LIVE MARKETS Hopes for recovery from Omicron too rosy?

  • Major U.S. stock indexes higher; Nasdaq up 1.5%, S&P 500 up 1%
  • All major S&P 500 sectors rise; materials out front
  • Euro STOXX 600 index rises ~1.7%
  • Dollar dips; bitcoin, gold, crude edge up
  • U.S. 10-Year Treasury yield dips to ~1.92%

Feb 9 - 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

HOPES FOR RECOVERY FROM OMICRON TOO ROSY? (1220 EST/1720 GMT)

As cases of the COVID-19 Omicron variant decline and politicians discuss taking off masks and use hopeful expressions like 'return to normal,' strategists and investors are also scoping out the light at the end of the economic tunnel.

Signs of investor hope can be seen in the economically sensitive Dow Jones transportation average (.DJT) rally, which puts it on track for a two-day gain of about 3%. The rally has had a lot of help from airlines - a classic reopening-trade sector - with the S&P 500 airlines index (.SPLRCALI) was on track for its third straight day of gains and is up more than 10% so for this week.

While Wells Fargo Investment Institute's senior global market strategist Scott Wren sounds reasonably bullish too, he throws some caution on the celebrations.

Omicron caused economic growth headwinds when the calendar turned to 2022, and Wren sees February economic activity still restrained by the virus, although he tells investors to "look for improvement as March progresses."

Wren calculated that it would take monthly growth rates in February and March that approach Oct. 2021's big increase in GDP to hit the consensus expectation for 4.5% GDP growth in Q1.

"We think that is unlikely at this point," Wren says. Aside from the big hurdle GDP would have to clear, Wren notes that although the setup looks good for consumers with a tight labor market and rising wages, there are concerns.

For example, he says, the Apple Mobility Index and OpenTable show demand fell as Omicron spread and "some consumers are staying at home."

He also points to Atlanta Federal Reserve GDPNow estimates, which shows current quarter growth "barely above the flat line."

So Wren, who still sees full-year 2022 GDP growing 4.5%, describes current quarter estimates as "too rosy" and expects downgrades to these forecasts as the quarter wears on.

(Sinéad Carew)

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HOPING FOR NO GASP AFTER DATA THIS WEEK (1125 EST/1625 GMT)

Kristina Hooper, chief global market strategist at Invesco, in a note Wednesday says "there was a gasp heard around the world" last week when Christine Lagarde, president of the European Central Bank, talked about inflation.

"The ECB is clearly getting concerned about inflation, just as the Federal Reserve has been. And with some good reason," she writes.

With that in mind, market watchers will be particularly focused on consumer price index data Thursday and other economic reports this week, she says, adding: "I can only hope for a 'no gasp' week in terms of the data."

Hooper says investors already expect CPI to be much hotter than the previous month, so she doesn't expect "any real rattling of markets" unless the data is above expectations.

"We don't anticipate inflation will peak until the middle of 2022, so we would not get flustered by a 7.3% year-over-year rise in inflation — which is the consensus expectation for the CPI," she writes.

Market choppiness related to central bank policy expectations could stick around though, she notes.

"Our attention remains on just how far the Fed and other central banks feel they must adjust to match the new realities of inflation—and therefore how much longer we expect policy to dominate the market narrative," Hooper writes.

"Until we see inflation abate, or at least inflation expectations indicating they are better anchored, we're likely not through the woods yet."

(Caroline Valetkevitch)

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S&P 500, NASDAQ UP 1% EARLY AS MEGA CAPS GAIN (1005 EST/1505 GMT)

The S&P 500 (.SPX) and Nasdaq (.IXIC) are up more than 1% in early trading Wednesday and the Dow (.DJI) is also higher, with the market led by gains in mega-cap stocks including Microsoft (MSFT.O) and Alphabet (GOOGL.O).

All S&P 500 sectors are higher in early trading, but real estate (.SPLRCR) and materials (.SPLRCM) are leading in percentage gains.

Aluminum prices rose to 13-1/2 year highs amid a supply shortfall caused by smelter closures in Europe and China.

Investors remained focused on the prospect of rising interest rates, even as the yield on the 10-year Treasury note retreated from 27-month highs on Wednesday.

All eyes will be on U.S. consumer price data Thursday.

Here is the early market snapshot:

for feb 9

(Caroline Valetkevitch)

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HIGHER MORTGAGE RATES LOWER THE CEILING ON HOMEBUYER AFFORDABILITY (0920 EST/1429 GMT)

The housing market is showing signs of settling into its foundations as rising interest rates appear to be lowering the demand temperature.

Demand for home loans dropped by 8.1% last week as mortgage rates continued their hike out of the ravine.

The Mortgage Bankers Association (MBA) report showed the average 30-year fixed contract rate (USMG=ECI) climbing 5 basis points to 3.83%, resulting in 9.6% fewer applications for loans to purchase homes (USMGPI=ECI) and a 7.3% drop in refi demand (USMGR=ECI).

As interest rates for home loans follow benchmark U.S. Treasury yields back to pre-pandemic levels, depleted supply of homes on the market - driven by a mad stampede for the suburbs in search of elbow room and home office space - has launched home prices into the stratosphere.

Those two elements combined are pulling the prospect of home ownership beyond the grasp of many would-be buyers, particularly at the lower end of the market.

"The rise in rates is taking a toll on homebuying affordability, which has been eroded by sharply higher home prices," writes Mahir Rasheed, U.S. economist at Oxford Economics.

As seen in the graphic below, overall mortgage demand is now down 39.6% from a year ago, due primarily to a 52% year-on-year refi dropoff:

MBA

Still, homebuyer demand remains fairly robust, with the purchase index - regarded as one of the more forward-looking housing market indicators - is down a mere 11.4% from the year-ago buying frenzy.

This jibes well with most recent data from the National Association of Realtors, which shows signed contracts for pending home sales dipping by 3.8% in December but still hovering above pre-COVID levels.

But the stock market is an even more forward-looking indicator, providing a picture of where investors see housing shares six months to a year from now.

And while the S&P 1500 Home Building index (.SPCOMHOME) and the Philadelphia SE Housing index (.HGX) enjoyed a solid outperformance through much of the health crisis, a look at their 12-month performance shows those indexes are now underperforming the broader S&P 500:

Housing stocks

(Stephen Culp)

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CLEAN ENERGY STOCKS: SUN ABOUT TO SHINE AGAIN? (0900 EST/1400 GMT)

Clean energy stocks went from being 2020 stars to 2021 dogs. Indeed, after surging more than 200% in 2020, the WilderHill Clean Energy Index (.ECO) lost more than 30% of its value last year. So far this year, the group is down 22%.

Indeed, in what appears to have been a classic case of "buy the rumor, sell the news," ECO ran up ahead of the late 2020 blue-wave victory, and then went parabolic as President Joe Biden took office read more :

ECOSPX02092022

After peaking shortly thereafter in early-February of last year, ECO collapsed. In fact, the decline from its Feb. 10, 2021 intraday high to its Jan. 28, 2022 intraday low was a stunning 64% loss. This put it below its Nov. 3, 2020 close, or the day Biden was elected.

However, ECO has reached important chart support. With its Jan. 28 low, at 102.89, it essentially tagged the top of the 76.4%/78.6% maximum Fibonacci retracement zone of its entire 2020-2021 advance, at 102.74/97.43.

This zone can provide fertile ground for some form of turn. Since testing it, ECO ended Tuesday up more than 13% from the intraday low in just seven trading days.

Additionally, with its late-January low, the ECO/S&P 500 (.SPX) ratio nearly tagged a log-scale support line from late 2018. This line offers the potential for a relative strength shift back in favor of clean energy stocks.

There is clearly work to do on both charts to turn the prevailing trends back up, but these support measures may offer a ray of sunshine for this beleaguered group.

In the event they give way, ECO's prospects may quickly dim again, both in terms of its price action and its relative performance. read more

(Terence Gabriel)

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

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