Invictus Asset Management

Overnight Asia

Asian stocks were mixed on Wednesday as traders weighed company earnings and risks from inflationary pressures. Treasury yields rose and the Dollar dipped.

A rally in Chinese technology firms such as Alibaba Group Holding Ltd. bolstered Hong Kong on hopes the worst of Beijing’s regulatory crackdown is over. Equities slipped in China, where the Central Bank boosted short-term liquidity, held loan prime rates steady and set a weaker-than-expected Yuan reference rate in a sign of discomfort over currency strength.

US and European futures edged lower. The S&P 500 closed near a record as traders weighed the corporate impact of supply chain snarls and higher commodity prices. Johnson & Johnson raised a profit forecast, Netflix Inc. subscribers jumped and Procter & Gamble Co. faced rising costs. The 10-year US Treasury yield was above 1.60% and Australian debt of a similar tenor slid. Bitcoin is close to hitting a record on optimism following the debut of the first Bitcoin-linked exchange-traded fund listed in the US. Oil fell from a seven-year high.

The earnings season has taken some of the spotlight away from concerns about a slowing pandemic recovery, price pressures stoked by energy costs and reduced Central Bank support. The Cboe Volatility Index, a measure of implied equity swings for the S&P 500, has fallen back to the lowest level since August.

In the latest Fed comments, Governor Christopher Waller said the Central Bank should begin tapering its bond-buying programme next month. He expects inflation to be moderate and said interest rate hikes are probably “still some time off.” “I don’t think the Fed is going to act or hike very aggressively in part because they have this inflation view, but also because we are going to be in a slowing growth environment by the end of next year,” Esty Dwek, FlowBank SA Chief Investment Officer, said on Bloomberg Television.

Meanwhile, progress on President Joe Biden’s economic agenda appears closer, after Congressional Democrats made headway in breaking a stalemate on the multi-trillion Dollar tax and spending package.

Traders continue to monitor the debt woes at China’s real estate developers. Sinic Holdings Group Co. became the latest to default, while the wait continues for China Evergrande Group’s overdue interest payments on Dollar bonds. A property slump saw China’s home prices fall for the first time in six years.

Events to watch this week:

• Earnings roll in including from AT&T Inc., Barclays Plc and Tesla Inc.
• EIA Crude Oil inventory report, Wednesday
• China property prices, loan prime rates, Wednesday
• US Conference Board Leading Index, US existing home sales, jobless claims, Thursday
• Fed Chair Jerome Powell takes part in policy panel discussion, Friday

Some of the main moves in markets:

Stocks:

• S&P 500 futures fell 0.10% as of 7.01 am in London. The S&P 500 rose 0.70%
• Nasdaq 100 futures dipped 0.10%. The Nasdaq 100 rose 0.70%
• Japan’s Topix Index was little changed
• Australia’s S&P/ASX 200 Index added 0.50%
• South Korea’s Kospi Index fell 0.50%
• Hong Kong’s Hang Seng Index gained 1.30%
• China’s Shanghai Composite Index shed 0.20%
• Euro Stoxx 50 futures slipped 0.20%

Currencies:

• The Japanese Yen was at 114.51 per Dollar, down 0.10%
• The offshore Yuan was at 6.3810 per Dollar, down 0.10%
• The Bloomberg Dollar Spot Index dipped 0.10%
• The Euro traded at $1.1646

Bonds:

• The yield on 10-year Treasuries was at 1.64%
• Australia’s 10-year bond yield climbed about eight basis points to 1.81%

Commodities:

• West Texas Intermediate Crude was at $82.76 a barrel, down 0.20%
• Gold was at $1,776.87 an ounce, up 0.40%

US Market Wrap

The S&P 500 extended its rally for its strongest five-day streak since March as earnings season’s shift from financials to consumer staples, transportation giants and other bellwethers helped ease worries in a quarter shadowed by supply chain issues and rising commodity prices. The benchmark gauge rose 0.7%, trading at its highest level in six weeks. 10 of the 11 major industry groups rose, with the health care and utilities leading gains, while consumer discretionary fell. The tech-heavy Nasdaq 100 Index rose 0.7%, while the blue-chip Dow Jones Industrial Average climbed by 0.6%.

The focus on earnings is drawing attention away from the inflation worries that have stalked the market recently, even as Brent Oil closed above the $85-per-barrel mark for the first time since October 2018 and US 10-year yields rose above the 1.63% level. “Investors will be particularly parsing reports this week, as results from the banks and financials only provided metrics on spending and lending in the economy,” Art Hogan, Chief Market Strategist at National Securities, wrote in a note. “As other factors continue to bite businesses and consumers alike, it will be crucial to see how supply chain disruptions, inflation, higher energy costs and labour shortages affected the biggest US corporations in Q3.”
Netflix Inc. reported its strongest subscriber growth this year, beating estimates. Johnson & Johnson lifted its profit forecast for the year, boosting its shares the most since January. Procter & Gamble Co. slipped as rising costs pushed against strong demand. And fracking giant Halliburton Co. expects the global energy crisis to boost its sales. This week’s earnings results “will go a long way towards telling us if inflation and margin compression are legitimate risks, and if the consumer remains as strong as expected,” said Tom Essaye, Founder of the Sevens Report newsletter.

“The answer to that question, combined with where yields go over the next few days, will likely determine whether this rebound in stocks continues and the S&P 500 moves comfortably above 4,500 or fades,” Essaye wrote.

Sectors in Focus:

• Covid pill and vaccine makers were in focus after Roche’s partner Atea Pharma said a mid-stage study for their antiviral pill missed its main goal in Covid-19 patients. Roche fell in European trading while Atea crashed about 66%
• An Index for health care equipment companies, the S&P Supercomposite Health Care Equipment Index, rose the most since April after Johnson & Johnson’s results showed growth for its medical technology sales
• The NYSE FANG+ Index extended gains, rising to a record. The Index, which includes an assortment of technology-related stocks including Apple and Tesla, had fallen 9.40% from a previous high on 7 September to 4 October

Politics/Economy:

• US housing starts decreased in September, driven by a pull-back in multi-family construction, as lingering supply chain constraints, shortages of skilled labour and elevated materials costs continue to challenge builders. Residential starts fell 1.60% last month to a 1.56 million annualised rate, according to government data released on Tuesday
• Boris Johnson said the global climate talks the UK is hosting at the end of the month will be “extremely tough,” as he made a last ditch call on world leaders to take concrete steps to protect the planet
• President Xi Jinping ordered better regulation of the country’s technology sector, underscoring the intense scrutiny and upheaval faced by Chinese internet giants following their rapid growth

Markets

• S&P 500 Index up 0.70%
• Dow Jones Industrial Average up 0.60%
• NASDAQ Composite Index up 0.70%
• Russell 2000 Index up 0.40%
• 10 of 11 main S&P 500 sectors closed higher
• Health care up 1.30%
• Utilities up 1.30%
• US Generic Govt 10-Yr up 2.20%
• Bloomberg Dollar Spot Index (Rebased Version) up 0.10%