- Major U.S. indexes slide almost 2%; small caps, banks hit harder
- All major S&P sectors red: financials, materials weakest groups
- Dollar, gold, bitcoin decline, crude off ~5%
- U.S. 10-Year Treasury yield edges down to ~1.40%
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GREENER PASTURES FOR ESG BONDS (1234 EST/1734 GMT)
Investment-grade environmental, social, and governance (ESG) bonds are faring better in the primary market for corporate debt compared to other bonds, according to a recent BofA Global Research report.
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Analysts estimated that over the last four years, ESG bonds on average were priced 2.4 basis points tighter, when comparing new issue concessions for ESG bonds to the rest of the market.
“The increasing cost savings when issuing ESG debt should continue to support rapid market growth next year after issuance increased 73% (year over year) to $84 billion in 2021,” the report said. “Demand could also benefit from more U.S. (investment-grade) credit investors adhering to strong ESG guidelines, which currently stands at just 5% of the total.”
BofA’s November survey of U.S. credit investors found 59% pay attention to ESG issues but have flexibility in their investment decisions.
LOOKING FOR SHELTER IN A MARKET STORM (1153 EST/1653 GMT)
With Omicron, the latest variant of COVID-19, raising anxiety levels among investors, DataTrek Research took stock of the situation and sought out silver linings.
Looking at post-Thanksgiving weakness in the market, co-founder Nicholas Colas, cites a preference for U.S. large-cap stocks. As of Friday’s close while the S&P 500 (.SPX) has fallen 1.7% since Nov. 24, but he noted that it had outperformed other areas such as small caps. The Russell 2000 (.RUT) is off 6.8% in the same time frame, as are emerging markets stocks.
Colas notes a defensive preference among investors with healthcare (.SPXHC) rising 4% in this time frame followed by a 3.2% gain in utilities (.SPLRCU) and consumer staples (.SPLRCS) and a 1.9% gain in real estate (.SPLRCR). In comparison consumer discretionary (.SPLRCU) has fallen 6.9% while energy (.SPNY) was down 6% followed by financials (.SPSY) down 3.8% and industrials of 3.4%.
Of course the defensive bias is not just due to the pandemic but also the drop in US long term yields – 1.65% 10-year yields on November 24th to 1.41 pct at the time of writing.
This drop would automatically favor yield-sensitive groups like utilities, staples, and real estate. But while Colas points to healthcare as DataTrek’s favorite defensive sector the strategist says he still likes energy, financials, and industrials in cyclicals.
Colas also looked at the other elephant in the market’s room – the Federal Reserve and concerns about rate hikes.
He’s arguing that Fed Funds Futures are actually “the most bullish market signal out there right now.” If the virus was to “become a systemic challenge to the US economy in the first half of 2022 (as the bear case goes)”, he asked if the Fed would really raise rates quickly?
“We doubt it, even if inflation were still a concern,” he said.
In any event, in Monday’s trade, amid the unsettled skies, action seemed to confirm Colas bias, given that staples, utilities and healthcare are falling the least of all major S&P 500 sectors.
STOCK BUYBACKS MAY KEEP CORRECTIONS BRIEF, EVEN AS VOLATILITY INCREASES (1055 EST/1555 GMT)
Companies have been ramping up repurchases of their own shares even as retail stock purchases slow and institutions pare equity holdings. That is likely to mean that stock market corrections will remain shallow, though market volatility is expected to increase, said Brian Reynolds, chief market strategist at Reynolds Strategy.
Net Corporate buybacks hit a record $263 billion in the third quarter, and outpaced investor inflows for the first time since the pandemic began, Reynolds said in a report on Monday, citing flow of funds data.
When you break down the data further it shows that companies, retail investors and institutional investors are all on “vastly different trajectories,” he added, noting that this “augers for more equity volatility in 2022 than was seen in 2021, though less so on average than was seen in the prior bull market.”
The debt-fueled corporate share repurchases will likely be strong enough to keep stock market corrections brief, though they will not prevent a panicky selloff as the Wall Street desks that execute corporate share buybacks prefer to buy shares as they recover, after the selling is exhausted, Reynolds said.
Retail investors are also likely to help keep pullbacks brief and smaller, on average, than were seen in the last bull market, he said.
However, Reynolds sees stocks at risk of a 10% correction if inflation expectations fall too rapidly, and the spread of the Omicron COVID variant could contribute to such a move.
The bearishness of institutional investors, who turned into sellers in the third quarter, is also likely to keep the market volatile. “Our overall view is that of a bull market that will be pockmarked with brief, but scary corrections,” Reynolds said.
U.S. STOCKS REEL IN EARLY TRADE (0953 EST/1453 GMT)
Major U.S. indexes are sharply lower on Monday, dragged down by concerns about the impact of tighter COVID-19 curbs on the global economy, and a potentially devastating setback to President Joe Biden’s investment bill.
Among other developments, China cut its lending benchmark loan prime rate (LPR) for the first time in 20 months on Monday read more , and Turkish markets are under pressure following President Tayyip Erdogan’s defense of low interest rates on Sunday.
With this, the Euro STOXX 600 (.STOXX) is off around 1.4%. However, it was down 2.6% at its worst level of the day.
In the early throes of U.S. action, it is a sea of red. With this, more economically sensitive S&P 500 (.SPX) sectors are taking the biggest hits, while, not surprisingly, defensive bond-proxy groups are off the least.
Here is an early U.S. trading snapshot:
DOW INDUSTRIALS: SICK AGAIN (0900 EST/1400 GMT)
U.S. equity index futures are tumbling on Monday, dragged down by fears over tighter restrictions on the global economy, as a result of the Omicron variant.
Given action in CBT e-mini Dow futures , the Dow Jones Industrial Average (.DJI) is poised to slide more than 400 points when regular-session trading kicks off.
This relapse is occurring after the blue-chip average failed to register a close above the 76.4%/78.6% Fibonacci retracement zone of its November-December slide at 35,961.87/36,018.16, keeping alive the potential that its December bounce was counter-trend read more :
With early weakness Monday, the DJI can once again threaten its rising 200-day moving average (DMA), which ended Friday around 34,605.
Key support resides at a broken log-scale resistance line from 1929, which now comes in around 34,100, and the Dow’s Dec. 1 low, which is at 34,006.98.
Closing below this support zone can suggest the potential for a much greater decline, given that trend line has subsequently contained Dow weakness since it was first overwhelmed in March.
A reversal back over the 50-DMA, however, which ended Friday around 35,545, can see the Dow make another go at the Fibonacci barrier. read more
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Terence Gabriel is a Reuters market analyst. The views expressed are his own
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