* Major U.S. indexes decline; banks, chips especially weak
* Cons disc weakest major S&P sector; staples, utilities
gain
* Dollar, bitcoin fall; gold, crude rise
* U.S. 10-Year Treasury yield retreats to ~1.85%
Jan 19 - 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
NASDAQ COMPOSITE ENDS DOWN MORE THAN 10% FROM RECORD HIGH
(1605 EST/2105 GMT)
The Nasdaq Composite finished the day down 10.7%
from its November-19 record close, confirming a correction for
the first time since February/March 2021.
Indeed, this is now the biggest Nasdaq fall since the 11.8%
slide in late 2020, which took just 14 trading days to play out.
This current decline has taken 40 trading days, making it the
longest fall of more than 10% from a record high close for the
Nasdaq, since its near-24% August/December 2018 collapse that
played out over 81 trading days.
Wednesday's selloff came despite the U.S. 10-Year Treasury
yield hitting a high of 1.9020% earlier in the day,
before reversing down to the 1.8500% area. Nevertheless, the
yield is still on track to rise for a fifth-straight week.
Meanwhile, the S&P 500 is now off 5.5% from its
January-3 record close, and the Dow Jones Industrial Average
is off 4.8% from its January-4 record close.
Of note, despite the Nasdaq weakness, and the Nasdaq 100
ending down 9.2% from its November 19 record close, the
Nasdaq 100 Volatility Index is actually ticking down
slightly on the day.
Here is Wednesday's closing snapshot:
(Terence Gabriel)
*****
DIGITIZATION TO DRIVE SOFTWARE DEMAND (1355 EST/1855 GMT)
The Fed’s hawkish intentions became clearer with the release
of its December FOMC minutes. This helped propel the recent rise
in bond yields and a pronounced shift away from growth stocks.
Saira Malik, chief investment officer, equity, at Nuveen, is
noting that the software industry has not been immune to this
rotation, as illustrated by the iShares Expanded Tech-Software
Sector ETF, which has collapsed around 20% from its
all-time high in November.
Malik says that, as expected, volatility for the industry
has increased in response to rising-rate expectations, fears of
moderating growth and tighter margins. However, she also thinks
that given the intensity of recent slide, valuations for
software names are beginning to look more attractive as they
rapidly approach pre-Covid levels.
That said, she believes that pockets of turbulence are
likely to persist this year due to less accommodative monetary
policy, some demand being pulled forward, the unwinding of
Covid-driven expense savings and general labor tightness.
However, Nuveen believes the outlook for software is bright,
as demand remains robust. Malik notes that according to Gartner,
IT/software spending is expected to grow 5.4%/11.5% worldwide in
constant currency terms in 2022, versus an estimated 6.8%/10.9%
in 2021.
"Longer term, we believe that (1) accelerating and pervasive
global digitization will serve to improve the pace and duration
of the software industry’s growth and (2) increasingly strategic
positioning with customers will result in more resilient
financial models."
(Terence Gabriel)
*****
LAND HO! REAL ESTATE INVESTORS EYE A STRONG YEAR (1231
EST/1731 GMT)
U.S. consumers are still rushing to snap up homes in the
suburbs, as homebuilders struggle to keep up with demand. That's
led to a strong performance over the past year for housing
stocks.
It's also meant a strong year for real estate sales and
investments in rural areas which are facing similar imbalances
between supply and demand according to Jason Walter, CEO of
National Land Realty.
Essentially, buyers snapped up tracts of land starting in
the second half of 2020, and "they aren't making anymore,"
Walter told the Reuters Global Markets Forum
Land's appreciation during high inflationary periods has
also meant sellers are becoming scarce, he said. Covid is
throwing another wrench in the works as well, as law firms shut
down and buyers push back their timelines.
"We anticipate Q1 to fall below previous expectations but
then foresee a massive Q2 once Covid slows down," Walter says.
Two of the most sought after sectors are agriculture and
timber. This is partly due to low debt levels, making these
sectors safer in a downturn, and rising prices for commodities,
Walter said.
A lot of agricultural land has also been snapped up by solar
developers, Walter said. "The bottom line is there are more
people to feed and less land to feed them with."
This is reflected by the performance of U.S.-listed real
estate investment trust (REITs) focused on these sectors.
Farmland REITs Gladstone Land Corp and Farmland
Partners have jumped 152% and 75% since the pandemic
began in 2020.
Timberland REIT Weyerhaeuser Company has risen about
36% since 2020, slightly underperforming the S&P 500
which gained about 41% in the same period.
Developers are still hesitant on office and retail spaces as
the future of work-from-home is somewhat uncertain, but
properties related to logistics are "off the charts hot," Walter
said.
(Join GMF, a chat room hosted on Refinitiv Messenger: https://refini.tv/33uoFoQ)
(Lisa Mattackal)
*****
TSA AND AIRLINE STOCKS: OMICRON DEPARTURE DELAYED, NEXT
BLIZZARD ETA TBA (1231 EST/1731 GMT)
Commercial airlines in the United States aren't having the
best year so far, reeling in the first weeks of 2022 from a
one-two punch of Omicron and snowstorms.
The Transportation Safety Administration (TSA), which
provides nearly up-to-the-minute passenger throughput data - the
most recent data point is one day old - shows a marked drop-off
in January so far.
The year began with several massive storms that crippled
much of the U.S. and grounded thousands of domestic
flights.
As a result, TSA shows the number of passengers passing
through metal detectors in their socks is down more than 30%
from the corresponding weekday in 2020, before the pandemic
brought commercial air travel to a virtual halt.
But while blizzards pass and runways can be plowed, the
staying power of the Omicron variant (along with new variants
likely to follow) is far less certain.
The airline industry skidded in its landing at the end of
2021, as nearly a thousand flights were canceled on Christmas
Day alone as surging COVID-19 infections sidelined flight crews
and other personnel.
Together, this persistent uncertainty has grounded airline
stocks of late.
While investors are typically capable of looking beyond
near-term challenges, placing their bets on where stocks will be
six months to a year from now, current calamities appear to be
weighing down those expectations.
The S&P 1500 Airlines index is having a down
day, last off 0.8%. For the week, it's down more than 3%.
(Stephen Culp)
*****
STIFEL'S BANNISTER SEES S&P 500 DROP TO 4,200 POSSIBLE IN Q1
(1210 EST/1710 GMT)
Barry Bannister, chief equity strategist at Stifel, has
reiterated on Wednesday his call for a market correction, this
time estimating the S&P 500 could fall to 4,200 and probably in
the first quarter of 2022. (4,200 is around 8.5% below the SPX's
current level of ~4,590).
Bannister notes that tighter financial conditions will bring
about a decline in the P/E ratio, with global M2 money slowing
as the dollar strengthens from a flight to safety and the Fed
exit from its soft monetary policy.
While the equity risk premium (using CAPE operating EPS
earnings yield minus the 10-year TIPS real yield)
may be a bullish offset, that is countered by the rising 10-year
TIPS real yield weakening growth P/E ratios more than value.
In addition, Bannister also believes earnings per share
looks extended, having only taken one year to bounce back in
2021 following the 2020 recession compared with the three years
it took earnings to rise above trend in the wake of the 2000 and
2009 recessions. That fast rebound was the result of fiscal
support, according to Bannister, which replaced income lost from
the COVID-19 pandemic, leaving actual EPS due to slow.
Another negative, according to Bannister is tightening of
stimulus by China in 2021, which usually leads global PMIs by
about 8 months. Should the tightening spill over as expected to
the U.S. PMI in the first half of the year, the S&P 500 may soon
decline closer to the spring 2021 level of about 4,200.
(Chuck Mikolajczak)
*****
MID-TERM ELECTIONS AND THE MARKET (1139 EST/1639 GMT)
The U.S. market tends to be volatile in mid-term election
years according to the latest research from Bespoke Investment
Group which points out that "2022 is living up to that
reputation so far."
Here are the numbers in aggregate behind that reputation. In
the post-WWII period, the S&P 500 has actually gained 5.03% on
average in mid-term years, but it compares with the average gain
of 8.95% for all years and is more than five percentage points
lower than the average for all non-mid-term years in the
post-WWII period, Bespoke wrote.
But the data crunching firm sees the stand out illustration
in "how weak the S&P 500 has been during the summer months and
early fall" in mid-term years.
"Overall, the S&P 500 tends to consolidate YTD gains during
this period," but during mid-term years the S&P has shown a
"first-half peak in April and steady weakness right through the
end of Q3."
Bespoke also looked at the percentage of time the S&P 500 is
positive YTD at different times throughout the year.
Besides a brief period in March when the S&P 500 has been
higher YTD more consistently than it has been in all other
years, "for the rest of the year, the S&P 500 was never higher
YTD more than two-thirds of the time," according to the
research. But for all other years the S&P 500 was higher YTD at
least 70% of the time, it said.
Here is a graphic from Bespoke showing mid-term year
underperformance:
(Sinéad Carew)
*****
HOUSING: DUST HASN'T YET SETTLED ON THE GREAT SUBURBAN LAND
RUSH (1055 EST/1555 GMT)
Nearly 133 years ago, tens of thousands of people waited at
the Oklahoma border for the green light to commence a stampede
into the territory in their race to stake a claim.
Housing data released on Wednesday showed the more recent -
although less brutal and bloody - pandemic-driven stampede for
the suburbs continues apace. However, as the dash for suburbia
drones on, homebuilders are struggling to keep up as demand
continues to outpace supply, and as a lack of materials and
buildable lots weigh on affordability.
Ground breaking on new U.S. homes unexpectedly
increased last month by 1.4% to 1.702 million units at a
seasonally-adjusted annualized rate (SAAR), according to the
Commerce Department.
Consensus called for a 1.7% decline.
"The strong starts in December, a historically slower month
amid the holiday season, reflects market optimism in the
residential sector, and bodes well for a strong start to 2022,"
writes Kelly Mangold, Principal at RCLCO Real Estate Consulting.
Building permits - a more forward-looking
indicator - also defied expectations by surging by 9.1% to 1.873
million units SAAR, a solid acceleration from November's 3.9%
increase.
This would appear to be a strong indication that
homebuilders are indeed expecting the demand wave to continue.
"New home inventory is now more than three times higher,
relative to sales, than inventory of existing homes, the biggest
gap ever, by far," says Ian Shepherdson, chief economist at
Patheon Macroeconomics.
As illustrated by the graphic below, both housing starts and
building permits, despite recent fluctuations, remain at or
above pre-COVID levels.
Homebuilders "will be closely watching how people respond to
rising mortgage rates; a further surge in new home construction
at this point looks risky to us," Shepherdson adds, providing a
tidy segue.
Applications for home loans increased by 2.3% last week even
as interest rates continue their uphill climb.
Mortgage Bankers Association (MBA) data showed the average
30-year fixed contract rate following Treasury yields
higher, rising 12 basis points to 3.64%.
Even so, demand for loans to purchase homes
jumped a robust 7.9%, handily offseting a 3.1% decline in refi
demand.
"Mortgage rates hit their highest levels since March 2020,
leading to the slowest pace of refinance activity in over two
years," notes Joel Kan, associate vice president of economic and
industry forecasting at MBA.
Interestingly, the average loan size for purchase
applications hit a record $418,500, largely a symptom of
depleted housing inventories, and further evidence that home
ownership is drifting beyond the realm of affordability,
particularly at the lower end of the market.
Indeed, demand for loans to buy homes is down about 12% over
the last year, with overall mortgage applications around 37%
below year-ago levels, as seen in the graphic below:
While building permits and purchase loan applications are
among the sectors most leading indicators, as they offer clues
as to into home sales a month or two down the road, housing
stocks offer the most forward-looking view of them all,
reflecting where investors expect the sector to be six months to
a year from now.
Housing stocks have generally outperformed the broader
market over the course of the pandemic as market participants
generally back the notion that the COVID housing boom still has
gas in its tank.
"Pent-up demand, the need for supply, relatively upbeat
homebuilder sentiment and an elevated backlog of starts will
support new home construction this year," says Nancy Vanden
Houten, lead U.S. economist at Oxford Economics. "However,
persistent supply-side constraints, including record shortages
of labor, will continue to pose headwinds and prolong
construction timelines."
The following graphic shows the 12-month performance of the
Philadelphia SE Housing index, the S&P 1500 Home Building
index, and the benchmark S&P 500.
So far this year, that outperformance has narrowed.
Wall Street reversed early gains and was last pale red, with
banks and chips leading the charge lower.
(Stephen Culp)
*****
U.S. STOCKS BOUNCE IN EARLY TRADE (1013 EST/1513 GMT)
U.S. stock indexes are bouncing on Wednesday after upbeat
results from a host of companies partially offset a wobbly start
to the fourth-quarter reporting season, while Big Tech stocks
also made a comeback after a bruising selloff.
Indeed, tech is posting the biggest rise among
major S&P 500 sectors. FANGs and chips
are gaining.
That said, banks and financials are among
weaker groups.
This as the U.S. 10-year Treasury yield has
dipped back to the 1.85% area after hitting a high of 1.9020%.
In any event, the Nasdaq Composite, at around
14,630, has work to do if it is to reclaim its 200-day moving
average. This long-term moving average now stands as resistance
at around 14,740.
Here is where markets stand in early trade:
(Terence Gabriel)
*****
TREAD CAREFULLY WITH THE NASDAQ (0940 EST/1440 GMT)
Fears of rising interest rates are triggering a selloff
in global stocks, but the Nasdaq could be at greater risk due to
its stronger retail participation, says Jefferies.
The shape of the U.S. yield curve prices equities in two
different ways, the New York-based brokerage explains: The
long-end is a gauge on valuation, and equities are long-duration
assets.
Any changes to short-term rates influence speculative
behavior, since it changes the cost of purchasing assets through
the carry-trade, margin-financing, repo rates, and so on. The
movement in short-rates, then, can also dictate a firm's ability
to raise money, as capital markets can be fickle when rates
start to move up too quickly.
Interestingly, Jefferies notes similarities between now and
the 2000-1 period, when a faster Fed tightening cycle was
under-appreciated after ‘Y2K’ fears proved unfounded. “True, the
constituents are very much different as are the business models,
but the degree of margin financing and heightened risk appetite
is similar.”
Moreover, the first four or so months of 2021 saw a wide
divergence in the performance between S&P 500 companies
depending on their FCF yield as U.S. yields pivoted
upwards, analysts added. "Indeed, high PE stocks were equally
hurt."
The bottom line, Jefferies says, is that gyrations in the
treasury market will influence the high PE, low FCF yield stocks
the most. They expect the 10-Year Treasury, which earlier on
Wednesday reached 1.90%, to settle ~2.4% by the end of 2022.
“The sell-off of 2-year treasury yield notes is an excellent
lead indicator of rate tightening cycles which then means higher
margin financing costs. The consistency of earnings growth in
the FAANG+M ought to mean that they provide an ‘adequate’ hedge
to Nasdaq. Remain long S&P 500, tread carefully with Nasdaq,”
the analysts write.
(Anisha Sircar)
*****
NASDAQ 100: CAN THIS VIXEN COOPERATE? (0900 EST/1400 GMT)
The Nasdaq 100 index ended Tuesday down a little more
than 8% from its November 19 record close.
Meanwhile, despite the Nasdaq 100's recent drubbing, the
CBOE Nasdaq 100 Volatility index has yet to surpass its
December 3rd high:
The VXN spiked to a high of 36.64 on December 3. Since then,
and despite lower NDX lows on either an intraday or closing
basis, the VXN has been making lower highs. It ended Tuesday at
29.36.
Of note, since early 2020, the six biggest NDX declines from
record-high territory ultimately saw lows accompanied by a lower
VXN high on a multi-week/multi-month basis.
This as the spikes in the implied volatility measure were
either their most intense earlier on in the declines, or were
less severe vs the most recent period of instability.
Therefore, traders will be watching Nasdaq 100 volatility
closely vs its 36.64 early-December high. A calming VXN can
coincide with an unfolding NDX recovery attempt.
That said, a VXN thrust above 36.64 will cause this pattern
to reset, suggesting the potential for much greater NDX
weakness.
(Terence Gabriel)
*****
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)