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LIVE MARKETS-Why real rates are falling as inflation roars

Wed, 27th Oct 2021 19:10

* Nasdaq jumps, S&P edges higher, Dow slips

* Growth stocks pull ahead of value

* Europe's STOXX 600 closes down 0.36%

* Mixed earnings weigh, miners hit by China concerns

* Gold gains; dollar, crude, bitcoin decline

* U.S. 10-year Treasury yield slides to ~1.53%

Oct 27 - 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

Why real rates are falling as inflation roars


If rising inflation is the big buzz in markets, why is the
yield on the benchmark 10-year U.S. Treasury note falling?

The 10-year TIPS breakeven rate was at
2.676% Wednesday, indicating the market sees inflation averaging
about that much annually for the next decade.

Yet the yield on the benchmark 10-year U.S. Treasury note
slid to below 1.53%, leading Joe LaVorgna, chief economist for
the Americas at Natixis in New York, to ask "what gives?"

The real interest rate component of nominal yields is
offsetting an increase in the inflation expectations component,
because the bond market believes U.S. economic growth will be
structurally weak over the next decade, LaVorgna said in a note.

A comparison of productivity growth, the building block of
GDP, to real rates tells the story, he said. Real rates have led
the trend in productivity by five quarters and in essence are
now predicting a big slowdown in economic growth ahead.

So what? Bonds are likely to remain attractive compared to
other assets, including equities, in a sluggish environment,
LaVorgna said.

(Herbert Lash)



Investors have been especially keen for news on how the
semiconductor industry has been managing supply issues that have
been wreaking havoc on so many businesses.

They got a little insight from results late Tuesday when
Advanced Micro Devices gave an upbeat revenue forecast
and bet on it could meet demand despite a "weak supply chain,"
while Texas Instruments forecast tepid quarterly

Advanced Micro's shares are up nearly 1% on Wednesday and
outperforming the broader U.S. equity market, while Texas
Instruments' shares are down more than 4%. The Philadelphia
semiconductor index is down 0.3% and S&P 500 is
roughly flat.

"The semiconductor space has been ground zero for supply
chain distortions," Mike O'Rourke, chief market strategist at
JonesTrading, wrote in a note late Tuesday.

The latest results follow disappointing news last week from

O'Rourke added that while Texas Instruments pointed out
changing patterns in customer orders, but said Advanced Micro's
CEO gave "a very optimistic outlook for demand going forward"
even while noting the supply constraints.

(Caroline Valetkevitch)



The economy may return to more "normal" patterns next year,
but it will also bring never seen before hazards, says
Christopher Smart, chief global strategist & head of the Barings
Investment Institute.

There are at least three “reactions” that bear close
attention amid an otherwise sunny outlook, according to Smart in
his most recent market commentary.

Smart says that receding government support, shifting
post-COVID preferences and rapid financial innovation “may not
metastasize into the next crisis anytime soon, but they will
likely create air pockets as the global economy gains more

Smart believes the massive government response to the
pandemic has launched a surge in economic activity on par with
China's emergence into global trade flows two decades ago.

However, that the surge in financial markets has also
triggered notable bankruptcies in hedge funds and Chinese
property, he said.

Abundant capital flows disrupted the competitive landscape
in unexpected ways and investors simply "can’t buy 'the market'
or even a sector without carefully differentiating among
business models that look resilient amid these shifting
currents,” Smart said.

New patterns of spending are taking shape as COVID continues
to cause havoc while polls show a majority of respondents
believe the worst of the pandemic is still ahead, which he says
is a “stunning disconnect from the conventional wisdom of

Finally, Smart says the innovation that is transforming
traditional finance bears closer scrutiny. Some of it is
transparent and well-understood, but he fears the combination of
expanding capital flows and a lengthening list of new products
carries risks.

As Smart sees it, the hotly debated risks of inflation or
stagnation are only partly priced in. Meanwhile, “unknown
unknowns” like a global pandemic will always catch markets off
guard, he said.

“But there are categories of ‘known unknowns’ that we can
already dimly see and will still deliver real shocks for those
caught unaware. That’s where discerning investors will be
keeping a sharp eye out.”

(Terence Gabriel)



The tech-heavy Nasdaq was gaining ground on Wednesday with
growth stocks outperforming value stocks while the S&P 500
oscillated between positive and negative territory and the Dow
industrials was in the red.

The S&P Growth index was up 0.6% while the S&P Value
index fell 0.7%. Growth shares, which rely on low-cost
financing to propel future earnings, were helped by a slide in
the yield in the benchmark 10 Treasury note to 1.57%.

Consumer discretionary led the 11 S&P 500 sectors
higher, while energy was the biggest decliner.

Stocks valued at more than $1 trillion, including Microsoft
Corp, Tesla Inc, Google parent Alphabet Inc
and Amazon.com Inc, led the S&P higher.

Apple Inc was the only member of that exclusive
club losing ground.

McDonald's Corp was up 1.6% after reporting
quarterly U.S. sales that beat Wall Street expectations, helped
by higher prices, larger order sizes and newer menu items.

Global same-store sales jumped 12.7% in the third quarter,
compared with estimates of a 10.31% rise, according to Refinitiv
IBES data.

The Dow Jones Industrial Average fell 0.28% to
35,656.18, the S&P 500 lost 0.07% to 4,571.44 and the
Nasdaq Composite added 0.35% to 15,289.12.

One of the most active stocks was Coca-Cola Co, which
rose after it raised its full-year profit forecast in a sign
higher prices and demand for its sodas across the globe were
helping it counter a profit squeeze from supply chain

The S&P 500 posted 24 new 52-week highs and 2 new lows; the
Nasdaq Composite recorded 42 new highs and 65 new lows.
(Herbert Lash)



Futures for the three main stock indices on Wall Street were
up in premarket trade on Wednesday as companies report strong
quarterly results that have pushed the S&P 500 and Dow to record
highs this week.

Companies are reporting earnings 13.3% above expectations,
with the blended earnings growth estimate at 35.6%, according to
Refinitiv data. If the energy sector is excluded, the growth
rate for the index is 28.2%, Refinitiv said.

Microsoft Corp was up after it forecast a strong
end to the calendar year thanks to its booming cloud business
but said supply chain woes will continue to dog key units.

Google parent Alphabet Inc reported higher than
expected third-quarter ad sales, a sign that the business is
overcoming new limits on tracking mobile users and that online
shopping is as popular as ever heading into the holiday season.

But Google shares, which have gained nearly 59% so far this
year, fell slightly in premarket trade.

Stronger-than-expected earnings reports have helped life the
S&P 500 and Dow Industrials to record closing
highs this week, while the tech-heavy Nasdaq is 1% off
its record peak.

Shares of Robinhood Markets Inc fell below their
initial public offering price in premarket trade after the
retail broker reported softer revenue than expected for the
third quarter as trading levels declined for cryptocurrencies.

The slowdown in retail trading, one of the standout market
trends of the COVID-19 era, comes as U.S. vaccine rollouts have
helped the country to ease pandemic restrictions and activities
like sports and other entertainment to resume.
Crypto trading revenue, which makes up for the majority of
HOOD's total trading revenue, increased 860% in the third
quarter from a year earlier but was off second-quarter highs.

Shares of Swedish music streaming platform Spotify
Technology SA rose in premarket trade after it beat
Wall Street estimates for third-quarter revenue.

The company reported a 19% jump in paid subscribers for its
premium service from a year earlier, driven by demand in Europe
and North America

(Herbert Lash)



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