Germany Coalition Colours

After a wild ride in the polls where the CDU, Greens and SPD each took the lead one after the other in the months leading up to the election, the Germans eventually voted for None of the Above. Every party was left disappointed:

• The CDU posted their worst ever result at 24.1%
• The SPD came too close to the CDU/CSU for comfort, just ahead at 25.7%
• The Greens had hoped to clear 20% but managed barely 15% of the vote
• The FDP had hoped to come third but added less than 1 pct pt to their last result
• The Left barely scraped the 5% threshold

The two traditional large parties, the CDU and SPD, together failed to reach even 50% of the vote, demonstrating the frustration of German voters as they look for a new home.

Breakdown of German Federal Elections by party and vote share.

This decline in the two main parties means that for the first time in post-war Germany a majority coalition will require three parties. But which three will it be?

Traffic Light or Jamaica

Beep beep! We can’t help but think of frustrated drivers when we hear Germany might end up with a traffic light coalition. So-called because it would include the parties who are denoted by the colours Red (SPD), Yellow (FDP), and Green. But in a dramatic lurch off the autobahn, just switching out one large party for the other and bringing in the CDU/CSU (Black) would apparently leave us sitting in the Caribbean sunshine, with those colours representing Jamaica’s national flag.

Forget this dizzying array of colour combinations. You only need to look at the election results to know that the government will be going left and going green.

The two parties with the most momentum and therefore the most mandate to govern are the SPD and the Greens. The latter saw their vote share jump by two thirds since the last election, they’ve regularly polled in at least second place in the last three years, and they’ve firmly put environmental issues on the map. All the Chancellor candidates of the three biggest parties responded firmly that climate change is man-made when asked by Die Zeit magazine.

For the SPD, their man Olaf Scholz commands the most public support to become leader of Germany. Even one-third of CDU/CSU voters have to admit he would be a good Chancellor, according to a post-election poll from Infratest Dimap:

Graphics showing Infratest Dimap German Chancellor preference results.

That same poll shows that 60% of CDU/CSU voters think their candidate, Armin Laschet, has performed so poorly that he should resign.

Forming a coalition isn’t just about racking up the numbers: it must have public support as well. Just remember Pedro Sanchez in Spain who became Prime Minister in June 2018 despite his party holding only 84 seats. He was able to govern for almost a year before he had to go to the polls.

The CDU simply cannot claim enough support to be a senior party in government after results like these.

Christian Lindner – Court Jester, not Kingmaker

So why is the FDP still pursuing the CDU? This all comes down to their leader, Christian Lindner, who managed to resurrect the party after their disastrous election result in 2013 where they failed even to overcome the 5% threshold for parliamentary representation. He has certainly effected an impressive turnaround, enough that he almost formed part of the coalition after the 2017 election.

But he walked out of those negotiations, using words that will soon come to haunt him: “it’s better not to govern than to govern wrongly”. In doing so he forced the CDU back into a grand coalition with the SPD and subjected Germany to almost six months without a government. It became the straw that broke the camel’s back for Merkel, as she announced her retirement just seven months after that. This leaves Lindner a dangerous and unreliable coalition partner. If the SPD and Greens were to include the FDP they run the risk of always being subject to a potential walk-out, giving Lindner uncomfortable outsized veto power. The Green Party co-leader Habeck has already cautioned that a “traffic light” coalition is not just ‘red and green with a bit of yellow speckled on it’.

It might be bearable if Lindner were on the same policy page as the other traffic lights. But ideologically, he’s too far away from the SPD and the Greens, not least because he wants to reimpose the debt brake whilst the others understand that doing so would kill the economy. The co-leader of the SPD warned the morning after the election that ‘the FDP wants dramatic tax cuts, they don’t want to take out loans but they also want to invest. That’s voodoo economics, it doesn’t work’.

The Political Compass test (you can take it yourself here) places parties on the left-right economic axis, along with their position as authoritarian versus libertarian. You can see from their analysis of the German parties just how far out there the FDP sit:

Graphic showing political alignment of German political parties.

But the FDP think they hold all the cards, and will try to play off the CDU against the SPD. In overplaying his hand, Lindner will fail to compromise and so will not form part of the government.

The Super Grand Coalition

For the SPD, doing a deal with the FDP is not a price worth paying. Scholz would prefer a weakened CDU to an awkward Lindner. And so, after all the sound and fury of backroom deals and coalition quibbles, the SPD and Greens will be left with two choices: Either become Germany’s first post-war minority government; or bring back into the tent a humiliated CDU/CSU who will obey their radical policy platform.

The latter would be more likely to last the parliamentary term, not least given it represents the votes of almost 70% of the population. But to sell it to the public, we must first go through the rigmarole of entertaining the FDP as a potential option. It’s only by airing how intransigent they are to the public that the electorate will understand why the FDP can’t be part of the government.

This is also required to sell the eventual coalition to the parties themselves. Both the CDU and SPD are struggling with internal party strife. Scholz in particular needs to put his stamp on the SPD having lost out on becoming their leader just two years ago. Laschet might find he loses out entirely and is reshuffled away in order for the CDU to retain some scrap of power.

The colours have been nailed to the mast: Germany is going left and going green.

Stocks rally into quarter end

Morning Note

It’s month and quarter end. Scores on the doors are FTSE 100 up 1.6% for the quarter, 0.5% for September, which is not bad going considering the kind of volatility we have seen. Less positive for the US indices with the S&P 500 down 3.6% in September, just holding onto its quarterly gain of 1.4%. The Nasdaq 100 is down 5% this month. The DAX is down for both the month and the quarter. Hang Seng –15% almost for the quarter after all the tumult for tech stocks and Evergrande. Three-quarters of the way into 2021 and the S&P 500 is up 16%, the FTSE 100 up 10% and the DAX up 12%. The FTSE All World Index – a measure of global stocks – is lower for September, flat for the quarter, but still up 26% over the last 12 months. Flattish performance this quarter reflects stagnating growth rates globally and a rocky month we have just seen. September lived up to its promise for volatility, October is set to bring more with inflation, central bank tightening and slowing growth combining to create a less positive backdrop for equity markets. Investors should also be keeping a close eye on Washington – whilst a default is unthinkable – the merry dance keeps bond markets guessing.

This morning European stock markets opened firmly in the green after a broadly positive session in Asia, though shares in Tokyo and Hong Kong fell. The selloff on Wall Street on Tuesday failed to gather steam, with the broad market managing a mild gain yesterday, though the Nasdaq notched a mild decline as the pressure from higher bond yields and inflation concerns persisted.

Boohoo shares tumbled 10% as the company warned that rising costs were hitting margins. Management warned on supply chain and wage costs, whilst a higher number of customer returns and ongoing business investment were also a factor in the lower margin guidance. Boohoo might be at the sharp end of rising input inflation but it’s a marker for the rest of the market. We might expect to see other companies performing a similar degree of expectation management, albeit there is always the chance some will be sandbagging.

The FTSE 100 broke clear of the recent range to notch its best since Sep 7th, clearing a high above 7,150 and taking back into the area traded in the second half of August. Weakness in sterling might be a factor in its favour.

Dollar on the rampage: Sterling continues its run lower despite UK growth being revised higher than earlier estimates. GDP rose by 5.5% in the second quarter, above the initial indication for growth of 4.8%. It means the economy is about 3.3% below where it was before the pandemic. Meanwhile, house prices chalked up a 5th straight month of double-digit rises. Cable is still in the doldrums however after two large down days, with the 1.340 round number support tested this morning. Fears that the Bank of England will be raising rates just as growth is stagnating is hurting sentiment towards the pound a touch, whilst the dollar is going gangbusters. DXY has broken above 94 with an exceptionally strong move yesterday and EURUSD has a 1.15 handle again for the first time since July last year. USD is just moving a little lower in early trade after yesterday’s rampage.

Briefly:

• China’s manufacturing sector entered contraction for the first time since the pandemic

• Oxford Nanopore Technologies shares open at 545p on debut, above the IPO price of 425p, extend gains to trade +40% higher around 588p.

• Look ahead to German inflation later in the session, plus more from Powell and a raft of Fed speakers. Chicago PMI and weekly unemployment claims also on the tape alongside the final US Q2 GDP reading.

Stocks stage a bounce after Monday selloff

Morning Note

A battling close lifted the spirits on a very tough day for equity markets on Monday. European markets are taking that bounce at the death on Wall Street – and a firmer close for Europe – and rallying this morning after a drubbing in yesterday’s session. Basic resources leading the way – what went down furthest yesterday is bouncing the most today. Shell rallied 3% in early trade, whilst IAG continued to catch bid on the reopening of the lucrative transatlantic trade. The airline group trades +6% after a double-digit rally yesterday as the US said it would let UK and EU travellers back in. Lufthansa is also up more than 4%.

Question now is whether this rally has enough puff or if there is a tendency – as I suggested last Wednesday – to sell into rallies rather than buy the dip. Not a lot of data to get in the way and a two-day Fed meeting that starts today suggest risk appetite will be moderate for the time being. Market indicators are flashing – US 10yr swap spreads at widest in 6 months, Vix spiked to its highest since May. To answer this – have market fears that led to the sell-off gone away or been fully priced? For now, I like a -10% decline rather than just 5% but so much depends on what the Fed delivers tomorrow.

The S&P 500 closed down 1.7%, its worst daily decline since May, but rallied a solid 50pts in the last 45 minutes or so of the session. That ought to offer some encouragement for bulls that there are still dips to be bought but we should caution that the uptrend is broken, and we should look for recovery of the Sep 14-16 highs around the 4,485 mark for a sign that the downswing is over. The Nasdaq fell 2.2%. Shares in Tokyo fell 2% as it caught up following a holiday – just wait until Chinese equity markets reopen on Wednesday. Hang Seng almost flat, Evergrande down a little over 1% as the panic moderated.

European stocks closed off the lows: FTSE –0.86% at 6,904, having touched an intra-day low of 6,8027. The DAX finished –2.3% at 15,117, having hit a low of 15,132. Bid started to come through just ahead of the US cash open- which though soft – was encouraging as it marked the low of the day for the futures. 4,350 is the key near-term support for the S&P 500, eyes down for the 200-day SMA at 4,100, having tested the 100-day SMA at 4,326 with a low of 4,305 yesterday.

Briefly:

• Coinbase stock fell 3.5% as the company dropped plans to launch its Lend programme, following a major spat with the SEC.
• Tesla dropped 4% as regulators took aim at the carmaker’s self-driving function. The US National Highway Traffic Safety Administration (NHTSA) has already announced an investigation into Tesla’s Autopilot over its possible involvement a number of crashes. Now the National Transportation Safety Board (NTSB) is weighing in, calling the approach Tesla is taking “misleading and irresponsible”. Jennifer Homendy, the new head of the regulator, told the WSJ that “[Tesla] has clearly misled numerous people to misuse and abuse technology.”
• Shares in Universal Music Group surged on debut in Amsterdam, rallying +35% above the reference price after its spin-off from Vivendi, which declined 17% on the dilution. Tomorrow will be a difficult second album for the biggest listing in Europe this year.
• Minutes from the Reserve Bank of Australia reiterated that there will be no rate rise until 2024 and that the Delta variant “delayed, but not derailed, the recovery”.
• Stagecoach +17%, National Express +5% on news that they are exploring a merger that would create some big synergies and an even bigger national travel operator. Immediately I think competition concerns might be a problem. Shares in the pair have been cut by the pandemic – a tie-up makes sense.
• Return of sporting events lifted Compass, with revenues +86% over 2019 levels. Shares just traded a tad light on the news.
• Kingfisher shares down 5% to the bottom of the FTSE despite strong performance and a hike to the dividend. The interim dividend is up 40% and LFL sales up 22.8% and corresponding 2-year LFL up 21.3%. Retail profits rose 45%, though free cash flow was 30% lower as result of the reversal of working capital inflow in the prior year related to inventory. But H2 is up against some very tough comparisons as Kingfisher was a big winner from lockdowns. Management expect LFL sales to be between -7% to -3% (previously -15% to -5%), with corresponding 2-year LFLs of +9% to +13%. Full year adjusted pre-tax profit is now seen in the range of c.£910 million to £950 million. Always going to be incredibly tough for KGF after the monster rally during the pandemic on some pretty amazing performance – investors will want to see more on the longer-term strategy on how to carry on the momentum.

Elsewhere, Bitcoin dropped to its weakest since the start of August having crashed through its 200-day SMA as the entire crypto space was smashed down as it was caught up the broad market sell-off. The riskier the asset, the quicker it is to be sold in times of stress, so hardly a surprise that crypto takes a beating whenever markets turn.

New highs for the dollar were made yesterday but just seeing some pause in early trade this morning. EURUSD still looking weak and bearish MACD still in play. Bit of RSI divergence to watch that might call for a flip as dollar strength looks overdone.

EURUSD Chart 21.09.2021

GBPUSD: Again some pushback from sterling bulls this morning – RSI/MACD divergence may be calling for a rebound once the descending triangle plays out.

GBPUSD Chart 21.09.2021

What is Forex trading and how can you start?

If you’re a newcomer to the world of forex trading, it might seem a bit intimidating. In this beginner’s guide, we run through the basics so you can start your FX trading journey.

Forex trading?

What is forex?

Forex, also shortened to FX, stands for foreign exchange. In practice, it’s the exchanging and trading of different currencies.

FX is the most popular trading activity in the world. Every day, $6 trillion – more than the GDP of the UK and France put together – exchanges hands.

A number of different types of traders are involved in the FX trader, including banks, companies, individual retail investors, and even governments.

There is no centralised exchange when it comes to Forex. It’s typically done over-the-counter. Essentially, anyone can get involved – but please only commit any capital if you are comfortable taking any losses.

In our case at Markets.com, we offer FX trading via contracts for difference (CFDs). With CFDs, you do not own the underlying asset. These are leveraged products. That means you gain exposure for a fraction of the total trade’s value. However, profit and loss is gauged by the total size of your position, not your deposit, and can far outweigh your initial deposit. Your risk of loss is higher.

What makes FX trading appealing?

There are lots of reasons why foreign exchange is so popular, such as:

  • Market size – roughly $6 trillion changes hands every day!
  • Variety – We offer over 60 different currency pairs to trade at Markets.com
  • Accessibility – Unlike stocks and other assets tied to exchanges, currency can be traded 24/7
  • Leverage – As mentioned above, currency pairing CFDs allow you to open a trade at a fraction of the trade’s total value

There is also a degree of flexibility with forex.

CFDs allow speculation on price movements in both directions. If you think the currency pairing is going to lose value, you will take a short position. If you think it will gain value, you’ll take a long position.

What are currency pairs?

Currency pairs are the financial instrument used in foreign exchange.

It is a quotation for two different currencies. It’s basically the amount you would pay in one currency for another.

Let’s look at an example.

The currency pair is GBP/USD at 1.15.

That means you could exchange 1 GBP for 1.15 USD.

If one of the paired currency’s value changes, then the currency pair’s value will change too.

For example, GBP/USD has started the day at 1.15. By the end of the day, it has risen to 1.16. That is because the strength of pound sterling has risen in value against the US dollar.

If the currency pair starts the day at 1.15, then drops to 1.13, for instance, that means the value of pound sterling has weakened against the US dollar.

At Markets.com, our currency trading offer is split into three categories: Majors, minors, and exotic.

Majors are some of the most popularly traded pairs on the market, coming from the largest global economies. They’re essentially the engines of global commerce and economics. Major currency pairs include:

  • GBP/USD – Pound sterling to US dollar
  • EUR/USD – Euro to US dollar
  • JPY/USD – Japanese yen to US dollar
  • USD/CHF – US dollar to Swiss franc
  • AUD/USD – Australian dollar to US dollar
  • NZD/USD – New Zealand dollar to US dollar
  • CAD/USD – Canadian dollar to US dollar

The minor pairings are still from important economies but do not include the US dollar. These are still popular trading assets. Take a look at some examples below:

  • AUD/CAD – Australian dollar to Canadian dollar
  • CAD/JPY – Canadian dollar to Japanese yen
  • EUR/GBP – Euro to pound sterling
  • USD/DKK – US dollar to Danish kroner

Exotic pairings are pairings featuring potentially more volatile currencies. In the past, such currencies may also have had unique or difficult conversion requirements. Many come from emerging economies.

  • CHF/PLN – Swiss franc to Polish zloty
  • EUR/RUB – Euro to Russian rouble
  • GBP/TYR – Pound sterling to Turkish lira
  • USD/ZAR – US dollar to South African rand

What factors affect the currency market?

Like any financial instrument, currency pairs are affected by numerous external factors. If you’re looking to enter the world of forex trading, be aware of the following:

  • Central bank policy & interest rates – It’s the job of central banks to essentially watch over all aspects of a nation’s monetary policy. That will give it oversight over many things that can affect currency prices. Interest rates are a key part of this. If a central bank increases its overnight rate, then currency traders looking to enjoy higher yields may end up buying more. This can make currency prices rise.
  • Economic releases – Big economic releases, such as monthly, quarterly, and annual GDP growth figures, manufacturing and services PMIs, employment figures, and inflation all have an influence on FX prices.
  • Politics – It goes without saying that political tussles can affect a currency pairing’s valuation. Think how the pound slid dramatically after the Brexit vote, or how the USD wobbled in the wake of the US/China trade war under the Trump administration.
  • Volatility – The above factors will have an impact on price volatility, which can then affect how traders trade. Some may prefer to trade on volatile currency pairs; others may wish to hold off until markets fall back to normal. Be aware that some currency pairings are more volatile than others.

Some currency trading tips for beginners

  • Research – Don’t commit any of your money until you’ve done your research. Study the markets. Take time to head over to our news and analysis section. You’ll find plenty of pieces on what’s moving markets and how major currency pairs are currently fairing. The old adage fail to prepare; prepare to fail runs true here. Make sure you’re informed before placing a trade.
  • Practice – A com demo account lets you practice trades with $10,000 in demo credit to play about with. That way you can get a feel for currency markets, familiarise yourself with our platform, and see how tools can help impact your trades, in a risk-free environment. You won’t be spending any money.
  • Tools – We have a suite of powerful trading tools designed to help you. From various different charts to sentiment indicators, and much more besides, these are all designed to give you a potential trading edge. Click here to learn more about our tools.
  • Know your limits – Only trade if you are comfortable taking losses. Don’t be afraid to cut your losses either if you feel you are losing too much. Do not overextend. At the same time, don’t be tempted to take all of your potential profit out the first time it appears. You can be confident – but only you will know your own limits.

Remember: trading is inherently risky. The value of your trades can down as well as going up. Bear this in mind if you decide to take the forex trading plunge.

Stocks pick up, bonds remain bid ahead of Fed minutes

Morning Note

European stocks edged higher early Wednesday after taking a sharp tumble in yesterday’s afternoon session. Bonds and the dollar rallied, leaving benchmark yields at their lowest in some months, knocking the wind out of the cyclical recovery trade. The FTSE 100 ended the day down 0.9% at 7100 but has regained some poise in the early part of today’s session to trade at 7,130. European markets remain very much stuck in month-long ranges. Shell shares rose more than 2% on a promise if higher shareholder returns.

Mega cap growth helped the US market keep a more level head as the S&P 500 declined 0.2%, easing away from a record high set last week, whilst the Nasdaq rallied by almost the same amount. The Dow Jones fell 0.6% as economically sensitive names like Caterpillar, Chevron, Home Depot and JPMorgan slipped. US 10yr yields are under 1.34% this morning, a five-month low. Similar story for gilts, with the yield on 10yr paper at 0.627%, the lowest since Feb.

Yesterday’s pullback and the sharp drop in bond yields reflected doubts about the pace of growth, and the extent to which costs are going up for businesses. The talk is that peak growth is behind us and The ISM services PMI reflected the trouble for growth is not on the demand side; quite the reverse. Businesses anecdotally reported ‘supply chain outages, logistics delays and employee- and management-staffing constraints’ and that ‘business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous. We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market’. I fail to see how this implies inflation will be transitory.

A run-up in the S&P 500 of 5% in the last two weeks looks to be unsustainable and at the very least I’d anticipate we see a pause and trading sideways, if not a deeper correction over the summer. For now, though, Tuesday’s dip is not a sign of reversal. The market is narrowing, too. The S&P 500 would have had a much sharper drop (~1%) had it not been for the 14 index points added by Apple and Amazon. Shares in Amazon rallied almost 5% as the US Defense department cancelled its $10bn JEDI contract with Microsoft, with the Pentagon saying it will seek a new multi-vendor contract. It will seek proposals from both Microsoft and Amazon.

The narrative and the ‘macro picture’ seem a little less understood – has growth peaked, will inflation wipe out economic gains, has the Fed really got inflation angst? We get to find out a lot more about that with today’s release of the minutes from the last FOMC meeting. Earnings season is coming up but it’s well known we are going to see some monster numbers and it is less obvious how Q2 reporting will drive the market higher – if anything it could lead to a round of profit taking and recalibration. Expectations are already so high. But we can’t ignore the bond market and equity market concentration in growth stocks – if bonds find more bid and the 10yr pushes yet lower to 1%, then the stock market can keep gliding higher.

The dollar is holding higher against peers ahead of the minutes from the June meeting. The meeting revealed a couple of things we had pretty well expected: a) Fed officials are talking about tapering, b) dots are coming in due to the rapid economic rebound and, less well anticipated, c) the Fed is a little bit concerned about letting inflation off the leash. The minutes should provide some further clarity/explanation about the Fed’s likely position but ultimately we don’t see any change until Jackson Hole in late August or the September meeting. The trouble for the market is dealing with the Fed’s reaction function in terms of yields: a hawkish Fed and quicker taper/hike ought to drive yields higher, but the reaction to the June meeting saw the reverse as the statement and projections implied the Fed wouldn’t let inflation get out of control. So now we know this, we are likely to see a more considered market reaction that, all else equal, should see rates move higher this year as the Fed lays down the tapering agenda and inflation remains more persistent than central banks think.

EURUSD made a fresh 3-month low in a further extension from the bear flag downside breakout.

EURUSD price action on July 7th 2021.

GBPUSD: firm rejection of 1.39 yesterday and continues to stick to the downtrend. For now, continues to scrap around the 1.38 area, felling just below this morning and eyeing a break to 1.3660 area, the 200-day SMA and Mar/Apr double bottom.

GBPUSD price action on July 7th 2021.

Crude oil futures catching a little bid in early trade this morning after yesterday’s reversal. Concerns remain that the failure by OPEC to agree to gently increase production could lead to the output agreement unravelling, which could lead to more crude coming on the market. But there is a lot of uncertainty – if OPEC+ stick to the current quotas global inventories will draw down further and the market will further tighten, squeezing prices higher.

Chart showing crude oil price action.

Gold is getting a filip from lower yields, though the stronger greenback is checking its advance. 10yr TIPS have slipped to –0.94%, the lowest since the middle of February as nominal rates fell. Price action remains above $1,800 with the bullish crossover on the MACD confirmed.

Gold chart showing price action 07.07.2021

Stocks firm, oil runs into technical problems

Morning Note

European stocks moved higher in early trade Tuesday after a sizeable down day in the previous session and a rather limp handover from Asia. The FTSE 100 recaptured 7,100, rising 0.5%, after slipping below this level yesterday, having closed down 0.9%. European indices continue to trip along recent ranges having set post-pandemic highs earlier this month as the market looks for more direction re inflation and bond yields. Everyone seems happy to buy the line that inflation will be transitory: the super-hot peaks we are getting right now will be, we knew that as base effects and pent-up demand played out; the question is what sort of new inflation regime persists beyond this summer. Once the inflation genie is out the bottle it is hard to put back in easily.

 

US markets are grinding higher along the path of least resistance but on lower vols and declining breadth. As bond yields remain in check and inflation expectations cool, big tech and other bond proxies are providing the heavy lifting for the indices. The S&P 500 inched to a new all-time high with just healthcare and utilities up and twice as many advancers as decliners. Energy was smoked, registering a decline of 3%, with Valero, Halliburton, Phillips 66, Occidental and Marathon all down 5%. Cruise operator stocks sank 6-7% as Carnival announced an additional stock sale of $500m, whilst Disney delayed a planned test voyage. Growth is beating value right now as the reflation trade unwinds: the Nasdaq rallied 1%, whilst the Dow fell 151pts as the likes of Chevron and Boeing pulled back. US 10yr yields are back under 1.5%, and this morning US stock futures are flat. After a pause, AMC rallied more than 7%. SoFi (Nasdaq: SOFI) is the most talked about stocks on Wallstreetbets, with WKHS, WISH, CLOV, BB, SPCE and GME also still garnering some of the most mentions. 

 

Among the big tech leaders making gains was Facebook, which rallied 4% to take its market capitalisation above $1tn for the first time as it saw off a monopoly legal threat. A judge rejected two antitrust lawsuits brought by the Federal Trade Commission and a coalition of 46 states. The news removed a significant headwind for the stock, though the FTC has a month to refile its complaint. It seems that the judge’s rejection of the case was based on the lack of evidence, or the way it was presented, which could be remedied with a new lawsuit.  

 

Elsewhere, in FX the dollar is mildly bid with GBPUSD testing the Jun 22th low around 1.3860 and EURUSD creeping back to 1.1910. Chart pattern looks a bit bearish and flaggy.

 

EURUSD price action chart.

Crude oil turned lower through the day after touching its best levels in almost three years. So far this market has been a buy-the-dip affair, and market fundamentals seem solid as supply remains tight, but we just need to be mindful from a technical perspective. Yesterday’s outside day bearish engulfing candle is one red flag, the bearish MACD crossover on the daily chart is another. Not necessarily the top but would call for a potential near-term pullback such as a ~10% correction as seen in Mar/Apr this year. Anyway, market fundamentals remain firm and OPEC+ has scope to increase in August – it would be about 1.5m bpd short of demand without any additional output from OPEC or Iranian oil coming back online.

Oil price movement chart.

Bitcoin – still holding under the 200-day SMA but the selling may be done now as bears tire and weak hands are out; there is a potential rip higher incoming.

Bitcoin price action chart.

Biden tax plan weighs on stocks, Bitcoin tumbles

Morning Note

European equity indices opened a tad lower on Friday morning after stocks fell on Wall Street on reports Joe Biden is planning to slap much higher capital gains taxes on the wealthy. This was always part of the equation when we looked at the implications of a Biden presidency, but markets have been pepped up on a mix of fiscal stimulus, the Fed’s extraordinarily accommodative stance, a strong cyclical impulse from the vaccine-led reopening and a bounce back in earnings. The major averages fell in lockstep, dropping by almost 1% , though the Russell 2000 ended the session flat as the selling was led chiefly by the longer-term growth names like Tesla and Amazon. The Dow Jones finished the day at 33,815, a decline of more than 300 pts. The S&P 500 closed down 0.92% at 4,134 and the Nasdaq Composite notched a similar decline to finish at 13,818. The FTSE 100 opened lower and is heading for a decline of more than 1% for the week. As of send time the CAC 40 had inched into the green. I would not describe risk as being offered as such; it’s been a pretty choppy week and I would be equally unsurprised if stocks turned around this afternoon and ended the week higher as I would if Wall Street led a sharp decline into the weekend.

The Biden administration is looking to raise the top marginal income tax rate to 39.6% from 37%, whilst also doubling capital gains tax to 39.6% for people earning more than $1 million. Tax the rich, hand it out to the poor. Sounds like furlough, but on a permanent basis. The big problem (one of many) in all this is the Senate – it would require support of all the Democrats in the upper chamber and this is far from assured. Stocks would probably be a lot lower if investors were really worried, and I think markets can overcome this move, even if it manages to pass through the Senate, which I don’t think it will. Nevertheless, coming off record highs and a good run up through the start of the year, the macro picture not really changing, rising Covid cases globally, strong earnings and other supportive factors largely priced in and the extent to which investors are ‘all in’ equities, we could be set for a downwards move in equities over the coming weeks. Beware seasonal factors (I dare not say ‘sell in May’…)

The economic picture continues to improve in the US. Initial claims for unemployment insurance fell to 547,000 last week, down from 576,000 the prior week and below the roughly 600,000 estimated. The number of continuing claims also fell.

Likewise, UK retail sales numbers were very positive in March as consumers opened their wallets ahead of the reopening of non-essential shops. Sales rose by 5.4% from February, well ahead of the 1.5% expected. Clothes, gardening goodies and specialist food items from bakers and butchers were in vogue.

Even Europe is showing immense resilience in the face of lockdowns – France’s Services PMI came in at 50.4 against 46.7 forecast, whilst the manufacturing survey surged to 59.12. The composite PMI rose to 51.7 from 50 previously, with the outperformance in services meaning it easily beat the 49.4 expected. Germany’s composite PMI came in at 56, still in expansion territory, but short of the 57 expected and down from the 57.3 in March.

The dollar is offered in early trade, with EURUSD jumping to 1.2050, Yesterday’s ECB presser high of 1.2070 is the main target for bulls. GBPUSD also tried to sustain a rally to 1.39 but hit resistance at 1.3890 and reversed a touch.

The euro remains steady following yesterday’s ECB meeting, which left markets on an even keel as the central bank managed to maintain its dovish stance and fend off chatter about wrapping up its emergency bond buying programme. Christine Lagarde played down any taper talk, saying this was ‘premature’ and that the recovery still has a long way to go. The yield on 10-year German bunds moved lower.

Bitcoin prices have tumbled. Spot trades under $48k this morning, meaning it’s down 25% from last week’s all-time high. The low tested several times in Feb at $44k is the big support. Basically, it seems to have been bid up on a lot of speculation (even more than usual) ahead of the Coinbase IPO and all this froth has evaporated like a lot of hot air. There has also been a cluster of regulatory reports and rumours that point to a clampdown and tighter regulation. JPMorgan analysts led by the closely-followed Nikalous Panigirtzoglou say the rollover in prices has been led by a steep liquidation in speculative futures positions. “Momentum signals will naturally decay from here for several months, given their still elevated level,” he says.

Shares in Coinbase are in for a hit should cryptos go further south. Also, Cathie Wood’s ARK Innovation ETF is still loading up on COIN – watch this one ,too. The Coinbase listing – the ultimate poacher-turned-gamekeeper moment – might have been the high watermark for Bitcoin.

I refer to two points we highlighted when Coinbase registered to go public:

1. Earnings are inextricably tied to crypto prices. This may be obvious, but it is interesting to see in black and white. “Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected.”

2. More than anything it’s highly dependent on Bitcoin. A majority of Coinbase’s net revenue is from transactions in just two crypto assets: Bitcoin and Ethereum. For the year ended December 31, 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of assets on the platform respectively. “If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected” says the filing.

Caveat emptor and all that.

ECB preview: Keep it simple

The European Central Bank (ECB) convenes today for its latest policy meeting. After last month’s word puke from Lagarde (“Financing conditions are defined by a holistic and multifaceted set of indicators, spanning the entire transmission chain of monetary policy from risk-free interest rates and sovereign yields to corporate bond yields and bank credit conditions.”), we have spent several weeks trying to accurately assess where the ECB is really at in terms of responding to the changing economic outlook with regards the recovery from the pandemic, rising bond yields and higher inflation expectations. There is greater clarity now – it looks like the ECB is happy to let inflation run higher and only let bond yields move up if due to better growth: it’s now all about real yields. At the last meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point. The question about tapering PEPP should wait until June, and ending the programme may need to be discussed in September, but for now the ECB should be looking to keep it simple.

This ought to be a quiet one for the ECB, but the propensity for miscommunication is strong. Since the March 11th meeting, the selloff in sovereign debt and rally in yields cooled, before picking up some steam again. While German 10-year bunds are north of where they were at the time of the March meeting and close to the February highs, real rates remain at historic lows. This is what matters to the ECB more than nominal rates. Moreover, the economic data has not materially changed since the last meeting and there signs the largest economies are adapting to lockdown restrictions better than before and are more resilient. The latest Zew survey about the German economy shows investor sentiment at its highest in over a year. The head of the French central bank recently noted that economic activity is declining less than feared in April. Vaccinations, slow to start, are picking up pace and the EU should be on course to catch up the UK and US before too long.

So we look rather to the risk that a hawkishness creeps in. The ECB will need to be careful about getting itself tied in knots about when and how it will exit PEPP just yet, and whether a PEPP taper coincides with raising traditional asset purchases, and just what the reaction function is given it’s spent several weeks trying to clarify this since the last meeting. Now is not the time for such debates, however markets will look towards hawks becoming louder as inflation starts to pick up. Hawks are going to get more vocal if inflation starts runs higher over the next few months – the mandate is clear on this one. Lagarde will need to not sound overly confident about the recovery (why should she anyway?), or else risk letting markets latch on a timeframe for winding down PEPP.

And we should note that chatter about when is the right time to exit emergency mode is coming just as the ECB is looking at a potential change to the inflation mandate. Not content with a more symmetric target a la the Fed, it also wants to introduce inequality and climate change mandates…This only makes guessing the future path of monetary policy and the ECB’s reaction function even more muddy, which in turn may lead to some form of spike in yields and widening of spreads, which exactly what the ECB is seeking to avoid. Another reason to keep it simple tomorrow.

Tighter financial conditions ahead?

The ECB will also have to wrestle with the expectation of tightening financial conditions in the Euro area later this year. Banks and Eurozone banks expect to tighten access to credit in the second quarter, having already tightened in the first quarter. “This reflects banks’ uncertainty regarding the severity of the economic impact of the third wave of the pandemic and the progress in the vaccination campaign,” the ECB said, adding that loan demand is also faltering as companies postpone investments.

The ECB’s job is to make sure it doesn’t get dragged into a conversation about tapering PEPP and keep the markets happy until June when it will have much more data at its disposal and news on vaccinations will hopefully be much better. For this meeting, keep it simple is the order of the day.

EURUSD: Rejection of the 100-day SMA sets up today’s retest of the 1.20 round number support. Ultimately the ECB may not be the main driver of the pair right now and more exposed to broader risk sentiment and Treasury yields impacting the USD momentum.

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.

Stocks wobble again, oil up, Musk tweet lifts Bitcoin

Morning Note

Stocks are looking a bit wobbly again this morning, whilst the US dollar is bid and the euro trades at a four-month low. European bourses are broadly lower as indices continue to retreat in the face of rising cases, a recovery that could be already priced in, doubts about the sustainability of monetary and fiscal support etc, etc. If you look at this we are just seeing a bit of a pullback from the recent highs (record highs for the DAX, US, Global), whilst the FTSE 100 is simply around the middle of its 4-month range. One year into the bull market – the S&P 500 had its best 12 months since the 1930s – US markets were lower yesterday as Treasury Secretary Janet Yellen said Biden’s $3tn economic would need to be paid for by tax rises. RobinHood has confidentially filed documents with the SEC in preparation to list, whilst GameStop shares fell after-hours following the company’s first earnings since the January frenzy.

Just as Britain’s excess death level falls below the 5-year average for the first time in months, the EU is set to announce fresh rules to allow it to control vaccine exports. Officials are playing down the importance of it, saying it’s nought but a scrap of paper to let governments take action if required, but it smacks of protectionism and is not going to down well in Britain. Meanwhile, after questions were raised by the US National Institute of Allergy and Infectious Diseases (NIAID), AstraZeneca said it will reissue vaccine data within 48 hours, saying that the numbers released Monday were based on a “pre-specified interim analysis” with a cut-off date in mid-February. The all-seeing Dr Fauci said the press release from AstraZeneca could be misleading. Another blow to confidence, another PR nightmare for Astra, which has been dogged by doubters ever since it released its preliminary results for the vaccine last year. It’s a lesson in how, no matter how good you are, you need to be good at communicating this to people or they just won’t believe it.

Suez crisis: Oil prices moved higher today after a massive container ship blocked the Suez Canal in both direction, which followed the sharp demand-driven fall on Tuesday amid doubts about the demand-led recovery from Europe this summer and another build in oil inventories. The API said crude oil stockpiles rose 2.9m barrels last week – EIA figures on tap later are expected to show a build of 1.4m barrels.

Bitcoin jumped above $56,300 from under $54,000 earlier this morning as Elon Musk shilled, I mean tweeted, about it again. It’s not a clear break and not that big a deal given how much Bitcoin moves around at these levels but there was a discernible sustained rally after Musk tweeted:

You can now buy a Tesla with Bitcoin.

Tesla is using only internal & open source software & operates Bitcoin nodes directly. Bitcoin paid to Tesla will be retained as Bitcoin, not converted to fiat currency.

Bitcoin rises after Elon Musk tweet.

European flash manufacturing and services PMIs show bullishness despite rising infection rates. I think this is interesting since although new restrictions in some of the major economies, businesses remain upbeat. The survey data was collected between March 12th and 23rd, so it is very much up to date. Whilst compilers IHS Markit note that the outlook as deteriorated amid rising infection rates, business activity is strong, particularly in manufacturing. (read DAX outperformance in the cyclical recovery). The flash Eurozone composite PMI rose to an 8-month high at 52.5, with a clear two-speed recovery evident with Services still in contraction territory at 48.8, albeit this was a 7-month high, whilst manufacturing hit a record high at 62.4.

Inflation, inflation, where art thou, inflation? Inflation in the UK fell last month as cars, clothes and games dragged the consumer prices index (CPI) lower. CPI rose by 0.4% in the 12 months to February 2021, down from 0.7% to January 2020. As with the recent US data, this is going to be the last easy print ahead of the spring as base effects and –fingers crossed – cyclical recovery boost inflation readings. The pandemic has skewed a lot of the usual seasonal data so we need to be careful about reading too much into any one print.

Everyone’s favourite stock, GameStop shares fell over 12% in after-hours trade as fourth quarter earnings missed on the top and bottom line. EPS came in at $1.34 on $2.12bn in revenues, both a little light. But e-commerce sales rose 175% – woohoo the next Amazon of gaming is here. Well not quite. There was not a whole lot of detail about the strategy, though it does seem they will raise capital by selling shares. This may have hit the stock after-market as it initially rose on the earnings release. Meanwhile many investors were left disappointed by a lack of a Q&A session. GameStop has been pretty tight-lipped through all of this frenzy, but you would have thought that this earnings call would have afforded management the opportunity to speak to investors openly. YTD gains remain solid at +864%.

On the tape today there are several Fed speakers, including Williams, Daly and Evans, as well as Jay Powell and Janet Yellen’s second day of testimony in Congress on the CARES Act. ECB chief Christine Lagarde is also due to speak. On the data front watch for the US flash manufacturing and services PMIs and durable goods orders.

Fedspeak

Powell and Yellen did their double act yesterday, delivering testimony to lawmakers about the economic response to the pandemic. It wasn’t quite Kris and Rita, but the way Treasury and Fed are in harmony is new. Full MMT? Not quite. Biden’ $3tn stimulus plans on top of the $1.9tn just launched – and all the stimulus last year – suggests the government just doesn’t care a heck of a lot about deficits. Except Yellen stressed that the $3tn economic plan would require tax hikes. Investors sat up, the Dow sold off in the afternoon after trading flat in the morning. What is unclear is the degree to which this could be debt-funded, and to what extent increasing taxes could amount to fiscal tightening (the idea is that it won’t as it will be targeted at those who exert the lowest marginal impact on spending, in other words, the rich). Powell said that the economic recovery from the pandemic had “progressed more quickly than generally expected and looks to be strengthening.” Yellen thinks the economy will be back to full employment next year.

Fed governor Lael Brainard said the central bank will show “resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance” rather than taking “pre-emptive” action.

Dallas Fed president Robert Kaplan said he expects rates to back up further, but this would be a healthy signal and he would not want to get in the way. Kaplan also came out of the closet to say he was one of those on the FOMC calling for a rate hike in 2022 – hardly a surprise given he is one of the most hawkish members. Also worth noting he is not a voting member this year or next, so his hawkishness won’t have any real effect on Fed policy over the next 22 months. The Dallas Fed president also said: “the first step for withdrawing accommodation would be to reduce the Fed’s asset purchases,” which matches our expectations that the Fed will seek to taper its $120bn bond buying programme before it looks to think about thinking about raising rates. If the current market positioning is right, this would indicate that the Fed may need to start the tapering wheels in motion as early as its June meeting. Kaplan reiterated the Fed’s central stance that inflation will rise this year but not be sustained, and that it’s good to do a lot now rather than waiting. And he suggested than anything to distort the yield curve any more than the Fed is already doing by its massive bond buying programme would be less helpful – ie no Twist.

FX

No one can escape dollar strength right now. The Dollar index has popped above the recent swing high to its highest since November with the 200-day SMA firmly within the bulls’ sights at 92.6720, which should offer resistance near term at least.

The euro trades this morning at its weakest in 4 months after breaking down at the 200-day SMA at 1.1850.

The euro trades this morning at its weakest in 4 months.

GBPUSD has cracked key trend support and now bears will eye a squeeze back to the 100-day moving average a little above 1.36.

GBPUSD has cracked key trend support.

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