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European equity close: Moderate selling weighs on stocks

  
Analysis, Global Indices
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Closing changes for the main European bourses:

  • UK FTSE 100 -0.3%
  • German DAX 0.4%
  • Italy MIB +0.2%
  • French CAC -0.4%
  • Spain IBEX +0.4%
The periphery did better today. In Spain stocks opened much lower but recouped the losses quickly and then finished at he highs of the day. The IBEX daily chart continues to consolidate but that’s a nice rejection of the lower trendline.
Closing changes for the main European bourses:

North Korea appears to have resumed operation of its plutonium-producing reactor

  
Analysis, Politics
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Producing plutonium will allow the country to expand its arsenal of nuclear weapons.

Wall Street Journal report on findings of the UN Atomic Agency:
  • “Since early July, there have been indications, including the discharge of cooling water, consistent with the operation of the reactor,” said the report by the International Atomic Energy Agency.
  • and there are indications that North Korea is also using a nearby laboratory to separate plutonium from spent fuel previously removed from the reactor.
The agency described the twin developments as “deeply troubling” and a clear violation of United Nations Security Council resolutions.
North Korea’s plutonium-producing reactor is at Yongbyon
  • appeared to have been inactive from December 2018 until the beginning of July 2021
Producing plutonium will allow the country to expand its arsenal of nuclear weapons. 

The bond market wakes up. US 10-year yields hit the highest since Aug 13

  
  Analysis
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Taper back on the table?

Taper back on the table?
There’s a sweet spot for many markets where delta pushed back the taper but the economy remains solid and rates stay low.
Of course, that’s an impossible paradigm to hold. Yes, Powell probably won’t signal a taper this week but beyond that either delta will meaningfully hurt the global economy or delta will fade and the case for tapering will return.
At the moment, the bond market appears to be hinting at a fade in delta and rising odds of a September taper. Overall, I suspect this is more about delta and confidence this round of cases will fade quickly but I see the Fed argument too.
From where I stand, Powell’s best course of action is to preserve some optionality into the Sept meeting but emphasize that the Fed will do everything it can to support the recovery. Ultimately, a November taper hint and December announcement makes the most sense.
Despite the uptick in rates, the bond market certainly isn’t seeing any inflation.

US President Biden says he will not be telling the Federal Reserve what to do

  
  Analysis
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US President Biden says he has not spoken with Fed Chair Powell

  • “I’m not going to do the kinds of things that have been done in the last administration, either talking to AG…or the Fed telling them what they should and shouldn’t do”
  • “The Federal Reserve is an independent operation.”
The end of an era …   🙁
US President Biden says he has not spoken with Fed Chair Powell

Fed’s Barkin says the dot plot is not FOMC policy

  
  Analysis
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Barkin is the president and CEO of the Federal Reserve Bank of Richmond, he has some comments crossing on the wires.

Speaking in a Bloomberg TV interview.

 

  • you want yields to respond to what happening in the economy
  • yields reflecting good news on vaccines, fiscal aid
  • really hopeful that we’re at the back end of pandemic
  • the Fed’s interest-rate dot plot is not Federal Open Market Committee policy
  • Fed has tools to handle unwanted inflation
  • inflation is not a one-year phenomenon, it’s multi-year
  • expect to see price pressures in 2021
  • expect strong demand, met by some supply-chain issues
  • the US economy will have strong spring and summer
Re that headline I put in the, headline …. the dot plot is part of the Fed’s forward guidance. Barkin’s comments are in line with other comments from Fed officials, they are toeing the party line since Chair Powell laid down the law and told them all to shut up about tapering a month or so back.

 

Barkin is the president and CEO of the Federal Reserve Bank of Richmond, he has some comments crossing on the wires. 

US Q4 GDP (second reading) +4.1% vs +4.2% expected

  
  Analysis
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Fourth quarter 2020 GDP estimate

US Q4 GDP (second reading) chart
  • First reading was +4.0%
  • Final Q3 reading was +33.4%
  • Personal consumption +2.4% vs +2.5% expected
  • GDP price index +2.1% vs +2.0% expected
  • Core PCE +1.4% vs +1.4% expected
  • Deflator +2.0%
  • Full report
Details:

  • Ex motor vehicles +4.7% vs +4.5% prelim
  • Final sales +3.0% vs +3.0% prelim
  • Inventories added 1.11 pp to GDP vs 1.04 in prelim report
  • Business investment +14.0% vs +13.8% prelim
  • Business investment in equipment +25.7% vs +24.9% prelim
  • Exports +21.8% vs +22.0% prelim
  • Imports +29.6% vs +29.5% prelim
  • Home investment +35.8% vs +33.5% prelim
The consumer was a tad weaker in Q4 than initial reports while business and home investment was a bit stronger. Overall, I don’t see anything here that will bleed into Q1 2021.

Germany bans travel entry from UK, Brazil, South Africa, Portugal, Ireland over coronavirus variants

  
Analysis, COVID-19
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The travel ban will stay in effect until 17 February at least

Germany
ICYMI, the restriction has gone into effect yesterday and covers land, air, and sea travel into the country, according to local media citing the German interior ministry.
The exceptions to the restriction is only for Germans living in those countries, those who have residency in Germany, and passengers in transit or the movement of goods.
Even the UK government travel advisory has been updated as such:

“The German government has restricted air and sea travel to Germany at its external Schengen borders. Travellers from the UK are currently only permitted to enter Germany if they are returning to their place of residence, if they serve in an important role or if they have an urgent need, such as urgent medical treatment.”

Generally speaking, if more countries in the EU adopt similar restrictions, it isn’t quite a good look on how virus developments are playing out in Q1. And that also adds another negative point to the list for risk sentiment.

US 10-year yields reject the break of 1%

  
  Analysis
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Yields quickly move back higher

Yields quickly move back higher
The chart of 10-year yields is an interesting one. There was the consolidation pattern at the top that broke down this week but now it has rejected the first test of 1% and bounced 6 bps to 1.06%.
It’s now testing the bottom of the old range and we’ll soon find out of there will be a broader range of consolidation or it will range from 1.00%-1.06%.
Notably, the bond market was a step ahead of stocks this week and that break lower came well ahead of the rout in equities yesterday. There has been a great pass-through to FX, but keep an eye on yields from here.

FOMC – Powell will err on the side of removing accommodation too slowly rather than too quickly #AnirudhSethi

  
  Analysis
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The Federal Open Market Committee statement and Powell’s press conference on Wednesday US time were both non-eventful.

Responses are coming in, this a quick summary on what Oxford Economics have to say:
Powell signalled the FOMC would rather risk erring on the side of removing accommodation too slowly then removing it too rapidly, for several reasons:
  • heightened uncertainty around the pandemic remains
  • the economy and labour market are far from full recovery
  • new policy framework is asymmetrically dovish
  • policymakers want to avoid ‘taper tantrum’ that would send long-term rates higher

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Oxford Economics forecast is for a ‘gradual’ QE taper to being in 2022. but by the end of that year, the Fed’s open market account will remain very elevated.
The Federal Open Market Committee statement and Powell's press conference on Wednesday US time were both non-eventful.

Elon Musk is now the world’s richest person

  
  Analysis
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Elon Musk passes Jeff Bezos

Elon Musk passes Jeff Bezos
Shares of Tesla are up another 4.2% today and with that, Tesla CEO Elon Musk has passed Jeff Bezos to become the world’s richest person, according to Bloomberg calculations. His net worth is $188 billion dollars, about $1.5 billion more than Bezos.
In the past 12 months, Musk’s net worth has risen by more than $150 billion on a 750% rise in Tesla’s share price. He owns 20% of the company but also holds options that are now worth $42 billion.
The Tesla chart is breathtaking
Tesla musk
Tesla is now the world’s sixth-largest company.
It’s not just Musk, the 500 richest people in the world added 31% to their wealth last year, according to Bloomberg.
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