- Nasdaq gains, DJI dips, S&P 500 just above flat
- Comm svcs leads S&P sector gainers; staples weakest group
- Dollar, bitcoin dip; gold ~flat; crude gains
- U.S. 10-Year Treasury yield rises to ~1.51%
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PIPER SANDLER SEES S&P 500 UP 10% NEXT YEAR (1300 EST/1800 GMT)
The S&P 500 is likely to end 2022 up about 10% from current levels, supported by an ongoing, albeit slowing, economic recovery, Piper Sandler says in a report on Wednesday.
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“Accommodative monetary policy and continued economic momentum should support risk appetite and the TINA (there is no alternative) playbook,” Piper Sandler writes in its report, reiterating its 2022 target of 5,150 for the S&P 500 (.SPX).
Real GDP next year should grow by 3.9%, “as this year’s pent up consumer spending comes back to reality,” according to Piper Sandler.
Delving into how U.S. consumers are dealing with the current inflation spike, DataTrek in a separate report says it checked how frequently people have been using the words “cheap,” “discount” and “coupon” in Google searches. It found that those words are not being used more than in previous holiday shopping seasons. That might suggest consumers are not reacting strongly to inflation.
It is possible that the strong U.S. labor market is offsetting inflation worries, or merely that consumers have become good at finding deals without searching with the specific words in question, writes Nicholas Colas, Co-founder of DataTrek Research.
“No matter which explanation(s) is/are true, we see it as a positive that American consumers are not fixated on finding the very best value. Yes, that does feed into inflation pressures at the margin. But it also allows for better corporate margins, and that’s what drives earnings and therefore stock prices,” Colas writes.
QUICKER FED RATE HIKES RISK STALLING ECONOMIC GROWTH (1202 EST/1702 GMT)
Earlier-than-anticipated interest rate hikes next year and expectations of a potentially more-aggressive U.S. Federal Reserve would likely spark a broad-based, risk-off trade in financial markets and could slow economic growth, according to Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
While the bond market has priced in two full rate hikes in 2022 commencing in June and a more than 55% chance of a third, Bostjancic examined the impact of three 25-basis-point hikes starting in March and ending in July.
“Early rate hikes would spark an 11 (percentage point) rise in the equity VIX index, a 14% decline in the S&P 500 stock index, further widening in corporate bond spreads, a 3% appreciation in the dollar, and a 65 (basis point) rise in the 10-year yield in first half of 2022 that unwinds in the second half of the year,” she wrote in a research briefing on Tuesday.
Economic activity would be hampered as the “sharp contraction” in financial conditions would slow the flow of credit to corporations and consumers.
“(This) would in turn weigh on corporate and business confidence, which would further restrain economic growth,” Bostjancic said in the briefing.
LETTING THE FACTS GET IN THE WAY OF A GOOD STORY (1105 EST/ 1605 GMT)
While Monday and Tuesday’s U.S. equity market rally undoubtedly made some investors happier, it left others cold.
After the Dow (.DJI) added 1.4%, the S&P 500 (.SPX) gained 2.1% and the Nasdaq Composite (.IXIC) vaulted up 3%, JonesTrading Chief Market Strategist Michael O’ Rourke came out with a Tuesday evening research note describing that session as “one of those days where many of the stories driving or failing to drive the tape, were head scratchers.” read more
O’Rourke argued that China’s announcement of the December 15th Reserve Requirement Ratio (RRR) reduction earlier was “not a surprise” as China’s Premier Li had already said Friday that the PBOC would cut the RRR at the proper time.
Then the strategist pointed to Omicron developments, describing late afternoon headlines from South Africa’s Africa Health Research Institute as “at least mildly alarming” citing a 41 fold reduction in covid fighting antibodies for people who had taken the Pfizer (PFE.N) BioNTech vaccine.
The companies themselves said Wednesday that while a three-shot course of their COVID-19 vaccine neutralizes Omicron variant in a laboratory test, two doses brought significantly lower neutralizing antibodies. On the plus side said they could deliver an upgraded vaccine in March 2022 if needed. read more
Even before the companies’ data O’Rourke was writing that a “drop in protection should be a concern especially for a market that has already dismissed the variant.”
On top of all this, the strategist noted that “markets clearly are not concerned about the Russian buildup on the Ukrainian border.” On Wednesday, Russian President Vladimir Putin said Russia would send proposals to Washington within a week after what he described as constructive talks with U.S. President Joe Biden. But he called suggestions Russia was planning to attack Ukraine “provocative”. read more
But O’Rourke says “the world has evolved to one where neither Russia nor China fear Western reprisal for territorial aggression,” he wrote. “It is fair to say financial market complacency may simply result from the absence of real consequences.”
O’Rourke says the market also appeared to ignore progress in lawmakers’ efforts to lift the U.S. debt limit. read more
“That alleviates the potential headwind next week that coincides with the FOMC decision on taper acceleration,” he said.
“We always talk about price setting the narrative in this tape. That appeared to be the case today as facts did not get in the way of a good story,” he said referring to Tuesday’s session.
EUROPEAN BANKS: LONGING FOR 2022 (1025 EST/1525 GMT)
European banks have had a stellar 2021 so far with their biggest yearly jump since 2009 when financial stocks bounced back from the abyss of the great financial crisis.
The sector’s index is up a whopping 31% year-to-date, which comes just behind tech and its 32% jump.
Banking stocks have been the ultimate proxy to play the reopening trade triggered by the November 2020 COVID-19 breakthrough and many investors and analysts must now wonder whether it’s time to call it a day.
Not JP Morgan.
“Their balance sheets are strong, the sector offers high levels of capital return, and it is trading cheaper now than at the start of the year, despite outperformance”, the investment bank’s analysts write in their 2022 outlook.
While they remain long on European banks, their view is also quite positive on the broad European equity market for which they believe investors should stay bullish.
“We are calling for another year of positive earnings surprises, relative to current consensus estimates”, they write, penciling in an upside of 13% and 16% in total returns.
U.S. STOCKS MIXED AND MODEST (1007 EST/1507 GMT)
Major U.S. indexes are mixed with just modest changes in early trade on Wednesday after Pfizer and BioNTech said a three-shot course of their COVID-19 vaccine was shown to have a neutralizing effect against the new Omicron coronavirus variant in a laboratory test.
In any event, the S&P 500 (.SPX), at around 4,691, continues to flirt with the 76.4%/78.6% Fibonacci retracement zone of its November 22 to December 3 decline in the 4,685.13/4,690.61 area, while the Nasdaq Composite (.IXIC), at around 15,677, is still struggling with the 61.8% Fibonacci retracement of its November 22 to December 3 decline at 15,722.821. read more
A failure to overwhelm these barriers can suggest this week’s bounce may just have been a counter-reaction in what COULD still be a developing decline.
Here is where markets stand in early trade:
SUPPLY CHAINS ARE GETTING A BIT BETTER (0919 EST/1419 GMT)
Supply chain bottlenecks are a big issue for financial markets as they threaten to slow down the economic recovery while boosting inflation.
After some analysts a few weeks ago wondered whether the worst was over, we might use some insight from Deutsche Bank.
It created a ‘bottleneck monitor’ which looks at goods moved with ships, trucks, and airplanes.
“The cost of shipping has started to fall, and port congestion is improving,” Deutsche Bank analysts say, mentioning their first edition of the monitor, which focuses on the U.S.
“There is also a notable easing in road haulage conditions. If this improvement persists, it would have material implications for the outlook next year,” they add.
NASDAQ COMPOSITE: WASHED OUT OR WATERFALL? (0900 EST/1400 GMT)
Of note, when the Composite topped on February 19, 2020, the Nasdaq New High/New Low (NH/NL) index, which had been diverging from the IXIC at that time, stalled at 76.6%.
It then took the NH/NL index 17 trading days to collapse to 12.3%. In so doing, the Composite slid about 20%. From there, the NH/NL index continued down to just 1.2% over the next six trading days, while the Composite lost another 13% into its March 23 low.
Recent NH/NL action is quite similar to back then. The measure diverged into its early November highs, and then from a reading of 75.7% on November 10, it fell 17-straight trading days into its December 6 low of 12.5%. However, in a testament to the market’s current bifurcated state of mega-cap haves and smaller-cap have-nots, however, the Composite only lost 5%. read more
On Tuesday, the NH/NL index ticked up to 14.8%.
It now remains to be seen if the Nasdaq became sufficiently washed out, that a broad recovery can take hold. This measure certainly has room to rise, and if it can reclaim its descending 10-day moving average it may add confidence in the potential for more sustained strength under the surface.
A NH/NL index violation of Tuesday’s 12.5% low can open the door for a test of its March 2020 trough. With this, however, the IXIC this time, may instead find itself going over a waterfall. read more
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Terence Gabriel is a Reuters market analyst. The views expressed are his own
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