A UN-backed scientific panel tasked with assessing the effects of the 1989 Montreal Protocol – an international agreement to phase out Ozone Depleting Substances – has found that the ozone layer continues to strengthen, and as a result, the earth will avoid 0.3 – 0.5°C of global warming by 2100.

Under the 1989 agreement, 99% of ozone-killing chemicals, including chlorofluorocarbons (CFCs) that once kept fridges cool, were banned due to a thinning of the ozone – also known as an ozone hole – above Antarctica.

In around four decades, the thinning of the Antarctic hole will be completely reversed, according to the report. The much smaller hole above the Arctic is expected to repair much sooner, DW reports.

By 2066, the Antarctic ozone hole is expected to reduce to its size in 1980, while the Arctic hole will do the same around 2045. Thinning around other areas of the globe should recover around 2040.

Beyond CFCs, ozone-eating chemicals including halons, methyl chloroform, carbon tetrachloride, hydrochlorofluorocarbons (HCFCs) and methyl bromide were once abundant in refrigerators, air conditioners, aerosols, solvents and pesticides. 

These compounds attack ozone by releasing chlorine and bromine atoms that degrade ozone molecules in the stratosphere.

Since the substances were banned, declining concentrations of chlorine and bromine have helped to limit human exposure to harmful UV rays from the sun that can cause skin cancer, cataracts and suppress the immune system. -DW

“Thanks to a global agreement, humanity has averted a major health catastrophe due to ultraviolet radiation pouring through a massive hole in the ozone layer,” said UN Secretary-General Antonio Guterres last September 16, World Ozone Day. 

Impacts on climate change?

Meanwhile, in a fringe benefit that won’t likely silence environmentalists, the panel affirmed the treaty’s positive impact on the climate.

“By protecting plants from ultraviolet radiation, allowing them to live and store carbon, it has avoided up to an extra 1°C of global warming,” said UN head Antonio Guterres, who praised the protocol’s impact on the ozone and the climate, adding that it was a “universally ratified and decisively implemented” model for global action.

“Only by mirroring the cooperation and speedy action of the Montreal Protocol elsewhere can we stop the carbon pollution that is dangerously heating our world,” Guiterres continued. “The Montreal Protocol is a success because, when science discovered the threat we all faced, Governments and their partners acted.”

Authored by Simon White, Bloomberg macro strategist,

The stock market will remain stuck in a bear market until new sector leadership is clearly established.

The new year has brought with it some optimism, with a seemingly very upbeat take on last week’s jobs data – a belief that somehow recession will be averted and the Fed will cut rates. While this is akin to betting a coin is going to land on its edge, there is a more structural headwind to stocks: changing leadership.

The tech sector drove the US stock market through the last cycle. Its exceptional outperformance could be explained on the premium investors were willing to pay for FAANG-like stocks.

However, that exceptionalism has seemingly been jettisoned, with Tesla down 70% from its highs, Meta down 60%, and Amazon and Nvidia over 50%. Apple and Microsoft are relatively unscathed, but even they are not immune to much steeper falls.

Tech remains the largest S&P 500 sector, but its weight is dropping fast, and other sectors’ weights are rising.

The world is changing and stock leadership eventually must reflect those changes. We are in state of flux, and it is not clear yet how much tech will be “humbled,” and who the new leadership will be, but one clear beneficiary in a more autarkic world with rising geopolitical tensions is energy.

We need only go back to 2008 to reach a time when tech and energy had a similar market cap. In the ensuing go-go years of all things new and shiny and tech, energy was dismissed, and technology grew to be the largest sector, accounting for almost 30% of the S&P.

The market-weight gap between tech and energy has started to narrow and could go much further in a resource-constrained world where tech valuations are prone to overshooting to the downside, which would keep pressure on the headline index.

Investors will also continue to adapt to an inflationary world where higher-duration assets will fare less well, and if one is to own them, one needs to be sufficiently compensated. Tech is one of the highest-duration sectors, but its long-term expected EPS growth is inferior to energy, which also has a very low duration, and should fare better with elevated inflation.

Other sectors have lower long-term expected EPS growth than tech, but have lower duration to compensate.

Until the market has an assertive leader again, it is unlikely stocks can embark on a new bull market.

Following the Monday passage of the House rules package, the next order of business will be “populating” the chamber’s committees.

And after Democrats weaponized Nancy Pelosi’s gavel over the last two years – booting GOP Reps. Marjorie Taylor Greene and Paul Gosar off committees over QAnon wrongthink and posting memes – Republicans are set to return the favor, with McCarthy expected to boot Reps. Adam Schiff, Eric Swalwell and Ilhan Omar from their committees.

Democrats are expected to name Schiff and Swalwell to the Intelligence Committee, and place Omar on Foreign Affairs, according to Punchbowl News, citing multiple Democratic leadership sources.

“Swalwell can’t get a security clearance in the private sector. I’m not going to give him a government security clearance,” newly minted House Speaker Kevin McCarthy told Punchbowl. “Schiff has lied too many times to the American public. He should not be on Intel.”

“I made all [three] cases before. It’s not like it’s anything new… Remember, this is what Nancy Pelosi, this is the type of Congress she wanted to have,” McCarthy added.

Swalwell notably banged an alleged Chinese spy who helped him fundraise in 2014. After an FBI briefing on the woman, the top Democrat said he cut all ties with the woman – Christine Fang, also known as Fang Fang.

In 2020 when the news broke, McCarthy called for Swalwell to be “removed from Congress.”

.@GOPLeader Kevin McCarthy on China planting a spy in Congress: @RepSwalwell should be “removed from Congress” [via @IngrahamAngle] pic.twitter.com/2m9c5tojcJ

— Tom Elliott (@tomselliott) December 9, 2020

Schiff, of course, vehemently peddled the Russiagate hoax and played a large role in both impeachments of former President Trump (and claimed there was ‘more than circumstantial’ evidence that Trump colluded with Russia).

When asked about losing his seat, Schiff told Punchbowl that McCarthy “will adhere to the wishes of Marjorie Taylor Greene.”

And the Somali-born Omar has made anti-Semitic comments and probably married her brother in an immigration scam, according to the Daily Mail.

More via Punchbowl News:

Also: Texas GOP Rep. Jodey Arrington is the new Budget Committee chair. Arrington beat Reps. Buddy Carter (Ga.) and Lloyd Smucker (Pa.) to win the gavel in just his fourth term in the House.

Recap: Missouri Rep. Jason Smith is the new chair of the Ways and Means Committee. He beat Reps. Vern Buchanan (Fla.) and Adrian Smith (Neb.). North Carolina Rep. Virginia Foxx won another term as chair of the Education and the Workforce Committee. Check out our full coverage in Monday’s Midday and PM editions.

Isn’t this fun?

Authored by Chris Menahan via Information Liberation,

The hero customer who shot and killed an armed robber at a Houston taco joint last week has been ordered to face a grand jury by District Attorney Kim Ogg, the Soros-funded prosecutor who appears to have let the career criminal he put down out on bond.

WATCH:

From KTRK, “Grand jury will decide fate of ‘hero’ customer who shot and killed robber at taqueria, HPD says”:

A grand jury will decide whether an armed taqueria customer, who shot and killed a robber last week in southwest Houston and is now being hailed a hero, will be criminally charged.

Investigators said the 46-year-old customer, who police have not identified because he’s not under arrest, turned himself in and is cooperating with detectives.

Fortunately, our hero hired an attorney to defend himself and exercised his right to remain silent.

His lawyer put out the following statement:

“My client, who wishes to remain anonymous, was dining with a friend at El Ranchito Taqueria and as it has been seen on video, a robbery suspect entered the restaurant, and pointed a weapon at my client and the other customers demanding money. In fear of his life and his friend’s life my client acted to protect everyone in the restaurant.

In Texas, a shooting is justified in self-defense, defense of others and in defense of property. The customer has met with the Harris County District Attorney’s Office and Investigators with HPD homicide. He fully intends to continue cooperating with the ongoing investigation.

When the investigation is complete, this case will be presented to a Grand Jury. We are confident that a Grand Jury will conclude that the shooting was justified under Texas Law. This event has been very traumatic, taking a human life is something he does not take lightly and will burden him for the rest of his life. For that reason, he wishes to remain anonymous. Due to the overwhelming coverage, we ask the media and the public to respect his privacy.”

The thug he shot was a career criminal who should have been locked up in prison, KTRK reports:

On Monday, the medical examiner identified 30-year-old Eric Eugene Washington as the robbery suspect who was killed.

Records show Washington had an extensive criminal history and was out on bond during the would-be robbery.

Records show that in 2015, Washington was convicted on a lesser charge of aggravated robbery with a deadly weapon and sentenced to 15 years in prison in connection to the shooting death of 62-year-old Hamid Waraich, a cell phone store owner. Houston police also charged two other men.

According to records, Washington was released on parole in 2021 and charged with assaulting his girlfriend in December 2022.

Waraich had a fiancée and three sons who reacted strongly when contacted by ABC13.

“If the guy who sopped Eric was around 10 years ago, maybe I’d still have my dad,” Aman Waraich, the son of the store clerk that was killed, said.

“Eric was an evil criminal that took joy in harassing and robbing innocent families. The individual at the taqueria is a true hero!” Sean Waraich, the victim’s other son, added. “He did the right thing in stopping the robber and in protecting the community from a dangerous perpetrator.”

WATCH:

Our hero never would have even been put in this position if Kim Ogg actually locked criminals up rather than kneel before them.

This is a clear-cut case of self-defense but you never know how a jury will rule in the Black Lives Matter era.

Shares of Broadcom will be on watch heading into today’s cash session after news broke Monday that Apple would be taking steps to “ease its dependence” on the chipmaker by late 2024.

Apple is targeting replacing a Broadcom chip from its devices in the same fashion it phased out Intel with custom silicon, according to AppleInsider this week. The report notes that Apple will be releasing its first modem by the end of 2024/early 2025, which will result in dropping a Broadcom component. 

Broadcom shares slipped more than 1% toward the end of the day Monday on the news and are down another 1% in pre-market trading on Tuesday.

Apple is Broadcom’s largest customer, the report notes, and accounts for about 20% of the company’s revenue, amounting to about $7 billion last year. It has been “working to limit its reliance on other chipmakers,” reporting by Yahoo Finance said on Monday. 

Stacy Rasgon, an analyst with financial services firm AB Bernstein predicted that the move could cost Broadcom $1 billion to $1.5 billion in revenue. Broadcom’s radio frequency chips would likely not be replaced in the short-term, Rasgon said, because they are too complex to make. 

AppleInsider noted that Broadcom CEO Hock Tan had mentioned this potential situation on a conference call in December. He said “that while Apple would be reducing its dependence on Broadcom, the company will continue to work with Apple”. 

Tan said: “We believe we have the best technology and delivering value to our customers. There’s no reason to find something else where you’re not the best.”

Qualcomm has also been on watch as Apple is reportedly looking to swap out its cellular modem chips with its own on the same timeframe. 

By Ven Ram, Bloomberg markets live reporter and commentator

Take a loaf of hope, knead it with oodles of optimism, add a generous sprinkling of speculation and definitely avoid even a hint of reality. Bake the concoction carefully, and what do you get? The current state of mind of investors positioning for runaway gains in US stocks.

In January last year, I posited that the S&P 500 will find its equilibrium band for 2022 between 3,900 and 4,130. As it turned out, the average for the year was 4,098. Despite Friday’s dizzying rally in stocks, the S&P is still struggling to breach that band.

At the heart of stocks’ recent optimism is speculation that the Federal Reserve will pivot enough to cut rates this year — a scenario that is largely predicated on inflation and the US economy alike crumbling like a soggy winter cookie. While the macroeconomic backdrop may indeed sour to some extent, it seems premature to conclude that price pressures will wane sufficiently enough to converge to the Fed’s target.

A headline inflation rate of, say, 4%-6% will have the press running breathless headlines about cooling price pressures, but the Fed will still see those rates as unacceptable in reference to where it wants that number to be — a message that Chair Jerome Powell has reiterated umpteen times, only for the markets to gloss over that piece of guidance on an equal number of occasions.

As a basket, the S&P 500 now offers an earnings yield that is about 225 basis points more than long-dated Treasury yields, way below an average of some 375 basis points that has prevailed since the global financial crisis. If anything, the Nasdaq 100 offers a paltry pick-up of 120 basis points.

If you believe in mean reversion, you have got to assume that either stock prices will have to tumble a fair bit from here or earnings need to skyrocket. Even assuming that the latter is what happens, what kind of economic scenario would cause inflation to slow and simultaneously spur earnings to shoot up to the stratosphere? Such a plot would no doubt require an ingenuous recipe, but one you can’t cook up in reality.

At 9am ET, Powell will be speaking at a Riksbank panel on “central bank independence and the mandate – evolving views”, and accordingly, some believe that there is a risk that he disappoints those who are looking for fresh insight on the current monetary policy outlook. The stream is below (and also here, scroll down on the page to view the video).

Stocks slumped ahead of Powell’s speech yesterday on fears that Fed chair will talk stocks down as financial conditions have once again eased notably since the FOMC even though Powell explicitly warned that “unwarranted easing is a problem.”

Courtesy of Newsquawk, here’s what to look for in Powell’s comments:

“PEAK INFLATION” HAS BEEN DISCOUNTED: The start of 2023 has been characterized by data that continues to allude to cooling inflation pressures combined with softening activity data that alludes to deteriorating growth dynamics Judging by traders’ reactions to last week’s ISM reports {weak activity in both manufacturing and services) and non-farm payrolls {wage growth cooling), there is a feeling that the ‘peak inflation’ narrative has now been fully discounted and traders are increasingly fretting about the challenging growth situation These dynamics will again be put to the test this week with the release of various inflation reports out of the US. Ahead of Thursday’s December US CPI data, the NY Fed’s survey of consumer inflation expectations for that month was mixed with the lyr ahead expectation easing to 5% from 5.2%. expectations for 3yrs ahead was steady at 3%. while the 5yr rose to 2 4% from 2.3%. Participants will also be eyeing the Preliminary January University of Michigan survey on Friday particularly the inflation expectations

WHEN WILL FED PIVOT FOCUS ONTO GROWTH: If these inflation data continue to show a cooling in price pressures, traders will gain confidence in the notion that the Federal Reserve will need to pivot its focus to support the growth side of the equation, which may involve easing up on some of its hawkishness Fed Chair Powell’s remarks on Tuesday will also be eyed in this context although the Fed is expected to continue its hawkish messaging on inflation until they see substantial evidence that inflation has indeed peaked and that its price target is back within sight.

TERMINAL RATE: Despite the Fed’s December Staff Economic Projections penciling in a peak Federal Funds Rate of 5 1% {5.00-5 25% FFR target), and warnings by some officials that if inflation doesn’t behave then 5.4% could also be seen (5.25-5.50%). money markets continue to see the peak at between 4 75-5.00 from March onwards, and expects rates will stay there until November when markets begin to price rate cuts Fed officials – burned by their incorrect pandemic view that inflation was transitory – are trying to re-establish their inflation-targeting credentials so are unlikely to relent on their hawkishness any time soon, out of fear of causing credibility issues. Analysts note that, historically, the Fed has stayed at terminal for between 3-15 months, with the average being around 6.5 months

LAYING THE GROUNDWORK FOR A PIVOT:

While the Fed may not explicitly pivot its policy until it has seen substantial evidence that inflation has peaked there are some elements that officials could introduce that suggests that its focus is moving.

“SUBSTANTIAL PROGRESS”: At the December FOMC. Powell suggested that the Fed wants to see “substantially more evidence” that gives confidence that inflation is on a sustained downward path and while inflation has been cooling, at around 6% it is still three times the Fed s 2% inflation target.

“ONGOING” RATE HIKES: Although the Fed s December meeting statement was little changed it still ‘anticipates that ongoing increases in the target range will be appropriate’ : there were some outside expectations for the Fed to tweak this guidance in December to something to the effect that it sees some further’ rate hikes ahead. Accordingly, if officials begin using language like this, it might hint that the last rate hike of the cycle is in sight.

GROWTH CONCERNS: Many consider the ISM’s reports on business to be a more forward-looking indicator than releases like the jobs report Last week, the ISM data showed that the headline and new orders components for both the manufacturing and services sectors were sub-50 in contractionary territory. Analysts note that, historically, when this happens the Fed is usually easing policy to support the economy However. Fed officials’ base case, for now. is only a growth slowdown, and many are not predicting a recession, instead citing the labor market strength. If officials do begin expressing concerns about slowing growth, and backing away from their previous baseline views, traders might use that as part of the case that shows the Fed is realigning its focus onto growth

FINANCIAL CONDITIONS: Some argue that the Fed’s concerns about loosening financial conditions (read lower yields, higher stock prices) is second only to inflation and currently ranks above growth concerns Powell in December said that the Fed’s tightening had engineered tighter financial conditions but added that these conditions fluctuate in the short term in response to many factors, but it was important that over time these conditions reflect the policy restraint that the central bank is putting in place to return inflation back to the 2% The latest minutes also revealed that participants were wary of an “unwarranted” easing in financial conditions. If Powell continues to express concerns about easing financial conditions, it would not be a sign that he was preparing us for a policy pivot (and vice versa).

In recent weeks, viral artificial intelligence bot ChatGPT has lit up the internet, gathering millions of users as its imitation of human conversation sparked speculation about its potential to supplant professional writers and even threaten Google’s core search business (Google’s management even issued a “code red” over the potential rival, the  The New York Times reported in December).

OpenAI, the organization behind it, was co-founded by Elon Musk and Silicon Valley investor Sam Altman in 2015, and makes money by charging developers to license its technology.

the first day of openai, seven years ago today pic.twitter.com/4kQUQtgb6t

— Sam Altman (@sama) January 4, 2023

And now, Semafor reports that Microsoft is in discussions to invest as much as $10 billion in OpenAI, valuing the company at $29 billion.

As part of the current deal Microsoft is negotiating, it’s proposing to get 75% of OpenAI’s profits until it gets it recovers its investment, after which Microsoft’s aims to get 49% stake in the company, per the media outlet.

Other investors are expected to own another 49% of the company, while OpenAI’s nonprofit parent would hold the remaining stake, per Semafor.

The Wall Street Journal reported last Thursday that OpenAI was in talks to sell existing shares of the company in a tender offer that would value the firm at $29 billion (the company is currently valued around $20 billion).

Venture capital firms including Thrive Capital and Founders Funds were in talks to invest at least $300 million in the share sales, according to the Journal.

Bloomberg reports that Microsoft has previously invested about $1 billion in OpenAI.

It’s also working to add ChatGPT to its Bing search engine, seeking an edge on Alphabet’s dominant search offering.

The bot is capable of responding to queries in a natural and humanlike manner, carrying on a conversation and answering follow-up questions, unlike the basic set of links that a Google search provides.

So, is Microsoft about to ‘bail out’ Musk’s Twitter bridge loan?

US futures dropped as investors waited to see whether Fed Chair Jerome Powell will differentiate himself from hawkish comments made by two policy makers on Monday when he speaks later at an event in Sweden at 9am ET. S&P 500 and Nasdaq 100 futures dropped to session lows around 7:15am ET after trading little changed for much of the overnight session. Traders are also reluctant to take strong directional bets before US inflation data is published on Thursday and visibility clears up on the trajectory of interest rates. The Bloomberg Dollar Spot Index was near session after trading earlier in a tight range, while the rest of the currencies in the Group of 10 were mixed. Treasuries also broke out above a range, hitting session highs around 3.57% around the time stocks stumbled. Oil rose with gold and Bitcoin rallying for a seventh-straight day.

Among US premarket movers, Virgin Orbit slumped as much as 27%, putting the stock on track for its biggest drop since June 2022, after the failure of a rocket that Richard Branson’s satellite company launched from a Boeing 747. Among winners, Oak Street Health rose 33% after Bloomberg reported that drugstore operator CVS is exploring an acquisition of the primary care provider, in a deal which could exceed $10 billion, including debt. Shares in Frontline, listed both in the US and Norway, surged as much as 20% in Oslo after the shipping giant controlled by billionaire John Fredriksen walked away from its plans to acquire Belgium’s Euronav, which dropped 21% on the news. Bed Bath & Beyond shares also jumped as much as 20%, poised to continue its rebound from the previous session, ahead of its earnings report and after the troubled home furnishings retailer saw its long-term rating upgraded at S&P. Here are some other notable premarket movers:

• Boeing stock slides 2.7% as Morgan Stanley downgraded its rating on the planemaker to equal-weight from overweight, saying the stock is now approaching fair value following recent outperformance.
• Frontline (FRO US) shares surge 22% after the company said it wouldn’t make a voluntary conditional exchange offer for all outstanding shares of the oil tanker operator Euronav. The decision not to proceed follows opposition from Belgium’s Saverys family – a major holder in Euronav.
• Bed Bath & Beyond (BBBY US) shares jump 20%, poised to continue their rebound from the previous session before its earnings report. The troubled home furnishings retailer also saw its long-term rating upgraded at S&P.
• HP Enterprise shares were down 1.9% after Barclays downgraded them to equal-weight, taking a cautious view on IT hardware stocks in 2023 given a challenging macro backdrop. The broker also cut NetApp (NTAP US) and upgraded Keysight (KEYS US) shares.
• Barclays expects a difficult 1H for US software stocks as estimates still look too high, even if valuation levels are “interesting.” The broker upgrades DoubleVerify (DV US) and Confluent (CFLT US), cuts Dynatrace (DT US).
• RBC anticipates a challenging start for US software stocks in 2023, which will eventually give way to “green shoots” of optimism. The broker outlines its top picks in the sector and cuts Box (BOX US) to underperform.
• Watch Chemours (CC US) after the stock was cut to sector perform from outperform at RBC on expectations that a challenging fourth quarter for the chemicals firm will feed into the first half of 2023.
• Keep an eye on PPG Industries (PPG US) as it was cut to sector perform from outperform at RBC with limited upside seen for the paint-maker’s stock amid expectations that volumes will come under pressure.

Sentiment was dented on Monday, as a 1.4% gain in the S&P was fully reversed, after the San Francisco and Atlanta Fed presidents poured cold water on hopes that monetary tightening would soon ease off by calling for interest rates to rise above 5% and staying there, a scenario strategists believe would be negative for stock markets. It’s also what they have been saying for months, but the market is always happy to keep pricing in the same flashing red headline as if it was new.

“Sentiment is torn between the fear of missing out good news on inflation and, by opposite, angsts the Fed will be stubborn in its fight against inflation which reinforces the risk of a recession,” said Sarah Thirion, a Paris-based strategist at TP ICAP Europe. Fears about Covid in China and the trend of corporate guidance which will be unveiled during the next earnings season are also weighing on stocks, Thirion said.

“The same pattern keeps emerging, with investors clinging onto any data which appears to show the economy is cooling off, only to see their hopes dashed by policymakers who clearly believe the inflation-busting job is far from over,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Thursday’s US inflation report, which will come out almost a week after the latest jobs data showed wage growth has decelerated, will be among the last such readings Fed policy makers will see before their Jan. 31-Feb. 1 gathering.

European stock markets, which have outperformed Wall Street since September, were also in a cautious mood with the Stoxx 600 down 0.6% after hitting an eight-month high yesterday. Retailers, industrials and miners are the worst performing sectors. Here are some of the most notable European movers:

• Orsted gains as much as 4.1% after being named among preferred picks in the renewables space by both Morgan Stanley and Exane.
• Card Factory jumps as much as 9.4% after raising full-year pretax profit guidance in a trading update. Liberum said the greetings-card retailer delivered another “impressive” update.
• Plus500 gains as much as 3% after giving an update for the year-end, with Liberum saying the trading platform saw an “excellent” performance in FY22.
• AO World rises as much as 18% after raising guidance for FY adjusted Ebitda. Jefferies says the update shows that efforts to cut costs and improve margins are working.
• European staffing stocks drop following a warning from UK recruiter Robert Walters and with Dutch peer Randstad downgraded by Degroof
• Euronav slumps 21% after Frontline said it won’t make a voluntary conditional exchange offer for all outstanding shares of the oil tanker operator.
• Husqvarna falls as much as 4.6%, the most since Dec. 15, after Danske Bank cut its recommendation to hold from buy, expecting a “challenging” first half of 2023.
• Kahoot shares fall as much as 18%, the most since November, after the company published below-forecast fourth- quarter preliminary adjusted Ebitda on weak macro conditions.
• Games Workshop falls as much as 6.9% after reporting 1H results that Jefferies said contained highs and lows, highlighting the challenges flagged by management.

Optimism for the region is rising with economists at Goldman Sachs no longer predicting a euro-zone recession after the economy proved more resilient at the end of 2022, natural gas prices fell sharply and China abandoned Covid-19 restrictions earlier than anticipated. GDP is now expected to increase 0.6% this year, compared with an earlier forecast for a contraction of 0.1%. Economists led by Jari Stehn warn in a report to clients of weak growth during the winter given the energy crisis, and say headline inflation will ease faster than thought, to about 3.25% by end-2023. As reported previously, BofA CIO Michael Hartnett said a new era may have started with the ratio of the S&P 500 index to the Stoxx Europe 600 breaking its 100-week moving average, a support that has held strong for more than a decade.

Earlier in the session, Asian stocks declined as Chinese equities halted their rally, which had pushed a key regional benchmark to a bull market, amid profit-taking and renewed caution on the Fed’s rate-hike path.  The MSCI Asia Pacific Index dropped as much as 0.3% as of 4:17 pm in Singapore, dragged lower by Alibaba and Ping An Insurance. Trading volume was about 4% lower than the three-month average, according to data complied by Bloomberg. Tuesday’s breather comes as Asia’s benchmark index a day earlier entered bull territory, driven by China’s reopening and a weakening dollar that lured investors back to the region after facing a downward spiral for much of 2022.  Benchmarks in Hong Kong posted moderate losses while stock gauges in India, Singapore and Indonesia dropped more than 1%. Indonesian stocks were on track to enter a technical correction as investors looked to cash out from one of Asia’s hottest markets for 2022.

Japanese equities climbed as traders returned from a holiday; as investors assessed the impact of China’s reopening and US job data that showed slower-than-expected average wage growth. The Topix Index rose 0.3% to 1,880.88 as of the market close in Tokyo, while the Nikkei advanced 0.8% to 26,175.56. Daikin Industries Ltd. contributed the most to the Topix Index gain, increasing 5.3%. Out of 2,162 stocks in the index, 1,092 rose and 953 fell, while 117 were unchanged. “Japanese stocks benefited from the belief that the Fed’s next rate hike will be more moderate,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management. “China’s reopening has a positive impact on Japanese stocks, and inbound demand will resume once regulations around Chinese tourists are eased.”

“After the sharp rally, Asian markets could see a bout of profit taking amid headwinds from tighter financial conditions and no respite in Fed rate-hike outlook,” said Nitin Chanduka, a strategist at Bloomberg Intelligence.  Two Fed officials said the central bank will likely need to raise interest rates above 5% before pausing and holding for some time. Still, the recent rally in Chinese equities may have more legs as consumption-driven firms drive the reopening rebound further and China shifts its focus to economic growth. Investors expect a strong 2023 for both Chinese stocks and the yuan as Asia’s largest economy bucks the global trend of weakening expansion. Morgan Stanley turned even more bullish on the market, raising price targets further and expecting China to top global equity-market performance in 2023.  “We remain of the view that Asian investors should use this volatility in 1Q23 as an opportunity to raise exposure,” said Chetan Seth, an Asia equity strategist at Nomura Holdings. 

Australian stocks nudged lower after Fed speakers dampened risk sentiment. The S&P/ASX 200 index fell 0.3% to close at 7,131.00 as investors assessed hawkish commentary from Fed officials. The retreat halted the benchmark’s four-day run of gains. Miners and banks were the biggest drags on Tuesday. In New Zealand, the S&P/NZX 50 index rose 0.2% to 11,665.26

Stocks in India resumed a decline after bellwether Tata Consultancy’s quarterly earnings showed increasing caution over technology spending amid an uncertain economic outlook. The S&P BSE Sensex fell 1% to 60,115.48 in Mumbai, while the NSE Nifty 50 Index declined by an equal measure. Both the gauges are close to extending their losses from peak levels last month to 5% as investors resort to profit-taking at the start of the earnings season. Sixteen of BSE Ltd.’s 20 sector sub-gauges declined, led by telecom companies, while Reliance Industries was the biggest drag on the Sensex, plunging 1.5%. Tata Consultancy Services closed 1% lower after its net income for the fiscal third quarter trailed estimates. Foreign investors have been sellers of local shares this month, taking out about $602 million through Jan. 6 after $167m of outflows in December.

In FX, the Bloomberg Dollar Index jumped near session highs after the greenback initially slipped against most of its Group-of-10 peers. The dollar finds itself at a make-or-break technical moment, with its two-year rally under threat as key US inflation data looms.

• The euro rose to a daily high of around $1.0750 in European session. The euro hit fresh cycle highs Monday and options pricing is coming to reflect a more constructive outlook in the short-term. Bunds and Italian bonds dropped, underperforming Treasuries
• The Canadian dollar was steady. USD/CAD’s downward path is being refueled in the options space as traders position for an extended period of US dollar weakness
• The Australian dollar was the worst G-10 performer. Sovereign bonds inched up
• The yen was steady at 131.80 per dollar. Tokyo’s inflation outpaced forecasts to hit 4% for the first time since 1982, suggesting the underlying price trend is stronger than expected by economists, a factor that could further fuel speculation the Bank of Japan will adjust policy again

In rates, Treasuries ease lower, following wider losses across core European rates amid supply pressures and ahead of a Riksbank conference on central bank independence where ECB’s Schnabel, BOE Governor Bailey and Fed Chair Powell are all scheduled to speak. US 10-year yield around 3.56%, cheaper by 3bp on the day with bunds and gilts lagging by additional 2.5bp and 2bp; long-end Treasuries outperformance flattens 5s30s by 1.5bp vs Monday’s close.  Front-end and intermediates lead slight losses in Treasuries, flattening 5s30s spread. After Powell appearance, the year’s first auction cycle begins at 1pm ET with $40bn in 3-year new issue, followed by $32b 10-year, $18b 30-year reopenings on Wednesday and Thursday.  European bonds are also in the red with Bund futures underperforming their UK counterparts. The Gilt curve bear steepens with 2s10s widening 2.1bps.

In commodities, crude futures reversed an earlier drop to trade higher. WTI Has added 0.5% to trade near $75.00. Spot gold rises roughly $5 to trade near $1,877/oz.

Bitcoin is support above the USD 17k mark, holding towards the top-end of USD 17133-17294 parameters.

Looking to the day ahea, at 9 a.m., Fed Chair Jerome Powell will speak at an event hosted by the Swedish central bank. Other speakers include  BoE Governor Bailey, BoJ Governor Kuroda, BoC Governor Macklem, and the ECB’s Schnabel, De Cos, and Knot. An hour later, we’ll get the latest data on wholesale inventories. At 10:30 a.m., President Joe Biden will meet Canada’s Justin Trudeau, while Treasury Secretary Janet Yellen meets Canadian Deputy Prime Minister Chrystia Freeland at 1:30 p.m. The US will sell $40 billion 3-year notes at 1 p.m.

Market Snapshot

• S&P 500 futures down 0.5% to 3,896
• STOXX Europe 600 down 0.7% to 445.05
• MXAP little changed at 161.72
• MXAPJ down 0.3% to 534.27
• Nikkei up 0.8% to 26,175.56
• Topix up 0.3% to 1,880.88
• Hang Seng Index down 0.3% to 21,331.46
• Shanghai Composite down 0.2% to 3,169.51
• Sensex down 1.1% to 60,097.38
• Australia S&P/ASX 200 down 0.3% to 7,131.00
• Kospi little changed at 2,351.31
• German 10Y yield little changed at 2.27%
• Euro up 0.2% to $1.0751
• Brent Futures up 0.1% to $79.73/bbl
• Brent Futures up 0.1% to $79.74/bbl
• Gold spot up 0.3% to $1,876.70
• U.S. Dollar Index little changed at 103.06

Top Overnight News from Bloomberg

• Cost pressures in corporate Germany appear to be easing, with fewer companies planning price increases during the coming months. Price expectations for the whole economy fell to 40.3 points in December from 46.2 points the previous month, according to a survey by the Ifo Institute published Tuesday
• Back in October equities and bonds were breaking from their normal settings to move together far more tightly than at almost any stage in history. Since then, the ties have only become tighter, as the prospects of an end to Fed rate hikes helps to drive gains for both Treasury futures and S&P 500 contracts
• East European nations started 2023 with a flurry of dollar issuance, putting the region on track for a record year as it rediscovers the foreign-debt market beyond its traditional euro-denominated sales
• Deflationary pressure in China worsened in the fourth quarter as the economy slumped, with price-growth likely to be subdued even when the economy rebounds later this year, according to China Beige Book International
• Egypt’s urban inflation accelerated at its fastest pace in five years as several rounds of currency devaluation filtered through to consumers

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mostly lower as the risk appetite in the region stalled following a similar handover from Wall St where the major indices failed to sustain early gains despite a further dovish Fed repricing. ASX 200 was lacklustre amid weakness in industrials and mining stocks, although price action was rangebound amid the lack of any major fresh drivers. Nikkei 225 outperformed as it played catch-up to Monday’s advances on return from the extended weekend but with upside capped as participants also reflected on weak Household Spending and firm Tokyo CPI data releases. Hang Seng and Shanghai Comp were indecisive as the border reopening euphoria faded and despite reports that China will cut VAT for small businesses, while the PBoC also continued to drain liquidity.

Top Asian News

• Chinese state media noted that the COVID-19 wave is past its peak in many parts of China.
• China’s embassy in South Korea stopped issuing short-term visas for Korean citizens visiting China and said it will adjust policy subject to the lifting of South Korea’s discriminatory entry restrictions against China, according to Reuters. Subsequently, the embassies in Japan took the same step.
• China’s State Planner publishes registration rules for mid- & long-term foreign borrowings by companies, aimed at promoting orderly offshore financing.
• PBoC is to increase financial support for domestic demand and the supply system, to guide the balance sheets of high-quality real estate enterprises back to a safe range, ensure steady and orderly property financing.

European bourses are underpressure, Euro Stoxx 50 -0.5%, in a continuation of the tepid APAC tone amid minimal newsflow. US futures are similarly contained and are diverging slightly around the unchanged mark pre-Powell. Amazon (AMZN) intends to close three UK warehouses (will impact 1,200 jobs), according to the PA.

Top European News

• ECB’s Schnabel says greening monetary policy requires structural changes to our monetary policy framework rather than adjustments to our reaction function. Preliminary inflation data for December point to a persistent build-up of underlying price pressures even as energy price inflation has started to subside. Interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive.
• Adyen, Nexi to Be Hit by Weaker Card Spending, Barclays Says
• Teneo Is Said to Near Deal to Buy British PR Firm Tulchan
• RBC Sees Good Growth For European Luxury and Premium Brands
• Uniper Says CEO and COO to Resign After Government Takeover

FX

• Dollar is trying to regroup ahead of Fed Chair Powell, but DXY is heavy on the 103.000 handle and mixed vs majors.
• Kiwi marginally outperforming as Aussie retreats with Yuan after some Chinese officials warn about 2-way volatility in 2023.
• AUD/NZD cross reverses towards 1.0800 from 1.0860+, USD/CNH bounces from 6.7585 to almost 6.8000.
• Euro consolidates on a 1.0700 handle vs Buck, but Pound runs into resistance pips from 1.2200
• PBoC set USD/CNY mid-point at 6.7611 vs exp. 6.7613 (prev. 6.8265)

Fixed Income

• Bonds retreat further from peaks in consolidation and consideration of heavy conventional and syndicated issuance.
• Bunds sub-137.00 and very close to Monday’s base, Gilts mostly under 102.00 and T-note below par within a 114-19+/11 range.
• Focus on Central Bank speakers at a Riksbank symposium where ECB’s Schnabel has already been hawkish.
• Saudi Arabia has begun marketing a three-part USD bond, via Bloomberg.

Commodities

• Crude benchmarks spent much of the European morning little changed, but have recently broken out of and eclipsed initial parameters, with upside of circa. USD 0.50/bbl as such.
• Barclays remains constructive on the space reiterating its Brent 2023 forecast of USD 98/bbl; writing there is the potential for USD 15-25/bbl of downside if the slump in global manufacturing worsens..
• Goldman Sachs cut its Summer 2023 TTF price forecast by EUR 80 to EUR 100/MWh, citing exceptionally warm realised and forecast weather, as well as strong energy conservation.
• Iraq’s December crude production was unchanged from November at 4.43mln BPD; in-line with its OPEC+ quota.
• Large Chinese nickel producer Tsingshan is in talks with struggling Chinese copper plants regarding processing its material which could double Chinese refined nickel output this year, according to Mining.com.
• LME says further work will be required to prepare and communicate to the market a detailed implementation plan re. the Oliver Wydman review.
• Spot gold and silver are diverging a touch and remain in close proximity to the unchanged mark in similarly narrow ranges, base metals are generally contained though the negative APAC bias remains in play.

Geopolitics

• US Pentagon is mulling sending Stryker armoured vehicles to Ukraine in an upcoming aid package, according to people familiar with the matter cited by Politico.
• UK is willing to send battle tanks to Ukraine with PM Sunak supportive of Challenger II supply that could provide Ukrainian President Zelensky with a ‘knockout punch’, according to The Telegraph.
• Russian Defence Minister Shoigu says Moscow will develop its nuclear triad and be the main guarantee of Russian sovereignty, according to Interfax.

Crypto

• Bitcoin is support above the USD 17k mark, holding towards the top-end of USD 17133-17294 parameters.

US Event Calendar

• 06:00: Dec. SMALL BUSINESS OPTIMISM, 89.8; est. 91.5, prior 91.9
• 10:00: Nov. Wholesale Trade Sales MoM, est. 0.2%, prior 0.4%
• 10:00: Nov. Wholesale Inventories MoM, est. 1.0%, prior 1.0%

Central Bank Speakers

• 05:10: Bailey, Schnabel, Macklem Speak in Stockholm
• 09:00: Powell Discusses Central Bank Independence at Riksbank Event

DB’s Jim Reid concludes the overnight wrap

Markets looked set to start the week off with a positive start across the globe yesterday until the last hurdle as the S&P 500 slipped around 1.5% from the European close to end -0.07%. The narrative explaining the reversal centred around more hawkish Fed speak but short-end markets didn’t move at all over this period so one has to be cautious on the reasons for the dip.

For the record though, Atlanta Fed President Bostic indicated that the Fed was committed to raising interest rates into a “5-5.25% range” and then holding there through 2024 in order to stamp down on excess demand in the economy. The length of time and the implication that rate cuts were not imminent seems to have been what the market grabbed on to, and this mirrors the comments from the FOMC minutes earlier this month, which indicated the Fed’s concern over a “pause” being mistaken by the market as a “pivot”. Bostic also was in favour of slowing rate hikes to 25bps in February if the inflation print on Thursday showed consumer prices cooling after the payrolls data last Friday showed slowing wage growth. Separately, San Francisco Fed President Daly said that she expected the fed funds rate to reach above 5% but that the final level is dependent on incoming inflation data, while highlighting how core services ex-housing has been a persistent source of pricing pressures. Neither Fed presidents are voting members this year, but offer a window into the FOMC’s thinking but as we said, Fed pricing was also little changed after these comments.

Those remarks come ahead of Fed Chair Powell today, who’ll be speaking at an event on central bank independence at 14:00 London time. It’s uncertain whether the topic in question will lead to an in-depth policy discussion, but if we do get any, a key question will be whether he entertains the prospect of a further downshift in the pace of rate hikes to 25bps. That’s currently the base case in markets, but clearly the CPI release on Thursday will be an influence on this and to future FOMC meetings too.

Most of the US session was more about pricing in less Fed hikes over the coming months with the 10yr yield down -2.59bps to 3.532% (fairly flat in Asia this morning). Investors also continued to downgrade their expectations for further hikes from the Fed, with the year-end rate at just 4.44%, down -4.2bps on the day. Those moves were given a further boost by data from the New York Fed, whose data on inflation expectations showed that 1yr expectations fell to a 17-month low in December of 5.0%. That said, the news wasn’t quite as positive when it came to longer time horizons, with 3yr expectations remaining at 3.0%, and 5yr expectations ticking up a tenth to 2.4%.

Even though US equities gave up gains, Tech stocks outperformed with yields lower, with both the NASDAQ (+0.63%) and particularly the FANG+ index (+2.41%) holding on to larger gains. Tesla (+5.9%) was the best performing member of the large-cap index and reduced its YTD losses to -2.77%. And back in Europe, the STOXX 600 (+0.88%) continued to move higher, bringing its 2023 YTD gains to +5.52%, and marking out European equities as one of the top 2023 performers so far.

However, one area that struggled yesterday were European sovereigns, with yields on 10yr bunds (+1.8bps) and OATs (+1.1bps) both rising, even if both had come off their earlier session highs. That followed data showing that Euro Area unemployment remained at a record low of 6.5% in November, which points to a historically tight labour market that could lead to further wage and hence inflationary pressures. Gilts were one of the biggest underperformers, with the 10yr yield up +5.4bps on the day amidst a speech from BoE chief economist Pill. In his remarks, he said that “the distinctive context that prevails in the UK… creates the potential for inflation to prove more persistent”.

In terms of currencies, the US Dollar index (-0.85%) weakened to its lowest level since early June, which brings its declines to almost -10% (-9.73%) since its peak in late-September, back when the UK mini-budget turmoil was at its height and global markets were selling off more broadly. This decline in the dollar very much leans into our strategists’ latest FX blueprint, where they write that various forces such as a reversal in the European energy shock and the economic reopening in China have bearish implications for the dollar with a target of $1.15 by year-end (current $1.07). You can read their full piece here.

That dollar weakness went hand-in-hand with noticeably tighter CDS spreads for most of the day, hitting levels we haven’t seen in months. For instance in Europe, the iTraxx Crossover tightened -8.4bps to 417bps, meaning it’s now more than -250bps beneath its own peak in late-September and the tightest since April. Meanwhile in the US, the CDX HY spread was down -10bps to 438bps at one point, its tightest level since August, before the late turn in risk assets saw CDX HY spreads wider (+1.9bps) on the day. A reminder that we revised our already bullish Euro Q1 credit spreads forecasts tighter over the weekend. See the piece here.

Asian equity markets are mixed this morning with the Hang Seng (-0.34%), the Shanghai Composite (-0.18%) and the CSI (-0.10%) lower whilst the KOSPI (+0.31%) and Nikkei (+0.76%) are edging higher with the latter reopening following a public holiday. DM stock futures are pricing in a weaker start with contracts on the S&P 500 (-0.28%), NASDAQ 100 (-0.35%) and the DAX (-0.85%) all trading in the red.

Early morning data showed broadening signs of inflationary pressures in Japan after Tokyo’s core consumer prices advanced +4.0% y/y in December – the fastest pace in four decades and beating market expectations of a +3.8% gain and against a +3.6% increase last month. With the core inflation figure staying above the BOJ’s 2% price target for the seventh consecutive month, it further heightens the possibility of an additional rise in the nationwide CPI.

There wasn’t much in the way of other data yesterday, although German industrial production grew by +0.2% in November (vs. +0.3% expected), and the previous month’s decline was revised to show a larger -0.4% contraction (vs. -0.1% previously).

To the day ahead now, and there are an array of central bank speakers including Fed Chair Powell, BoE Governor Bailey, BoJ Governor Kuroda, BoC Governor Macklem, and the ECB’s Schnabel, De Cos, and Knot. Otherwise, data releases include French industrial production for November, and in the US there’s the NFIB’s small business optimism index for December.

Since the end of December, a ‘parade of cyclones’ has swamped California. The latest round of torrential rain has caused flooding in Los Angeles County, and still unclear in the early morning hours of Tuesday the extent of the destruction, though social media video on Monday evening shows flooded streets, overflowing streams and rivers, and mudslides in what is usually a dry, sunny place where residents have to worry about drought.

National Weather Service said 34 million people are under flood alerts across Southern and Central California through early Tuesday. In Los Angeles County, a flood warning is in effect through the evening. 

Yet another surge of moisture will inundate #California on #Tuesday for more heavy rain and flooding. A moderate threat (level 3 out of 4) for excessive rain and #flooding covers a large chunk of southern California, including the Los Angeles metro area. #TurnAroundDontDrown pic.twitter.com/BJg4pGfbyz

— National Weather Service (@NWS) January 9, 2023

Dramatic footage has surfaced on social media showing the widespread flooding. 

BREAKING: Ellen DeGeneres shares an intense clip of raging flood waters near her home in Montecito, California, which is under mandatory evacuation following the recent storm system in the area.#southerncalifornia #flooding pic.twitter.com/WetD81ocD2

— Los Angeles Magazine (@LAmag) January 10, 2023

Flooding east of Fresno, California. #flooding #naturaldisaster #water #flood #California pic.twitter.com/zYuBhNGkh5

— Trevor (@trevsaucy) January 10, 2023

California is a mess. Mass-flooding happening all because Gavin Newsom can’t get his shit together. He’s a horrible Governor and the reason for all ot this. Here’s a shot of what Santa Cruz, California looks like. pic.twitter.com/lzIKlpvSwX

— The Sly Show🇺🇲 (@theslyshow) January 9, 2023

Just how bad is the flooding in California?

My daughter just sent me this photo from downtown San Luis Obispo (she’s a senior at Cal Poly) pic.twitter.com/V56Qzj0Zzn

— Adam Taggart (@menlobear) January 9, 2023

Flooding in California. Highway 101 is completely covered by the Ventura River… pic.twitter.com/RGsTxKrV3Q

— Citizen Free Press (@CitizenFreePres) January 10, 2023

EXTREME CAUTION
STATE ROUTE 168 CLOSED at top and bottom of 4-lane.

See dramatic video from @ChpFresno Officer.

Avoid travel to Shaver Lake and above if at all possible!⚠️ @ABC30 @KSEE24 @KMPHFOX26 @CBS47 @FresnoBee @FresnoSheriff @CaltransDist6 @Cal_OES pic.twitter.com/0B2Qqgm85z

— CHP Fresno (@ChpFresno) January 9, 2023

Forecasters estimate the latest round of rain could bring upwards of 5-10 inches in some areas by the end of this week. 

More stormy weather is forecasted for today. NWS said heavy precipitation is expected this morning and will begin to taper later in the day, warning a new and “energetic” low-pressure system was becoming more powerful offshore.

Officials said Los Angeles and San Diego residents faced an increased risk of flash flooding and mudslides. Tropical storm-strength winds were also forecast for San Luis Obispo County. Parts of Highway 101, which runs up and down the West Coast, were closed due to flooded-out sections of the major roadway. 

Santa Barbara County told residents to shelter in place and closed public schools today. Officials told wealthy residents of Montecito, such as Prince Harry and Meghan, the Duchess of Sussex, to evacuate because of the flooding.   

And it was just only six months ago ‘global warming’ alarmists and celebrities were complaining about droughts… 

California Governor Gavin Newsom announced yesterday that storms had caused 14 deaths. He said that figure was higher than deaths caused by “wildfires in the past two years combined.”

The endless deluge is due to an atmospheric river leaving low altitudes with record amounts of rain and high altitude with feet of snow. In the Sierra Nevada, a mountain range in Eastern California, some areas received 1 to 4 feet of snow. 

Most of California has seen rainfall totals in the past few weeks up to 600% higher than average, according to NWS. AccuWeather said the storms have already caused more than $1 billion in losses and damages.