Stocks look to end week on a high as travel stocks catch tailwind

Morning Note

European markets on a firmer footing on Friday – FTSE 100 made a bold move at the open to recapture the week’s intraday high at 7,093 struck on Monday before pulling back, still trades up roughly half of one percent in early trade. This comes after a lacklustre session on Wall Street – Nasdaq up a touch, S&P 500 down a touch after the textbook bounce off the 50-day SMA on Thursday. Cyclicals were higher along with real estate, while basic materials and energy declined as oil pulled back from its highs and precious and some other metals took a hit. Stock markets on either side of the pond now just in the green for the week, Nasdaq just a tad lagging at the moment. Better session for the Hang Seng but still down 5% for the week.

 

Airlines and associated travel stocks are among the top performers this morning on hopes for the relaxation of international travel rules. Ministers are looking to scrap the need for the double-jabbed returning to the UK to take PCR tests, whilst the traffic light system would be scrapped. This would remove a huge blockage for the industry, though what hoops you need to go through once you get to your destination is another matter… ‘your papers please’…’I just wanted a sandwich!’. Anyway, shares in the likes of TUI and IAG rose around 4%. SSP – which does the sandwiches – up 3%. WH Smith +2%.  Informa – which does conferences – also benefitted as it ought to make business travel less of a headache for those HR teams. Not all travel shares were up – EasyJet fell another 1%. HSBC rallied on two upgrades. IHG also got a boost as Berenberg upgraded to buy. Wickes rose 5% after Deutsche Bank raised the stock to buy. 

 

UK retail sales missed expectations in August, but people are spending more on doing things than they are stuff. We had 18 months locked up to order patio sets and games consoles. Now is the time to get out and go the pubs, restaurants or whatever it is you like to do. 

 

After bemoaning the lack of FX volatility earlier this week, yesterday saw it reappear. The main story was a stronger dollar, which rose to its highest in three weeks after some surprisingly good US data. US retail sales rose +0.7% vs –0.8% decline expected, which signalled resilience among consumers as delta fears start to ebb and perhaps indicates spending will start to improve as US households unwind savings again after a period of caution. JPMorgan’s latest spending data report showed consumer spending well above July/August levels. More good news for the US economy emerged as the Philly Fed manufacturing index jumped as price pressures eased. 

 

And now an FT report claiming the European Central Bank is far closer to raising rates than official communiques indicate has the market guessing. The report cites an internal memo saying the ECB is on track to hike rates in about two years’ time, a year earlier than forecast. EURUSD has caught some bid after hitting its weakest since late August but this could just as well be about a paring of dollar gains after an outsize move yesterday. I would not be surprised if the ECB were to keep schtum over a possible earlier rate hike, as it won’t want the euro to rally, however such a hawkishness would go against everything we have come to learn about the ECB over the last decade. It maybe reflects internal concerns that inflation will be stickier than central banks admit right now and that they will be forced into adopting a less accommodative stance presently. On that note, markets are keen to see what the Bank of England does next week to get a grip on inflation.

 

EURUSD: potential inverted head and shoulders but near-term momentum with bears – note bearish MACD crossover. Current price action is tracking a well-worn channel. If a test of 1.6660 fails then we look to recover 1.19. If this gets taken out first and confirmed, looking for 1.22.

Gold was hammered yesterday as the dollar rose and Treasury yields spiked on the better US data. Whilst neither of the data sets should materially alter the Fed’s decision next week, they do nudge things in favour of the USD and spikier yields. The MACD indicator again provided us with a good signal last week for a short. Could be a shakeout of the weaker hands before resumption of attack on $1,830.

Stocks pick up some bid after textbook S&P 500 bounce

Morning Note

European stock markets were modestly higher on Thursday after a rebound in the US and another dip for Asian equities overnight. Hong Kong down 1.7% as casino stocks fell again, and is now testing the lows struck in July and August, down about 20% from its Feb peak. Indebted real estate group Evergrande fell another 7%. Gold struggled to hold the $1,800 level as Treasury yields climbed a touch. The dollar is a bit stronger after yesterday’s decline. 

 

FTSE 100 in the middle of the range after the decline of last week. Industrials and healthcare to the top, basic materials the only sector in the red. Ashtead is the top gainer, up 3%, after reporting Q1 revenues of £1.85bn and said it sees the full-year performance ahead of previous guidance. The company now expects growth of 13-16%, ahead of the 6-9% prior guidance. Rolls Royce also rallied 3% after the UK struck a security deal with Australia and the US to help supply the former with nuclear submarines. BAE Systems, another mentioned in the press statement from the government, also rose.

 

Buy the dip: The S&P 500 rallied 0.85% as it found support once more at the 50-day simple moving average, taking it back to where it was a month before – still down almost 1% MTD. The bounce off the 50-day line was pure textbook. Mega cap growth delivered, but cyclicals also got a boost as breadth was solid. Microsoft did some serious heavy lifting after announcing a mega buyback programme. The company will launch a share buyback programme of up to $60bn and raise its quarterly dividend by 11%. A mild gain for MSFT added almost 5pts to the S&P 500, even more to the NDX. Energy led the sectors with a gain of almost 4% as oil prices continued their ascent. Natural gas made another 8-year high. 

 

We’ve digested a couple of inflation readings this week and it’s clear it’s stickier than central bank Panglosses told us. It comes to down to there being too much money – aka liquidity – and not enough stuff to match. People can moan about the supply chain problems and labour shortages, and claim ‘there’s nothing the Fed can do about bottlenecks at ports, or ‘what can central banks do about chip shortages?’, but this is all about the inflationary environment unleashed by governments and central banks through their printing vast sums of cash during the pandemic and failing to suck it all back in afterwards. Instead, they run it hot in the vain quest for jobs when there are plenty of jobs out there, and let inflation get higher to eat into any wage growth and make people poorer. Meanwhile the asset rich get richer. 

 

I talked about this in May, referring to comments made a year before: “Ultimately it goes back to the question asked by the great Paul Tudor Jones about a year ago: can the Fed suck all this money back out of the system as quickly as it injected it. The answer then was almost certainly no, and post the recent policy shift and vast pro-cyclical stimulus it is clearly absolutely no. So we have inflation worries and, as described on multiple occasions last year, the worry is that the Fed allows inflation expectations to become unanchored as per the 1970s.” 

 

Briefly: 

 

Ray Dalio on Bitcoin – if it gets really successful, they’ll kill it and they have ways to kill it. Neatly sums up my long-standing position. Price higher today, but the rally off the Monday dip is losing momentum as it runs into near-term resistance around $48,500.

 

Bank of Japan boss Kuroda – If necessary, BOJ will further relax monetary policy such as by reducing interest rates. The comments ahead of the government’s first cut to its economic outlook in 4 months. USDJPY steady around 109.30 after touching its weakest since Aug 17th yesterday.

 

Cathie Wood reducing Tesla exposure: A $3,000 price target on the stock, but Ark Investment Management has sold more than a million shares in Tesla in the last 5 months, according to a Bloomberg report. 

 

WTI is holding onto gains after briefly rising above $73 after the EIA reported US inventories fell by 6.4m barrels last week, though the impact of Hurricane Ida is to blame.  

UK inflation surges, stocks struggle

Morning Note

European markets flat at the open this morning as UK inflation surged to a record high in August and Chinese economic data was soft. China’s retail sales fell to +2.5% in August, down from +8.5% in July, whilst industrial output grew by 5.3%, the weakest in more than a year. Asian stocks were weaker again following another soft session on Wall Street. Macau casino stocks the latest to plummet on a Beijing crackdown – Wynn Macau –27%, Sands China –31%, leaving the Hang Seng down 2%. Evergrande shares fell another 5%. Apple unveiled new products, more spending on content. Shares fell 1%, taking losses over the last 5 days to more than 5%. Stock these days has a look of a safe utility and it always does badly on the September product day.

 

FTSE 100 this morning is flat around 7,030, with energy and financials leading the way higher, tech and healthcare at the bottom. Restaurant Group shares weaker despite some good momentum since indoor dining reopened allowing it to raise earnings guidance. Darktrace shares +8% as it raised revenue guidance, now seeing growth of 35-37%, vs the prior guidance of 29-32%. Fevertree shares up 2% as direct-to-consumer sales doing well and US growth good.

 

Stagflation?

UK CPI inflation jumped to 3.2% in August, the highest since 2012, and rising from 2% in July reflecting a huge month-on-month jump in prices. Not a heap of reaction in the market – sterling still in the recent range after breaking briefly out of it yesterday. Question is one for the Bank of England – it already expects inflation to rise to 4% this year, so it’s unclear whether this will force the MPC into taking a more hawkish stance. It’s hard to say right now – a lot of the pressure could be due to base effects, but equally the core month-on-month increase stood at 0.7%, which shows inflationary pressures are not easing and can’t just be attributed to what happened last year. There is no doubt that with rising energy prices, VAT for hospitality returning to 12.5% and the forthcoming NI rise, living standards are going to suffer. The readings ought to be proving that the transitory narrative was and is wrong and central banks ought to be getting a handle on it to deliver on their mandate. Meanwhile, our power-crazed government are all too willing to impose restrictions on our liberties again over the winter, something that will hurt sentiment and demand in the economy if it happens.  

US inflation slows, slightly

US CPI inflation was a fraction softer than expected. The August CPI jumped 0.3% month-to-month, or 5.3% year-on-year. The all-important core reading excluding food and energy costs was up just 0.1% and below the 0.3% anticipated. Stock futures rallied initially on the news but subsequently gave up gains and ended weaker with little appetite to push higher – selling rallies now seems to be the way, at least in the near-term. Yields fell as 10s plumbed 1.275%, while gold recovered $1,800 and holds this level in early trade this morning. 

Indices technical analysis

S&P 500 looking at the 50-day line again where it has found support all through the rally this year. Now we are heading into the options expiry choppiness which this year has seen selling into the 19th of the month before recovering. Could see this 50-day area given a real test – failure to hold it would open up the potential for the 10% type correction that many in the market expect this month or next. Yields came off so growth won over cyclicals – Russell 2000 down 1.44% vs the Nasdaq off by 0.45%, the former now through its 50-day and 100-day SMAs and looking towards the 11,282 level where sits the 200-day – last tested in the middle of August.

Russell 2000 futs sitting on the 200-day line, the small caps have chopped sideways since February.

The dollar lost more ground, sinking to its lowest in a week after the inflation report. Cable rallied to its best since August 6th above 1.3910, but got slapped back down by the 100-day SMA and this morning trades around 1.3820.

Crude oil remains well support and the International Energy Agency (IEA) reported yesterday that vaccinations for Covid-19 are set to deliver a major boost for oil demand as concerns about the passage of the delta variant start to ebb.

“Already signs are emerging of Covid cases abating with demand now expected to rebound by a sharp 1.6 mb/d in October, and continuing to grow until end-year,” the Paris-based organisation said on Tuesday. Global oil demand is now expected to rise by 5.2m bpd this year and by 3.2m bpd in 2022.

Unexpected outages during August forced a decline in supply for the first time in five months, the IEA said, which extended the sharp drawdown in global oil stocks. “The most severe by far was Hurricane Ida, which wreaked havoc on the key US Gulf Coast oil producing region at the end of August, knocking 1.7 mb/d offline.”  But concerns over delta and its impact on oil demand has kept prices in check – signs that this is already unwinding. Meanwhile the API reported a hefty draw of 5.4m barrels last week, thanks largely to Hurricane Ida. EIA figs today expected to show a draw of 3.6m barrels.

Crude oil (Oct) firmer again and momentum with bulls, just finding some pause for breath at the 61.8% retracement level.

Investors look to Apple product show as equities struggle for momentum

Morning Note

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

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

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

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

 

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

 

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

Risk on to start the week as inflation looms

Morning Note

Stocks are trading a tad firmer in the early part of the session, after a toughish week. US indices fell for a fifth straight day on Friday, weighed down by Apple’s setback, the stock falling over 3% after a court dealt a big blow to its app store payment model. Tesla shares fell 2.5% after Cathie Wood’s Ark group sold down its holdings. More than a whiff of mega cap tech/growth fading – question is whether we get the rotation into cyclicals to keep the market grinding higher. Dip buyers failed to come in last week so looking perhaps to see whether there are further losses to come. Futures are this morning trading in the green. Meanwhile inflation is still a problem, with US producer prices rising 8.3%. China’s regulatory crackdown on big tech continues, with Beijing planning to break up Ant’s mobile platform Alipay, sending Alibaba shares down 5% in Hong Kong and the broader Hang Seng down by 2%. 

 

Nevertheless, there is a mild risk-on feel to the start of the new trading week. The FTSE 100 is up half of one percent after it tested the 7,000 support last week, which has held for now. The index is slap in the middle of the range it’s treaded since April, failing to break out in any meaningful way. Utilities, energy and financials doing the lifting this morning, with Royal Mail and National Grid at the top of the leader board. ABF fell to the bottom despite raising its profit target for the year on improved margins as supply chain problems hurt sales. SThree shares jumped another 6% after it also said profits would be ahead of expectations – staffing shortages playing into the hands of recruiters.

Inflation ahead

Stagflation: The US PPI reading for August was hot, with prices up 0.7% month-on-month and sending the annual increase to 8.3%, the biggest since records began in 2010. Whilst some may argue that this is transitory, and due to supply chain bottleneck, shortage of vessels etc etc, and therefore ‘nothing the Fed can do about it’, you have to ask yourself whether expansionary monetary policy is actually doing more harm than good right now.

 

Light day for data so all eyes on the US consumer price index tomorrow. The key inflation reading for the month of August is set to come in at 5.3%, according to consensus. In July, inflation steadied at 1 13-year high of 5.4%. Core inflation rose 4.3%. But there was some moderation in the month-on-month increase, with core at +0.3% vs +0.9% in June. Vehicle prices have been one of the main drivers of the increase, but the pace of price increases slowed almost to a halt in July. A hotter-than-expected reading tomorrow could see the market adjust its view of when the Federal Reserve begins tapering asset purchases. Cooling in inflation pressures would be positive for market sentiment.

Oil prices advance

Crude oil prices are firmer with WTI (spot) nudging its head above $70 again. Supply remains affected by Hurricane Ida. OPEC is due to release its monthly outlook later today. In FX, the dollar is firmer, with the euro dropping to its weakest since the end of August. GBPUSD is just about holding on to 1.38. Hard to talk meaningfully about FX trades right now with everything so range bound and trading sideways. Elsewhere, Bitcoin is lower again around $4k and chart action looks dicey. 

Fed fallout, Morrisons shares jump

Morning Note

The reverberations from the Fed’s policy meeting last week continue to be felt across global markets. Stocks have fallen, bond yields too, amid a sharp repricing of the risks of the Fed raising rates. Asian shares fell as global markets continue to react to the Fed’s willingness to raise rates in the face of higher inflation and its admission that members are talking about talking about tapering. US stocks suffered their worst week in several months, with the Dow Jones declining the most since October. European markets followed suit with a broad sell-off in early trade Monday. US 10yr yields have fallen below 1.4%, whilst the dollar is surging. The funny thing about all this is that given the data coming out of the US the Fed didn’t do anything terribly surprising, it just seems to have caught some by surprise by saying it wasn’t going to keep things super easy forever. Let’s be clear – this is not a shift away from average inflation targeting or somehow the Fed abandoning its employment-first approach: only a realisation that two and a half years from now the economy should be pretty well recovered, and inflation will have been running above 2% for a good amount of months, so some tightening would be warranted. Yields declining after a ‘hawkish’ Fed is frankly odd, and indicates the market thinks the stance is appropriate to keep a lid on inflation.

Shares in Morrisons jumped 30% to 234p after it said it rejected an informal offer from Clayton, Dubilier & Rice at 230p, saying that the bid undervalues the business. CD&R has until July 17th if it wants to make a formal offer, though this could flush Amazon out to finally make an approach. MRW has been undervalued for a while and before today not got nowhere near recovering its pre-pandemic valuation. Owning the bulk of its store estate outright makes it an attractive asset for private equity intent on gearing it up (think Toys R Us…). There is a lot of PE money sniffing around the UK as valuations are low – we knew this before the pandemic. But its market share of the UK grocery market, its growing wholesale business and its existing tie-up with Amazon surely means it is not impossible the US tech giant will make an offer. However, if Amazon were interested, you’d assume that an offer would have come by now. A PE bid seems more likely and ultimately may be the best way to unlock value for shareholders who’ve gone through a lot but ultimately not seen any appreciation in years (before today). Shares in Tesco and Sainsbury’s were up strongly partly on the read-across, partly on expectations that a PE buyout would see MRW less able/willing to compete.

This morning the FTSE 100 declined half of one percent to trade under 7,000 following from Friday’s drubbing on Wall Street that left the S&P 500 down 1.3% on the day and the Vix rose towards 22. As flagged last week, the UK market was liable to a pullback as it approached the top of the rising wedge.

Chart showing FTSE 100 movements on 21 June 2021.

Dollar looks stretched and liable to pullback but lots of speculative short USD/long EUR/GBP positions need to be unwound. This is a big dollar short squeeze.

21st June 2021's Dollar Index performance

Gold tested $1,760 where it has found some near-term support, but it’s going to be tough to avoid a flirt with $1,675.

Gold performance 21.06.2021.

Travel stocks rally, China PPI shrugged off for now

Morning Note

European markets opened mixed but broadly remain calm as they have for the whole week. Everyone’s waiting for signals on inflation – investors seem to be largely shrugging one from China today. Having led the way higher yesterday, the FTSE 100 is weaker today, whilst European indices are just in the green as they chop sideways ahead of tomorrow’s ECB and US CPI double-header. The Tiggerish outgoing chief economist of the Bank of England, Andy Haldane, said this morning that the UK economy is going gang-busters and inflation pressures are strong.

 

It was a mixed bag over the US in yesterday’s session as the Dow slipped a modest 30pts, the S&P 500 stayed flat as it struggles to make a new all-time high, and the Nasdaq rose 0.3%. The S&P 500 rose by less than 1pt to 4,227.26, a whisker below the record 4,238.04 reached on May 7th. 10yr Treasury yields slipped to 1.513%, the lowest level in a month. Remember payrolls data last week showed strong but not too strong job creation – enough to keep tapering talk at bay, or at least so the market seems to think. Yesterday’s huge JOLTS jobs openings report highlighted that the US economy is booming but a shortage of the right labour in the right places could a) force up wages and b) restrain growth (stagflation?). But, in the words of Mario Draghi, this is a ‘high class’ problem to have.

 

China’s producer price index, a key leading indicator of global inflation, rose at its fastest pace in 13 years as base effects from last year’s pandemic and a boom in commodity prices fed into higher prices paid by businesses. PPI in China rose at 9% in May, the highest it’s been since 2008, and a signal that inflationary pressures are not going away soon. It’s not a major surprise – expectations were for 8.5%: we know inflation is here right now. The question remains about the degree to which this is a transitory force or a lasting shift. There is another question: can companies pass these on to the consumer? If so, it runs the risk of stagflation; if not it could means slowing earnings growth. Does this favour the value trade still? We’ve seen a big rotation already, but growth and inflation this year ought to continue to be supportive. Cathie Wood of Ark thinks otherwise. “The rotation back to growth is probably close at hand,” she said at an Ark Invest webinar on Tuesday.  

 

Travel stocks popped up a touch on news the EU parliament has approved vaccine passports to ease travel this summer. We saw the likes of TUI, IAG, EasyJet and Ryanair all jump as the news broke on the wires. WH Smith also ticked higher, dependent as it is now on travel sales. SSP, the operator of food and beverage outlets in travel locations worldwide, should also be pleased. It reported a £300m loss this morning as revenues declined by almost 80%. Management say they don’t think sales will return to pre-Covid levels until 2024. Shares dropped at the open on the big loss but turned higher as the EU travel news broke. Meanwhile, the US eased travel restrictions for 61 countries, but not the UK. Nevertheless, there is a real sense that vaccines are working to open up the US, EU and UK to travel this summer, albeit not quite how it once was.

Oil pushed to fresh highs ahead of the EIA inventory report later and tomorrow’s OPEC monthly report. WTI drove on beyond $70 to mark an almost-three-year high overnight amid encouraging signs of demand recovery. Meanwhile fears of Iranian supply hitting the market later this year subsided after the US secretary of state Anthony Blinken said hundreds of sanctions would remain on the regime in Tehran, even if the two countries reach a nuclear deal. Whilst vaccines and the reopening of economies have left the market in deficit, helping to drive prices up 35% this year, the persistence of cases in some parts of the world combined with ongoing travel restrictions in Europe/US means there are still doubts about how quickly demand will recover this year.  Nevertheless, prices hit their highest since Oct 2018 after the API reported a draw of 2.1m barrels last week. 

Thursday sees the release of the latest OPEC monthly oil market report.  Last month’s report saw the cartel reiterate its belief in a strong recovery in world oil demand in the second half of 2021. This month’s report is not expected to show much change from the previous version, which said demand will rise by 5.95m bpd this year, up 6.6% from 2020 levels. Ahead of this, traders will look to today’s inventory report from the Energy Information Administration (EIA). Last week’s EIA inventory report showed stockpiles declined by 5.1m barrels, a larger-than-expected draw that helped to support the bullish view on oil prices as demand in the US recovers. Analysts expect a draw of 3.3m barrels to be posted today.

Elsewhere, Bitcoin trades at $34k after touching $31k yesterday. A SEC official expressed concern about the US financial regulator’s push to enforce stricter rules around cryptos. GBPUSD continues to hold below 1.42, but a breakout of the triangle to the upside needs to be monitored with MACD (1hr) crossover still supportive of a nudge up to 1.42 – failure at 1.4180 could beget a drop to the 1.4120 area.

EZ economic activity picks up, UK retail sales soar

Morning Note

European markets are tentatively higher in early trade on Friday, solidifying gains from Thursday’s upbeat session as global stocks made gains. DAX traded not far off recent intra-day all-time high at 15,440, but 15,500 continues to act as headwind for bulls and early gains were largely pared after one hour of trading, whilst the FTSE 100 dropped more than half of one per cent in early trade to drop under the key 7,000 level. Tech shares led a rebound on Wall Street as stocks in the US snapped a three-day losing streak. The S&P 500 rallied over 1% to 4,159, with the Nasdaq up 1.8% to 13,535. NDX rallied almost 2% as the big tech names that have the biggest impact on the index put in a strong day with Apple and Netflix both up 2%, with other FAANGs rising 1% and Tesla +4% and ARKK rose 3.5%. Futures indicate the major US indices will open higher later.

On the FTSE, tech and energy are leaders, whilst healthcare and industrials (yesterday’s gainers) are lower as the market continues to really chop around these 6,850-7,150 ranges. Until we see a breach in either way, this is our stomping ground for the time being. The big rejection of the 6800 handle on May 13th indicates little appetite for the lower end, but many factors are at work here. Not least, as discussed yesterday, the exposure of basic resources and energy stocks to the growth in emerging markets that could be affected by covid.

Chart showing FTSE 100 price movements.

UK retail sales beat expectations as all that pent-up demand was unleashed in April as non-essential shops were allowed to reopen on the 12th of the month. Sales rose 9.2% from March, versus forecasts of +4.5%. GBPUSD was bid up to 1.42 ahead of the release before peeling back to the 1.4180 area.

PMI numbers show progress in Europe, with the composite index for the Eurozone at 56.9 vs 55.1 expected, helping to keep EURUSD close to a 3-month high, however it keeps hitting a brick wall at 1.2240 and has retreated a touch from here this morning to sit at the 78.6% retracement of the Jan-Mar drop. With a potential topping patter at this area we could look to a retreat to 1.2170 area should the dollar catch any yield-related bid. Upside breach of 1.2240/5 area, the Feb swing high, calls for return to the Jan highs. Of course it all depends on markets’ analysis of the relative pace of change in expectations for the ECB and Fed tapering actions.

EURUSD currency pairing performance on May 21st.

Gold remains steady around the 50% retracement of the Aug-Mar decline. Treasury yields are steady, with 10s around the 1.64% level – so far not seeing much direction from the bond market but I’d expect this to shift up a gear soon.

Chart displaying gold price as of May 21st 2021.

WTI is testing nearly one-month lows at the $62 handle following the last couple of sessions’ weakness. Fears about tapering maybe, fears about demand in Asia rolling over and fears about Iranian crude coming back on the market certainly. Potential triple top could herald breakdown to the $60.60 area after downside breakout of the longer term trend line. But if bears can’t get it here then look for rebound to the $64 area.

WTI price movements.

Timid end to positive week for European equities, sterling on the ropes

Morning Note

European stocks opened a shade lower on Friday morning as the major bourses look to close out a largely positive holiday-shortened trading week. The FTSE 100 is up around 3% this week after hitting its strongest since February 2020. It’s been a very good week for UK equities as the blue chips finally broke out to post-pandemic highs and the mid-caps on the FTSE 250 hit an all-time high. Lots of reasons behind the positive moves in UK equities this year: a vaccine rollout of immense success and an expected economic bounce back as activity returns towards normal both here in Britain and globally are supportive. But you could also look to the relative underperformance of UK equities as a factor – from a low bar they are finally catching up, you could say. Whilst the US and European equity benchmarks have roared to all-time highs since the pandemic, the FTSE 100, in particular, has struggled. The recovery in the pound has not helped -weakness this month has helped the FTSE – but it remains the case that the UK’s largest companies are trading at a discount to peers. This has been the case for years, but there is reason to think Britain can close the gap. The FTSE 100 is already up 7% this year to date, against gains of around 9% for the S&P 500 and almost 11% for the DAX. 

 

It was a positive session on Wall Street again. The S&P 500 rose over 0.4% to set a record closing high for the second day in a row. The Nasdaq added more than 1% as Amazon, Netflix, Microsoft and Alphabet all rallied. Tesla rose almost 2% as Morgan Stanley said the company is set to benefit from Joe Biden’s plans to spend massively on developing America’s electric vehicle ecosystem. Investors, they said, “face greater risk not owning Tesla shares in their portfolio than owning Tesla shares in their portfolio”. The Dow inched up thanks chiefly to Apple’s almost 2% gain. Overnight shares in Asia were mostly lower. Tencent-backed Linklogis jumped about 9% on their debut on the Hong Kong market.  

 

China’s factory gate prices – an important leading indicator for inflation – rose ahead of analyst expectations and at the fastest clip since July 2018 in March. China’s producer price index (PPI) rose 4.4% last month, well up from the 1.7% in Feb. It’s a clear sign of robust demand for goods made in China, as well as indicative of rising costs for raw materials. Meanwhile new bank loans in China are seen rising sharply in March, according to a Reuters poll.  

 

German industrial production fell 1.6% in February, a surprisingly poor showing in a sector of the economy that has done well despite pandemic-related restrictions. It now means an unlikely jump in activity in March is required to prevent Europe’s economic engine suffering a contraction in the first quarter. Another report showed a 0.9% rise in exports during February as robust demand from outside Germany and Europe. France’s industrial output declined by 4.7% in February compared with January – lockdown bites.

 

Sterling fell out of bed this morning, with GBPUSD dropping under the 100-day simple moving average at 1.3680 and the March lows at 1.3670 to hit its lowest since the start of February. Since hitting an intra-day high above 1.42 at the end of February, cable has been a one-way street since, sliding 4% over the 7 weeks. EURGBP also rallied to its best since the end of Feb and looked at the 0.87 level. After a bad run through April the dollar is bouncing this morning after slipping under its 200-day moving average yesterday.

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.

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