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U.S. INDEXES, BOOSTED BY GROWTH SHARES, GARNER GAINS (1605 EDT/2005 GMT)
Wall Street's main indexes, boosted by growth stocks, rallied on Monday, despite cautionary signals in the bond market, and talk of more sanctions against Russia over Ukraine.
Indeed, S&P 500 growth enjoyed its best day vs S&P 500 value in nearly a month. With this, the IGX/IVX ratio rose to a two-month high.
Given strength in growth, the NYSE FANG+TM index handily outperformed on the day. NYFANG rose more than 4% with all 10 of its members higher. The index was led by 27% surge in Twitter, after Elon Musk revealed a stake in the company.
Here is Monday's closing snapshot:
(Terence Gabriel)
EVERYTHING'S FINE? MAYBE ASK SOME CONSUMERS (1320 EDT/1720 GMT)
Strategists have been furiously debating whether it's "different this time" or if the yield curve inversion is really predicting a recession as it's been known to do in the past.
With this in mind, some economists such as Frances Donald, Global Chief Economist at Manulife Investment Management are keeping a very close eye on consumers since the U.S. economy is roughly 70% dependent on their spending. Investors are eyeing measures such as solid jobs reports, corporate earnings and consumer savings for reassurance.
But under the hood Donald sees weak spots: "The market has been so focused about headline inflation they've ignored the composition of inflation."
Until the war, she saw inflation largely impacting optional goods due to COVID-related supply chain shortages.
"The new inflation coming through the system - via the conflict in Russia, Ukraine - in food and energy prices, is an entirely different dynamic," says Donald. "Energy and food inflation is likely to have a much larger impact on consumption demand than COVID generated inflation."
Dismissing the high savings levels counter-argument, she sees savings concentrated among high-income Americans and eroding for low and middle income consumers. Wages are growing for lower income workers, but not as fast as inflation, so people are using savings to cover basic necessities, according to the economist.
"American households are seeing a steep decline in real wages and purchasing power. It's no wonder that consumer confidence and sentiment indicators are declining," she said.
"It's fairly clear to me we're heading toward a significant growth slow down," Donald said. "Many will point to robust job growth but job growth is one of the last indicators to turn when we hit speed bumps."
But isn't the Fed raising rates to tame inflation? Yes, but Donald notes that food and energy inflation are not so interest rate sensitive.
She is monitoring inventory levels, noting significant inventory rebuild in Q4 and Q1, which "may drag on GDP in the months ahead."
While some investors hope consumers can switch spending from goods to services as COVID eases, Donald worries "if households are spending their money on food and energy and mortgages, they're less likely to make up for goods purchases with services purchases."
Donald isn't assuming a 2022 recession but the probably rose to 30% from 15% in January due to the Russia, Ukraine war.
"Whether we see a recession this year depends on the math around inventory rebuild and how aggressive central banks will be," said Donald. "It's atypical for the Fed to be hiking interest rates into declining consumer confidence."
Meanwhile Wall Street indexes say everything's fine with Nasdaq up 1.5% on Monday though still down 7.5% year-to-date while the S&P was up 0.5% on the day with its biggest decliner the defensive utilities sector. The consumer discretionary sector was up 1.8% on the day but down 7.4% so far in 2022.
HAVE TREASURY YIELDS TOPPED? APRIL MAY BE PIVOTAL (1235 EDT/1635 GMT)
The benchmark 10-year Treasury yield ended the first quarter below a critical resistance level, which keeps the bond market’s 40-year bull market intact, and yields are likely to fall or trade sideways in the second quarter, according to Bank of America.
The 10-year Treasury yields hit 2.557% in March, the highest since May 2019, but that brief jump hasn’t broken the long-term bull trend, BofA technical strategist Paul Ciana said on Monday in a report.
The benchmark yield has trended down in a channel for at least the last 25 years with the top of the channel around 2.37% to 2.40% in March, and yields ended the month below this, at 2.338%. That means, “there is no confirmed secular bearish breakout," Ciana said.
The period from February to April often marks pivotal turning points in the market, adding to the case that a top may be near. Going back to 1965, there have been 18 yield topping patterns that preceded lower yields, 8 tactical yield peaks or declines, and 14 yield bottoms that preceded high yields during this period, Ciana said.
Treasuries also ended the first quarter in a similar fashion to how they ended the first quarter of 2021, when yields similarly jumped sharply. That is with oversold conditions, a TD Sequential buy signal, a Doji candle and with yields testing a key Fibonacci retracement level, Bank of America said.
As long as the bull market line continues, the bank is watching for yields to post a double top or a head and shoulders top, which would see the 10-year note at 2.66%, before declining again. Bank of America’s bias is for long positions in the 2.50% to 2.66% area.
Momentum is also starting to revert, with the 10-year note yield’s monthly Relative Strength Index (RSI) the highest since 1981, while the weekly RSI is above 70 and starting to turn down.
Targets for the 10-year yields would be a mean reversion to the 2.10%-2.0% area, with a possible move below 2% if a topping pattern is formed, Ciana said.
MEANWHILE, DIVIDENDS EYE 11TH RECORD YEAR (1201 EDT/1601 GMT)
The view for S&P 500 dividends looks positive, according to the latest research from Howard Silverblatt, senior index analyst at S&P Global.
Silverblatt sees dividend payments increasing in excess of 7% for 2022, which would set an annual record for the 11th consecutive year.
This would represent a sharp acceleration from 2021's 3.5% increase and 2020's 0.18% increase, but would be comparatively less than 2019's pre-pandemic 8.4% increase and 2018's 9.8% rise.
His S&P 500 dividend estimate for 2022 is currently at $65.11/shr vs last year's $60.40/shr, or total payments of $558 billion for this year compared with $511 billion for 2021.
This estimate takes into account the impact of the Russia-Ukraine conflict, continued U.S. COVID-19 improvement - even as the BA.2 variant cases increase - and an expected consumer expenditure slowdown, according to Silverblatt.
While he also cited a potential 2023 recession as a major concern, Silverblatt notes that the shorter-term concern remains inflation, "as higher payouts would need to compete with other rising rate instruments."
But in the end, he says "dividend investors typically weigh the risk-reward components with a bias towards secure income."
(Sinéad Carew)
CRACKS ARE FORMING IN LOAN MARKET - BUT HOW BAD? (1117 EDT/1517 GMT)
Higher interest rates generally are good for loans as demand for floating rate products increases, but stagflation could pose a risk this time around as the good times lose some luster, says Neha Khoda at BofA Securities.
Loans are likely to hold together as rates rise, but there is bound to be trouble on the margin as volatility remains elevated and dispersion, downgrades and defaults head higher over the next year, Khoda writes in a note on Monday.
As long as the loss of risk appetite is not total and only serves to distinguish the winners from the losers, it makes loans as an asset class stronger, Khoda said.
The key is whether the market suffers a "minor pullback" in risk or something larger. Severe risk cutbacks can result in a sudden loss of financing and lead to irreversible damage to business models that precipitates a default cycle, she says.
Most default cycles in leveraged finance happen in lock-step with economic recessions, but Khoda says at times bad credit markets have prevailed without a larger macro underpinning. To be sure, talk of recession is premature, in her view.
Loan coverage is the key to watch, as it encompasses the two biggest fundamental risks for loan issuers - interest costs and earnings.
Benchmark rates are likely to rise between 1.5% to 3.5%, resulting in coverage rates of about 2.5x in a pessimistic scenario and 3.5x in an optimistic scenario.
Issuers at risk are those with CCC or low-B credit ratings where debt coverage will be 1x in a pessimistic scenario. "This is where the cracks will grow wider with increasing rates," she said.
U.S. FACTORIES TAKE A SMOKE BREAK (1100 EDT/1500 GMT)
The manufacturing sector, which accounts for around 11% of U.S. GDP, continues to be burdened by high prices, a yet-to-be-resolved supply chain muddle, rising input costs and a tight labor market.
New orders for U.S. factory made merchandise dropped by 0.5% in February, retreating from January's upwardly revised 1.5% gain and hitting the consensus bull's eye.
Excluding transportation goods, however, factory orders actually increased by 0.4%, standing on the shoulders of the prior month's 1.2% gain, according to the Commerce Department.
This echoes the Institute for Supply Management's (ISM) purchasing managers' index (PMI) released on Friday, which showed the manufacturing sector losing momentum in March.
This deceleration was largely due to the new orders component, which plunged to its lowest level since May 2020, the first month of recovery from the steepest, most abrupt recession on record.
"The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment," ISM's Timothy Fiore said on Friday.
The Commerce Department also revisited its durable goods data released earlier in the month.
New orders for long-lasting items - which include everything from waffle irons to fighter jets - dropped 2.1% in February, slightly better than the 2.2% decline initially reported.
Core capital goods - which excludes defense and aircraft, and is considered a barometer of business spending plans - was also nominally better than the first take, having fallen 0.2% instead of 0.3%.
Wall Street began the first full week of April offering a mixed bag.
Market leading megacaps pushed the S&P 500 and the Nasdaq into the green, while healthcare and industrials are keeping the Dow essentially flat.
(Stephen Culp)
THE BEAR MARKET RALLY IS OVER - MORGAN STANLEY (1019 EDT/1419 GMT)
With Q1 in the rearview mirror, Morgan Stanley chief U.S. equity strategist Michael Wilson notes the rough quarter which saw the S&P 500 fall about 5% was largely in-line with the firm's view entering the year, with a rally in the latter half of March helping to salvage the quarterly performance.
But that rally in the latter half of March was a bear market rally, according to Wilson, and that is now over.
While concerns about the Federal Reserve's hawkish turn weighed on stocks in the quarter, the other major driver of markets was the war in Ukraine, which Wilson said was not in their initial forecast on 2022 and has made the firm "incrementally more negative on growth trends than we were at the end of last year."
Wilson said investors now face multiple headwinds to growth that will be harder to ignore, including payback in demand from last year's stimulus, high prices causing demand destruction, the war in Ukraine pushing up food and energy prices that serve as a tax and inventory builds that have caught up to demand.
With inventory catching up to demand, pricing power will dissipate, and "discounting could return in many areas of consumer goods that typically are price takers," while there is also the likelihood of order cancellations as shortages caused an increase.
With the defensive tack, Wilson remains overweight utilities , REITs and healthcare while underweight consumer discretionary and cyclical tech.
(Chuck Mikolajczak)
AIRLINES WEIGH ON EUROPE'S TRAVEL AND LEISURE STOCKS (0913 EDT/1312 GMT)
Europe's travel and leisure index is flashing green, outperforming the wider index with a 0.9% gain while the STOXX 600 is currently only 0.5% higher.
But zooming in, the story is more complicated, with leisure doing the heavy lifting as travel stocks topple.
Airlines are suffering, with Easyjet down about 1.7%, Wizz Air falling 2.7% and BA-owner IAG down 0.4%. Ryanair and Deutsche Lufthansa are down 1.1% and 0.7% respectively.
Flight disruption in the UK is topping headlines today after EasyJet cancelled hundreds of flights due to staff sickness levels amid a surge in Covid-19 infections in the country.
Meanwhile gaming company Evolution is lifting the travel and leisure index, up 5.6%. Betting giant Flutter Entertainment is 0.94% higher and French lottery operator FDJ is 1.2% up.
U.S. FUTURES MODESTLY HIGHER AS TWITTER SURGES (0847 EDT/1247 GMT)
U.S. futures were little changed on Monday, slowly losing steam as the opening bell approached in a somewhat light week for economic data with eyes on the latest round of talks between Ukraine and Russia as the West mulls more sanctions against Moscow.
As global outrage grew following civilian killings in North Ukraine, the possibility of additional sanctions against Russia by the U.S. and Europe increased, while peace talks between Moscow and Ukraine were poised to restart on Monday.
The S&P 500 used a late flurry to the upside to snap a two-day losing skid on Friday, following a payrolls report that was widely expected to keep the Federal Reserve on its aggressive monetary policy path, which expectations solidifying for a 50 basis point hike at its May meeting.
Shares of Twitter surged more than 20% in premarket trade, however, as Tesla CEO Elon Musk disclosed a 9.2% stake in the social media company.
Below is your premarket snapshot:
(Chuck Mikolajczak)
FOR MONDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE:
