All looks calm ahead of the Fed meeting

Morning Note

Cooler rates and broadly positive risk sentiment helped send the Nasdaq composite to a record high on Monday, whilst the tech sector lifted the broader market as the S&P 500 also notched a fresh all-time closing high. Mega tech names led the gains for the index, whilst financials were the biggest drag. European stock markets are broadly higher in early trade. Growth/tech have come back, whilst the reopening/reflation trade has cooled somewhat.

Ahead of the Federal Reserve meeting this week there is no sign of a tantrum. Stocks are happy to catch the tailwinds higher despite being caught between a super-hot inflation reading last week and the Fed’s policy meeting. Rates have been steady coming into the meeting with the benchmark 10yr yield hovering a little below 1.5% and have been edging lower since the end of March – allowing growth stocks to catch some bid in recent weeks. The calm shows markets are broadly in tune with what the Fed’s views so far, but this can shift if the Fed acts too early or delays too long. Indeed, today’s Bank of America fund manager survey shows 72% think inflation is transitory, which pretty much tells you all you need to know about market positioning. The bottom line: “investors bullishly positioned for permanent growth, transitory inflation & a peaceful Fed taper via longs in commodities, cyclicals & financials,” the FMS report says. On the Fed and policy, 63% expect the Fed to signal a taper Aug/Sept; US infrastructure spending now seen a bit lower at $1.7tn and expectations for a steeper yield curve are at their lowest since Aug 2020.

The Fed’s two-day meeting begins today with markets paying close attention to the language from the FOMC’s statement and what the latest economic projections will tell us. Inflation and growth forecasts for the near-term will likely be revised substantially higher, but this is not going to materially alter the Fed’s position. It’s probably too early to hint at a taper – they can point to the labour market still being some way off where they want it to be and a lack of upwards pressures on inflation expectations. The transitory message will be clear. Chair Powell will seek to tamp down expectations for a taper but as the minutes from the last meeting revealed, he’s allowing it to be known that some policymakers are thinking about thinking about tapering asset purchases. But he will stress that the economy is not there yet: it’s under consideration but more progress is required. The first real signal will be left to Jackson Hole in August, or possibly the September meeting, in preparation to begin tapering in Dec/early 2022.

Yesterday crypto stocks jumped as Bitcoin recovered the $40k handle following a tweet by Elon Musk. MicroStrategy rallied almost 16%, whilst Coinbase added more than 6%. Meme stocks aren’t going away – AMC jumped 15% and Wish added almost 13%. A survey shows hedge funds expect to hold 7% of their assets in cryptos in the next 5 years.

This morning Ashtead slipped a little even as it reported a doubling in profits in the fourth quarter of the year. Operating profits +95% to £264m was a good performance and reflects the recovery in construction in the US as the economy reopened. Shares have risen by 45% this year as it has demonstrated both resilience to the downturn and a positive uptick in activity as economies reopen for business. As chief executive Brendan Horgan puts it: “Our business can perform in both good times and more challenging ones.”

No lift for sterling out of its current moribund range as UK labour market data out this morning showed the number of employees on company payrolls rose by 197k last month, though this remains about 550k below where it was before the pandemic hit. A positive report on the whole. GBPUSD maintains its slightly weaker bias as it slides down the channel looking for a meaningful shift in gear.

Britain takes vaccine lead, Brexit talks stumble, Ashtead pops

Morning Note

V for vaccine: A 90-year-old Briton became the first person to be inoculated against Covid-19 this morning as the UK begins its mass vaccination programme. The name Margaret Keenan will hopefully be remembered for symbolizing a momentous turning point in the fight against the virus.

Pfizer and BioNTech have had trouble with the supply chain but the UK should have 4m – enough for 2m people – by the end of the year. The second person vaccinated is a certain William Shakespeare from Warwickshire…a good omen? Health Matt Hancock says the Oxford University vaccine will get approval within a couple of weeks and that once the most vulnerable have been vaccinated the government will begin to lift restrictions. Truly light at the end of the tunnel.

Brrrrrr is for Boris’s Brexit: the saga drags on. UK prime minister Boris Johnson will fly to Brussels this week for a tete-a-tete with Ursula von der Leyen to try to break the impasse. The problem seems to be that there is simply no zone of compromise in the three remaining areas – fishing, level playing field and governance. So with neither side seeing a way to accommodate the other, they are both relying on the time element to do the work for them. This is risky as both sides have said no-deal is better than a bad deal. We know neither wants to compromise on key areas of sovereignty. Nevertheless, a last-minute effort should still lead to some form of agreement, even if it is a slimmer, incomplete package.

Sterling dipped sharply yesterday morning on some negative headlines but faded this move easily and this morning GBPUSD is holding steady above 1.33.

European stock markets traded a little lower in the early part of the session with Brexit risks perhaps weighing on sentiment and mixed session in Asia overnight. US lawmakers are set to pass a funding bill to avert a government shutdown, whilst market attention remains on whether a stimulus package can also be agreed before Christmas and the end of federal support on Dec 26th. Last week’s soft payrolls number ought to add to the sense of urgency.

US markets traded mixed on Monday, with the Nasdaq rising and the S&P 500 and Dow a bit weaker. Uber says it will end its driverless car ambitions, whilst Tesla shares rallied another 7% ahead of the stock’s inclusion in the S&P 500 later this month. The market cap now exceeds $600bn, which will make it among the largest stocks on the index. Shorts have been well and truly toasted and seem to be throwing in the towel – Jupiter Absolute Return fund manager James Clunie is stepping down after suffering a very bad run from his short Tesla position.

Lockdown in England in November saw a UK retail sales growth hit. Following from a string of upbeat numbers for retail, last month saw sales rise by just 0.9% from last year, a marked slowdown from the 4.9% year-on-year growth in October. Retailers will hope that the December lifting of restrictions and a Christmas to be largely spent at home and not on the slopes will deliver a lift.

With little to do, restaurants shut, and Christmas parties cancelled, grocery sales are resilient – Kantar reports 11.3% year-on-year growth in the 12 weeks to Nov 29th, and 13.9% growth last month alone. November turned out to be the biggest month ever for UK supermarkets. In the 12 weeks to the end of last month, Tesco sales rose 10.4%, Sainsbury’s +10.8%, WM Morrison +13.7% and Asda +7.7%, with the sector seeing inflation of 1.4% over the month.

On the earnings front, Ashtead shares shot to the top of the FTSE 100 after the company said it now expects full-year results to beat previous expectations. Enjoying essential business status in key markets helped it remain open over the second quarter, supplying equipment to various key service providers. In the first half, revenues fell 3%, with rental revenues down 4% on a constant currency basis. Operating profit declined to £641m from £771m last year but overall, the second quarter, covering the period to the end of October, was a lot better than the May to July period. In Q2, the decline in rental revenues slowed to just –1%. Pre-tax profits declined -21% in the first half, but Q2 showed a marked improvement from Q1 as profits only fell by –7%. A much more resilient period in the second quarter has allowed management to lift full-year expectations for free cash flow to exceed £1.2bn from previous guidance of £1bn. Rental revenue growth in both the UK and Canada is now seen at 15-20% this year, up from flat previously. At a group level, full year rental revenues are seem between –3% and –7% from previous guidance of –5% to –9%.

Yields pulled back, with the 10-year Treasury down to 0.93 having threatened to break 1% on Friday. Real rates moved further into negative territory, helping to push gold higher. Spot gold rose through the 21-day moving average on the upside as prices cleared the 38.2% retracement of the Mar-Aug rally.

Spot gold has risen through the 21-day average.

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