Main U.S. indexes decline; FANGs, chips green
All S&P 500 sectors fall: real estate weakest group
Dollar gains; gold, bitcoin lower, crude off ~3%
U.S. 10-Year Treasury yield falls to ~3.94%
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CRE LOANS FROM SMALL BANKS SHOW VULNERABILITY -BNY MELLON (1300 EST/1800 GMT)
With the Fed poised to hike interest rates higher for longer, John Velis at BNY Mellon says he is frequently asked what are the odds something in the financial system "breaks."
Certain segments of the economy, in particular areas with significant leverage, can come under duress and often lead to financial-sector strains, says Velis, FX and macro strategist for the Americas at BNY Mellon.
An area of interest are CRE loans, he says.
"We are keeping an eye on commercial real estate (CRE) loans as one area of the financial system where we see vulnerabilities present," Velis says in a note on Tuesday.
CRE loans account for nearly 24% of all bank loans now, the highest level since the end of the Great Financial Crisis some 13 years ago, he says.
Loan growth in the sector, running at 13% year-over-year, is at its highest since just before the GFC and even eclipses the rate of increase during the past decade, when interest rates were near zero amid loose financial conditions.
With $3.9 trillion in CRE loans on their books, banks have begun to rein in lending, he says.
A long period of higher-for-longer rates, combined with a fundamental and structural change in demand for CRE, will likely dislocate the sectors and erode the quality of bank balance sheets, he said.
"With a mixed, at best outlook, this is one area of the market we are concerned about," Velis says. "Banks’ loan standards for CRE loans are getting more restrictive and they are increasing quickly," he says.
NOVAVAX FEELS RETAIL LOVE DESPITE WORST ANNUAL PERFORMANCE (1220 EST/1720 GMT)
COVID-19 vaccine maker Novavax Inc remained a retail favorite last year even as it tracked its worst annual percentage performance on record.
The stock drew nearly $140 million worth of net retail investment last year even as it slumped 93%, data from Vanda Research shows.
This year alone, they have purchased $27.8 million worth of shares alongside a 30% decline in shares, data showed.
The Maryland-based firm flagged going concerns last week as it falls further behind in the race of COVID-19 vaccine makers with its shares down over 98% since its Feb. 2021 record high after skyrocketing 2,700% in 2020.
Novavax last week raised doubts about its ability to remain in business, hurt by manufacturing and regulatory delays which led to sluggish uptake in key markets.
Novavax's shot, a traditional protein-based vaccine, was pitched as an alternative to the newer mRNA-based shots from Moderna and Pfizer-BioNTech in the hope it would win over skeptics.
As concerns around the vaccine maker's financial health grow, it remains to be seen whether retail investors will pull back or choose to be loyal.
NVAX last down just over 1% around $7.19.
WHEN IT COMES LONG-RUN INVESTING, STOCKS ARE THE KING OF THE RING-CARSON GROUP (1205 EST/1705 GMT)
When it comes to the long-run, Brett Carson, equity strategist at the Carson Group, says nothing beats equity returns. Not bonds. Not housing. Not gold, oil, or copper.
Carson admits there are periods of exception, and certainly the past year or so has been a rough one for stocks amid heightened volatility and uncertainty, but he says that historically, such periods haven’t lasted long. "Whether 200 years, 100, 50, or 25, no other asset class has generated as much wealth as the stock market."
According to Carson, just looking at 100 years of data (1920-2020), equities have outperformed 10 and 30-year Treasury bonds by more than 4.5% per year, corporate bonds by 3.7%, gold by 5.6%, and oil by 8.4%.
Additionally, Carson says that stocks expand their lead over other asset classes in “real” terms, or after inflation.
From 1920 to 2020, he says equities posted annualized real returns of 7.7%. Carson notes that housing (ex-rents) was up just 1.1% per year, and an overall commodity index was actually negative 1.1% per year. Only gold (2.0% per year) and copper (0.5% per year) were positive. Carson says that the closest annual real return to equities over these 100 years is BBB bonds at 4.2% per year.
Carson's bottom line is that when it comes to the long-term, "stocks are king." However, since they are also volatile, investors should be compensated with higher returns compared to most asset classes, which is why Carson Group continues to overweight stocks in their long-term allocations.
POWELL 'OPENS THE DOOR' TO RETURN TO 50 BPS HIKES (1130 EST/1630 GMT)
Remarks by Federal Reserve Chair Jerome Powell Tuesday "opened the door" to a return of 50-basis-point rate hikes at the Fed's March meeting "if data flow warrants it," according to a note from economists at Morgan Stanley just after the release of Powell's remarks.
Powell told U.S. lawmakers in opening remarks at a hearing before the Senate Banking Committee that the Fed will likely need to raise rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation.
One key factor for that rate hike outlook may be this Friday's monthly U.S. jobs report.
"Upside surprises to Friday's payroll report could drive a faster and longer tightening cycle," the Morgan Stanley economists wrote.
Moreover, they noted that stronger-than-expected economic data recently suggests the peak rate of interest rates may be higher than previously anticipated.
In a separate note, Mark Haefele, chief investment officer at UBS Global Wealth Management, said uncertainty about the trajectory for inflation, monetary policy and economic growth could keep the market volatile in the months ahead.
The CBOE Volatility index briefly hit a session low of 18.51 following the release of Powell's comments, but then began to climb again. It was last up around 0.4 points at around 19.00.
U.S. STOCKS PRESSURED BY POWELL REMARKS (1030 EST/1530 GMT)
U.S. stocks are taking a hit on Tuesday as Fed Chair Powell told U.S. lawmakers that the Federal Reserve will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the "totality" of incoming information suggests tougher measures are needed to control inflation.
According to the CME's FedWatch Tool, it is now roughly a coin flip (~50%-50%) as to whether the FOMC raises rates 25 or 50 basis points at the March 21-22 meeting.
The main U.S. indexes are lower and all S&P 500 sectors are red. Under the surface, banks are among those groups seeing the sharpest losses.
That said, there has been some bounce off the lows. The SPX hit a low of 4,009.53, and now stands around 4,025.
Regarding Powell's remarks, Quincy Krosby, chief global strategist, at LPL Financial, said, "Coming into the meeting, it was almost a 30% probability priced in by the futures market for a 50 basis points (rate hike)."
However, "Powell makes it clear the Fed would react accordingly if the data suggests that inflation continues to move in the wrong direction. And you can see the reaction in the equity market, and at this stage they don't know what the CPI is going to indicate, nor the PPI."
Krosby added, "But Powell was matter of fact in that statement. It was very clear to the market that the Fed is not going to equivocate in terms of data that suggests inflation continues to climb higher or remain sticky."
Here is a snapshot of where markets stood shortly before 1030 EST:
(Terence Gabriel, Caroline Valetkevitch)
SILVERGATE'S FAILED PAYMENT SYSTEM COULD BOOST STABLECOIN VOLUMES (0915 EST/1415 GMT)
In the wake of Silvergate shutting its crypto payments network - Silvergate Exchange Network - stablecoins could see a boost in trading from traders looking to convert fiat to cryptocurrency, analytics firm Kaiko said.
Liquidity in cryptocurrency trading could suffer as SEN served as one of the only fiat payment rails in the industry, other than Signature Bank, Kaiko analysts said in a note on Monday.
That leaves the door open for traders to enter crypto markets via stablecoins.
"With the death of SEN, stablecoins will likely become even more ubiquitous among traders," Kaiko analysts said.
"Rather than deposit your dollars with an exchange, you deposit them with a stablecoin issuer, receive stablecoins, and then transfer those to an exchange."
Popularity of stablecoins has increased after FTX imploded.
The market share of dollar to tether trade volume for bitcoin trading pairs has climbed to 92% from 3%, recently hitting an all time high in the aftermath of the FTX collapse, Kaiko said.
S&P 500 INDEX: TRADERS EYE LEVELS AHEAD OF POWELL (0900 EST/1400 GMT)
Although the S&P 500 index closed higher for a third-straight session on Monday, it saw most of its early session gains evaporate. After rallying as much as 0.81%, the benchmark index ended up just 0.07%.
This action was perhaps not surprising given Fed Chair Powell will testify before the Senate Banking Committee at 10 a.m. ET (1500 GMT) on Tuesday, with investors focused on whether he remains confident about the Fed's moves for bringing inflation towards its 2% target.
Meanwhile, traders are eyeing nearby SPX support and resistance levels:
With Monday's early strength, the S&P 500 was able to overlap resistance at its Feb. 10 low at 4,060.79. The SPX hit a high of 4,078.49 before sinking back to close at 4,048.42:
Above Monday's high, the resistance line from the January 2022 high, across the Feb. 2 high, now comes in at 4,145. Above here can see the SPX challenge the 4,195.44-4,203.04 area which includes the Feb. 2 high, the 23.6% Fibonacci retracement of the March 2020-January 2022 advance, and the Aug. 26 Fed-Chair Powell Jackson Hole speech high.
On weakness, the rising 50-day moving average (DMA) should reside around 3,996 on Tuesday. The 200-DMA, the March 2 low, and a broken resistance line from the January 2022 record high, which is now support, are in the 3,940-3,900 area on Tuesday.
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)