hasn’t taken Iranian oil since December 2020. Supplies have often been re-branded as originating from Oman and Malaysia in the past.
The November spree likely marks the end of elevated buying for now. Flows are set to be subdued until late February following the Lunar New Year holiday and the Beijing Winter Olympics, which end on Feb. 20, according to Yuntao Liu, an oil analyst at Energy Aspects in London. China’s oil demand in early 2022 will have very limited upside, he added.
And I've mentioned that I take the IEA estimates (they're the ones showing a very big surplus next year) with a grain of salt. It should be noted that they called a "top" in coal in 2013. We hit a record high in demand this year with next year expected to be higher.
Nat Gas (/NG) - Down a percent as it continues to trade in the range of the past two weeks but starting to lose its connection with the uptrending 200-DMA. Currently at $3.71. Daily technicals remain negative but are close to flipping.
Gold (/GC) - We noted last night that it "Needs a green day tomorrow" after pushing through a big cluster of MA's as well as the 1800 level, and it's getting that right now although off its highs. But it's cleared some very heavy resistance and has a pretty clear path to the 1835 area. Daily technicals now positive.
Copper (/HG) - Up this morning trying to follow gold in pushing through heavy resistance. Daily technicals neutral.
US Data
No data today, so I'll be catching up on a few reports that I missed last two days. We did get the American Institute of Architects report this week which softened from 54.3 in October to 51.0 in November, but remained in expansion territory (anything above 50 indicates expansion in demand for architects' services). This is a leading index for commercial real estate that usually leads CRE investment by 9 to 12 months. It includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.
Architecture firms reported increasing demand for design services for the tenth consecutive month in November, according to a new report today from The American Institute of Architects (AIA).
The ABI score for November was 51.0, down from 54.3 the previous month. While this score is down slightly from October’s score, it still indicates positive business conditions overall (any score above 50 indicates billings growth). During November, scoring for both the new project inquiries and design contracts moderated slightly, but remained in positive territory, posting scores of 59.4 and 55.8 respectively.
“The period of elevated billing scores nationally, and across the major regions and construction sectors seems to be winding down for this cycle,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “Ongoing external challenges like labor shortages, supply chain disruptions, spiking inflation, and prospects for rising interest rates will likely continue to slow the growth in firm billings in the coming months.”
...
• Regional averages: Midwest (57.6); South (53.7); West (50.9); Northeast (45.5)
• Sector index breakdown: mixed practice (56.9); multi-family residential (51.4); commercial/industrial (50.5); institutional (50.1)
Misc.
Random stuff:
As at least in S Africa Omicron continues to be much milder in terms of severe disease. Hopefully this will translate to other countries. BBG.
South Africa delivered some positive news on the omicron coronavirus variant on Friday, reporting a much lower rate of hospital admissions and signs that the wave of infections may be peaking.
Only 1.7% of identified Covid-19 cases were admitted to hospital in the second week of infections in the fourth wave, compared with 19% in the same week of the third delta-driven wave, South African Health Minister Joe Phaahla said at a press conference.
Health officials presented evidence that the strain may be milder, and that infections may already be peaking in the country’s most populous province, Gauteng. “We are really seeing very small increases in the number of deaths,” said Michelle Groome, head of health surveillance for the country’s National Institute for Communicable Diseases.
The number of Covid-19 hospitalizations in this wave is also being inflated by the fact that milder patients are being admitted because there is room to accommodate them. Many are there for other complaints but are routinely tested for the pathogen, according to health officials.
Still, new cases in that week of the current wave were more than 20,000 a day, compared with 4,400 in the same week of the third wave. That’s further evidence of omicron’s rapid transmissibility, which a number of other countries, such as the U.K., are also now experiencing.
As rush for boosters is on.
As the Navy tests a new laser weapon system. BBG.
The U.S. Navy successfully tested a new generation laser weapon system earlier this week in the Gulf of Aden, the Navy’s Middle East-based 5th Fleet said in a statement on Thursday.
During the demonstration on Wednesday, a high-energy laser weapon was fired from the USS Portland, an amphibious transport dock ship, on a static surface training target. The Laser Weapons System Demonstrator, or LWSD, had been previously tested in May 2020, when it successfully disabled a small unmanned aerial system while operating in the Pacific Ocean.
And Covid or not, people wanted to see Spider-Man. Can't say I blame them, one of my favorite characters.
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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