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Stocks look heavy, Barclays down despite beat, Unilever rallies on prices
Caution is the order of the day…European stock markets fell moderately in early trade as the risk-on rally that powered Wall Street to fresh all-time highs ran out of steam overnight. Major bourses –0.5%, with the FTSE 100 under 7,200 again and the DAX under 15,500. The yen rose and Japanese equities fell, leading a broad decline in Asian equities overnight as Evergrande shares resumed trading and promptly plunged 13%. US futures are lower after the Dow Jones industrial average recorded a fresh all-time high and the S&P 500 notched is sixth daily gain on the bounce as investors looked through inflation and central bank fears to better earnings.
The Dow rose to a record intra-day high of 35,669.69, but finished the day 0.1% off its record close, gaining 0.4% for the session. As noted here recently, it might just be that the market has passed peak in/stagflation worries, even if the situation is going to be evident in the real economy for many months to come. Earnings are generally beating expectations – 84% so far according to FactSet. As commented on last night, growth is stalled – the Atlanta Fed’s Q3 GDP estimate is down to just 0.5% from +6% in the summer; inflation is running at +5% at least – German producer price inflation is running above 14%; and the yield curve is inverting, but ‘stonks’ just keep on rising. Rates flattish close to multi-month highs today – as noted yesterday there has been some mild steepening in yields, 2s/10s at 1.25%, 5s30s at 0.96.
Travel stocks are doing a little better in early trade with IAG, EasyJet +1% after posting sizeable losses yesterday as the UK signalled it could reintroduce some restrictions, whilst rising case numbers will make the country less accessible to many foreigners.
Oil is a little lower this morning after moving to fresh multi-year highs overnight – WTI just a shade under $84, Brent hitting $86 a barrel. US inventories were bullish with big draws for distillates and gasoline. Global inventories still falling, India is again calling on OPEC to pump more. Reports indicate Exxon is debating abandoning some of its biggest oil and gas projects.
Tesla earnings beat expectations, but the stock fell. Insiders have been selling the stock ahead of the earnings release, which maybe tells you something. EPS rose to $1.86 vs $1.59 expected on a record revenue quarter. gross margins improved – 30.5% for its automotive business and 26.6% overall. Vice president of vehicle engineering Lars Moravy struck a more conciliatory tone about the NHSTA than his boss: “We always cooperate fully with NHTSA.”
Unilever products are just about everywhere in just everyone’s homes. So, when they raise prices it usually affects a lot of people. Unilever raised prices by an average 4.1% in the third quarter across all its brands, helping it to achieve underlying sales growth of 2.5% despite sales volume declining 1.5%. Turnover rose 4%. The company said it is taking action to “offset rising commodity and other input costs”. Share rose over 2%, delivering a boost to the FTSE 100.
Barclays said profits doubled in the third quarter as a strong performance at its investment bank and further reduction in Covid-era impairments boosted earnings. Attributable profit rose to £1.45bn, up from $611m for the same quarter last year. Return on tangible equity returned to a more normal 11.9% from the 18.1% in the previous quarter. Provisions for loan losses fell to £120m as the economic recovery continues to ease pressure on banks.
CEO Jes Staley touted “the benefits of our diversified business model” as Barclays posted its highest Q3 YTD pre-tax profit on record in 2021. Pre-tax profits at the investment bank rose a mighty 51% to £1.5bn, well ahead of expectations. Staley also pointed to consumer recovery and better rate environment. But does Barclays get enough credit for the investment bank earnings? Despite driving the performance in a fashion similar to some of the big Wall Street beasts it seeks to emulate, shares continue to trade at a hefty discount. Barclays trades at a price to book of about 0.5, whilst US peers are above 1, with BoA at about 1.5 and JPM closer to 2. But if investment banking revenues were not that sustainable and ‘can’t be counted on for future quarters’, why do it? Certainly they are more volatile quarter to quarter – revenues from equity trading, M&A and advisory fees cannot be counted on in the coming quarters to the same extent that mortgage fees and credit card fees might be. But discounting these entirely seems like a mistake by investors. Barclays rightly touts its more diversified revenue stream. When consumer and business growth markets are strained – like during the pandemic – volatility in financial markets creates a good environment for trading revenues to prosper. Barclays is reaping the benefits.
After a softer day on Wednesday, the dollar is a tad firmer this morning as risk is on the back foot. Yen also stronger. GBPUSD tests 1.38 support – daily candles suggest near-term top put in at 1.3830 area and maybe calling for pullback towards lower end of the rising channel. Hourly chart points to declining momentum. Test at 1.3740 for bulls.
US Natural gas futures slip – is the honeymoon over?
With US natural gas futures on a downward trend, we ask is time up for high gas prices?
Natural gas trading
Natural gas futures start the week in the red
What a couple of weeks it’s been for the Henry Hub natural gas contract.
It seems only yesterday that we were talking about natural gas reaching all-time highs. It’s certainly true that wholesale commodity prices in Europe and Asia are still exceptionally high.
While oil continues to rise, gas looks like it’s on the decline. But in terms of the US, which Henry Hub focuses on, we’re asking is the honeymoon over?
Prices were firmly in the red on Monday. Starting the day at around $5.20, Henry Hub futures dropped to $4.90 at their lowest. As of Tuesday morning, prices had climbed back into the green, before slipping down to the $4.90 level.
Why the slump? There are a couple of factors at play.
First up, there is the weather. Mild to seasonal high temperatures across much of the US is capping off demand.
Natural Gas Weather states: “One weather system will bring showers to New England, while a second system tracks through the Mtn West w/rain and snow, but both mild w/highs of 40s to 60s. The rest of the US will be nice w/highs of 60s to 80s for very light national demand.
“The system currently over the Mtn. West will track across the Great Lakes and Northeast this weekend w/highs of 40-60s, lows 20s-40s for a modest bump in national demand.
“For next week, weather systems will bring rain and snow to the West, while very nice over the eastern 2/3 of the US. Overall, national demand will be LOW through Friday, then MODERATE this coming weekend.”
Basically, not a lot of need for gas heating in key consumption areas of the US.
However, we have seen a slight bump in gas consumption. For the week ending October 8th, US consumption increased 1.3% week-on-week.
We’re also in injection season: the time of year when the US looks to build stockpiles in line with colder winter temperatures.
The EIA forecasts that US natural gas inventories ended September 2021 at about 3.3 trillion cubic feet 5% less than the five-year average for this time of year. Injections into storage this summer have been below the previous five-year average.
This was down to a combination of hot summer temperatures leading to more electricity use for cooling purposes and increased exports. Despite this, domestic production has remained fairly flat across the year. A sizeable chunk of US production infrastructure was shuttered earlier in the year due to Hurricane Ida.
The latest EIA data ahead of Thursday’s release shows total stocks standing at stood at 3.369 Tcf for the week ending October 8th – down 501 Bcf from a year ago and 174 Bcf below the five-year average once again.
Gazprom to the rescue?
Switching to European markets, Gazprom might be following the lead of President Putin (read: orders of President Putin) by stepping up production capacity for its long-term gas deals.
“Of course, if Russia’s European partners increase orders and if the volumes in long-term contracts grow, I think that Gazprom will surely develop its production capacity,” Deputy Prime Minister Alexander Novak said in an interview during last week’s Russian Energy Week summit.
This is pipeline all part of pipeline politics. Russia has been accused of gas market manipulation in an effort to force the EU into accepting the Nord Stream 2 pipeline. Never mind that this is pretty much a necessity for Germany’s energy needs, but the bloc has long been basically hostile towards Russia.
But as the European gas crisis rolls on it seems the deck is stacked fairly heavily in Gazprom and Russia’s favour. They’re the ones with the gas. They’re the ones with the export infrastructure. They’re the ones with more customers than just Europe.
Unless Europe picks up more gas from America or Qatar, then it’s likely to remain reliant on Russian products for the foreseeable future.
FTSE makes new post-pandemic high, Bitcoin up on ETF hopes
GPs will be paid more to do what they used to do before the pandemic, like see patients face to face. This is what dislocation and the ‘new normal’ looks like: same service, costs more. That’s one of the reasons why inflation is not going to be as transitory as central bankers have been telling us.
Markets are not that concerned by this, so it seems. The FTSE 100 has broken out to a new post-pandemic high, stretching its recent range by a few more points on the upside to hit a high of 7,242 this morning. This marks a roughly 400pt reversal from the Sep 20th intraday low. It’s been a very tight range of that size since April but there are encouraging signs the FTSE can yet end the year at its pre-pandemic level of 7,700.
Why the rally? Key is energy – BP and Shell among the top performers of the last month and have a big index weighting. That’s BP and Shell, which are both up more than 20% in the last month as oil and natural gas prices have soared. WTI is back above $82 this morning. Next is the two big reopening stories – IAG and Rolls Royce, they are the best performers of the last month among the blue chips. Reopening of travel has been a major factor and we see more good news today with the move to lateral flow tests for international arrivals. Then third we have the big banks – HSBC, Lloyds, StanChart and NatWest have all rallied over 10% in the last month as rates have risen and the macro environment has held up pretty well. Bets the Bank of England is far closer to raising rates have helped, but global bond yields have also been moving higher. The FTSE is exposed to the winds of the global economy and trade, which despite it all are holding up well, and UK shares remain heavily discounted to peers. The FTSE 250, a better gauge of the UK economy, has ticked higher in the last few sessions but is down by around 5% from its Sep high.
Wall Street closed firmly higher yesterday amid a rush of positive earnings reports from the big banks. Walgreens and UnitedHealth also delivered positive results that indicate the large corporations are still able to deliver earnings growth and higher profits despite the rising costs. Supply chain problems will become more obvious when some more consumer discretionary names report, but so far the storm is being weathered. Meanwhile lower rates lifted the big tech boats. The 1.7% rally for the S&P 500 was its best day since March.
On the data front, US initial jobless claims fell below 300,000 for the first time since the pandemic, but inflation is not going away. US PPI was a tad cooler than expected but still running hot at 8.6% year-on-year, however core PPI ticked up to 6.8% from 6.7%. The headline 8.6% was the largest advance since 12-month data were first calculated in November 2010. Today – US retail sales, Empire State mfg index.
Bitcoin eyes $60,000 as traders bet the SEC is poised to allow the first exchange-traded fund based on BTC futures. The SEC is reviewing around 40 Bitcoin-linked ETFs and a report from Bloomberg suggests the regulator will approve some of these. Bitcoin spiked on the report, which indicated that Invesco and ProShares could be among the providers cleared to start trading on Bitcoin ETFs. With the kick on to the $60k level it may be a matter of time before we see a fresh all-time high.
Gold – pulling back to the 23.6% retracement as it pares gains in the face of the $1,800 test.
GBPUSD: Nudging up to the trend line again at yesterday’s 3-week high.
Stocks rally, inflation sticks, earnings on tap
Stock markets rose in early trade as investors parsed the latest signs of inflation and the central bank reaction function, whilst earnings season has got underway across the pond with some decent numbers from JPMorgan. Wall Street rose mildly, snapping a three-day losing streak. VIXX is off sharply, which maybe reflects increasing comfort that the market has stabilised, if not able to make new highs just yet.
Earnings season gives investors a chance to ignore some of the noise and market narratives and get into actual numbers. Only this time we expect the corporate reporting season to underline the inflation narrative – the question is whether it’s just inflation or stagflation. Probably we get a bit of both – watch for sandbagging. JPMorgan numbers were positive, but as ever the stock fell despite beating on the top and bottom line. Profits were boosted by better-than-expected loan losses. Trading revenues were robust, asset and wealth management strong, loan growth improving and likely to pick up in 2022. Delta Air Lines also posted numbers that topped expectations including a first quarterly profit ex-state aid since the pandemic. But higher fuel costs and other expenses will hit the fourth-quarter profit – shares fell over 5%. Today sees Citigroup, Bank of America, Morgan Stanley and Wells Fargo report.
Chinese producer price inflation rose 10.7% in September, the highest level since 1996. The China PPI number is an important leading indicator for global consumer inflation. On that front, US consumer price inflation accelerated in September to 5.4%, with prices up 0.4% month-on-month. Core rose 0.2% from August, leaving prices ex-volatile items like energy and food at 4%. US PPI inflation today is seen at +0.6%, +0.5% for the core reading.
Minutes from the Fed’s last meeting indicated the US central bank is likely to commence tapering asset purchases next month. “Participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,” the minutes said.
Post the CPI and FOMC minutes we see Treasury yields lower, the dollar lower, gold firmer. Lower bond yields lifted megacap growth, or at least provided some marginal buying excuse to do so. Inflation is still hot but not getting much hotter. Narrative has clearly exited team transitory to support team sticky. The question now is whether we are at peak in/stagflation fears and this allows the market to move on to start pricing for 12-18 months hence, by which time you’d feel a lot of the post-pandemic bottlenecks and pressures will have eased. The problem for this – still team transitory if you like – is that anything that raises the costs of getting goods from source to consumer is inflationary and the pandemic has certainly been that. But so too is the shift in globalisation trends, eg Brexit.
Sterling is firmer as the dollar weakened in the wake of the CPI report. GBPUSD has broken free of the trend resistance and with bullish MACD crossover in play. Bulls would like to see the previous two highs on the MACD cleared (red line) to confirm reversal of the downtrend since May.
Chart: Dollar index easing back to the middle of the channel, but faces pressure from bearish MACD crossover.
Yesterday I noted that gold was likely to face some volatility and break free from its recent consolidation. CPI numbers were indeed the catalyst and we saw gold prices hit the highest in a month, approaching $1,800 before pausing. Near-term, consolidation again with the 1hr chart showing a clear flag pattern with the lower end capped by the 23.6% line.
Oil has firmed, with WTI recovering the $81 handle, though price action remains sluggish and sideways for the time being. OPEC yesterday cut its global oil demand growth forecast for 2021 but maintained its 2022 view and cautioned that soaring natural gas prices could boost demand for oil products.
OPEC cuts its demand growth forecast for 2021 to 5.82 million barrels per day, down from 5.96 million bpd. As we noted some months ago, it was always likely that OPEC would need to trim its 2021 forecast since it had always backdated so much of that extra demand to come in H2. The original 6m bpd forecast implied 1m bpd in H1, 5m bpd in H2, which always seemed optimistic. Critically, though, it was not wildly optimistic – demand has come back strongly after shrugging off the summer Delta blues. The cartel maintained its 4.2m bpd growth forecast for next year. EIA inventories today – a day late due to the Columbus Day holiday – forecast 1.1m build.
Nat gas – holding the trend support and 20-day SMA, bearish MACD crossover still in force.
Hays shares +4% as fees rose 41% from a year ago. Strong leveraged play on record numbers of job vacancies and staff shortages. Shares have been flat the last 6 months, though +17% YTD, +45% the last 12 months leaves not a lot of room left on the table.
Dunelm still performing strongly against tough comparisons. Total sales in the first quarter increased by 8.3% against a very strong comparative period in FY21, when sales grew by 36.7%. Gross margins were down 10bps and expected to be 50-75bps lower than last year for the full year. Management warned on supply chain problems and inflation but stressed that good stock levels should provide them some cover. Some way to go to for the shares to recover recent highs but encouraging signs.
Markets primed for US inflation, FOMC minutes, JPM kick off earnings season proper
European stocks were off half a percent this morning in early trade after another fragile day on Wall Street saw selling into the close and another weaker finish. All eyes today on the US CPI inflation number, minutes from the FOMC’s last meeting and the start of earnings season with numbers due out from JPMorgan. Asian equities mixed after Chinese trade data was better than expected.
Markets in Europe turned more positive after the first half-hour but it’s clear sentiment is anaemic The FTSE 100 is chopping around its well-worn range, the DAX is holding on to its 200-day moving average just about. Possible bullish crossover on the MACD needs confirming – big finish required.
JOLTS: We saw a marked jump in the „quits rate“ with 4.3m workers leaving their jobs, with the quits rate increasing to a series high of 2.9%. Tighter labour market, workers gaining bargaining power = higher wages, more persistent inflation pressures.
But… 38% of households across the US report facing serious financial problems in the past few months, a poll from NPR found. Which begs the question – why and how people are not getting back into work and quitting. One will be down to massive asset inflation due to central bank and fiscal policy that has enabled large numbers of particularly older workers to step back sooner than they would have down otherwise. Couple of years left to retire – house now worth an extra 20% and paid off, 401k looking fatter than ever, etc, etc. Number two is something more sinister and damaging – people just do nothing, if they can. Working day in, day out is like hitting your head against a brick wall – you get a headache, you die sooner, and you don’t go back to it once you’ve stopped doing it. Animal spirits – people’s fight to get up and do things they’d prefer not to do – have been squashed by lockdowns.
More signs of inflation: NY Fed said short and medium-term inflation expectations rose to their highest levels since survey began in 2013.
UoM preliminary report on Friday – will give us the latest inflation expectation figures. This is where expectations stand now. Today’s CPI print is expected to show prices rose 0.4% on the month to maintain the annual rate at 5.4%.
The Fed’s Clarida said the bar for tapering was more than met on inflation and all but met on employment. FOMC minutes will tell us more about how much inflation is a worry – we know the taper is coming, the question is how quickly the Fed moves to tame inflation by raising rates.
Watch for a move in gold – it’s been a fairly tight consolidation phase even as rates and the USD have been on the move – the inflation print and FOMC minutes could spur a bigger move. Indicators still favour bulls.
US earnings preview: banks kick off the season
Wall Street rolls into earnings season in a bit of funk. The S&P 500 is about 4% off its recent all-time high, whilst the Nasdaq 100 has declined about 6%, as the megacap growth stocks were hit by rising bond yields. S&P 500 companies are expected to deliver earnings growth of 30%, on revenue growth of 14%.
JPMorgan Chase gets earnings season underway with its Q3 numbers scheduled for Oct 13th before the market open. Then on Thursday we hear from Bank of America, Citigroup, Morgan Stanley and Wells Fargo, before Goldman Sachs rounds out the week on Friday. JPMorgan is expected to deliver earnings per share of $3, on revenues of $29.8bn. Note JPM tends to trade lower on the day of earnings even when it beats expectations for revenues and earnings.
Outlook: Nike and FedEx are among a number of companies that have already issued pretty downcast outlook. Supply chain problems are the biggest worry with a majority of companies releasing updates mentioning this. Growth in the US is decelerating – the Atlanta Fed GDPNow model estimates Q3 real GDP growth of just 1.3%. Higher energy costs, rising producer and consumer inflation, supply bottlenecks, labour shortages and rising wages all conspiring to pull the brake on the recovery somewhat. Still, economic growth has not yet given way to contraction and after a global pandemic it will take time to recovery fully.
Trading: Normalisation of financial markets in the wake of the pandemic – ie substantially less volatility than in 2020 – is likely to weigh somewhat on trading revenues, albeit there was some heightened volatility in equity markets towards the end of September as the stock market retreated. Dealmaking remains positive as the recovery from the pandemic and large amounts of excess cash drove business activity.
Costs: The biggest concern right now for stocks is rising costs. Supply-side worries, specifically rising input and labour costs, pose the single largest headline risk for earnings surprises to fall on the downside. The big banks have already raised their forecasts for expenses this year on a number of occasions. It’s not just some of the well-publicized salary hikes for junior bankers that are a concern – tech costs are also soaring.
Interest rates: Low rates remain a headwind but the recent spike in rates on inflation/tapering/tightening expectations may create conditions for a more positive outlook. The 10s2s spread has pushed out to its widest since June. Rising yields in the quarter may have supported some modest sequential net interest income improvement from Q2.
Chart: After flattening from March through to July, the yield curve is steepening once more.
Loan demand: Post-pandemic, banks have been struggling to find people to lend to. Commercial/industria loans remain subdued versus a year ago, but there are signs that consumer loan growth is picking up. Fed data shows consumer loan growth has picked up as the economy recovers. However, UBS showed banks were lowering lending requirements in a bid to improve activity, which could impact on the quality, though this is likely a marginal concern given the broad macro tailwinds for growth. Mortgage activity is expected to be substantially down on last year after the 2020 surge in demand for new mortgages and refinancing.
Chart: Consumer loan growth improving
Other stocks we are watching
The Hut Group (THG) – tanked 30% yesterday as its capital markets day seems to have been a total bust. Efforts to outline why the stock deserves a high tech multiple and what it’s doing with Ingenuity and provide more clarity over the business seemingly failed in spectacular fashion. The City has totally lost confidence in this company and its founder. No signs of relief for the company as investors give it the cold shoulder. Shares are off another 5% this morning.
Diversified Energy – the latest to get caught in the ESG net – shares plunged 19%, as much as 25% at one point after a Bloomberg report said oil wells were leaking methane. Rebuttal from company seemed to fall on deaf ears. Shares recovering modestly, +3% today.
Analysts are lifting their Netflix price targets, partly on the popular „Squid Game.“ Netflix will report its third-quarter earnings next week.
Stocks lower, rates on the move
Stock markets declined on Tuesday morning following on the heels of a wobbly session on Wall Street, with losses of around 0.5% for the broader European Stoxx 600. The FTSE 100 continues to chop in a sideways direction, trading just below 7,100 it is held firmly within the range of the last 6 months, whilst the DAX is back to the lower end of the recent range to test the 200-day moving average once more. Inflation worries persist, though our tradeable US natural gas and oil prices have edged back from the highs. Yesterday saw WTI rise above $82 for a fresh multi-year peak, before paring gains to take an $80 handle this morning. Coal prices in China meanwhile have risen to a new all-time high. Copper has rallied 7% this month, though it’s still ~10% below its May peak.
Rates are on the move again with the 10-year US Treasury note at 1.63%, a four-month high. The 2yr note yield also notched an 18-month high. Earlier we saw UK gilt yields spiked on markets believing the Bank of England could act early to tame inflation. The simple way of looking at this is higher energy costs = higher inflation expectations = early, faster central bank tightening. Later today we hear from the Fed’s Clarida and Bostic, whilst a 10yr bond auction in the US will be watched for demand. US CPI inflation numbers are due tomorrow.
On Wall Street, sentiment looked fragile as early gains reversed the market closed at the session low. The S&P 500 fell 0.7%, with similar losses for the Nasdaq and Dow Jones. Lots of churn, little real direction to this market right now until the macro picture on inflation and CB reaction function is better understood. Asian shares were broadly weaker as another deadline for Evergrande bond coupon payments has passed.
EasyJet shares declined more than 2% despite sounding a confident tone over the reopening of the travel sector. The company reported Q4 headline losses decreased by more than half with positive operating cash generated. Management now expects a headline loss before tax of slightly more than £1.1bn. However, on a more upbeat note the company says it sees positive momentum carried into FY22 with H1 bookings double those of the same time last year.
WTI: Finding support at the 23.6% retracement of the move up off the Oct 7th swing low.
GBPUSD: Pulling back from yesterday’s 2-week high, where it retreated from our trend line, now sitting on the 23.6% retracement of the Mar ‘20 to May ‘21 rally at 1.35950.
Slow start for equities, Asos tumbles
Soft and sluggish start for European equity markets – typical Monday morning feel until we all get out of bed. FTSE 100 is out the traps better at +0.2%, with banks, basic resources and oil & gas leading the way higher this morning, DAX lower at -0.3%. Rates are up – US 10yr Treasury note north of 1.6% and 2s and 5s highest since around March 2020. Last week’s nonfarm payrolls missed expectations, but Fed chair Powell says it’s about accumulated progress, not a blowout month. After the first flush of summer and two very strong prints, jobs growth is slowing and wages are up sharply at 4.6% – the stagflation bears may point out. US stocks froze somewhat in the headlights of the miss, declining mildly on Friday but nevertheless posting a positive week. The S&P 500 posted its best since August, the Dow Jones its strongest since June.
US and inflation on deck this week will be the focus, but so too earnings season as it gets underway on Wall Street. Earnings on tap this week include JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Wells Fargo, Citigroup, Delta Airlines and Walgreens Boots Alliance.
As mentioned a couple of times last week, the question facing investors is whether earnings calls are positive – supply chain woes, labour shortages, etc etc. And this takes us to the point also made last week – are we at peak inflation/stagflation/supply chain fear? The macro outlook still seems somewhat cloudy in terms of growth, policy and inflation, but that does not mean equities cannot make gains – climb the wall of worry, as the saying goes. Indeed, there are signs that some of the worst of the container shipping problems are rolling over. The stagflation shadow may be around for a while, but this may now be fully ‘priced’. What we don’t know is whether equities – particularly US and megacap growth which has dominated and is now a large part of the S&P 500 by weighting – will roll over as the Fed starts to taper and we see rates move higher. Whilst it has been choppy and volatile, so far the move to 1.6% on 10s from the August lows at 1.17% has not produced panic. Since peaking in early September, the broad market is down ~3%, whilst the Nasdaq 100 is about 6% lower. Not without damage, for sure, but the move has been fairly orderly, rotational, and is seen has a ‘healthy’ type of correction that is generally supportive for equities in the longer run.
Of course, don’t expect companies to waste a good crisis. Remember the warnings due to Covid that generally turned out to be fake news. This quarter’s earnings schedule should feature some pretty heavy expectation management that may create good opportunities for entry points. Corporate sandbagging might weigh on individual names temporarily though the broad market should be able to withstand this.
Asos shares tumbled this morning as CEO Nick Beighton steps down and the company warned of continued supply chain problems. Revenues also missed expectations, but undoubtedly the departure of Beighton, who has steered the company through an incredible period of growth, is a contributing factor. A big loss for the company. The search is on for a successor who can deliver £7bn of annual revenue within the next 3 to 4 years. Annual results were impressive with sales growth of +22% and profits +36%, but expectations for the next year are being massaged down to 10-15% with first half sales in mid-single digits. Asos is not wasting this supply chain crisis to lower the bar. Zalando down more than 3% in sympathy.
Energy markets remain in sharp focus with all-time highs for Chinese coal echoing loudly this morning. Nat gas is steady around $5.70, though European prices remain volatile. Oil is higher again with WTI north of $81. Declining inventories, supply kept in check, demand recovering post the big summer Delta wave fear = bullish for oil. CFTC data shows speculators getting longer oil.
Sterling on the move: GBPUSD has broken resistance and cleared the recent range to reach its best level in two weeks. The pair has broken out to 1.3670 in early trade this morning with a clear bullish bias having cleared out the ranges. Sterling is firmer thanks to increased speculation the Bank of England will raise rates sooner than previously expected. MPC member Michael Saunders said households should prepare for „significantly earlier“ interest rate rises as inflation pressure rises – though he didn’t necessarily signal that November is on the table. Remember markets were pricing for Feb hike of 25bps and Saunders said that “markets have priced in over the last few months an earlier rise in Bank Rate than previously and I think that’s appropriate”. This morning the money markets have brought this forward to Dec – arguably on Saunders remarks, arguably were heading that way anyway. We should note that Saunders is on the hawkish end of the committee and voted to halt the BoE’s bond buying programme early.
GBPUSD: MACD bullish crossover, just now running into trend resistance.
Bitcoin: momentum positive but pulling back at $57k, the 78.6% retracement.
How to trade CFDs: a beginners guide
Trading CFDs is one the most popular methods of stock market trading. Learn how to do it in this beginners guide.
What are CFDs?
CFD stands for Contracts for Difference.
A CFD is an agreement between two parties to exchange the difference in the value of a financial market between the time the contract (trade) is opened and the time it is closed.
You can trade CFDs on markets like shares, foreign currency (Forex), indices, bonds, ETFS, and commodities.
CFDs are what’s called Derivatives. That means the price you trade comes from the underlying market value.
For example, if you were to trade US crude oil CFDs on Markets.com, the price would come from the underlying value of the US crude oil futures contract (WTI).
You don’t own the underlying asset when trading CFDs. You buy or sell contracts by speculating on how you think the market will move.
By trading CFDs you are taking a Position. A Position is your exposure to the market, i.e., the value of the CFDs you wish to trade.
Benefits of trading CFDs
CFDs are a great way to get started in the world of trading. They have lots of benefits that make them a smart choice for first-time traders.
Efficient use of your capital
Capital is the money you put down to start trading. With CFDs, you can use that more efficiently.
You trade using your margin. This gives you leverage. We will go into more detail on these two aspects of CFD trading later.
For now, it means you only have to put down a fraction of the trade’s full value to open a position. That lets you start trading with a small budget.
Because you are trading agreements to exchange differences in the opening and closing points of a position, CFDs offer flexibility in how you can trade.
CFDs let you trade Long or Short.
In CFD trading, you trade long is if you believe prices will go up.
If you think prices will rise, you buy your contracts and take a Long Position.
You trade short if you believe prices will go down.
If you think prices will drop, you sell your contracts and take a Short Position.
This means you can trade on markets that are going down as well as up and still potentially make a profit. This offers traders quite a lot of flexibility.
No Stamp Duty
In the UK, you do notpay stamp duty on a CFD trade. This is because you do not take ownership of any of the assets you are buying and selling.
Please be aware that tax treatment of CFD trading will depend on your individual circumstances and be subject to change.
As CFDs can be traded across lots of different markets, you have plenty of scope to choose sectors, companies, and geographies that you think will help you reach your trading goals.
Markets available include:
- Shares – Shares in individual companies like Tesla, Apple, Amazon, Lloyds, Vodafone, Volkswagen etc
- Foreign currency (Forex) – US Dollars, Euros, Pounds, and so on
- Indices – Stock markets like FTSE 100, S&P 500, Dow Jones, DAX, etc.
- Commodities – Assets like oil & gas, crops, and so on
Markets.com offers 2,200 different instruments for you to choose from on our multi-asset platform.
Risks of trading CFDs
There are inherent risks when it comes to trading any financial product like Contracts for Differences.
Please read the below carefully and understand the potential risks you will undertake if you decide to start trading CFDs.
CFDs are Leveraged Products
Leveraged products like CFDs give you market exposure for a percentage of the full trade you wish to make. This means that you can potentially make profits if the market moves in your favour.
You can also lose money if the market moves against you and you are not using adequate risk management tools.
Let’s look at an example.
If you place a CFD trade worth £1,000 with a margin rate of 5%, the margin requirement to open this trade would only be £50.
However, if the price of the trade moves against you by 10%, you would lose £100, i.e., double your initial stake in your initial CFD trade.
This is because your exposure to the market, i.e., your risk, is the same as if you had purchased £1,000 worth of physical shares, foreign currency, commodities and so on.
This means that any move in the market will have a greater effect on your capital than if you had purchased the same value of shares.
Market volatility & gapping
Markets are inherently volatile. They can go up, but they can also go down.
Outside effects like government policies, unexpected information and changes in market conditions mean prices can fluctuate.
Small changes may have a big impact on returns when it comes to trading CFDs.
Unfavourable effects on the underlying asset’s value may cause the trade provider to demand further margin payments. These are called Margin Calls.
If a margin call cannot be met, the provider may close your position. Alternatively, you may have to sell at a loss.
Another risk associated with market volatility is Gapping.
Gapping happens when prices of instruments, i.e., CFDs being traded, suddenly shift from one level to another skipping any intermediate levels.
This may mean Stop-loss Orders are applied at an unfavourable price. A stop-loss order is a market risk tool that helps manage risk by closing a position once an instrument or asset reaches a certain price.
Market volatility’s risk and impact can be lowered by applying boundary or guaranteed stop-loss orders to your trades.
Client Money Risk
There are client money protection laws that apply to CFDs in countries where contract trading is legal.
They are designed to protect investors from potentially harmful practices from irreputable CFD providers.
Money transferred to CFD providers must be kept separate from the provider’s money. This is to prevent CFD providers hedging their own investment.
Even so, some laws may not prohibit clients‘ money from being pooled into one or more accounts.
A provider withdraws an initial margin when a contract is agreed upon. The provider also has the right to request further margins from pooled accounts. If clients in the pooled account cannot meet margin calls, the CFD provider has the right to draw from the pooled account. This can have a negative impact on returns.
How to trade CFDs
Here is how to get started trading Contracts for Difference.
Margin & Leverage
Before you get started, it’s vitally important you understand the concepts of Margin and Leverage.
Margin is the money you need to lay down in order to open a leveraged trade, i.e., start trading CFDs.
Margin and leverage are related terms.
In short, the leverage ratio determines the amount of margin you need to have in your account.
Margin rates vary across different regions and asset classes.
Leverage allows you to gain full exposure to a market by investing only a fraction of the capital you would normally require.
Upon opening a transaction, the margin value will be required and held as collateral to be maintained until termination of the relevant transaction.
The amount of the margin payments is dependent on the leverage ratio of the CFD, the underlying financial instrument, and the contract value of the transaction.
Let’s look at an example.
If you are trading FX with a leverage ratio of 30:1 – equivalent to a margin rate of 3.33% – it means you can control a trade with a notional value of £3000 with only £100 of margin.
The minimum level required for maintaining positions is 50%.
In the above scenario, once opening the trade you would need to maintain at least £50 of available funds in your account to satisfy the margin requirements.
Please note: if margin thresholds are not met, then your positions may be closed.
Set your budget & fund your account on Markets.com
Firstly, set yourself a trading budget.
If you are a beginner trader, you might want to start low.
£100 is the minimum amount of funds you need to start trading with Markets.com. This is just to open your account. You do not need to trade the £100. If you have the correct margin funds on an instrument or asset, you could trade £50.
The other available currencies are: USD/EUR/DKK/NOK/SEK/PLN/CZK/AED
Got more experience and confidence? You may want to add more funds – but this is only advised if you have previously traded CFDs before.
If you want to try your hand at trading without risking your money, then open a Demo account. No money will change hands and you can explore the Markets.com platform without any of the risk.
Build your trading plan
Think about what you want to achieve from trading.
- How much profit are you hoping to make?
- How much time can you realistically spend trading?
- How much can you safely spend?
- Are you comfortable assuming the risk?
- What does acceptable loss look like to you?
If you can answer these questions, it will help you make more informed trading decisions that suit your individual goals.
Research your opportunities
With over 2,200 assets to choose from, you will find opportunities to suit you at Markets.com.
In the platform, you can search across CFDs on various sectors, such as:
- Foreign currency (Forex)
XRay is our streaming service, featuring videos and content from market experts. It covers everything from leading stocks to currency movements, to current affairs information.
Insights is much the same: market news delivered by professionals.
These tools will aid you in choosing the correct CFDs for you.
Open your first position
When you have decided which market you want to trade, you are ready to start trading.
The first thing to decide is whether you want to go long or short.
In CFD trading, you trade Long is if you believe prices will go up.
- If you think prices will rise, you buy your contracts and take a Long Position.
You trade Short if you believe prices will go down.
- If you think prices will drop, you sell your contracts and take a Short Position.
Once you’ve taken your position, your profit or loss will move in line with the underlying market price.
You’ll be able to monitor this on our platform using the various performance and analytical charts available.
You can also do this manually by placing the same trade you originally placed but in the opposite direction.
For example, if you opened your position by buying, you could close by selling the same number of contracts at the sell price – and vice versa.
Your profit or loss is calculated by multiplying the amount the market moved by the size of your trade.
Buy & Sell Prices
Buy and Sell Prices are very important.
When trading CFDs, you will be offered two prices based on the instrument you are trading’s underlying value.
- The Buy Price is what you bid to purchase an instrument
- The Sell Price is the seller’s offer
Buy prices will always be higher than the instrument’s current underlying value. The price to sell will always be lower.
The difference between the two prices is called the Spread.
Number of contracts
A key aspect of CFD trading is selecting how many contracts you wish to trade.
Each market has its own minimum number of contracts.
For example, the FTSE 100 has a minimum contracts number of one.
There is no maximum contracts number. The level you can buy will depend on how much capital you originally put down, your budget, and so on.
Stops & limits
Stops and Limits are put in place to minimize trading risk.
Remember: CFDs are leveraged products. You only ever need to put down a small deposit to gain exposure to the full value of the trade.
This means your capital goes further but also means that you could lose more than your initial outlay.
To help restrict your potential losses, you might choose to add a stop. Stops automatically close your position when the market moves against you by a specified amount.
Limits are the opposite to Stops.
They close your position when the market moves a specified distance in your favour. Limits are a great way to secure profits in volatile markets.
An example CFD trade
Let’s put all the above into practice.
You want to trade shares in Apple as CFDs.
The Apple shares have an underlying market price of 314.6p. The sell price is 314.5p and the buy price is 314.7p.
Apple is expected to make an earnings announcement soon. Market forecasts suggest Apple’s earnings release will be positive and the company is performing well.
Because you think the price will go up, you buy 2,000 Apple share CFDs at the buy price of 314.7. This is equivalent to buying 2,000 Apple shares.
As CFDs are leveraged products, you do not need to put up the full value of the shares you wish to trade. You only need to cover the margin. This is calculated by multiplying your exposure with the margin factor for the market you are trading.
In this example, the margin factor is 20%. Your margin would be 20% of the total exposure of your trade:
- The total exposure is £6,294 (2,000 CFDs x 314.7p).
- 20% of £6,294 = £1258.80.
If the CFD value rises
Your prediction was correct! Apple’s earnings announcement shows the tech giant has had a very good quarter. Sales are up, and its share price has risen.
You decide to close your position when it reaches 354.3p, with a buy price of 354.4p and a sell price of 354.2p.
You reverse your trade to close a position, so you sell your 2000 CFDs at a price of 354.2p.
Now you can calculate your profit.
To do that, you multiply the difference between the closing price and the opening price of your position by its size:
- 354.2 – 314.7 = 39.5
- 39.5 x 2,000 (the number of your CFDs) = 790
- Your profit = £790
Remember: You will also need to pay a commission fee, capital gains tax, and any potential overnight fees that have affected your trade.
If the share price goes down
Bad news. Apple’s earnings are worse than the market anticipated. Its share price has fallen, and you decide to cut your losses and sell your CFDs.
The sell price is 288.7. That means your position has moved 26p against you.
The process for calculating your loss is the same as profit:
- 288.7 – 314.7 = -26.
- -26 x 2,000 = 520
- Your loss = £520
Those are the basics of what CFDs are and how to trade them.
Stocks climb but price action still choppy
Choppy: Stocks are firmer in early trade following yesterday’s losses. For all the movement we have seen, the FTSE 100 is tracking slap in the middle of its 6-month range. But now it’s facing near-term resistance from its 50-day and 100-day averages at 7,092/7,078, which seem to be capping any rallies at the moment, whilst the 200-day support at 6,913 is looking good for a retest. The DAX moved up more than 1%, or about 170pts, to around 15,150 as it looks to recover its 200-day moving average at 15,037. You are in ranges now where you feel it could break either way – as noted earlier this week you need to feel that the repricing for risk from a different macro outlook and rate environment (higher yields) has bottomed, that the valuations are looking healthier, earnings can deliver beats not misses and that we’ve passed peak inflation/stagflation ‘fear’ (if not the actual environment, which could last for many months).
Wall Street reversed early losses to rally on signs of progress on the US debt ceiling. The Dow Jones industrial average erased a drop of 400pts to end the day up 100pts. The S&P 500 rallied 0.4% as mega-cap tech rallied as bond yields didn’t really push on and investors thought they’re close to being oversold. But it’s still all rather indecisive. The S&P 500 continues to chop around its 100-day SMA and the 4,300 area. Futures are indicating higher with 10yr yields back down to 1.52% from 1.57% hit yesterday, the highest since June.
Senate Minority Leader Mitch McConnell said Republicans would back a short-term motion to raise the debt ceiling. “To protect the American people from a near-term Democrat-created crisis, we will also allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December,” he tweeted.
ADP reported that private payrolls increased by 568k jobs last month, easily topping expectations. Allowing for the usual ADP caveats, this is a positive signal ahead of the nonfarm payrolls report on Friday – remember a key release ahead of the Fed’s November meeting re tapering.
Natural gas was the big story as prices spiked out of control in Europe/UK. US Henry Hub prices did reach a new multi-year high before reversing, apparently on comments from Vladimir Putin who said Russia would seek to stabilise the market and pump more gas. There is a lot going on there – political machinations aplenty and questions over whether much of the problems in the market have been Russia’s doing in the first place (weaponization of gas), but it did seem to cool the market. Prices are down 15% from yesterday’s $6.46 peak and now testing lowest in a week around $5.50 and possible bearish MACD crossover in the offing could signal a top.
Oil was weaker too as it also seemed to consolidate after extending the rally into overbought conditions – as highlighted on Tuesday. Inventories were mildly bearish too, rising 2.3 million barrels last week. The US said it was considering releasing oil reserves to cool prices – always a political hot potato in the US as much as in Europe. WTI is close to 5% below yesterday’s high at $76, possible test of near-term Fib and trend support around the $75.60 area.
Talking of rising fuel costs, these are feeding into rising inflation expectations. UK inflation expectations topped 4% for the first time since 2008. A gauge of US inflation expectations has moved to its highest since June.
In FX, the euro made fresh YTD lows yesterday but is steadier this morning, with EURUSD back to 1.1560. Looking a tad oversold but the fresh low needs to mark a bottom soon or further selling can take off on another leg lower.
Vlad to the rescue? Putin steps in to calm nat gas crisis
Vlad to the rescue… Looks like Putin has just come in to call a (temporary) halt to the gas crisis in Europe, finally stepping in with comments that have offered some stability to the market after a tumultuous morning/week.
- Boosting gas supplies to Europe
- Ready to stabilise global energy market
- Gazprom supplies to Europe to reach new record
- Increasing gas transit via Ukraine & will exceed contractual obligations for gas via Ukraine.
Henry Hub Nat Gas prices were offered on the comments/headlines that Russia is ready to help out. The situation remains difficult of course but could be that Putin has just put a ceiling on these crazy market moves for the time being. There are other factors but a boost in supply from Russia would ease immediate concerns in Europe. Longer-term of course the lack of fossil fuel capex in response to high prices is a big driver of prices staying higher for longer. Winter is coming and supplies are still very short and markets volatile. Plus how long does Putin play nice?
Anyway, it seems to have calmed the market for the time being. One thing you have to take from all this is that Nord Stream 2 is surely going to be approved soon…Merkel stressing in comments just a few minutes ago that it is not yet ready.
Henry Hub prices tumbled off the highs to test $6 again on the news crossing the wires. UK prices have meanwhile completed a heck of a round trip with a daily gain of 40% reduced to 4%. Whilst US nat gas prices are not directly correlated to the situation in Europe we can see that the comments from Putin hit prices as they crossed the wires. Oil was also pulled down on the comments.