LIVE MARKETS Underweight mutual fund positioning should support stocks - UBS

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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
  • Euro STOXX 600 index ends down ~1%
  • Dollar, crude rise; gold, bitcoin dip
  • U.S. 10-Year Treasury yield rises to ~1.86%

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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.

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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.

(Chuck Mikolajczak)

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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.

snapshot

(Danilo Masoni)

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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%.

JPMorgan Chase (JPM.N) shares are off 3.8% after falling 6% on Friday after its quarterly report also showed trading-related weakness. read more

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.

(Sinéad Carew)

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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.

Its General Business Conditions index - better knows as the Empire State

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.

Empire State

Meanwhile, folks in the homebuilding racket have grown less optimistic this month.

The National Association of Home Builders' (NAHB) housing market index 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.

NAHB

Wall Street is deeply in red territory in morning trading, with tech (.SPLRCT) weighing heaviest.

Financials (.SPSY) are running a close second, with Goldman Sachs (GS.N), in the wake of its quarterly profit miss read more , pulling the sector down.

(Stephen Culp)

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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.

Indeed, FANGs (.NYFANG) and chips (.SOX) are being hit especially hard, while energy is the only major S&P 500 (.SPX) sector in the green.

And even though financials (.SPSY) are the weakest major SPX sector on the day, value (.IVX) is still on track for its biggest monthly percentage gain vs growth (.IGX) since February 2001.

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:

earlytrade01182022B

(Terence Gabriel)

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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%:

US10YYGF01182022

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.

(Terence Gabriel)

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

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