US EARLY MORNING: Equity futures and bonds are being heavily sold amid inflation and growth concerns, while geopolitical tensions remain tense

Equities and bonds are pressured. The weekend tenor of news focussed on surging consumer prices and growth risks. Geopolitical tensions are also ramping up. There isn’t much on the calendar for today, so these themes will continue to be in focus ahead of a huge week for central bank events. 

SNAPSHOT: US equity futures are tilting further to the downside, with concerns about inflation and growth at the forefront, ahead of a huge week of central bank events (YM -2.0%, ES -2.6%, RTY -2.7%, NQ -3.3%). Treasuries are bear-flattening, continuing the sell-off, with yields up by between 6-18bps across the curve, with most of this underperformance being felt in the short-end. The 2s10s part of the curve inverted again this morning, which many have argued is a signal of a future recession. 

COMMENT: It has been a grim weekend of news on almost every front. While incremental updates have been minimal, reports in wake of the hot US CPI data for May note that prices pressures are prevalent almost everywhere (except lumber, which is being smashed by diminished housing demand), the housing market faces risks of a sharp downturn, US gasoline prices are picking up to new highs as the driving season gets underway. Geopolitics continues to remain tense, with China’s language around Taiwan becoming increasingly bellicose, Ukraine is potentially facing a shortage of ammunition amid fears that Russia could take control of the entire Luhansk region within a few weeks. Let’s not forget COVID: while most of the world is moving on (and the demand recovery is stoking prices in travel and leisure sectors), China’s Beijing city is undergoing “ferocious” testing amid outbreaks – China has been trigger-happy with shutting regions down amid outbreaks, leaving downside risks to already lowered growth expectations for the country, which in turn has the potential to weigh on global activity too. Domestically, these themes are taking their toll on the administration; the NYT says that dozens of frustrated Democrats are expressing doubts about President Biden’s ability to rescue his party and take the fight to Republicans, and The Hill reports that Democrats could be on track to experience a historic rout worse than 1994 or 2010 at the upcoming midterm elections in November.

EQUITY VALUATIONS: In terms of the knock-on for stocks, Morgan Stanley strategist Wilson, whose bearish S&P 500 PT of 3,400 has recently been garnering much attention, argues that growth risks are still not fully priced in. Wilson says that at year-end 2021, equity risk premiums were not reflecting rising risks to growth this year that it was expecting, and now ERP even lower (it estimates it is around 295bps currently, which is 75bps below its estimate) of fair value. "Given the growing evidence of slowing growth and the risk to earnings, that estimate could even rise further," Wilson warns, and again reiterates that the S&P 500 is headed toward 3,400 before a more tradable low is in. "With growth now the main risk to stocks, our focus remains on names that can deliver on earnings in a very difficult environment for many companies to navigate," he says, "in short, it is still the year of the stock picker as the index remains challenged." MS continues to like classic late-cycle winners, like defensives and energy, as well as companies with high operational efficiency.

DAY AHEAD: The week ahead is packed with key central banking events, the standout being the Wednesday FOMC; the base case is for a hike of +50bps, although risks of +75bps move cannot be ruled out given signs that the Fed action thus far has not managed to contain runaway inflation, according to Barclays. Some also suggest that the Fed could start to talk about outright selling of MBS holdings in an effort to accelerate the balance sheet wind down and tighten financial conditions. That said, others warn that this might be detrimental to the Fed’s forward guidance and could damage its ability to signal upcoming policy tweaks (given it would be revising its recently issued guidance so soon) at a time that many already accuse the central bank of losing control of inflation and acting too slowly to manage surging prices. The day ahead is thin in terms of scheduled US events, but the themes noted above will likely be over-discussed, keeping the conversation about surging consumer prices, growth risks, and potential hawkish policy reaction all at the forefront. In equities, Oracle (ORCL) releases numbers after the bell. Day ahead calendar here, and our week ahead preview can be accessed here.

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13 Jun 2022 - 09:38- EquitiesData- Source: Newsquawk

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