Stocks headed to the moon if Yellen whips out a surprise this month, says Nomura strategist

HSBC’s global equity strategist Alastair Pinder says global stock markets have likely overshot fundamentals, and a temporary pause should be expected, which seems to be largely happening, right on cue. “With markets increasingly priced for perfection, the risk/reward looks less attractive to us,” he says.

There seems to be a lot of that sentiment in the air lately, as the pullback to start the year has offered some of last year’s bearish strategists some vindication.

Onto our call of the day from Nomura Securities International’s strategist Charlie McElligott, who says stocks may get a surprise boost from Treasury Secretary Janet Yellen at the next quarterly refunding announcement (QRA) expected Jan. 29. The government’s borrowing plans, that is size of auctions and debt duration, have become an increasingly monitored event.

“So here we are, with many clients I speak to believing that both stocks and bonds have overextended / ‘too much, too fast’ into the start of ’24, with widespread expectations of a healthy pullback SOON,” McElligott says in a note.

And he reminds traders of the “binary” risk into the end of this month and early next from that Treasury QRA, where many are expecting a resumption of coupon issuance increases. Under that outcome expect “USTs lower/ long-end yields bleeding higher, re-tighten financial conditions, and collectively then act as a headwind for now ‘high valuation’ equities.”

Just to back up, coupon refers to how much interest a bond will pay out to an investor and higher interest rates over the past couple of years has driven up coupons for bonds. Treasury bills, on the other hand, do not offer a coupon as they are instead sold at a discount rate to their face value.

So back to McElligott who offers up an alternative scenario for investors to think about with regards to that Treasury event.

“But what if that ‘consensus path’ for the QRA yet-again sees ‘political interventionism /activism’ from the Treasury’s Yellen, and she not only again leans on ‘more bills’ with ‘less coupon’ increase than currently anticipated…but then also too clearly provides guidance to markets that this is the final coupon increase moving-forward?”

“This is how we get the ‘right tail,” says the strategist, who explains that such a “shocker” would help ease financial conditions and lead to a flattening of the yield curve — long-term rates falling faster than short-term ones — and lower real and nominal yields, helping risk assets rally.

It’s a bit of a bullish voice in a sea of bears.

Read: ‘Goldilocks thinking’ can set stock-market investors up for losses: Howard Marks

The markets

Stock futures
ES00,
-0.04%

NQ00,
+0.10%
are mostly struggling for traction, as Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
slip. Oil prices
CL.1,
+0.25%
are flat and gold
GC00,
+0.31%
is up, hovering at $2,037/oz.

The buzz

The SEC says its X account was compromised on Tuesday, leading to an unauthorized post saying it had approved the launch of exchange-traded funds investing in bitcoin. The crypto
BTCUSD,
-0.02%
was up slightly at $45,569 following a volatile day of trading.

Hewlett Packard Enterprise
HPE,
-8.92%
announced a $14 billion deal for Juniper Networks
JNPR,
+21.81%.

Taiwan Semiconductor Manufacturing
2330,
-0.34%,
which makes chips for Apple and Nvidia, reported a fourth-quarter sales rose, against analysts expectations for a fall. 

Aehr Test Systems
AEHR,
+1.54%
is tumbling after the maker of testing systems for sensors and semiconductors cut its sales outlook due to slowing EV sales growth weighed on orders.

Wholesale inventories are due at 10 a.m., and New York Fed President John Williams will speak at 3:15 p.m.

A barrage of missiles and drones fired into the Red Sea by Yemen’s Houthi rebels were shot down late Tuesday.

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The chart

“Asian markets continue to trade poorly, especially China, trading near its 2019 lows. There have been a lot of key levels broken in the CSI 300, which makes one wonder just how much lower this index could go and how bad the economic conditions in China are,” observes Michael Kramer, founder of Mott Capital, in a blog post.

And when China struggles the rest of the world can follow, says Kramer who says that country’s struggle is hitting oil and may be affecting manufacturing and services sectors. “The weakness seemed to show up in Nike’s
NKE,
-0.85%
results, and I suspect that Nike won’t be the only company to see these struggles when earnings come out over the next few weeks,” he said.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

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