Midweek Roundup: Asia, U.S. futures rebound, BofA calls for caution

by Knowledge Resources |

Asian equity markets rose on Wednesday as a sell-off in sovereign bonds was halted, bringing relief to investors with concerns over tighter policies that have rattled assets so far this year.

Stocks rose in Japan, South Korea and Australia, while US stock futures also advanced. The S&P 500 closed (SPX) near session highs, with trigger-happy investors boosting the Nasdaq 100 (NDX) and US small caps.

Investor confidence in Asia could be boosted by China, where state-owned funds intervened in the stock market on Tuesday, helping the benchmark index recover from its biggest intraday drop since August 2021. The Nasdaq Golden Dragon China Index soared.

The yield on 10-year U.S. Treasury bonds (GT10) fell but remained at the highest levels since 2019, as the Federal Reserve prepares to raise interest rates to curb inflation. The greenback fluctuated against other global currencies.

Investors are weighing still-robust corporate earnings against concerns about a rapid withdrawal of pandemic-era stimulus. This week’s data is expected to show that US inflation is still overheating, potentially fueling bets on a more aggressive rate spike by the Fed in March.

Speaking with Bloomberg TV, Lauren Goodwin, multi-asset portfolio strategist at New York Life Investments, remarked: “We’re still in an environment where a lot of things are going really well for the economy – It’s still a totally cyclical story from our perspective.”

Goodwin said the company is looking at asset classes such as small caps and value stocks, while emphasizing the importance of fixed-income securities.

Oil took a sharp drop as investors ponder ongoing tensions in Eastern Europe and resuming nuclear talks with Iran. 

Bitcoin (BTC) was trading at around US$44,000.

Bank of America wary of risk in US stocks

The US stock market may be facing more risks than you might think, Bank of America analysts have warned.

Extreme intraday market fluctuations in the price of individual stocks seen this year show that there is “turmoil” surfacing, according to equity derivatives analysts led by Gonzalo Asis in a note released on Tuesday. The moves were exacerbated by the collapse of the liquidity of so-called S&P 500 e-mini futures contracts to near levels seen only in 2020 as the markets tumbled when the Covid-19 pandemic hit.

“A tug of war is unfolding in the US stock market, with strong earnings and economic growth facing the least favorable stance from the central bank in decades,” Asis wrote. “The consequences are felt deeply in intraday volatility and individual stocks.”

Apprehensive investors have been rapidly reducing their positions in growth stocks — which have rocked the S&P 500’s rally over the past decade — as the Federal Reserve prepares to raise rates to curb inflation. Higher interest rates hurt the pricier tech stocks, which are valued on expectations of future growth.

Shares in Meta Platforms, Facebook’s parent company, tumbled 26% after the release of dismal quarterly results. Its market cap has declined by $251.3 billion—the biggest market cap loss ever seen for a US company.

Asis and his colleagues pointed out that the last time the US stock market recovered from a drop bigger than 10% without the Fed’s help was in February 2018. But that recovery did not last long and stocks collapsed later that year. .

This time, the Fed may not intervene until the stock market drops 15% or more from current levels, according to BofA.

What’s going on today

  • USA: MBA Mortgage Applications; Wholesale Sales and Inventories (Dec); Crude Oil Inventories, Oil Refinery Activity by EIA
  • Europe: Germany (Trade Balance/Dec), Italy (Industrial Production/Dec)
  • Asia: Japan (Machine Tool Preliminary Orders/Jan); Hong Kong (International Reservations)
  • Central Banks: Statements by Loretta Mester and Michelle Bowman (Fed), Richard Macklem (Chief of Canada), Huw Pill (BoE), Isabel Schnabel (ECB)
  • Earnings: Disney, L’Oréal, GlaxoSmithKline, Uber, Toyota
  • Latin America: Brazil (IPCA/Jan; Foreign Exchange Flow; Retail Sales/Dec); Mexico (IPC/Jan)

Worth keeping an eye on:

  • Corporate results: AstraZeneca (AZN), Commonwealth Bank of Australia, GlaxoSmithKline (GSK), Toyota Motor (TM), Twitter (TWTR), Uber (UBER), Walt Disney (DIS)
  • Federal Reserve Bank of Cleveland President Loretta Mester speaks on Wednesday;
  • UK Bank of England Governor Andrew Bailey speaks on Thursday;
  • US Consumer Price Index, Initial Jobless Claims Thursday;