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S&P 500, Nasdaq dip, DJI modestly green
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Real estate weakest S&P 500 sector; energy leads gainers
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Euro STOXX 600 index ends off ~0.7%
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Dollar, crude decline; gold up, bitcoin gains >2%
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U.S. 10-Year Treasury yield rises to ~3.97%
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WALL STREET STILL BEARISH STOCKS, BUT LOVING BONDS -BOFA (1215 EST/1715 GMT) BofA's Sell Side Indicator (SSI), which tracks the average recommended allocation to stocks by U.S. sell-side strategists, was unchanged in February at 52.9% as the S&P 500 declined 2.6%. Savita Subramanian, equity and quant strategist at Bank of America Securities (BofAS), says that the SSI is one of six inputs into their 2023 year-end S&P 500 target of 4,000, but is the most bullish of the six factors, suggesting an expected price return of +16% over the next 12 months (S&P 500 at ~4,600). According to Subramanian, historically, when the SSI was at these levels or lower, subsequent 12-month S&P 500 returns were positive 95% of the time (vs. 81% over the full period) and the median 12-month return was +22%. Subramanian adds that Wall Street's consensus equity allocation has been a reliable contrary indicator. In other words, it has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa. "The SSI is in 'Neutral' territory, a less predictive range than the extreme 'Buy' or 'Sell' thresholds. But the big drop in equity sentiment since 2021 puts the SSI just 1.5ppt shy of a 'Buy' after nearly triggering 'Sell' in 2021." This shift in sentiment is one reason BofAS has a more constructive outlook into 2023. Subramanian notes that with no changes in February, equity allocations remain near a contrarian "Buy" signal, while bond allocations remain at a 10-year high and cash allocations remain near record lows in their data history. "With the S&P 500 trading near our year-end target, we do not think now is the time to buy the market index wholesale. But we do see stock selection opportunities, particularly in old economy sectors that have been starved of capital for 10+ years."
(Terence Gabriel)
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IN LIKE A LAMB: PMI, MORTGAGES, CONSTRUCTION SPENDING (1120 EST/1620 GMT) A flock of disparate data sauntered into view on Wednesday, the first day of a new month, each in their own way reflecting hints of economic softness on the first day. But in light of its restrictive policy rates and tough-on-inflation talks, is it soft enough for the Fed?
U.S. factory activity has been contracting for four months.
The Institute for Supply Management's (ISM) purchasing managers' index (PMI) improved by a negligible 0.3 point to 47.7, falling shy of the 48 consensus. A PMI number south of 50 signifies a pull-back, or contraction of activity from the previous month.
A shallower decline in new orders was offset by the employment component dipping back below 50 and prices paid pivoting back into expansion - not a happy sign for inflation watchers. The survey's respondents are "reporting softening new order rates over the previous nine months," says Timothy Fiore, chair of ISM's manufacturing survey committee, adding "the February composite index reading reflects companies continuing to slow outputs to better match demand for the first half of 2023 and prepare for growth in the second half of the year." Remarks from the participants echo that partly sunny/partly cloudy sentiment, with remarks like "expect the first half of 2023 in the U.S. to be slower than the second half" and "even though our number of quotes are down, we are still staying busy," peppered throughout. Here's a breakdown of the index's select components: Not to be outdone S&P Global also released its final take on February PMI , which landed at 47.3, half a point lower than its "flash" reading from earlier in the month, but still a modest improvement over January's 46.9. Chris Williamson, chief business economist at S&P Global noted "greater success in filling vacancies, and the improvement in supply chains helped reduce input cost inflation," while also warning "rising wage pressures and efforts to raise margins meant average prices for goods leaving the factory gate rose sharply once again, the rate of inflation accelerating for a second straight month to hint at stubbornly high price pressures." The two PMIs differ in the weight they apply to different components (e.g., new orders, employment). This graphic shows the extent to which they agree (or not). Demand for home loans continued to sink last week, dragged down by the weight of rising interest rates, according to the Mortgage Bankers Association (MBA). The average 30-year fixed contract rate notched 9 basis points higher to 6.71%, the highest it's been since mid-November. Potential borrowers were unimpressed, with applications for loans to purchase homes and refinance existing mortgages falling by 5.6% and 5.5%, respectively. This marks three straight weeks of weakening demand, says MBA's deputy chief economist Joel Kan, who points out that "mortgage rates have jumped 50 basis points over the past month." "Data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as anticipated, which continues to put upward pressure on rates," Kan adds. If the housing market is indeed about to find a floor, it should think about doing it soon - overall mortgage demand is now down 59.3% from the same week a year ago. Finally, expenditures on U.S. construction projects defied expectations by falling 0.1% in January, extending December's downwardly-revised 0.7% drop. Economists projected a modest 0.2% rebound. Breaking it down, a 0.6% drop in residential construction spending - reflecting ongoing housing sector weakness - and a 0.9% decline on highways and streets helped offset a robust 6% increase in manufacturing projects. Public construction spending dropped by 0.6%. Excluding housing, private construction expenditures rose by a healthy 0.9%. Wall Street struggle to start the new month with gains was being thwarted by Tesla , Nvidia and Apple in morning trading.
(Stephen Culp)
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U.S. STOCKS STRUGGLE AS RATES STILL WEIGH ON SENTIMENT (1001 EST/1501 GMT) The main U.S. indexes are tilted lower early on Wednesday as the prospect for higher rates for longer continued to weigh on parts of the market, while investors also looked to snatch up some beaten down stocks. Some analysts are concerned that stocks have further room to fall even after recent weakness, as they have not yet caught up to the rapid repricing in the bond market as it adjusts for a more hawkish Fed policy. “Shortly following the early February Fed meeting, rates increased sharply, while equity markets initially rallied. This opened a divergence between equities and bonds that has yet to close, despite the modest equity market decline over the past ~1.5 weeks,” JPMorgan analysts including Marko Kolanovic said in a note sent on Wednesday. Here is a snapshot of where markets stood around 1000 EST:
(Karen Brettell)
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SAFE AND EASY BOND YIELDS BACK IN PLAY? (0947 EST/1447 GMT)
Investing in U.S. markets is turning out to be more
difficult than what many were expecting coming into 2023, but as
the high-inflation, high-rates environment takes the shine off
equities, returns from the bond markets aren't looking so bad.
The yield on six-month Treasury bills hit a 15-year high of 5.1% and the return on 30-year bonds is at 3.8%, making investments in government-backed securities a more attractive alternative to the rational investor. Compare that to the highest dividend yielding sectors on the S&P 500 index, real estate (3.6%), utilities (3.5%) and energy (3.5%) and it's a no-brainer.
The dividend yield on the benchmark S&P 500 now stands at 2.2%.
"Money chased an 'easy, safe 5% plus yield' on short-term Treasury bills from the market, as dividend investors questioned the spread," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Analysts still see fourth earnings declining 3.2%, per Refinitiv data, with high-profile firms including Intel Corp , Newmont Corporation and VF Corp all having announced dividend cuts since the start of the year.
To make things more difficult, money markets are now seeing
a peak rate of 5.43% by September with little to no chance of
the Federal Reserve cutting rates this year. However, all hope is not lost as Silverblatt notes S&P 500
dividends are still expected to grow through 2023 on bets of a
mild recession, even as the economy slows and interest rates
rise.
(Shreyashi Sanyal, Johann M Cherian)
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NASDAQ 100 TRIPLE-Qs: GOING WITH THE FLOW? (0901 EST/1401
GMT)
The Invesco QQQ Trust Series 1 , which tracks the
Nasdaq 100 index , took a beating last year, losing 33% of
its value. That said, amid that weakness, one indicator, the
money flow index (MFI), survived tests of a long-term monthly
support line.
Now, early in 2023, along with burgeoning QQQ strength, the
MFI has vaulted to a more than one-year high:
Amid last year's collapse, and despite a series of lower QQQ lows, the MFI, and indicator that incorporates both price and volume, held the support line from its 2002 trough. That support line proved to be a staging ground, ultimately leading to an upward QQQ reversal, which saw the ETF hit a six-month high in February. Given the MFI's tendency to respect long-term monthly support and resistance lines, 2022 may have marked a significant trough for the indicator. However, the MFI, now just over 53, will need to clear the resistance line from its 2014 high, now around 61, to add credence to the bullish turn.
Conversely, an MFI reversal and break of its 2022 low, at
28.7, would see it spill out of its long-term channel. That
could suggest potential for QQQ to see another waterfall slide
given the substantial room before the indicator would reach its
2009 trough at 16.6 or its 2002 low at 11.2.
(Terence Gabriel)
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FOR WEDNESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EST/1400
GMT - CLICK HERE
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
