Stocks ease back at the open, oil and yields higher still

Morning Note

Yields are popping, as a bond market selloff that started last week in the wake of the Fed meeting gathers steam. US 20yr and 30yr paper is yielding the most since July, both above 2%, whilst the benchmark 10yr note has jumped above the psychologically important 1.5% level to 1.53%, its highest since June. Bets on central banks tightening monetary policy more swiftly than previously thought are fuelling the selling in rates as investors also focus in on the wrangling in Washington over the US debt ceiling. Whether we are talking reflation or stagflation, the ‘flation part of the equation is clear and yields need to rise as a corollary. If the Fed is buying $120bn a month in debt today, but buying less tomorrow, it makes sense that rates will inevitably rise.

Senate Republicans on Monday were true to their word and blocked a House bill that would avert a government shutdown and potential default on US debt. Democrats have until Friday to pass legislation that will avoid a shutdown, whilst it’s likely that the debt ceiling must be raised by the middle of October to prevent the US government defaulting on its debt. This pantomime must play out, but it seems impossible that the debt ceiling won’t be raised. A shutdown is possible, however default is unthinkable. Two Fed officials warned of extreme market reaction in the event of a default. Whilst this extreme tail risk is in any way ‘on the table’, Treasuries can expect to go through a period of further volatility.

And with rates on the rise the reflation-value play in the stock market is back on. Energy and financials and stocks tied to the reopening of the economy did well, mega-cap tech and growth was generally weaker as yields rose. Real estate, healthcare and utilities stocks also fell. That mix left the Dow higher but the S&P 500 and Nasdaq lower for the day. We await to see whether the rotation stardust can power further returns for the broad market – as happened at points earlier this year – or if the heavy weighting of the mega cap tech names will weigh further still. European stock markets are a touch lighter in early trade following Monday’s session which was a story of declining risk appetite throughout the session after a pop at the open. Oil keeps heading in one direction, with WTI above $76 and Brent touching $80.

Time to redo the dot plot: Whilst the Fed has started to sound a tad more willing to raise rates, two of its most hawkish members are on the way out. Boston Fed chief Eric Rosengren and Dallas Fed boss Robert Kaplan announced they will be stepping down shortly. “Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve’s execution of that vital work,” Kaplan said in a statement. “For that reason, I have decided to retire.”

This does three things. One, it draws a line under the recent trading disclosure furore. It shows that the Fed under Powell won’t suspect behaviour. Two, it’s going to lower the chances of the insider trading story scuppering Powell’s renomination as Fed chair. Three, it removes two of the more hawkish members from the committee, which could have some implications for monetary policy depending on who replaces them. In the meantime vice presidents Meredith Black (Dallas) and Kenneth Montgomery (Boston) will stand in as interim presidents.
Powell and Yellen testify before a Senate Banking Committee today – the timing of Kaplan and Rosengren stepping down should allow Powell to easily bat away some potentially touch questions over their trading. We also have the Fed’s Evans, Bostic and Bowman on the tape later.

Rising Treasury yields offered support to the US dollar. EUR/USD is down to 1.1670 area, through some big Fib zones and near to the key support at 1.1664-66, while USD/JPY above 111.30 with the YTDS high at 111.64-66. Dollar index is north of 93.60 and towards the very top of the range of the last 11 months – big test here to see if the dollar is going to exert more strength into the back end of the year.

EURUSD Chart 28.09.2021

Gold struggling, making new lows this morning with rates on the march.

Gold Chart 28.09.2021

Fed waits

The Federal Reserve is playing for time – more certainty from Washington as much as inflation and the path of growth are needed before they really start to move, but the consensus is clearly tilting towards a marginally more hawkish view with rate hikes now pencilled in for 2022. Market reading this as marginally dovish since the taper was not announced but this is balanced by the more hawkish dots. On balance market reaction seems a little off kilter but we await chairman Powell next.

On tapering – if economic progress continues then reducing asset purchases would be warranted. It’s a prewarning but they are not tying themselves to any date just yet. Still set to taper this year but the absence of a clear signal in the statement indicates it’s more likely to be Dec after being announced in Nov.

On lift for rates – median hike brough forward to 2022 from 2023 previously. Markets had already been pricing Dec 2022 as the lift-off for rates so this is well anticipated. Dot plots are firming up the shorter maturities as investors price in the Fed raising rates in the near future but the long end is not playing ball as no one sees long-term growth picking up massively – so more curve flattening, not the big steepener we’d thought earlier this year – but that is just for the time being. 10s are weaker around 1.305%, down heavily from the 1.34% area traded earlier today. Gold is firmer and the dollar weaker, though the kneejerk in the seconds after the release was the reverse. The Dow trades firmer and the S&P 500 rallied to session highs in the wake of the release. So far the market is buying the Fed’s line that tapering ain’t tightening and that it will do all it can to avoid a tantrum in the bond market.

Fed Dots 23.09.2021

On inflation – the core PCE inflation number for this year was hiked to 3.7% from 3.0%, the 2022 figure to 2.3% from 2.1%. They’re pulling out the ‘transitory but not quite as transitory as we thought’ line. I called 3.5% for 2021 and 2.5% for 2022 – so Fed still frontloading inflation expectations here – more in 2021, cooling sharply next year. Still not the ‘substantial further progress’ because it’s transitory – go figure.

On growth – hotter this year, cooler next, reflecting the slowdown in the reopening burst and also the problems in global supply chains, labour shortages leaving the economy running below potential and the impact of inflation.

Fed inflation forecasts 23.09.2021

On employment – like the more circumspect growth outlook the unemployment outlook for this year is not so good – 4.8% vs 4.5% in June. Slower growth, plus a less racy recovery in the labour market net out the inflation concerns – but it’s signalling stagflationary trouble ahead.

Stocks drop, Bitcoin weaker again

Morning Note

You couldn’t really have set it up better. On the day El Salvador made Bitcoin legal tender, the asset plunged by 16%. It’s almost as if the inherent volatility in Bitcoin makes it really bad at being a currency that people use to spend and save. After hitting a fresh high above $52,000 overnight, prices dropped to under $44,000 before finding some stability around the $45,000 area. Not a good start to its life in the mainstream. It simply underscores the fact that it is not a good means of payment or reliable store of value. The El Salvadoran government apparently bought more Bitcoin on the dip.

 

Cathie Wood of Ark was talking on Bitcoin – responding to comments by investor John Paulson. She wheeled out the Bitcoin-bro case that it’s not just digital gold, it’s new global monetary system. She said it’s not subject to the whims of policymakers – in fact it’s a hedge against the whims of policymakers. That may be or may not be, investors should be extremely cautious. The impoverished people of El Salvador don’t have much choice.

 

Stagflation: inflation plus a tax rise plus slowing growth is probably not a great setup for the UK economy. The Tories are pushing on with a regressive tax hike for workers, plus increase the tax on dividends which is going to be an extra blow to investors. It means the overall tax burden is the highest in this country since the second world war. The question that needs to be asked is a bigger one – if you can print money to pay for furlough, test and trace and the rest, why can’t you print money for social care reform?  

 

European stocks saw brisk selling in early trade after a drop for Wall Street and a weak handover from Asia. All sectors in the Stoxx 600 are down in early trade and the major bourses trade -1% to the downside. But it was another record high for the Nasdaq and again there is a slow growth feel to the stock market – things that don’t need cyclical economic growth doing well like Netflix – new all-time high – and Tesla. Cruise liners, casinos and Disney were the best performers though – signs that it’s all doom and gloom with regards Delta and vaccines. Industrials were weak but so too some of the bond proxies like real estate and utilities as bond yields rose. The Dow fell 270pts to 35,100, while the S&P 500 declined 0.34% to 4,520. It seems like the kind of uptick in consumer spend and consumption into the back end of the year will not be as strong as thought due to delta. James Bullard, a relative hawk, said tapering should go ahead soon. US futures heading lower – definite pullback mode so watch out – question is how quickly the market is to buy the dip, so schooled in doing so it is.

 

Time to sell bonds? The 10yr Treasury yield approached 1.4%, hitting a two-month high and breaking above its 200-day SMA. The July high of 1.42% and the 100-day SMA at 1.44% are in view. Gold fell as yields moved up along with the US dollar, which is recovering some ground lost over the last fortnight. USD/JPY ticked up to its best in 3 weeks, while sterling is weaker again after a sharp fall yesterday.

 

Morrisons shares are trading up a touch as the company said it will engage with the panel on a possible auction. Neither Fortress nor CD&R have declared their offers final, so a ‘competitive situation’ exists still. Shares ticked up by about half of one percent at the start of the session.

Stocks pick up, bonds remain bid ahead of Fed minutes

Morning Note

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

Stocks dip as Fed shakeout continues

Morning Note

How do you trade the Fed? Not easily, is the simple answer. US has ripped higher as the Fed signalled it won’t let inflation run riot, but bonds have been pretty steady – 10yr yields have slipped back under 1.48%. Stocks have come off their record highs since the Wednesday meeting, but yesterday the Nasdaq Composite – composed of tech and growth companies that ought to do less well in a rising rate environment – gained 0.87%. That may be because investors are retreating to a form of quality right now. NDX rose 1.3% as the mega tech names enjoyed solid gains. The broader market was weaker with small caps -1%, commodities slipped with palladium -10%, platinum -7%, oil lower and the dollar was bid up to its best day in over a year.

European indices saw a mixed start to the session on Friday but have mostly turned red as investors dial down their risk in the wake of the Fed’s slightly hawkish meeting. What the Fed’s meeting also told us was that once inflation expectations become unanchored, it’s a tough job to re-anchor them. I continue to envisage higher yields by the end of the year but the Bank of America Flow Show report today stresses that cyclicals face a ‘perfect storm’, with ‘excess positioning, China tightening, US fiscal hopes fading, and now hawkish Fed’ combining against them.  Metals are a tad firmer this morning after steep losses Thursday, but copper is still ~14% off its recent peak and set for its worst week in 15 months. A combination of a tighter Fed and China’s efforts to lower prices have worked. Gold is also set for its steepest weekly loss in more than a year as a stronger dollar and Fed’s hit job on inflation works its way through some stretched speculative longs.

UK retail sales indicated the direction of the post-pandemic economy. Sales fell 1.4% between April and May as shoppers ditched stuff for experiences, dining out more and hitting the pub again. Tesco Q1 numbers this morning evidence this, with the company reporting that sales growth peaked in March at +14.6% and moderated in April/May as restrictions eased.  Tesco is starting to hit some extremely tough comparisons with last year’s pandemic-driven surge in sales. Shares in the retailer declined more than 1% towards the bottom of the FTSE 100.

Dollar strength continues to dominate the FX narrative in the wake of the Fed. GBPUSD is lower again with a break of the 100-day moving average to 1.3860.  The washing out of longs maybe has some way to go yet and a test of the April double bottom at 1.3660 may be on if there is further for this to correct. Fairly stretched GBP longs and shorts on the USD mean this could have further to unwind. USDJPY trades lower at 110 support after the BoJ kept monetary policy unchanged and extended its pandemic relief programme. EURUSD is also on the back foot and trying to hold onto the 61.8% retracement of the Mar-May rally around 1.1920. AUDUSD is through the April low and testing the 200-day SMA at 0.7550. Very light data day but EU finance ministers are meeting for a second day in Brussels.

Shares in EasyJet, Ryanair and Wizz Air all rose after an upgrade for budget airlines from HSBC, which says ‘the process of reopening borders and enabling travel is assuming momentum within the EU, and the UK may follow’. EasyJet and Ryanair were both upgraded to buy from hold, whilst Wizz was given a hold rating having previously held a reduce tag. HSBC adds that whilst UK policy is ‘not easily predicted’ (you don’t say), it expects UK travel restrictions to ease.

Stocks shrug off higher inflation, gold up as yields are pinned

Morning Note

A mildly positive start to the Friday session for European markets after Wall Street set fresh records, with the S&P 500 jumping to a new all-time high even as data showed US inflation surged in May. US CPI rose to 5% last month, whilst the core reading rose to +3.8%, the highest in 30 years. Core month-on-month declined from 0.9% in April to 0.7% in May but still remains extremely high. Rates actually fell with the 10yr Treasury under 1.44%, sending the dollar to under 90 and gold firmer. 

 

Hot inflation readings right now are pretty much fully priced and understood, as is the reaction function of central banks: they see it as transitory, nothing to worry about. This was evinced by the European Central Bank yesterday, which stuck to the inflation-is-temporary script. It raised expectations for growth and inflation this year but sees inflation at just 1.4% in 2023. The message from the ECB was that things are much better, but we are not about to ease off. 

 

The ECB said it sees risks to the growth outlook as “broadly balanced”, for the first time since December 2018. And the statement was quite dovish given upgrades, with the bank saying that “the Governing Council expects net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year”. We might have expected them to drop the word significantly at this meeting. It’s all set up nicely for a battle over the summer between the hawks and doves – if the data continues its current trajectory, we should anticipate a September taper announcement. 

 

Bank of America’s closely-followed Flow Show shows strong flows to bonds, with $12.5bn inflows vs $1.5bn to equities in the last week. The paper notes dryly that “nobody knows how to trade inflation, everybody knows how to trade ‘don’t fight the Fed’.” This is an apt way of describing the fact that just about no one around today really understands either a strong and sustained period of inflation, nor a proper bear market. Just because you’ve not had to deal with it before doesn’t mean it can’t happen.  

 

Yields falling on a hot inflation print seems counter-intuitive. But while inflation is surging, inflation expectations are not shooting higher. As such, at its meeting next week, the Fed can still argue that the inflation we are seeing is a factor of base effects and short-term supply problems. The question remains: at what point does the stream of higher inflation readings become more than just transitory?

 

With yields sinking to fresh 3-month lows, real rates (TIPS) shot lower too, giving a helping hand to gold. The set up for gold looks promising – rising inflation + a Fed willing to keep its thumb on yields, producing even-more negative real rates. Prices have clawed back the $1,900 level and could be heading for the $1,960 region if the recent peak at $1,196 can be cleared. Failure to retain the $1,900 could see the 50% retracement at $1,877 again.

The FTSE 100 is testing the near-term highs around 7120 in early trade – a break could call for test of the post-pandemic peak at 7,164 at the top of the ascending triangle. Continued MACD divergence is a headwind.

Attention shifts to bond yields as stocks rally, ARKX ETF launch, Deliveroo IPO priced at the bottom

Morning Note

Despite some volatility in individual names associated with the Archegos Capital fallout, chiefly the big banks that had acted as prime brokers to the hedge fund, there was no broad selloff in blue chips. The Dow Jones industrial average wiped out a 160pt loss at one point to finish 98 points higher for a fresh record close, while the S&P 500 and Nasdaq were flat. The DAX notched a record high, whilst the Euro Stoxx 50 hit its highest since the pandemic. European stock markets are broadly higher this morning, with the FTSE 100 eyeing 6,800 again with all sectors but healthcare in the ascendancy. The DAX made a fresh all-time high again. Banking shares in Europe are higher – shrugging off the Archegos episode as yields are on the move higher. Even CS is 1% higher this morning.

Market participants will be glad to see this has so far been contained – though there may be some more trades related to Archegos that need unwinding. Banks left holding the bag – which look to be Nomura and Credit Suisse more than others – will suffer significant losses. Goldman Sachs, surprise, surprise, seems to have escaped cleanly by acting swiftly and decisively to get out first. So far though there has not been a big unwind across assets.

Attention quickly turned to the bonds as the US 10-year yield jumped to 1.76% this morning, towards the top of the recent range. This helped lift the dollar to its highest since November, with the dollar index hitting 93. Gold fell to the bottom of the recent range to test $1,700 again – key trend and Fib support coalesces around $1,690 should the round number go. Bitcoin climbed to $58,000 say Visa offered more ‘corporate support’ by saying it would allow the use of the stablecoin USD Coin to settle transactions on its payment network. WTI (May) eased back from $62, the highest in a week, ahead of the OPEC+ meeting this week at which producers seem all but certain to maintain supply curbs through May.

Deliveroo is pricing its IPO at the bottom of the range, with shares off at £3.90 and valuing the company at £7.6bn. Still it’s the biggest London listing in a decade so it should get plenty of interest once the stock opens for unconditional trading next week. The IPO has not has been as warmly received in the City as found Will Shu might have expected. Numerous funds including giants Aviva, Aberdeen Standard and Legal & General are not taking part amid various concerns about governance (dual class shares), working practices (riders getting £2 an hour) and regulatory concerns. It’s also true to say that the path to profitability remains questionable.

Cathie Wood’s Space ETF – ARKX – is due to start trading today. The first new ETF in two years from the Wood stable is eighth in total. There are several eye-catching elements to the ETF’s holdings.

First, the holdings, which are not aligned very closely to existing space-focussed funds like the Procure Space UFO ETF. Somewhat amazingly, the second biggest holding in the ETF, at more than 6% weighting, is – get this – another ARK ETF, the 3D Printing ETF (PRNT). Loading up ETFs with other ETFs – which you are promoting – seems kind of wrong. You could rightly ask: is it a pyramid? It smacks of the 1920s American experience of the Goldman Sachs Trading Corporation, which in turn set up the Shenandoah Corporation, also an investment trust, which in turn set up Blue Ridge Corporation. Yes, another investment trust. What you had was a lot of trusts with the same people and same investments – cross-investing in one grand pyramid scheme. We all know how that ended up.

Second, it contains a number of names that are not associated with ‘space’. For instance, JD.com is a 5% holding, whilst Virgin Galactic is less 2%. Netflix is a 1.27% holding. True, the prospectus makes it clear that ‘space’ investments would only ever be no less than 80% of holdings, but it is nonetheless noteworthy to package up a load of investments in this way.

And, ARK has changed the language in its ETF prospectuses to remove the limits on single-company exposure. It also added a reference to blank-check companies (SPACs) to the risk section. This will only add to concerns about the concentration in large cap momentum stocks and exposure to high risk SPACs comes with its own set of worries for investors.

Constiuents of the ARKX space exploration ETF

A light calendar for data today – just the US CB consumer confidence report on tap as well as preliminary German inflation numbers. Fed speakers Williams and Quarles are up, too.

Fed governor Christopher Waller offered a robust defence of the central bank’s policy making, refuting suggestions it is keeping rates low to finance government debt. That is one in the eye for MMT supporters. US total government has risen $4.5 trillion, about 20%, since March 2020. In many ways the pandemic brought MMT from the theoretical shadows to the de facto limelight without any debate. However, the Fed is seeking to assert its independence and rejected the idea that the central bank is working in concert with the government to directly finance debt.

“My goal today is to definitively put that narrative to rest. It is simply wrong,” Waller said in prepared remarks to the Peterson Institute for International Economics. “Monetary policy has not and will not be conducted for these purposes.” We shall see.

Investing money for beginners: a handy guide

Investing can be a great way to grow your capital. If you don’t know how to get started, check out our guide on investing money for beginners to find out what you need to know. 

Investing money for beginners 

What is investing? 

You might be asking yourself “how can I invest my money? What even is investing? Where do I begin?”.  

We know investing can be intimidating if you’re a newcomer, so let’s start with the very basics. 

Investing is the act of buying securities with the hope that their value will grow over time. Securities are a mixture of different assets which includes company shares, commodities, index funds, ETFs, and so on. We’ll cover these later in more detail.  

The ultimate goal of investing is to put together a portfolio of assets that will maximise profits over the long term while mitigating risk. 

Please note, that while investing can make you money, you can also lose capital if investments go wrong. It is risky, so please bear that in mind before you begin your investment journey. Only start if you can afford any potential losses. 

Do you need a lot of money to start investing? 

It’s a popular misconception that you need millions in the bank to be a successful investor. This isn’t true. You can start investing for £500 or under. It’s basically up to you how much capital you commit to building your portfolio. The practice is open to everyone. 

Why is investing worth it?

Whether you want to simply make money or tuck your some away for a retirement nest egg, or grow your capital for another reason, investing can be a smart move – provided you actively keep on top of your investments and manage your risks. 

At present, investing may be able to make you more money than by putting your money in a savings account. In the UK, for example, the current base rate, a benchmark rate used by lenders, is 0.1%. Banks use this to set their interest rates on savings accounts. So, at the current 0.1% rate, your annual return on every £100 would be 10p. 

With market interest rates so low and the average dividend yield on a FTSE 100 stock around the 3% mark, it’s safe to suggest that equities have higher chance of giving better returns on investment (ROI), albeit they also come with the risk of falling value. Stock markets around the world have been on strong upward trends over the last century.  

Let’s look at an example. If you had invested £100 into an S&P 500-tracking mutual fund in 1989, and reinvested the dividends, that would have grown into £1785 over 30 years to 2019. The same amount put into a UK savings account across the same period would have grown into £364. Investing in the tracking fund would have created 390% more profit.  

What can you invest in? 

When looking at investing money for beginners, it’s important to see all the different assets available. Here we’ll look at some of the most common options available to novices and seasoned pros alike.  

Stocks for beginners 

Stocks are probably the most well-known asset class. When buying a company’s shares or stock of a company, you are buying a small part of that company. That means you are now officially a shareholder. You are then entitled to capital appreciation and dividends. 

Dividends are a portion of a company’s profit paid back to investors. They’re basically a reward for keeping faith and capital invested in a business. Because they offer more pay back on top of capital appreciation, i.e. stocks rising in value, dividend stocks are often popular with investors.  

Not every company pays dividends. Sometimes they can’t afford to. Others may prefer to reinvest profits back into the business.   

Stocks for beginners can be intimidating. How do you know which to choose and which to avoid? We advise undertaking careful research when picking stocks and shares to add to your portfolio. Be aware that share prices can go down as well as up. Unexpected events outside your control can affect company performance, and thus their share price. 

Diversification can help lower your risk, but we’ll cover that later. 

Bonds 

Did you know the first ever official government bonds were issued by the Bank of England in 1693 to raise money to fund to the Nine Years War? Bonds have been around for centuries and are essentially loans given by governments or businesses to raise funds. 

Investors who buy bonds get a fixed-interest rate. This is paid either monthly or quarterly for the duration of the loan. Investors receive money back at the end of the loan period, which typically ranges from three months to 20 years. 

Because bonds sit higher in the capital structure than stocks, bondholders get paid first. That usually means bonds are a safer investment than shares. However, because this is still a loan-based investment, there is a risk the issuer, i.e. the company or government, may fail to pay back at the end of the loan period.  

It’s important to look at a bond’s risk status before adding it to your portfolio. These can be found through credit rating companies. A bond with a rating of A or above would be considered a good investment and is likely to offer inflation-beating ROI. 

Commodities 

Commodities are tangible assets. There are plenty of commodities out there, with the most common being crops and agricultural products like soybeans, oil & gas, metals, and gold. Commodities tend to be listed on special exchanges. They can also be very expensive. An oil futures contract, for example, would cover a thousand barrels of oil. With the current oil price of $61 for a barrel of WTI, you’d be paying $61,000 for a futures contract. Not something we’d recommend when discussing investing for beginners. 

Because of the price and complexity involved, novice investors should avoid physically buying commodities. Instead, you can get exposure to them in different ways. You might want to buy stocks of companies involved in commodities production, like Esso or Chevron for oil, for instance. Groups of commodities are also bundled together in some exchange traded funds (ETFs).  

ETFs 

ETFs are made up of a group of assets, such as stocks from companies working in related sectors, commodities, bonds, or a mixture of different asset classes. The assets inside an exchange traded fund help track the performance of the fund’s underlying market as closely as possible.   

By investing in an ETF, you can gain exposure to an entire sector with a single trade, instead of investing in individual stocks. Some contain thousands of assets, whereas others are much smaller and more focussed.   

ETFs are listed on exchanges unlike other funds.  

Exchange traded funds are great for keeping up with trends. For instance, the ARK series of funds group together technological pioneers in various sectors like healthcare, disruptive technologies, fintech, and automation. 

Planning your investment strategy 

An important tip for investing money for beginners is to think carefully about your goals. Instead of asking yourself “how do I invest my money?” ask yourself some of these questions below: 

  • What do you hope to achieve with investing?  
  • Where do your interests lie?  
  • Which assets interest you? 
  • How much are you willing to invest?  
  • How much can you afford to lose? 

It is recommended when investing in the stock market to hold onto assets for at least five years for to benefit from any significant ROI. 

Our Investment Strategy Builder is designed to help put together a tailored portfolio that works for you. If you’re unsure about starting your journey on your own, feel free to reach out to us and start using our Builder. We may be able to help you reach your goals. 

Investment portfolio diversification 

We often say, when picking stocks for beginners, that diversification is a good idea. Many of the most successful portfolios are comprised of lots of different asset classes. 

Portfolio diversification is all about improving risk-adjusted returns, or how much profit you can potentially make versus how much risk you take.  

A diverse portfolio contains open positions across a range of instruments and assets. This way, you’re not overly exposed to a single type of risk. Investors use multi-asset portfolios to balance potential risks, which can help create higher returns in the long run. 

David Swenson, the investor in charge of overseeing Yale University in the US’ investments, is a good example to follow. According to the New York Times, David has managed to get 16.3% annualised ROI on his investments over the past 20 years of managing Yale’s endowment, worth around $20bn. Here’s what his portfolio looks like: 

  • 30% – US stocks 
  • 15% – International stocks from Developed economies 
  • 5% – Emerging markets stocks 
  • 20% – Real estate funds 
  • 15% – Government bonds 
  • 15% – Treasury inflation-protected securities 

No single choice represents an overwhelming section of David’s portfolio. Any underperforming sector’s losses will potentially be covered by the other parts of the portfolio, thus mitigating the risk factor. 

Investing money for beginners: A final word on risk 

We hope this guide to investing for beginners has been helpful, but we have to stress the potential risks once again. Your money can go up, but it can also go down. Diversify your portfolio, monitor your investments, and do everything you can to mitigate risks if you want to be a successful investor.  

Fed to let yields, inflation run; Bank of England to follow

Morning Note

Fresh records for Wall Street, a weaker US dollar, yields higher, volatility crushed: these were some of the outcomes from a dovish Federal Reserve yesterday as the US central bank resolutely stuck to its guns to let the economy run as hot as it needs to achieve full employment. European stocks moved higher in early trade Thursday but worries about vaccinations and Covid cases weigh. The FTSE 100 still cannot yet sustain a break north of 6,800 and is the laggard, declining a quarter of one percent this morning.  

 

Longer dated paper moved a lot as Powell said the Fed would look past inflation overshooting; US 10-year Treasury yields have shot about 10 bps higher today to above 1.72%, whilst 30s are at their highest in almost two years close to 2.5%. Spreads are at their highest in over 5 years. Stock markets liked it – the Dow Jones industrial average climbed 0.6% to close above 33,000 for the first time. The S&P 500 closed within 25pts of 4,000. The Vix fell under 20. 

 

Tracking the move in US Treasuries, gilt yields rose this morning as markets look to the Bank of England meeting to deliver the next dose of central bank action. It will leave interest rates on hold at 0.1% and the size of the asset purchase programme at £895bn. The success of the vaccine programme – albeit now running into some hurdles – has allowed the Bank to take a more optimistic view of the UK economy beyond Q1 2021. At its February meeting the Old Lady said the UK economy will recover quickly to pre-pandemic levels of output over the course of 2021. It expects spare capacity in the economy to be eliminated this year as the recovery picks up. All this really puts the negative rate conundrum on hold – the next move should be up, if not this year certainly next. Nevertheless, Andrew Bailey stressed earlier this week that the BoE is not concerned by rising yields or temporary inflation blips. So today it will be more about what the BoE doesn’t say. Remaining silent on the rise in bond yields could be the cue for sterling. 

 

What did we learn from the Fed and Jay Powell? Chiefly, the Fed is staying its hand and letting the economy run hot. In a nutshell the Fed said inflation will overshoot but not for long; yields are moving up as part of the cycle as growth improves; and it won’t stop until full employment is achieved along with inflation above 2%. The Fed’s dovishness on monetary policy was contrasted by sharp upgrades to growth and inflation forecasts this year – but the Fed is in a new outcome-based regime focused on absolute employment levels, not on the Philip’s Curve. It also doesn’t really think the sharp bounce back this year is sustainable, meaning now is not the time to remove the punchbowl.

 

Transient: Things like supply bottlenecks and base effects will only lead to a “transient” impact on inflation, according to the Fed. The Fed plans to maintain 0-0.25% until labour market conditions achieve maximum employment and inflation is on course to remain above 2% for a sustained period. A ‘transitory’ rise in inflation above 2% as is seen happening this year does not meet criteria to raise rates. This is where things get dicey vis-a-vis yields since inflation could get a bit big this spring which would pressure (the Fed is immune so far) for hikes sooner. I think also the Fed should be looking around a bit more about where there is clear inflationary pressures and have been for some time, like in asset prices.

 

Stick: It seems abundantly clear that Powell and the Fed see no need and feel no pressure to carry out any kind of yield curve control or Twist-like operation to keep a lid on long-end rates.  This is a steepener move and the market reaction was plain as we saw longer-end yields rise just as the yield on shorter-dated maturity paper declined at first. The 5s30s spread widened around 9bps to 1.66%, whilst 2s10s widened 7bps to 1.5%. 

 

Patient: Is it time to start talking about talking about tapering? “Not yet” came the reply. Which matches expectations – any talk of tapering will not be allowed until June at the soonest when the Fed will have a lot more real data to work with post-vaccinations. That will be things get harder for the Fed as inflation starts to hit. 

 

Outcome-based: Focus on ‘actual’ progress rather than ‘forecast’ progress. This tallies with what know already about the Fed taking a more outcome-based approach to its policy rather than relying on Philip’s Curve based forecasts. The Fed’s rear-view policymaking will let inflation loose. It also means the dots are kind of useless, but nonetheless the lack of movement on dots kept shorter dated yields on a leash, pushing real rates down. The question about what actually constitutes a material overshoot on inflation and for how long it needs to be sustained will be dealt with another day, with Powell admitting the Fed will have to quantify this at some stage. 

 

SLR: Powell kept his cards close to his chest and only said something will be announced on SLR in the coming days. This may involve some kind of soft landing for the exemption to lessen any potential volatility.

 

Long end yields moved higher with curve steepeners doing well. I expect bond yields and inflation expectations to continue to rise over the next quarter – the Fed remains behind the market but this time, crucially, it doesn’t mind. Whilst Powell said the Fed would be concerned by a persistent tightening in financial conditions that obstruct its goal, the difference this time is that stock market stability is not what the Fed is about these days. Post 2008, the Fed fretted about market fragility since that is what caused the recession. Now it’s comfortable with higher yields and won’t be concerned if the stock market is lower from time to time.

 

With the long end of the curve anchored by the Fed’s dovishness, and longer-end yields and inflation expectations moving up, this creates better conditions for gold to mount a fresh move higher, but it first needs to clear out the big $1,760 resistance. MACD bullish crossover on the daily chart below is encouraging for bulls.

Gold needs to clear out the big $1,760 resistance.

GameStop soars on ‘ecommerce hopes’, stock markets diverge as investors look to bonds

Morning Note

It’s a short squeeze. It’s dealer gamma exposure. No, it’s a fundamental deep value trade based on the company’s ability to be a disruptive force in gaming and deliver a compelling e-commerce offering that supports the long-term investment thesis, which is based on an increasingly progressive free cashflow model. You never actually thought GameStop rally was just froth? Roaring Kitty made a pretty stubborn defence of the fundamental thinking behind his long GME position when he talked to lawmakers on the financial services committee. Most Redditors would agree and maybe, just maybe, there is a fundamental basis for this stock’s 930% rally year-to-date. I’m sure some people genuinely do think it will be the Amazon of gaming.  However they are probably less worried about execution risk than they might be.

 

Shares surged over 41% to almost $195 yesterday, as it looks as though GameStop has taken the first big step towards to fulfilling its latent ecommerce potential. Whilst the ousting of the CFO Jim Bell last month indicated that something was afoot, an update from the company filled in some blanks and underlined that Chewy’s Ryan Cohen is taking charge of this ship.

 

GameStop has formed a “Strategic Planning and Capital Allocation Committee” which will focus on identifying actions that can “transform GameStop into a technology business and help create enduring value for stockholders”. The committee will be responsible for evaluating areas that include GameStop’s current operational objectives, capital structure and allocation priorities, digital capabilities, organizational footprint, and personnel. The Committee is comprised of Cohen, former Chewy CMO Alan Attal, Ryan Cohen, and Kurt Wolf, another activist GME investor. In addition, the board is appointing a Chief Technology Officer and two new executives to lead the company’s customer care and e-commerce fulfilment functions, respectively. There is also a plan to replace the ousted Bell at CFO. 

 

Divergence: In the broader market, European stock markets and the Dow Jones rallied though tech weighed on the S&P 500 as the sell-off in growth and momentum continued. The DAX in Frankfurt rallied over 3% to mark a new record high, whilst the Dow Jones climbed 300pts to a record high 31,800. The Nasdaq composite declined 2.4% and the NDX 100 was off almost 3%. Tesla declined another 6% almost to $563, whilst Apple fell over 4% to $116. A record high for the Dow just as the Nasdaq enters correction territory: We’ve not see such a divergence between the industrials and growth in a long time. The S&P 500 is caught somewhere in the middle, though the weighting of the tech names (the 5 FAANGs were worth about a quarter of the market until recently).

 

It’s a buying opportunity? ARK’s Cathie Wood played down the problems at her flagship ETF, saying she is even more confident in her highest-conviction trades such as Tesla and that the selloff is simply a buying opportunity. At these moments she looks to “concentrate” portfolios to the “highest conviction names”, so this means selling more liquid stocks (eg Apple) which are participating in innovation but are not ‘pure play’ innnovators. The fact that the bull market is broadening out is a good thing, she says, and this is certainly true. But it doesn’t mean Tesla should be worth what it was valued at. She also suggested that the 60:40 stocks to bonds portfolio could one day be 60:20:20 stocks:bonds:cryptos … 

 

Clearly, everyone is looking at the bond market right now, but some are not convinced that yields are only going one way. David Tepper, the founder of Appaloosa Management, told CNBC that the move in rates may be just about over. He pointed to a flip in Japanese investors, who he thinks are likely to become net buyers of US Treasuries (after years as net sellers) following the rise in yields – the 10-year has risen from 1.09% at the end of Jan to north of 1.6%. This, he says, will cap the rise in yields. Whilst yields pared back yesterday, stocks weren’t really listening. Ten-year and 30-year bond auctions this week will be crucial tests of demand – it was a weak sale of 7-year debt last month that sent reverberations around the market. Today we have an auction of $58bn in three-year paper but it is the 10-year and 30-year offerings that will be the big test. Investors will be angsty about how these auctions go off – a repeat of the Feb 25th 7-year auction would undoubtedly create another broader sell-off in rates and lead to yet more instability in equity markets. A key unanswered question remains about whether the Federal Reserve extends looser capital requirements – the supplementary reserve requirements (SLR). Last April the Fed let banks exclude Treasuries and cash from their calculations – but this means banks are sitting on a tonne of US government bonds that would need to liquidate if the looser SLR rules are not extended. This could create further trouble in the bond market if all this were to hit the market at once. 
 
Is WFH dead? Zoom, the poster child of the work from home trade that drove much of the 2020 rally up until the November vaccine bounce, declined almost 8%. It’s now worth around half what it was at the peak in October. It was reported after the closing bell that CEO Eric Yuan has transferred about 40% of his stake in the company – valued at around $6bn- to two unspecified recipients. Another work from home name – DocuSign – declined fell over 5%, meaning it is down around a third from its recent all-time high. There are two things at work here – first is the reopening and expectations people won’t be so reliant on WFH as last year. Second, these were some of the most richly rated of the growth names and therefore most likely to be pulled down by a rise in rates.  

 

Domino’s posted strong final results as it enjoyed pandemic related stay-at-home demand. Strong appetite in the UK & Ireland saw system sales up 11.4% to £1.35bn. Underlying profit before tax of rose £2.4m to £101.2m, but this was limited by Covid-related safety costs  and other efforts to placate franchisees. The free cash improvement (+73% to £99m) was another mark in its favour. Nordic disposals have helped – it never really got a handle on the Norwegian and Swedish markets. It’s also looking to offload its Swiss and Icelandic businesses. Trading this year has started strongly with “exceptional trading” over the New Year period as the company notched its busiest ever week. The question is whether Domino’s has the momentum now to deliver its goal boosting sales growth as consumers prepare to get out and about much more? Shares rose 10% as the company also announced it was returning £88m to shareholders via a 9.1p dividend and £45m in share buybacks.

 

Shares in ITV dropped over 6% in early trade as the company reported a 16% decline in total external revenues, led by a 25% drop in Studios and 11% decline in Advertising, despite VOD being +17%. That left adjusted earnings before nasties down 21% at £573m which was not as bad as expected and was driven by the strong end to Q4 and tight cost control delivering £116m of overhead savings, of which £21m are permanent. Now the focus is on beefing up Studios earnings by working closer with streaming platforms on delivering content – anything that dilutes the importance of traditional ad revenues should be a positive, albeit consumer brand spending on media this year ought to be markedly better than last year. Indeed, whilst Q1 has been challenging management think April ad revenues are expected to be up between 60% and 75% on last year. 

 

Oil prices are proving to be very volatile. After Brent rallied to $71 yesterday it’s now trading with a $68 handle this morning. Clearly a spot of panic after the attacks on the Saudi facilities was overdone, but I stick to the view that the market is tight and will become increasingly tighter now that OPEC is rolling over cuts into April.  

Elsewhere, Bitcoin trades above $54k, its highest since around Feb 23rd, whilst gold continues to test the 61.8% retracement support at $1,690. Yesterday’s swing high at $1,714 is the first hurdle, thence $1,724.

Gold continues to test the 61.8% retracement support at $1,690.

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