Global stocks bleed but US makes strong comeback


Read on for a morning round-up of what's going on in markets
Newsfeed25 Jan 2022
    Photo credit: AFP Photo


    US

    A stock selloff that at one point rivalled any of the last two years was wiped out as dip buyers emerged by Monday’s (24 January) close, the latest breath-taking reversal in markets rattled by geopolitical tensions and the Federal Reserve’s campaign against inflation.

    In a session marked by explosive trading volume and wild market swings, the S&P 500 rebounded after tumbling as much as 4% earlier in the day. Retail, energy, and industrial companies led gains in the benchmark gauge. At its worst, the index was more than 10% below its 3 January record, headed for a correction. It escaped that with the late-day surge, closing down about 8% from its peak. The dollar pared its advance, while 10Y Treasuries were little changed.

    Concerns over the Fed’s imminent hike have recently weighed on risk assets. Higher interest rates pose little threat to equities, and looking beyond the short-term horizon, there are opportunities for equities to gain even as Treasury yields eventually resume their move higher, according to analysts.

    The North Atlantic Treaty Organization said it would boost its deployments in eastern Europe in a bid to deter a new Russian invasion in Ukraine with the Pentagon announcing it has put 8,500 troops on heightened alert. Russian President Vladimir Putin has denied he is planning an attack. – Bloomberg News.

    The S&P 500 climbed 0.28% to 4,410.13, the Dow Jones Industrial Average rose 0.29% to 34,364.50, and the Nasdaq Composite Index upped 0.63% to 13,855.13 on Monday.

     

    EUROPE

    Europe is imposing new requirements on how banks report environmental risks and carbon targets, to give investors a better picture of the threats that climate change poses to the industry.

    The European Banking Authority (EBA) has unveiled a new set of mandatory templates, tables, and instructions that banks will have to follow, after a review of environmental, social, and governance (ESG) reports found “shortcomings”, the Paris-based EBA said on Monday (24 January). The new rules give banks far less leeway to cherry pick what to disclose or to use exaggerated language to describe what they are doing, the regulator said.

    The EBA’s requirements form part of Europe’s broader climate agenda. The bloc last year became the first to force asset managers to document their ESG claims. This year, the European Union (EU) will see the first reports from companies and the financial sector showing how well their businesses line up with a list of environmentally sustainable activities.

    Mandated disclosures are designed to bring market pressures to bear, and represent the third pillar in the EU’s framework for regulating the banking industry. The requirements come on top of industrywide capital rules and individual bank assessments.

    The EBA said it focused on climate in the new requirements because of the “urgency” of global warming and the availability of data. It plans to provide additional instructions on how to account for other risks, including those in the trading book. Banks also will have to describe how they are incorporating ESG into governance structures, strategies, and business models, as well as risk management frameworks. – Bloomberg News.

    The Stoxx Europe 600 Index fell 3.81% to 456.36.

     

    JAPAN

    Rising yields are creating buying opportunities in global bond markets but Japanese investors are likely to stay home.

    Japan’s 20Y securities offer a volatility and currency hedged-adjusted yield that is more than twice that of Treasuries for Japanese investors, according to a Bloomberg analysis. The yield also outstrips that on high-yielding notes from Italy, and outperforms those of six other Developed Markets (DM).

    Japanese bonds have largely escaped the rout that has jolted other debt markets as the central bank’s ultra-loose monetary policy keeps yields locked in a narrow range. The investment patterns of Japan’s funds are worth watching given the Asian nation’s position as the world’s largest net creditor.

    While yields adjusted for currency hedging point to a premium for US Treasuries, that picture changes when volatility is also taken into consideration.

    The ratio of yield-to-volatility is computed by subtracting the rolling three-month currency hedging costs from 10Y bond yields and dividing the figure by the 60-day yield volatility. In the case of Japan, 20Y yields are used as the BOJ keeps 10Y yields anchored around zero. – Bloomberg News.

    The Nikkei 225 Index dipped 1.25% to 27,242.50 in early-Tuesday trading. The benchmark gained 0.24% to 27,588.37 the previous session.

     

    MAINLAND CHINA & HONG KONG

    China’s efforts to spur asset sales by cash-strapped developers are starting to gain momentum with a flurry of deals involving state-run rivals, potentially easing the industry’s debt crisis.

    Chinese regulators see asset sales as a key step to easing the liquidity crisis that is afflicting the real estate industry and impeding an economic recovery. Authorities in December eased limits on borrowing by major property firms used to fund M&A, part of efforts to engineer a soft landing for the sector after years of debt-fuelled expansion.

    The latest deals spurred optimism among bond and stock investors. A Bloomberg Intelligence index of Chinese developer stocks rose for a fifth day on Monday (24 January), taking gains over that period to as much as 12%, on course for the most in 18 months. Chinese high yield dollar bonds, which are dominated by builders, rose as much as 2 cents on the dollar, according to credit traders.

    Asset purchases may help state builders gain more market share from their ailing private competitors. In 2021, 40% of the top 10 developers’ gross contracted sales were generated by central SOEs, up from 20% market share in 2010, according to Bloomberg Intelligence.

    Meanwhile, Shanghai Pudong Development Bank priced a three-year, CNY30b bond at 2.69% on Friday, with CNY5b of the proceeds to be used for funding M&A in China’s property industry, the lender said. The bond was the first to be issued by a financial institution for M&A deals in the real estate development sector, the bank said Saturday in a WeChat statement. – Bloomberg News.

    The Shanghai Composite Index added 0.04% to 3,524.10 while the Hang Seng Index fell 1.24% to 24,656.46.

     

    REST OF ASIA

    South Korea’s recovery remained on track last quarter as the economy expanded at a faster pace supported by firm export demand and a pickup in consumption during a lull in virus infections before the emergence of omicron.

    Gross domestic product grew 1.1% in the October-to-December period from the prior three months, data from the Bank of Korea (BOK) showed Tuesday. That was in line with economists’ forecasts. From a year earlier, the economy expanded 4.1% in the fourth quarter, while annual growth in 2021 rose 4%, matching the BOK’s earlier forecast for the biggest gain since 2010.

    The acceleration supports the central bank’s view that the overall economy is maintaining sufficient momentum as the BOK moves away from its emergency stimulus settings. The bank has increased its benchmark rate three times since initiating a tightening cycle in August, and signalled it could hike borrowing costs further as inflation becomes a major concern.

    Exports have been the economy’s mainstay in 2021, with the nation’s shipments hitting a record value last year as global trade recovered from the pandemic and tech demand continued to soar. The data showed exports kept growing in the fourth quarter, expanding at a faster pace of 4.3%.

    Private consumption also picked up, growing 1.7% in the last quarter as earlier restrictions were lifted and some pent-up domestic demand was released before omicron and a record surge of infections prompted renewed curbs on activity. Government spending was up 1.1%, while infrastructure investment fell 0.6%.

    The government has since extended the tighter curbs twice in January, while easing the limit on private gatherings.

    The BOK’s next policy meeting in February will be Governor Lee Ju-Yeol’s last. Lee has said a benchmark rate at 1.5%, a quarter percentage point above its current level, should not be considered policy tightening. Still, many economists see the central bank waiting before it raises rates again as it monitors developments in the economy following its earlier policy moves. The bank will also want to keep a close eye on the trajectory of the virus, the outcome of a looming presidential election and the aggressiveness of the Federal Reserve in tightening US policy. – Bloomberg News.

    South Korea’s Kospi Index opened 0.87% lower at 2,767.57. It erased 1.49% to 2,792.00 on Monday.

    Australia’s S&P/ASX 200 Index tumbled 1.48% to 7,033.60 at the open on Tuesday, adding to Monday’s 0.51% loss to 7,139.50.

    The Taiwan Stock Exchange Weighted Index rose 0.50% to 17,989.04.

     

    COMMODITIES

    Oil in New York slid as risk-off sentiment prevailed for much of the day across financial markets driven by concerns about tighter monetary policy.

    West Texas Intermediate (WTI) futures closed 2.2% lower on Monday (24 January) with the S&P 500 tumbling as much 4% before buyers swept in late in the day. Additionally, gains in the dollar made commodities priced in the currency less attractive.

    Crude recently has been buoyed by robust demand in the face of the omicron variant. Saudi Aramco said Monday that consumption is nearing pre-Covid levels. That is now being compounded by the attack on United Arab Emirates by Yemen’s Houthi rebels and the heightened political risk as Russia amasses troops near Ukraine. 

    Despite the inherent strength in the crude market’s dynamics, there are some signs that the recent rally could be growing increasingly stretched. Money managers hold more than 12 bullish bets for every bearish one in WTI, the most since November. Crude has also recently been on a run of being technically overbought. – Bloomberg News.

     

    CURRENCIES

    The Japanese yen is finally having a moment in the sun as nervous investors battered by the equity market selloff seek out havens. The currency’s longstanding undervaluation means it has potential to rebound further.

    Options traders are looking to hedge against yen strength, based on risk reversal skews, and the headwind typically provided to the currency by higher US bond yields appears to have somewhat abated. The currency has jumped about 1% so far this year on a spot basis to 114 per dollar, though it remains far weaker than it was after notching a decline of more than 10% in 2021, its worst year since 2014. And while the yen lagged the dollar on Monday (24 January) as stocks took one of their biggest intraday beatings of recent times, it is still the standout performer among G-10 currencies this year.

    The average estimate of analysts surveyed by Bloomberg is for the currency to end this year around 113 per greenback, marginally stronger than its current level. – Bloomberg News.

    The yen weakened 0.24% to 113.95 per dollar on Monday. The US Dollar Index upped 0.29% to 95.918, the euro lost 0.16% to USD1.1326, the pound lost 0.48% to USD1.3488.

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