LIVE MARKETS Options market sceptical ahead of CPI data

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  • European shares little changed
  • U.S. inflation data in focus
  • Delivery Hero slumps as guidance disappoints
  • Nasdaq futures edge lower

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OPTIONS MARKET SCEPTICAL AHEAD OF CPI DATA (1205 GMT)

The U.S. options market are not reflecting the same level of complacency as the stock market ahead of the U.S. inflation report, warned Michael Oyster, chief investment officer of Chicago-based Options Solutions.

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The S&P 500 (.SPX) is about 4.5% away from its all-time closing high but the CBOE volatility index (.VIX), Wall Street’s fear gauge, is hovering at its long term average of 20 points.

This, Oyster noted, indicates that the “options market is exhibiting a healthier dose of scepticism than the stock market.”

“The CPI reading coming in above consensus estimates is a fear that the options market is currently pricing in, in that investors are still paying for put protections and that’s why you see the elevated pricing in the VIX,” Oyster said.

Consensus sees U.S. consumer prices increasing by 7.3% year on year last month after recording the strongest reading in nearly four decades in December.

The surge in inflation could force the Federal Reserve to tighten monetary policy more aggressively than previously feared.

Markets have fully priced in the possibility of a rate hike in March, according to CME’s FedWatch tool, with 77% betting on a 25 bps rise in borrowing rates and rest on a 50 bps hike.

“The stock market seems immune to any kind of bad news like the inflationary data or the reality that interest rates are going up… and you see that in the buy-the-dips mentality”, Oyster also said.

“The options market is saying there is an underlying risk that we are not fully appreciating at this point.. (so) puts are going to be expensive”, he concluded.

(Medha Singh)

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KRYPTONITE CPI? (1142 GMT)

We’re about three hours away from the publication of U.S. CPI and there’s a clear feeling that the data will likely decide the fate of this session and possibly beyond.

For Jim Reid at Deutsche Bank, rising inflation is currently to markets what Kryptonite is for Superman: a game changer.

“If we don’t start gliding lower in line with expectations soon, the market is going to be pricing some 50bps Fed hikes into the equation for 2022”, he warned.

The outcome for stock markets is quite binary for equity markets, argued Ipek Ozkardeskaya at Swissquote.

“Either we will see a reasonable CPI read and the equity rally could carry on, or we will see an ugly number, and the bears will run into the marketplace and destroy the recent gains.

Among the different markets bracing for impact, tech is clearly on the front line.

“Today’s US inflation report could well be the catalyst that determines whether the Nasdaq 100 breaks back above that key 200-day MA level in the next few hours”, wrote Michael Hewson at CMC Markets.

As a reminder, the Reuters consensus sees the January CPI at 7.3% but there’s plenty of speculation floating around.

“There is also market chatter of whispers that today will see a CPI downside surprise –so only 7.1% y/y? Such non-inflationaryness!!– for the first time in a while”, read Rabobank’s Global Daily note.

df

(Julien Ponthus)

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ECB TAPERING SCENARIOS (1040 GMT)

The Pandemic Emergency Purchase Programme (PEPP) will end in March, but analysts expect the central bank to increase its Asset Purchase Programme (APP) to avoid a cliff effect and to implement a gradual tightening of its monetary policy.

ECB data showed that net PEPP volume stood at 50.1 billion euros for January, and is expected to remain at that level until the March 10 policy meeting, according to Citi analysts.

“This means that the starting point for taper is slightly higher than we previously assumed, making it more likely that ECB opts to stick with an APP pace for Q2 of €40bn/month to prevent a steep drop,” they say in a research note.

The APP amounts to 20 billion a month since 2019, but analysts expect the ECB to raise it when the PEPP ends.

“We also change our APP assumptions – to €40bn and €20bn in Q2 and Q3, respectively, after which we expect net purchases to end,” Citi analysts add.

“The ECB’s first active line of defence after the end of net asset purchases would be the flexible use of reinvestments, but it appears there is limited willingness to commit to anything beyond that,” ING analysts say.

Periphery spreads remain exposed “to further widening amid expectations of accelerated policy tightening,” they add.

UBS expects the ECB to announce on 10 March that the APP will end on August 31.

PEPP

(Stefano Rebaudo)

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FLAT STOXX COVERS BIG MOVES ON EARNINGS (0851 GMT)

The STOXX 600 (.STOXX) is flat like a pancake in early trading as traders avoid taking big directional bets ahead of U.S. inflation data that could shape the path of Fed rate hikes this year. But under the surface there are big moves for single stocks reacting to earnings updates.

Delivery Hero is tanking 18% on a disappointing outlook, helmet maker MIPS is down 17% after results, while a $2.7 billion impairment saw IT consulting firm Atos falling 7%.

On the positive side, Siemens is rallying 6% after a boom in quarterly orders and packaging maker Huhtamaki is also up by 6% after profit beat expectations.

snapshot

(Danilo Masoni)

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A PAUSE FOR BREATH (0812 GMT)

Markets are enjoying a respite of sorts. With 10-year Treasury yields down five basis points from recent highs, the Nasdaq has managed to rebound around 10% from late-January troughs. Europe’s STOXX 600 is opening higher after bumper earnings propelled the index to its best day in two months.

Meanwhile Walt Disney Co. assuaged fears, raised after Netflix’s lacklustre earnings report, that the entertainment streaming sector faces a reckoning as the pandemic ends. Disney shares rose 8% after-hours thanks to a 34% revenue jump and predictions of stronger subscriber growth.

Wall Street futures signal a weaker open however as the release of U.S. January inflation data comes into view. CPI is forecast at a four-decade high of 7.3% but many hope the number will show the economy is starting to work its way through supply glitches and labour shortages.

More than five quarter-point Fed interest rate hikes are currently priced by year-end but the data could swing those bets either way.

Bond market signals have been reassuring for tech investors. Thursday’s 10-year Treasury auction saw the strongest demand since May 2020 in a sign that buyers will rush to grab higher yields, potentially capping their rise. Let’s see what happens at a 30-year auction later in the day.

Similarly, Spain on Wednesday took 60 billion euros in bids for a 7 billion-euro 30-year issue (Spanish 10-year yields are up some 35 bps this month).

US inflation

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

Credit Suisse ends torrid year with $2.2 bln Q4 loss; SocGen quadruples profit

-Unilever warns of high inflation, rules out big M&A; AstraZeneca sees 2022 growth but COVID boost fades read more

-UK RICS housing survey

-Swedish Central Bank announces interest rate decision 0830 GMT

-ECB board member Philip Lane speaks 1315 GMT

-Bank of England Governor Andrew Bailey speaks 2015 GMT

-U.S CPI/weekly jobless figures

-US 30-year bond auction

-U.S. earnings: Linde, Twitter, Coca-Cola, Moody, Philip Morris, Kellogg, Expedia, Western Union, Mohawk, First Energy

-Emerging market central banks: Indonesia, Mexico, Peru, Serbia

-South Africa President Ramaphose to deliver state of the nation address

(Sujata Rao)

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EUROPE: CAUTION AHEAD OF U.S. CPI (0740 GMT)

European shares look set to edge up this morning but trading is likely to remain cautious ahead of closely watched U.S. inflation data for January which could shape expectations for a Federal Reserve rate hike next month.

The headline CPI is expected to have increased more than 7% on an annualised basis, but Fed officials are holding out hope that the peak may be near. read more

Futures on the Euro STOXX index rose 0.4% and FTSE contracts were flat after a tech-fuelled global stocks rally cooled in Asia read more , while derivatives on the Nasdaq declined 0.2% lower.

In corporate news, it’s another busy day for earnings releases.

Credit Suisse is on the watchlist after posting a $2.2 bln quarterly loss, hurt by provisions to settle its investment bank’s legal costs and a slowdown in business for its trading and wealth management divisions. read more

Here are some more earnings headlines:

Unilever warns of high inflation, rules out big M&A read more

AstraZeneca sees 2022 growth as dividend rises but COVID boost falls read more

France’s Credit Agricole beats profit target a year early read more

Siemens reports big surge in orders as profit beats forecast read more

Steelmaker ArcelorMittal reports higher-than-expected Q4 earnings read more

France’s Total swings back to profit in 2021 read more

(Danilo Masoni)

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