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S&P 500, DJI dip, Nasdaq edges green
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Energy weakest S&P 500 sector; comm svcs leads gainers
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Dollar up, bitcoin gains >2%; gold, crude fall
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U.S. 10-Year Treasury yield rises to ~3.81%
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HOW TO PLAY SMALL CAPS IN A DOWNTURN? LOOK FOR BUYBACKS
(1219 EST/1719 GMT)
Bank of America’s U.S. Regime Indicator is on the cusp of
tipping into a Downturn, which if confirmed means that higher
quality and lower risk stocks are likely to outperform.
For small cap investors, companies that buy back shares, which has already been one of the best-performing small cap factors over the last 12 months, may be also be worth focusing on, Bank of America analysts Jill Carey Hall and Nicolas Woods said in a report. “Buybacks done at inexpensive valuations make sense today – e.g. in sectors like Energy – and small caps overall are historically cheap,” they said. Bank of America notes that since 1989 the top quintile of the Russell 2000 by Share Repurchase has seen 8 percentage points of annualized alpha vs. the equal-weighted index in periods when the Russell 2000 forward price-to-earnings ratio was below its long-term average, vs. annualized alpha of just 1 percentage point when the price-to-earnings ratio was above its long-term average. And, “similar to in large caps, new announced Russell 2000 buybacks are sparse so far this year, so scarcity value combined with inexpensive small cap valuations should lead to a continued reward for this factor, in our view.” Bank of America’s U.S. Regime Indicator flipped to negative in January and will be officially out of Late Cycle if it posts a second consecutive month of confirmation. In a Downturn, Quality, Cash Return and Low Risk have been the most consistent styles within small caps.
Individual factors including free cash flow-based factors such as free cash flow to enterprise value and free cash flow to return on assets were among the best long- and long-short factors, in addition to share buybacks being a top long factor, the bank said.
(Karen Brettell)
*****
FTSE HITS HISTORIC 8,000 MILESTONE (1149 EST/1649 GMT)
UK's FTSE 100 benchmark index climbed to a fresh
record high, hitting the 8,000 point psychological milestone, as
the pound sank after data showed domestic inflation eased more
than expected.
Hopes that inflation is abating globally have driven flows
into stocks this year. Data on Wednesday showing that British
inflation fell by more than expected in January led sterling
lower and stocks higher as cooling price pressures added to
signs that further hefty BoE interest rate hikes are unlikely.
"The 8,000 level is a purely psychological milestone, but
investors in the UK stock market will nonetheless be happily
counting their coffers after a year in which it has been one of
the best performing major markets," says Laith Khalaf, head of
investment analysis at AJ Bell.
Sophie Lund-Yates, lead equity analyst at Hargreaves
Lansdown, says the likely outlook for now shows a relatively
clear path back to more normal fiscal environments in the UK,
but sentiment could still change quickly.
"The recent momentum has been astounding in its speed, and
highlights that the outlook for UK plc has turned a corner.
Fundamentally though, sentiment could shift quickly depending on
the outcome of central bank decisions," she adds.
The FTSE 100 closed up 0.6% at 8,002 points.
(Joice Alves)
*****
JPMORGAN CUTS RISK ASSETS, GOES OVERWEIGHT GOVERNMENT BONDS
(1131 EST/1631 GMT)
JPMorgan is further reinforcing its defensive posture in its
model portfolio, saying on Wednesday that “markets are
overpricing recent good news on inflation and are complacent of
risks.”
Stocks are “trading near last summer’s highs and at
above-average multiples, despite weakening earnings and the
recent sharp move higher in interest rates,” analysts including
Marko Kolanovic and Nikolaos Panigirtzoglou said in a report.
At the same time, “equity markets appeared to read this
month’s central bank meetings as dovish, while dismissing the
weak Q4 earnings and the implications of the strong US payroll
report for both monetary policy and corporate margins,” they
said.
To prepare for a worsening risk outlook, JPMorgan said it is
covering an underweight position in government bonds and moving
slightly overweight in the asset class. This is funded by
“reducing risk across equities, credit and commodities.”
“We see the equity risk/reward as skewed to the downside, as
upside potential for markets is likely fairly limited given
stretched valuations and high rates, while downside could be
meaningful,” the bank said. These downside risks include “a
further weakening of activity, persisting inflation, higher
terminal rates, or a resurgence of geopolitical risk.”
JPMorgan is, however, maintaining an overweight in
commodities, primarily in energy, and in emerging market
equities, which are likely to benefit from tailwinds from
China’s reopening.
In rates, the bank prefers long-end curve flatteners in U.S.
Treasuries to position for an eventual Fed pause, and emerging
market local bonds as inflation downshifts and gives emerging
market central banks room to ease.
(Karen Brettell)
*****
WEDNESDAY DATA: RETAIL SALES SPREE COUNTERS ECONOMIC
SOFTENING NARRATIVE (1110 EST/1610 GMT)
A truckload of data dumped on investors' front lawns on
Wednesday provided treasures for optimists and pessimists,
showing evidence of robust consumer spending, softening
manufacturing and a potential light at the end of the tunnel for
the woebegone housing market.
No matter the outlook, market participants will read the tea
leaves for clues as to when Powell & Co will press the rate-hike
pause button.
Receipts at U.S. retailers bounced back last
month, jumping by 3.0% - the biggest monthly surge in almost two
years - and marking a solid about-face from December's 1.1%
decline.
The number sailed well above the 1.8% monthly gain analysts
expected.
On the granular level, sales at department stores roared
back to life, surging 17.5%, autos jumped 5.8%, and food & drink
services leapt 7.2%.
"Today's Retail Sales report came in much higher than
expected and the prior report was revised higher, showing the
strength of consumers and their willingness to keep spending,"
writes Chris Zaccarelli, chief investment officer at Independent
Advisor Alliance. "The labor market's resilience is the main
reason consumers continue to spend and as long as that's the
case, inflation is likely to remain sticky."
So-called "core" retail sales, which strips out autos,
gasoline, building materials and food services - a measure which
most closely corresponds with the personal expenditures element
of GDP - gained a less impressive, but still respectable 1.7%.
Year-over-year, the core figure accelerated from 5.89% to
6.38%.
But those scanning the skies for economic softness found it
in the form of January's industrial output number,
which flatlined, unchanged from December.
Economists polled by Reuters predicted a 0.5% increase.
Line-by-line, as 1.2% increase in business equipment and a
1% rise in manufactured goods was canceled out by a 0.7% drop in
consumer products and a whopping 9.9% decline in utilities.
On an annual basis industrial production lost momentum,
rising 0.79%, down from 1.15% the month prior.
"Abstracting from the noise, the bigger picture here is that
the trend in manufacturing output has softened significantly
since the middle of last year, as the 450bp of hikes by the Fed
takes its toll on business capex," says Ian Shepherdson, chief
economist at Pantheon Macroeconomics.
Capacity utilization , often seen as a barometer
of economic slack, unexpectedly inched 10 basis points lower to
78.3, in rude opposition to the 20 basis point gain analysts
expected.
Add this to the upside surprise column: activity in the
factories of New York State was much less dire than anticipated.
The New York Fed's Empire State index landed at
-5.8, much improved from last month's -32.9 print and a mile
above the -18.0 consensus.
Even so, the report marks the index's third consecutive
month in the red - an Empire State number below zero signifies a
monthly contraction of activity.
Despite the could-have-been-worse print, "the worst is
likely ahead," says Gurleen Chadha, U.S. economist at Oxford
Economics. "Manufacturing is being hurt by higher interest rates
stifling demand for goods, past appreciation of the dollar, and
a softening in global demand."
What's more, the mood amongst U.S. homebuilders is showing
some robust improvement in February.
The National Association of Home Builders' (NAHB) jumped 7 points to 42, and breezing past the 37
level predicted and touching the highest level since September.
The glass-half empty crowd will be quick to outpoint that
builder sentiment has been below 50 - pessimistic territory -
for seven months.
This is largely attributable to the perfect storm of
skyrocketing home prices, rising mortgage rates and tighter
financial conditions, which have combined to push the prospect
of home ownership beyond the grasp of many potential buyers.
Still, "even as the Federal Reserve continues to tighten
monetary policy conditions, forecasts indicate that the housing
market has passed peak mortgage rates for this cycle," says NAHB
chief economist Robert Dietz.
And finally the value of goods stacked in the store rooms of
U.S. businesses hit the consensus bull's eye by
increasing 0.3% in December.
Business inventories have increased now for 20 straight
months, and private inventories contributed to the plus column
of fourth quarter GDP, according to the Commerce Department's
advance take released last month.
Wall Street is just modestly red with NVIDIA ,
Amazon.com , and Meta Platforms weighing
heaviest.
Small and mid-caps , however, are both green.
(Stephen Culp)
*****
U.S. STOCKS RED AFTER RETAIL SALES (1005 EST/1505 GMT)
Wall Street's main stock indexes are lower early on Wednesday after stronger-than-expected retail sales data underscored a resilient U.S. economy, which could offer more room for the Federal Reserve to raise interest rates. All S&P 500 sectors are down with energy taking the biggest hit by far, down more than 2%. Crude futures are off 1%.
Most other sector changes, however, are relatively muted. Utilities are now just below flat. In a note Wednesday morning, Art Hogan, chief market strategist at B Riley Wealth wrote, "We assume that inflation will look better in the second half. Core PCE, the inflation measure the Federal Reserve looks at, could be 3% or a bit lower by the end of the year, which suggests that the Fed will need to be less aggressive."
Hogan added "While we envision more choppiness in markets in
the first quarter, we see markets settling into a slow grind
higher after that."
Here is a snapshot of where markets stood a little over 30
minutes into the trading day:
(Terence Gabriel)
*****
BITCOIN BACK ON TRACK AFTER FALSE BREAK? (0900 EST/1400 GMT)
Recently battered bitcoin is trying to make a quick
come back. And if last week's downside range resolution proves
to be a false break, it may signal another risk-on charge.
From its Feb. 2 high, BTC plunged about 12% into its low on
Monday:
With this, the Nasdaq Composite , which also topped
on Feb. 2, lost more than 5% over its next six trading days.
BTC's recent decline included a sharp slide last Wednesday
to Friday. Just prior to this, bitcoin's daily Bollinger Band
(BB) width, a historical volatility measure, had once again
become especially compressed suggesting a market ripe for much
more spirited action, or indeed, its next trend.
Given BTC's breakdown, BB width popped. However, unlike with
several sharp BTC slides in the spring and summer of last year,
or its explosive advance earlier this year, the measure's rise
proved surprisingly stunted.
A stunted BB width rise occurred in fall 2022 with a BTC
upside breakout. Bitcoin's bigger move then occurred after
reversing back below its 20-day moving average (DMA).
BTC is now rallying back to challenge its 20-DMA at just
over $22,750. Reclaiming and holding above this swing level can
tilt back toward the potential for a further rise in volatility
to instead accompany an upside run.
Such a turn could be good news for stock bulls given that
bitcoin's rolling 50-day correlation with the IXIC is a robust
0.89 (1.00 is a perfect positive correlation).
(Terence Gabriel)
*****
FOR WEDNESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EST/1400
GMT - CLICK HERE
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BTC02152023 earlytrade02152023 Retail sales Industrial production Empire State NAHB Business inventories FTSE 8000 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
