A magnificent Monday to you as investors wary of risks following deaths from virus in China.

In brief (TL:DR)

• U.S. stocks closed higher on Friday with the Dow Jones Industrial Average (+0.59), the S&P 500 (+0.48%) and the Nasdaq Composite (+0.01%) all up.

• Asian stocks fell amid concern that China may tighten Covid curbs after a string of reported deaths. 

• Benchmark U.S. 10-year Treasury yields declined four basis points to 3.79% (yields fall when bond prices rise). 

• The dollar climbed against is Group-of-10 counterparts and emerging-market currencies. 

• Oil sank with December 2022 contracts for WTI Crude Oil (Nymex) (-0.85%) at US$79.40 on concern of a weakening demand outlook from China. 

• Gold edged lower with February 2023 contracts for Gold (Comex) (-0.42%) at US$1,761.50.

• Bitcoin (-3.17) fell to US$16,152.

In today's issue...

1. Big Money Managers are Betting on Stagflation

2. Holiday Sales May not be a Savior for Retail Stocks 

3. Crypto Traders in US Surged 149% to 2.3 Million as Pandemic Hit 

Market Overview

Stocks fell amid concern that China may tighten Covid curbs after a string of reported deaths, with investors seeking shelter in the haven assets of Treasuries and the dollar.

Worsening outbreaks across China are stoking concerns that the authorities may again resort to harsh restrictions to minimize the death toll, even though they recently called for loosened quarantine and mass testing rules.

Traders this week will also be looking to minutes of the most recent Federal Reserve policy meeting for more clues on the course of rate hikes. 

Asian markets were mostly down on Monday with Tokyo's Nikkei 225 (+0.16%) up slightly, while Seoul's Kospi Index (-1.02%), Hong Kong's Hang Seng Index (-2.02%) and Sydney’s ASX 200 (-0.18%) all down.

1. Big Money Managers are Betting on Stagflation

• Stagflation is the consensus viewpoint among a whopping 92% of respondents in Bank of America Corp.’s latest fund-manager survey.

• For now, professional investors and institutions will need to see more conclusive evidence of a benign shift in the economic trajectory before materially changing their defensive positioning across the beaten-up world of stocks and bonds. 

Bank of America’s latest fund-manager survey shows a pervasive belief in stagflation among a whopping 92% of respondents, with a closely watched section of the Treasury yield curve sending fresh recession signals. 

Although promising inflation data over the past week or so suggest the Federal Reserve may accomplish a soft landing after all, big money managers are still betting that an economic downturn riddled with still-hot price pressures will define trading next year. 

While Citigroup is painting a scenario of the “Powell Push” in which the Fed will be compelled to hike even if growth plunges, BlackRock Inc. sees no prospect of a soft landing either in the US or Europe. 

A US growth slowdown, earnings downgrades and elevated price pressures are forecast for the next year, even as recent data on employment as well as consumer and producer prices - combined with decent corporate earnings - suggest the US central bank may actually succeed in its high-wire mission to ramp up borrowing costs without crashing the business cycle.

Bank of America’s’s latest survey also shows they’re historically underweight equities with tech-share positioning the lowest since 2006 and overweight cash.

Invesco is also treading carefully, tilting exposure to defensive equities with overweight bets in Treasuries and US investment-grade credit.

For now, professional investors and institutions will need to see more conclusive evidence of a benign shift in the economic trajectory before materially changing their defensive positioning across the beaten-up world of stocks and bonds.

2. Holiday Sales May not be a Savior for Retail Stocks 

• Traders are clearly betting against the sector or hedging their exposure to even deeper losses with trading volume in bearish put options for the consumer discretionary sector spiking recently. 

• The bad news reflects how much inflation, growing economic uncertainty and rising interest rates are weighing on holiday spending plans.

2022 has been a brutal year for retail stocks with the S&P 500 Retailing Index has lost more than 30% in 2022. And unfortunately, the last quarter may not be a savior this time around as consumers increasingly tighten their belts heading into the crucial holiday shopping season. 

Traders are clearly betting against the sector or hedging their exposure to even deeper losses with trading volume in bearish put options for the consumer discretionary sector spiking recently. 

More stores and chains warn that frugal shoppers are going to cut into their bottom lines. While Target Corp. tumbled after announcing that sales trends softened in October, calling out weakness in key gift areas like toys, the National Retail Federation also predicted that holiday sales would grow at a significantly slower pace than last year.

Meanwhile, Amazon.com projected the slowest holiday-quarter growth in its history, sending its market value briefly below $1 trillion.

According to data from S&P Global Market Intelligence, shares out on loan for the members of the S&P 500 Consumer Discretionary Index, an indication of short positioning against the group, are up to 3.7% on average from 2.7% at the beginning of the year. 

Although US retail sales actually climbed the most in eight months in October, according to Commerce Department data released last week, sales at department stores still fell, and other key discretionary categories like electronics and sporting goods declined. 

Soaring inflation is forcing shoppers to pay more for essentials, and that’s left stores stuck with a glut of excess products, causing retailers to mark down prices at the expense of profits. Goldman Sachs surveyed 1,000 US consumers and found that nearly half plan to spend less this holiday season than they did last year. 

Investors will be closely watching quarterly earnings reports this week from Best Buy Co., Nordstrom Inc. and several mall-based apparel retailers for further perspective on holiday sales trends.

3. Crypto Traders in US Surged 149% to 2.3 Million as Pandemic Hit 

• Roughly 2.3 million US taxpayers told the Internal Revenue Service they traded cryptocurrencies in 2020, data from the agency show.

• The figures underscore crypto's growing popularity before this year's painful market rout and may also reflect the IRS's efforts to ensure that filers disclose holdings and pay taxes on any gains. 

According to data from the Internal Revenue Service, roughly 2.3 million US taxpayers traded cryptocurrencies in 2020. 

That’s a 149% increase from 2019, when nearly 928,000 taxpayers answered “yes” to a question of whether they had received, sold, sent or otherwise acquired virtual currency.

The figures underscore crypto's growing popularity before this year's painful market rout and may also reflect the IRS's efforts to ensure that filers disclose holdings and pay taxes on any gains. 

A Federal Reserve study from late 2021 and released in May found 12% of American adults “held or used cryptocurrencies in the prior year”. 

The IRS report on individual tax return data also showed Americans’ unemployment compensation jumped to $405 billion in 2020, from $21.4 billion in 2019. 

Despite the economic fallout from the pandemic, government relief payments and a rise in investors’ capital gains helped total US individual income climb 5.2% to $12.7 trillion. Wages and salaries increased more slowly, by 1.7% to $8.4 trillion.