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- Major U.S. indexes tumble; small caps, banks, chips hit harder
- All major S&P 500 sectors down: financials weakest group
- Dollar, crude rise; gold, bitcoin dip
- U.S. 10-Year Treasury yield rises to ~1.86%
Jan 18 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at firstname.lastname@example.org
IS THAT A RECESSION COMING AROUND THE BEND? (1345 EST/1845 GMT)
JP Morgan chief global strategist David Kelly is flagging the potential for a U.S. recession to hit in the next several years.
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He adds that although it is not their baseline view, investors would well advised to consider what it might mean for their portfolios.
As Kelly sees it, a year of rising interest rates followed by a recession would represent a dual challenge to more speculative investments. Higher rates would obviously be a problem for long-duration bonds and high-P/E stocks as well as more esoteric investments such as cryptocurrencies and NFTs.
Additionally, he notes that a more traditional recession, without the stay-at-home characteristics of the last one, would be much less profitable for goods retailers and tech companies. Also, a U.S. recession which put an end to Fed tightening could be dollar negative, enhancing the relative returns on overseas assets.
Kelly emphasizes that recession is not JPM's baseline scenario. However, he says "investors should diversify not because of what they expect but because of what they never expect that ends up biting them."
In any event, he adds that given a very wide dispersion of valuations across capital markets, that investors "should take steps today to ensure that they are not overweight those assets which are obviously overpriced."
HOW TO BET ON THE URANIUM TRADE (1330 EST/1830 GMT)
Despite not being as popular as green energy darlings like wind and solar, nuclear energy could be making a comeback. 2021 saw Japan reboot a long-dormant nuclear reactor during the Olympics, while the European Union has drafted a plan to label nuclear investments "green." read more
Prices of uranium have hence soared over the past year, nearly doubling in 2021, touching as high as $51 per pound in September. However, investors looking to play this trade have fewer options than in years past.
"The number of uranium sector stocks has dropped from 600 in 2007 to circa 50 publicly traded names today," Nick Lawson, chief executive officer of advisory firm OceanWall told the Reuters Global Markets Forum.
The total value of global uranium stocks stands around $35.8 billion, Lawson added, with Kazakhstan's Kazatomprom (KZAP.KZ), , the world's biggest uranium producer, and Canada's Cameco Corp (CCO.TO) making up the lion's share. That's compared to a market cap of over $150 billion in 2007.
The spot market for "yellowcake" is relatively thin compared to other commodities, while an existing supply deficit means that the growth of nuclear power could run into challenges, Lawson said.
Recent unrest in Kazakhstan, which produces over 40% of global supply could be another catalyst for prices.
"If I were investing, I'd be concerned about this in the long run ... this has implication for efforts to move towards nuclear power in Europe and other parts of the world," Jennifer Brick Murtazashvili, an expert in Central Asia at the University of Pittsburgh told the forum.
For investors looking to play the trade, Lawson says his "go to stock" is London-listed Yellow Cake PLC (YCA.L). The popular Sprott Physical Uranium Investment Trust , which physically holds over 42 million pounds of yellow cake is another option, as are explorers like Uranium Energy Corporation .
The Global X Uranium ETF (URA.P) has jumped over 42% since the start of 2021.
EARNINGS SEASON REVS UP WITH NETFLIX THIS WEEK (1300 EST/1800 GMT)
After some disappointing fourth-quarter results from a few of the big U.S. banks in recent days, investors will shift their focus to results from the big growth names, with Netflix reporting on Thursday after the bell.
The bank results, including Goldman Sachs (GS.N) on Tuesday, whose stock was down more than 8% in midday trading, may have left investors wondering how the rest of the season will go.
As of Friday, overall year-over-year profit growth for S&P 500 companies is expected to be 23.1%, up from 22.3% on Jan. 1, according to IBES data from Refinitiv. read more
That's still lower than profit growth was in first three quarters of 2021. Those earnings seasons saw much higher than expected profit growth.
With results in so far from 26 of the S&P 500 companies, 77% are beating analysts' earnings expectations, compared with a full-season average of 84% of companies beating estimates over the past four quarters, based on Refinitiv data.
Some investors are also looking for earnings to justify high valuations.
"The median stock remains expensive even though the most egregiously priced stocks have corrected. Focus turns back to earnings for picking winners from here," Morgan Stanley strategists wrote in a note Tuesday.
UNDERWEIGHT MUTUAL FUND POSITIONING SHOULD SUPPORT STOCKS - UBS (1224 EST/1724 GMT)
With the S&P 500 (.SPX) off more than 3% to start 2022, Keith Parker, equity strategist at UBS, notes that underweight positioning should support equities, and value over growth, in the near term.
In a note on Tuesday, Parker said he sees the next equity rally, and value over growth rotation, being fueled by Q4 earnings beats as active managers raise equity exposure and growth mutual funds are overweight into reporting.
Parker said that value mutual funds are very underweight, with positioning 1.2 standard deviations below average, while on the flip side, growth mutual fund exposure jumped to 1.6 standard deviations above average thanks to about 65% of growth mutual funds underperforming their benchmarks year-to-date.
Value mutual funds continue to get better relative flows than growth, said Parker, "add relative performance vs benchmarks should further that." In addition, Parker said relative ETF flows favor value over growth and short interest levels for stocks in the S&P 500 growth (.IGX) are at historic lows, while value (.IVX) short interest is notably higher.
Active fund positioning is also 0.7 standard deviation below average, even with last year's rally of nearly 27% in the S&P 500, based on the firm's composite of about 900 mutual funds with about $8 trillion in assets under management and hedge fund indexes. With balanced fund exposure 1.5 standard deviations below average, macro CTA fund positioning 0.7 standard deviation below average and long/short hedge funds slightly overweight, Parker says there is ample room to support another leg up in equities.
WHO'S NEXT IN VIDEOGAME M&A? (1109 EST/1609 GMT)
Microsoft's swoop on Activision made a bang with the effects reverberating across markets and making traders speculate over who's the possible next target in the videogame M&A.
Looking at the share prices, France's Ubisoft (UBIP.PA) stands out with an 11% rally, although other studios aren't being ruled out either. Videogame makers in Europe and the U.S. all spiked on the news while Activision was up almost 30%.
"The sector may be ripe for consolidation after the Microsoft move today," says Jawaid Afsar, sales trader at Securequity.
"Is Ubisoft next on the list?," Midcap Partners says, while on a less bullish note Credit Suisse says Microsoft's (MSFT.O) bid for Activision (ATVI.O) carries a mixed reading for the French house: "Gaming IP valuable & accelerated consolidation, BUT removes (for now) one major likely partner for UBI".
So, trying to address the question of who's next, Neil Campling, head of TMT Research at Mirabaud, digs deeper, coming up with a longer list of potential takeover candidates from Japan to the U.S. and passing via Europe.
"A quick scan of current 'players' makes us think Electronic Arts and Frontier Developments, in particular, are high on the potential list," he notes.
And here are more names in the list. Bandai Namco (7832.T), Capcom (9697.T), CD Projekt (CDR.WA), Electronic Arts (EA.O), Frontier Developments (FDEV.L), Konami (9766.T), Take-Two (TTWO.O), Ubisoft (UBIP.PA).
In the snapshot you can see shares in videogame makers. Those in the red are the names in Asia, where bourses closed well before the Activision deal became news.
BANK EARNINGS PART II: INVESTORS FLEE (1050 EST/1550 GMT)
The fourth quarter earnings season was off to a rocky start with shares in some of the biggest banks falling sharply in the second day of reporting. The S&P 500 financial sector (.SPSY) is the biggest loser among the benchmark's 11 major sectors, last down 2.2%.
On Tuesday, Goldman Sachs (GS.N) shares are down around 8% after its profit fell nearly 13% and missed expectations as a less volatile equity market hurt trading revenue offsetting a bumper year for deals. The stock hit its lowest point since April 2021 earlier in the session and was on track for its biggest one-day percentage decline since June 2020. read more
The news dragged on rival Morgan Stanley (MS.N), which is due to report results before market open on Wednesday. That stock is down 4.0%.
Silvergate Capital (SI.N) shares are falling 18.3% after the crypto currency bank's results disappointed in its first revenue and profits quarterly miss since it went public in Nov 2019, per Refinitiv
FB Financial (FBK.N) shares are down 1.8% after its report.
Also in financials, brokerage Charles Schwab shares are down 5.0% after adjusted Q4 EPS was two cents shy of analyst estimates and Q4 revenue, while rising 13%, was $0.2 billion short of consensus, according to Refinitiv.
Bank of America was out with a note saying that while bank earnings have been mixed, the sector came in 5% above consensus in aggregate.
Still, the S&P 500 banks index (.SPXBK) decline of 2.4% illustrates how little this beat seems to be impressing investors especially as Treasury yields were rising on Tuesday, a move that often boosts bank stocks.
JANUARY ECONOMIC BAROMETERS SHOW OMICRON COLD FRONT MOVING IN (1046 EST/1546 GMT)
Some of the first economic data of the New Year was released on Tuesday, both of which reflect ongoing supply constraints and the resulting inflation wave, but also the first look at the extent to which the Omicron COVID variant has dragged the party down.
Factory activity in New York unexpectedly contracted this month according to the New York Federal Reserve.
An Empire State number below zero indicates a contraction of activity from the previous month, and this month's print marks the first negative reading since June 2020, just months after mandated shutdowns to contain the pandemic sent the economy into its steepest, most abrupt recession in history.
While the employment and near-term outlook stayed in expansion territory, they lost momentum as the critical new orders component plunged to -5.0.
The one encouraging sign was a pullback in prices paid, which dropped 3.5 points to a still-elevated 76.7.
"This report has our attention, as it's the weakest major regional survey for some time," writes Ian Shepherdson, chief economist at Pantheon Macroeconomics. "But it is not definitive, and might yet prove to be more noise than signal. Our guess is that other reports will confirm that Omicron has hit activity."
The Philly Fed report due on Thursday, which economists see accelerating, gaining 4.6 points 20, should provide a broader picture of Atlantic region manufacturing.
Meanwhile, folks in the homebuilding racket have grown less optimistic this month.
The National Association of Home Builders' (NAHB) housing market index (USNAHB=ECI) unexpectedly shed one point in January to 83.
Analysts expected the index to hold steady at 84.
While housing demand still supports the sector, that support is showing cracks of late, as lack of supply and soaring prices of building materials, along with steadily rising interest rates, are combining to push home ownership beyond the grasp of many potential buyers, particularly at the lower end of the market.
"While lean existing home inventory and solid buyer demand are supporting the need for new construction, the combination of ongoing increases for building materials, worsening skilled labor shortages and higher mortgage rates point to declines for housing affordability in 2022," writes Robert Dietz, NAHB's senior economist.
Still, as seen in the graphic below, homebuilder sentiment and NAHB's gauge of potential buyer traffic remain comfortably above pre-COVID levels.
Wall Street is deeply in red territory in morning trading, with tech (.SPLRCT) weighing heaviest.
AMID YIELD RISE, U.S. STOCKS BATTERED (1005 EST/1505 GMT)
U.S. stock indexes are under pressure early on Tuesday as technology stocks are slammed by rising Treasury yields, while Goldman Sachs led declines among big banks after missing profit expectations.
Meanwhile, the Nasdaq Composite (.IXIC), which is now down around 9% from its Nov. 19 record close, is threatening to end below its 200-day moving average, which now sits around 14,735, for the first time since April 21, 2020.
However, with this, the tech-laden index is off its early low, and its daily RSI is hovering just above oversold territory.
Here is where markets stand in early trade:
AS NASDAQ 100 FUTURES TUMBLE, ALL EYES ON YIELDS (0900 EST/1400 GMT)
Futures tracking the technology-heavy Nasdaq 100 index (.NDX) are slumping around 1.5% on Tuesday as traders return from a long holiday weekend to position for a more hawkish Federal Reserve ahead of a policy meeting next week.
This, after the U.S. 10-Year Treasury yield held support last week in the 1.7050%/1.6930% area. Indeed, the yield hit a low of 1.6940% on Thursday and has since vaulted to a high of 1.8550% on Tuesday.
Meanwhile, the rolling 10-day correlation between CME e-mini Nasdaq 100 futures and the 10-Year yield, hit -0.88 last week, or a near perfect negative correlation (-1). On Tuesday, the reading has moved up, but remains a robust -0.72.
Of note, however, with its 1.8550% high, the 10-year yield neared a weekly Gann line on the charts, which now resides around 1.87%:
A Gann fan is a series of lines drawn at specific angles from important highs and lows. The line in question capped the yield rise into late-March 2021, which then led to a significant decline.
The yield has since backed away slightly. Thus, traders will be watching to see where the yield finishes on a weekly basis vs this Gann line.
A reversal, which takes out 1.6930%, can suggest the potential for a greater fall in yield. And if the inverse correlation with the Nasdaq 100 futures holds up, it would likely coincide with a recovery in tech/growth shares.
A weekly yield close above 1.87%, however, can suggest room for a much greater rise in yields based on the Gann chart. Additional lines are above 2.20%.
In that event, with a still strong negative correlation, the Nasdaq 100 futures could be vulnerable to a much greater fall.
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