Deliveroo shares climb, UK equities catch a bid

Morning Note

Deliveroo shares edged higher at the start of unrestricted trading as investors shrugged off the stock’s dreadful start to life as a public company. There were fears the 70,000 retail customers who had participated in the float would take the opportunity to offload, but investors are holding the line for the time being. Having tumbled 26% on day one, the first day of unrestricted trading saw the stock climb 3% to £2.88. I’m not sure if this is a vote of confidence or a case of averaging in, but it’s no doubt a big relief to management and the bankers involved that the retail army has not routed at the first sound of gunfire. Given the wipe-out that has already taken place, I think a lot of investors will simply think that it cannot go any lower and it’s worth holding on for a better price. Cutting losers is harder than letting winners run. It comes as hundreds of Deliveroo riders prepare to strike over pay and conditions. The walkout underlines the regulatory risk attached to the stock and the implied impact any Uber-like ruling could have on margins.  

 

European stock markets are tentatively higher after a flat session on Wall Street, with the major US indices pulling back slightly from record highs. UK equities are leading the way this morning: The FTSE 100 rose 0.9% in the early part of the session to trade at its highest since the start of the year – 6,900 looks to be on. I’d still be confident that the discount in UK equities combined with a solid domestic and global outlook supports the investment thesis and the blue chips could be eyeing a pre-pandemic 7,700 by the end of the year. The FTSE 250 rose another 0.6% to trade above 22,129 and mark a new record intraday high. The mid-cap index is now up 8% since the start of the year and is on track to reflect the UK’s economic bounce back from the pandemic. UK domestic stocks have been buoyed by the rapid rollout of vaccines – Moderna starts this week, adding to the positivity – and the implied resurgence in economic activity. And as I pointed out in my preview to 2021, UK equities were set to catch up as they entered 2021 trading at a large discount to European and US peers, but have yet to really achieve their full potential.  

 

FOMC minutes tonight will be one to watch. The minutes could help explain how the Fed plans to communicate future policy decisions and shed light on how some policymakers could change their view on monetary policy if inflation and growth does accelerate as expected this summer. Whilst Jay Powell has kept market speculation at bay, the minutes could allow participants to focus on when the Fed will tighten. As detailed after the meeting statement, it looks as though the Fed is happy to let the economy run hot and won’t intervene to cool it down. Even with growth in excess of 6.5% this year, 3% in 2022 and 2% in 2023; it still sees no need to tighten policy within the next almost three years. This reflects what we know already about the Fed’s view on employment and inflation and the 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. US 10-year yields have retreated to under 1.64% – given the pullback from the recent highs there is a risk the market sees something in the minutes which signals it could tighten policy sooner than it is currently guiding. 

 

Crude oil tried to pick up yesterday as the IMF raised its global growth forecasts and the API said inventories declined by 2.6m barrels last week. But the market remains sceptical for the time being about the demand recovery that OPEC is expecting and has used to justify pumping more barrels from May. OPEC+ have really taken a gamble on oil demand bouncing back this summer. The decision by the cartel and its allies to ease self-imposed production curbs helped push prices sharply lower on Monday but a softer dollar and stronger US and Chinese economic data, combined with the IMF forecasts, had eased the selling pressure yesterday. WTI bounced off lows a little under $58, though short of the key support at $57.40, but the rally fizzled at the $61 resistance. EIA figures today are expected to show a decline of 2m barrels. Last week’s inventory data showed American refiners processed the most oil since the start of the pandemic as US travel markers improve.

Stocks start April on front foot, Roo licks its wounds, European manufacturing picking up?

Morning Note

In Pittsburgh, Pennsylvania, Joe Biden announced another massive ‘once-in-a-generation’ economic spending package barely weeks after a $1.9tn Covid relief bill. His $2tn+ infrastructure plan envisages a big, bold splurge on improving multiple areas of the economy. It’s another c10% of GDP, on top of the 10% added by his Covid bill and about the same added last year. This time, the package will be funded by tax rises, however these will be phased in over 15 years and it’s hard to see how the spending will not add to the deficit. The plans are already facing criticism on multiple fronts (too much, too little, don’t raise taxes, raise them even more!).

European markets trade broadly higher on the first trading day of the quarter after solid opening three months to 2021. The FTSE 100 moved a little higher this morning but remains well within its range for the year, and it 4% higher in 2021. The DAX trades above 15k and is +7% for the year – most of its exposure is to outside Germany, so it’s benefiting from the recovery in Asia and US. Yesterday the S&P rallied 0.9% for a fresh intra-day high just 5 points below 4,000, before closing up 0.4% to finish the quarter 5.8% ahead. The Dow was weaker on the day but nevertheless rose 7.8% for the quarter. For both, their performance in March was the best monthly gain since November.

Global manufacturing activity is starting to look good. Italy’s factory activity has grown at the fastest pace in over 20 years, according to this morning PMI. France’s March PMI showed the sharpest rise in manufacturing output since September 2000, albeit before the nation’s third lockdown was announced. The report also notes that the headline figure was inflated by a sharp downturn in vendor performance, which in normal times is a sign of health but these are not normal times and is more about supply chain problems and raw material shortages. Inflationary pressures were also evident as the scarcity of raw materials forced up cost burdens at the fastest rate since May 2011. The rate of inflation for prices charged to consumers was the strongest since June 2011. The Chicago PMI yesterday hit the best in two and a half years. The Bank of Japan’s headline Tankan index for big manufacturers’ sentiment improved to +5 in March from -10 in December. China’s manufacturing recovery continues, albeit at a slower pace last month.

Deliveroo shares are lower again after an ignominious crash on day one, sliding over 1% in early trade to 283p. ROO ended its first day of trading at 287p, down 26% from its list price. Several reasons are behind the poor performance. In addition to the failure to bring several large funds on board, the dual class share structure, regulatory uncertainty, general profitability concerns and a miscalculation by the bankers on the pricing in relation to wider demand in the market, it also looks like some hedge funds shorted the stock aggressively from day one. Not all stocks have a happy start to life on the stock market – just ask Tim Steiner or Mark Zuckerberg – but it’s not a great advert for London as a destination for tech listings.

Next shares are higher after it raised its full year profit outlook by £30m to £700m. Whilst the end of lockdown is two weeks later than expected, management said the profit lost from those additional two weeks has been offset by the benefit of the extension of business rates relief announced in March. In the first eight weeks of the year, online sales were stronger than expected, rising more than +60% on two years ago.

Bitcoin trades a little under $59k following news that Goldman Sachs is set to offer crypto services. Yesterday the bank said it is looking to offer a “full spectrum” of investments in Bitcoin and other digital assets, “whether that’s through the physical Bitcoin, derivatives or traditional investment vehicles”.

Gold popped up off the support at the $1,685 area to trade around the $1,715 marker. WTI has tested the $59 support ahead of the OPEC+ meeting, at which members are expected to maintain the current level of output curbs and Saudi Arabia will stick to its additional 1m bpd cut. The usual sources are already hitting the wires with ministers said to be discussing a range of options that include a rollover of cuts and a gradually increase in output at a maximum of 500k bpd, presumably on a monthly basis. US crude inventories unexpectedly fell as refiners ramped up activity to meet demand – gasoline demand is above where it was last year.

Deliveroo serves up cold fare as debut misfires, European equities flat

Morning Note

Shares in Deliveroo got off to a horrible start on the market, declining 23% in early trade to £2.95 after pricing at £3.90. It’s a very big early move lower and there will be chatter about what this says about the broader market, investor appetite for listings, the state of the UK economy etc, etc. So what does it mean? Firstly, I’m sightly surprised there is not more of a stabilisation effort here. It reflects the cautious approach big funds have shown to the stock amid concerns about working practices and governance. A lot of the big UK funds are not on side, which was failure number one. Will Shu could have avoided that by going for a premium listing and eschewing the tech stock desire for a dual-class structure that leaves power with the founder. Old City habits die hard, despite what the FCA wants to do. There could be implications for the plans by the government and Lord Hill to loosen listing rules – but probably not material. If anything it might make some want to get change faster so these kind of tech stocks can be indexed – it hardly shows off London as the place to list a tech stock. Retail may also have been put by some of the negative chatter on social media and in the press – the narrative has been negative really since it came out with the IPO. Chiefly though it reflects the fact that even pricing the IPO at the bottom of the range, Deliveroo was demanding too high a price tag for a loss-making delivery platform in a very competitive space with a questionable path to profitability. The books were covered, it was just plain mis-priced.

Talking of greed…Goldman Sachs has some serious chutzpah. The Archegos scenario went something like this: Bankers at the venerable New York institution discussed the hegde fund’s positions with fellow prime brokers on Thursday. Four of the six committed to avoiding a disorderly unwind – they would work together to avoid fire sale. GS was not one of those four and by Friday morning had lined up blocks to unload and leave others holding the bag. Nomura flagged it would lose $2bn, Credit Suisse losses could be double that. Swiftly Goldman analysts downgraded Nomura to neutral and cut their price target on CS by almost 10%. Regulators are looking at the behaviour of prime brokers. And this at a time when the US Supreme Court is hearing a case dating back to the Great Recession, in which shareholders Goldman lied when it made claims like “Integrity and honesty are at the heart of our business”.

Markets have thus far shrugged off the fallout from the fire sale. There will be more shares to be sold to get these off the books of banks, but the market seems largely unperturbed for now. What worries some is the fact that there is bound to be over-geared funds out there and this is not even a bear market.

Bonds have come back into focus as the benchmark US 10-year yield rose to 1.77%, rising 6bps to its highest since January, with the 2s10s spread up above 161bps, the widest since 2015. Rising bond yields and Yesterday’s pop dragging the Nasdaq 100 down by 0.5%. The Dow slipped 100pts from its record high, while the S&P 500 was off by 0.3%. Stocks in Europe have got off to a very muted start to trading after rising in the previous session.

Month-end, quarter-end: It’s been a decent start to the year despite some gyrations. The DAX has rallied over 9% this quarter, whilst the FTSE 100 has risen almost 5% and FTSE 250 is up 5.3%, with a gain of 3% in March. The S&P 500 is over 5% higher, whilst the small cap Russell 2000 has rallied over 11%. Hit by rising bond yields, the Nasdaq Composite has risen by just 1%, while the Nasdaq 100 of the largest tech/growth names is flat on the year. This is a sign of the kind of moves we have seen in bond yields in the context of an expected post-pandemic reopening and the reflationary backdrop as stimulus feeds through.

Meanwhile, Ryan Cohen is pulling something off. Shares of GameStop rose 7% after the company announced the appointment of Elliott Wilke as chief growth officer, after a seven-year stint with Amazon. The company also named Andrea Wolfe, former Chewy vice president of marketing, as vice president of brand development. Another Chewy alumnus, Tom Petersen, who was the vice president of merchandising, joins GameStop as vice president of merchandising. The calibre and experience of these and other recent appointments adds further credence to the belief GameStop could turn its e-commerce offering around and may support the fundamental thesis on stock. A long, long way to go however and we haven’t even spoken about execution risk.

Elsewhere, Bitcoin trades close to record highs a little under $60k this morning. Gold is testing key long-term trend support as yields have moved higher. The US dollar is off a little this morning but still very close to its Nov high. EURGBP has cracked the 0.8540 support again but is not moving decisively on the breach.

EURGBP has cracked the 0.8540 support again.

OPEC+ preview: Saudis continue to take the strain

OPEC+ meets this week after its surprise decision to extend production cuts through April. Prices enjoyed something like a Suez Canal ‘put’ but this is fading fast. A pullback in prices since the last meeting has rather vindicated OPEC’s decision to maintain production curbs. Overproduction vs cut promises at the start of the year are a factor, and OPEC will want to stress the importance of compliance. Prices declined since the March meeting amidst liquidation of speculative long positions as the pandemic worsened in Europe and lockdown restrictions were reimposed. It’s likely that given the retreat in prices OPEC+ will stay the course and Saudi Arabia will keep cutting the additional 1m bpd.

With the Saudi unilateral cut in play, Russia’s influence is not what it was a few months ago. So, while Russia will be watching for US shale output (Baker Hughes rig count has risen for 8 straight months), the Saudi aim of prioritising prices over market share ought to win out. For now US shale output is not rebounding significantly. Meanwhile, the JTC reported Tuesday that cumulative excess production of OPEC+ rose to 3m bpd through February, up from f 2.8m bpd in January.

Watch for the UAE as it has recently spent big on increasing its production capacity. Its new Murban benchmark launches this week. Also look to overproduction by Iraq and rising output from exempt countries Libya and Iran. And we will be watching for whether Russia – which is increasing output by 125,000 bpd in April from 9.18 million bpd in February – is allowed to further raise production in May.

WTI (May) showing double bottom support around the $57.40 level but the 200-period SMA on the 4hr chart proving to offer resistance near-term as it meets the $62 horizontal round number.

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.

Archegos Capital sends waves through European bank stocks, oil down as Ever Given is refloated

Morning Note

Bubbles everywhere are a sign of dysfunction and stress, but a fund blowing up is not itself a systemic risk, more of questionable internal risk management. A massive fire sale of some individual stocks last week had traders talking about who’d taken the hit as shares in ViacomCBS and Discovery plunged 27% on Friday alongside some big Chinese tech stocks. It looks certain the unwinding was caused by a massive margin call on Archegos Capital, the family fund run by Tiger ‘cub’ Bill Hwang.

The fallout has hit banks: Nomura shares fell 16% as it warned of a $2bn loss at its US unit, Credit Suisse said a ‘significant US-based hedge fund defaulted on margin calls’ last week and that this would have ‘highly significant and material’ impact on first quarter results. Shares fell 14% in early trade. European banks were offered this morning amid some uncertainty about who else might be on the hook for losses. UBS declined 4% and Deutsche Bank dropped 5%, with the Stoxx 600 bank sector down over 1%. Despite the stress this is causing among banking stocks, there is no sign of contagion in broader markets with the DAX hitting a fresh all-time high this morning. US indices leapt late on Friday afternoon, pushing the S&P 500 to a record closing high but with the quarter end and a holiday-shortened week we are expecting volatility. Also watch this week for more details about Joe Biden’s $3tn economic on Wednesday. Stock markets will be shut for Good Friday but the US nonfarm payrolls is still slated for release.

Chinese tech giants involved: As well as the tumble in the two US mass media stocks, reports indicate that Deutsche Bank, Goldman and Morgan Stanley forced Archegos to liquidate trades in a number of big China tech stocks on Friday. Archegos had built up a large stake in companies like Baidu and Farfetch, which had started to sell off in March. A new SEC rule aimed at Chinese stocks listed in the US, which requires firms to submit documents to establish that they are not owned or controlled by a governmental entity in a foreign jurisdiction, had exacerbated a decline in some big China tech names of late. This heaped more pressure on Archegos.

Systemic worries? I don’t think is systemically risky in itself – Archegos was massively levered and it appears to have been too concentrated in a number of risky stocks – but when we look at this and think about the GameStop saga and the decline in Tesla as two examples – what we’re seeing are more and more pockets of very unusual trading activity in some stocks. Shares in ViacomCBS and Discovery had been bid up to the rafters this year and came tumbling down, taking Archegos with them. ViacomCBS was up over 170% YTD and Discovery was +150% YTD before last week’s unravelling. The spark that led to the margin call seems to have been a massive $3bn stock offering by ViacomCBS which prompted selling last Tuesday and Wednesday. Archegos may have been trying to squeeze shorts in those US media names – according to Refinitiv short interest stands at 18% of Viacom and 28% of Discovery shares. Attempting a short squeeze alone is a risky game (should have gone to /wallstreetbets). At the other end, GSX Techdu, which has been under heavy activity short-seller attacks, finally broke down. The stock fell 40% on Friday on large block trade sales, possibly by Archegos as part of the fire sale.

You worry that this sort of frothy trading activity in turn creates pockets of distress among investors and banks that leads to larger unwinds and losses for financials. Leveraged family funds blowing up is nothing new though and I’d think that whatever impact this has on the banks, it will be a quarter or two of profit at worst. Excessive valuations in some names and sectors have created pockets of distress when things start to unravel. It’s a worry and a symptom of excess liquidity. And coming so soon after the Greensill fiasco, you have to wonder about what this says about Credit Suisse risk management if it can be saddled with such heavy losses from one fund. The Swiss financial watchdog Finma says it is aware of the hedge fund case and notes that several banks are involved.

So, this takes us nicely on the Deliveroo IPO (ROO), which is going to price towards the bottom of the indicated range amid some ‘volatile’ market conditions. Having aimed at pricing the IPO between £3.90 and £4.60 per share, implying a market cap of almost £9bn, it has today said it will price shares at between £3.90 and £4.10. It’s been a rocky process for Deliveroo as a number of big investors said they would not participate due to ESG concerns as well as a rich valuation and uncertain path to profitability. Despite this there is strong demand for the offering with deal well covered – the question is whether shares can deliver long term for investors or whether this is another DoorDash.

Apparel and retail names were under fire last week as Chinese consumers took issue with claims made about forced labour in Xinjiang. Nike fell more than 3% on Thursday (before rebounding over 3% on Friday) after a statement that resurfaced on Chinese social media suggested the company was worried about reports of forced labour. The undated statement said “We are concerned about reports of forced labor in, and connected to, the Xinjiang Uyghur Autonomous Region. Nike does not source products from the XUAR and we have confirmed with our contract suppliers that they are not using textiles or spun yarn from the region.”

A statement from H&M flagged last week said it was “deeply concerned by reports from civil society organizations and media that include accusations of forced labour and discrimination of ethnoreligious minorities in Xinjiang”. Meanwhile an Inditex webpage stating its concerns about reports alleging social and labour malpractice in various supply chains among ethnic Uighurs in Xinjiang was live on March 24, but subsequently taken down. Burberry’s plaid design was removed from the popular video game “Honor of Kings,” according to the game’s official Weibo account. A Hong Kong executive and legislative council member tweeted that she would no longer buy Burberry products. Wang Yibo, a popular actor, terminated his contract with Nike saying that he ‘firmly oppose[s] any act to smear China’. Fellow actor Tan Songyun also said she is terminating her contract with Nike. Burberry also got hit hard as Jefferies noted risks of a possible cancellation of the company’s partnership with Tencent Games. All this provides some interesting background ahead of H&M earnings this week (Mar 31st) for the first quarter, having already reported sales on March 15th. As well any commentary re China, we’ll be looking to see management’s view of how current trading is impacted by tighter coronavirus restrictions in Europe. Next (Apr 1st) is also reporting its full-year results to the end of January with the focus on the shift to online from the high street. We will also be looking for what management might have to say in terms of store footprints in light of the recent closures announced by peers.

And finally, I know some people will be rather disappointed the saga is over, but the 400m long Ever Given has been successfully refloated. Oil prices fell as the premium attached to crude from the blockage unwound. Oil traders can put the episode behind them now and focus on the OPEC+ meeting this week. WTI futures for May topped out around the 200-hour moving average at $61.40 and now wrestle with the 23.6% Fib level at the $60 round number. A break here calls for retest of the $57.40 lows last week with some tentative support around $59.

Oil futures dropped as the Suez blockage is solved.

Stocks look to rally but eyes on yields again

Morning Note

The change in tone from the White House in the last 65 days has been striking. Joe Biden held his first press conference as President yesterday and the atmosphere could not have been more different to Trump’s combative ‘you’re fake news’ and ‘you’re fake news’ pressers. The 78-year-old lacked energy but appeared relaxed; the press was respectful, happy to give him the benefit of the doubt. Mr Biden said he would run in 2024 – aged 82 – and committed to 200m vaccinations in 100 days. He wasn’t asked about the coronavirus – perhaps the one thing he most wanted to talk about since the programme of vaccinations is going so well. Across the pond things are not going so well. EU leaders failed to agree on a way to deliver extra vaccines to member states in the most need. Austria won’t back a deal that excludes them.  

 

Equity indices are on the front foot this morning after a directionless, choppy merry-go-round of a week. The major bourses edged up by around 0.5-1% in early trade, with the FTSE 100 recovering the 6,700 area and the DAX north of 14,750. The bounce comes after shares on Wall Street staged a late rally yesterday that snapped a two-day losing streak. The S&P 500 closed up 0.5% at 3,909, erasing a 0.9% intraday loss at one point. The Dow Jones Industrial Average rose 200 points, having at one stage been down almost 350pts. US futures indicate Wall Street will open higher.

 

The Suez Canal remains blocked and it could take weeks to sort out. A high tide this weekend may dislodge it sooner but no one seems to know for sure how long it could last. Shipping companies are starting to reroute LNG around the Cape of Good Hope. Caterpillar said it is facing shipment delays and may airlift parts. It’s reportedly costing $400m an hour in delays. WTI crude retested the week’s lows around the $57.30 region yesterday afternoon before rallying to $60.  

 

The US jobs market continues to show signs of strength: initial unemployment claims fell to 684,000 last week, the lowest since the start of the crisis a year ago. Nonfarm payrolls next Friday ought to show another handsome rise in new jobs in March similar to the +379K print last time. UK retail sales bounced back in February, rising 2.1%. Online rose to make up a record 36.1% of all sales but overall retail sales were down 3.7% from a year ago.  

 

Today we have US personal income (seen –7.3%), personal spending (-0.8%), PCE inflation, the Fed’s preferred gauge, (core deflator seen at 0.1%), the Michigan Consumer Sentiment survey (+83.6%) and the Bank of England’s Saunders gives a speech on “Supply and demand during and after the pandemic”. 

 

Watch yields again after another weak 7-year auction in the US. The yield on the 10-year Treasury is back above 1.66% following the auction, which again showed soft demand for the 7-year paper. The auction of $62 billion in 7-year notes took a yield of 1.3%, more than 10 basis points above February’s soft auction, whilst the bid-to-cover of 2.23 was also low.  

 

Funds and games 

 

Deliveroo has hit an ESG wall: the company lost another potential investor as L&G joined Aberdeen Standard, Aviva and M&G in saying it will not take part in the IPO next week. Funds are worried about things like the dual class share structure as well as workers’ rights, not to mention the path to profitability. It seems to be very good at delivering food and very good at burning cash. Institutional support is not necessary to get this IPO off very nicely for Shu and Amazon, but I would be questioning the sustainability of the kind of valuations an £8bn+ market cap implies. 

 

GameStop shares rallied over 50% on Thursday after their 30% decline post-earnings earlier this week. For this we can thank/blame Jefferies analysts Stephanie Wissink and Anna Glaessgen, who raised their price target on the stock to $175 a share from $15, hailing the company’s push towards online sales. “Our thesis is simply that rebalancing sales away from video game software/hardware will deliver superior gross margins,” they say, adding that “if the company “successfully sheds its retail heritage” and morphs into a digital commerce powerhouse its valuation could rival other purely online businesses. Meanwhile Wedbush raised its PT to $29 from $16 and Telsey Advisory cut its from $33 to $30. Quite where these numbers come from, I have no idea. Who needs a Monte Carlo valuation…? 

 

Talking of which…Cathie Wood’s space-focused ETF could launch as early as next week, Bloomberg reported. It comes as Wood’s own star shines a little less brightly after the flagship Innovation ETF fell by almost 30% in the last month. The ARKX fund will invest across four areas: Orbital aerospace companies that launch, make, service, or operate platforms in orbital space, which include things such as satellites and launch vehicles; Suborbital aerospace companies are similar, but not as high in the sky, and might include drones, air taxis and electric aviation vehicles; Enabling technologies companies are those that create the kit for aerospace operations, including artificial intelligence, robotics, 3D printing, materials and energy storage; Aerospace beneficiary companies are defined as those that stand to benefit from general aerospace activities, a diverse group that includes agriculture, internet access, global positioning systems (GPS), construction and imaging. Space is clearly going to be one of the most important areas for investors in the coming decade, with exposure to a broad range of technology players in this arena offering good optionality on the future of space travel and the commercial returns that it should deliver. 

Stocks choppy, Deliveroo IPO faces hurdles

Morning Note

It looks to be yet another day of choppy trading in European equity markets with little conviction on either side. At send time the FTSE had turned positive, while shares in Frankfurt and Paris were essentially flat. US markets were broadly weaker yesterday – the Nasdaq declined 2%, small cap Russell 2000 over 2.3%. The S&P 500 fell 0.55%, whilst the Dow was flat as financial and energy names fared better. Tesla fell 5% to $630 and the ARK innovation ETF declined almost 6% and is now around 27% below its recent peak. For both, anyone who has bought in since the start of December is nursing a loss. ARK’s Monte Carlo $3,000 ‘valuation’ for Tesla is not looking too clever. GameStop shares fell 30% after the earnings miss and signalled it will raise new capital. I think the reason for the decline was more about a lack of detail on the ecommerce transformation than raising cash – investors (traders) want it to raise money; they just want to know a lot more about what it plans to do with it.

Addressing US concerns, AstraZeneca revised the efficacy of its vaccine trials to 76% from 79%. Not a lot in that – hopefully it helps put doubts to bed, but of course it won’t. There has been a lot of huffing and puffing around the EU’s approach to vaccines – looking to curb exports, raiding a site in Italy to discover – shock, horror – vials of the AstraZeneca bound for…Belgium. Etc, etc. We can get down a rabbit hole of Brexit-y nationalism and counter-arguments. But what it amounts to Europe’s failure to secure enough jabs early enough and now turning that failure around and placing it on AstraZeneca and (how dare you be so much more efficient than the EU) countries that are doing vaccines rather well. Leaving aside how it makes the EU look to outsiders, for those within the bloc it makes the EU and more importantly for forthcoming German and French elections, the European Commission (by which we mean Ursula Von Der Leyen), the CDU in Germany and President Macron all look rather inept and rather petty. Meanwhile Frau Merkel has backtracked on a planned Easter lockdown. Mea culpa, she said, it was not possible. It does not suggest that the European centre is holding up terribly well and again raises fears about what will happen to Europe once Merkel goes. It also raises questions about how likely Marine Le Pen could give Macron a run for his sous next year.

Deliveroo is facing a bumpier road ahead of its IPO. Aviva and Aberdeen Standard won’t be taking part, citing concerns about riders’ rights, as well as the investment thesis. Growth has been exceptional – thank the pandemic – but it couldn’t serve up a profit despite last year’s 50% rise in revenues. It probably won’t be profitable for a while yet. Competition is pretty intense, particularly in the key London market. It hasn’t even reached Zone 9 yet out here in the sticks. Recent stock market debutant Trustpilot is offering clues. Yesterday shares fell below the IPO price; will Shu be sweating? I doubt it, but investors should always be careful about richly priced tech platform IPOs, particularly if they look like pricing at the top of the range because there is a lot of primary demand. That doesn’t leave a lot of headroom. Shares in Trustpilot rose by 14 per cent in its stock market debut on Tuesday. The company priced the IPO at 265p per share, giving it a market capitalisation of £1.1bn, and shares climbed as much as 16% from this level. But on Wednesday the stock was lower

DoorDash could be another useful case study, especially since it’s in the same game of delivering food at a loss. Shares in DoorDash closed at $189.51 on debut in December, 86 per cent above the IPO price, a sign of strong demand for shares. But the performance since has been weak: after hitting a high in February the stock currently trades about a third below its first day closing price at $125.

Cineworld shares fell 9% in early trade as it announced it would tap investors for more debt after a record $2.3bn loss. Despite plans to reopen in the US in April and over here in May, there are ongoing concerns about getting bums on seats. It has tapped investors for a $213m convertible bond maturing in 2025. Last November we noted that it had sufficient headroom for 2021 and beyond. However, it cautioned then that, in the event of a further delay to cinema reopening, whilst it the company has sufficient liquidity ‘for a number of additional months’, it ‘may require lender support in order to deploy that liquidity’. It seems that despite reopening in May, it won’t be back to normal quickly – lots of people are going to be fearful of enclosed spaces like cinemas. Shares remain among the most shorted in London, with around 5.6% out on loan.

Oil rallied strongly yesterday despite a surprise build in US crude inventories. OPEC+ oil producers at their April 1st meeting are likely to make similar decision to one month ago, extending production cuts of more than 7m bpd. Yesterday’s rally was significant but failure to recapture the previous day’s opening high on the daily candle indicates bears still have this. On the hourly chart on the left we can see the breakdown in the rally near-term but the $60 round number – which is also the 23.6% retracement of the bottom-to-top move since Nov – is offering support.

Oil rallied strongly yesterday despite a surprise build in US crude inventories.

In FX, the dollar remains on the front foot and sterling is pressured following the break below support at 1.3776, making new lows this morning with the focus on driving cable back to the 100-day SMA at 1.3610. (hourly on the left, daily on the right).

In FX, the dollar remains on the front foot and sterling is pressured.

EURUSD tests big support at 1.18 with a fresh 4-month low made this morning.

EURUSD tests big support at 1.18.

Deliveroo IPO date and how to trade shares

Equities

Deliveroo has set a price range for its shares of between £3.90 and £4.60 per share, implying an estimated market capitalisation of between £7.6 billion and £8.8 billion.

The company will issue 384,615,384 shares (excluding any over-allotment shares) and expects to raise £1bn from its IPO. Even at the lowest end of the range, it would be the largest listing in London for a decade and Europe’s largest this year.

Amazon has a 15.8% stake in the company but it plans to sell 23,302,240 shares for between £90.8 million and £107.2 million, depending on where the IPO prices. Chief executive and founder Will Shu will sell 6.7m shares, leaving him a remaining stake of 6.2% of the company, worth around £500m.

The IPO will take place on Wednesday March 31st, with unconditional dealings – the point where retail investors can start trading – begins on April 7th.

Accompanying the latest update on the pricing of shares, Deliveroo said the total value of transactions (GTV) were up 121% year on year in January and February. This marks a significant acceleration from the +64% growth run rate through 2020 and indicates that the £5bn estimated GTV in 2021 could be exceeded. GTV comprises the total food basket, net of any discounts and consumer fees.

How To Trade Deliveroo Shares

Before the IPO: Our Deliveroo Grey Market is open for trading now and until the IPO takes place.

After the IPO: Go long or short on Deliveroo shares with a CFD or spread bet (UK only) account.

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Soft start for stocks, Deliveroo sets price for IPO, Turkish lira falls

Morning Note

European stocks stumbled out of bed this morning after a weak close on Wall Street on Friday and mixed picture in Asia, whilst rising coronavirus cases and fresh lockdown measures are sapping confidence. Germany is considering extending lockdown as the number of new cases exceed the rate at which ICU bed start to run out, whilst France has already reimposed restrictions. But after an hour of trade the DAX traded about 100pts off its lows, just in positive territory, whilst the FTSE 100 also recovered some poise over the first hour of trade but remains negative. On Friday, the Dow closed more than 234pts lower as JPMorgan and Visa weighed. The Nasdaq rose 0.8% as investors chose to buy the dip in tech stocks. US 10-year Treasury yields rose to 1.72% after the Federal Reserve said it would not extend SLR exemption but are a tad under 1.69% this morning. 

 

The US trial of AstraZeneca’s vaccine shows the jab is both safe and very effective. Astra reports this morning that the phase 3 trial showed 79% efficacy at preventing symptomatic COVID-19, and importantly delivered 100% efficacy against severe or critical disease and hospitalisation. This ought to help the rollout in Europe, but you can take a horse to water and all that…a survey from YouGov shows that the constant undermining of the vaccine has hurt confidence in the jab among people in Spain, Germany, France, and Italy. Hopefully, this puts to bed any doubts, but I suspect it won’t. Shares rose about 1% in early trade.  

 

Airlines and travel stocks fell as it becomes increasingly likely that the travel season will be impaired by the pandemic as cases in Europe stubbornly rise and the UK could extend its international travel ban. Government aides have suggested that summer holidays this year will be ‘extremely unlikely’ because of the risk of bringing variants home. The current roadmap for exiting restrictions has May 17th as the earliest start date for foreign travel to resume, however it looks as though this may be pushed back by some weeks and may well depend on the vaccination progress in Europe above all. IAG –6%, EasyJet –6%, TUI –7%, Ryanair –6% in early trade. A lot of these travel stocks have had a healthy run up in recent months due to hopes that the summer season would be fine – increasingly it seems international travel is going to be badly affected this year despite the vaccine success.  

 

At the other end of the FTSE 100 this morning, Kingfisher rose over 3% following another strong set of results as consumers continue to focus on DIY during lockdown. Sales rose 7% in the year to January, while adjusted profits were +44% higher. This was a very strong performance across both the UK & Ireland and France. However, management warn that sales growth will slow this year. 

 

Deliveroo set the price range for its initial public offering in a range of £3.90 to £4.60 per share, implying an estimated market capitalisation of between £7.6 billion and £8.8 billion. This is higher than previously expected and makes it the biggest IPO in London for some time. The prospectus will be released later today. Accompanying this update, Deliveroo said the total value of transactions (GTV) were up 121% year on year in January and February. This marks a significant acceleration from the +64% growth run rate through 2020 and indicates that the £5bn estimated GTV in 2021 could be easily exceeded. (GTV is one of those new metrics that tech firms like that you will need to get used to for Deliveroo – it is defined as the total value paid by consumers, excluding any discretionary tips. GTV comprises the total food basket, net of any discounts and consumer fees. 

 

Trouble in Turkey: the Turkish lira tumbled after president Erdogan removed the country’s hawkish central bank chief. USDTRY rose to a high of 8.20, up 14% from Friday’s close around 7.20. The sacking of Naci Agbal raises fears about the path economic and monetary policy, with market participants prepared for rates to be cut and for the re-emergence of ‘Erdonomics’. It raises all sorts of questions about the government’s ability and competence to handle the economic issues facing Turkey. Agbal’s efforts to raise rates to counter inflation, which is still running at above 15%, helped to boost confidence more generally in the country’s assets. The Turkish central bank raised rates by 2% last week on top of 675bps of hikes last year. Shares in some banks with big Turkey exposure like UniCredit, BBVA and ING fell. 

 

Looking ahead to this week, the focus will remain on bond yields and inflation. In the wake of the FOMC last week the market is toying with just how far rates can go and how fast. This week we have Jay Powell’s testimony on the CAREs Act with Janet Yellen, as well as speeches from Fed members Lael Brainard and Richard Clarida, both of which deal with the “Economic Outlook and Monetary Policy”. They will reiterate how the Fed plans to stay in full accommodation mode until its employment goal is achieved. 

European stocks rise after wild Friday on Wall Street, Brent jumps above $70

Morning Note
  • Senate passes $1.9tn relief bill
  • Brent above $70
  • Deliveroo losses narrow

European shares edged higher in early trade after a blowout jobs report from the US on Friday drove gains on Wall Street and stoked further volatility in bonds, whilst the US Senate passed Joe Biden’s $1.9tn stimulus package over the weekend. This massive relief bill will deliver a huge fiscal impetus in the second quarter of the year just as the US economy is buoyed by reopening, as Friday’s jobs report indicated is already taking place.

US nonfarm payrolls smashed expectations last month, coming in at 379k for February and January’s numbers were revised up to +166k from +49k. The bulk of these gains came in the leisure and hospitality sector which indicates businesses are opening the doors and consumers are coming out in force. The big beat in turn drove up the longer end of the yield curve as the 10-year yield jumped above 1.6% and 30-year climbed north of 2.3%; and saw stocks swing wildly before notching solid gains. The S&P 500 moved in a 120-pt range and finished up 2% on the day but futures are pointing to a lower open later. The Dow swung by more than 800 points and finished up over 570pts, or 1.85%, for the session.  The turnaround indicates tech stocks are still on the hook for losses as yields rise but cyclical names are finding traction to support broader gains. Tesla shares ended almost 4% lower under $600, some 30% below its all-time high. This is a market that is taking out stretched growth valuations and rewarding value and cyclical patience.

Bunds are in focus ahead of the week’s ECB meeting after rising about 25bps this month – how much does the central bank lean against the pop in yields? Chief economist Philip Lane has already stressed the importance of the yield curve to the ECB – noting that there are ‘two key yield curves in the euro area for the funding conditions of all sectors in the economy’. Whilst Executive Board member Panetta was uber dovish last week, stressing that the ECB should not hesitate to ramp up emergency asset purchases, Germany’s Schnabel has been anchoring expectations by saying the PEPP envelope is a ‘ceiling not a target’. I think the ECB will this week seek to increase the pace of PEPP purchases in an attempt to lean against rising yields, and may increase the envelope size. It should be said however that the recent decline in the euro will be a positive for Lagarde.

Brent crude rose above $70 for the first time in year after an attack on Saudi Arabia’s oil facilities on Sunday. This is the kind of geopolitical risk premium we have come to expect over the years but really prices are being driven by a tight market that has been squeezed even tighter by OPEC’s surprise decision not to increase supply next month.

Deliveroo losses narrowed last year as soaring demand created by the pandemic led to a 64% jump in total sales, the company revealed today in its listing document. Gross Transaction Value increased 64.3% from £2.5bn in 2019 to £4.1bn in 2020. Underlying gross profit grew by 89.5% from £188.7m to £357.5m. Investors will be encouraged to also see underlying gross profit as a percentage of GTV rising from 7.6% to 8.8% over this period, indicating Deliveroo is becoming more efficient at getting things from A to B. This all culminated in an adjusted EBITDA loss of £9.6m, compared to a loss of £231.6m in 2019. The company is applying for a standard listing to enable a dual class share structure that will let founder Will Shu retain control. A shakeup of listing rules combined with a valuation of around £7.5bn could mean it joins the FTSE 100 in the not-too-distant future. £50m worth of shares being earmarked for customers will likely be in high demand.

Gold continues to test the 61.8% retracement as yields and inflation expectations rise.

Gold continues to test the 61.8% retracement as yields and inflation expectations rise.

Watch the dollar as it breaks 92 and heads towards key 20-day EMA. 

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