Semis 'n software intrigue Nuveen
Main U.S. stock indexes all down >1%
All S&P 500 sectors lower: staples weakest group
Dollar ~flat; gold, crude, bitcoin decline
U.S. 10-Year Treasury yield slides to ~3.40%
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SEMIS 'N SOFTWARE INTRIGUE NUVEEN (1315 EST/1815 GMT)
Revenues and margins may be the most important metrics to focus on as 2023 progresses. At least that's how Saira Malik, chief investment officer at Nuveen, sees it.
To this end, in the near term, Malik is maintaining the mantra that the best offense is a good defense when it comes to equity allocations.
"Further out, we think a likely pause in the Fed's interest rate hikes at some point in the first half of 2023 could serve as a catalyst for equity sectors that have struggled the most during the rising rate cycle."
According to Malik, certain subsectors within tech, namely semiconductors and software, may offer particularly intriguing opportunities. In fact, she believes this month could bring the final round of lowered earnings growth estimates for semis.
As for software companies, she notes that cash flows are driven more by enterprise than by the consumer, and enterprise contracts tend to have more consistent recurring revenues. Therefore, she thinks select software names could serve as a source of quality growth within an equity allocation.
Malik also finds public real estate to be attractive. Nuveen favors apartment REITs, which can benefit from revenue growth as elevated interest rates lead more people to rent rather than buy homes.
Additionally, she says that apartment REITs are more insulated from weakness in the broader global economy, "as 80% of their trailing 12-month revenue is derived from the U.S."
Malik continues to prefer U.S. equities versus their non-U.S. counterparts, and she's much less constructive on the consumer discretionary sector.
Headwinds for this sector include slowing economic growth and a sharp drop in the personal savings rate to levels not seen since the global financial crisis, as inflation eats into disposable incomes.
"Although we don't forecast a severe recession, we do expect consumer spending on non-essentials to come down meaningfully in the first half of this year."
RETAIL TRADERS BET NETFLIX TO DELIVER EARNINGS BLOCKBUSTER (1300 ET/1800 GMT)
Last year was not kind to stay-at-home darling Netflix Inc NFLX.O and its investors.
But the November roll-out of the streaming giant's ad-supported plan and a content slate that's the envy of rivals has made retail traders take stock of Netflix ahead quarterly earnings on Thursday.
Trading sentiment on Netflix was 89% long on Wednesday, as per retail trading platform Capital.com. That's a big jump from December, when only 66% of traders had long positions. It is also the highest in at least more than a year.
While a turbulent economy and saturating streaming market have dimmed the industry's prospects, some analysts believe that Netflix is poised to be "that one constant" in households among a flurry of streaming video platforms.
Others argue that expectations are now so low that an earnings beat is on the cards.
"The bar has been set pretty low for this earnings season so it's likely that we see a good amount of positive surprises that will engage positive momentum in the market," said Daniela Hathorn, senior market analyst at Capital.com.
Investors seem to agree. Netlfix's stock has risen 10% this year, after more than halving in a dismal 2022 for tech stocks.
DON'T BANK ON CENTRAL BANKS FOR A RESCUE -BLACKROCK (1225 ET/1725 GMT)
Stock investors in the U.S. and Europe are optimistic that the Federal Reserve and the European Central Bank (ECB) will ease their grip on monetary policy this year after the big hit equitiestook in 2022.
However, BlackRock, the world's largest asset manager, does not see either of the twocentral banks coming to the economy's rescue by cutting rates as many in the market believe, even if inflation falls faster than expected.
"They are the ones actively crushing activity to bring down inflation and they would not want to put that good work to risk by cutting too soon," said BlackRock researchers in a note.
BlackRock expects both the Fed and the ECB to continue raising rates until the resulting economic damage is clear. This, it says, would mean continuous rate hikes in early 2023, to above 5% in the U.S. and above 3% in the euro zone, and then a halt.
The researchers at BlackRock added that if the central banks want to get inflation all the way down to the 2% target, they would need to go further, triggering a deeper recession than the one currently unfolding.
But they will not do so, and rather prefer to live with the inflation lingering above their target than cause additional economic damage, the researchers said.
HUMP-DAY DATA DUMP: RETAIL SALES, PPI, ETC, ETC (1217 EST/1717 GMT)
A cascade of economic data on Wednesday buried market participants under a mountain of evidence that the Fed's restrictive policy rate is working its magic; demand would appear to be cooling, dragging inflation down with it.
Receipts at U.S. retailers USRSL=ECI dropped in December by 1.1%, steeper than the -0.8% consensus and extending November's downwardly revised 0.6% drop, a worrisome one-two punch amid the crucial holiday shopping season.
On a granular level, the Commerce Department's report showed broad-based weakness. The 4.6% decline at filling stations was to be expected as gas prices dropped, but the 6.6% plunge at department stores and a 1.1% slide in non-store (which includes e-commerce) were eye-poppers.
Core retail sales, which excludes autos, gasoline, building supplies and food services, and closely corresponds with the personal consumption element of GDP, also fell more than expected, dropping 0.7%, an acceleration from the previous month's 0.2% dip.
"The consumer is feeling the weight of slow wage growth and nagging price pressures," writes Jeffrey Roach, chief economist at LPL Financial. "Weak retail sales in December shows consumers are likely retrenching during a time of economic uncertainty."
Speaking of which, the prices U.S. companies get for their goods and services at the proverbial factory door cooled more than economists predicted last month.
The Labor Department's producer prices report (PPI) USPPFD=ECI showed a headline monthly decline of 0.5%, a stronger pullback than the nominal -0.1% forecast, resulting in a year-over-year print of 6.2% - a whopping 1.1 percentage points cooler than November.
"Much of latest decline can be attributed to the volatile final demand for energy, tempering some of the positive news," says Matthew Martin, U.S. economist at Oxford Economics. "We do not expect outright year-over-year declines to the headline index in 2023, but the annual rate should fall below the 2% mark by the end of the second quarter."
Core PPI, which strips away volatile food, energy and trade services, landed at 4.6% year-over-year, 0.3 ppts cooler than the previous month.
The report adds further certainty that the economy is on the post-peak side of the inflationary cycle. But the graphic below shows how far the major indicators have to fall before approaching Powell & Co's average annual 2% inflation target:
Moving on to the manufacturing sector, the industrial output USIP=ECI contracted by 0.7% last month, plunging past the slight 0.1% pullback analysts expected and building on the steeper-than-previously-stated 0.6% decline in November, according to the Federal Reserve.
Further, capacity utilization USCAPU=ECI - a measure of economic slack - dropped by a significant 0.6 ppts to 78.8, or 0.8 ppts to the south of consensus.
"The bigger picture here is that the downward trend in manufacturing output growth has accelerated sharply in recent months, bringing it closer into line with the survey data, which point to further weakness ahead," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Pivoting to the housing market, while the sector has been the source of much doom and gloom in recent months, on Wednesday it provided a rare and unexpected ray of sunlight.
First, the National Association of Homebuilders (NAHB) showed builder sentiment USNAHB=ECI unexpectedly growing less gloomy this month, coming in at 35 from 31.
Still, an NAHB print below 50 indicates pessimism in the sector.
"It appears a turning point for housing lies ahead," writes Robert Dietz, chief economist at NAHB. "In the coming quarters, single-family home building will rise off of cycle lows as mortgage rates are expected to trend lower and boost housing affordability."
Glad you mentioned mortgage rates, Mr. Dietz, because a 19 basis point drop in the average 30-year fixed contract rate USMG=ECI prompted a whopping 27.9% jump in applications for home loans last week, according to the Mortgage Bankers Association (MBA).
"Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall," notes Mike Fratantoni, chief economist at MBA. "As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers."
Even so, total mortgage demand is still 59.8% below the same week last year:
Finally, the Commerce Department's business inventories report for November USBINV=ECI bucked the trend by delivering exactly what economists projected, growing by 0.4%.
This is the 19th consecutive monthly increase, which suggests easing of supply chain headwinds combined with softening demand, both of which hint at headway in the Fed's attempt to cool the economy down.
Wall Street reversed initial gains as investors digested the data, as the soft data appeared to fuel recession worries.
But while the sell-off was broad, the transports index .DJT, considered a barometer of economic health, is providing a rare glimpse of green.
ESG INVESTORS KEEP A STERN BLIND-EYE TO ENERGY - BERNSTEIN (1055 EST/1555 GMT)
Environmental, social and governance (ESG) investors did not jump into the energy rally bandwagon in 2022 despite the sector's outperformance and kept up with their "exclusion policy" for the fossil fuel ESG funds, Bernstein says.
ESG investors have not loosened their exclusion policy over the past year while 12% of them have strengthened their exclusion lists, according to the brokerage's propreitary survey from a pool of more than 50 institutional investors.
"We don’t expect the exclusionary approach to go out of favor anytime soon, especially as most investors have adopted an exclusion policy for non-financial reasons," Bernstein says.
Investors pulled more money from funds marketed as "sustainable" than they added for the first time in more than a decade in 2022, hit by fallout from the Ukraine war, tumbling financial markets and a political backlash against the industry.
The funds, which reflect a range of environmental, social and governance (ESG) issues, are also set to lag the performance of non-ESG funds for the first time in five years, data shows, after the fossil fuel shares they typically shun soared.
While shunning energy, funds with global mandates continue to overweight industries along the clean energy value chain like electrical equipment and machinery, the brokerage says.
ESG funds globally continued to be "underweight" oil and gas relative to benchmarks as of the third quarter in 2022. Funds with global and Asian mandates became less "underweight" on oil and gas during the quarter, while European and North American ESG investors became slightly more "underweight."
GLIMMER OF HOPE FOR EUROPEAN EQUITIES IN 2023 (1022 ET/1523 GMT)
European equities are finally seeing some light at the end of the tunnel, considering China's reopening and a lesser stagflation shock in Europe limiting the downside risks to corporate earnings, analysts at Barclays say.
Energy services and utilities are set for another strong quarter, while insurance and banks are also poised for a decent one on the back of higher rates, according to Barclays' outlook.
Cyclical plays like construction, autos and luxury goods are also set for steady earnings.
NatWest Group PLC NWG.L, HSBC Holdings PLC HSBA.L and BNP Paribas SA BNP.PA were among the top picks within the banking space.
On the other hand, refiners and exploration & production sectors could post weak earnings owing to a sharp decline in energy prices.
The oil and gas sector .SXEP was the top performer in 2022 with, ending the year 24% higher as energy prices rose sharply.
Analysts were optimistic about higher earningsestimates for the broader market, barring commodities, at mid-high single-digit growth.
"Although earnings won’t help equities this year, we believe that if rates volatility indeed subsides, stocks may be okay," the brokerage said, adding that price-to-earnings de-rating in 2022 should provide equities some cushion to absorb mild earnings downside.
The pan-European STOXX 600 .STOXX fell around 13% in 2022, before gaining nearly 8% so far this year.
Easing inflation pressure could introduce a more stable rates backdrop in 2023, which in turn is likely to cushion equity valuations, according to the analysts at Barclays.
While resilient demand and pricing backdrop should support top lines, inventory destocking and still high costs are likely to pressurize margins, the analysts added.
WALL STREET RALLIES AS PPI BACKS SLOW INFLATION NARRATIVE (1012 ET/1412 GMT)
Stocks on Wall Street are higher on Wednesday after a bigger-than-expected decline in U.S. producer prices offered more evidence of receding inflation and kindled speculation the Federal Reserve can soon curb its interest rate hikes.
Energy .SPNY and consumer discretionary .SPLRCD are among leading S&P 500 .SPX sector gainers, while consumers staples .SPLRCS is the biggest loser.
Semiconductors .SOX, small caps .RUT and Dow transports .DJT are all in the green. Growth stocks .IGX are more than doubling the gains of value .IVX.
The producer price index for final demand decreased 0.5% last month, the Labor Department said, while data for November was revised lower to show the PPI rising 0.2% instead of 0.3% as previously reported.
Below is a snapshot of early prices on Wall Street:
HOW TO GUIDE FOR DISINFLATION [0930 EST/1430 GMT]
Strategists and economists at UBS believe that the pace of disinflation in 2023 could surprise investors just as much as the pace of inflation last year.
According to UBS, signs of easing inflation seem clearer and 80% of their sample of economies around the world saw lower price increases in the second half of 2022 than in the first half of the year.
"Based on our model, higher prices in 2021 were mostly caused by strong consumer demand after the Covid lockdowns ended, when in 2022, supply bottlenecks, magnified by the Russia-Ukraine war, were the main driver of inflationary pressures," wrote the researchers.
"In 2023, we expect both demand and supply to play a role in the disinflation process."
Globally, they have selected stocks most positively or negatively impacted by this trend based on return sensitivity to changes in inflation indexes, price performance during periods of declining inflation and sensitivity of revenues to changes in inflation indexes.
While preference varies on the region, they are generally overweight on health care, tech, communication services and consumer discretionary stocks given their past outperformance in periods of declining inflation.
UBS is underweight on energy stocks that have led gains last year, along with financials, industrials and materials, that have lagged in disinflationary periods.
Nevertheless, they expect global growth to be historically weak in 2023, at 2.1%, which is the weakest since 1993, outside of the pandemic and the Global Financial Crisis.
List of UBS covered stocks with positive or negative impact from disinflation’ based on UBS Strategy framework
Live Nation Entertainment Inc
Ubisoft Entertainment SA
El Puerto de Liverpool SAB de
Swatch Group AG
Dollar General Corp
Sao Martinho SA
New Oriental Education & Technology
Exxon Mobil Corp
Natura & Co Holding
Petroleo Brasileiro SA
B3 SA - Brasil Bolsa Balcao
Raymond James Financial Inc
Woori Financial Group Inc
Koninklijke Philips NV
Sonova Holding AG
Republic Services Inc
Sino Biopharmaceutical Ltd
Alfa Laval AB
Nippon Yusen KK
Grupo Aeroportuario del Pacifi
Skyworks Solutions Inc
Zebra Technologies Corp
Logitech International SA
Win Semiconductors Corp
Anglo American PLC
Akzo Nobel NV
Warehouses De Pauw CVA
China Jinmao Holdings Group Lt
Naturgy Energy Group SA
American Water Works Co Inc
GAIL India Ltd
(Bansari Mayur Kamdar)
S&P 500 INDEX: CAN IT MAKE THE LEAP? (0900 EST/1400 GMT)
In the wake of mostly cooler-than-expected PPI data and weaker-than-forecast retail sales numbers at 0830 EST, e-mini S&P 500 futures EScv1 are gaining around 10 points, or 0.3%, in premarket trade.
This, as the S&P 500 index .SPX has been flirting with a number of key resistance hurdles, which since late August, have served to cap strength:
These barriers include the descending 200-day moving average (DMA), the resistance line from its January 2022 record high, and the descending 233-DMA, a Fibonacci-based moving average.
The SPX hit a high of 4,015.39 on Tuesday before closing at 3,990.97. Thus, the benchmark index managed a second straight close just above its 200-DMA, which ended at 3,978.17. This long-term moving average should dip to around 3,975 on Wednesday.
Since early April, the SPX has only managed three marginal closes above the 200-DMA before quickly sinking again.
The resistance line, which was around 4,010 on Tuesday, should scale down to around 4,006 on Wednesday, and the 233-DMA should fall to around 4,033.
Of note, the benchmark index's summer rally ended on Aug. 16 after these hurdles were challenged. The index then forthrightly collapsed to fresh lows, losing nearly 20% of its value into its October low.
And after once again probing these levels in early December, the SPX suffered a 4.4% three-day slide and then again in mid-December, upon a test of these levels, the SPX promptly slid as much as 8.2% in just seven trading days.
Since the resistance line was initially established using the early January 2022, record high and the late-March reaction high, the benchmark index has not registered a daily close above it.
Thus, traders will be watching to see if the SPX can build on any early rise, or if it will once again reverse to the downside.
FOR WEDNESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EST/1400 GMT - CLICK HERE
Value vs Growthhttps://tmsnrt.rs/3kfpDQ8
Long positions among Netflix traders in 2022https://tmsnrt.rs/3QPsdIL
Streaming stocks in 2022https://tmsnrt.rs/3GPAaJq
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)</body></html>
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