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Tag: Commodity/Financial Market News

  • Oil prices jump after drone attack kills U.S. troops, escalating Mideast crisis

    Oil prices jump after drone attack kills U.S. troops, escalating Mideast crisis


    Oil futures popped higher Sunday evening, after a drone attack that killed three U.S. service members in northern Jordan, blamed by the White House on Iran-backed militants, marked a major escalation of tensions in the Middle East.

    West Texas Intermediate crude for March delivery
    CL00,
    +1.22%

    CL.1,
    +1.22%

    CLH24,
    +1.22%
    was up $1.09, or 1.4%, at $79.10 a barrel on the New York Mercantile Exchange. March Brent crude
    BRN00,
    +1.15%

    BRNH24,
    +1.14%    ,
    the global benchmark, gained $1.11, or 1.3%, to trade at $84.66 a barrel on ICE Futures Europe.

    Much will ultimately depend on the U.S. response and whether Iran takes action aimed at shutting down the Strait of Hormuz, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch on Sunday afternoon.

    “We are on the cusp of this escalating, which could seriously impact the flow of crude oil,” he said.

    Three U.S. service members were killed and more than two dozen injured in a drone strike on a U.S. base in northeast Jordan, according to U.S. Central Command. They were the first U.S. fatalities in months of attacks on U.S. bases by Iran-backed militias since the start of the Israel-Hamas war in October.

    President Joe Biden attributed the Sunday attack to an Iran-backed militia group and said the U.S. “will hold all those responsible to account at a time and in a manner (of) our choosing.” News reports said U.S. officials were still working to conclusively identify the precise group responsible for the attack, but have assessed that one of several Iranian-backed groups is to blame.

    Some congressional Republicans called for direct retaliation on Iran.

    “We must respond to these repeated attacks by Iran & its proxies by striking directly against Iranian targets & its leadership. The Biden administration’s responses thus far have only invited more attacks. It is time to act swiftly and decisively for the whole world to see,” wrote Sen. Roger Wicker of Mississippi, the senior Republican on the Senate Armed Services Committee, in a post on X.

    Oil futures rallied last week to their highest since November, but with gains attributed in part to production outages in the U.S. and more upbeat expectations around economic growth.

    “Crude already has the wind to its back, so this will only offer further upside,” Chris Weston, head of research at Australian brokerage Pepperstone told MarketWatch in an email.

    With the U.S. election later this year, “Biden needs to strike a balance between increasing aggression that potentially puts U.S. serviceman lives in danger and could potentially raise the cost of living…while also showing a defiant stance that shows his resolve against terror,” Weston said.

    Oil prices have seen short-lived rallies around developments in the Middle East since the start of the Israel-Hamas war, but have failed to build in a lasting geopolitical risk premium. West Texas Intermediate crude
    CL00,
    +1.22%

    CL.1,
    +1.22%    ,
    the U.S. benchmark, remains around $15 below its 2023 peak in the mid-$90s set in late September. Brent crude
    BRN00,
    +1.15%    ,
    the global benchmark, pushed back above $80 a barrel last week.

    Attacks by Iran-backed Houthi militants on Red Sea shipping have forced a rerouting of tankers and cargo ships. For crude, that’s had implications for the physical market but hasn’t interrupted the flow of crude from the Middle East.

    A move by Iran aimed at closing off the Strait of Hormuz, the world’s biggest oil-transportation chokepoint, remains a top worry.

    The strait is a narrow waterway that links the Persian Gulf with the Gulf of Oman and the Arabian Sea. At its narrowest point, the waterway is only 21 miles wide, and the width of the shipping lane in either direction is just two miles, separated by a two-mile buffer zone.


    Energy Information Administration

    Around 21 million barrels a day of crude moved through the waterway in the first half of 2023, equivalent to around a fifth of daily global consumption, according to the U.S. Energy Information Administration.

    The U.S. stock market has largely looked past Middle East tensions, with the S&P 500
    SPX
    returning to record territory this month, while the Dow Jones Industrial Average
    DJIA
    has also set a series of records.

    Dow futures
    YM00,
    -0.20%
    were off 94 points, or 0.3% as Asian trading got under way, while S&P 500 futures
    ES00,
    -0.22%
    fell 12 points, or 0.2%, and Nasdaq-100 futures
    NQ00,
    -0.24%
    lost 0.3%.

    Read: Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week

    Away from oil, there were no signs of a significant surge in demand for instruments that traditionally serve as havens during periods of increased geopolitical tension. Futures on U.S. Treasurys
    TY00,
    +0.21%
    saw a modest rise of 0.2%, while the U.S. dollar
    DXY
    was little changed versus major rivals and gold futures
    GC00,
    +0.41%
    ticked up 0.4%.

    Escalating Middle East tensions won’t go unnoticed by traders, but probably doesn’t warrant a “solid derisking,” Weston said, particularly with investors facing a barrage of major market events in the week ahead.

    For U.S.-focused investors, the week ahead features a Federal Reserve policy meeting, earnings from tech industry heavyweights and a crucial December jobs report.

    The Middle East situation “won’t take us too far off the rates, growth track, but we have an eye on whether this escalates,” Weston said.

    —Associated Press contributed.





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  • Denim pioneer Levi’s is rolling out ‘tech pants’ and other new offerings this year. But will retailers stock them?

    Denim pioneer Levi’s is rolling out ‘tech pants’ and other new offerings this year. But will retailers stock them?

    With a rough 2023 in the rearview mirror, Levi Strauss & Co. this year is trying to tackle its problems with new pants.

    That includes pants with lighter-weight denim; pants for women that can be worn as high-rise or low-rise; and even nondenim pants that management, during Levi’s
    LEVI,
    +1.27%
    earnings call on Thursday, referred to as a “tech pant” for men with “moisture control and 360 mobility.” The company also plans to expand its offerings of Performance Cool pants intended to keep the wearer cool and dry on hotter days.

    But as those products roll out, the retailers that account for most of Levi’s sales are still cautious about packing their shelves with new apparel — even though Levi’s executives pointed to slightly better demand from clothing stores during the fourth quarter and holiday period. And as the denim pioneer cuts costs, brings in new leadership and tries to be a bigger e-commerce player, Wall Street will now be digging around for signs of a payoff.

    “Ultimately, the market will be looking for evidence new strategies can drive accelerated growth,” Stifel analyst Jim Duffy said in a research note on Thursday.

    “We continue to believe in brand vitality and opportunities for extension. With product reflective of new direction arriving in the marketplace across 2024, the proof will be in consumer response,” he continued.

    In an interview with MarketWatch on Friday, Duffy said he was optimistic about Levi’s standing as an established brand and stronger demand for its dresses, skirts and other women’s clothing items. But the more products a company rolls out, he suggested, the more it has to invest to make them work — and the more it needs to manage if sales falter.

    “The risk, as I see it, is that more categories means more SKUs and more product that is fashion rather than core basic styles, and more investment and inventory that, if it doesn’t translate to the marketplace, could result in higher markdowns,” he said, referring to the stock-keeping units by which retailers track inventory.

    Levi’s on Thursday said it would lay off between 10% and 15% of its global corporate staff in the first half of this year, a move intended to save $100 million in costs over that period. The layoffs are part of a two-year plan, called Project FUEL, intended to save money and strengthen the part of Levi’s business that sells directly to consumers via its own e-commerce network and its physical stores, as opposed to third-party retail operations.

    The layoff announcement arrived days ahead of Chief Executive Chip Berg’s departure from that role, with Michelle Gass taking over on Jan. 29. As the company tries to be bigger than men’s jeans, Gass, in Levi’s earnings release on Thursday, said she saw an opportunity to grow internationally, make Levi’s own online and bricks-and-mortar sales a greater priority, and turn the brand into a larger “denim apparel lifestyle business.”

    Levi’s shares fell after hours Thursday, after the company’s full-year profit forecast came in below expectations. The stock rebounded 1.3% on Friday but is still down 10.3% over the past 12 months.

    Still, Levi’s direct-to-consumer sales jumped 11% during the fourth quarter, and accounted for 42% of sales overall. Duffy said that the company has pushed deeper into its direct-sales business because it gives executives greater insight into what consumers want, as well as more control over how it markets and sells its clothing. Cutting out other retailers also widens margins on sales, he noted.

    Levi’s operating margins were higher in the fourth quarter. It also declared a dividend of 12 cents per share, payable in cash on Feb. 23.

    But sales in Levi’s wholesale segment — the sales it gets from retailers who buy Levi’s product, then sell it to consumers — fell 2%. Better results in the U.S. and Asia were offset by a drop in Europe, the company said.

    Retailers have spent the past two years trying to clear unwanted clothes from their stockrooms, and cutting prices in the process, after spiking inflation restricted many shoppers’ appetites to basics.

    As Gass prepares to take the reins, she sought to put a positive spin on retail-chain sentiment. “So net-net, overall, as a company, we’re exiting the year on a strong note,” Gass said on the earnings call. “And U.S. wholesale, we’re encouraged. But as it relates to that channel, we’re not declaring victory yet. There’s been a lot of volatility this past year, some in our control, some outside. And so we are taking a cautious approach as we look forward.”

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  • The U.S. dollar had a strong start to 2024. Here’s why it’s unlikely to last.

    The U.S. dollar had a strong start to 2024. Here’s why it’s unlikely to last.

    The U.S. dollar has had a relatively strong start to 2024 — but some analysts believe the greenback is still more likely than not to depreciate over the course of this year. 

    The ICE U.S. Dollar Index
    DXY,
    which tracks the currency against a basket of six major rivals, has climbed about 2.1% so far this year, per Dow Jones Market Data.

    The dollar has risen as traders scale back their expectations on when the Federal Reserve will begin cutting interest rates this year, according to analysts at BofA Global Research. 

    As recently as late December, traders were pricing a likelihood as high as 90% for a rate cut in March — but those chances have since fallen to around 46% as of Friday, according to the CME FedWatch Tool. Meanwhile, the total amount of rate cuts priced in for this year, which reached as high as 170 basis points in mid-January, has now slipped to around 135 to 150 basis points.

    However, the greenback is likely to see depreciation throughout the rest of this year, analysts at the investment bank wrote in a Thursday note, adding that much of the retreat would likely happen in the second half of 2024.

    The BofA analysts said expect no recession this year and anticipate that the Federal Reserve will start cutting its key policy rate in March. Such a scenario is negative for the dollar, as the Fed’s easing would likely support risk assets with U.S. economic growth remaining resilient, according to the analysts.

    Based on historical data, the ICE U.S. Dollar Index’s performance has been mixed from the onset of the Fed’s first rate cut over the past six cycles, and has been relatively flat on average over the following quarters, the analysts said.

    “This is due in large part to the USD’s perceived ‘safe haven’ status and its negative correlation to risk, as cutting cycles have often been associated with recessions,” they wrote.

    Jonathan Petersen, senior market economist at Capital Economics, echoed that point in a Thursday note. He expects the dollar to face headwinds from strong risk appetite in global markets and falling bond yields in the U.S. over the course of the year, and anticipates the greenback will remain rangebound against most major currencies for most of 2024.

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  • What Biden’s decision to pause new U.S. LNG exports means for the energy market

    What Biden’s decision to pause new U.S. LNG exports means for the energy market


    The Biden administration’s announcement Friday that it’s pausing liquefied natural gas export approvals sparked political backlash, drew cheers from climate activists and stoked uncertainty in energy markets, but is unlikely to see the U.S. give up its title as the world’s top LNG exporter.

    The U.S. will delay its decisions on new LNG exports to non-free trade agreement countries, allowing time for the Energy Department to update the underlying analyses for LNG export authorizations, the White House said.

    Those analyses are roughly five years old and “no longer adequately account for considerations” such as potential cost increases for American consumers and manufacturers or the “latest assessment of the impact of greenhouse gas emissions,” it said.

    The Biden administration likely “realizes the role of LNG in foreign policy, but at the same time it needs to show the Democrat base that it is doing something for climate change,” said Anas Alhajji, an independent energy expert and managing partner at Energy Outlook Advisors, pointing out that the announcement comes during a presidential election year.

    “Delaying one project or stopping it may not be a big deal, but it is a problem if it becomes a trend,” he said in emailed commentary.

    Environmental groups, which have pushed for action, cheered the decision.

    The 12 impacted projects in the U.S. “would spew out as much climate-warming pollution as 223 coal plants per year, and they present explosion risks to the communities where they’re located and emit other health-harming chemicals,” the Sierra Club, an environmental group, said in a statement welcoming the decision.

    Top exporter

    The announcement is particularly important for a nation that became the world’s biggest LNG exporter in the span of less than a decade.

    The U.S. became the world’s largest LNG exporter during the first half of 2022 on the back of increases in LNG export capacity, international natural gas and LNG prices, and global demand, particularly in Europe, according to the Energy Information Administration.

    Less than a decade ago, U.S. LNG exports were negligible. The country had only started exporting LNG from the Lower 48 states in 2016, the EIA said.

    The country’s exports of LNG climbed to a fresh record in November 2023, with the EIA reporting domestic exports of 386.2 billion cubic feet, up from 384.4 bcf a month earlier. Exports in December 2016 were at just 41.8 bcf.

    U.S. LNG exports soared after 2016.


    EIA

    With 90% of U.S. LNG going to non-free trade agreement destinations, withholding licensing effectively “halts project development,” John Miller, managing director, ESG and sustainability policy at TD Cowen wrote in a Friday note.

    Equities

    LNG equities with operating facilities likely won’t benefit from the administration’s announcement, at least not immediately, until the impacts of this pause in export approvals to non-FTA countries becomes more clear, Jason Gabelman, director, sustainability & energy transition at TD Cowen said.

    U.S. companies with government approvals that have not been sanctioned, “could have a higher probability of moving forward this year, albeit modestly” as offtakers may be hesitant to sign up to new U.S. projects with LNG development getting “politicized,” he said. Among those, he pointed out approvals for proposed liquefaction units at NextDecade Corp.’s
    NEXT,
    +2.30%
    Rio Grande LNG export facility project in Brownsville, Texas.

    At the same time, it would not be a surprise if U.S. LNG companies pursuing growth that do not yet have non-FTA approval see downside pressure, said Gabelman.

    LNG projects take around 4 years to build and any delays to project sanctions today will take “multiple years to manifest in the market,” he said.

    Still, the U.S. announcement “introduces the risk of more stringent oversight that could limit new U.S. capacity” more than four years out, Gabelman said.

    Companies that supply equipment to LNG liquefaction projects include Baker Hughes Co.
    BKR,
    +0.59%
    and Chart Industries Inc.
    GTLS,
    -7.54%    ,
    said Marc Bianchi, a senior energy analyst at TD Cowen.

    Any slowing of approval would create “overhand on order growth,” he said.

    Climate change

    The White House said Friday that its decision will not impact the ability of the U.S. to continue supplying LNG to its allies in the near term but also acknowledged environmental concerns.

    “I think we’ve got to be clear eyed about the challenges that we face. The climate crisis is an existential crisis, and we’ve got to be, I think, really forward leaning into making sure that we’re taking that head on,” said Ali Zaidi, the White House national climate adviser, told reporters Friday.

    He added that given the number of approvals already completed, the number of projects under construction are set to double existing capacity with approvals beyond that set to double capacity yet again.

    “So there’s a long runway here, and we’re taking a step back and thinking, OK, let’s take a hard look before that runway continues to build out,” he said.

    Rob Thummel, senior portfolio manager at Tortoise, argued that U.S. LNG exports actually reduce global carbon emissions as natural gas typically “displaces coal to generate electricity in countries such as China and India.”

    They also improve global energy security as U.S. natural gas is becoming Europe’s primary energy supplier, replacing Russia, he said.

    In a statement Friday, Sen. Joe Manchin, a West Virginia Democrat and chairman of the U.S. Senate Energy and Natural Resources Committee, said that if the Biden administration has facts to prove that additional LNG export capacity would hurt Americans, it needs to make that information public. But if the pause is “another political ploy to pander to keep-it-in-the-ground climate activists,” he said he would “do everything in my power to end this pause immediately.

    Manchin plans to hold a hearing on the decision in the coming weeks.

    Market impact

    The U.S. decision to delay new LNG export permits is unlikely to have an impact on domestic natural-gas supplies or prices, said Energy Outlook Advisors’ Alhajji.

    Still, the EIA noted in its Annual Energy Outlook released in March of last year that it remains uncertain as to how LNG export capacity will affect domestic prices, consumption and supply.

    LNG prices and the rate at which new LNG export terminals can be constructed help determine LNG export volumes, the EIA said, and higher LNG exports can result in upward pressure on U.S. natural-gas prices, while lower U.S. LNG exports can pressure prices.

    On Friday, natural gas for February delivery
    NG00,
    +0.23%

    NGG24,
    +0.26%
    settled at $2.71 per million British thermal units, up 7.7% for the week.

    Meanwhile, the U.S. is likely to keep its position as the world’s top LNG exporter, according to Tortoise’s Thummel.

    The U.S. is the currently the largest LNG exporter at almost 12 bcf per day, with Qatar coming in second, he said.

    Qatar is expanding its LNG export capacity and is expected to have the ability to export almost 20 bcf per day by 2028, he said. The EIA reported recently that Qatar has averaged 10.3 bcf per day in exports during the last 10 years.  

    That would mark sizable growth. But the EIA reported in November that LNG export capacity from North America is likely to more than double from around 11.4 bcf per day to 24.3 bcf per day by the end of 2027.

    The EIA said North America’s LNG export capacity is likely to more than double by 2027.


    EIA

    Given expected growth in U.S. LNG export capacity, the U.S. is likely to “remain the largest exporter of LNG in the world” despite the U.S. announcement, said Thummel.

    —Victor Reklaitis contributed.



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  • 3 things to know about how the Fed might roll back quantitative tightening

    3 things to know about how the Fed might roll back quantitative tightening

    The notion that the Federal Reserve will soon slow, or perhaps even end, its program of quantitative tightening is increasingly being talked about on Wall Street like a foregone conclusion.

    But while investors wait to hear more on the subject from Fed Chair Jerome Powell during next week’s post-meeting press conference, they could be forgiven for asking themselves some questions.

    What might an imminent taper of the Fed’s balance-sheet runoff look like? Why has it suddenly become so urgent? What might it mean for the six or so interest-rate cuts investors are expecting from the Fed this year, as well as for markets more broadly?

    We aim to answer these questions below.

    What inspired talk of tapering QT?

    It wasn’t until the minutes from the Federal Reserve’s December policy meeting were published earlier this month that investors started to take the notion of the Fed declaring “mission accomplished” on QT seriously.

    The minutes revealed that a number of senior Fed officials felt it was nearly time to “begin to discuss” the technical factors that would govern the Fed’s decision to slow the runoff of maturing bonds from its balance sheet.

    Shortly after the minutes’ release, several senior Fed officials came forward to discuss the importance of ending the balance-sheet runoff. Dallas Fed President Lorie Logan, the first senior Fed official to expand on what was noted in the minutes, said earlier this month that the Fed should start to slow the pace of its balance-sheet shrinkage once assets locked up in the Fed’s reverse-repo facility fell below a certain level.

    According to Logan, senior Fed officials had been unsettled by the drain of $2 trillion in assets from the RRP facility last year.

    But there was another issue that was also likely bothering monetary policymakers heading into the Fed’s December meeting.

    Sudden spikes in overnight repo rates late last year drew uncomfortable comparisons to the repo-market crisis of September 2019, which foreshadowed the end of the Fed’s previous attempt at tapering its balance sheet, according to TS Lombard’s Steve Blitz.

    See: Something strange is happening in the financial plumbing under Wall Street

    See: One of Wall Street’s most important lending rates will stay elevated for weeks, Barclays says

    TS LOMBARD

    What is the Fed’s ‘lowest comfortable level of reserves’?

    A re-run of the repo-market crisis of 2019 is what the Fed is presumably trying to avoid. Economists are so concerned the central bank might accidentally bump up against the lower bound for reserves in the banking system, that they have come up with a name for the concept: They’re calling it the “lowest comfortable level of reserves.”

    According to this idea, strain in overnight-financing markets should emerge once reserves in the banking system retreat below a certain threshold. This would, in turn, likely force the central bank to scale back or even reverse quantitative tightening immediately, according to several economists.

    In order to avoid such a risk, Jefferies economist Thomas Simons said in a note to clients earlier this month that he expects the Fed will announce plans to start tapering QT after its March meeting.

    Across Wall Street, most economists expect the Fed will begin by tapering the pace at which Treasurys are redeemed from its balance sheet — perhaps cutting it in half to start, from $60 billion a month to $30 billion a month. Reducing the pace at which mortgage-backed securities are running off won’t matter as much until prepayments begin to climb.

    Going even further, economists at Evercore ISI said in a report shared with MarketWatch earlier this week that they expect the tapering to begin around the middle of 2024 and continue potentially through 2025, until the Fed has succeeded in reducing the size of its balance sheet to about $7 trillion.

    The balance sheet presently stands at $7.7 trillion, according to data published by the Fed. It peaked at nearly $9 trillion in April 2022.

    However, one key issue may complicate the Fed’s efforts to ascertain the “LCLoR.” According to Jefferies’ Simons, the amount of banking-system reserves counted as liabilities on the Fed’s balance sheet has been more or less steady since the Fed started its latest round of balance-sheet tapering. It stood at roughly $3.3 trillion recently, according to Fed data cited by Jefferies.

    Why stop at $7 trillion if bank reserves haven’t been all that heavily impacted by QT anyway? It’s probably worth noting that, whatever happens, nobody on Wall Street expects the Fed would attempt to shrink the size of its balance sheet back toward pre-crisis levels, when the amount of bonds on its balance sheet was miniscule compared to today.

    Why? Because there is simply too much debt sloshing around the global financial system to justify such a withdrawal of support, according to Steven Ricchiuto, chief economist at Mizuho Americas.

    “The Fed is not in a position to remove all that extra liquidity because now the system needs it just to function,” Ricchiuto said.

    What does this mean for markets?

    Because quantitative tightening is a hawkish policy stance, its rolling back should be bullish for stocks and bonds. But there are other considerations that could impact the outcome, market strategists said.

    Not only would a reduction in the pace of the Fed’s monthly runoff introduce a fresh dovish tilt to the Fed’s monetary policy, but by reducing the amount of bonds it allows to roll off its balance sheet every month, the Fed would become more active in the Treasury market, said James St. Aubin, chief investment officer at Sierra Investment Management, during an interview.

    There are also a few contextual factors that could impact how the equity market reacts. For example, as St. Aubin pointed out, context is equally as important as the nature of the decision itself. Should the Fed decide to end QT abruptly because the U.S. economy is sliding into a recession, then the decision could hurt stocks.

    Another issue, raised by a different market strategist, is the notion that the Fed could decide to start tapering QT in lieu of cutting interest rates — or at least in lieu of cutting them as quickly as investors expect. This could buy the central bank more time to press its battle against inflation while mitigating the risks that it could hurt the economy by keeping policy uncomfortably tight for too long, economists said.

    Ben Jeffery, U.S. interest-rate strategist at BMO, said in a recent note to clients that, based on Logan’s comments from earlier this month, he would lean toward this being the most likely scenario. Additionally, he said, tapering QT could potentially impact the Treasury’s refunding announcement due in May.

    Jeffery calculated that the Fed tapering QT by $20 billion beginning in April would save the Treasury from issuing nearly $250 billion in bonds compared to if the Fed had continued with its balance-sheet runoff apace.

    This should lead to lower Treasury yields, all else being equal. And lower long-dated Treasury yields are typically seen as beneficial for stocks, according to Callie Cox, a U.S. equity strategist at eToro.

    Although, once again, the outcome for markets would likely depend on the specific context.

    “Higher yields probably aren’t a good thing for stock investors these days, but in particular environments, higher yields and less Fed intervention could hint that the economy is healing,” Cox said.

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  • Oaktree Capital calls commercial real estate ‘most acute area of risk’ right now

    Oaktree Capital calls commercial real estate ‘most acute area of risk’ right now

    Distressed-debt giant Oaktree Capital sees big opportunities in credit unfolding over the next few years as a wall of debt comes due.

    Oaktree’s incoming co-chief executives Armen Panossian, head of performing credit, and Bob O’Leary, portfolio manager for global opportunities, see a roughly $13 trillion market that will be ripe for the picking.

    Within that realm is high-yield bonds, BBB-rated bonds, leveraged loans and private credit — four areas of the market that have only mushroomed from their nearly $3 trillion size right before the 2007-2008 global financial crisis.

    “Clearly, the most acute area of risk right now is commercial real estate,” the co-CEOs said in a Wednesday client note. “That’s because the maturity wall is already upon us and it’s not going to abate for several years.”

    More than $1 trillion of commercial real-estate loans are set to come due in 2024 and 2025, according to the Mortgage Bankers Association.

    A retreat in the benchmark 10-year Treasury yield
    BX:TMUBMUSD10Y,
    to about 4.1% on Wednesday from a 5% peak in October, has provided some relief even though many borrowers likely will still struggle to refinance.

    Related: Commercial real estate a top threat to financial system in 2024, U.S. regulators say

    “There’s a need for capital, especially for office properties where there are vacancies, rental growth hasn’t materialized, or the rate of borrowing has gone up materially over the last three years. This capital may or may not be readily available, and for certain types of office properties, it absolutely isn’t available,” the Oaktree team said.

    With that backdrop, the firm expects to dust off its playbook from the financial crisis and acquire portfolios of commercial real-estate loans from banks, but also plans to participate in “credit-risk transfer” deals that help lenders reduce exposure.

    Oaktree also sees opportunities brewing in private credit, as well as in high-yield and leveraged loans, where “several hundred” of the estimated 1,500 companies that have issued such debt are likely “to be just fine” even if defaults rise, they said.

    Another area to watch will be the roughly $26 trillion Treasury market, where Oaktree has some concerns “about where the 10-year Treasury yield goes from here” — given not only the U.S. budget deficit and the deluge of supply that investors face, but also how foreign buyers, once the “largest owners in prior years, may be tapped out.”

    Related: Here are two reasons why the 10-year Treasury yield is back above 4%

    U.S. stocks
    SPX

    DJIA

    COMP
    fell Wednesday after strong retail-sales data for December pointed to a resilient U.S. economy, despite the Federal Reserve having kept its policy rate at a 22-year high since July.

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  • Hang Seng leads selloff for Asia stocks, with 4% slump after China data

    Hang Seng leads selloff for Asia stocks, with 4% slump after China data

    TOKYO (AP) — Asian shares slid Wednesday after a decline overnight on Wall Street and disappointing China growth data, while Tokyo’s main benchmark momentarily hit another 30-year high.

    Japan’s benchmark Nikkei 225
    NIY00,
    -0.95%
    reached a session high of 36,239.22, but reverted lower, last down 0.3% to 35,477. The Nikkei has been hitting new 34-year highs, or the best since February 1990 during the so-called financial bubble. Buying focused on semiconductor-related shares, and a cheap yen helped boost exporter issues.

    Don’t miss: Wall Street firms catch up to Buffett enthusiasm on Japan as Nikkei keeps hitting records

    Hong Kong’s Hang Seng
    HK:HSCI
    tumbled 4% to 15,220.72, with losses building after data showed China hitting its economic growth target of 5.2% for 2023, surpassing government expectations, but short of the 5.3% some analysts expected. The Shanghai Composite
    CN:SHCOMP
    shed 2% to 2,833.62.

    Read on: China hit its economic-growth target without ‘massive stimulus,’ boasts Premier Li Qiang

    Australia’s S&P/ASX 200
    AU:ASX10000
    slipped 0.2% to 7,401.30. South Korea’s Kospi
    KR:180721
    dropped 2.4% to 2,435.90.

    Investors were keeping their eyes on upcoming earnings reports, as well as potential moves by the world’s central banks, to gauge their next moves.
    Wall Street slipped in a lackluster return to trading following a three-day holiday weekend.

    See: What’s next for stocks as ‘tired’ market stalls in 2024 ahead of closely watched retail sales

    The S&P 500
    SPX
    fell 17.85 points, or 0.4%, to 4,765.98. The Dow Jones Industrial Average
    DJIA
    dropped 231.86, or 0.6%, to 37,361.12, and the Nasdaq
    COMP
    sank 28.41, or 0.2%, to 14,944.35.

    Spirit Airlines
    SAVE,
    -47.09%
    lost 47.1% after a U.S. judge blocked its takeover by JetBlue Airways
    JBLU,
    +4.91%
    on concerns it would mean higher airfares for flyers. JetBlue rose 4.9%.

    Stocks of banks were mixed, meanwhile, as earnings reporting season ramps up for the final three months of 2023. Morgan Stanley
    MS,
    -4.16%
    sank 4.2% after it said a legal matter and a special assessment knocked $535 million off its pretax earnings, while Goldman Sachs
    GS,
    +0.71%
    edged 0.7% higher after reporting results that topped Wall Street’s forecasts.

    Companies across the S&P 500 are likely to report meager growth in profits for the fourth quarter from a year earlier, if any, if Wall Street analysts’ forecasts are to be believed. Earnings have been under pressure for more than a year because of rising costs amid high inflation.

    But optimism is higher for 2024, where analysts are forecasting a strong 11.8% growth in earnings per share for S&P 500 companies, according to FactSet. That, plus expectations for several cuts to interest rates by the Federal Reserve this year, have helped the S&P 500 rally to 10 winning weeks in the last 11. The index remains within 0.6% of its all-time high set two years ago.

    Treasury yields
    BX:TMUBMUSD10Y
    have already sunk on expectations for upcoming cuts to interest rates, which traders believe could begin as early as March. It’s a sharp turnaround from the past couple years, when the Federal Reserve was hiking rates drastically in hopes of getting high inflation under control.

    The Tell: No rate cuts in 2024? Why investors should think about the ‘unthinkable.’

    Easier rates and yields relax the pressure on the economy and financial system, while also boosting prices for investments. And for the past six months, interest rates have been the main force moving the stock market, according to Michael Wilson, strategist at Morgan Stanley.

    He sees that dynamic continuing in the near term, with the “bond market still in charge.”

    For now, traders are penciling in many more cuts to rates through 2024 than the Fed itself has indicated. That raises the potential for big market swings around each speech by a Fed official or economic report.

    Yields rose in the bond market after Fed governor Christopher Waller said in a speech that “policy is set properly” on interest rates. Following the speech, traders pushed some bets for the Fed’s first cut to rates to happen in May instead of March.

    On Wall Street, Boeing fell to one of the market’s sharper losses as worries continue about troubles for its 737 Max 9 aircraft following the recent in-flight blowout of an Alaska Air
    ALK,
    -2.13%
    jet. Boeing
    BA,
    -7.89%
    lost 7.9%.

    In energy trading, benchmark U.S. crude
    CL00,
    -1.55%
    lost 90 cents to $71.75 a barrel. Brent crude
    BRN00,
    -1.37%    ,
    the international standard, fell 78 cents to $77.68 a barrel.

    In currency trading, the U.S. dollar
    USDJPY,
    +0.44%
    rose to 147.90 Japanese yen from 147.09 yen. The euro
    EURUSD,
    -0.10%
    cost $1.0868, down from $1.0880.

    MarketWatch contributed to this report

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  • Beware ‘pricey’ stocks as inflation may ‘roller-coaster back up,’ says BlackRock

    Beware ‘pricey’ stocks as inflation may ‘roller-coaster back up,’ says BlackRock

    U.S. stocks appear on course for “another year of flip-flopping market narratives” as falling inflation may “roller-coaster back up” and rattle investor expectations for a “soft landing,” according to BlackRock. 

    “Market jitters in early January suggest there is some anxiety about macro risks further out,”  said BlackRock Investment Institute strategists in a note Tuesday. “We stay selective as we expect resurgent inflation to come into view.” 

    The strategists also pointed to “pricey valuations” in the U.S. stock market.

    Markets have favored a small group of seven megacap stocks “for their ability to leverage artificial intelligence,” they said. Those stocks’ price-to-earnings ratios for the next 12 months are “about a third higher than for the S&P 500 and when excluding them,” a chart in their note shows.

    BLACKROCK INVESTMENT INSTITUTE NOTE DATED JAN. 16, 2024

    Price-to-earnings ratios, which “divide a company’s share price by its earnings per share,” fell in the second half of 2023 as stronger earnings expectations supported the megacap rally, the BlackRock strategists said. The so-called Magnificent Seven, as those market-leading megacap tech stocks are known, skyrocketed last year, fueling the S&P 500 index’s 24% surge.

    “Even after the market-wide rally in December, market concentration in a handful of megacaps — firms with ultra-large market capitalizations — remains high,” the strategists said.

    The seven companies with massive market values — Apple Inc.
    AAPL,
    -1.24%    ,
    Microsoft Corp.
    MSFT,
    +0.49%    ,
    Google parent Alphabet Inc.
    GOOGL,
    -0.11%

    GOOG,
    -0.11%    ,
    Amazon.com Inc.
    AMZN,
    -0.94%    ,
    Nvidia Corp.
    NVDA,
    +3.09%    ,
    Facebook parent Meta Platforms Inc.
    META,
    -1.88%
    and Tesla Inc.
    TSLA,
    +0.49%
    — have an outsized weighting in the S&P 500.

    Chip maker Nvidia was among the best-performing stocks in the S&P 500 in afternoon trading on Tuesday, with a sharp gain of 2.7% at last check, according to FactSet data. By contrast, the broad S&P 500  index
    SPX
    was down 0.7% on Tuesday afternoon, while the Dow Jones Industrial Average
    DJIA
    and technology-heavy Nasdaq Composite
    COMP
    were also declining.

    Read: What’s next for stocks as ‘tired’ market stalls in 2024 ahead of closely watched retail sales

    Potential catalysts

    “We find valuations tend to matter more for long-term rather than near-term stock returns, and that’s why they usually aren’t enough to spoil market sentiment without a catalyst,” the BlackRock strategists wrote.

    “Earnings could be a catalyst,” as well as inflation, they said.

    Consensus expectations for earnings growth rose last year, with forecasts now calling for an increase of as much as 11% in the next 12 months, their note says, citing LSEG data.

    BlackRock expects that U.S. inflation will this year subside to near the Federal Reserve’s 2% target. For now, that may support the soft-landing scenario the stock market and Fed have “largely embraced,” in which the U.S. may avoid a recession as inflation falls to that desired target, according to the strategists.

    Many investors expect the Fed may start cutting interest rates this year as inflation eases, after the central bank hiked rates aggressively in a bid to tame it.

    “The problem: Inflation won’t remain at that target, in our view, and this risk becoming clearer could challenge upbeat sentiment,” the BlackRock strategists said. “So we monitor earnings season for any signs of cracks given pricey valuations.”

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  • Why Donald Trump is unlikely to get his wish for a 2024 U.S. stock-market crash

    Why Donald Trump is unlikely to get his wish for a 2024 U.S. stock-market crash

    Donald Trump is unlikely to get his wish that a U.S. stock-market crash occurs this year.

    I’m referring to the former U.S. president’s comments last week that he hopes the market crashes in 2024, since if he is elected in November and takes office a year from now, he doesn’t want to be another Herbert Hoover. Hoover was President when the stock market crashed in 1929.

    The stock market did plunge in two of the last four presidential-election years, so it’s understandable why one would worry that 2024 could see a repeat. In 2008, in the middle of the Global Financial Crisis, the S&P 500
    SPX
    lost 38.5% for the year. In 2020, as the economy ground to a halt because of the COVID-19 pandemic, the S&P 500 lost 34% in little more than a month’s time.

    It’s possible that a crash could occur at any time, of course, so a crash this year can’t be ruled out. Nevertheless, the odds of one occurring this year are significantly below average. That’s according to the latest “State Street US Froth Forecasts,” which are derived from research on crashes conducted by Robin Greenwood, Professor of Banking and Finance at Harvard Business School.

    In that research, Greenwood and his co-authors found that it’s possible to identify when there is an elevated probability of a crash. In an interview, Greenwood said that “crash probabilities are low” right now, not only for the market as a whole but “across the board” for individual market sectors as well.

    Greenwood’s model is based on a number of factors, such as performance over the trailing two-year period, volatility, share turnover, IPO activity and the price path of the trailing two-year runup. For example, he and his fellow researchers found that when an industry beats the market by 150 or more percentage points over a two-year period, there’s an 80% probability that it will crash — which they define as a drop of at least 40% over the subsequent two years. As you can see from the accompanying chart, State Street is reporting low crash probabilities for all sectors — in each case well below the average forecasted crash probabilities of the past five years.

    These probabilities don’t mean that stocks will have a great year in 2024. A new bear market could begin this year without the decline satisfying the researchers’ definition of a crash.

    Nevertheless, the takeaway from the State Street US Froth Forecasts is that there are bigger things to worry about this year than the possibility of a crash.

    Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

    More: Trump says he hopes market crashes in 2024 under Biden: ‘I don’t want to be Herbert Hoover

    Also read: Iowa caucuses are make-or-break for Donald Trump

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  • U.K. police arrest six people in plan to disrupt London Stock Exchange

    U.K. police arrest six people in plan to disrupt London Stock Exchange

    Six people are in custody on Sunday as Metropolitan Police detectives investigate a plot to disrupt the London Stock Exchange, authorities said.

    The police said the arrests were made in Brighton, Liverpool, and London.

    In a statement, the Metropolitan Police in the U.K. said the allegations are that activists from the Palestine Action group were intending to target the LSE on Monday, “causing damage and ‘locking on’ in an effort to prevent the building opening for trading.”

    A representative from the LSE said they had no comment but noted that no trading takes place at London Stock Exchange itself. Equity trading is fully electronic, and there hasn’t been a physical trading floor since 1986.

    A representative from Palestine Action said in an email: “The London Stock Exchange raise billions of pounds for apartheid Israel and trade shares in weapons manufacturers which arm Israel’s genocide of the Palestinian people. Whilst Britain remains complicit in the brutal colonisation of Palestine, our direct action campaign will not be deterred.” 

    The arrests were made earlier Sunday, the police said. The Metropolitan Police added that they are in touch with City of London Police and other forces in the U.K. after a suggestion that this was one part of a planned week of action “to ensure that appropriate resources are in place to deal with any disruption.”

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  • After Bitcoin ETFs, watch for the next most popular crypto to go the same route

    After Bitcoin ETFs, watch for the next most popular crypto to go the same route

    After long-awaited spot bitcoin exchange-traded funds made their debut this week, investors are now weighing the prospects of eventual approval of similar ether ETFs.

    The U.S. Securities and Exchange Commission on Wednesday greenlighted 11 spot bitcoin
    BTCUSD,
    -1.58%
    ETFs for the first time. The products, which made its debut trading on Thursday, logged a relatively strong first day. 

    However, bitcoin fell 6.8% on Friday, leaving it with a 3.2% gain over the past seven days, according to CoinDesk data. It underperformed ether
    ETHUSD,
    +1.82%    ,
    which rose 17.6% over the past seven days while it declined 1.2% on Friday.  

    The news about bitcoin ETFs was mostly priced in, while investors are now looking past it to a potential approval of ether ETFs, analysts said.

    “I see value in having an ETH ETF,” Larry Fink, chief executive at the world’s largest asset manager BlackRock, told CNBC’s Squawk Box on Friday. BlackRock, which just launched its iShares bitcoin Trust
    IBIT,
    in November filed an application for a spot ether ETF.

    “It’s hard to know exactly what the U.S. regulators would do” about ether ETF applications, said Alonso de Gortari, chief economist at Mysten Labs, an internet infrastructure company.

    However, “I would expect that once you open the door, it becomes easier and I think the industry is very excited about it,” de Gortari said. If bitcoin ETFs see an impressive institutional inflow in the coming months, it could make such products more established and set a good precedent for other crypto ETF applications, he said.

    Read: Vanguard’s decision to shun bitcoin ETFs triggers backlash — with some customers moving to crypto-friendly competitors like Fidelity

    Also see: Why the debut of bitcoin ETFs could be bad news for crypto stocks, futures ETFs

    The enormous competition and huge inflows into bitcoin ETFs will only boost investors’ interests in an ether ETF, according to Paul Brody, EY’s global blockchain leader. “There’s no doubt that ETH is the next big market and has immediately become a priority for financial services companies,” Brody said in emailed comments.

    Compared with bitcoin, the Ethereum blockchain offers more utility and has unique advantages, noted Fadi Aboualfa, head of research at digital assets custodian Copper. 

    Sandy Kaul, head of digital asset and industry advisory services at Franklin Templeton, said she eventually expects the arrival of ETFs that track a basket of cryptocurrencies. Such products, instead of those based on single crypto, would dominate the space if they are approved, she said.  

    “Just like the S&P 500 has 500 stocks in it, right? You don’t have just one stock.” Kaul said in a phone interview. The arrival of a bitcoin ETF, is just a “baby step into really beginning to think about the future market structure of crypto,” Kaul added. 

    However, not everyone is that optimistic. Will McDonough, founder and chairman of Corestone Capital, said the approval of an Ethereum ETF has “a long way to go.” 

    SEC chairman Gary Gensler previously said bitcoin was the only cryptocurrency he was prepared to publicly label a commodity, rather than a security. 

    The agency also went after companies that offered crypto staking, which allows investors to earn yields by locking their coins to secure blockchains such as Ethereum. The SEC shut down crypto exchange Kraken’s staking business in the U.S. last year.  

    One possibility is that “companies will be able to offer an ETH ETF, but they will not be allowed to stake that ETH and earn yield,” noted EY’s Brody.

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  • Vanguard Won’t Offer Spot Bitcoin ETFs on Its Platform

    Vanguard Won’t Offer Spot Bitcoin ETFs on Its Platform

    Updated Jan. 11, 2024 3:06 pm ET

    Bitcoin’s trip to Main Street just took a detour.

    Vanguard said Thursday it won’t offer the new spot bitcoin exchange-traded funds on its brokerage platform.

    Copyright ©2024 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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  • Bitcoin ETFs finally approved after a chaotic, ‘embarrassing’ 24 hours for SEC

    Bitcoin ETFs finally approved after a chaotic, ‘embarrassing’ 24 hours for SEC

    On Wednesday, the U.S. Securities and Exchange Commission for the first time greenlighted several exchange-traded funds investing directly in bitcoin.

    But the 24 hours leading up to that approval were chaotic, to say the least.

    The SEC approved the launch of 11 bitcoin
    BTCUSD,
    +0.09%
    ETFs, according to a filing posted on the regulatory agency’s website. The ETFs are due to start trading on Thursday.

    On Tuesday, however, the SEC’s official account on X, formerly known as Twitter, published what the agency described as an “unauthorized” post indicating that it had approved the spot bitcoin ETFs. In reality, the regulator had not approved any such ETFs as of Tuesday and its X account had been “compromised,” SEC Chair Gary Gensler said on the social-media platform. The SEC subsequently deleted the unauthorized post.

    The agency found “there was unauthorized access to and activity on” the its X account by “an unknown party,” an SEC spokesperson said on Tuesday, adding that the “unauthorized access has been terminated” and that the SEC would work with law enforcement to investigate the matter.

    Bitcoin’s price briefly shot 2% higher after the unauthorized tweet went out on Tuesday before soon pulling back.

    Then on Wednesday, shortly before the U.S. stock market closed for the day, the SEC posted an actual approval order of bitcoin ETFs on its website — but the link was soon broken, leading to an “error 404” page. The same filing was later reposted by the SEC. 

    It is unclear why the first link was broken. A SEC spokesperson did not respond to an email seeking comment on the matter.

    The events of the past 24 hours have proven “a bit embarrassing” for the SEC, especially as the agency has stressed that cryptocurrencies are exceptionally risky and vulnerable to market manipulation, according to Greg Magadini, director of derivatives at Amberdata. 

    Despite those warnings, Magadini said he doesn’t expect investors to be deterred from investing in the bitcoin ETFs.

    Bitcoin has actually seen lower volatility on Tuesday and Wednesday than options traders had priced in, Magadini said. The crypto was up about 0.4% over the past 24 hours to around $46,400 on Wednesday evening, according to CoinDesk data.

    Investors have been pricing in $1 to $2 billion of initial flows into the bitcoin ETFs.

    Read: Bitcoin in spotlight as SEC approves new ETFs, ether rallies. Here’s why.

    Steven Lubka, head of private clients and family offices at Swan Bitcoin, echoed Magadini’s point, noting that the hiccups on the way to SEC approval are unlikely to impact investor interest in the funds.

    “Ultimately, the SEC is not the one that launches the ETFs,” Lubka said in a call. “If anything, it shows how much attention is on these ETF products.”

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  • SEC Approves Bitcoin ETFs for Everyday Investors

    SEC Approves Bitcoin ETFs for Everyday Investors

    Updated Jan. 10, 2024 5:56 pm ET

    The U.S. Securities and Exchange Commission voted Wednesday to allow mainstream investors to buy and sell bitcoin as easily as stocks and mutual funds, a decision hailed by the industry as a game changer.

    The SEC decision clears the way for the first U.S. exchange-traded funds that hold bitcoin to be sold to the public. Expectations of U.S. regulatory approval for such funds drove the price of bitcoin to the highest level in about two years. The digital currency fell to just below $46,000 late Wednesday, up from $17,000 in January 2023.

    Copyright ©2024 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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  • U.S. stocks little changed in cautious trading ahead of inflation report, bank earnings

    U.S. stocks little changed in cautious trading ahead of inflation report, bank earnings

    U.S. stock indexes were edging higher on Wednesday with technology stocks looking to extend gains ahead of the December inflation report, which is expected to shed more direct light on when the Federal Reserve could dial back its two-year-long effort to tighten monetary policy and cool the economy.

    How are stock indexes trading

    • The S&P 500
      SPX
      rose 8 points, or 0.2%, to 4,764

    • The Dow Jones Industrial Average
      DJIA
      was up 38 points, or 0.1%, to 37,562

    • The Nasdaq Composite
      COMP
      gained 43 points, or 0.3%, to 14,901.

    On Tuesday, the Dow industrials fell 0.4%, to 37,525, while the S&P 500 declined 0.2%, to 4,757, and the Nasdaq Composite gained less than 0.1%, to 14,858.

    What’s driving markets

    Inflation and its impact on bond markets and the Federal Reserve’s monetary-policy trajectory are the primary focus for markets this week as investors remain on hold ahead of Thursday’s December inflation reading and high-profile corporate earnings reports on Friday, when some of the big banks will kick off the fourth-quarter 2023 earnings season.

    The S&P 500 sits less than 0.7% shy of its record high of 4796.6 touched a little over two years ago, after rallying strongly in the last few months primarily on hopes that easing inflation will allow the Fed to lower interest rates sooner and faster than the markets previously anticipated.

    The yield on the 10-year Treasury
    BX:TMUBMUSD10Y,
    the benchmark for borrowing costs, has fallen from 5% in October to 4.014% on Wednesday.

    But for this bullish narrative to play out, inflation must be seen continuing to fall back to the central bank’s 2% target. That’s why great importance is therefore being placed on the consumer-price index for December, which will be published at 8:30 a.m. Eastern on Thursday.

    See: These traders bet on surprise blip higher in key December inflation reading

    Economists forecast that annual headline CPI inflation inched up to 3.2% last month from 3.1% in November. The core reading, which strips out more volatile items like food and energy, is expected to fall from 4% to 3.8%.

    Adam Phillips, director of portfolio strategy at EP Wealth Advisors, said the CPI report may give investors enough confidence that the disinflation is likely to continue, even if the price levels are “still a very long way from anything that is considered healthy.”

    However, he cautioned that the economy has “certain factors” that are beyond the Fed’s control, such as the volatility in supply chains and growing geopolitical risks, as well as a potential resurgence in inflation, he told MarketWatch via phone on Wednesday.

    “[E]quities have remained broadly range-bound since just before Christmas, with little to push them in either direction,” said Jim Reid, strategist at Deutsche Bank.

    “That might change soon, since we’ve got the U.S. CPI print tomorrow, and then the start of earnings season on Friday, but for now at least, there’s been few headlines for investors to latch onto, just a bit of indigestion after over exuberance before New Year left markets with a little bit of an extended hangover,” Reid added.

    In U.S. economic data, the wholesale inventories declined 0.2% in November, in line with Wall Street expectations, as manufacturers continue to juggle with a fragile economy, according to the Commerce Department.

    New York Fed President John Williams will speak in White Plains, N.Y., at 3:15 p.m. Eastern time.

    Companies in focus

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  • The former bond king, Bill Gross, says 10-year Treasury is ‘overvalued’

    The former bond king, Bill Gross, says 10-year Treasury is ‘overvalued’

    The former bond king doesn’t like the fixed-income security that’s the lynchpin of the financial world.

    Bill Gross, the retired fund manager and co-founder of Pacific Investment Management, took to the social-media service X to say that the 10-year Treasury
    BX:TMUBMUSD10Y
    is “overvalued” with a yield of 4%. Yields move in the opposite direction to prices.

    Through Monday, the yield on the 10-year Treasury has fallen 99 basis points from its late October peak.

    He said the 10-year Treasury inflation-protected yield at 1.80% is the better choice. “If you need to buy bonds. I don’t,” said Gross.

    Gross also continued to talk of his idea to go long 2-year bonds
    BX:TMUBMUSD02Y
    while shorting the 10-year. “Stick with the return to a positive 10 year/2 year yield curve. Earns carry while you wait,” he said. In previous posts, he talked of making such trades via Treasury futures contracts.

    Gross said he was taking a bow for his recommendation of regional bank stocks six months ago and mortgage REITs in December. The SPDR S&P Regional Banking ETF
    KRE
    has climbed 49% from its May 4 low, and the iShares Mortgage Real Estate ETF
    REM
    has gained 21% from its late October low. Gross in November highlighted Annaly Capital Management
    NLY,
    +2.62%
    and AGNC Investment Corp.
    AGNC,
    +3.75%
    as mortgage REITs he likes for 2024.

    Gross said he still likes Capri Holdings
    CPRI,
    -0.39%
    as a merger arbitrage target. Tapestry
    TPR,
    +2.04%
    in August agreed to buy Capri for $57 per share, and on Monday, Capri closed at $50.49.

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  • Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024

    Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024

    Stock investors have gotten off to a wobbly start to the new year, hobbled by shifting expectations on the timing and extent of Federal Reserve interest-rate cuts in 2024.

    All three major U.S. stock indexes snapped a nine-week winning streak on Friday, after unexpectedly strong December job gains prompted traders to briefly pull back on the chances of a March rate cut. The S&P 500
    SPX
    and Nasdaq Composite
    COMP
    also failed to stage a Santa Claus Rally from the five final trading days of 2023 through the first two sessions of 2024, as questions grew about the market’s multiple rate-cuts view.

    It all adds up to a glimpse of what might be in store for investors in the year ahead. Already, the so-called “January effect,” or theory that stocks tend to rise by more now than any other month, could be put to the test by headwinds that include stalling progress on inflation. Inflation’s downward trend in recent months had given traders and investors hope that as many as six or seven quarter-percentage-point rate cuts from the Federal Reserve could be delivered in 2024, starting in March.

    Over the first handful of days in the new year, however, reality has started to sink in. For one thing, multiple rate cuts tend to be more commonly associated with recessions and not soft landings for the economy.

    Moreover, the idea that the Fed could follow through with as many rate cuts as envisioned by traders would significantly increase the probability that policymakers lose their battle against inflation, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets. That’s because six or more rate cuts would loosen financial conditions by too much, and boost the risk of another bout of inflation that forces officials to hike again, he said.

    Minutes of the Fed’s Dec. 12-13 meeting show that policymakers were uncertain about their forecasts for rate cuts this year and failed to rule out the possibility of further rate hikes. Nonetheless, fed funds futures traders continued to cling to expectations for a big decline in borrowing costs, with the greatest likelihood now coalescing around five or six quarter-point rate cuts that total 125 or 150 basis points of easing by year-end. That’s roughly twice as much as what policymakers penciled in last month, when they voted to keep interest rates at a 22-year high of 5.25% to 5.5%.

    Source: CME FedWatch Tool, as of Jan. 5.

    Uncertainty over the path of U.S. interest rates could leave investors flat-footed once again, and damp the optimism that sent all three major stock indexes in 2023 to their best annual performances of the prior two to three years. In November, analysts at Deutsche Bank AG
    DB,
    +0.81%
    counted seven times since 2021 in which markets expected the Fed to make a dovish pivot, only to be wrong.

    Sources: Bloomberg, Deutsche Bank. Chart is as of Nov. 20, 2023.

    Financial markets have been operating with “sky-high expectations” for 2024 rate cuts, but the only way to substantiate six cuts this year is with an “abrupt and sharp downturn in the economy,” said Todd Thompson, managing director and portfolio co-manager at Reams Asset Management in Indianapolis, which oversees $27 billion.

    Heading into 2024, euphoria over the prospect of lower borrowing costs produced what Thompson calls “an alarming, everything rally,” which he says leaves equities and high-yield corporate debt vulnerable to pullbacks between now and the next six months. Beyond that period, however, “the trend is likely to be lower rates as the economy finally succumbs to tightening conditions at the same time inflation continues to recede.”

    The coming week brings the next major U.S. inflation update, with December’s consumer price index report released on Thursday. The annual headline rate of inflation from CPI has slowed to 3.1% in November from a peak of 9.1% in June 2022. In addition, the core rate from the Fed’s favorite inflation gauge, known as the PCE, has eased to 3.2% year-on-year in November from a 4.2% annual rate in July.

    The Fed needs to keep interest rates higher because of all the uncertainty around inflation’s most likely path forward, and the U.S. labor market “won’t degrade fast enough in the first quarter to justify a first rate cut in March,” according to Sanders of Madison Investments.

    Rate-cut expectations are “going to be the issue for 2024, and a lot of it is going to be revolving around inflation getting back to that 2% target,” Sanders said via phone. “We think somewhere between 75 and 125 basis points of rate cuts make sense, and that the first move is more of a June-type of event. We don’t think it makes sense to have a March rate cut unless the labor market falls off a cliff.”

    History shows that Treasury yields tend to fall in the months leading up to the first rate cut of a Fed easing cycle. However, that isn’t happening right now. Yields on government debt have been on an upward trend since the end of December, with 2-
    BX:TMUBMUSD02Y,
    10-
    BX:TMUBMUSD10Y,
    and 30-year yields
    BX:TMUBMUSD30Y
    ending Friday at their highest levels in more than two to three weeks.

    See also: What history says about stocks and the bond market ahead of a first Fed rate cut

    While financial markets generally tend to be efficient processors of information, they “haven’t been very accurate in terms of pricing in rate cuts” this time, said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer for LPL Financial. He said the big risk for 2024 is if financial conditions ease too much and the Fed declares victory on inflation too soon, which could reignite price pressures in a manner reminiscent of the 1970s period under former Fed Chairman Arthur Burns.

    “We think rate-cut expectations have gone too far too fast, and that the backup in yields we are seeing right now is the market acknowledging that maybe rate cuts are not going to be as aggressive as what was priced in,” Gillum said via phone.

    December’s CPI report on Thursday is the data highlight of the week ahead.

    On Monday, consumer-credit data for November is set to be released, followed the next day by trade-deficit figures for the same month.

    Wednesday brings the wholesale-inventories report for November and remarks by New York Fed President John Williams.

    Initial weekly jobless claims are released on Thursday. On Friday, the producer price index for December comes out.

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  • AMC extends losing streak to five days, hits another record low close

    AMC extends losing streak to five days, hits another record low close

    AMC Entertainment Holdings Inc. extended its losing streak to five days Friday, with the stock ending the session down 2.5% to $5.15.

    AMC
    AMC,
    -2.45%
    shares are now on their longest losing streak since a seven-day slide that ended on Aug. 29, 2023. The movie-theater chain and onetime meme-stock darling ended Thursday’s session at a then-record-low close of $5.30. AMC was a top trending symbol on Stocktwits, a social platform for investors and traders, at Friday’s open.

    The stock’s previous record closing low had been $6.07, which was set on Dec. 21, 2023, according to Dow Jones Market Data, citing available information dating back to Dec. 18, 2013.

    Related: AMC hits another record-low close, extends losing streak to four days

    The decline in AMC’s share price is a far cry from its meme-stock heyday, when it hit an all-time closing high of $339.05 on June 2, 2021.

    In a regulatory filing Tuesday, AMC said that between Dec. 28 and Dec. 29, 2023, the company entered into a series of privately negotiated exchange agreements to issue nearly 3.26 million shares of Class A common stock in exchange for $22.5 million of its notes due in 2026.  The common stock issued had an implied value of $6.94 per share, according to AMC. “The company may engage in similar transactions in the future but is under no obligation to do so,” AMC said in the filing.

    The move is the latest in AMC’s attempts to tackle its debt burden, which reached more than $5 billion in 2022. That year, AMC launched its APE special dividend, and in 2023 it completed the conversion of the APEs into AMC common stock and a reverse 1-for-10 split of common stock. 

    Related: AMC CEO slams ‘prophets of doom,’ says company is ‘blazing new trails’ as it enters 2024

    In December, AMC also completed its latest at-the-market equity offering, raising approximately $350 million. AMC CEO Adam Aron has repeatedly warned that the company faces liquidity challenges. 

    AMC shares are down 84.8% in the last 12 months, compared with S&P 500 index’s
    SPX
    gain of 20.6%.

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  • Why Red Sea chaos is driving oil buyers ‘into the arms of U.S. shale producers’

    Why Red Sea chaos is driving oil buyers ‘into the arms of U.S. shale producers’

    Attacks by Iran-backed Houthi rebels on vessels in the Red Sea have led to transport disruptions for oil and other goods, but international oil shippers may have found a way to deal with the chaos.

    The latest data from the Energy Information Administration offers a hint to that solution.

    The report from the government agency showed surprisingly large weekly increases in gasoline and distillate supplies, contributing to losses for energy futures on Thursday.

    But Robert Yawger, executive director for energy futures at Mizuho Securities USA, also highlighted another key figure in the data — a weekly jump in U.S. petroleum exports.

    Exports climbed by 1.377 million barrels a day to 5.292 million barrels a day for the week ended Dec. 29, according to the EIA.

    “For the first time since Houthi Yemeni rebels started to attack international shipping in the Red Sea, we are seeing a spike in U.S. exports,” said Yawger, in a Thursday afternoon note.

    The Red Sea chokepoints are critical for international oil and natural-gas flows, according to the EIA.


    U.S. Energy Information Administration

    “Apparently, international shippers are worried about being attacked on the open sea, and are getting beat” on the cost of sailing around the Cape of Good Hope in South Africa as an alternative to the passage through the Red Sea, he said. Instead, the “safer and cheaper way to procure supply, especially for EU customers, is to sail the boat to the U.S. Gulf Coast and load up on cheap U.S. [oil] barrels.”

    See: Houthis launch sea drone to attack ships in Red Sea, hours after U.S. issues ‘final warning’

    U.S. benchmark West Texas Intermediate crude
    CL.1,
    +0.66%

    CLG24,
    +0.66%
    trades at a discount to global benchmark Brent crude
    BRN00,
    +0.45%

    BRNH24,
    +0.45%    .
    On Thursday, the February WTI futures contract settled at $72.19 a barrel on the New York Mercantile Exchange, while March Brent settled at $77.59 on ICE Futures Europe — a difference of $5.40 a barrel.

    That compares with a “cost of carry” for an Amsterdam/Rotterdam/Antwerp refiner of around $4 a barrel, said Yawger. So “forget about the Houthis/Iranian menace in the Red Sea,” he said. “You don’t need a U.S. Navy escort from danger — just a nice, clean two- to- four-week round-trip journey to the U.S.”

    “‘Ironically, the chaos in the Middle East is driving international crude-oil customers into the arms of the U.S. shale producers.’”


    — Robert Yawger, Mizuho

    He expects U.S. petroleum exports to sustain the 5 million plus barrel-per-day level in the coming weeks, with the “geopolitical situation seemingly heating up every day.”

    “Ironically, the chaos in the Middle East is driving international crude-oil customers into the arms of the U.S. shale producers,” said Yawger. “There is a very good chance U.S. exports break the all-time record in coming weeks, just in time for refiners to pull back on the run rate.”

    Weekly U.S. crude-oil exports reached a record 5.629 million barrels a day in the week ended Feb. 24, 2023, based on EIA data going back to February 1991.

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  • Mark Zuckerberg sold $428 million of Meta stock in the last two months of 2023

    Mark Zuckerberg sold $428 million of Meta stock in the last two months of 2023

    Mark Zuckerberg cashed in on his company’s 2023 stock rally in a big way — selling nearly $428 million worth of shares in Meta Platforms Inc. over the final two months of the year.

    The Meta
    META,
    -0.53%
    co-founder and chief executive offloaded just under 1.8 million shares over the course of every trading day between Nov. 1 and the end of last year, according to a regulatory filing with the U.S. Securities and Exchange Commission on Tuesday. 

    The sales were in accordance with a Rule 10b5-1 trading plan adopted by Zuckerberg in July and saw him capitalize on Meta’s rebounding stock price, which soared 194.1% in 2023 — and nearly threefold since it hit a seven-year low in November 2022. By comparison, the S&P 500
    SPX
    and the Nasdaq Composite
    COMP
    indexes gained 24.2% and 43.4%, respectively, in 2023.

    The moves also broke a two-year hiatus, dating back to November 2021, during which Zuckerberg did not sell any of his stock in the Facebook parent company, according to Bloomberg, which first reported the news. Zuckerberg, who owns roughly 13% of Meta, is ranked the seventh-richest person in the world with a net worth of $125 billion, according to the Bloomberg Billionaires Index.

    Nasdaq-listed Meta shares, which fell 0.5% on Wednesday to $344.47, are now roughly 11% off their all-time closing high of $382.18 from September 2021.

    Representatives for Meta could not immediately be reached for comment.

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