Soaring energy prices driving stagflation fears, yields up, stocks down

Morning Note

Inflation/stagflation, supply chain problems, the US debt ceiling, an energy crisis as natural gas prices soar to new records in Europe and the UK, tighter monetary policy from central banks, worries about the Chinese property sector – all swirling around equity markets this week and not going away any time soon. Chiefly this morning we might say that rising Treasury yields and soaring energy prices are conspiring to knock risk appetite.  

 

European stock markets declined by around 1-2% in early trade on Wednesday despite something of a Tuesday turnaround for the US. The DAX tumbled 2% and under its 200-day moving average as German factory orders declined 7.7% in August amid supply chain problems, a sharp decline from the 4.9% increase in July. Although some of the decline could be a reaction to big jump in July, it’s nevertheless pointing to a slowdown in activity. Motor vehicles and parts were –12%. Meanwhile the British Chambers of Commerce released a survey showing UK companies are deeply worried about inflation and supply chain problems, and it warned that a period of stagflation may be coming. Boris Johnson is due to speak later but I cannot believe he will instil much confidence. The ‘everything is fine’ meme springs to mind… The FTSE 100 fell by more than 1% to under 7,000, though still within its 6-month range.

 

Wall Street rallied on Tuesday, reversing some of the Monday slip. Mega cap tech rose, whilst energy also rallied again on higher oil prices with WTI approaching $80. Henry Hub natural gas rose to just about its highest level in 13 years, with yesterday’s 9% gain seeing the US contract on the Nymex close at its highest since Dec 2008. Treasury yields are higher again, with 10s at 1.570%, the highest since mid-June.  Soaring energy prices are pushing up inflation expectations, pushing up yields and weighing on stocks. The dollar is bit stronger this morning with EURUSD taking a 15 handle again and cable under 1.36. US futures are weaker to the tune of 1%, indicating another rocky session on Wall Street with the S&P 500 ready to test the 4,300 area again.

 

Tesco shares rose over 4% in early trade after raising its full-year outlook on a profit beat and initiated a £500m share buyback programme. The company said it expects full-year adjusted operating profit of £2.5bn-£2.6bn, about a £100m ahead of analyst expectations, after H1 adjusted retail operating profit rose 16.6%. The strong retail showing reflected UK market outperformance and sharp recovery of Booker catering, management said. Shares in Sainsbury’s also climbed more than 1% despite a soft session for the FTSE 100. 

 

The Reserve Bank of New Zealand raised rates for the first time in seven years, hiking the main cash rate by 25bps to 0.5%. The central bank warned that cost pressures are becoming more persistent and that headline inflation would rise above 4% in the near term. But it was confident that current covid-19-related restrictions ‘have not materially changed the medium-term outlook for inflation and employment’ and that the ‘further removal of monetary policy stimulus is expected over time’. 

 

Oil prices keep on rising with front month WTI approaching $80. APi figures showed inventories increased by 950k barrels for the week ended Oct 1st, vs expectations for a draw of 300,000 barrels. There were also builds for stocks at Cushing, distillates and gasoline. EIA figs today expected to show a build of 0.8m barrels. Small inventory builds in the US won’t really change the narrative.

 

Finally, Deutsche Bank has a note out today warning about the impact of the shortages in the UK economy, which are beginning to ‘bite’ in the manufacturing sector – important for exports and therefore the currency. “In the medium-term, shortages in sectors like manufacturing should mean that UK suffer from a (relative) fall in output and have to be replaced by imports from abroad, weakening the current account and the pound,” they say. GBPUSD trades noticeably weaker today but it’s more a dollar move after a decent recovery over the last 4 sessions and with EURUSD also moving to its weakest since last July.

GBP USD Chart 06.10.2021

 

EURUSD Chart 06.10.2021

Investors look to Apple product show as equities struggle for momentum

Morning Note

Weak start for equities this morning, taking the baton from a mixed bag for indices in the US and Asia. FTSE 100 off about 0.5% in early trade heading towards 7,000 again, whilst the DAX is closer to the flat line. US CPI inflation later is the chief attraction as well as Apple’s product show. Shares in China fell, while Tokyo closed at a 5-year high.

 

US stock markets showed growth-value divergence: the Nasdaq slipped and the Dow and the S&P 500 rallied as the market attempted to consolidate after a run of five straight losses. We saw a bit of a case of futures pumping, cash dumping: i.e. futures rallying but the market selling off on the cash open, which is never a good setup for the market. Futures are weaker today, whilst the US dollar is weaker, sitting in the middle of the recent range, after running into resistance at 92.85 area for the second time in a week. 

 

Large cap growth/tech dragging a bit, cyclicals and energy doing better. So, some rotation away from tech/growth towards the value/cyclical part of the market. Rotation magic still working on the broader market and keeps it steady in the face of a bigger pullback, for now. Apple up a touch as markets continue to digest the impact of the Epic court ruling and look ahead to today’s product event. Expect new models but I don’t believe there is any game-changing tech about to be revealed. 

 

The market has been conditioned to buy the dip since TINA – there is no alternative. But we have not seen this so much so it’s a market that could be unlearning what it was taught because of things like inflation. Persistent supply problems, labour shortages etc will mean it’s not as transitory as people think and since it’s supply-shock, cost-push (bad) inflation not just demand-pull (good) inflation, it is not good for the market.  Today’s CPI will be closely watched of course, but will be enough to change anyone’s thinking about whether inflation is stickier than the Fed tells us?

 

Big trouble in China: Shares in Evergrande plunged again after the company issued a statement saying it was struggling to offload assets to cover its monster debt pile amid a liquidity crunch. Shares fell more than 11% and trading in some of its bonds were halted.  

 

Crypto pump and dump: Litecoin shot higher in a frenzied spike on a press release purporting to be from Walmart, the retailer telling customers it is introducing a pay with Litecoin function in store. Wow, we all thought, Litecoin has been doing nothing for months and then it’s suddenly in with the biggest retailer in the US. The market obviously felt it was legitimate and was even more assured when Litecoin’s Twitter account share the tweet. It didn’t take long for it to be outed as fake news, however, and Litecoin came crashing down again. Litecoin jumped 35% in the space of 10 minutes before it went south. Pure Wild West – clearly a well-orchestrated bid by one or more holders who wanted to drive the price higher for just long enough to get out with the heads above water.  

 

There was a strong read across for other cryptos (note the spikes on the 5-min charts) but they are mainly starting to regain some momentum.

 

Ocado shares fell after it reported a 10% drop in revenues, caused by the fire at its Erith site on July 16th. Revenues were down before the fire – tough comparisons with last year – but slumped 19% in the period after. More capacity is incoming for the UK but no update on international progress. JD Sports ramped higher again on yet another strong performance with profit before tax and exceptional items rising to £439.5 million. Management forecast outturn headline profit before tax for the full year of at least £750 million.

 Can’t make it up: Last week talked a bit about how Coinbase was getting in a twist over the SEC suing it for launching Lend, a product that would let people earn interest (yield) on their Bitcoin holdings. So, it was quite amusing to see them this week tap the bond market, which lets people earn yield on their assets, ie the bonds. Coinbase said it would offer $1.5 billion in senior bond notes. “This capital raise represents an opportunity to bolster our already-strong balance sheet with low-cost capital,” the company said, though they’ll paying up to 4-5% for the privilege.

MicroStrategy is at it again, the company revealed it has purchased an additional 5,050 bitcoins for about $242.9 million in cash at an average price of $48,099 per Bitcoin. Down about $19m on that deal so far, then. “As of 9/12/21 we #hodl ~114,042 bitcoins acquired for ~$3.16 billion at an average price of ~$27,713 per bitcoin,” tweeted the boss Michael Saylor.

Trouble in the energy markets seems to be getting worse and there is going to be a rough winter as prices seem to be going only way. Call it political insanity led by the green agenda or a perfect storm of short-term factors, it’s not looking pretty right now.

European natural gas benchmarks keep hitting new highs. Henry Hub natural gas prices were up another 4% to $5.20, a fresh 8-year high and a 14-year high for this time of year. Demand for natural gas is actually growing but supply is failing to keep pace. Problem is the drillers can’t get the funding and they’re over geared as it stands so there is not the ability to go big on drilling to take advantage of the higher prices. Which means inventories are going to keep being squeezed and prices are going one way.

Oil is well and truly back to the races for a fresh run at the YTD highs after breaking above the Aug range at long last. As anticipated given it had completely backloaded its prior demand forecast for 2021 with all the growth to appear in H2, OPEC has finally had to cut its outlook. The cartel trimmed its world oil demand forecast for the last quarter by 110k bpd due to Delta.

“The increased risk of COVID-19 cases primarily fuelled by the Delta variant is clouding oil demand prospects going into the final quarter of the year,” OPEC said in the report. “As a result, second-half 2021 oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into first-half 2022.” OPEC is sticking with the 6m bpd increase in 2021 vs 2020 though, with Q3 showing resilience despite the ongoing problems with the pandemic. But the outlook for 2022 is bullish, with OPEC raising its oil demand forecast for next year by 900k bpd from last month’s outlook, taking demand growth in 2022 to 4.2m bpd. Meanwhile short-term pressure on supply remains with Hurricane Nicholas making landfall in Texas this morning.

WTI made a 6-week high and now clear of the August range and near-term trend resistance.

Stagflation: Industrial giant 3M yesterday warned that inflation is currently higher than company thought in Q3, seeing broad-based inflation, warns on chip shortages. 

 

And it’s not looking like it’s as transitory as the Fed keeps telling us. The Fed reports that consumer 3-year ahead inflation expectations hit 4%, a series high. One-year-ahead inflation expectations rose for the 10th straight month to a median of 5.2% in August. Food prices are expected to grow by 7.9% annually, up from 7.1% in July. Rent is expected to rise by 10%, and the price of medical care is expected to rise by 9.7% over the next year. 

 

Ok so supply chain problems are not the Fed’s fault, but AIT was always going to let inflation expectations become unanchored since it means the market no longer anticipates the Fed will step in. Previous incarnations of the Fed would have sought to guide the market to expect tighter financial conditions by now.

Meet the new DAX 40 constituents 

Equities
Indices

The German flagship index DAX is being increased to 40 constituents from September 20th. The change is the biggest in the history of the index and whilst it is not expected to materially alter the pricing of the index, it could affect the way investors view it. 

So, who are the new DAX members? 

Airbus SE 

Airbus is Europe’s answer to Boeing. Based in the Netherlands, it operates in the aerospace and defence industry. Through to September 10th the stock had rallied 26% year-to-date after taking a battering during the 2020 selloff, though it has yet to recover previous highs. Revenues rose 30% in the first half of 2021 from a year earlier, whilst the six-month period also saw the company return to profit after posting a loss of almost €2bn a year ago. 

Zalando SE 

Zalando is an online shoes and fashion retailer. It has undergone rapid expansion, accelerated by the Covid-19 pandemic as shopping trends shifted online. Revenues surged by 40% in the first half of 2021, whilst net income for the period grew from €36m a year before to almost €155m. Shares were trading just shy of €100, with the company commanding a market cap of around €25bn. 

Siemens Healthineers AG 

Siemens Healthineers develops technology used predominantly in the healthcare industry. Products in areas such as diagnostic and therapeutic imaging, laboratory and point of care diagnostics, and molecular medicine, are among its specialities. YTD gains of around 36% have seen it ascend all-time highs as demand for its products looks to be heading only one way. In the nine months to the end of June revenues were up 21% and net income up 29%. 

Symrise AG 

Symrise is a supplier of fragrances, flavourings and ingredients used in cosmetics. Shares are up roughly 10% in 2021 and the market cap has grown to over €16bn. In the six months to the end of June, revenues grew 5% to €1.91bn, whilst net income increased 16% to over €196m. 

HelloFresh SE 

HelloFresh is an online food services company that delivers pre-portioned ingredients to subscribers, allowing them to make home-cooked meals based on a recipe provided. As the market for online, home-delivered food grew rapidly during the pandemic, HelloFresh has enjoyed rapid growth in sales and its share price. Sales rose to €1.56 billion in the June quarter from €972 million a year earlier. It sees full-year revenue growth of 45-55% this year. Shares have rallied over 40% in 2021. 

Sartorius AG Vz  

Sartorius manufactures pharmaceutical and laboratory equipment, placing it squarely at the heart of the biotech sector. Needless to say, growth has rapid. In the first half of the year order intake rose 82.4 percent; sales revenue was up 60.1 percent; whilst underlying EBITDA margins improved markedly to 34.1 percent. Underlying EBITDA rose 89.2 percent to €555 million, whilst net profit climbed 108.7% to €259m. Shares in the group have risen 125% YTD. 

Porsche Automobil Holding  

Porsche makes cars. It is a holding company of VW with investments in the automotive industry. Shares have had a good year, with the stock up 50% YTD to its highest since the financial crisis of 2008. 

Brenntag SE  

Brenntag is a chemical distribution company based in Essen. In the six months through June 2021, revenues rose 9% to €6.6bn but income fell 2% due to a 20% spike in operating expenses. Nevertheless, shares have made all-time highs this year with a YTD gain of 32%. The consensus rating for the stock is ‘hold’ based on the 12 analysts who cover the stock. 

Puma SE  

Puma is a multinational that designs and manufactures athletic and casual footwear, apparel and accessories. It’s done well from the growing demand for leisure clothing (see JD Sports) and probably got a boost from Italy – who wear Puma kit – winning Euro 2020. The stock is up roughly 15% so far in 2021. 

Qiagen N.V. 

Qiagen is a diagnostics company that provides sample and assay technologies for molecular diagnostics, applied testing, academic and pharmaceutical research. It’s been a leading provider of tests for Coronavirus and variants. Profits doubled in the first six months of the year but was forced in July to cut its earnings and revenue guidance for the year because as it anticipates vaccines will cut demand for tests. 

DAX 40 index – all you need to know as the DAX 30 expands

Indices

From September, the DAX 30 will be no more as it expands to include ten additional members, creating the DAX 40. 

The German benchmark will be expanded by ten members, to a total of 40 constituents, while the MDAX Index will be reduced from 60 to 50 constituents. 

Deutsche Borse said it is making the changes to increase the quality of the DAX indices and to align them with international standards.

Selection criteria for the DAX 

  • DAX candidates must have a positive EBITDA in their two most recent annual financial statements.
  • The obligation to be listed in the Prime Standard of the Frankfurt Stock Exchange will no longer apply; a listing on the Regulated Market will be sufficient
  • DAX indices will have a scheduled main review twice a year in March and September. Previously there was just a single review each September.
  • All members will need to comply with the recommendations of the German Corporate Governance Code with respect to the formation of an audit committee in the supervisory board.
  • Constituents will be selected by market capitalization only from September. The exchange turnover criterion will no longer be part of the ranking process. Instead, constituents will need to meet minimum turnover requirements.

Potential new DAX constituents 

Heading into the end of August, the largest companies by market cap on the MDAX and therefore potentially set to feature in the new expanded DAX 40 include Airbus SE, Siemens Healthineers AG, Sartorius AG, Beiersdorf AG, Zalando SE, Hannover Rueck SE, Symrise AG, Hellofresh SE, Carl Zeiss Meditec AG and Puma SE. 

But the new rules could have implications for loss-making tech companies. Delivery Hero, for instance, has posted EBITDA losses of more than €330m in each of its last two years. This would make in ineligible under the new rules, though it will remain in the index as an existing member. 

Nothing should change to DAX pricing

We are not anticipating any major changes to prices to our current DAX cash & DAX future products. However, there could be implications to prices as the market responds to the inclusion of the new members.

You can continue trading both instruments at their current market values under the following tickers:

  • Germany 30
  • Germany 30 – Futures
  • MT5 Cash – De30
  • MT4 Futures – Germany30

Please note: there will be no out of hours pricing for these instruments between 22:00 CET on 27th August and 02:10 on 30th August.

Any questions or queries please don’t hesitate to contact us at support@markets.com.

European stocks pull back while dollar feels weak

Morning Note

European equities edged lower on opening this morning as investors respond to the flurry of earnings season reports from across the week.

A range of European-listed large caps are reporting today. Renault, Air France-KLM, BNP Paribas and IAG are some of the headliners today. It’s also a fairly busy day for US earnings too, with the likes of Proctor & Gamble, Chevron and ExxonMobil sharing their latest quarterly financials.

It will be interesting to see how Chevron and ExxonMobil perform. Oil prices have strengthened across 2021, despite recent dips due to OPEC+ wrangling, so this may have fed into resurgent revenues for the oil supermajors.

In terms of European earnings, BNP Paribas has shared headline profits of €2.9bn – a 26% annual rise – this quarter. Renault has also shared some insights already, noting €345bn in first half profits for 2021. It’s a major reversal for the French automaker, which posted a €7.3bn loss during the same period in 2020 after the Covid-19 caused mass factory shutdowns.

Looking at indices, we can see drops on the key European bourses. The FTSE 100 was down 73 points at the start of Friday at 7,005.2. Germany’s DAX is about 117 points lower, at 15,492, and the French CAC40 dropped 28 points at 6,605.

Conversely, the NASDAQ was at 14,778, showing a small 15.8 jump. The Dow Jones was up 153 points too at 35,083. The S&P 500 continues the positive trend for US indices, up by 18.51 to reach 4,419.

Asian markets were performing lower, especially Hong Kong’s Hang Seng, which had dropped nearly 1.56% at 24,905 at the time of writing. Shares in Asia are possibly on course for their worst month since May 2020 as trading volatility steps up.

Turning to the dollar, the Dollar Index, which weighs the greenback against six other major currencies, looks like it’s on track for more dismal performance following a dovish Fed outlook. It is currently rated at 91.88, after reaching a low of 91.85 – the lowest level seen since June 29th.

The Fed committed to boosting its monthly Treasury securities purchases by $80bn at its meeting on Wednesday July 28th. An accommodative approach to the economy, despite hot inflation and disappointing Q2 GDP performance, appears to be Chairman Jerome Powell and the Fed’s direction.

US GDP grew at 6.5% in the quarter ending June, falling way below the Dow Jones estimated 8.4%. A combination of higher consumer prices, high commodities prices, and falling manufacturing and services output contributed to the worse-than-expected second quarter growth rate.

WTI oil contracts started this morning at $73.48. Brent has dipped just below $75 at $74.99 but could be on course to crack that threshold by the end of the day. At week’s end, oil should have gained around 2%, with higher demand in the US and tighter supplies cited as supports.

Bitcoin had cleared $40,000 earlier in the week, but as of today had fallen back to $39,677 at its lowest. The world’s most popular cryptocurrency has had a bit of a torrid July and looks like it’s struggling to establish a breakout.

FTSE hits post-pandemic high, Bitcoin leaps on Musk tweet

Morning Note

European stock markets rose in early trade Monday, with the DAX in Frankfurt hitting a new all-time high and the FTSE 100 making a fresh post-pandemic high above 7180 as the broadly positive mood in equity markets continued to override concerns about inflation. Travel shares like IAG and EasyJet fell as it appears all but certain England’s full reopening will be delayed by another 4 weeks. Markets are now caught between last week’s big inflation reading and this week’s Fed meeting. Despite the big inflation reading from the US, inflation expectations are not really rising which should allow the Fed to keep its dovish stance. Treasury yields have held under 1.5%, indicating investors are buying the transitory story for now. Nevertheless, I’d expect these to take offer at some point and for 10s to retest 2% in the coming months. 

 

Wednesday’s statement from the Federal Reserve is not expected to feature any fireworks, but it is an important meeting as it will offer clues about the reaction function of the central bank to rising inflation. We know the Fed is happy to let inflation run a little hot over the summer as it pins everything on its employment mandate. So, labour market data is arguably more important than inflation numbers right now. On that front the last NFP jobs report was something of a Goldilocks number – not too hot to worry about an early taper of the Fed’s $120bn-a-month bond buying programme, but not so cool as to fret about the recovery. The truth is the Fed is looking at both and this meeting comes at a time of great uncertainty over whether inflation will indeed prove to be as transitory as policymakers believe.  

 

Minutes from the FOMC meeting in April had the Fed floating a trial balloon, as these 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. 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”. 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? This week’s meeting is not expected to deliver any surprises – the jobs numbers are positive right now, but the labour market is some way off the Fed’s goal, whilst the inflation story is fairly-well understood for now. Anything to suggest the Fed could tighten earlier would lead to volatility. 

 

Meanwhile Bitcoin shot higher this weekend to trade close to $40k after Elon Musk indicated Tesla could accept the crypto asset for purchases. “When there’s confirmation of reasonable (~50%) clean energy usage by miners with positive future trend, Tesla will resume allowing Bitcoin transactions,” the ‘Technoking’ of Tesla tweeted. Tesla’s decision last month to stop accepting Bitcoin led to considerable volatility in the asset, whilst it was the company’s big investment announced in February that helped propel it to an all-time high near $65k. This latest tweet only confirms what a crazy relationship Musk has with Bitcoin and his incredible influence on prices. 

 

Oil prices made fresh highs as the outlook for demand improves and supplies remain on the tight side. WTI broke out clear of $71, its highest in almost 3 years. It comes after the International Energy Agency (IEA) called on OPEC and its allies to increase production. “OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” it said last week. 

European stocks hit record high, euro highest since Jan

Morning Note

“I have some Bitcoin, and I have a very particular set of skills”.

Ok, Ray Dalio didn’t say the second bit, but it would have been good if he did. The guy hates cash; we know this, but now he hates on bonds too. For the founder of Bridgewater Associates, even the most volatile asset out there is better than picking up dimes from in front of the inflation steamroller. In a recorded interview shown yesterday at CoinDesk’s Consensus 2021 conference, Dalio said he would rather own Bitcoin than bonds. Dalio has a very particular set of skills: he’s good at making investment calls.

Or at least, he has been good for a long time. Last year, his main macro fund, the Pure Alpha II fund, lost 12.6%. Over the course of 2020, Dalio lost over $12bn whilst peers excelled. It was not a great performance in a year in which many investors were able to successfully call the bottom and ride the recovery in the stock market. He also famously said that ‘cash is trash’, which is kind of a pro-crypto statement in that it tells you he thinks that owning a depreciating asset (cash) is pointless. Dalio previously presented his views on Bitcoin in January, saying that Bitcoin “has features that could make it an attractive storehold of wealth”. The only problem with this argument is that anything that can depreciate by more than 30% in 24hrs is demonstrably not a good store of value. That’s a heck of a lot of years of inflation erosion compressed into a single day. Ok, it’s back up now a bit, but who’s telling where it will head next? Bitcoin bounced on Monday after a steep fall over the weekend. Price action ran into resistance at the $40k level and this morning trades a little below around the $39k area, but well above last week’s multi-month nadir of $30k.

Tech and reopening stocks rose in the US on Monday. Big tech gains helped the S&P 500 look at the 4,200 round number again. Apple rose as the judge in its case against Epic retired to consider her verdict. The case could have important implications for App Store margins. Crypto-exposed stocks like Tesla and MicroStratey both rallied 4% as Bitcoin rose, whilst Coinbase added just 0.4% as Goldman Sachs initiated coverage on the stock with a buy rating. That will be welcome news to Cathie Wood, as the stock is now a top-ten holding in her Innovation ETF. Coinbase offers traders the closest thing to real crypto exposure without actually owning any tokens. The crypto exchange recently listed shares on the Nasdaq via a direct listing but its start to life on the public market has been rocky to say the least. Shares opened on April 14th at $381 but closed the first day at $328 and have since slid to $225.30.

The euro hit its highest since Jan 8th this morning as Germany’s Q1 final GDP reading declined to –1.8% from the initial estimate of –1.7%. Forward-looking indicators were more positive – the Ifo business climate index hit 99.2, ahead of forecast and rising from 96.8 a month before. The expectations number rose to 102.9 from 99.5 a month before. EURUSD broke the resistance at 1.2240 to reach a four-month high at 1.2260. The breach calls for a retest of 2021 highs made at the start of Jan at 1.2350. The dollar index trades at its lowest since January, but sterling has not been able to latch on and GBPUSD holds a whisker under 1.42, a little shy of last week’s three-month high.

The DAX and Stoxx 600 both posted record highs in early trade as they returned from a long weekend. Deutsche Wohnen led the DAX’s 0.7% rally this morning as shares rallied 15% on €18bn takeover offer from German rival Vonovia. Shares in Vonovia fell 5% as the deal, which sees Deutsche Wohnen shareholders paid €0.52 per share an retain the rights to a €1.03 per share dividend, amounts to an 18% premium based on the stock’s undisturbed closing price on Friday. The FTSE 100 trades flat, but comfortably above the 7,000 pivot and towards the upper end of the six-week range.

Now two stocks showing two sides of the same rather tarnished coin: Restaurant Group shares rose ~3% as the casual dining operator reported an encouraging recovery in sales in the five weeks to May 16th. Both Wagamama and Pubs, with a combined 200 sites or so now open, reported comparable sales at 85% of 2019 levels. Leisure sites traded at around 60% of 2019 levels, which was in line with expectations. This ought to also be good news for UK plc and recovery in GDP in Q2 and Q3.

Meanwhile, Greencore tumbled ~11% as the sandwich maker reported revenue declined 19% to £577.1m in the six months to the end of March, noting the decline was driven by a reduction in consumer mobility as a result of tiered restrictions and lockdowns in the UK. Certainly, shares have enjoyed a good run so a bit of profit-booking on the results can be expected, but the reaction in the share price looks overdone – this is very much backward-looking data. Indeed, these results kind of underscore what we already know – anything up to the end of March was incredibly tough, but since then things are improving quickly.

The outlook from Greencore is positive, too. Management report ‘encouraging revenue momentum’ in the first seven weeks of the second half with pro forma revenue in food to go categories running at approximately 123% above prior-year levels and approximately 14% below the equivalent pre-COVID levels in FY19, they said. Pro forma revenue was approximately 64% above 2020 levels and approximately 5% below equivalent pre-COVID levels.

Elsewhere, Treasury yields declined, with the benchmark 10yr note under 1.6% again, as Fed officials sought to allay inflation fears. Gold trades near the top of the range close to $1,890. The weak dollar and lower nominal and real rates, plus fears about rising inflation, are all acting as valuable support for the metal. Oil is steady after a strong session on Monday with WTI (Jul) trading around $65.75 this morning. Demand growth is positive with vaccination efforts in major economies progressing well, whilst there is less confidence that Iranian oil will hit the market soon. Even if Iranian exports hit the market later this year, there is still scope for a summer spike in prices.

Equities hold ranges, gold jumps as US real yields sink

Morning Note

Equity markets are still looking for direction as they flit about the middle of recent ranges. Fear of a second wave of cases is denting the mood today, as the so-called R-number in Germany jumps to 2.88, US cases hit the highest level since early May, and Apple closes more stores in the US.

White House trade adviser Peter Navarro said the US is preparing for a second wave in the autumn – it’s debatable whether the current spike in cases in some states is still part of the first wave. Equity markets remain sensitive to headline risk around virus numbers, stimulus and economic data, but we are still awaiting signs of whether the strong uptrend reasserts itself or whether we see a more serious pullback.

Looking at the pullback over the second week of June, the major indices are still hovering either side of the 50% retracement of the move. Momentum may start to build to the downside should cases rise, and restrictions are re-imposed. For now, the indices are simply bouncing around these ranges. The question is whether markets finally catch up with the real economy – the disconnect between Wall Street and Main Street is a worry for those who think the market has rallied too far, too fast.

Economic data will continue to show a rebound, glossing over the fact that the numbers on the whole still indicate a severe recession. However, to make the bull case – the Fed and central bank peers are on hand and the old maxim still stands: don’t fight the Fed. Meanwhile there are record amounts of cash sitting on the side lines and bond yields on the floor – and will be for a long while – making equities (FTSE 100 dividend yield at 4% for example), more appealing.

The FTSE 100 opened down 1% and tested the 50% line at 6,223, whilst the DAX pulled away from its 50% level around 12,250 ahead of the open to fall through 12,200 before paring the losses. Asian markets were softer, whilst US futures indicated a lower open after falling on Friday – ex-tech.

Oil (WTI – Aug) ran out of gas as it tried to clear the Jun peak at $40.66 but remains reasonably well supported around the $39-40 level. We look at a potential double top formation that could suggest a pullback to the neckline support at $35. Imposing fresh restrictions on movement may affect sentiment ahead of any impact on demand itself, but OPEC+ cuts are starting to feed through to the market and we could be in a state of undersupply before long.

The risk-off tone helped lift gold to break free of the $1745 resistance, before pulling back to test this level again. The rally fizzled before the top of the recent range and recent multi-year highs were achieved at $1764. Whilst benchmark yields have not moved aggressively lower, with US 10s at 0.7%, real yields as indicated by the Treasury Inflation Protected Securities (TIPS) are weaker. 10yr TIPS moved sharply lower over the last two US sessions, from –0.52% to –0.6%, marking a new low for the year and taking these ‘real yields’ the lowest they’ve been since 2013.

Real yields are currently negative all the way out to 30 years.

In FX, GBPUSD started the week lower but has pulled away off the bottom a little. The momentum however remains to the downside after the failure to recover 1.2450. Bulls will need to clear the last swing high at this level to end the downtrend, though this morning the 1.24 round number is the first hurdle and is offering resistance.

CFTC data shows speculative positioning remains net short on GBP. Meanwhile net long positioning on the euro has jumped to over 117k contracts, from a steady 70-80k through May. Nevertheless, the current trend remains south though the 1.12 round number is acting support – the question is having seen the 1.1230 long-term Fib level broken, do we now and perhaps test the late March high at 1.1150.

Hong Kong dents optimism but stocks remain on track

Morning Note

US shares surged on Tuesday, with the Dow rising more than 2%, briefly trading above the 25k level again before closing a little short. The S&P 500 rose over 1%, traded above 3,000 for the first time since March 5th hitting a high at 3,021 before it too closed below this psychologically important level. The broad index traded above the important 200-day moving average but failed to close above this indicator.

Economies continue to reopen a little quicker than we’d feared. US airlines are reporting a uptick in passenger levels vs where they were last month, but were down about 80% from the same Memorial holiday weekend a year before. Globally, it seems as though countries are able to ease lockdown restrictions without sparking immediate secondary waves of infections – albeit the risk of such emerging down the line should not be ignored.

The higher the S&P 500 rises without earnings picking up the pricier it gets. PE multiples already look stretched and further gains for the index would come despite declining earnings, stretching these valuations still further. What happens when banks really lay bare all the non-performing loans they are going to need to write off?

US stock markets test key 200-day SMA

In the last two major recessions (see below chart), the 200-day simple moving average has been the ceiling for the market. A breakout here would be important for recovering market highs – failure could suggest it will contain price action for a while. I hate to say it but this time could be different – central bank largesse was not a factor like it is today. This only concentrates the power of the largest capitalised companies.

What’s going on in the real economy is not reflected by markets. Even as we reopen, the economic uncertainty and long-term health fears will support household deleveraging, boost savings rates and knock consumer spending.

Today the Fed will release its Beige Book providing anecdotal evidence of business activity across the US – there will be some very grim stories to tell and will underline how it will take a long time to get businesses and people moving at the same rate they were before the crisis.

Tensions in Hong Kong weigh on global equities – will the US sanction China?

The rally in global equities seen at the start of the week ran out of steam a little in Asia overnight though as tensions in Hong Kong hove into view once more. Riot police fired pepper pellets at groups gathering to protest a bill that would ban people from insulting the Chinese national anthem. This comes as tensions were stoked by China’s planned introduction of sweeping national security powers in Hong Kong.

There is a strong chance that the anti-Beijing feeling grows and leads to the kind of unrest we saw over several months last year. The US is said to be considering sanctions against China; Beijing said yesterday it was increasing its readiness for military combat. Whilst the eyes of the world are on Hong Kong, China is already engaged in a military standoff on its border with India.

Asia soft, European stocks firm

Asian shares fell broadly, although Tokyo held up as Japan said it will carry out another $1.1 trillion stimulus package on top of a $1.1tn programme already launched last month. The Hang Seng dipped by almost 1%. But European shares rose with the FTSE 100 recapturing 6100 and making a sally towards 6200 and to close the early March gap.

Yesterday the DAX made the move back towards its Mach 6th close at 11,541 to fill the gap but failed to complete the move on the close. This morning the DAX moved strongly through this level after a pause at the open, moving back to 11,600.

Euro, pound come off highs, retreat from key technical levels

In FX, both the euro and pound failed to really make any real breach despite a strong gain yesterday and have come off their highs. EURUSD moved back towards the middle of the recent range, having fallen short of a move back to 1.10 and was last trading around 1.0960.  GBPUSD has retreated under 1.23 having fallen short of the 50% retracement of the move lower over the last month around 1.2375.

After Germany and France proposed a €500bn bailout fund based on mutual debt issuance (what some have dubbed Europe’s Hamiltonian moment), EC President Ursula von der Leyen will present her plans, which will build on the Franco-German proposal and call for a €1 trillion plan. If the budget talks are successful it should lower the risk premium on EU sovereign debt, lowering bond yields and offering succour to the euro as well as to European equity markets. It would also mark a major step towards EU fiscal policy coordination and possible fiscal union. The frugal four remain a hindrance but Merkel’s weight is behind this.

We’re also looking at the appearance before MPs today by Michael Gove and UK Brexit negotiator David Frost.

Gold falls to test $1700, WTI crude oil edges down to $34

Gold was weaker, testing $1700 again as US yields rallied on economic reopening, but 10yr Treasury yields peeled back off the highs at 0.7% due perhaps to the US-China tension.

WTI (Aug) has retreated further from the $35 level and is testing support around $34. The pattern suggests a pause for thought as we try to figure out the mess of supply and demand. The pattern is one of consolidation with a bullish flag forming, with better demand forming the basis for the move alongside supply impairment that was evidenced by a new report from the IEA saying Covid-19 will cause investment in the energy sector to decline by $400bn this year. That is the kind of capex carnage that will remove a lot of supply and force rebalance quickly.

Chart: The 200-day line has been a ceiling in past recessions

Stocks stage fightback, Trump raises China stakes

Morning Note

US stocks staged a mighty comeback and closed at the highs as beaten-up financials managed to recover ground. The S&P 500 traded under the 50% retracement level at 2790, dipping as low as 2766 as US jobless claims rose by another 3m, before rallying to close up 1% at 2852. Financials, which have failed to really take part in the rally since March, led the way as Wells Fargo rose 6.8% and Bank of America and JPMorgan both rallied 4%. Energy stocks also firmed as oil prices rallied.

European indices were softer on Thursday but managed to recover a little ground in early trade on Friday. The FTSE 100 rose over 1% to clear 5,800, with the DAX up a similar amount and trying gamely to recover 10,500. Asian shares have largely drifted into the weekend with no clear direction.

The rally for Wall Street snapped a 3-day losing streak but the indices are still on for the worst weekly performance since mid-March. We’re still in this tug-of-war phase as the real-world impacts of Covid-19 run up against the stimulus and central bank support. Markets are still trying to figure it all out.  SPX needs to rally to 2915 today to finish the week flat, while the FTSE 100 requires 5,935.

The deterioration in US-China relations is another worry for investors, with Donald Trump saying he doesn’t even want to speak to President Xi and threated to ‘cut off’ China ties. He’s not angry, he just ‘very disappointed’. As I’ve pointed out in a past note, in an election year with the economy suffering from the worst recession in memory, Trump is likely to go very hard against China, particularly as this has bi-partisan support and polls indicate anti-China feeling running high. This will be partly a political game, partly what the US ought to be doing anyway, but either way it will likely provide yet another downside risk for investors.

Neckline support of the head and shoulders pattern is feeling pressure but yesterday’s rally is positive for bulls. Expect further push-and-pull around this region.

Overnight data showed Chinese factory output rise while consumer demand slowed. Retail sales declined 7.5% vs 7% expected in April. US retail sales today  are forecast at -12%, or -8.6% for the core reading.

Oil put on a good show with front month WTI rising above $28. The August WTI crude oil contract trades a little higher than $29, meaning the contango spread has narrowed by two-thirds in the last week. Price action suggests traders are far less worried about the underlying demand and storage constraints that have dogged prices for the last couple of months.

In FX, as flagged sterling tested the Apr 6th low, which has held for the time being and GBPUSD has recovered the 1.22 handle. Risks look to the downside, but short-term momentum looks like we could see a nudge up.

Gold has driven off the support and was last up a $1736. Whilst Covid-19 is initially a deflationary shock (negative for gold), the extent to which governments have fired up the printing presses and the fact that monetization of this debt seems the only way out, a significant period of inflation could be around the corner. Gold is still the best hedge against inflation. The Apr 23rd high at $1738 is first test before a retest of the previous top at $1747 and then $1750 to call for a breakout to $1800.

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