LIVE MARKETS Time to kiss U.S. exceptionalism goodbye?

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TIME TO KISS U.S. EXCEPTIONALISM GOODBYE? (1311 GMT)

One key feature of equity markets so far in 2022 is that European bourses are outperforming Wall Street and might very well continue to do so, many strategists believe.

Among the factors that can explain Europe’s edge this year is the fact the old continent’s blue chip indexes are overweight with cyclical and value stocks which typically thrive during monetary tightening cycles.

But according to a research note from Gustavo Medeiros, head of research at Ashmore, we might actually be witnessing the end of a deep structural trend that ran for over a decade and saw U.S. stocks outperform global markets.

“In our view, US stock market exceptionalism was mostly a function of five years of pro-cyclical fiscal expansion (Donald Trump corporate tax cuts in 2017 and Joe Biden’s overly generous stimulus in 2021) as well as more than 10 years of quantitative easing, which benefited primarily US stocks”, the analyst wrote.

“Both pro-cyclical fiscal stimulus and quantitative easing will end in 2022 as the US government seeks to consolidate its fiscal accounts and US politicians urge the Fed to focus on inflation”, he also said, adding this “will allow for the reversal of US stocks outperformance”.

And for Medeiros, this trend may very well have legs.

“The massive discrepancy in valuations of US stocks to the rest of the world is likely to make this a sustainable long-lasting trend, starting in 2022, in our view”.

(Julien Ponthus)

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BUYING A DEAD CAT, BETTING ON THE “FED CLUB” (1103 GMT)

There’s a lot of scepticism out there on how sustainable yesterday’s rebound really is.

European bourses may be currently rising but they’re nowhere near making up for the last session’s rout and Wall Street futures are currently trading in the red.

“We could be looking at a dead cat bounce rather than the start of a market recovery”, warned Russ Mould, AJ Bell’s investment director.

“Investors’ hands are already shaking after the bloodbath in equity markets so far in 2022 so that any aggressive moves by the Fed could cause a further sell-off among global shares”, he added in reference to the Fed’s meeting this week.

On that note, Michael Every at Rabobank suggests that looking at the sell-off, many market players decided to bet that some kind of a “Fed put” would likely put an end to the onslaught.

“The optimism implies that just before the hawkish Fed meets — with inflation high enough to get political — it is already reassessing because stocks and crypto are down year-to-date”, he wrote, comparing the so called “Fed put” to the famous 1999 “Fight Club” movie staring Edward Norton and Brad Pitt.

“That’s the assumed rule of Fed Club: you do not talk about it; you do not talk about it; but as soon as markets yell “stop!”, or go limp, or tap out, the Fed is over”.

Another big known unknown for the direction of travel in the coming days is the earnings season. Susannah Streeter at Hargreaves Lansdown made the point that there’s a lot at stake with very high expectations for Microsoft‘s results later today.

“With such high bars set, falling short of expectations could set off a fresh round of selling”, she said while for many pundits, any further escalation in Ukraine could rock European markets again.

Finally, Mark Haefele, CIO at UBS GWM made the straightforward case that the overall positive macro picture made a decent case for investors to just simply buy the dip.

“We also view it as a reflection of a fundamental environment that still looks positive on a medium-term view”.

(Julien Ponthus)

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MONEY MARKETS BOWING TO PRESSURE (0945 GMT)

Interest rate betting markets have been broadly impervious to the stock market selloff in recent days but signs around the edges show that THIS may be changing.

At the lows yesterday, U.S. stocks (.SPX) were down 4% on the day and money markets blinked with March futures not predicting a 25 bps rate hike by the U.S. Federal Reserve for the first time this year.

While that changed quickly as U.S. stocks staged an impressive recovery into the close, medium term expectations have taken a hit.

December fed fund futures rallied overnight trimming the cumulative amount of rate hikes priced for the whole of 2022 to around 92 bps from 98 bps on Friday.

It remains to be seen whether Federal Reserve policymakers will take note of the market selloff at the outcome of a policy meeting this week.

At yesterday’s lows, U.S. stocks (.SPX) were down more than 12% for the month and were then on track for their biggest monthly fall since the pandemic slammed into markets in March 2020.

The high-flying Nasdaq has seen $3 trillion wiped off its market value overall this month?

Any signs of a softening bias and rate expectations could melt further.

(Saikat Chatterjee)

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STOXX RECOVERS SOME GROUND (0915 GMT)

European shares kicked off the session on the positive side but caution over the Fed and Ukraine risks was palpable, making for some choppy moves in the first hour of trading.

The STOXX was last up 0.5% after moving earlier between flat and a gain of more than 1%, recovering part of Monday’s steep fall.

Well-received earnings from the likes of Logitech, Ericsson and Swatch helped sooth nerves, although Credit Suisse slid to a new 20-month low after the Swiss bank warned it was likely to report a net loss in Q4 as it flagged fresh legal costs.

Here’s you opening snapshot:

(Danilo Masoni)

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BUY THE DIP? OR PRAY FOR FED PUT? (0814 GMT)

Bears are on the prowl in markets while a different sort menaces Europe’s eastern flank.

It’s probably futile to expect the Russian bear to retreat the way Wall Street bears did late on Monday, when sentiment turned on a dime, allowing the S&P 500 which was 4% in the red at one point, to close higher.

Clearly dip-buyers haven’t entirely fled equity markets. Or was it a function of all those short Nasdaq positions, which suddenly found themselves in the money?

The impulse hasn’t carried through, with Asia deep in the red and Wall Street futures down almost 2%. Option market readings are not reassuring either; trading in put options, used to place bearish bets, outnumbered bullish call options by 1.1-to-1 on Monday, apparently the most bearish that ratio has been since March 2020.

Away from markets though, the global economic picture isn’t looking too bad. PMIs advance readings on Monday did show an Omicron-driven slowdown in December business activity but signalled a peaking in supply chain delays. South Korean GDP expanded at the fastest pace in 11 years and of the U.S. companies that have reported Q4 earnings, 77% beat forecasts.

In the middle of this market churn, the Fed starts a two-day meeting which may well be the last before a March interest rate liftoff. Many hope it will pay attention to the tightening in financial conditions such large equity selloffs inevitably cause. JPMorgan cite the robust earnings season to argue the bearishness is overdone. And after all, they add “the worst-case scenario could see the return of the Fed put”.

Key developments that should provide more direction to markets on Tuesday:

-Singapore tightened monetary policy settings in its first out-of-cycle move in seven years

-South Korea’s economy expanded at the fastest pace in 11 years in 2021

-Australia’s core inflation flew to its fastest annual pace since 2014 in the December quarter

-Credit Suisse warns of Q4 net loss

-Germany IFO survey

-Emerging markets: Hungary central bank

-U.S. consumer confidence January

-U.S. 5 year Note auction ($55 bln)

-U.S. earnings: General Electric, Johnson & Johnson, 3M, Xerox, Invesco, American Express, Verizon, Microsoft, Capital One

-European earnings: SEB, Remy Cointreau, Logitech, Ericsson

(Sujata Rao)

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EUROPE EYES TENTATIVE BOUNCE IN VOLATILE DAY (0730 GMT)

European stock futures are rising thanks to a surprise late rebound on Wall Street on Monday but volatility is likely to persist as rate and geopolitical risks reduce visibility over the short-term direction of markets.

So while contracts on the Euro STOXX 50, DAX and FTSE indices came off highs to trade up around 0.6% after the region suffered its worst day since June 2020, futures on the Nasdaq fell more than 2% and those on the S&P 500 slid 1.6%.

Investors remain nervous about the potential for military conflict in Ukraine and ahead of a key Fed meeting that could offer hints about the timing and pace of rate hikes. read more

(Danilo Masoni)

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