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. 

Stick or twist? Markets pin hopes on Fed chair Powell

Morning Note

Jay Powell, chairman of the Federal Reserve, speaks today at the WSJ’s Jobs Summit. We know the Fed’s policy on jobs already; what the market cares about is the central bank’s response to volatility in the bond market. This will be the last time we hear from Powell before the blackout period for Fed speakers ahead of the March 16-17th meeting.  


One option is for the Fed to embark on a third edition of Operation Twist, a policy that was last attempted in the wake of the last crisis. Twist simply refers to selling shorter dated government debt whilst simultaneously buying the same amount of longer-dated maturities. It attempts to control the yield curve by flattening it out – or ‘twisting’ it. It has the advantage of allowing the Fed to get a grip on both ends of the curve whilst not expanding its balance sheet. With the Fed committing to keeping short-term rates at zero for at least another couple of years, the effect on short-term rates should be small. Yesterday Philadelphia Federal Reserve president Patrick Harker stressed that rates won’t be rising in 2022, and that yield curve control is a tool in the Fed’s armoury. Lael Brainard hinted two days ago that the Fed is starting to pay attention to bond market volatility.


For the Fed it’s time to stick or twist. We know the RBA has started to blink, and ECB policymakers have been talking up how they won’t tolerate higher yields, albeit the messages have been a little mixed of late. The Fed has carried out Twist twice before – once in 1961 to strengthen the dollar, and again in 2011 during the sovereign debt crisis in Europe when rates were already at zero. The question is whether the Fed worries about the market stresses we are seeing, or whether it thinks the rise in yields is more about good economic news. The problem it has and has had for many years is that we are in world hooked on ultra-low rates so any move up reveals skeletons. 


Tech stocks are leading broader markets lower as a sell-off in government bonds picked up again. The yield on the 10-year US Treasury note rose to nearly 1.5% again and seems destined to nudge its way higher. US 5-year break even inflation expectations have risen to 250 bps, the highest since mid-2008. Yesterday the Nasdaq 100 cracked its 50-day moving average to close at 12,683, its weakest since the start of January. It’s now down for 2021 and is about 10% off its recent all-time high. The S&P 500 closed on a key trendline support at its 50-day SMA. It looks like it could be the moment for a crack – Powell could be make or break today. Tesla shares are down over 25% from their peaks. Cathie Wood’s main fund, the ARKK ETF, has shed 20% from its February high as the likes of Square, Zillow and Pinterest all tumbled in the region of 8%. Rocket Companies, which had become the next meme stock darling, fell out of orbit and crashed over 32% to $28.


After a decent day on Wednesday, European bourses took the cue from the decline on Wall Street that preceded a soft session in Asia as shares in Tokyo and Hong Kong both fell over 2%.  The FTSE 100 declined around three-quarters of a percent in the first hour of trade


Deliveroo has confirmed it will list in London and retain a dual class share structure. The timing is noteworthy since it comes a day after the Hill review. Deliveroo won’t be eligible for a premium listing – and the inclusion on FTSE indices that goes with it – but it soon will be.  


The review, which the chancellor endorsed in the Budget, calls for companies with dual class share structures to be able list in the premium listing segment, with some caveats to help protect investors, e.g. the dual class structure would be permitted for a maximum of 5 years and voting rights would be capped at a ratio of 20:1. It will also see the free float requirement lowered to 15% of available shares from the current 25%, and it will create a much easier regime for SPACs – blank cheque companies that are created with the aim of acquiring another business. Now the SPAC craze in the US may not be something we really want to emulate.  As Hill states, “listing on the premium listing segment of the FCA’s Official List has historically been globally recognised as a mark of quality for companies”, which begs the question of the merits of ‘watering down’ ‘the rules.


But the principle of evolving the listings rules for today’s markets, today’s technology, today’s investors, and the reality of Brexit, do make sense. For example, Hill notes that “it would be helpful if the FCA was also charged with the duty of taking expressly into account the UK’s overall attractiveness as a place to do business”, as happens in other countries. It also makes recommendations to consider how technology can be used to improve retail investor involvement in corporate actions. These would clearly be positives.


Tech firms may be attracted to London as a result of the changes. Between 2015 and 2020, London accounted for only 5% of IPOs globally, in large down to the appeal of Asia and New York for tech firms. But equally it’s about the depth of the market and multiples – are we really able to raise the kind of investment into tech start-ups from London that US bankers can achieve for Silicon Valley?  


Elsewhere, OPEC failed to reach agreement yesterday and reconvene today. Chatter of OPEC and allies rolling over cuts has helped support prices after touching the weakest since mid Feb. Crude oil inventories rose by over 21m barrels, the most in nearly 40 years as the weather in southern US has shut in refineries. The build came amid a 13.6m draw in gasoline stocks, which was the largest since 1990. and a 9.7m draw in distillate stocks. 


Finally, some good news: JD Wetherspoon will open 394 pubs on April 12th for outside service in gardens and terraces. Opening hours are 9am-9pm. I expect demand will be high. Shares nudged higher after a solid gain following yesterday’s Budget announcement, which provided more business relief and support for hospitality.


Deliveroo IPO: what you need to know


Deliveroo is reportedly planning to launch its long-awaited IPO process as early as March 8th. This is date that Sky News reported as being the likely launch of the prospectus to formally kick off the process.

Amazon-backed Deliveroo is sure to get a lot of attention from both institutional and retail investors with its high profile name and solid growth prospects ensuring this is going to be one of the most eagerly-anticipated London IPOs of 2021. It should also mark another strong tech listing for the London market, which seems set for a blockbuster year of listings as the economy emerges from the pandemic.

Deliveroo was last valued at around $7bn after completing a $180m fundraise last month. That’s up almost double from the previous fundraise. The company reported a loss of £317.7m in 2019, up a third from 2018, on revenues that rose 62% to £771.8m. Detailed financials for 2020 should be forthcoming when the IPO process kicks off officially.

As restaurants have been forced to close their doors, Deliveroo has emerged as one of the winners from the pandemic. It has also struck a number of deals with supermarkets to branch out into groceries, widening its footprint and reaching new demographics. Lord Wolfson, the Next boss, has recently joined the board, which can only be a positive. It might also point to Deliveroo seeing its partnerships with Waitrose, M&S, WM Morrison etc as something more than just for the lockdown era.

Whilst the backdrop is structurally positive for delivery apps, competition is fierce. recently announced plans for much more investment in London and its own courier network as it seeks to take on Deliveroo and other rivals. Valuations will look stretched, but for good reason: we know investors continue to pay a premium for growth and Deliveroo can deliver this along with your lunch. As the recent stock market debuts of The Hut Group and Moonpig prove, the UK market is hungry for new offerings, for growth and for tech – Deliveroo ticks all three boxes.

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