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LIVE MARKETS-The cross-asset inflation positioning playbook

Wed, 15th Sep 2021 20:11

* Major indexes rally; small caps, transports outperform

* Energy leads major S&P 500 sector gainers; utilities sole

* Dollar, gold down; crude, bitcoin up

* U.S. 10-Year Treasury yield ~1.31%

Sept 16 - 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

EDT/1911 GMT)

Fairly benign recent U.S. inflation readings mean it has
been a while since we heard "reflation" being whispered (or
yelled), but Chad Oviatt, Director of Investment Management at
Huntington Private Bank, expects yields to grind higher next

Oviatt anticipates the U.S. 10-year Treasury yield
will range between 1.50% and 2.00% in 2022 as
markets normalize from extraordinary fiscal and monetary
stimuli, with more clarity on factors such as fiscal, tax and
monetary policies later this year.

Keeping this in mind, Oviatt told the Reuters Global Markets
Forum https://refini.tv/3aAt61T (GMF) he is expressing this view
via bonds, equities and REITs.

The fixed income portfolios his firm manages are overweight
intermediate-term maturity (4-7 year) investment grade
corporates, while underweighting shorter- and longer maturity
bonds, a "bulleted" structure he feels should benefit from yield
curve steepening, with the sector possibly further outperforming
as the stimulus-driven economic recovery continues.

Among stocks, Bank of America is "currently well
positioned relative to some of its peers" and was added to
portfolios in August. Among financials, he has bought Prudential
on expectations of above average return on equity,
particularly for life insurers, on falling COVID-19 mortality

Oviatt likes REITs - despite higher expected rates - as he
believes REITs will do well as economic recovery continues,
boosted by likely higher occupancy rates as more companies
return to the offices.

(Aaron Saldanha)



U.S. corporate dividends and buybacks should rebound further
over the next one to two years, a trend that should support
higher stock prices, according to Jonathan Golub, chief U.S.
equity strategist at Credit Suisse.

"Interest rates are really low and corporate profits are
expected to grow quite robustly in the year ahead, and they are
being adjusted higher," he said this week.

On top of that, companies have a lot of capital that they
will likely be returning to shareholders, Golub said.

"Some of that is going to be dividends and some of that is
going to be buybacks, but it's a pretty big number. That places
further downside protection behind the market," he said.

When the global economy shut down in 2020, S&P 500 profits
dropped and companies cut dividends and buybacks by 27%, he

"The majority of what's been drawn down are the buybacks...
Companies really don't want to adjust their dividends down, so
the real rebound is most likely to happen in buybacks," he said.

Buybacks boost EPS numbers.

Moreover, companies are likely to spread the activity out
over a period of time, "especially since right now there's still
concerns about supply chains, still concerns about the virus,"
Golub said. "Companies are not going to take all of this excess
capital and just immediately return it in a big block to the
"It's not going to be a one-time event, but it will be more
like a wind in the sails for the market, this underlying
additional support that's going to play out over a period of

(Caroline Valetkevitch)



Ken Johnson, investment strategy analyst at the Wells Fargo
Investment Institute (WFII), takes a look at the uncertainties
surrounding Chinese equities in a research note this week.

With this, Johnson notes that Chinese authorities have
undertaken action to promote "common prosperity" in an effort to
empower disadvantaged workers and address social inequality. In
so doing, the Chinese government has targeted a vast array of
businesses, including online video games, after-school
education, and internet companies. He notes that
the MSCI China Index has declined around 10% year-to-date.

Johnson outpoints that consensus estimates for 2022 Chinese
GDP growth have now fallen below pre-pandemic levels, while
earnings revisions have cratered.

U.S. investors also face risks as the Chinese government
considers removing Chinese ADRs from major U.S. exchanges. He
notes there are roughly 250 Chinese companies currently listed
in the United States with a combined market cap of around $2.1
trillion. Since this is less than 5% of the total U.S. market
cap, as he sees it, their removal "should not create substantial
negative consequences for U.S. markets." However, he does admit
holders of these ADRs could experience increased volatility.

In any event, Johnson believes that these regulatory and
political risks are "difficult, if not impossible, to quantify."
Therefore, he expects investors will require higher rates of
return to take on these risks.

While he believes that the largest tech firms are
fundamentally "well positioned," he thinks investors should
"proceed with caution" as developments continue to unfold.

WFII continues to favor emerging market equities, but
prefers U.S. over international.

(Terence Gabriel)


EDT/1611 GMT)

BofA Securities clients were net buyers of U.S. equities
last week, purchasing single stocks, but selling exchange-traded
funds (ETFs), bucking a trend in most weeks this year, according
to a BofA Global Research report on Tuesday.

"We see several signs the tables could be turning for active
versus passive and watch for more confirmation from client
flows," the report said.

Institutional clients led buying with their biggest week of
inflows since February, while hedge funds for a third-straight
week and private clients for a sixth-straight week were sellers,
it added.

BofA said its corporate clients continued to buy back
stocks, with the tech sector moving ahead of financials in terms
of the largest buy backs last week.

Single stock inflows were broad based with the exception of
health care, while large cap and blend ETFs saw the most
selling. Growth ETFs were hit with selling for the first time
since July, but value ETFs had inflows for a seventh week.

(Karen Pierog)


EDT/1503 GMT)

A wave of hump-day data crashed ashore on Wednesday,
bringing with it increasing signs that the U.S. economy is
finding its land legs after being tossed about by the tempest of
the pandemic.

Industrial production growth slowed down as
expected in August, meeting consensus by growing 0.4%, half the
pace of July's 0.8% growth.

The report from the Federal Reserve also showed
manufacturing output fell short of forecasts, inching up a
meager 0.2% versus the 0.4% increase expected.

But capacity utilization, a measure of economic
slack, grew to 76.4%, inching above pre-pandemic levels for the
first time since mandatory shutdowns to contain COVID-19 brought
the global economy to its knees.

"Both total and manufacturing output have made a full
recovery from pandemic-related losses," writes Rubeela Farooqi,
Chief U.S. economist at High Frequency Economics. "Growth in
manufacturing going forward is likely to be supported by low
inventories. But supply issues and shortages remain a constraint
for now that are preventing a stronger rebound."

Factory activity in New York State kicked into overdrive
last month.

The New York Fed's Empire State index delivered
a reading of 34.3, a sharp acceleration from July's 18.3.

Analysts expected the index to tick lower to an even 18.

An Empire State reading above zero indicates expansion.

While new orders and employment rebounded, some of the
increase was unfortunately driven by components associated with
supply chain challenges, namely delivery times and prices

"These components indicate that supply chain disruptions
remain severe," notes Ian Shepherdson, chief economist at
Pantheon Macroeconomics, who adds that "the situation is no
longer deteriorating at an accelerating pace."

The prices Americans pay for imported goods
unexpectedly decreased in August, according to the Labor

Import prices pulled back by 0.3% instead of increasing by
that amount as seen by the mean forecast.

Year-over-year, import prices cooled, shedding 1.3
percentage points to come in at a still-elevated 9%.

"Looking ahead, import price inflation will remain sticky in
the near term until virus disruptions are resolved," says Mahir
Rasheed, U.S. economist with Oxford Economics (OE). "However,
decelerating import price inflation confirms that price dynamics
will continue normalizing on fading base effects, softer
domestic demand, and a steady dollar."

The graphic below, which shows major indicators against the
Fed's average annual 2% inflation target, looks like a cresting
wave and suggests the worst of the re-opening price spikes are
behind us.

Finally, the Mortgage Bankers Association (MBA) delivered
the happy news that demand for home loans inched up last week.

A 7.5% increase in applications for loans to purchase homes
uncharacteristically did the heavy lifting, while
refi demand, which represents the lions share of the
total, inched lower.

The average 30-year fixed contract rate held its
ground at 3.03%.

Lest we get too excited, however, OE's lead economist Nancy
Vanden Houten reminds us that mortgage demand data is usually
volatile during holiday weeks. What's more, she writes that
while "underlying demand, still-low mortgage rates and a small
increase in the inventory of existing homes," supplies remain
"historically tight," and record prices are putting home
ownership beyond the reach of many potential buyers.

Wall Street continues to dance the value/growth pivot tango,
once again favoring value stocks which stand to gain the most
from economic revival.

The Dow and the S&P 500 are green, but the
Nasdaq is slightly lower.

(Stephen Culp)


(1040 EDT/1440 GMT)

The wider adoption of autonomous vehicles on highways in the
United States will take several decades, posing little threat to
auto insurers who rely heavily on personal auto insurance
policies, J.P.Morgan analysts said on Wednesday.

Investors fear that as more self-driving cars take to the
roads, it could shift the liability of accidents from
individuals to auto manufacturers, thereby reducing the need for
individuals to sign up for personal auto insurance.

Indeed, the rise in accidents involving self-driving cars
has brought driver assistance systems under the National Highway
Traffic Safety Administration's radar.

However, JPM's Jimmy Bhullar dismissed concerns over vehicle
owners being absolved of liability, saying that such a shift
would require a major regulatory overhaul.

"The introduction of autonomous vehicles should reduce
accident frequency over time but could drive an uptick in
frequency initially as human drivers try to adapt to vehicles
with unfamiliar driving tendencies," Bhullar said in a note.

Top insurers Allstate Corp and Progressive Corp
are most susceptible to any changes once autonomous
vehicles become more prevalent, but they are well positioned to
weather the change, JPM analysts said.

Major U.S. auto insurers including Travelers Companies Inc
and State Farm have already seen a fall in auto
insurance claims since the start of the pandemic as Americans
stayed at home under widespread orders to help contain the
spread of the virus.

(Tanvi Mehta and Noor Zainab Hussain)



With workers in short supply and inflation on everybody's
mind, Barclays head of investment sciences Ryan Preclaw finds
that companies that rely on paying low wages have underperformed
higher-paying counterparts.

So the firm recommends selling stock in the companies most
exposed to the low-wage factor as the biggest wage gains are
occurring in the lowest-paying industries.

In the past four months they observe that the lowest-paying
companies have underperformed with a "statistically significant
relationship between the share of a company’s employees being
paid well below the median wage and stock performance since the
end of April 2021," citing data from Revelio.

Companies lagging include those with more than 80% of
workers making less than $87,000. Barclays also cautions against
hope that the end of federal unemployment insurance supplement
in August would lead to an influx of workers, saying that "the
evidence suggests otherwise."

Barclays suggests tilting away from low-paying companies or
pairing "shorts in names more exposed to low wages with longs in
similar names that pay at the higher end of the scale."

It says to sell a basket of the 150 low-paying names, which
has lagged the S&P 1500 by about 3% since the end of April and
is expected to keep underperforming as wage pressures intensify.

For example, it suggests selling Cracker Barrel Old Country
store and buying Starbucks Corp, selling Addus
Homecare and buying Mednax, selling Heartland
Express and buying Union Pacific selling
Illinois Tool Works and buying Rockwell Automation
and says to sell MGM Resorts International and
buy Host Hotels & Resorts.

(Sinéad Carew)



The latest bout of weakness in U.S. stocks is following a
pattern that has become all too familiar to options market

While stocks have traded higher for months now, scaling one
record after another, it has not been without the occasional
wobble, most of which have occurred around options expiration

Once a month, on the third Friday of every month, millions
of options contracts on stocks, ETFs and indexes expire, leading
to a change in options dealers' trading behavior.

Options dealers are considered long or short gamma depending
on whether they have bought or sold options. To manage their
risk they may continuously hedge by buying and selling stocks,
futures and options.

When dealers are long S&P 500 index gamma, rising stocks
lead them to sell equities or futures, while a falling index
would lead them to buy stocks or futures. This tends to dampen

With expiring options changing dealers' gamma profile,
volatility can potentially rise.

People are more understanding of options' impact on the
market and are just trying to "front-run it," Kris Sidial
co-chief investment officer at volatility arbitrage firm Ambrus
Group, said.

While increased volatility around options expiration is
nothing new, growth in options trading volume and increased
awareness of this dynamic has led to a more noticeable uptick in
stock gyrations during options expiration weeks this year.

Of the 13 weeks this year that the S&P 500 logged a weekly
loss, 7 have been options expiration weeks. All but the April
expiration saw stocks head lower.

The SPX is now down around 0.4% for the week.

(Saqib Ahmed)


EDT/1320 GMT)

China's summer slowdown is having a sizeable impact on
today's session in Europe with luxury goods makers well in the
red and France's LVMH and Kering taking the
most points off of the STOXX 600.

Mikael Jacoby, head of continental European sales trading at
Oddo notes that Beijing's policy shift to close the wealth gap
in the country had prompted fears among investors of "hunt the
rich" policies would obviously hit European luxury giants.

Moreover, with China providing the bulk of the growth for
these groups, the latest macro data and Covid-19 infections were
a clear worry.

More cracks appeared indeed in China's growth story after
today's batch of disappointing retail sales while supply
bottlenecks and raw material shortage dent factory output and
social restrictions weigh on service.

Meanwhile, debt-laden China Evergrande's liquidity
crisis and the country's recent regulatory crackdown add to the

What could brighten the picture, some economists believe, is
some good old monetary stimulus.

"Today's weak data and the cumulative impact of policies
mean the economy needs more liquidity to lessen the impact of
rising credit premiums," analysts at ING said in a note.

They called for a 50 basis point cut to the reserve
requirement ratio by the country's central bank in October as
did Standard Chartered.

Both banks also said they would downgrade China's annual
growth projections if the situation did not improve.

(Anushka Trivedi with Julien Ponthus)



The Nasdaq Composite relative to the
Refinitiv/CoreCommodity CRB index appears to be at an
important juncture on the charts:

The Nasdaq/CRB ratio, on a weekly basis, hit a record high
of 80.54 in early November last year. Since then, however, the
tech-laden Nasdaq has underperformed the index of materials and
things. In fact, the ratio hit a 14-month low at 65.69 in early

Although it has since clawed its way back up some and is now
at 67.88, the ratio has been flirting with what appears to be
significant support in the form of a log-scale trend line from
its 2011 trough, now around 67.85, as well as the 100-week
moving average (WMA), now around 67.30.

The ratio did fiddle with the support line in late 2018.
However, with the market's December bottom that year, it quickly
reversed to the upside without breaking the 100-WMA. The
trendline then contained weakness in 2019, and again in early

Of note, the ratio has been on a record run versus its
100-WMA. In fact, it is on pace for its 512th-straight weekly
close above this long-term moving average. This current run
above the 100-WMA absolutely dwarfs the ratio's 155-week streak
that lasted into the Y2K "tech-bubble" top.

However, the ratio is now only 0.8% above the 100-WMA, which
is the tightest disparity since it crossed back above it in
early December 2011.

Thus, it may now be time for tech, and FANGs
for that matter, to once again step up in order to
underpin a renewed Nasdaq advance relative to commodities.

A ratio weekly close below support can add credence to the
view that a sea change in trend is underway. A deeper decline to
threaten the March 2000 high at 28.9 could see the ratio lose
more than half its value from current levels.

(Terence Gabriel)



(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)

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