UK, Euro stocks rally for 2nd day ahead of Fed meeting

Stocks have opened higher again after Europe rallied handsomely on Tuesday with gains of +1%. Wall Street was more timid – the S&P 500 declined marginally, as did the Dow Jones industrial average. The Nasdaq and Russell 200 both eked out small gains. Shakeout from Monday seems to be lingering longer in the US – there was an attempted bounce yesterday but failure to finish above the previous close is perhaps a signal that there is further weakness in the offing. However, it’s hard to take too much risk on with attention now squarely on today’s FOMC statement and press conference with Jay Powell.

Whilst markets do not expect the Federal Reserve to race towards tapering asset purchases – the soft jobs report did for that – there is a broad consensus in the market that it will begin dialling back the pace of its QE programme at some point this year – likely Nov, but maybe Dec. That means this week’s meeting may be an appropriate moment for the Fed to give the market fair warning. Or not. In a sense it doesn’t matter much what they say or don’t say on tapering – the risk lies in what the Fed does or doesn’t say about rate hikes. And though Monday’s market sell off may have caught the Fed off guard, with stocks just 4% off record highs there is not any reason for panic right now. Stocks have been rolling over since the weak jobs report, and Fed officials should be prepared to look through some softer data and mild pullbacks in equity markets. I don’t think the Fed is actually worried about the S&P 500 dropping 4-5%, despite what some of the fintwit crowd suggest.

The main hawkish risk for the market is with the dot plot – if you still pay attention to it. The market does, at least for a time. A hawkish dot plot bringing lift-off into 2022 could be a sell signal. Also watch inflation forecasts. Inflation is going to be higher for longer and the Fed is starting to realise this. Close attention will be paid the latest round of economic projections for a guide on whether the Fed is changing its mind on the pace of inflation and growth. My own view is that we get a Fed that is more ready to accept – at least in the projections and dots, if not Powell’s words – that inflation is stickier than they thought it would be. Core PCE forecast at 3% in 2021 needs to revised higher but the big one will be the outlook for 2022 and 2023, which at the Jun meeting were forecast at 2.1%. My bet is the Fed raises 2021 to 3.5%, 2022 to about 2.5% and leaves 2023 alone, pulling a ‘it’s transitory but not quite as transitory as we thought’ angle. My own view: the Fed’s policy response to the pandemic and failure to pullback emergency support sooner has allowed long-term inflation expectations to become unanchored, creating damaging effects on confidence and growth longer-term: stagflation.

Noteworthy that the OECD came out yesterday to say inflation will grow faster than before the pandemic for at least two years. G20 inflation will fall from 4.5% at the end of 2021 to 3.5% by the end of 2022, the OECD said.

Shares of Evergrande in Frankfurt are surging this morning after the company struck a debt deal over a repayment due Thursday. The EV1 ticker rallied 20% in early trade to €0.32. China’s central bank was also stepping up liquidity injections, adding to the improved risk sentiment. The PBOC pumped 60 billion Yuan of 7-day reverse repos and the same again in 14-day reverse repos, though they stopped short of cutting the prime 1yr and 5yr loan rates. The mood boosted AUD and NZD and injected some bid for metals, with copper back above $4.20 having tested $4.0 yesterday. The fillip helped basic resources top the FTSE 100 in early trade this morning, with Anglo American, Antofagasta, BHP, Glencore and EVRAZ the top risers. Mega default contagion risk abated for the time being.

Entain shares soared higher as the company announced that it received an offer from DraftKings worth 2,800 pence per share. The offer would consist of 630p in cash and the balance payable in new DraftKings shares. Shares trade up 7% again to 2,432p, suggesting investors are not betting the farm on this deal going ahead. Entain says it will ‘carefully consider the proposal and a further announcement will be made as and when appropriate’. Consolidation in this space has been taking place for years over this side of the pond. Deregulation of the US sports betting market was always going to create further change as the technology and expertise of the British firms came to the fore – the question I have why are these takeovers not going in the other direction? Anyway, Flutter up 5% today because you know – who’s next and all that – but also it settled its case with the US state (Commonwealth) of Kentucky, agreeing to pay another $200m in addition to the $100m already forfeited.

Safety equipment maker Halma reports ‘strong progress’ in the first half of the financial year, with performance ahead of management expectations, with revenue growth and return on sales exceeding both expectations and historic levels. Order intake was better than the 2019 period. Halma cautions that it expects to see more typical rates of revenue growth and return on sales in the second half of the year, with the latter more in line with historic levels as variable overhead costs gradually return. In addition, management warn they will see continued impact on revenue, costs and working capital from increased supply chain, logistics and labour market disruption. Despite this, adjusted profit before tax for the full year is expected to be slightly ahead of previous guidance.

Oil rose, as near-term weakness in prices caught in the broader risk sell-off waned, allowing firmer price action to take over. Goldman Sachs said that combined with the spike global gas prices, a colder winter in Europe and Asia could drive demand for crude and $5 a barrel to the price of oil. API data showed a draw of more than 6m barrels last week, well above the 2.4m expected. EIA figs today expected to show a draw of 3.3m barrels, which would be the 7th straight weekly decline in inventories with the disruption from hurricane season still playing out on the ground. Momentum just cooling a touch on the daily charts but market fundamentals still look very good.

Elsewhere, the dollar is flattish this morning. GBPUSD is testing month lows again around 1.3640 – potential bottoming taking place – key test here whether we break these trend lines on the price and also the RSI and MACD (green). A bounce calls for a rally back to 1.390 perhaps – beware tonight’s Fed meeting for headfakes.

GBPUSD Chart 22.09.2021

A new low for Bitcoin overnight, weakest since early Aug. Price action is wobbly and may see the Jul lows around $30k unless the 200-day is recaptured soon.

Bitcoin Chart 22.09.2021

China risks weigh on stocks, Fed meeting ahead

Rough day for equities: China risks to the fore at the start of the week as the fallout from the collapse of Evergrande weighed on the Hong Kong market. The Hang Seng fell 3.5%, with Evergrande down another 12%. Basic resources are feeling the heat as a slowdown in demand from Chinese property developers would be a negative. Luxury also hit – Chinese investors are seeing portfolios hammered, which means less for fur coats. Hong Kong’s weakness was all the more noticeable with Japan, China and South Korea on holiday. Spiking natural gas prices and a European energy crisis, talk of produce shortages and surging inflation don’t provide an encouraging backdrop. Meanwhile a Federal Reserve meeting this week and Sunday’s German election both offer macro uncertainty.

Contagion risks from the Evergrande meltdown are the prime cause of today’s sell-off. You’ve got all kinds of banks and insurers caught in the net but ultimately, I don’t see this as a Lehman’s moment right now. But combined with the tech crackdown it’s probably another reason why investors will be seeking to avoid China in the near term. What we are seeing today is how risks get priced gradually then suddenly. It is definitely though a major cause for investor concern right now and it is possible we see further losses before the dip finally gets bought. A market so well-conditioned to buying the dip will find it hard to resist. But the Fed meeting this week will be of particular importance – does a Chinese property collapse and energy crisis collide with expectations for a Fed rate hike next year and biting inflationary pressures? That would be a pretty nasty cocktail for risk appetite and I think these are the risks being priced into today’s (and possible further) selling.

European equities took the weak handover and limped to a decline of more than 1% in early trade. The blue-chip index is now testing its 200-day simple moving average at 6,880. Rolls-Royce and AstraZeneca gained 2% each but the rest of the board is nasty looking, led lower by basic resources and financials. Prudential fell 4% after placing 130m shares in Hong Kong following the demerger of its US business Jackson Financial. A very soft start for the DAX’s brave new world – 10 more companies added as of this morning but down more than 2% at the start of the session. Airline stocks are just about the only bright spot on the Stoxx 600 as investors bet that looser restrictions will drive up demand over the winter. Also, Lufthansa’s decision to launch a capital raise to pay back the €2.1bn state bailout it received during the pandemic is also being viewed as a positive – clearly, the company feels the medium-term prospects allow it to think about paying back the state. All sectors on the Stoxx 600 are lower.

Wall Street suffered a third straight down week, with the S&P 500 failing to hold its 50-day SMA support and declining 0.9% on Friday to 4,432.99. Futures indicate the market will open about 1% lower around 4,390. The Dow Jones industrial average was lower by 0.5% on a day of veay volume – the highest since July on quad witching day. Although the S&P 500 has traded through its 50-day SMA before and bounced in the last year, we’re dealing with a set of financial fears (China) rather than ‘concerns’ about a variant weighing on growth.

Conspiracy theory: Handy timing for Fed officials to be forced to sell their stocks a week or two ago because of ‘ethics’, not perhaps because they wanted out at the top? The Fed haters and many more think it’s more than a coincidence that their stock trading was revealed, leading to voluntary liquidation just in time to avoid a fallout. Better that than selling out at the top and people finding out later.

Metals weaker – copper down 2% and testing its 200-day SMA, gold treading water at $1,750 after last week’s steep losses, hitting its lowest since mid-August earlier this morning. Silver – once a darling of the Reddit crowd – dropped to its weakest since Nov 2020.

Natural gas prices in the US have come back after spiking last week above $5.60 – top called? Expected rise in demand going into the winter may be well priced. Remember what is happening in Europe with gas prices and the infrastructure problems are not directly correlated to the Henry Hub contract.

Natural Gas Chart 20.09.2021

The USD is finding all this risk-off sentiment a positive – fresh three-week highs for DXY. GBPUSD declined to a new three-week low at 1.36650, towards the bottom of the YTD range, whilst EURUSD is testing a 4-week low at 1.170.

GBP USD Chart 20.09.2021

Cryptocurrencies also markedly weaker on the general risk-off liquidation we are seeing across global markets. Bitcoin took a leg lower in early European trade and may want to test the Sep 13th lows around $44k.

Bitcoin Chart 20.09.2021

Little in the way of data today so all the China contagion/fallout stories will be the prime driver of sentiment. Looking ahead we have the Federal Reserve meeting on Wednesday – key question is whether it announces plan to taper QE or sits on its hands a little longer. But actually, the key risk lies in what the dots (if you still look at them) tell us about when Fed policymakers (increasingly hawkish?) think the lift-off date for rate hikes will be. Meanwhile, the Bank of England will need to respond to biggest jump in inflation on record when it convenes this week. Does is call time on QE now and prepare the market for a rate hike soon? Surging inflation is not going away and the MPC risks all kinds of trouble by not administering some medicine early.

European stocks slide in wake of Fed minutes

European stock markets continue to trip the ranges – sliding sharply this morning following yesterday’s jump. The FTSE 100 dropped 1.3% in early trade to the 7,050 level, whilst the Euro Stoxx 50 declined 1.7% to test 4,000. Asian shares were broadly weaker overnight, with a steep fall in South Korea registered as daily Covid cases there surged. Bonds are still bid as weaker hands get washed out with the 10yr Treasury note yielding 1.28%, a new 5-month low in the wake of the Fed meeting minutes – it’s either sending a warning signal or it’s just a flush before the move higher. US stock markets were mildly higher yesterday, with futures pointing to a drop at the open. Apple shares hit a fresh record, whilst meme stock favourites such as GME, WISH and AMC fell sharply. In London, money transfer app Wise got off to a solid start as shares rallied on the first day of trade. Shares in troubled Chinese ride hailing app Didi fell another 5% as it faces a lawsuit from US shareholders.

Minutes from the FOMC’s meeting in June showed pretty much what we knew; policymakers are moving but with a degree of caution. “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated” but it is “their intention to provide notice in advance of an announcement to reduce the pace”. Meanwhile China is back in the game – the State Council issued a statement saying it would seek “to increase financial support to the real economy” by using “monetary policy tools such as RRR cuts”.

Deliveroo reported a better-than-expected rise in revenues in the second quarter but cautioned it would not lead to better profits. Gross transaction value (GTV) rose 76% year-on-year to £1.7bn. For the full year, the company raised its GTV growth estimate to 50-60% from 30-40%. However, gross margins are seen in the lower range of what was previously communicated, with management citing investment and lower average order spend. Looks to me like it should be making more money if GTV growth is a full 20 percentage points higher than expected. Poses serious questions about the model if it cannot at least deliver margins in the upper range of expectations on such impressive sales growth.

Oil prices slipped as the gulf between OPEC and the UAE showed no signs of closing. The UAE signalled it could open the spigots to pump at will. The fear is the supply deal could unravel, heaping more crude on the market. WTI (Aug) held at $73 the first time but cracked on the second attempt and quickly declined and found support at $71. Another test at this level can be expected.

Oil chart showing prices of crude on 08.07.2021.

Finally, it was great to see Wembley almost full last night with tens of thousands of fans. No masks, plenty of singing, social distancing forgotten. So why can’t my kids have a school sports day? The inequities of opening up are legion, almost as much as the inequality of lockdown. We can only pray the mask-wearing Covid Stasi are silenced for good and we can get on with our lives.

Stocks pick up, bonds remain bid ahead of Fed minutes

European stocks edged higher early Wednesday after taking a sharp tumble in yesterday’s afternoon session. Bonds and the dollar rallied, leaving benchmark yields at their lowest in some months, knocking the wind out of the cyclical recovery trade. The FTSE 100 ended the day down 0.9% at 7100 but has regained some poise in the early part of today’s session to trade at 7,130. European markets remain very much stuck in month-long ranges. Shell shares rose more than 2% on a promise if higher shareholder returns.

Mega cap growth helped the US market keep a more level head as the S&P 500 declined 0.2%, easing away from a record high set last week, whilst the Nasdaq rallied by almost the same amount. The Dow Jones fell 0.6% as economically sensitive names like Caterpillar, Chevron, Home Depot and JPMorgan slipped. US 10yr yields are under 1.34% this morning, a five-month low. Similar story for gilts, with the yield on 10yr paper at 0.627%, the lowest since Feb.

Yesterday’s pullback and the sharp drop in bond yields reflected doubts about the pace of growth, and the extent to which costs are going up for businesses. The talk is that peak growth is behind us and The ISM services PMI reflected the trouble for growth is not on the demand side; quite the reverse. Businesses anecdotally reported ‘supply chain outages, logistics delays and employee- and management-staffing constraints’ and that ‘business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous. We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market’. I fail to see how this implies inflation will be transitory.

A run-up in the S&P 500 of 5% in the last two weeks looks to be unsustainable and at the very least I’d anticipate we see a pause and trading sideways, if not a deeper correction over the summer. For now, though, Tuesday’s dip is not a sign of reversal. The market is narrowing, too. The S&P 500 would have had a much sharper drop (~1%) had it not been for the 14 index points added by Apple and Amazon. Shares in Amazon rallied almost 5% as the US Defense department cancelled its $10bn JEDI contract with Microsoft, with the Pentagon saying it will seek a new multi-vendor contract. It will seek proposals from both Microsoft and Amazon.

The narrative and the ‘macro picture’ seem a little less understood – has growth peaked, will inflation wipe out economic gains, has the Fed really got inflation angst? We get to find out a lot more about that with today’s release of the minutes from the last FOMC meeting. Earnings season is coming up but it’s well known we are going to see some monster numbers and it is less obvious how Q2 reporting will drive the market higher – if anything it could lead to a round of profit taking and recalibration. Expectations are already so high. But we can’t ignore the bond market and equity market concentration in growth stocks – if bonds find more bid and the 10yr pushes yet lower to 1%, then the stock market can keep gliding higher.

The dollar is holding higher against peers ahead of the minutes from the June meeting. The meeting revealed a couple of things we had pretty well expected: a) Fed officials are talking about tapering, b) dots are coming in due to the rapid economic rebound and, less well anticipated, c) the Fed is a little bit concerned about letting inflation off the leash. The minutes should provide some further clarity/explanation about the Fed’s likely position but ultimately we don’t see any change until Jackson Hole in late August or the September meeting. The trouble for the market is dealing with the Fed’s reaction function in terms of yields: a hawkish Fed and quicker taper/hike ought to drive yields higher, but the reaction to the June meeting saw the reverse as the statement and projections implied the Fed wouldn’t let inflation get out of control. So now we know this, we are likely to see a more considered market reaction that, all else equal, should see rates move higher this year as the Fed lays down the tapering agenda and inflation remains more persistent than central banks think.

EURUSD made a fresh 3-month low in a further extension from the bear flag downside breakout.

EURUSD price action on July 7th 2021.

GBPUSD: firm rejection of 1.39 yesterday and continues to stick to the downtrend. For now, continues to scrap around the 1.38 area, felling just below this morning and eyeing a break to 1.3660 area, the 200-day SMA and Mar/Apr double bottom.

GBPUSD price action on July 7th 2021.

Crude oil futures catching a little bid in early trade this morning after yesterday’s reversal. Concerns remain that the failure by OPEC to agree to gently increase production could lead to the output agreement unravelling, which could lead to more crude coming on the market. But there is a lot of uncertainty – if OPEC+ stick to the current quotas global inventories will draw down further and the market will further tighten, squeezing prices higher.

Chart showing crude oil price action.

Gold is getting a filip from lower yields, though the stronger greenback is checking its advance. 10yr TIPS have slipped to –0.94%, the lowest since the middle of February as nominal rates fell. Price action remains above $1,800 with the bullish crossover on the MACD confirmed.

Gold chart showing price action 07.07.2021

Fed fallout, Morrisons shares jump

The reverberations from the Fed’s policy meeting last week continue to be felt across global markets. Stocks have fallen, bond yields too, amid a sharp repricing of the risks of the Fed raising rates. Asian shares fell as global markets continue to react to the Fed’s willingness to raise rates in the face of higher inflation and its admission that members are talking about talking about tapering. US stocks suffered their worst week in several months, with the Dow Jones declining the most since October. European markets followed suit with a broad sell-off in early trade Monday. US 10yr yields have fallen below 1.4%, whilst the dollar is surging. The funny thing about all this is that given the data coming out of the US the Fed didn’t do anything terribly surprising, it just seems to have caught some by surprise by saying it wasn’t going to keep things super easy forever. Let’s be clear – this is not a shift away from average inflation targeting or somehow the Fed abandoning its employment-first approach: only a realisation that two and a half years from now the economy should be pretty well recovered, and inflation will have been running above 2% for a good amount of months, so some tightening would be warranted. Yields declining after a ‘hawkish’ Fed is frankly odd, and indicates the market thinks the stance is appropriate to keep a lid on inflation.

Shares in Morrisons jumped 30% to 234p after it said it rejected an informal offer from Clayton, Dubilier & Rice at 230p, saying that the bid undervalues the business. CD&R has until July 17th if it wants to make a formal offer, though this could flush Amazon out to finally make an approach. MRW has been undervalued for a while and before today not got nowhere near recovering its pre-pandemic valuation. Owning the bulk of its store estate outright makes it an attractive asset for private equity intent on gearing it up (think Toys R Us…). There is a lot of PE money sniffing around the UK as valuations are low – we knew this before the pandemic. But its market share of the UK grocery market, its growing wholesale business and its existing tie-up with Amazon surely means it is not impossible the US tech giant will make an offer. However, if Amazon were interested, you’d assume that an offer would have come by now. A PE bid seems more likely and ultimately may be the best way to unlock value for shareholders who’ve gone through a lot but ultimately not seen any appreciation in years (before today). Shares in Tesco and Sainsbury’s were up strongly partly on the read-across, partly on expectations that a PE buyout would see MRW less able/willing to compete.

This morning the FTSE 100 declined half of one percent to trade under 7,000 following from Friday’s drubbing on Wall Street that left the S&P 500 down 1.3% on the day and the Vix rose towards 22. As flagged last week, the UK market was liable to a pullback as it approached the top of the rising wedge.

Chart showing FTSE 100 movements on 21 June 2021.

Dollar looks stretched and liable to pullback but lots of speculative short USD/long EUR/GBP positions need to be unwound. This is a big dollar short squeeze.

21st June 2021's Dollar Index performance

Gold tested $1,760 where it has found some near-term support, but it’s going to be tough to avoid a flirt with $1,675.

Gold performance 21.06.2021.

Was it all that hawkish? Markets recovering poise after Fed meeting

European stocks fell slightly in early trade Thursday, following Asia (ex-China) and the US into the red after the Federal Reserve signalled it thinks rates will rise a year earlier than previously forecast. Bonds fell, with US 10yr yields up to 1.59% before easing back a touch to 1.56% this morning, and the 2yr hitting its highest in a year. The dollar rallied on expectations of tighter US monetary policy, with sterling back under $1.40 and the euro under $1.20. Gold is weaker amid the strong USD, higher yield picture. Oil remains bid after another bullish inventory report.

 

The Fed’s much-maligned dot plot signalled policymakers believe there will be two rate hikes by the end of 2023, vs the previous zero moves until 2024. The interest rate on excess reserves was raised by 5bps – worries about inflation perhaps.  It’s a technical move, but it points to the direction of travel: tighter not looser. The forecasts for this year were a lot punchier – 7% GDP growth and 3% core inflation. The market took all this as unvarnished hawkish – certainly it paves the way for an Aug/Sep taper announcement. Powell also dialled back the transitory language around inflation. 

 

So, was it all that hawkish? I thought we’d stop bothering with the dots a long time ago – Powell said you should take them with a “big grain of salt”. As I said a couple of years ago, “decisions to cut or hike are binary and tangible; dots are like dreams; imaginary and fluid. They also cannot account for things when there is very great, and very real, uncertainty in the economy”. None of the policymakers know what’s going to happen tomorrow, let along in 2023 – they are not fortune tellers. I don’t think it told us much we shouldn’t already have expected – the April meeting minutes showed the Fed is thinking about thinking about tapering, while rates are going to remain anchored at zero for a couple more years. Powell said this meeting was the talking about talking about tapering (and said this phrase should be retired). Lift off not until after 2023 always seemed unlikely given the pace of the reopening and Fed is reflecting this – we can all see the data coming in every week – these dots only get wheeled out every quarter and since the March projections things have clearly improved – it is not a surprise that Fed policymakers have noticed.

 

But the meeting did signal a shift on inflation: confidence in the labour market + economy is still there but they are just a shade more concerned about inflation, which might be seen as odd since they were expecting it and some hot readings this summer were guaranteed. But there is a clear sense they are less confident in the transitory narrative. Indeed, the shift in the number of policymakers forecasting hikes in 2023 can probably be attributed to a couple of hot inflation prints we have had since the last projections. Whilst growth and inflation forecasts for 2021 were raised substantially, projections for growth, unemployment and inflation for 2022 and 2023 were almost unmoved. It’s saying – we saw those CPI numbers, don’t worry.

 

“Inflation could turn out to be higher and more persistent than we expect,“ Powell said in the presser. In some ways this tells us less about the Fed’s view of 2023 and more about the concerns of some policymakers right now, that they are presiding over an overheating economy, and they need to get back in front of the curve PDQ.  They’re not saying the economy is going to be booming in 2023, it’s just that the dots are a way to express concern about inflation today.

So far not much damage: The S&P 500 closed just half a percent lower. European markets are a shade lower this morning but hardly tumbling. The Fed is communicating its views reasonably well and has managed to signal its intent to tighten without actually doing anything. The question remains over whether inflation becomes more troublesome before labour market recovery is established, which could force the Fed into tightening before it would like and forcing a recession.

Amid all this, bank stocks liked the hawkishness as higher yields help them, with shares in Barclays and Lloyds both up about 2% this morning. Airline stocks are also higher this morning amid reports ministers are looking to ditch quarantine rules for Brits travelling to amber list countries who have had both jabs. IAG rose 3.5%, EasyJet +4% and Ryanair +3.8%. Finally CureVac stock dropped 50% after its vaccine candidate showed an efficacy of just 47%.

Stocks up, Fed floats trial balloon, Kingfisher sales surge

Markets in Europe have opened broadly higher this morning as they recover some of the losses from the swathe of selling on Wednesday, whilst the Federal Reserve underscored it’s in no rush to tighten monetary policy, minutes from its April meeting showed. Focus remains on the broader pace of inflationary pressures and recovery in the US with the weekly unemployment claims data (f/c +453k) and the Philly Fed manufacturing index. Iron ore and other industrial commodities linked to steel making feel as China said it would step in to curb rampant prices, though copper is rallying this morning. Focus also remains on the volatile crypto space after a dramatic day.

Crypto prices collapsed, with Bitcoin tumbling 30% to $30k on the nose before staging a big rally off this level. Outages at the Coinbase and Binance exchange didn’t help, fuelling a sharp leg lower around midday to the lows at $30k, but chiefly this seems to have been a run on stops triggering margin calls in the wake of China’s regulatory crackdown, which followed a period of steady losses seemingly brought about by a toppy market chart pattern and Elon Musk somewhat walking back his prior enthusiasm for the crypto. Institutional options activity seems to have further accelerated some of the moves as strikes were hit. As of this morning, the rout had stabilised, with Bitcoin trading around 30% off yesterday’s low, above $40k. There will be a lot of stranded longs now selling into any kind of strength. Stocks exposed to crypto prices like MicroStrategy, Coinbase and Tesla, were caught up in the storm, though they too closed well above their low of the day as the market recovered some of the losses.

Michael Saylor of MicroStrategy said he’s not selling. “Entities I control have now acquired 111,000 #BTC and have not sold a single satoshi. #Bitcoin Forever,” he tweeted. I expect him to keep Martingaling until it all unravels. Tesla boss Elon Musk tweeted that the emoji for ‘diamond hands’, following up by saying ‘Credit to our Master of Coin’, aka the CFO, Zach Kirkhorn. (I now check Elon’s Twitter the way I used to check the Donald’s each morning). Cathie Wood stuck to her $500,000 ‘target’ for Bitcoin, and suggested there were multiple signs the market is in a capitulation phase, which is often a good time to buy. Har har, Cathie would say any time is a good time to buy if it’s what she is pumping. The Innovation ETF ended the day down by almost 2%, and is roughly 34% below its all-time high struck in Feb.

The Fed floated a trial balloon, as minutes from its April meeting indicated some policymakers are thinking about thinking about tapering asset purchases. “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said. This was the first pointer – the first signal. It was done on purpose. Members of the FOMC also stressed the importance of “clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases”. Tentative – the question remains: when does the Fed think it’s hit the landing area for the economy, and does inflation take off in the meantime? US 10-year yields looked to test the 1.70% level again, trading at 1.672% this morning. Gold remains held up by technical support at the 50% retracement around the $1,870 mark, though real rates moved slightly higher – taper talk could make life trickier for gold bulls in the near term. Meanwhile the ECB warned of financial stability risks stemming from rising levels of sovereign debt. Vice president de Guindos warned of a “legacy of higher debt and weaker balance sheets which … could prompt sharp market corrections and financial stress”.

Markets were in a broad risk-off mode yesterday. There is talk of greater correlation between crypto and risk assets these days – certainly when you see a big move in either direction they tend to follow each other. The FTSE 100 ended the day down more than 1% at 6,950. The rub for the FTSE 100, as we witnessed from yesterday’s concentrated selling in consumer cyclicals, miners and energy, is that whilst the reflationary environment and reflation trade may still broadly said to be ‘on’, the index is really quite exposed to emerging market growth – so rising cases across Asia – India, Taiwan, Vietnam, Japan and Thailand in particular – may pose a risk to the market’s ability to regain the kind of 7,700 handle we saw pre-pandemic. Whilst the situation in the UK, Europe and US is improved greatly, the risk to emerging markets from the pandemic remains. Stocks like oil majors, miners and big consumer goods companies rely a lot on emerging markets for growth. Materials continued to roll over yesterday but copper firmed this morning after hitting its weakest since May 6th, while WTI  oil is also firmer around $63.50 after hitting its weakest since Apr 26th. However iron ore amid concerns China will act to keep a lid on surging prices. Again I’d be encouraged by the flat rejection of anything sub-6,900.

Kingfisher trades at highs not seen since 2017 after raising guidance for the first half of the 2021/22 year. After a particularly strong first quarter, management now expect mid-to-high teens group like-for-like sales growth, having previously guided for growth of low double-digit growth. As a result they’ve hiked adjusted pre-tax profit guidance to between £580m and £600m. This comes after a stonking first quarter in which group  LFLs rose 23% from 2019 levels and were up 64% year-on-year. Stunning year-on-year stats can be misleading, but the performance against the 2019 comparison is noteworthy and shows how Kingfisher has not only put integration problems behind it but also managed to successfully adapt to the pandemic. Execution of the ecommerce strategy has been exceptional – online sales up 258% from two years a Of course, DIY has been a popular pandemic past time, but nonetheless, group growth is ahead of the market.

EasyJet shares fell as it reported a 90% drop in revenues and a headline loss of £701m for the six months to the end of March. Passenger numbers for the 6-month period decreased by 89.4% to 4.1 million. I’d like to know who these 4m people are and what they are doing.

Sterling advances to $1.42, shares in Frankfurt hit new record

Shares in Frankfurt rose to a record high in early trade as European stock markets started Tuesday in upbeat fashion after an indecisive session on Monday left the major indices only slightly lower. The DAX rallied almost 1% to 15,540 at the high just after the open. The FTSE 100 is also firmer near 7,100 after last week’s big rejection of the 6800 handle left a path clear to retest the post-pandemic highs. Yesterday saw Wall Street down but only a little and the major indices were well off the lows. Meme stocks had a good day as AMC rallied 7%, whilst GameStop finished up by almost 13% on the day. Airbnb and Doordash were among the big fallers, decaling over 6% and 5% respectively. The S&P 500 closed down 0.25% at 4,163, whilst the Nasdaq was a tad weaker and the Russell 2000 rose marginally. UBS has increased its ear-end S&P 500 forecast to 4,400 citing exceptionally strong earnings growth this year that will more than compensate for valuation headwinds.  

 

Vodafone charged to the bottom of the FSTE 100, declining more than 6% and knocking 9pts off the index, as it said capital expenditure would rise. Full year results show group revenue declined 2.6% to €43.8bn, a little better than consensus, whilst adjusted ebitda fell 1.2% to €14.4bn. Covid’s impact on roaming was a big factor in lower revenues, but a €500m reduction in European operating costs helped offset in terms of earnings. But the higher capex guidance, as Vodafone invests in new tech and services like 5G, is why investors are taking some skin out of the game today. 

 

In the wake of last week’s inflation scare, Fed officials have duly been wheeled out to shore up risk sentiment. Arch hawk Kaplan of the Dallas Fed (non-voting this year) reiterated his belief that rates could rise next year, but we know he’s an outlier with no say this year. Vice-chair Clarida stressed patience as the economy reopens. Minutes from the last FOMC meeting due on Wednesday will be parsed for any kind of dissent beyond Kaplan. At his press conference for the April meeting, chair Powell was adamant that it’s way too early to discuss tapering: “We’ve said we would talk well in advance and it is not yet time to do so.” Minutes will show the Fed is still on course – the question is what the data does to the market over the coming weeks and months and whether it really believes the Fed won’t blink.

 

Sterling trades at its best level against the US dollar since late February, with the cable pair mounting a push back to 1.42 in early trade this morning after a solid employment report from the UK. The 3-month calls for a look again at the post-pandemic peak at 1.4250 struck on Feb 24th, but rejection of this area again may signal a double top and slow grind back to the 1.38 region. The British labour market looks in decent shape for now; the true test comes with the end of the furlough scheme. The unemployment rate declined to 4.8% in the January-March quarter from 5.1% in the preceding three-month period. The employment rate also rose but remains below its pre-pandemic level. Payrolled employees increased in April for a 5th straight month but was down 772k since February 2020. 

 

The dollar remains on the back foot more generally. DXY has flipped under 90 and is now at its weakest since dollar since the Feb 25th drop, whilst EURUSD has hit 1.22 again.  US 10-year yields are a tad firmer at 1.65%, pushing real rates lower with the 10yr TIPS to –0.90%. The combination of weaker USD and lower real rates helped gold continue to advance beyond $1,870 where it is looking at the 50% retracement of the move down since August, as flagged in yesterday’s note. 

 

WTI crude oil futures jumped to $67, breaking clear of the recent range to look again at testing their strongest since before the pandemic, struck on March 8th at $68. Brent hit $70 for the first time since March 5th. This has to be a risk-on move off the back of signs that Europe and the US are moving forward with reopening despite concerns about variants. News that vaccines seem to be effective against the current variants has traders optimistic that reopening plans will largely go ahead as planned. Breakout of the horizontal resistance could see return to $75 WTI. The opening up of travel is encouraging, whilst US airports are seeing more passengers passing through terminals than at any stage since before the pandemic. Whilst worries exist about the situation in India, this is largely a known quantity and the ‘trade’ is to look for a rebound in demand this year. By the mid-summer this may be over as demand might not pick up as expected.

Chart showing performance of various indices and commodities.

Stocks rally as Fed speakers get back on script, earnings support + Bank of England set to raise forecasts

Rotation and reflation remain the order of the day: The Dow Jones industrial average rose almost 100pts to a record close, whilst the S&P 500 edged up 0.1% and the Nasdaq fell another 0.4% as the big tech stocks had another choppy day. Energy and basic materials did well, while so-called bond proxies like utilities and real estate fell. US 10-year rates remain under 1.6%. Tech, growth and momentum continued to face pressure. Cathie Wood’s ARK Innovation ETF fell another 1% and trades about 30% off its highs struck earlier this year, down 10% YTD.

European stock markets bounced back strongly yesterday – the FTSE 100 rose 1.7% to settle one point below its post-pandemic intra-day peak at 7040, having broken this earlier in the day. The DAX added more than 2% to almost reverse all of Tuesday’s losses.

Markets are on the front foot again in early European trade this morning, with the FTSE 100 breaking out to a new post-pandemic peak at 7069. As consistently argued, UK equities trade at a discount to peers and should be well exposed to the strong cyclical recovery in the global economy as well as fiscal stimulus from the US. Meanwhile the DAX also firmed up by another 1% in early trade to 15,286 before paring gains somewhat. Bulls will want to finish today above Monday’s close at 15,236 in order to erase the big Tuesday reversal. Adding to the positive mood in Europe, shares in UniCredit and SocGen rallied over 4% as the Italian and French banks reported solid earnings. AB InBev rose almost 4% after reporting strong earnings. Ever-cautious Next raised its profit guidance for the year by £20m.

Following Yellen’s comments about raising rates to prevent overheating, a cornucopia of Fed speakers (Clarida, Mester, Williams, Evans, Rosengren and Kashkari) have swung behind the Fed’s policy stance to keep risk assets well supported. All have reiterated the Fed’s commitment to the cause (employment), helping to buoy risk after the Tuesday wobble. NY Fed president John Williams took the cue from Janet Yellen’s off-kilter remarks about raising rates to repeat the dovish mantra. Inflation will rise but will be temporary, he said, adding that he wouldn’t draw a line on where inflation would need to reach to prompt policy change. Chicago Fed president Charles Evans reiterated that policy would remain highly accommodative for some time, stressing that conditions for the ‘substantial further progress’ required by the Fed will not be met for a while. Cleveland Fed boss Loretta Mester said policymakers will be ‘deliberately patient’ regarding inflation. Boston Fed president Eric Rosengren said it’s too early to talk about tapering the Fed’s $120bn-a-month asset purchase programme. All on script and helping to lift the boats following Yellen’s mis-speak.

Shares in some drug makers fell after the US said it would support a patent waiver for Covid vaccines. Moderna fell 6%, Novavax was down 5%, whilst Biontech and Curevac are 12% lower today. Chinese drugmaker Cansino Biologics fell 15%.

Peloton stock tumbled 15% after the company recalled its treadmills following the death of a child in an incident involving one of the machines. Bank of America downgraded the stock, citing risks about bad publicity and a delay to future product launches. Baird and Stifel said this is a buying opportunity.

A £2.75bn auction of 10-year gilts sold at an average 0.924%, whilst the yield on the paper currently trades around 0.82% ahead of the Bank of England’s monetary policy decision today. It’s almost certain that the BoE will upgrade its economic and inflation forecasts in the quarterly Monetary Policy Report. More important will be the outlook across the full horizon of the bank’s forecast period – is the recovery sustained or are we dealing lower long-term potential growth and scarring? The Bank forecast a 4% decline in Q1 (quarter-on-quarter), however the data so far indicates that the contraction was milder than the February projection. There is no question about raising or lowering interest rates – the big question hanging over this meeting is whether the MPC chooses now to signal how and when it will begin to taper asset purchases. There has to be some tapering this year, the only question is really how much the bank is prepared to sound hawkish and do this early.

The economic recovery taking shape in the UK is surely encouraging and warrants the Bank slowly exiting emergency mode. However, with furlough set to run until September, there is not any immediate pressure for the MPC to take the lead in saying ‘we’re out of this’. Markets are currently pricing a small hike this year, and 50 basis points over the three years of the BoE’s forecast horizon. If it sounds too optimistic it raises the risks markets thinking more tightening is required.

GBPUSD trades a little higher this morning at 1.390 with bulls eyeing a push back to Monday’s highs at 1.3930 on any hints of BoE hawkishness. Meanwhile watch for today’s Scottish election results coming overnight and tomorrow – a majority for the SNP, or even a coalition of pro-independence parties – could energise calls for a second referendum. Whilst the current Tory government has made clear it will sanction one, grumblings north of the border create headwinds for sterling. A big win for the SNP could knock the pound back.

Ahead of tomorrow’s nonfarm payrolls report, ADP reported that US companies created 742,000 new jobs last month. This was the biggest jump since last September but was a little short of expectations. It could be a problem not of demand but of supply – companies seem to be finding it hard to find workers. This poses problems for growth (you cannot grow without the staff) and inflation (you have to pay more to attract workers). A culture of dependency like never before seen in the US is being bred by the Biden administration. Initial jobless claims data is released today, forecast at +540k.

Oil recovered after a bit of slip on yesterday’s inventory data. Whilst the EIA reported a large draw of nearly 8m barrels, gasoline stocks rose for a fifth straight week. After rising as high as $66.67 yesterday, WTI for June declined to just under $65 at one stage following the inventory report but has since reclaimed $65.80. Recovery to yesterday’s peak, corresponding with the Mar 15th swing high could, bring on an attack on the Mar 5/8 post-pandemic highs near $68.

Gold trades higher as US yields are a touch softer with bulls eyeing up another attempt to take out the 100-day and round number resistance at $1,800.

A chart showing gold performance on 6th May 2021.

Do Yellen’s rate hike comments matter?

Treasury secretary Janet Yellen said rates might have to rise to cool an overheating economy. Shock, horror. Did no one give her Powell’s script? “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said during an economic forum at The Atlantic. “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”

Economics 101 shouldn’t offend markets or perturb investors – stocks hit session lows off the back of the remarks. But this was seen as a significant remark since it is a break with the Fed’s new policy stance. Now what’s she’s saying is demonstrably true: central banks raise rates to stop economies from ‘overheating’, since this tends to lead to bad things like inflation and misallocation if capital. It’s the kind of thing central bankers would normally say in normal times to signal a tightening cycle is imminent. But we are not in normal times and the Fed has been hammering its message home that its goal is not to quell forecast inflation, but to get back to full employment come-what-may. Some will flag the potential incursion into monetary policy by the Treasury as big no, but in this instance it’s not about central bank independence – Yellen is far too well versed in this topic and far too academic in her approach to be trying to strong arm the Fed.

But it’s very much the antithesis of the way the Fed has been playing things since the pandemic. We’ve all kind of assumed the Fed is happy to let the economy run hot, because it’s implicitly said so: employment is the goal, inflation can be overlooked until enough people have jobs. Now many of us have questioned the sustainability of such a pivot in policy and break with the traditional central bank approach, which has always been to remove the punch bowl before the party got out of a hand (overheating). But we’ve assumed that the Fed was so all-in it wouldn’t change course.

Of course, Janet Yellen is no longer ‘the Fed’. That’s now Jay Powell’s purview. Her comments – seen in isolation – are just the same in reverse as Mario Draghi’s persistent calls for economic, structural and fiscal reform in the EU. But she was the Fed chair so her words carry weight. Moreover, Yellen and Powell have been singing from the hymn sheet – they’re not at odds on this, which could lead some to think it’s part of the ‘masterplan’.

So, the question for market watchers is whether what the Treasury says about monetary policy is all that important. Yellen looks more like an interested outsider than a Fed mole. I don’t think it was choreographed to signal a Fed taper. I think it was a genuinely held belief that multi-trillion-dollar stimulus and infrastructure spending coming at a time of a major cyclical recovery and zero percent interest rates could lead the US economy to get a bit warm. Coming from a central bank background, it’s natural for her to think that ‘well we need to spend this money now, so rates might need to go up to compensate for all this extra money we’re printing at a later date’. It’s not, in my view, scripted policy manoeuvring. Just sensible observation – the Fed could do with this.

Indeed, Yellen later made these comments at the Wall Street Journal’s CEO Council Summit: “It’s not something I’m predicting or recommending … If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”

Market reaction? Rates were unmoved, with the benchmark US 10-year still nestled around 1.60% but richly priced tech stocks fell, leaving the Nasdaq down almost 2%, which would imply that rates might not be moving at the short end (I.e. her comments are not a taper signal), but investors do think cyclical and value areas of the market warrant more attention (rotation). If anything has been clear about the last few months, it’s that some corners of the market that have been overlooked by investors are gaining more kerb appeal as inflation expectations and nominal yields pick up. Yellen’s comments only further underline this trend. The S&P 500 wiped out Monday’s gains, sliding 0.7%. The DAX fell sharply but is up this morning as European markets stage a fightback. The FTSE 100 trades up 1% and making a fist of 7,000 again after pulling back from the 7040 area yesterday to finish well south of 7,000.

Where are stocks headed? We spend a tonne of time chatting about what signals central banks are sending and what vaccines might or might not do for the economy. But all you lot really want to know is where the market is going to be in a week, a month, six months maybe tops.

So given it’s early May and the market is permeated with a sense of trepidation as traders really do take one eye of their screens as summer approaches, now’s as good a time as any to look at the prospects for the broader stock market in the coming months.

The old ‘sell in May’ adage is doing the rounds of course. On seasonality, Stifel says: “We see the S&P 500 flat/down -5-10% May 1st to Oct-31st, 2021: Seasonality is especially applicable at this moment in time“. And Bank of America notes that the May-October period has the lowest average and median returns of any equivalent six-month period, looking at data going back to 1928. Maybe there is something in the ‘sell in May’ trope. Certainly, given the run-up in equities we have seen, the well understood macro picture and the propensity for yields to edge higher, a period of cooling off seems reasonable.

Earnings are powering ahead – we’ve just entering the last stretch of a blowout quarter in both the US and Europe. But this has been largely priced. Can corporates keep up the pace? The second quarter is meant to be even better – stimulus cheques are back, and GDP growth is seen powering ahead. Markets may not truly reflect just how strong this recovery will be. According to the Atlanta Fed Q2 growth is seen at 13.2% and the US economy will exceed its pre-pandemic peak before the quarter is over (as it should when you have pumped something like 20%-30% of GDP into the economy by way of fiscal stimulus and emergency relief packages). The money supply has ballooned; now is the time for the velocity of money to recover. We should be careful; we are already seeing some heinous year-on-year chart crime as economies recover.

Spending seems to be strong as the reopening of the global economy, but companies are experiencing supply chain problems and raw material shortages. This ought to push up inflation, raising nominal bond yields (though not necessarily real rates), which could hinder equity market returns over the coming months.

What about sentiment? Clearly investors are very bullish right now – they’re pretty well ‘all in’. BofA notes that Wall Street bullishness is at a post Financial Crisis high. „We have found Wall Street’s bullishness on stocks to be a reliable contrarian indicator. The current level is 50bp away from triggering a contrarian “Sell” signal,” they write.

And the technicals? In short, the S&P 500 appears very over-extended at current levels and retrace of around 400pts to 3,800 would be considered as the first stop in multi-month reversion to more sustainable levels. The Vix does not suggest market participants are overly concerned and some are making big bets on markets remaining tranquil for the next few months.

Valuations are harder to get a handle on – the Case Shiller PE ratio is at 37, its highest since the dotcom boom – indeed it has only ever been this high during that period of ebullience and irrational exuberance. But given the rebound in the economy and earnings taking place and expected to continue, this backwards-looking metric is probably less reliable now than at other times (the Fed has already made somewhat outdated as a gauge of stress in the market). Forward multiples are less exaggerated – about x22 the next 12 months earnings. This is still relatively high but until the Fed removes the punchbowl, it can be sustained. Margin debt has exploded, suggestive of a large amount of leverage in stock markets that could be exposed to a sharp correction, making a pullback self-sustaining.

Should you worry? A lot depends on monetary policy reaction function. In other words, how do central banks respond to changing economic circumstances. More simply, when does the Fed remove the punchbowl? To be even more precise, at what point does the Fed start to signal it might start thinking about turning the music off. Yellen may have fired the starting pistol, but I now think Powell and co will work hard to row that back and reiterate their commitment to employment goals – I don’t think that has changed.

It’s like a game of musical chairs where everyone has worked out that it’s better to rush for a seat when the compere is looking like he might press stop than wait until the music actually finishes. US economic growth and spending this year could be even stronger than expected – this could push the Fed to tighten policy sooner than markets expect – or as we might surmise from Yellen’s remarks, the fiscal impetus could force the Fed to move sooner than it thinks it needs to. But only if employment recovers to pre-pandemic levels. If it does not, the Fed could keep administering kool aid for longer. Inflation remains the big unknown and has the potential to derail growth. Either way, yields should tend to move higher over the summer as data comes in, this could drive up rates and hurt equities even if it also means a weaker dollar as real rates in Europe move up.

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