Sentiment and valuations about to go toe-to-toe -BofA
Main U.S. indexes sharply lower: S&P 500 down ~1.2%
All S&P 500 sectors red: energy weakest group, down >4%
KBW regional banking index slides ~5%
Dollar edges down; crude falls ~5%; gold, bitcoin rally
U.S. 10-Year Treasury yield tumbles to ~3.44%
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SENTIMENT AND VALUATIONS ABOUT TO GO TOE-TO-TOE -BofA (1331 EDT/1731 GMT)
BofA's Sell Side Indicator (SSI), a contrarian sentiment model that tracks the average recommended allocation to stocks by U.S. sell-side strategists, was effectively unchanged in April at 52.7%, a six-year low. This as the S&P 500 index .SPX rose 1.5% for the month.
In a Data Analytics note out on Monday, a BofA research team, led by Savita Subramanian, equity and quant strategist at Bank of America Securities, says the SSI is one of six inputs into their year-end target and is the most bullish of these signals.
According to Subramanian, the SSI indicates a +16% price return over the next 12 months, putting the S&P 500 at 4,600 by year-end. She adds that, historically, when the SSI has been as low or lower, 12-month forward S&P 500 returns were positive 94% of the time (vs. 81% overall).
"Bearish sentiment and conservative positioning argue for tactical upside to stocks over bonds, cyclicals over defensives and risk on from here," write the BofA analysts in the note.
However, they also say that elevated market valuations and global earnings revisions argue for conservatism.
"One of our most negative S&P 500 indicators is based on the relationship between the Fed balance sheet and market multiples, where quantitative tightening (QT) penciled in from here argues for a 15ppt decline in the S&P 500 over the next 12 months (year-end forecast of ~3700)."
DEMISE OF VALUE VS GROWTH, RISE OF NEW BIG THREE -CITI (1230 ET/1630 GMT
Who still believes in the growth versus value format of understanding what's happening in U.S. equity markets? Scott Chronert and his team at Citi admit they're not big fans.
More is going on underneath the surface of the S&P 500 index .SPX than typically can be gathered from the traditional growth vs value analysis, he said.
Delineating the market into two buckets has become more difficult as indices evolve, leading Chronert's team to look at the S&P 500 through a Cyclical, Growth and Defensive lens.
The S&P 500 will transition from a growth-heavy index to a more "blended exposure," consistent with Chronert's long-term view that leadership will gradually shift from tech creators to tech users.
The new delineation results in an index that is 41% Growth, 30% Cyclicals and 29% Defensives per market cap, Chronert says in a note "Deciphering S&P 500 Index Regimes."
But earnings are more heavily Cyclically-biased, reflecting a lower P/E than Growth and Defensive names.
The current index is Growth tilted, but after the tech bubble, the S&P 500 was much more economically sensitive with Cyclicals dominating the index, Chronert says.
"This faded in the post-Financial Crisis timeframe as low rates sustained a long run of Growth leadership," he says.
"In its current composition, it is hard for the S&P 500 to move materially higher without Growth leadership, while Defensives cannot be expected to lead the market but can serve as a balance or offset as macro forces evolve," he said.
EUROPE BUYS INTO 'SELL IN MAY' MANTRA (1145 EDT/1545 GMT)
European shares have begun the month on the back foot with declines for all the major indexes, led lower by the energy .SXEP and media .SXMP sectors, with investors cautious ahead of the Fed meeting on Wednesday.
The STOXX 600 .STOXX ended the session down 1.3%, while Germany's DAX .GDAXI, France's CAC 40 .FCHI and Britain's FTSE 100 .FTSE were all down between 1.2%-1.5%.
"Last week saw risk appetite revive on better earnings from tech giants, but a host of worries about interest rates, further bank crises, the US debt ceiling and of course pre-Fed nerves have conspired to prompt a reversal in equity markets," says Chris Beauchamp, chief market analyst at IG.
"European and US indices are down sharply, as investors' nerves get the better of them."
Pearson, down 15%, fell in tandem with U.S. peer Chegg after the education services provider said viral chatbot ChatGPT was pressuring subscriber growth, weighing on the media sector.
Shares in oil giant BP fell over 8.6%, the biggest daily fall since the early days of the COVID pandemic in March 2020, after it slowed the pace of its share buyback programme.
Meanwhile, the Euro STOXX volatility .V2TX index rose 3.139 points, closing above 20 for the first time since March 29.
THE SLOWDOWN SHUFFLE: JOB OPENINGS DECLINE, FIRINGS PICK UP, CAPEX PLANS WEAKEN (1138 EDT/1538 GMT)
JOLTS and factory orders data released on Tuesday gave Powell & Co something to chew on as they convene for their two-day policy palaver.
The number of unfilled jobs in the United States fell by 3.9% in March to a still-elevated 9.59 million, fewer than the 9.775 million consensus.
It marked the third consecutive decline, which is happy news for Fed watchers, as high job openings combined with a low unemployment rate is a toxic combination that puts upward pressure on wage growth - a major driver of inflation and one of the Fed's top concerns.
Job openings have dropped 20.3% from the all-time record high reached in the year-ago month, but remain 37.1% above the pre-pandemic level of February 2020.
Those elevated numbers keep upward pressure on wage growth, a major driver of core inflation and one of the Fed's top concerns.
"Before the pandemic, the highest number of US unfilled positions per unemployed worker was 1.25," says Ronald Temple, chief market strategist at Lazard. "Less than a year ago, this ratio peaked at 2 open jobs per unemployed worker and now stands at 1.64."
"The Fed should gain some comfort from the gradual decline in this ratio, but also is likely to see this data as reaffirming the need for another rate hike tomorrow," Temple adds.
This Friday, in the April payroll report, analysts see average hourly earnings growth of 4.2% year-over-year, repeating March's print.
Beneath that headline, the Labor Department's Job Openings and Labor Turnover Survey (JOLTS) USJOLT=ECI, showed new hires were little changed, while involuntary separations - firings and layoffs - crept higher.
Voluntary separations - otherwise known as quits - held steady 3.9 million, or about 2.5% of the workforce.
The quit rate is often seen as a gauge of consumer sentiment, as workers are unlikely to walk away from a gig in times of economic uncertainty.
But when the labor market is tight, employers find themselves sweetening the pot to entice workers to switch jobs.
Quits remain about 10% higher than the pre-pandemic level.
Separately, new orders for goods manufactured at U.S. Factories USFORD=ECI increased by 0.9% in March in a partial rebound from February's downwardly revised 1.1% drop, according to the Commerce Department.
The increase, which was largely attributable to a jump in commercial aircraft orders, fell just a hair shy of the 1% gain analysts expected, and mirrors the improving manufacturing PMI data released by the Institution of Supply Managers and S&P Global's purchasing managers indexes (PMI) released on Monday.
New orders for core capital goods - which excludes defense and aircraft and is considered an indicator of corporate capex intentions - were revised down, to -0.6% from -0.4% echoing the theme of economic uncertainty heard in many companies' quarterly earnings calls.
Wall Street has veered sharply into the red in morning trading as investors await an expected rate hike from the Fed on Wednesday, with the accompanying statement and subsequent Q&A.
The looming potential for default amid contentious debt ceiling negotiations is also working investors' nerves.
BLACK SEA GRAIN DEAL AND WHAT'S AT STAKE (1040 EDT/1440 GMT)
Talks on a U.N-brokered deal that allows the safe Black Sea export of Ukrainian grain are scheduled for Wednesday, with all sides in the negotiations involved, said a senior Ukrainian source.
Ukraine, one of the world’s largest grain exporters, used to supply around 45 million tonnes of grain to the global market every year before the Russian invasion last year.
A drop in Ukrainian shipments was one of the major catalysts for the global food price crisis last year, with poorer emerging markets that are among the largest global importers of wheat bearing the brunt and still reeling from its impact.
For instance, Egypt a major importer of basic commodities such as wheat and vegetable oil has suffered a foreign currency crunch that pushed its pound down by nearly 50% against the dollar, suppressed imports and pushed official headline inflation to 32.7% in March, just shy of an all-time record.
Since the July deal, global food prices have fallen and were down 20.5% in March from a record high hit one year ago.
"An end to this deal obviously risks a new price spike, once any excess inventory depletes," said Hasnain Malik, head of equity research at Tellimer Research.
"This implies inflation, current account balance, and, where there are subsidies, fiscal deficit risks in the poorer emerging markets that are among the largest global importers of wheat, eg Bangladesh, Egypt, Indonesia, Morocco, Philippines, and Vietnam."
However, Russia has repeatedly signaled there will be no extension after May 18 unless the West removes obstacles to the export of Russian grain and fertilizers, including the reconnection of Russian Agricultural Bank (Rosselkhozbank) to the SWIFT payment system.
"The US and EU are very unlikely to yield on those sanctions," added Malik.
"The Black Sea deal has always been fragile and its collapse would increase expectation of a ramp up in hostilities on the battlefield this spring."
(Bansari Mayur Kamdar)
WALL STREET SLIPS AS THE FED'S POLICY DECISION LOOMS (0958 EDT/1358 GMT)
Wall Street is trading lower early on Tuesday as investors await one more day to see whether the Federal Reserve pauses its monetary tightening or keeps the door open for further rate hikes to brake worrisome wage growth and other signs of inflation.
Heath care .SPXHC/Industrials .SPLRCI are leading the 11 S&P 500 .SPX sectors higher, while energy .SPNY is the biggest decliner.
Semiconductors .SOX are up as the Dow Transports .DJT and small caps .RUT are lower. Growth .IGX is declining less than value .IVX.
A 25-basis-point increase in the federal funds rate is expected when a two-day policy meeting ends on Wednesday, while chances of a quarter-point hike on June 14 rose to 32.1% from 27.7% on Monday, according to CME Group's FedWatch Tool.
While there is likely to be a further reduction in forward guidance from the Fed on Wednesday, the statement and comment from Chair Jerome Powell should keep open the possibility of further hikes, Macquarie economists in Canada said.
Further labor market deterioration is likely, "but based on current data this is not yet a foregone conclusion. This dynamic contributes to the argument that the FOMC is likely to keep its subsequent policy options open," economists David Doyle and Neil Shankar said in a note prepared for sales and trading personnel.
Incoming data will continue to deteriorate with the U.S. economy entering a recession in 3Q23, the pair said. "This informs our view that this week's rate hike is likely to be the final one for the cycle," they said.
The following is a snapshot of market prices in early trading:
THE CASE FOR AN ITALIAN LUXURY CHAMPION (0923 EDT/1323 GMT)
In luxury, big is better. Take LVMH LVMH.PA which has seen its market cap rise seven fold over the last decade to become Europe's biggest company by market value.
But it's not only LVMH, or just a matter of market cap.
"Over the past ten years, luxury conglomerates have outperformed their mono-brand competitors on most metrics: taken together, LVMH, Richemont and Kering revenues grew twice as fast, margins expanded 10ppt more, and share prices outperformed by >200%," BofA Global Research says.
So, based on that, the U.S. bank is floating the idea of an Italian luxury champion reaping the benefits of larger scale, whereas now mono-brands are the rule.
"Overall, we think organic growth will, and should, remain the priority for these Italian groups. However, given the very strong brand momentum and financial performance some Italian groups currently experience, and the clear advantages multi-brand groups come with, inorganic growth and combinations could now be considered again," write BofA analysts.
"It is also interesting to note that several family-owned Italian luxury groups are in a management transition phase, with a new generation of the family taking more important responsibilities - which could lead to changes in growth strategy and cooperation," they add.
The market cap of LVMH, Kering PRTP.PA and Richemont CFR.S combined is up over 250% since 2014, while the Italian names - Prada 1913.HK, Moncler MONC.MI, Cucinelli BCU.MI and Ferragamo SFER.MI - have grown less than 50%, per BofA.
NASDAQ COMPOSITE: ONE TOUGH CEILING (0900 EDT/1300 GMT)
Like the S&P 500 index .SPX, the Nasdaq Composite .IXIC is bumping up against levels that have proven to be especially strong resistance:
In September of last year, the Composite put in a high at 12,270.189. After hitting new lows later in the year, the IXIC then rallied into an early February 2023 high at 12,269.555.
Thus, the Composite stalled less than one point from its September high, before then suffering another sharp setback into mid-March.
A subsequent recovery continues to be capped by the September 2022 high.
Over the past five weeks or so, strength has continued to peter out on an approach of the September ceiling. The weekly highs have been 12,228, 12,225, 12,206, 12,245, and 12,228. On Monday, the Composite's high was at 12,261.318 before it settled back to end at 12,212.598.
Given that this week will bring the results of a critical FOMC meeting, Apple's AAPL.O quarterly results and the latest non-farm payroll report, traders will be focused on whether the Composite can break through the ceiling, potentially clearing the way for further gains, or if it will once again fail, putting the index at risk for another downdraft.
FOR TUESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE
56.4% of the commodities through the Black Sea grain deal go to developing nationshttps://tmsnrt.rs/40UVPrJ
Early market priceshttps://tmsnrt.rs/40XiraY
Wage growth and job openingshttps://tmsnrt.rs/3VmbUWh
Core capital goodshttps://tmsnrt.rs/42l0eFD
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)</body></html>
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