LIVE MARKETS Antithesis of ARK innovation ETF enjoy rally

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  • European stocks down 1%
  • Bond selloff continues ahead of Fed meeting
  • Microsoft to buy Activision in $68.7 bln deal
  • Nasdaq futures down 1.4%

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ANTITHESIS OF ARK INNOVATION ETF ENJOY RALLY (1351 GMT/ 0851 ET)

ARK Innovation ETF is down nearly 3% in premarket trading on Tuesday, in tandem with broad tech wreak caused by a spike in U.S. bond yields and fears of faster than anticipated U.S. rate hikes.

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Investment products betting against the ETF, however, have raced ahead.

Three times short ARK Innovation ETF is up 8% in London on Tuesday, bringing gains for the year to over 70%, while the underlying ETF down 15% YTD.

Tuttle Capital Short Innovation ETF (SARK.O), that tracks the inverse of the daily performance of the ARKK by entering via swap contracts, has gained over 50% since its launch on Nov. 9.

Popular investor Cathie Wood's flagship ETF that consists of high-growth, high-valuation companies has halved from its all-time peak in Feb 2021. It was the top-performing U.S. equity fund tracked by Morningstar in 2020 before plummeting to among the worst performers of 2021.

So far this month, the ARK Innovation ETF has bled nearly $240 million in investment outflows, according to Lipper data. By contrast, SARK drew in $45 million in the week ended Jan 12, the largest weekly inflow since the ETF's inception.

Flows in short ARK Innovation ETF rise

(Medha Singh and Danilo Masoni)

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EUROPEAN EQUITIES POISED FOR GROWTH (1201 GMT)

A survey from BofA shows that investors see monetary tightening as the key risk for markets, which beats both COVID and inflation as top perceived risks.

survey bofa

Yet, investor bullishness remains unfazed by central bank tightening plans, BofA says.

Some 81% of 374 respondents with $1.2tn in assets under management expect European equities to rise by at least 5-10% this year.

Banks, insurance and industrials are the largest sector overweights, while tech dropped out of the top three to an underweight position for the first time in four years.

"The net proportion of investors saying they are overweight banks hit a new high, with that for insurance rising to the highest level since 2014," BofA says.

Investors also remain bullish on cyclicals versus defensives.

survey2

(Joice Alves)

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SEEKING VALUE? CHECK OUT THE MILAN BOURSE (1124 GMT)

On way to play the portfolio shift towards the value segment of the stock market is doing that through the Milan bourse, which is rich in banks and other cheaply priced stocks that could benefit from a surge in interest rates globally.

UBS has taken a fresh look at Italian stocks and remains overweight the space, even though the presidential election this month could heat up the political climate, creating turbulence.

"Italy is one of the European markets most heavily exposed to Value – a style we continue to expect to perform well over coming months," say economists and strategists at the Swiss investment bank led by Felix Huefner.

On top of that they also highlight:

  • Attractive valuations with a dividend yield over 50% above that of Europe and a P/E relative close to a 20yr low
  • Earnings momentum relative to the wider European market is at a 4yr high
  • Italian equity performance normally correlates highly to European Banks and most recently it has lagged behind somewhat

So what about the political risks?

"Near-term political concerns must be monitored as equity performance moves closely with the BTP-Bund spread (a reflection of macro and political nervousness). As it stands, our macro team’s forecast of a 150bps spread over the medium term seems likely manageable for the equity market," they say.

(Danilo Masoni)

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BOJ? NOT THAT HAWKISH AFTER ALL (1120 GMT)

With investors focused on future central banks’ moves, a hawkish outcome from the Bank of Japan's policy meeting might have applied some upward pressure on bond yields globally.

But, according to John Vail, Chief Global Strategist, Nikko Asset Management, overall, BOJ was “relatively dovish,” even if “coupled with a moderately more positive outlook for the economy.”

“The BOJ also cut its gull year 2023 GDP forecast a bit to 1.1%, which is a disappointment, but that is about the natural growth rate for Japan, so it’s not too surprising,” he says.

“In sum, it raised its assessment of the economy but also said economic risks are to the downside, likely due to worrisome oil prices and geopolitics,” he adds.

“The policy update has in reality though proved less eventful,” MUFG analysts say, after mentioning speculation about BOJ debating a possible rate hike if inflation perks up.

The Bank of Japan raised its inflation forecasts on Tuesday but said it was in no rush to change its ultra-loose monetary policy, as rising prices fan speculation it may soon signal a shift in its decade-old stimulus experiment. read more

(Stefano Rebaudo)

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STOXX DEEPER DOWN IN THE RED FOR 2022 (0920 GMT)

Selling pressure looks quite intense across the board at the open in Europe, sending the STOXX 600 deeper into loss-making territory so far this year, as rate hike jitters sour the mood.

The pan-European equity benchmark slid around 1.3% in morning deals, and was and down around 2% compared to end-2021.

Tech (.SX8P) led declines, down more than 2%, while energy was the only sector in the black, up 0.2% a crude prices climbed to 7-year highs, as you see in the snapshot:

snapshot

(Danilo Masoni)

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TECH TROUBLE (0754 GMT)

Nasdaq futures are down almost 1% on Tuesday, making it likely the tech-heavy index will add to its year-to-date losses of around 4.5%. Having risen for 12 of the past 13 years, it is under heavy pressure from the prospect of higher interest rates and bond yields, more so than the broader S&P 500 index or MSCI's global equity benchmark.

The 4.5% loss masks deeper falls -- 29 shares have lost 10% or more already this year, according to Capital Economics.

Nasdaq futures positioning has shifted dramatically short, Citi analysts point out, noting that $2 billion worth of remaining long positions are deep in the red.

Those investors will be looking nervously towards bond markets, where two-year U.S. Treasury borrowing costs have risen above 1% for the first time since Feb. 2020. In Europe, German 10-year yields are close to bursting above 0% for the first time since mid-2019.

Inflation is front and centre, as crude oil prices hit seven-year prices. That's good news for some -- the Bank of Japan signalled earlier the country was finally emerging sustainably out of deflation -- but the bond selloff is setting the stage for a dismal stock market session; most Asian bourses fell and Europe looks set to open weaker.

All eyes on central banks now. The U.S. Federal Reserve is now more or less priced to start lifting interest rates from March, Canada could move as early as next week while Britain's forecast-beating labour data on Tuesday, makes it all but certain the Bank of England's Feb 2 meeting will yield a hike.

Nasdaq

Key developments that should provide more direction to markets on Tuesday:

-BOJ raises price outlook but maintains ultra-easy policy read more

-UK employers add record number of jobs read more

-Brent climbs to more than 7-year high on Mideast tensions, tight supply read more

-EU finance ministers meeting on minimum corporate tax, recovery fund, EU budget

-ECB Vice President Luis de Guindos speaks

-Bank of France governor Francois Villeroy de Galhau speaks

-Riksbank Governor Stefan Ingves speaks

-German ZEW

-U.S. earnings: BNY Mellon, Goldman Sachs, Charles Schwab

(Sujata Rao)

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EUROPE SET TO FALL AS BUND YIELDS MARCH TOWARDS ZERO (0745 GMT)

With bonds selling off and 10-year German yields marching towards zero, equities are struggling globally, as traders bet the Fed could tighten policy faster to tame inflation.

So, after losses in Asia, European stocks look set to follow with stock index futures down around 0.3%, while U.S. futures pointed to heavy losses for tech stocks later on.

Also in Europe investors will be watching the tech (.SX8P) space, a sector that has flourished thanks to abundant central bank stimulus boosting valuations, and the COVID-19 pandemic.

Oil meantime is continuing its rally with Brent crude now at a 7-year high, which could possibly help energy stocks further.

(Danilo Masoni)

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