Distinction Matter - Subscribed Feeds

By Eric Peters, CIO of One River Asset Management

“I tried to jump into the Potomac when I was young and my mother nearly killed me,” said the CIO.

“Now you could drink from our rivers if you had to, which is great, but the cleanup has meant everything is more expensive.”

The Environmental Protection Agency was founded in 1970 by Nixon to protect human health and the environment. We’re all better for it.

“Across an economy, we make both public and private investments. In the 1970s, we made big public investments.”

The returns accrue to society, but rarely to capital owners, and often at the expense of them.

“I would argue that the investments we made back then were good, but the tradeoffs we made included upward inflationary pressure and lower real rates of returns on private investments.”

The S&P 500 peaked in Nov 1968 and swung in a wild range through the 1970s, ending the decade unchanged in nominal terms.

In real terms, it lost roughly 50% of its value during that period.

From 1980 to present, the S&P 500 is roughly 42x higher in nominal terms and 10x higher in real terms (none of these returns include dividends). It’s been a great run for capital owners since 1980.

“The government will most likely continue to borrow and print to subsidize societal preferences for renewable energy and reliable supply chains,” he said.

“It is near-term uneconomic in that windmills and solar plants don’t cover their costs to private investors without federal subsidies. But they satisfy our collective preferences. They help insure us against risks we see geopolitically and environmentally,” he said.

“That’s why I see us headed into a 1970s-style inflation. Three, four, five percent inflation is probably where we’ll settle in.”

Anything above five percent tends to see equity multiple compression.

“It’s probably good for investors who measure their returns in nominal terms, but real returns will be lower looking forward, and inflation will continue to be tough for everyday people.”

The head of climate research at commodities hedge fund firm Andurand Capital Management says now is not the time to bet on a bull market for carbon credits. There is growing pessimism in the voluntary carbon markets amid turmoil within the world's top arbiter of corporate climate targets for allowing controversial carbon credits to offset Scope 3 emissions. 

"I don't think you're going to find people stampeding to buy credits to offset their Scope 3 emissions," Andurand's Mark Lewis told Bloomberg in an interview. Scope 3 is emissions not owned or controlled by the reporting organization but released in the supply chain owned by other companies, such as transportation and leased assets. These types of emissions can account for nearly 90% of total emissions, depending on the industry. 

The Science Based Targets initiative (SBTi), a globally recognized certifier of corporate emissions goals, made an announcement on April 9. This decision, which allowed the use of offsets for Scope 3 emissions, sent shockwaves through the carbon markets. Wind farm companies can now sell carbon offset credits to other companies to offset their pollution, without necessarily reducing their own emissions. 

Lewis noted that too many risks remain for companies to dramatically increase their reliance on carbon credits. 

Luiz Amaral, the chief executive of SBTi, has taken a nuanced stance on Scope 3 emissions, stating that "not all Scope 3 emissions are created equal." He emphasized the need for "difficult" discussions to determine the most effective course of action, acknowledging the complexity of the issue. 

Lewis at Andurand explained any relaxation of rules guiding the use of carbon credits, such as those outlined by SBTi, is "clearly bullish for the voluntary market — at the margin — because clearly it means there are potentially more buyers now than there were before."

But here's the caveat: "I don't think there's a stampede out of the door today to rush into the market," he said.

Furthermore, several multinationals, including Shell, Europe's largest oil company, and the world's number four iron ore producer, Fortescue Metals Group, along with other companies, have quietly shelved or at least reduced carbon offset plans amid mounting concerns carbon offsets are prone to 'greenwashing' and most credits don't actually benefit the climate. 

A few years ago, Elon Musk posted on X, "ESG is a scam. It has been weaponized by phony social justice warriors." 

Last year, we noted, "Carbon Credits Are The Biggest Scam Since Indulgences... How You Can Avoid Being Fleeced." 

US equity futures rose, putting the S&P on pace for its first gain after 6 straight days of losses, as focus shifted from Middle East tensions to a raft of company earnings this week, including four of the Mag7 tech megacaps which got hammered last week. At 7:40am, S&P emini futures gained about 0.5% after the index recorded its worst week since March 2023; Nasdaq futures were 0.6% higher while Europe was green across the board. Demand for havens eased as traders took comfort from the absence of further escalation from Iran following Israel’s retaliatory strike. A Bloomberg dollar index was steady as geopolitical tensions eased and the Fed entered a blackout period before its May 1 policy decision, while the yield on 10-year US Treasury yields rose three basis points. Oil reversed an earlier slide while gold dropped around 1.4% as demand for haven assets fades.

In premarket trading, Nvidia rebounded almost 3% after the artificial intelligence favorite shed nearly $212 billion of its market capitalization in Friday’s broad tech selloff. Salesforce rose 3.6% after Bloomberg reported that takeover talks with Informatica have cooled. Retail wireless provider Verizon advanced after an earnings beat. On the downside, Tesla, which is set to report earnings on Tuesday, dropped 3% as the automaker’s decision over the weekend to slash prices across its range in China risks sparking another round in the nation’s bruising electric-vehicle price war. Here are some other notable premarket movers:

• Crypto-linked companies rise as Bitcoin’s quadrennial halving completed late on April 19. Bitcoin advocates expect the halving to be a positive catalyst, with the cryptocurrency on the rise for three consecutive days, and currently at $66,044.35. Coinbase (COIN) +2%, Riot Platforms (RIOT) +5%, Marathon Digital (MARA) +4%
• Informatica (INFA) slips 6% after Salesforce’s takeover talks with the data-management company were said to have cooled, with the parties struggling to agree to terms. Meanwhile, Salesforce (CRM) rises 3%.
• Verizon Communications (VZ) rises 2% after beating analysts’ estimates for profit while boosting wireless service revenue.

Even though a military base in Syria belonging to a US-led coalition came under rocket-fire late on Sunday, in the first attacks against US bases in the Middle East since early February, the lack of further escalation between Isreal and Iran eased fears about military conflict in the Middle East accelerating.

“We are seeing a relief rally underway this morning as geopolitical risks subside,” said Kyle Rodda, a senior market analyst at Capital.com in Melbourne. “The move basically squares the ledger now and allows the markets to go back to focus on macroeconomic and corporate fundamentals."

Robust earnings from corporate America are expected to pull the S&P 500 Index out of its latest morass, despite rising concerns about a significant jump in bond yields, according to Bloomberg’s latest Markets Live Pulse survey. Nearly two-thirds of 409 respondents said they expect earnings to give the US equity benchmark a boost. That’s the highest vote of confidence for corporate profits since the poll began asking the question in October 2022.

Profits for the seven biggest growth companies in the S&P 500 — Apple, Microsoft, Alphabet, Amazon.com Inc., Nvidia Corp., Meta and Tesla — are on course to surge 38% in the first quarter, according to Bloomberg Intelligence. When excluding them, the rest of the benchmark index’s profits are anticipated to shrink by 3.9%.

Traders are also recalibrating their positions after a solid run of US data forced the Fed to reset the clock on its first interest rate cut. Data prints later in the week are likely to help finesse policy bets, with both US growth and the Fed’s preferred measure of inflation due.

In Europe, the Stoxx Europe 600 gained about 0.4%, recovering some of last week’s slide as retail and personal care sectors leading gains, while automobiles & parts as well as utilities shares are the biggest laggards. Prosus NV shares jumped as much as 5% as Tencent, in which it is a major shareholder, rallied after nailing down an earlier-than-anticipated debut of one of the year’s most eagerly-awaited mobile games. Among other individual movers, Galp Energia SGPS SA surged as much as 19% after the Portuguese oil company provided an update on a commercial oil find off the coast of Namibia. Sandoz Group AG climbed more than 4% to a record after the Swiss pharma company confirmed the European Commission’s approval of its Pyzchiva psoriasis drug. Here are the biggest movers Monday:

• Galp Energia’s shares jumped as much as 21% after the Portuguese oil company said a well test “potentially” indicates Mopane could be an important commercial find in Namibia
• Embracer shares soar as much as 18%, the most since February 2020, after CEO Lars Wingefors unveiled a plan for the Swedish gaming group to split into three listed companies to unlock potential
• Telefonica shares gain as much as 1.6% after JPMorgan resumes coverage with a neutral rating, ending a long-standing underweight call
• Royal Unibrew shares rise as much as 4.1%, adding to last week’s jump, with trading volume almost quadruple the 20-day average for this time of day
• Sandoz shares soar as much as 4.4% and hit a record after the Swiss pharma company confirms the European Commission’s approval of Pyzchiva, a biosimilar value driver for the company, according to Vontobel
• Alstom shares gain as much as 6.7% as analysts cheer the sale of the Signaling North America businesss as a “key step” in debt reduction
• Tyman gains as much as 30% to 385p after Quanex bid at about 400p/share, in a deal seen as attractive by Jefferies
• Dr. Martens shares advance as much as 8.7%, the biggest intraday gain since January 25, after the Mail on Sunday reported that the bootmaker had attracted  takeover interest
• RWE shares slide as much as 1.4% after New York ended contract negotiations with three offshore wind developers, including one co-developed by a RWE unit, because the companies couldn’t reach agreements on terms
• Mobico Group shares fall as much as 6.8% after the bus and rail company’s earnings came in lower than hoped, despite having reset expectations less than a month ago

Earlier in the session, Asian stocks rose, with gains in Hong Kong on Beijing’s latest market support measures helping offset declines in tech hardware shares. The MSCI Asia Pacific Index climbed as much as 1.1%, with Tencent and Alibaba among the biggest boosts. Hong Kong’s benchmark Hang Seng Index jumped 1.8%, with notable gains also seen in Japan, Australia and South Korea. Chinese regulators announced five measures to optimize stock connects and bolster Hong Kong’s position as a financial hub. That helped improve sentiment along with the absence of further escalation in the conflict between Israel and Iran. Meanwhile, chip and AI shares declined after Nvidia’s biggest drop in four years drove US stocks lower Friday.

In FX, the Bloomberg Dollar Spot Index is flat while the antipodean currencies top the G-10 FX pile, rising 0.3% versus the greenback respectively. The Australian and New Zealand dollars climbed as fast-money funds continued short-covering that began in London on Friday, according to Asia-based FX traders. There could be temporary relief on the horizon from the recent volatility in currencies as there has already been “a considerable scaling back of Fed rate cut expectations,” according to Paul Mackel, global head of FX strategy at HSBC Holdings Plc. “It is hard to think Friday’s US PCE data will change this picture much,” he wrote in a note to clients.

In rates, Treasuries are slightly cheaper across the curve, following similar losses across European rates as demand for haven assets fades in the absence of major escalation in Middle East conflict. Meanwhile, investors are looking ahead to a heavy slate of Treasury and corporate new-issue supply this week. US long-end yields are higher by as much as 3.5bp on the day, with 2s10s and 5s30s spreads steeper by 2.4bp and 1.2bp as front-end outperforms; 10-year around 4.66% is 4bp cheaper on the day with bunds lagging by additional 1bp in the sector.

A hefty slate of Treasuries auctions will be a major test of whether yields have peaked for the year.  Higher-than-expected interest rates amid persistent inflation are perceived as the biggest threat to financial stability among market participants and observers, the Fed said in its semiannual Financial Stability Report published Friday.

In commodities, Brent fell 0.6% to trade near $86.70 while spot gold falls 1.8% to around $2,342/oz. Treasuries dip as investors look ahead to a hefty slate of auctions. US 10-year yields rise 3bps to 4.65%. The Bloomberg Dollar Spot Index is flat while the antipodean currencies top the G-10 FX pile, rising 0.3% versus the greenback respectively. Bitcoin rises 2%.

Bitcoin climbs higher post-halving and now holds just above USD 66k; Ethereum also firmer and back at 3.2k.

Looking at today's calendar, US economic data slate includes March Chicago Fed national activity index at 8:30am; ahead this week are April preliminary PMIs, March new home sales and durable goods orders, first estimate of 1Q GDP, and March personal income and spending (with PCE deflator). Fed members have entered quiet period ahead of May 1 policy announcement.

Market Snapshot

• S&P 500 futures up 0.6% to 5,032.50
• STOXX Europe 600 up 0.2% to 500.52
• MXAP up 1.0% to 169.02
• MXAPJ up 0.8% to 518.96
• Nikkei up 1.0% to 37,438.61
• Topix up 1.4% to 2,662.46
• Hang Seng Index up 1.8% to 16,511.69
• Shanghai Composite down 0.7% to 3,044.60
• Sensex up 0.5% to 73,490.15
• Australia S&P/ASX 200 up 1.1% to 7,649.16
• Kospi up 1.4% to 2,629.44
• German 10Y yield little changed at 2.52%
• Euro little changed at $1.0653
• Brent Futures down 1.5% to $85.99/bbl
• Gold spot down 1.4% to $2,359.10
• US Dollar Index little changed at 106.13

Top Overnight News

• Blinken will travel to China on Apr 24-26 and plans to warn Beijing the US will take punitive steps unless weapons-related shipments to Russia are halted. FT
• China’s state fund Central Huijin purchased ~$41B worth of stocks in Q1 as part of a government-coordinated campaign to bolster the country’s equities market. RTRS
• SNB increases the minimum reserve requirement for banks from 2.5% to 4%, a move aimed at reducing the amount of money the central bank has to pay out to lenders. BBG
• Israel had planned a much larger counterstrike against Iran last week, but dialed back the mission in part because of pressure from the US and other allies. NYT
• Iran continues to significantly downplay the Israeli strike from Thurs night/Fri morning, the latest sign of Tehran’s desire to deescalate tensions in the region. WaPo
• Paris apartment rental demand for the upcoming Olympics has been sluggish, disappointing owners hoping for a large boost around the games. FT
• TSLA slashed prices on vehicles and FSD (full self-driving) software over the weekend as the company aims to bolster sales amid myriad pressures. BBG
• The UAW scored a major win when workers at VW’s Tennessee factory voted to join the union (this is the first time a southern plant outside of GM/Ford/Chrysler has been organized), and the group is hoping for similar success at a Mercedes plant next month. NYT
• Trump’s national lead over Biden head-to-head cut to two points in a new NBC poll, down from 5 points in Jan, and Biden actually pulls ahead by 2 points if Kennedy is included (as RFK Jr captures more from Trump than Biden). NBC News

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly positive following the lack of any major geopolitical escalations over the weekend. ASX 200 was underpinned amid gains in nearly all sectors and with the advances initially led by outperformance mining stocks as copper prices approached closer to the USD 10,000/ton level and with firm gains in South32 following its quarterly output update.Nikkei 225 gained but is well off intraday highs after the index briefly wiped out all its earlier spoils before recovering again with price action choppy after last Friday's comments from BoJ Governor Ueda who suggested a hike is very likely if underlying inflation increases.Hang Seng and Shanghai Comp. were mixed in which the latter outperformed with strength in biopharma, tech and consumer stocks front-running the gains in the index. Conversely, the mainland lagged amid US-China frictions after the US House passed a bill that could lead to a total TikTok ban, while China's benchmark Loan Prime Rates were maintained at their current levels, as expected.

Top Asian News

• US Secretary of State Blinken will visit China on April 24th-26th to meet officials in Shanghai and Beijing, while Blinken will be joined by top State Department official for Asia Kritenbrink, top narcotics official Robinson and cyberspace and digital policy ambassador Fick. Furthermore, a US official said Blinken will express US intent to have China curtail its support for Russia’s defence industrial base and it was also stated that the US is prepared to take steps against firms acting against US interests, according to Reuters.
• BoJ Governor Ueda said the BoJ will reduce JGB purchases at an unspecified time in the future but the extent of the reduction remains undetermined, while he reiterated to expect accommodative financial conditions to continue for the time being and that they need to take time to consider what to do with their ETF holdings. Ueda said the weighted average of medium and long-term inflation expectations indicates a rising trend but remains slightly below 2% and noted that raising interest rates is very likely if underlying inflation increases. Furthermore, he said the BoJ will proceed cautiously and is watching wages and will see the effect of possible wage increases on prices, especially service prices, while he added that they may change the short-term policy rate depending on the incoming data.
• Earthquake has been felt in the Taiwanese capital of Taipei, according to witnesses cited by Reuters; reports suggest it could be a 4.2 magnitude earthquake.

European bourses are mixed, Stoxx 600 (+0.2%), having initially opened with a clear positive bias. In catalyst-thin trade, equities have ebbed lower, and off best levels, though generally hold a positive bias. European sectors are mostly positive; Retail is found at the top of the pile after Jefferies upgraded several Cos from within the sector. Autos are the clear underperformer, after Tesla (-3.2% pre-market) cut prices for some of its models, as such, European peers are suffering. US Equity Futures (ES +0.4%, NQ +0.5%, RTY +0.6%) are entirely in the green, with the NQ and ES attempting to pare back some of the hefty losses seen in the prior session. Elsewhere, UBS downgraded Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), Meta (META), Microsoft (MSFT) and Nvidia (NVDA) to Neutral from Overweight

Top European News

• UK government rejected an EU proposal to negotiate a post-Brexit deal to relax travel and allow young adults to move across the Channel more easily, according to Bloomberg.
• UK Chancellor Hunt is reportedly considering lowering stamp duty in his final autumn statement before the general election, according to The Times; the threshold at which homebuyers pay stamp duty from GBP 250l to GBP 300k.
• S&P affirmed Greece at BBB-/A-3; Outlook revised to Positive on ongoing debt stock reduction.
• ECB governors reportedly fear that publishing rate forecasts, or Fed-style "dot plot", would invite pressure from governments to gauge if the ECB was serving its domestic agenda, according to Reuters sources. A few governors are open to discussing the proposal at the next review due to start next year.
• The Swiss National Bank is raising the minimum reserve requirement for domestic banks from 2.5% to 4%, and to this end is amending the National Bank Ordinance as of 1 July 2024; will not affect the current monetary policy stance.

FX

• Mixed performance for the USD; softer vs. risk-sensitive peers but faring better vs. traditional havens. DXY has been able to hold above the 106 mark and stick within Friday's 105.84-106.34 parameters.
• EUR is flat vs. the USD with the pair pivoting around the 1.0650 mark and respecting Friday's 1.0610-1.0677 range.
• JPY is steady vs. the USD with comments from BoJ Governor Ueda overnight unable to help the Yen gain ground against the Dollar. As such, USD/JPY continues to eye the multi-year peak at 154.78.
• Antipodeans are both firmer vs. the USD amid the more favourable risk environment. AUD/USD has gained a firmer footing above the 0.64 mark, advancing to a high of 0.6455 after printing a YTD low at 0.6362 on Friday.
• SNB’s Jordan said it is very important that monetary policy remains geared towards price stability rather than being used to finance debt, otherwise it will not end well, while he added that structural reforms are needed to increase competitiveness so that growth can increase which is one of the biggest challenges, according to Reuters.

Fixed Income

• USTs have been contained within a 107.25-17+ range, given the lack of geopolitical escalations over the weekend. From a yield perspective, 4.696% remains the recent peak for the US 10-year with a current level of circa 4.65%.
• Bund price action has followed USTs; the benchmark hit a fresh YTD trough earlier in the session at 130.64, before scaling back losses. German 10-year yield now at levels not seen since last November, and eyes 2.55%.
• Gilts are leading peers as the fallout from dovish comments by BoE Deputy Governor Ramsden continues to reverberate around the market with the central banker confident that inflation is returning to target; Gilts are trading on either side of 97.00 mark with a session high of 97.13 eclipsing Friday's peak at 97.05.

Commodities

• Crude is softer but off worst levels as a lack of major geopolitical escalations over the weekend unwinds geopolitical premium in the complex. Brent Jun'24 slipped from a USD 87.15/bbl high to a USD 85.79/bbl intraday trough before trimming overnight losses.
• The geopolitical unwind is also reflected in precious metals prices amid a lack of escalation over the weekend; XAU declined from a USD 2,392/oz high to a USD 2,351.60/oz intraday low.
• Mixed trade across base metals within relatively tight ranges, in fitting with the price action seen in the greenback.
• UBS said it is targeting an increase in Brent to USD 91/bbl by mid-year; continues to see the oil market as being undersupplied.
• Nornickel said the Co. plans to gain access to Chinese battery technology and produce them in Russia
• Chile imposed temporary anti-dumping tariffs on Chinese steel products used in mining to support the local industry, according to Bloomberg.

Geopolitics: Middle East

• "Another attack on US forces in the region in the last hours, now on Al Assad base in Iraq", according to Walla News' Elster.
• Iran said nuclear weapons have no place in its nuclear doctrine.
• An explosion at a military base in Iraq used by the pro-Iranian militant group Iraqi Mobilization Forces south of Baghdad killed one person and wounded eight people, while the explosion was said to have been caused by an unknown air attack although Iraq’s military reported there were no drones or fighter jets in the area, according to Reuters.
• Five rockets were fired from the northern Iraqi town of Mosul towards a US military base inside of Syria, according to two security sources cited by Reuters. Furthermore, a US official said a coalition fighter destroyed a launcher in self-defence after reports of a failed rocket attack near the coalition base at Rumalyn, Syria.
• Iran-backed Lebanese group Hezbollah said it downed a drone that was attacking locations in southern Lebanon. It was separately reported that Hezbollah targeted two buildings used by enemy soldiers in the settlement of Metula and achieved a direct hit.
• Iran’s Supreme Leader Khamenei thanked the Revolutionary Guards for the April 13th attack on Israel and said the key issue is how Iran displayed its power in attacking Israel not how many missiles were launched or hit their target, while he called on Iranian armed forces to ceaselessly pursue military innovation and learn the ‘enemy’s tactics’, according to state media.
• Iraqi Kataib Hezbollah announced a resumption of operations against US forces citing a lack of progress on US troop withdrawal during the Iraqi PM's Washington visit.
• US is expected to sanction an IDF unit for human rights violations in the West Bank, while Israeli Defence Minister Gallant spoke with US Secretary of State Blinken and urged the US to reconsider the decision to sanction the IDF, according to Axios.
• US State Department said Secretary of State Blinken discussed with Israel's Gantz the need for an immediate ceasefire in Gaza and the release of detainees, according to Reuters.
• German Chancellor Scholz had a telephone call with Israeli PM Netanyahu and stressed the importance of avoiding escalation of regional hostilities, while Scholz explained the decision of the EU to impose further sanctions against Iran, according to Reuters.
• Turkish President Erdogan discussed efforts to reach a ceasefire and deliver humanitarian aid to Gaza with Hamas leader Haniyeh during a meeting in Istanbul, according to Reuters.
• Palestinian Authority President Abbas said they will reconsider bilateral relations with the US after its veto against the Palestinian bid for UN membership, according to Reuters.

Geopolitics: Other

• US House passed a USD 95bln aid package for Ukraine, Israel and Taiwan, while the bills include legislation on TikTok that would force it to be sold or face a national ban in the US, according to Reuters.
• Ukrainian President Zelensky US aid will send a signal that it will not be a second Afghanistan and that the US will stay with Ukraine, while he said Ukraine will have a chance for victory and needs long-range weapons not to lose people on the front line. Furthermore, he responded that Ukraine is preparing when asked about a possible major offensive by Russia, according to Reuters.
• Ukraine sources said a large-scale drone attack was conducted against Russia which targeted energy facilities that support Russian military-industrial production in which at least three power substations and a fuel depot were hit in the attack, according to Reuters.
• Kremlin spokesman Peskov said the House passage of the Ukraine bill will make the US richer and further ruin Ukraine, resulting in more deaths, while he added the bill’s provision on confiscation of Russian assets will tarnish the image of the US and that Russia will take measures in response, according to Reuters.
• Russian Foreign Ministry said the US is using Ukrainians as cannon fodder and is fighting a hybrid war against Russia, while it added that deeper US immersion in a hybrid war against Russia will turn into a fiasco like its wars in Vietnam or Afghanistan, according to Reuters. In relevant news, the Russian Defence Ministry said Russia took full control over Bohdanivka in the Donetsk region, according to IFAX.
• China’s Foreign Ministry said any attempt to provoke camp confrontation in the South Pacific region does not serve the urgent needs of South Pacific island countries and the region should not become an arena for a major power rivalry, according to Reuters.
• North Korea said it conducted a test firing of missiles on Friday.
• North Korea fired would could be a ballistic missile on Monday, via Japanese Government; missile flew towards the sea off the East coast, according to South Korean military; missile believed to have fallen outside of Japan's Exclusive Economic Zone (EEZ).
• Poland is "ready" to have nuclear weapons on its territory, according to the President cited by AFP. Russia's Kremlin on reports Poland is ready to host US nuclear weapons, said "our military will analyst this and take the necessary steps".

US Event Calendar

• 08:30: March Chicago Fed Nat Activity Index, est. 0.09, prior 0.05

DB's Jim Reid concludes the overnight wrap

It's a bit of a messy picture for markets at the moment with huge uncertainty around events in the Middle East, US tech seeing its biggest sell-off for around 18 months, and with yields climbing as rate cuts gets increasingly pushed out. The lack of further escalations in tensions over the weekend in the Iran and Israel situation is helping Asia get off to a better start this morning though.

In terms of this week, we’ll have to wait for Friday for the main macro event namely the US core PCE print within the income and spending report. Our economists expect the core PCE deflator to come in at +0.30% vs. +0.26% last month. This would drop the YoY rate to 2.7% but within a whisker of rounding up to 2.8%, a level that both Chair Powell and Vice Chair Jefferson suggested that the Fed staff’s estimate had pencilled in.

In equity markets all eyes will be on earnings with a whopping 178 of the S&P 500 reporting including four of the Magnificent Seven namely Tesla (after Tuesday’s close), Microsoft, Alphabet (Thursday) and Meta (Wednesday). The final three are the 1st, 4th and 6th largest S&P 500 firms by market cap and make up nearly 14% of its market cap. Tesla is down -41% YTD and under a lot of pressure so it’s an important release for them. This all comes off the back of the worst week for the S&P 500 (-3.05%) since the US regional banking stress last March, and the worst week for the Nasdaq 100 (-5.36%) and the Magnificent Seven (-7.73%) since November 2022. A -3.47% decline on Friday marked a sixth day of consecutive losses for the Mag-7.

With three consecutive weeks of losses, the longest such streak since last September, the S&P 500 is now -5.5% from its recent peak. The VIX volatility index rose +1.4 points (and +0.7 points on Friday) to 18.71, to its highest weekly close since last October.

Nvidia (which doesn't report for another month) fell exactly -10% on Friday (-13.59% on the week), contributing around half of the -0.88% loss in the S&P 500 on Friday, and is now down -25% from its highs on 25 March. One catalyst appeared to be their hardware partner Super Micro Computer announcing its earnings date (April 30th) but without preliminary guidance as they have previously tended to do. They fell -23.1%. Everything else related to chips and AI also got stung with Advanced Micro Devices dropping -5.4%, and Arm Holdings -16.9% to 87.19 as examples. By contrast, the Dow Jones index was largely resilient last week, up +0.56% on Friday and flat (+0.01%) over the week. The Europe STOXX 600 also suffered in the risk-off environment but outperformed the tech heavy US market, falling -1.18% (and -0.08% on Friday).

Bonds did not benefit much from the risk-off tone, as markets became more sceptical about US rate cuts. Investors dialled back the number of rate cuts expected by year-end by +7.6bps to 39bps (+0.2bps on Friday). Off the back of this, 2yr Treasury yields jumped +8.8bps last week (unchanged on Friday). The story was similar for 10yr Treasury yields, which rose +9.9bps on the week to 4.62%, though they fell -1.2bps on Friday as markets sought haven assets. In Asia this morning they are back up +3.9bps to 4.66%. In Europe, 10yr bund yields were up +14.1bps on the week (+0.3bps on Friday), reaching the 2.50% level for the first time since November.

In commodities, oil prices initially surged following the news of a retaliatory Israeli missile strike against Iran on Friday, before unwinding most of the gains as details emerged suggesting no further imminent escalation. Brent crude fell -3.49% last week to $87.29/bbl (+0.21% on Friday), and WTI slipped -2.94% to $83.14/bbl (and +0.50% on Friday), also weighed down by stronger US crude inventories data earlier in the week. This morning in Asia, Brent futures are lower again, trading -0.62% as I type.

On the other hand, gold continued its ascent to another record high, rising +2.03% to $2392/oz (and +0.16% on Friday). It's losing a bit of safe haven demand this morning though (-0.9%). Ahead of its major halving event on Saturday, Bitcoin rose +0.72% to $64,034 on Friday after a volatile week. It is up at $64,800 this morning. For more detail on the halving, see here.

In Asia the Hang Seng (+1.67%) is outperforming following a regulatory boost as China’s market regulator pledged support to bolster Hong Kong’s status as a financial hub. Elsewhere, the S&P/ASX 200 (+0.87%), the KOSPI (+0.77%) and the Nikkei (+0.72%) are also edging higher. Meanwhile, Chinese stocks are bucking the trend (down around a quarter to a half percent), after the People’s Bank of China (PBoC) kept the loan prime rates steady. Outside of Asia, S&P 500 (+0.26%) and NASDAQ 100 (+0.36%) futures are trading higher.

Overnight, French central bank chief Francois Villeroy de Galhau stated in an interview that Middle East tension are unlikely to drive up energy prices and should not derail the ECB plans to start cutting interest rates in June.

Coming back to this week, the other main highlights by day are the global flash PMIs and US new home sales tomorrow, US durable goods and the German IFO (Wednesday), and US GDP and pending home sales (Thursday). Alongside the core US PCE print, Friday also sees the latest BoJ meeting and Tokyo CPI. Our Japan economist previews the BoJ here and expects no change in their monetary policy stance. However, he forecasts that the BoJ will remove its JGB purchasing guidelines from its statement or revise them to make its purchasing operations more flexible. He also sees the central bank raising its inflation forecast for FY24 amid the strong wage growth data already available as of the March meeting. Elsewhere, the Fed is now on its pre-FOMC media blackout but the ECB speakers will be in full force as you'll see in the week ahead calendar at the end, alongside all the main earnings and macro highlights. 112 Stoxx 600 companies will report this week alongside the 178 for the S&P 500 we mentioned above.

Larger cracks are appearing in the US commercial real estate market at a time when uncertainty around the regional bank industry flashes red. 

The latest report from real estate data provider ATTOM shows CRE foreclosures topped 625 in March, up 6% from February and 117% from the same period last year.

ATTOM has been tracking commercial foreclosures since 2014. The number of foreclosures is approaching the peak of 889 in October 2014. 

"California began experiencing a notable rise in commercial foreclosures in November 2023, surpassing 100 cases and continuing to escalate thereafter," the report said. 

New York, Florida, Texas, and New Jersey also showed increases in CRE foreclosures last month. 

Regional banks provide a bulk of the financing for the space. The ongoing mess in the lending space due to tighter conditions adds pressure to the CRE downturn. Banks are expected to set aside more money to cover potential CRE losses. 

Last month, Federal Reserve Chair Jerome Powell testified on Capitol Hill, "We have identified the banks that have high commercial real estate concentrations, particularly office and retail and other ones that have been affected a lot," adding, "This is a problem that we'll be working on for years more, I'm sure. There will be bank failures, but not the big banks." 

Data from a recent Treasury Department's Financial Stability Oversight Council warned office vacancy rates have climbed sharply in recent years, reaching a record of 13.1% at the end of 2023. 

CoStar analyst Phil Mobley recently noted the "reset in office demand has rocked US markets." 

Morgan Stanley warned earlier this year that office prices could plunge 30% due to sliding demand. 

With sliding demand comes a massive amount of supply. Morgan Stanley pointed out that most of the oversupply is in offices and apartments. 

Source: Morgan Stanley

For those wondering why the excess supply of office towers can't be converted into affordable housing, Goldman also noted that prices must drop 50% for housing conversions to make sense. 

Powell has a rolling crisis on his hands. And the goal is to save the fireworks for after the election.