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* European shares positive
* Takeover approach boosts Morrisons
* U.S. stock futures gain
June 21 - Welcome to the home for real-time coverage of
markets brought to you by Reuters reporters. You can share your
thoughts with us at markets.research@thomsonreuters.com
MIND THE GAP: TIME TO STEP BACK INTO CYCLICALS? (1158 GMT)
JPMorgan has spotted a gap between the strength of cyclical
earnings and stalling price performance relative to defensives.
And what's interesting here is that this discrepancy could
offer a new entry point into cyclicals following recent fatigue.
"This could be an opportunity, in particular if we get a
resumption of the upmove in bond yields in 2H," JPM says
"The market is currently putting in place the flattening of
the yield curve, a classic late cycle signal, but that might end
up materially premature," it argues.
Check out this JPM chart below.
(Danilo Masoni)
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GOLDMAN UPS U.S. HOUSEHOLDS' EQUITY DEMAND FORECAST (1155
GMT)
As individual trading activity has made a comeback in June,
Goldman Sachs analysts expect households to be net buyers of
U.S. equities in the remainder of 2021.
Goldman lifts its forecast for households net equity buying
to $400 billion from $350 billion for the rest of the year, and
along with corporations, expects equity demand upwards of $500
billion.
Households currently allocate 44% of their assets to
equities, driven by the buildup of cash in money market funds,
anaemic credit yields and a rebound in retail trading activity,
the broker says. This comes in slightly below the all-time high
allocation of 46% in 2000.
On the macro side of things, "any signs of a sustained
increase in inflation would favor equities over bonds or cash,"
writes David Kostin, chief U.S. equity strategist at Goldman.
In its Weekly Kickstart note, the broker notes that online
broker activity data and U.S. equity call option volumes
appeared to peak in February and then declined but have been
rising since the start of June.
Goldman's basket of Retail Favorites and Rolling
Most Short have outperformed the S&P 500 by 3
percentage points and 9 percentage points this month,
respectively, suggesting renewed strength in retail activity.
Moreover, U.S. equity fund inflows are already heading for
the strongest H1 since at least 2007, with hedge fund gross and
net exposures sitting near all-time highs and mutual funds
holding a record low allocation to cash, according to the note.
(Medha Singh)
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STICKING WITH THE FED'S 'TRANSITORY' NARRATIVE (1032 GMT)
It seems the torrid market price action which followed the
Fed meeting is now settling down and sentiment has switched back
to a cautious risk-on on equity markets this morning.
The return of the upbeat mood may not be that surprising in
the big scheme of things especially given that most investors
are in sync with the Fed, according to a global survey of 400
market professionals by Deutsche Bank.
An overwhelming majority (about 75%) believe U.S. inflation
will be, just as the Fed does, transitory as you can see below:
That being said, the palpable nervousness can probably be
explained by the fact that 61% see higher-than-expected
inflation/bond yields as the biggest risk for markets.
Perception can be a volatile thing however.
The consensus of the poll is that France is the most likely
nation to win the euro 2020, over twice as likely as Italy.
But that's probably no longer the case after France drew
against Hungary over the weekend and Italy secured a third
straight win against Wales.
(Julien Ponthus)
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MAKING SMALL CAPS GREAT AGAIN! (0959 GMT)
Coverage of the small and midcap space has plunged in recent
years in many European markets, since MIFID II rules forced
brokers to charge buy side clients separately for coverage,
rather than bundling the research up with other products.
Britain’s Financial Conduct Authority and France’s AMF have
both said they are looking into the impact on the market of the
rules changes, amid dwindling coverage of small caps.
But in the meantime, Investec believes there is a gap in the
market and that the time is ripe for the comeback of an often
unloved sector.
Manager of the new Investec Brief product, Nathan Piper,
told Reuters the bank has launched research on 50 stocks with an
average market cap of 250 million pounds ($346.00 million),
covering sectors including tech and financials.
His Edinburgh-based team make the economics work by cutting
out the time-consuming process of producing traditional
forecasts and Buy/Sell recommendations, instead focusing on
data to screen for stocks that stand out on one or more metric.
Will buy side clients bite?
Piper thinks so, the team recently hired a third analyst and
will aim to expand its coverage universe to 100 over the next
year, he said.
(Lawrence White)
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DEFLATING COMMODITIES (0948 GMT)
It's been an exceptionally strong year for commodities so
far but signs have emerged that investors are starting to feel
uncomfortable about holding on to their positions in a trade
that's now the most crowded one in global markets.
The latest example of cracks appearing in the commodities
space is the price drop today in Rio Tinto shares, which
has fallen over 3% to the bottom of the STOXX 50 after a
downgrade to sell from UBS mainly because of macro headwinds.
"Near-term risks for the commodity complex are increasing
with the Fed turning more hawkish & China taking action to
deflate commodities (eg by selling strategic base metal
reserves," say analysts at the Swiss investment bank.
"We expect this to accelerate the unwinding of the
'reflation trade'," they add in a note.
Earlier this month BofA data showed commodities were the top
returning asset class for first time since 2002, up 72% YTD, and
in June they overtook bitcoin as the most crowded trade.
In this chart you can see how Europe's Basic Resources index
has come under pressure recently after climbing to an
8-year high in May relative to the broader market.
(Danilo Masoni)
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WHAT IF A HAWKISH FED PUSHES YIELDS FURTHER DOWN?(0903 GMT)
After last week's hawkish Federal Reserve policy meeting,
something unusual has been happening, namely, the drop in
long-end yields, including the 10-year maturity.
Some analysts say the Fed statements pushed up two-year and
five-year yields, which are the most sensitive to rate changes,
while investors are unwinding trades that were betting on higher
inflation.
But there are different views, with George Saravelos, head
of forex research at Deutsche Bank, saying that Fed hawkishness
might lead "to even lower long rates."
According to Saravelos, the real neutral rate or r*, which
boils down to the balance of excess savings overconsumption, is
currently extremely low, and that is why long-end bond yields
haven't been rising after the Fed.
The critical question is what households will do after the
pandemic as they might have turned more risk-averse and keep all
the cash hoarded in deposits or other investments "… pushing r*
further down."
"If that is the case, Fed hawkishness will
counterintuitively lead to even lower long rates, just as we
have witnessed in recent days," Saravelos says.
"In the UK and Israel, despite most activity being open,
spending has flatlined after the initial surge rather than
accelerating," he adds.
(Stefano Rebaudo)
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REFLATION TRADE ON HOLD (0733 GMT)
It doesn't seem such a painful move as of now, with Europe's
Stoxx 600 down 0.5% and the U.S. stock futures mixed
around Friday's levels after dropping earlier this morning.
Some analysts flag that Friday's fall on Wall Street was
coupled with "quadruple witching day," the quarterly
simultaneous expiration of U.S. options and futures contracts,
an event that usually increases volatility.
But reflation trade is losing momentum as a risk-off mood is
spreading ahead of more Federal Reserve speakers due this week,
after Fed's James Bullard talking about stronger than expected
inflation spooked markets on Friday.
Basic materials stock index is the worst performer,
down 1.7% after the Fed triggered a sharp correction in
commodity prices.
Bank stock index is down 1.1% after the U.S. yield
curve saw the largest one-week flattening in nearly ten years.
Shares in Morrisson are up 33% after on hopes
private equity firm Clayton, Dubilier & Rice (CD&R) might raise
its proposed offer for the British supermarket group or flush
out interest from other possible suitors.
Its peers Sainsbury and Tesco are also
among the Stoxx 600 best performers.
(Stefano Rebaudo)
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MYSTERIOUS WAYS (0714 GMT)
Bond investors could be forgiven for humming U2's signature
tune after the strange moves in the U.S. Treasury yield curve in
the wake of the Federal Reserve catching markets off guard last
week by anticipating rate hikes as early as 2023.
Consider this: 2-year U.S. Treasury yields are near 16-month
highs while 30-year debt yields are near 2021 lows. The 5
year-30 year yield curve saw the largest one-week flattening in
nearly ten years, says Deutsche Bank. It is unnatural for U.S.
long-end yields to decline and the curve to flatten after a
hawkish Fed meeting before a hiking cycle has even begun.
Whether the U.S. bond market moves signal a
weaker-than-expected global economic recovery or too much
hawkishness being priced in at the front end of the curve,
markets are clearly in risk-off mode.
U.S. and European stock futures are in the red after a weak
Wall Street close while safe-haven currencies including the
Japanese yen are in demand.
There is plenty of food of thought for investors this week
with a swathe of flash business surveys from the world’s major
economies on Wednesday offering more clues into whether the
economic recovery is proving as strong and rapid in June as it
did in previous months.
Several Fed officials speak this week, including Chair
Jerome Powell, who testifies before Congress on Tuesday.
Investors will watch if the Bank of England becomes the latest
central bank to signal further steps on the path to tapering
pandemic-era stimulus after the Federal Reserve’s hawkish tilt
last week.
Bitcoin was nursing overnight losses while the Australian
dollar fell to seven-month lows driven by a steep drop in iron
ore prices. Inflationary signals were mixed from the commodities
markets with copper nursing losses while oil climbed above $72 a
barrel.
In corporate news, Billionaire investor William Ackman's
Pershing Square Tontine Holdings signed a deal to buy 10% of
Universal Music Group (UMG), Taylor Swift's label for about $4
billion while Goldman launched its transaction bank in Britain.
Key developments that should provide more direction to markets
on Monday:
Copper prices at two-month lows after near 9% drop last week
ECB’s Lagarde speaks to women political leaders’ summit
Fed speaker corner: Bullard, Kaplan
Emerging markets: U.S. National Security Advisor Jake Sullivan
says Washington readying another package of sanctions against
Russia
(Saikat Chatterjee)
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EUROPE IN THE RED AFTER HAWKISH FED (0528 GMT)
The European stock futures fell as Wall Street and Asian
stock markets showed a significant adverse reaction to last
week's Federal Reserve sudden hawkish turn.
Investors brace themselves ahead of Fed speakers due this
week after St. Louis Fed President James Bullard spooked markets
on Friday by saying a faster tightening of monetary policy is a
"natural" response to economic growth and quicker inflation.
A correction of equities doesn't come as a surprise after
their strong run for such an extended period, with analysts
flagging that, as of now, market action is not disorderly.
(Stefano Rebaudo)
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