Last checked at 
Dow gains >1%, Nasdaq edges lower
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Cons staples leads gainers, tech lags
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Euro STOXX 600 index closes down 0.56%
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Crude, dollar slip; bitcoin ~flat; gold gains
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U.S. 10-Year Treasury yield last ~3.89%
Oct 11 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at
FED BOND LOSSES HALT PAYMENTS TO US TREASURY (1345 EDT/1745 GMT)
A sharp spike in U.S. Treasury yields has raised concerns about the impact of unrealized losses in the Federal Reserve’s massive bond portfolio.
According to Morgan Stanley’s chief global economist Seth Carpenter, this is not necessarily a concern for the Fed and it won’t impact its liquidity or risk a bankruptcy. It will mean, however, that the Treasury will stop receiving remittances, which could increase its need to issue more debt.
Income generated from the Fed’s System Open Market Account portfolio ballooned to more than $100 billion as the U.S. central bank expanded its bond portfolio, from $20-$25 billion per year on average before the Global Financial Crisis, Morgan Stanley said.
That came as the Fed’s balance sheet this year reached a peak of $9 trillion, up from $900 billion in August 2007.
However, that income has now turned negative, and losses are likely to deepen as the policy rate rises. These losses are unrealized, however, unless the Fed sells the bonds.
“So, what do losses mean?,” Carpenter asks, “Is there a hit to capital? Bankruptcy? An inability to conduct monetary policy? No. First, remittances to the Treasury end, and the Treasury issues more debt. The Fed then cumulates its losses and, rather than reducing its capital, creates a 'deferred asset.'”
That means that when earnings turn positive again, remittances to the Treasury will stay at zero until the losses are recouped, Carpenter said, noting that “profitability will eventually return because currency will keep growing, lowering interest expense, and QT (quantitative tightening) will shrink interest-bearing liabilities.”
REITS LIKELY TO SEE MORE PAIN (1307 EDT/1707 GMT)
In a typical market downturn, investors often flock to defensive assets such as the U.S. dollar, bonds and real estate investment trusts (REITs), but this has been an atypical market downturn.
While the dollar has surged more than 17% this year, the FTSE NAREIT REITs All REITs index has tumbled more than 32% and that weak performance can largely be attributed to the Federal Reserve's tightening cycle, according to John LaForge, head of real asset strategy at the Wells Fargo Investment Institute.
As the Fed has raised the fed funds rate by 300 basis points this year as it seeks to combat inflation, bond prices, REITs and other investments sensitive to interest rates have suffered. REITs, which heavily depend on debt to finance new real estate projects and can see demand for real estate space slow if rates rise too fast or too high, are particularly vulnerable.
LaForge said in periods of rising interest rates, it is common for REITs to underperform other stocks, while income-seeking investors will prefer the lesser risk of bonds over REITs.
With the Fed's hiking cycle unlikely to end soon, LaForge expects the relative underperformance of REITs to continue until the Fed's hiking cycle ends and bond yields become less attractive.
THE WORST IS YET TO COME (1205 EDT/1605 GMT)
Nomura expects a deeper downturn in 2023, downgrading its real GDP outlook to decline 1.8% from peak to trough from a 1.5% fall previously, as it sees further demand destruction needed to control red hot inflation.
"The outlook for external growth has continued to deteriorate as Europe enters recession and growth in China remains constrained by ongoing "zero-COVID" efforts," economists wrote in a note.
"While the timing remains uncertain, conviction in our view that a recession will ultimately be required to break the significant entrenchment of domestically generated U.S. inflation has increased."
As financial conditions tightened over recent weeks, the market appears too optimistic about both the growth outlook and the Federal Reserve's likely response to weakening activity if trend inflation pressures persist, they added.
Nomura maintained the broad contours of its forecast through 2023, including an expected five consecutive quarters of negative real GDP growth.
In a brutal year for stocks, bets on a recession caused by the Fed's aggressive interest rate hikes to curb soaring prices have pushed the S&P 500 down nearly 25% this year.
In an ominous sign, the International Monetary Fund on Tuesday warned that global financial stability risks have increased, as it cut its global growth forecast for 2023 and said "the worst is yet to come".
SMALL BUSINESSES SHED GLOOM AMID MIDTERM RUN-UP (1126 EDT/1526 GMT)
The mood among small business owners grew a bit less morose last month.
Early Tuesday, the National Federation of Independent Business' (NFIB) released its Business Optimism index , which ticked higher for the third consecutive month to a reading of 92.1.
But the number remains below the long-term average of 98, and the dreaded "i" word is still the top concern among the survey's respondents, along with persistent tightness in the labor market.
"Inflation and worker shortages continue to be the hardest challenges facing small business owners," writes Bill Dunkelberg, NFIB's chief economist.
Diving deeper into the report, while near-term expectations soured to a net negative 44%, the uncertainty component and "hard-to-fill job openings" metric both eased.
"Despite the increasingly uncertain economic landscape, price pressures and labor shortages will continue to be key headwinds for small business owners through the end of the year and 2023," says Matthew Martin, U.S. economist at Oxford Economics. "While we expect a moderation in labor market tightness in the coming months, it will take time for demand and supply of labor to reach better alignment."
"As such, we look for small business optimism to remain constrained until these imbalances dissipate."
The graphic below pits the NFIB optimism index against the Russell 2000, and provides a breakdown of the participants' top four concerns: Of significance, perhaps, is the fact that despite inflation worries the percentage of survey participants who intend to raise prices notched its fourth consecutive decline.
Even so, intentions to hike prices have cruised well above inflation worries for all but one month since pandemic lockdowns sent shockwaves throughout the global economy: It should be noted that the NFIB is a politically active membership organization - in the 2022 election cycle, the 98.2% of its PAC's donations have gone to Republican candidates, according to opensecrets.org.
The recent string of increases in NFIB's optimism index has occurred in the run-up to congressional mid-term elections, and the likelihood of a Republican take-over of the U.S. House of Representatives is currently set at 83%, according to political prediction exchange PredictIt.
At last glance Wall Street is mixed in late morning trading, but off earlier lows.
Heavy-hitting growth stocks Microsoft, Amazon.com , Apple and Meta Platforms are the heaviest drag.
ARE WE THERE YET? U.S. HOUSING MARKET SLOWDOWN CLOSER THAN EVER (1058 EDT/1458 GMT)
Rising mortgage rates and high valuations have started to wane the enthusiasm of U.S. consumers who are now finding home buying to be less affordable, according to a Bank of America Institute report.
The annual growth rate in wire payments to escrow and title companies – that are typically used to pay deposits ahead of closing a housing sale – has been slowing and turned negative in 2022, according to BofA's internal data.
Potential buyers have now found themselves pushed into the rental market to wait out the storm, adding to fast-rising prices in the space.
The slowdown "is weighing on affordability particularly for new buyers, forcing some into the rental market, which then creates further upside pressure on rent prices,” says David Tinsley, senior economist at the Bank of America Institute.
Median rent payments have climbed 8.1% compared to last year for BofA customers, particularly hurting the spending power of lower-income and younger brackets.
Fed policymakers have recently said that faster policy tightening has begun to cool the housing market even as the full effect may take time to appear in the data.
Still, Americans are weathering the economic storm with some buoyancy, helping to sustain spending albeit at a slower pace although BofA expects housing market trends to may be a drag going forward.
In a surprise bright spot, travel demand remained resilient past its summer peak season with credit and debit card spending in foreign countries zooming 29% compared to the same period in 2019.
While total credit and debit card spend at the bank rose 9% in September compared to last year, it was down on a per household basis from last month, squeezed by decades-high inflation.
GERMANY OVERTAKES UK AS THE MOST-SHORTED EUROPEAN MARKET(1021 EDT/1421 GMT)
Germany overtook the United Kingdom to become the most shorted European market as of Sept. 30, according to data and analytics firm SEI Novus.
The aggregated data set, which covers over 30 billion euros in short positions from more than 150 managers, showed Germany's short exposure was 25.47%, followed by UK with 20.2% and Sweden with 11.41%.
"Turbulence in European markets has driven increasing short activity, as investors seek returns in an increasingly tough market and as the economic outlook darkens," Michelle Silsbe, director at SEI Novus, said.
"In September, the UK's political and economic troubles were overshadowed by increasing short interest in Germany, which faces a tough winter as the war in Ukraine and rising energy costs impact the industry."
Industrial stocks (manufacturing) were the most shorted in September, ending the month accounting for 24.47% of total short activity in Europe, up from 22.98% in August, which Silsbe said was in anticipation of weakening demand.
Data last week showed
German industrial production
contracted in August as supply bottlenecks remained and inflation tightened its grip.
Overall registered short positions jumped to 483 on 30th Sept. (up from 452 on 31st August). Bridgewater Associates Inc had the greatest exposure, accounting for 19.32% of registered short positions last month.
Dutch chipmaker ASML Holding NV was the most shorted European stock by size with 3.7%, followed by 3.5% in beer maker C&C Group PLC, 2.2% in German software group SAP SE, 2.1% in Koninklijke Philips NV and 2% in British pest control services provider Rentokil Initial .
The German blue-chip index has lost 23.2% year-to-date, compared with a 20.5% decline in pan-European STOXX 600 index.
Europe's largest economy has lagged as it grapples with rising prospects of a winter recession due to an energy crisis and central banks' determination to tame inflation running at multi-decade highs.
U.S. STOCKS FALL ON EARNINGS, INFLATION ANGST (0955 EDT/1355 GMT)
U.S. stocks dipped on Tuesday as rising Treasury yields and concerns that the Federal Reserve will spark a recession as it aggressively hikes rates weighed on risk appetite.
Macro-economic concerns are expected to be reflected in corporate earnings as companies struggle with higher interest rates, surging inflation and a soaring dollar.
Investors are also cautious this week before consumer price inflation data due on Thursday, which could spark another selloff if it comes in above expectations and increases the likelihood that the Fed will plow ahead with large rate increases in a bid to bring down price pressures.
All major U.S. stock indexes were lower on the day, with the Nasdaq Composite leading losses with a decline, of more than 1% followed by the S&P 500, which dipped 0.8%.
Sector wise the picture also showed broad risk aversion, with consumer staples the only S&P 500 sector in the green. Info tech, financials and communications services were among the leading decliners.
Here is a snapshot of where markets stood in early trading:
SMALL CAPS: WHERE THERE'S SMOKE, THERE MAY ALSO BE VALUE -BofA (0900 EDT/1300 GMT)
2022's bear market has hit small caps hard. The Russell 2000 has fallen about 25% year-to-date, and is down about 31% from its early-November 2021 record close.
With this, however, a BofA Securities research team led by equity and quant strategist, Jill Carey Hall, is noting that the small-cap forward P/E recently fell to 11x, or its lowest level in more than 30 years.
According to BofA, amid September's sell-off, P/E multiples were compressed by 9% across all three size segments. The Russell 2000 forward P/E slid to 10.8x from 11.8x - or its lowest reading since 1990, and 30% below its long-term average since 1985.
Carey Hall adds that the relative forward P/E of the Russell 2000 vs Russell 1000 was little-changed at 0.71x from 0.70x, which is 30% below its historic average of 1.01x and remains at the lowest levels since the Tech Bubble.
For long-term investors, BofA says that today's valuations imply ~13% annualized Russell 2000 returns over the next decade vs ~10% for the Russell 1000.
BofA continues to believe small caps are largely discounting recession risks, and that small cap value still looks like a bargain relative to small-cap growth. Indeed, despite economic concerns, BofA says that sectors with the best estimate revision trends are cyclicals, while consumer discretionary now ranks last.
"Energy continues to rank best in our small cap sector ranking framework (based on relative valuations, revisions, technicals and BofA analyst upgrades-downgrades), where it also remains one of the most historically inexpensive sectors vs. history and vs. large cap peers."
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