S&P 500 gains and Nasdaq loses after volatile day

Fri, 25th Mar 2022 20:22

March 25 - 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

S&P 500 GAINS AND NASDAQ LOSES AFTER VOLATILE DAY (1610 EST/2010 GMT)

Wall Street ended mixed on Friday after a volatile session, with financials gaining and some megacap growth stocks losing ground.

Berkshire Hathaway increased almost 2% and Amazon added 0.7%, fueling gains in the S&P 500. But dragging on the widely followed benchmark were, Nvidia which dropped 1.6% and Moderna, which tumbled almost 8%.

After paring gains in the first part of the last hour of trading, the S&P 500 managed to end 0.5% higher, with a comeback in the final half hour of the session although it still ended the day below its session high.

The S&P 500 financials index ended 1.3% higher after the benchmark Treasury yield jumped to its highest in nearly three years. Investors are trying to guage how aggressive rate hikes are likely to be after Fed Chair Jerome Powell this week raised the possibility of a 50-basis-point hike in May.

The S&P 500 energy index climbed 2.3% as traders reconciled the impact of a missile attack on an oil distribution facility in Saudi Arabia with a possible release of oil reserves by the United States.

For the week, the S&P 500 rose 1.8% and the Nasdaq added 2.0% while the Dow added 0.3%.

Here is a final snapshot:

(Noel Randewich)

INDIVIDUAL INVESTORS REACT TO FED LIFTOFF (1345 EST/1745 GMT)

In the most recent American Association of Individual Investors (AAII) Sentiment Survey, AAII asked its members for their reaction to the Federal Reserve’s first interest rate increase since 2018, and how it affected their outlook for stocks.

AAII reported that almost a third of respondents (32%) said that they have "a neutral outlook regarding stocks." Many anticipate or expect the Fed to embark on a path to higher interest rates.

Meanwhile, 21% of respondents said the rate hike made them bearish. These respondents think the economy "may be heading for a recession" and that the recent interest rate increase will not be enough to tame inflation.

Against this, approximately 20% of respondents were bullish on stocks, with many saying that the rate hike indicates the economy "is in a strong place."

Finally, around 20% of respondents cited a mixed outlook. Respondents in this category see both positive and negative aspects relating to the interest rate increases.

Here are a couple of quotes from investors on the matter:

“It does not influence my outlook, since it has been anticipated for a few months and is just the first step in a lengthy process.”

“Seems like not enough to tackle the inflation but may turn out to be okay after six or seven hikes, especially if oil prices come down and the pandemic turns into an endemic.”

NO WEEKLY GAINS FOR EUROPE (1310 EDT/1710 GMT)

Global equity markets are all set for another week of gains, but Europe is missing out.

The pan-European STOXX 600 index lost 0.2% this week while ending the day just 0.1% higher. Over on Wall Street, the S&P 500 is on course for weekly gains of over 1%.

"An afternoon wobble shows that nervousness remains, but equities have moved through the week without giving back too much ground", IG analyst Chris Beauchamp commented, noting that there was little to be bullish about moving forward.

"With the Fed now openly talking about 50 basis point hikes, it is sensible to ask whether valuations can keep rising, even as the prospect of weaker growth looms ever larger", he added.

That said, many strategists believe that a ceasefire in Ukraine would have a dramatic effect on European stocks.

"Investors should be aware that any geopolitical de-escalation will potentially trigger a sharp recovery in risky assets", Amundi analysts wrote in a note published on Thursday.

One encouraging piece of news this afternoon was Russia apparently scaling back the formulation of its war goals.

The Russian defense ministry said the first phase of its military operation was mostly complete and it would focus on completely "liberating" Ukraine's breakaway eastern Donbass region.

That announcement appeared to indicate that Moscow may be switching to more limited objectives after running into fierce Ukrainian resistance in a month of war.

(Julien Ponthus)

NEGATIVE CORPORATE PROFIT OUTLOOKS UP VS Q4 AND YEAR AGO (1250 EDT/1650 GMT)

Negative outlooks from S&P 500 companies on the first quarter are up compared with the fourth quarter and the first quarter of 2021, according to IBES data from Refinitiv.

As for Friday, 72 negative outlooks had been given by companies on the first quarter of 2022 and 26 positive ones, for a negative-to-positive ratio of 2.8 to 1.

For the first quarter of 2021, negative outlooks totaled 44 compared with 55 positive ones, for a ratio of 0.8 to 1. In the most recent earnings period, negative forecasts totaled 57 compared with 34 positive ones, for a ratio of 1.7 to 1.

To be sure, not all companies issue outlooks, and estimated earnings of 6.4% for S&P 500 companies for the first quarter has not changed much in recent weeks, but investors are watching outlooks from companies for clues on how the first-quarter reporting period will fare.

The 2.8-to-1 negative-to-positive outlook ratio for the first quarter also is slightly higher than the long-term average, according to Refinitiv data:

It "compares to a long-term average (since 1997) of 2.5 and prior four quarter average of 1.0," Tajinder Dhillon, senior research analyst at Refinitiv, wrote in a report Friday.

(Caroline Valetkevitch)

MANGO IS THE CHIP INDUSTRY'S NEW FANG - BOFA (1240 EDT/1640 GMT)

FANG now has an equivalent in the semi space, according to BofA Global Research. FANG, meet MANGO.

Investors remain worried about geopolitical risks related to the chip industry as well as concerns about peak demand for smartphones and PCs, according to a report by BofA on Friday. But analyst Vivek Arya is bullish on chips, pointing to factors including steady global economic growth and the central role of chips in an increasingly digital world.

BofA's report follows a 16% rebound in the Philadelphia Semiconductor Index from its March 14 low through Thursday, helped by a broad recovery in growth stocks. With the SOX dropping 1.4% on Friday, the highly volatile index remains down about 14% from its record high close last December.

Similar to the FANG group of mega-cap growth stocks that captivated investors and powered Wall Street higher in recent years, Arya has coined an acronym of chip stocks BofA sees leading the way in the semiconductor sector. His "MANGO" group - based on companies' ticker symbols - includes seven stocks:

M - Marvel Technology

A - Advanced Micro, Analog Devices and Broadcom

N - Nvidia

G - Globalfoundries

O - ON Semiconductor

"We have high conviction these stocks are levered to the right end-markets with solid demand visibility and consistent execution," Arya writes.

Nvidia, Marvell, Broadcom and AMD are favored due to their exposure to cloud computing, AI and enterprise, while ON Semi has an attractive PE valuation, even as it enjoys exposure to electric vehicles, according to Arya.

Analog Devices has strong profitability and improving free cash flow returns, while U.S.-based contract manufacturer Globalfoundries has upside as U.S. and European governments encourage companies to "reshore" their foreign manufacturing operations, Arya writes.

(Noel Randewich)

BULLS JUMP, BEARS DIVE (1223 EDT/1623 GMT)

The percentage of individual investors with a bullish short-term outlook on the U.S. stock market took a big leap in the latest American Association of Individual Investors Sentiment Survey (AAII). With this, the number of investors describing their outlook as “bearish” plunged.

AAII reported that bullish sentiment, or expectations that stock prices will rise over the next six months, surged by 10.3 percentage points to 32.8%. Optimism was last at this level on Jan. 6, 2022. Even with the big jump, however, bullish sentiment remains below its historical average of 38.0% for the 18th consecutive week.

Bearish sentiment, or expectations that stock prices will fall over the next six months, collapsed 14.3 percentage points to 35.4%. Pessimism was last lower on Jan. 6, 2022 (33.3%). In any event, this is bearish sentiment’s 18th consecutive week above its historical average of 30.5%.

Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, rose by 4.0 percentage points to 31.7%. This is the first time in five weeks that neutral sentiment is above its historical average of 31.5%.

With these changes, the bull-bear spread posted a near-flat reading of -2.60 from -27.3 last week.

AAII noted that "bullish sentiment, bearish sentiment and the bull-bear spread are all now back within their typical historical ranges."

(Terence Gabriel)

RECESSION MORE LIKELY THAN MANY THINK, COULD STEEPEN YIELD CURVE – MACRO HIVE (1215 EDT/1615 GMT)

High energy prices, a hawkish Federal Reserve and underlying weakness in the labor market make a U.S. recession more likely than many expect, and the U.S. Treasury yield curve could steepen sharply if it nears, according to research firm Macro Hive.

The closely watched two-year, 10-year Treasury yield curve has flattened to 19 basis points and many analysts expect it to invert in the coming weeks or months, which has in the past been a reliable indicator that a recession will follow in the next one-to-two years.

But while many economists have downgraded growth expectations for this year, most do not expect a recession. Macro Hive, however, says its yield-based recession model sees a 50% probability for one to occur in the next 12 months.

“A hawkish Fed and rising energy prices are a powerful combination for inducing a recession. We also think that the low unemployment rate and high job vacancy rate could be masking underlying labour market weakness,” Bilal Hafeez said in the report.

One reason for this is that household real wages have been falling despite an apparent job shortage, Hafeez said. And “more worryingly, the total hours worked are still below pre-COVID trends.”

Hafeez noted that hours worked in manufacturing is 9% below trend, with the heavy engineering sector 20% below trend. Hours worked in services is also 6% below trend, with only transport and tech above trend. Hours worked in the leisure sector is also 20% below trend.

If a recession is approaching that may mean that the flattening in the U.S. Treasury yield curve is also nearing an end.

Since the 1970s the two-year, 10-year part of the yield curve on average flattens or goes sideways in the year or two prior to recession, and then steepens sharply, Macro Hive said. “The current flattening of the curve could therefore be drawing to a close and the risks of a steepening would start to increase as we approach recession territory,” the firm said. (Karen Brettell)

NEGATIVE YIELDS: THE END "A STRANGE 7-8 YEAR EXPERIMENT"? (1157 EDT/1557 GMT)

Bonds are selling off once again and there's now a flurry of euro zone government bonds whose yields are springing out, day after day, of negative territory.

This afternoon for instance the yields of Belgian and Dutch 2-year bonds were just a whisker, -0.0037% and 0.0065% respectively, from making it back to the black for the first time since 2015.

At Deutsche Bank, strategist Jim Reid believes that it's now likely that the amount of total negative yielding debt will become negligible again by the end of the year, provided that the ECB hikes twice.

"This will then end, for all extents and purposes, a strange 7-8 year experiment", he said.

"I remember discussing negative yields in economics at school 30 plus years ago and the teacher saying we can mostly skip this part of the syllabus as it will never happen!", he added.

Here's the chart from his note showing the drop in the amount of negative yielding corporate and government bonds out there:

(Julien Ponthus)

UTILITIES HIT RECORD HIGH IN DEFENSIVE MARKET (1130 EDT/1530 GMT)

The S&P 500 utilities sector hit a record high on Friday and is last up 0.7% as investors favored more defensive stocks with the Russia, Ukraine war still raging and yields in benchmark 2- and 10-year U.S. Treasury notes jumping to almost three-year highs.

The bond market appeared to anticipate that inflation would spiral higher as strategists estimated how aggressive the Federal Reserve will be in tightening policy.

Also, on Thursday UBS was out with a research note estimating strong growth in demand for electricity from electric car owners. With EV cars and trucks currently representing 1.5 GW of load nationwide, it sees demand rising to 10 GW in 2025 and 62 GW in 2030, representing 8-10% of electric sales.

Since 2010, volume growth in the electric utility sector has been stagnant at ~1% per year nationally, according to UBS analyst Ross Fowler.

The sector's biggest gainers on the day are Pinnacle West , up 1.9% and Entergy, up 1.7%

At the start of the week, Morgan Stanley had upgraded its utilities rating to "overweight" saying that data was suggesting the economy is later in the expansion than its strategists had thought a few months ago.

However, the utilities sector is the third biggest gainer among the S&P's 11 major sectors on a year-to-date basis, behind only financials and energy. While utilities and financials are up just less than 1% compared with energy's ~40% gain, they have done well year-to-date compared to the biggest decliners communications services, down 11%, and real estate and consumer discretionary, both down around 10%.

(Sinéad Carew)

SLIP-SLIDING AWAY: PENDING HOME SALES, UMICH (1115 EDT/1515 GMT)

A one-two punch of downbeat indicators on Friday sent investors skulking into the weekend with news of a cooling housing market and a dour consumer mood.

Pending sales of pre-owned U.S. homes unexpectedly dropped last month by 4.1%, defying analyst expectations for a 1% gain and notching their fourth decline in as many months.

The National Association of Realtors' (NAR) pending home sales data is among the more forward-looking housing market indicators, as it tracks signed purchase contracts and leads existing home sales data by a month or two.

The index is now well below pre-pandemic levels.

Lawrence Yun, NAR's chief economist, writes that while "buyer demand is still intense," but adds that "fast-changing conditions regarding affordability are ahead."

The data is the latest in a series of housing market indicators - home sales, mortgage demand, building permits, homebuilder sentiment, housing prices - that point to an imminent cool-down in a sector which was the undisputed star of the pandemic economy.

A suburban stampede drove inventories to record lows, which in turn launched home prices into orbit. And now, with mortgage rates hitting three-year highs, waning affordability means the prospect of home ownership is fading, particularly for prospective buyers at the lower end of the market.

And the number likely hasn't found a floor, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Pending home sales are "nowhere near bottom," he writes, "given the continued surge in mortgage rates."

Separately, the mood of the American consumer, who does the economic heavy lifting by contributing about 70% of U.S. GDP, has cooled down a bit more than previously thought, hitting its lowest level in nearly 11 years.

The University of Michigan's final take on March consumer sentiment delivered a print of 59.4, 0.3 points lower than the preliminary reading, its direst level since August 2011.

"Personal finances were expected to worsen in the year ahead by the largest proportion since the surveys started in the mid-1940s," says Richard Curtin, director of consumer surveys at UMich.

Deterioration of the "current conditions" component - hitting its deepest trough since August 2009 - was largely responsible for the downgrade, with the "expectations" element shedding a nominal 0.1 point.

Inflation remains the biggest worry among the survey's respondents. One-year and five-year inflation expectations remained red-hot, holding steady at 5.4% and 3.0%, respectively.

"When asked to explain changes in their finances in their own words, more consumers mentioned reduced living standards due to rising inflation than any other time except during the two worst recessions in the past 50 years: from March 1979 to April 1981 and from May to October 2008," according to UMich.

Still, market participants are reminded that what consumers say and what they do are two different things.

The graphic below shows the disparity between monthly changes in Consumer Sentiment and personal outlays:

Wall Street is mixed in late morning trading, with value outpacing growth and the blue-chip Dow just above flat.

Tech shares are weighing on the Nasdaq. That index is off nearly 1%.

(Stephen Culp)

U.S. STOCKS MIXED, BUT YIELDS POP, SPREADS NARROW (1008 EDT/1408 GMT)

Wall Street's main indexes are mixed with just modest changes in early trade Friday as investors weigh concerns about the Russia-Ukraine conflict and the possibility of bigger interest rate hikes.

Of note, the U.S. 10-Year Treasury yield hit 2.4750%, which is a fresh high back to May 2019. Meanwhile, the spread between the 30-Year T-Bond and 5-year T-Notes has fallen to around 9 bps, or its lowest level since February 2007.

In any event, with this, banks are outperforming, and financials are posting the biggest rise among major S&P 500 sectors.

Tech, chips and FANGs are on the weak side.

Value is outperforming growth on the day so far. Though, for the week, growth is still out front on a relative basis.

Here is where markets stand in early trade:

(Terence Gabriel)

BEARISH CLIENT FEEDBACK FOR EUROPE (0945 EDT/1345 GMT)

According to the latest EPFR data, capital has been flowing out of European equities for six weeks in a row as the war in Ukraine prompted investors to pull out.

Beyond the hard data, there's also circumstantial evidence that Europe Inc is no longer the hot place it used to be at the beginning of 2022.

Barclays European equity strategy team went on a road show and found little enthusiasm from its clients.

"Most U.S. investors we met this week were very bearish on Europe, in stark contrast with the prevailing optimism of the start of the year", the team wrote in a note this morning.

"In short, the view of many is that Europe recession is inevitable as the energy shock squeezes the consumer and adds to supply woes for companies, with the Ukraine crisis unlikely to de-escalate quickly, in the best case", they add.

"So Europe may look very cheap and under-owned again, but no one seems to have appetite to get back in, as it may be a value trap", they conclude.

One piece of good news though: Barclays clients seem to broadly agree that London's FTSE, rich with oil majors and miners, deserves an overweight.

(Julien Ponthus)

UK STOCKS OUTPERFORM GLOBALLY SINCE FIRST RATE HIKE (0915 EDT/1315 GMT)

The MSCI United Kingdom Index is up 5.5% since December 15, 2021, the day before the Bank of England hiked interest rates for the for the first time since the onset of the pandemic.

The upward trend is especially pertinent given that the wider MSCI world price index is down 4.1% in the same period.

For US-based wealth and asset management firm Fisher Investments, the discrepancy serves as evidence that even a pretty aggressive start to tightening isn’t automatically bearish.

They remain bullish on stocks despite predictions of incoming rate hikes from the Fed and recession worries, questioning the power of the Fed and how easy it is to predict what it will do next.

"The Fed normally moves after the fact to where short-term Treasury rates already are—a straggler, not a trailblazer," the note said.

They also point out that rate hikes are often already priced in when they are finally implemented.

"Rate hikes aren’t inherently bearish, and cuts aren’t necessarily bullish, either. (Or vice versa.)" the note said, "This is because markets pre-price expected Fed moves. If the Fed does what everyone already thinks is likely, there isn’t much reason to believe any action should drive stocks further beyond random short-term sentiment swings."

S&P 500: AND NOW THE 100-DAY HURDLE (0900 EDT/1300 GMT)

With its recent recovery, the S&P 500 index is back up to battle a number of hurdles in the form of longer-term moving averages:

Over the past week or so, the SPX has been churning around its 200-day moving average (DMA), which now resides around 4,475.

After 22-straight closes below this moving average, the SPX managed to finish back above it on Tuesday and again on Thursday.

On Thursday, the S&P 500 posted its highest close since Feb. 9, which was the last time it finished above its 100-DMA. It's been 30-straight trading days that the SPX has ended below this moving average, which now resides around 4,550.

The 100-DMA acted as near-perfect support in December and early January. However, it was broken in mid-January, and then in early February, it proved to be resistance in conjunction with the descending 30-DMA.

The SPX was only able to score two separate closes above the 100-DMA at that time, before selling back sharply. The reversal back below it on Feb. 10 led to new lows.

Therefore, traders are watching for two-straight SPX closes above the 100-DMA. Such a turn may suggest a change in character, and add confidence in the potential for further gains.

That said, the SPX also faces a zone of chart congestion between 4,582 and 4,595. The index stalled in this zone on Feb. 9 and 10.

A reversal below support at the March 3 high at 4,416.78 and the 30-DMA, now around 4,355, can put the recent lows at risk again. The 30-DMA more directly capped upward reactions in early February and again in early March.

Since it was reclaimed on March 17, traders now look for it to act as support. If it were to fail to hold on weakness, the SPX could be vulnerable again to increasing downside pressure.

(Terence Gabriel)

FOR FRIDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE: