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LIVE MARKETS-With Treasury yields seen laying low, investors favor duration

Mon, 20th Sep 2021 17:37

* Major U.S. indexes down >2%; small caps, FANGs hit harder

* Financials weakest major S&P 500 sector; utilities sole

* Dollar flat; gold up; crude down, bitcoin off >7%

* U.S. 10-Year Treasury yield ~1.31%
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DURATION (1237 EDT/1637 GMT)

Mixed data over the last week or so has sent economic
forecasts on a roller coaster ride and put Fed taper
expectations in flux.

So far, however, equities have weathered that ride
relatively unscathed, largely due to persistently low interest

In its most recent Weekly Kickstart note, Goldman Sachs
explores where it expects interest rates to go and how it
expects stocks to react.

With the U.S. Federal Reserve set to convene its two-day
monetary policy meeting on Tuesday, the broker sees the uneven
economic indicators helping to keep the central bank's key
interest rate targets low, a state of affairs which has provided
support for equity valuation multiples.

As a result, and perhaps counterintuitively, "the
correlation between the S&P 500 and economic data surprises has
recently been slightly negative, reflecting a 'good news is bad
news' mentality among equity investors," writes David Kostin,
chief equity strategist at Goldman.

With Goldman analysts projecting the benchmark 10-year
Treasury yield rising only modestly - to 1.6% by year-end -
"investors continue to pay an above-average valuation premium
for stocks with long-term growth and 'quality' attributes,"
Kostin adds, noting that "the performance of long duration
stocks have tracked closely with the path of interest rates."

But it's not necessarily the level of interest rates that
determines the trajectory of the equities market, but rather the
"speed and composition" of such changes that remain key,
according to the note.

Stocks struggle when rising rates occur "during periods of
improving growth," rather than "perceived Fed policy changes."

The graphic below, courtesy of Goldman Sachs, illustrates
how equities underperform when nominal 10-year Treasury yields
rise quickly:

Should interest rates unexpectedly rise, while
shorter-duration stocks will "tacitly outperform," the broker
says, its economists' macro outlook "supports maintaining
longer-term positions in high quality secular growth stocks."

For now, market participants will be eagerly trying to read
between the lines when Federal Reserve Chair Jerome Powell and
crew assemble tomorrow, parsing its concluding statement and
subsequent Q&A session for any clues on policy tightening.

Signaling at this week’s meeting "regarding the timing of
both tapering and lift-off will also be key for the path of
yields," Kostin says.

(Stephen Culp)



At one point during the session European equities were down
2.5% in what would have been their worst session since October,
but it looks like bets that China will not let the Evergrande
crisis spiral out of control made traders confident enough to
pull the pan-regional benchmark off its lows.

"We see the cracks in the markets limited and ring-fenced...
The accommodative monetary/fiscal policies and macro recovery
are still suggesting a 'buy-the-dip' strategy," said Angelo
Meda, head of equities at Banor SIM.

At the finishing line, the STOXX 600 was down just
1.6% - up nearly 1 percentage point from the session's low.

(Danilo Masoni)


EDT/1525 GMT)

The S&P 500 is likely headed for a steep fall, Morgan
Stanley strategists predicted on Monday based on certain
economic indicators.

Michael Wilson described two risk paths for market
correction: "fire," whereby the U.S. Federal Reserve begins to
taper its pandemic-era stimulus leading to a 10% correction in
the S&P 500, or "ice," resulting in a more destructive 20%+
plunge on lower earnings revisions and signs of decelerating

The "fire" outcome, typical of mid-cycle transitions, would
lead to a modest and healthy correction, however, the "ice"
scenario is starting to look more likely, Wilson said.

Flatlining near-term earnings revisions, a recent fall in
consumer confidence and a likely decline in business activity
(PMI) supports the view for a worse than expected slowdown in
growth, strategists said.

Among sectors, Morgan Stanley recommends defensively
oriented healthcare and consumer staples to
protect from the "ice" scenario while keeping a leg in
financials to participate in the "fire" outcome as
higher rates materialize.

MS remains "underweight" on consumer discretionary
given overconsumption that's already taken place within consumer
goods and the fact that pricing is becoming demand destructive.

Wall Street's main indexes tumbled on Monday, with the S&P
500 about 4% below its record high hit earlier this month on
concerns about the pace of a global recovery at the start of a
week in which the Fed could announce the start of tightening
monetary policy.

(Medha Singh)



Homebuilders launched a week lousy with housing market data
with a surprise to the upside.

The mood of U.S. homebuilders has unexpectedly brightened
this month according to the National Association of Home
Builders (NAHB), whose Housing Market index
delivered a print of 76.

This was a one-point uptick from August as opposed to the
one-point move in the opposite direction expected by economists.

An NAHB number above 50 signifies optimism in the sector.

Lower lumber prices and still-robust demand drove the
modest increase.

"The September data show stability as some building material
cost challenges ease," writes NAHB chairman Chuck Fowke.

Still, the index remains well below its COVID peak, as is
the traffic of prospective buyers, which together suggests that
revived health fears due to the Delta variant along with
explosive home price growth and scarcity of materials are
keeping house-hunters at home.

"Housing affordability will be a key demand-side challenge
in the coming quarters, given the rapid rate of growth for home
prices and construction costs over the last year," according to
NAHB's press release.

Or as Ian Shepherdson, chief economist at Pantheon
Macroeconomics more bluntly puts it: "Activity in the new homes
market peaked at the turn of the year, and those peaks aren’t
coming back anytime soon."

This week is set to spin an extensive housing market
playlist, with housing starts and building permits due on
Tuesday, mortgage demand and existing home sales on Wednesday,
and new home sales on Friday.

Together, they should paint a fairly clear picture of the
sector, the erstwhile star of the pandemic recovery which has
stumbled in recent months under the weight of its own success.

Social distancing restrictions initially sent buyers
stampeding for the suburbs in a mad rush for elbow room and home
office space, a spike in demand that depleted inventories to
record lows.

That, in turn, launched home prices into orbit and beyond
the grasp of many homebuyers, particularly at the lower end of
the market.

But while economic indicators are thumbprints from the
recent past, the stock market, a more forward-looking creature,
offers a suggestion as to where the sector is headed.

Although housing stocks did better than the broader market
in the initial months of the health crisis, that relationship
has since reversed.

As seen in the graphic below, the Philadelphia SE Housing
index and the S&P 1500 Home Building index
are being handily beaten by the S&P 500, with the indexes
rebased to a year ago.

Wall Street failed to be amused by builders' cheerier mood.

All three major U.S. stock indexes were sharply lower, with
energy and financials down the most, weighted
dropping crude prices and Treasury yields, respectively.

(Stephen Culp)



Wall Street's main indexes are under pressure on Monday,
amid concerns over the pace of the economic recovery. This
action kicks off a week in which the Federal Reserve will decide
on potentially tapering its pandemic-era stimulus.

The Dow, S&P 500 and Nasdaq Composite
are all sliding around 1.2%-1.7%. That said, they are off their
worst levels of the day.

Of note, the IXIC is now joining SPX in having fallen below
its 50-day moving average (DMA). The Dow, which ended below its
50-DMA on Sept. 9, is now below its 100-DMA.

Every major S&P 500 sector is red with more economically
sensitive groups like energy and financials
taking the biggest hits. Defensive bond proxies are also down,
but with much more tempered losses.

After hitting a 1.3850% high during the day on Friday, the
yield on the U.S. 10-Year Treasury has fallen back
to the 1.33% area.

Here is where markets stand in early trade:

(Terence Gabriel)



It appears last week's choppy range trade in the Dow Jones
Industrial Average was just a pause in a developing
decline. This as CBT e-mini Dow futures now suggest the
blue-chip average is poised to slide nearly 2%, or more than 600
points, at the open. That would be the Dow's worst open since a
2.6%, more than 700 point, collapse at open on June 11, 2020.

If so, the Dow will kick of regular session trading on
Monday down more than 4% from its August 16 record high, and on
pace for a fourth-straight week of losses.

With the projected opening break lower, the DJI can be on
track to threaten a number of significant support levels:

These include its late July and June lows in the
33,741.76/33,271.93 area, as well as the broken log-scale
resistance line from 1929, which is now support, around 33,675,
and the rising 40-week moving average, which ended last week at

Since breaking out above the more than 90-year resistance
line earlier this year, the Dow has been reacting positively
each time it has fallen toward, or tested, this line.

Therefore, a weekly close back below the broken resistance
line can suggest a throw-over reversal, leaving the index
vulnerable to a much more significant decline.

In that event, the early 2020 high, at 29,568.57, and the
still open weekly gap from early November of last year, which
requires a fall to 28,495.05, may be the next significant

Of note, weekly momentum diverged into the Dow's August
peak, and remains on the back foot. The weekly MACD ended Friday
at a 10-month low.

(Terence Gabriel)



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