IPO watch: Volvo Cars seeks $23bn valuation on public launch

Equities
Investments
IPO

In one of the largest IPOs of 2021, Volvo Cars is going public. Here’s what you need to know about the Gothenburg carmaker’s stock market debut.

Volvo IPO

Volvo Cars hopes to raise $2.9bn in initial public offering

Chinese-owned Volvo Cars will make its public stock market debut on October 28th, 2021.

The company has set its sights on a $23bn valuation when it debuts on the Nasdaq Stockholm stock exchange in ten days.

In its prospectus, Volvo said it would be offering shares priced between 53-68 krona ($6.12-7.86) per share, initially offering $2.9bn worth to investors. Volvo Cars’ offering is made up of 367,647,058–471,698,113 newly issued common class B shares.

The transaction, including expected converted investments by investors AMF and Folksam, was seen resulting in a free float of about 19.5% to 24.0%, Volvo said.

That would give its owners, Geely Motors, a substantial ROI. The Chinese firm picked up Volvo from the ailing Ford back in 2010 for a cool $1.8bn.

Part of Volvo’s potential valuation is the fact it owns 50% of EV spinoff Polestar. Polestar is preparing its own IPO, which is expected to place a $20bn valuation on the premium electric car brand, due to launch in 2022.

Geely and Volvo also jointly own 8.2% of Volvo Trucks.

Volvo enjoys strong brand recognition and sales in key markets, such as China, mainland Europe, the UK, and the US.

The Swedish carmaker sold 770,000 vehicles last year, spearheaded by the popular XC family of SUVs. If it can pull of that $23bn target, Volvo would sit firmly alongside premium contemporaries like Daimler and BMW in terms of market cap, if not cars sold.

BMW shipped 2.3m cars worldwide in 2020. Mercedes-Benz shipped 2.2m.

Volvo’s electric outlook

Raising capital to develop its EV product offer and production capabilities is one of the key reasons behind this IPO. Volvo is aiming for annual car sales of 1.2m per year – an increase of 56% against 2021’s numbers.

“Volvo Cars believes that its unique structure and focused strategy makes it one of the fastest transformers in the global automotive industry, with mid-decade ambitions dedicated to electrification, sustainability and digitisation.” the Swedish company said in a statement.

As with pretty much all legacy car manufacturers, Volvo is looking to electrify its line up away from the Polestar brand. New electric models from Volve Cars will be badged as such. Think of Polestar as the premium of the premium. Volvo Cars are more in line with midrange BMW models, like the 1, 2 and 3 series, although it does offer models that can compete in the saloon and SUV/Crossover classes.

Could Volvo become one of the top EV stocks to watch?

The float, if successful, will help fund Volvo’s electric ambitions.

By 2030, Volvo aims to have removed internal combustion engines from its range. It expects 50% of total sales to come from electric-powered vehicles by 2025. In an interesting move, the auto manufacturer also expects 50% of its sales to come from online via the Volvo website by this time too rather than bricks-and-mortar dealerships.

“There is no long-term future for cars with an internal combustion engine,” Henrik Green, Volvo Cars’ Chief Technology Officer, said earlier in the year. “We are firmly committed to becoming an electric-only car maker and the transition should happen by 2030.”

September saw global Volvo sales fall 30% year-on-year. Supply chain chaos, chipset shortages, and worker COVID-19 breakouts all impacted manufacturing and delivery at this time. Volvo has said all workers have been given vaccines in its Southeast Asia factories, but it will still be hampered by semiconductor supply constraints.

IPO Watch: Warby Parker & Olaplex line up public debuts

Investments
IPO

Two fresh IPOs together worth a projected $13bn come next week as Warby Parker and Olaplex start public trading. 

IPO trading – stocks to watch 

Warby Parker 

First up is Warby Parker which is expected to launch on the New York Stock Exchange on September 29th. 

The direct-to-customer e-commerce eyewear brand is forecast to garner a $3bn valuation when its IPO lands. 

Recent guidance and results for 2021 so far suggest Warby Parker is in rude health. Its first half results saw a 53% year-on-year increase in revenues for a total of $270.5m. The business did incur a $7.5m loss during trading but said this could be attributed to Covid-19 lockdowns at the tail end of 2020. 

Full year projections put revenue growth at 35-36% for 2022. Revenues are forecast to clock in at between $532-537m. Additionally, the business is hoping to expand its bricks-and-mortar offer in order to support its core online business by opening 30-35 new stores. That would bring the total number of locations up to 160. 

According to co-founders and joint CEOs Neil Blumenthal and Dave Gilboa, Warby Parker is targeting 25% revenue growth for 2022. 

In a statement, the pair said: “The outlook we’ve provided underscores our belief that delivering remarkable customer experiences, making a positive impact on all stakeholders, and living our core values will lead to continued long-term sustainable growth.” 

There’s plenty of reasons to be optimistic – but as ever there are lots of reasons to be cautious too.  

The e-commerce format where Warby Parker made its mark is not the most lucrative for eyewear manufacturers against the broader industry. According to Forbes, online sales of eyewear and glasses has grown at a CAGR of 4% against 18% for e-commerce as a whole. 

It seems shoppers may still prefer to purchase their eyewear in person. It is true that Warby Parker is committed to growing its physical store numbers, as mentioned above. There are still question marks over the sustainability of its online business, despite recent successes.  

Is a $3bn valuation an over optimistic target? 

The US eyewear business is notoriously fragmented. As a $35bn a year industry, it’s big fairly big business, but it’s made up of a wildly different variety of independents, mom-and-pops, and smaller firms. No one business has really been able to dominate. Of course, that does present an opportunity for Warby Parker which it is not doubt keen to grasp. 

At the moment, Warby Parker controls 1% of the market space. Vision Source and Luxotica control 8% and 6% of the market respectively.  

Olaplex 

Olaplex, the premium hair products brand, is forecast to launch its own public offer September 30th. 

Despite challenges thrown up by the COVID-19 pandemic, the business reported a 90% increase in sales across 2020 for a total of $282.3m. EBITDA rose 98% over the same period to reach $199.3m. 

In its IPO filing, Olaplex reported first half net sales had reached $270.2m. Things are looking good for the Advent Capital-owned luxury brand. 

The filing also revealed Olaplex’s initial offer plans. 67 million shares priced between $14 and $16 each to retail customers once public. At the top end of the range, Olaplex would raise $1.07 billion in the IPO.  

Olaplex was acquired by Advent International in 2019. The filing shows Advent would control 79.6% of the combined voting power of our common stock, or 78.2% if underwriters exercise their options in full. Prior to the offering, Advent owns 89.3% of shares, followed by 6.8% owned by Mousse Partners. Emily White, the President of Anthos Capital, owns 3.6% of shares. 

What are IPOs and how can you trade them?

When a company decides to go public, it may do so by making an Initial Public Offering, or IPO. Here, we take a look at what that means – and how you can start trading on a company going live for the first time.

IPOs

What are IPOs?

Companies often do not start as publicly traded companies. They do not issue stock or may only issue shares to private shareholders.

However, many companies decide to go public. This means their stock will be listed on stock exchanges and be available for public trading. In theory, anyone could be a shareholder by purchasing shares in said company.

These tend to be some of the most exciting events for stock traders and investors. For instance, when Coinbase announced it was going public in February 2021, it created a wave of market interest.

There are a couple of different ways a busines can go public. One of the most popular is by making its Initial Public Offering.

There are a couple of reasons why a company may choose an IPO, including:

  • Raise capital
  • Pay off debts
  • Monetise assets
  • Improve its public profile

Once it goes live, the business’ stock will be available for retail traders and investors to buy and trade.

These tend to be medium-to-large cap companies. For example, when money sending service Wise was worth an estimated $5-9bn ahead of its IPO.

Smaller companies may use other methods to get access to public capital. The London Stock Exchange Alternative Investment Market (AIM), for example, is where small companies that have exhausted their private money, but are not at the level required of an IPO, can still be publicly listed.

How does the IPO process work?

The first part of an IPO is the audit. This is basically a review of all the company’s financial ins and outs.

The company will then have to file a registration statement with the relevant authorities. So, if a business were to launch on the London Stock Exchange, then it need to share its registration statement with the Financial Conduct Authority (FCA).

The stock exchange the company wants to list on will then review the business’ application. If successful, the company will move on and work with an underwriter to determine how many shares it should release to the public. If unsuccessful, it will have to go back, review its application, and try again.

The filing will also be read by traders and investors to get a flavour of a) the company’s financial health b) its IPO plans and c) what to possibly expect when it finally launches.

Generally, a business will work with an investment bank to determine its IPO share price, i.e., the price per share when the stock first goes public. Goldman Sachs was hired to price trading app Robinhood’s IPO, for example.

There is no set timeframe for an IPO. They require many different stakeholders and complex processes to reach fruition.

Trading or investing in an IPO

There are a couple of ways to trade and invest in a stock that’s gone public – even before the process is completed.

Grey markets

At Markets.com, we offer grey markets.

A grey market let’s use offer Contracts for Difference (CFDs) on a stock before it goes live. You can speculate on its price movements and estimated market cap up to the end of the stock’s first trading day.

A grey market CFD’s price will be determined by our pricing team, based on the company’s prior financial performance, its initial public offering filing, and predictions on how we think the stock will perform.

Trading is about speculating on price movements. CFDs allow you to do this without owning 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. Only commit capital if you can afford to take any potential losses.

Please note: a grey market will not be offered as an investment product. Investing is the act of buying shares to hold onto in the hope they gain value. Because the stock hasn’t actually launched yet, you would be unable to buy and hold a grey market CFD.

When the IPO launches

One the IPO goes public, you will be able to buy the stock to add to your investment portfolio. Alternatively, you will now be able to trade on its price movements using spread betting or CFDs in the manner mentioned above. To reiterate, you will not own the asset if you pursue a spread or CFD-trading strategy.

How do IPOs perform after launch?

That depends on a myriad of factors. Sometimes stocks come roaring out the traps. Other times, as was seen with Robinhood with its IPO launch, a company going public can be a bit of a damp squib and fall below market expectations.

The stock’s performance should also be gauged over different timelines.

We’ve split the table below into different stock categories to see how company shares tend to perform in their first day, first week, and first month after their first public offering.

The data represents a global overview for stocks in 2020, rather than IPOs stocks listed on a specific exchange. It also includes a comparison of IPO stocks against main market and AIM stocks.

Stock type Price movement- first day Price movement – first week Price movement – first month
All IPOs 6.6% 9.0% 1.5%
Main market 4.6% 4.4% 0.7%
AIM stocks 9.0% 14.6% 12.4%

 

Where can you find out about upcoming initial public offerings?

Generally, each stock market will have a dedicated calendar or page detailing upcoming debut stock listings. Here are some examples

London Stock Exchange

Nasdaq

New York Stock Exchange

We also inform our clients on upcoming IPOs. You can find more information in our news section.

A word on debut listings and risk

Please note that trading and investing carries with it the risk of capital loss. The value of your investments may go down. If you trade leveraged products like CFDs then you may encounter serious losses.

Do your research prior to committing any capital. Only invest or trade if you can afford to take any potential losses.

Robinhood files for IPO: Just PFOF

Equities
Investments
  • Regulatory scrutiny may present risk to business model
  • Mega growth in active clients
  • Crypto a growing part of the business

US online trading company Robinhood has finally filed for its long-awaited public listing in what’s sure to be one of the most closely watched IPOs of recent years. The company, which enjoyed rapid growth last year but has been at the centre of a storm over trading outages and restricting access to trades earlier this year when capital limits were reached, is seeking a valuation of around $40bn. The stock is set to list on the Nasdaq under the ticker HOOD.

Regulatory scrutiny

The S1 prospectus dropped just a day after FINRA issued Robinhood with a $70m for “widespread and significant harm” to its customers. The investigation remains ongoing and Robinhood expects more penalties. There are numerous other cases, including class action suits relating to Robinhood restricting access to trading on a number of very volatile stocks at the height of the GameStop frenzy. As I commented on back in January when all this was taking place, I didn’t think Robinhood wanted to stop trading – it was just a question of regulatory capital requirements and Value at Risk models that left the clearing house demanding more cash up front.

Since having to secure $3.5bn from investors PDQ, Robinhood has strengthened the balance sheet considerably and now has about $4.8bn in cash or cash equivalents, plus it has a new $2.2bn revolving credit facility for financing margin trading in the event of another volatile episode.

Meme stocks

“Our vision is for Robinhood to become the most trusted, lowest-cost, and most culturally relevant money app worldwide,” the company said in the SEC filing document. Part of this has involved offering questionable products (like stock options) to relatively unsophisticated traders. (Although the GameStop frenzy proved the Reddit crowd could be very sophisticated indeed, ganging together to concentrate out of the money calls where dealers couldn’t hedge on stocks with lots of short interest, the concentrated buying of the physical to squeeze shorts and create a gamma squeeze on the dealers). The tragic suicide of one customer

Robinhood has ridden – and in many ways helped fuel – a boom in retail trading in recent years, particularly since the pandemic hit. Retail investing now comprises roughly 20% of US equity trading volume, doubling in the decade from 2010 to 2020. “Yet, we believe there is still significant room for growth,” the company asserts. Meme stocks are a big part of the business and I think this presents a risk, albeit Robinhood itself could benefit from becoming the next big meme stock itself – a lot depends on how much reputational damage it suffered this year and how much good faith it retains among the retail crowd. The fact that it is reserving as much as 35% of the shares at IPO for its retail clients could be a master stroke.

Financials

For the year ended December 31, 2020, total revenue grew 245% to $959 million, up from $278 million in 2019. But it’s still not exactly profitable, recording net income of $7 million, compared to a net loss of $107 million in the prior year. Adjusted EBITDA rose to $155 million, compared to negative $74 million.

Fuelled by the meme stock craze, the first three months of 2021 saw total revenue grow 309% to $522 million, up from $128 million in the same period of 2020. However it recorded a net loss of $1.4bn in the quarter due to a $1.5 billion fair value adjustment to its convertible notes and warrant liability.

Incredibly, Robinhood has doubled the number of users since the start of the year, with 31m accounts. Of these, 18m are funded, representing a 151% increase from last year. Fundraising in 2020 indicated a market valuation of around $11bn, but the rapid growth in active accounts and revenues this year has seemingly propelled the company to seek a much larger valuation.

Payment for order flow

Robinhood came under fire in the first quarter of 2021 as meme stock craze exploded. Among the many charges levelled against the platform was the practice of paying for order flow. Robinhood sells market makers like Citadel client trades, who will execute at or better than the current market price. This is what enables commission free trading but has come under scrutiny as could represent a conflict of interest. Nevertheless, Robinhood made 75% of its revenues last year – some $720m – from selling client trades. Of this, about half comes from Citadel Securities (34% of total revenues).

This is perhaps the biggest risk for investors: the SEC has already fined Robinhood $65m for misleading customers over PFOF, as it is called. And chief Gary Gensler has ordered a review of the practice, as well as the ‘gamification’ of investing through apps and incentives. This would tend to put Robinhood in the crosshairs of the SEC just as the former seeks to go public and the latter is likely to get stricter. Timing appears problematic for Robinhood.

If the US regulator were to act on PFOF it could hit the very business model that Robinhood has relied on to secure growth so far. “Because a majority of our revenue is transaction-based, including payment for order flow … reduced spreads in securities pricing, reduced levels of trading activity generally, changes in our business relationships with market makers and any new regulation of, or any bans on, PFOF and similar practices may result in reduced profitability, increased compliance costs and expanded potential for negative publicity,” the filing states (my emphasis).

Crypto trading: blame Elon

Robinhood specialises in stocks and stock options, but cryptocurrency trading is a growing part of the business. From just 4% last year, crypto accounted for 17% of revenues in Q1 2021.

Robinhood notes that 34% of its cryptocurrency transaction-based revenue was attributable to transactions in Dogecoin, as compared to 4% for the three months ended December 31, 2020. For a token set up as a joke, that’s a staggering amount – roughly 5% of all Robinhood revenues in the first quarter of the year.

“A substantial portion of the recent growth in our net revenues earned from cryptocurrency transactions is attributable to transactions in Dogecoin. If demand for transactions in Dogecoin declines and is not replaced by new demand for other cryptocurrencies available for trading on our platform, our business, financial condition and results of operations could be adversely affected,” the S1 states.

I tend to think there is always another Dogecoin round the corner. Robinhood currently supports 7 cryptocurrencies on its platform. That compares with 25 at Markets.com.

The view

Regulatory headwinds appear strong, particularly regarding PFOF, which should see the shares trade at a discount. Crypto is also clearly an area that presents a high level of regulatory uncertainty as well as unreliable flow and trading activity. Reputational risk is also a big factor post-GameStop and in a highly commoditized industry, it’s hard to see where it can really deliver much in the way of margin growth. The business is still not really profitable and the valuation of $40bn+ looks well above peers, even assuming growth continues apace this year.

Didi Global: When is the IPO and where can I trade it?

Equities
Investments

Didi Global, China’s rival to Uber, is looking to raise $4 billion in what could be one of the biggest IPOs in years. Books were covered on the first day of the build, meaning the company comes with an estimated valuation of $62 billion to $67 billion. That would place its market capitalisation some way behind Uber’s $95bn but well ahead of rival Lyft’s roughly $19bn valuation.

The company is offering 288 million American depositary receipts (ADRs) at $13 to $14 each, with a midpoint implying it would raise $3.9bn, making the second-biggest IPO this year behind Coupang Inc. Pricing is due to be finalised Tuesday/Wednesday this week with the stock beginning trade on Jun 30th. The company will list on the New York Stock Exchange under the ticker symbol DIDI.

Didi boasted in SEC filing that it operates in 16 countries and revenues of $6.4 billion for the three months ended March 31, 2021, with net income turning positive at $800m. Rather like Uber and Lyft it has not been profitable before then, racking up $1bn+ losses in each of the last three years.

Uber sold its China business to Didi in 2017 for $7bn and retains a 12% stake in the company after the IPO. The largest shareholder is SoftBank Group, which owns 21.5% ahead of the IPO.

Wise IPO: everything you need to know

Equities
IPO

Fintech firm Wise is planning its initial public offering. No date has been set yet, but with the original May deadline now passed, observers think the IPO is coming very soon. Here’s what to watch out for. 

Wise IPO: what to watch 

What is Wise? 

Previously known as TransferWise, Wise is an online money transferring service. The company was founded in London by Estonians Taavet Hinkirus and Kristo Käärmann in 2010 and has since expanded considerably.  

Wise allows customers to send money abroad at real mid-market exchange rates, as opposed to higher bank-transfer rates, plus low fees. 

As an example, Wise charges less than $8 in fees for sending $1,000 to Europe. Going via a bank would cost $26. This is done on a peer-to-peer basis.  

February’s rebranding away from TransferWise lets us see where Wise wants to go. It is no longer just for money transfers.  

Wise now offers a multi-currency account, designed to make it easier for people to relocate and let them pay with local currencies when ordering goods online, alongside a debit card service.  

How is Wise performing financially? 

As of 2020, Wise’s revenues were totalling $300m annually, with a 70% year-on-year growth rate. It boasts over 10 million customers worldwide and employs around 2,200 workers in 11 countries.  

Ahead of the IPO, Wise is valued at an estimated $5bn – but the float may take its valuation as high as £9bn according to some of the more over-optimistic forecasts. 

Looking at financials, Wise appears very healthy. 

Its pre-tax profit for the financial year ended March 2020 to £20m from £10m in 2019. As mentioned above, revenues also jumped 70% between 2019 and 2020.  

Profitability within the tough challenger bank and money transfer spheres suggest Wise’s upper management is pursuing a successful strategy. Impressive y-o-y revenue growth and an expanding customer base reinforce this. 

Because Wise straddles two worlds, challenger banks and money transferring, it has a variety of competitors. In terms of money transfers, Western Union, MoneyGram, WorldRemit, Remitly, and PayPal are Wise’s chief rivals. In the alternate challenger banking space, Wise’s competitors include Monzo, Revolut and Starling Bank. 

Against its rivals, Wise has been praised for the transparency of its fees structure. Offering true mid-market exchange rates is also a big selling point for the brand, reflected in the growing volume of transactions handled by the firm. Wise processed £67bn worth of customer payments in 2020 – nearly double 2019’s £36bn. 

Where will Wise be listed? 

Wise is likely to go public via a direct listing on the London Stock Exchange. This is something of a coup for the LSE, as it could imply incoming rules changes, such as the introduction of a dual-class share structure and lower float requirements, are enticing more tech firms to list in London.  

The London-listing Wise is pursuing will be one of the largest European tech listings since Spotify went public in 2018. 

A direct listing means Wise will be offering shares via the London Stock Exchange without the need for any intermediaries. There are several potential reasons why Wise is pursuing such a strategy. Wise could be looking to avoid share dilution, for example, or might be wanting to avoid lock-up periods. It may be a money-saving move too, as direct listings tend to be cheaper than IPOs. 

Commentators believe Wise could be pursuing a dual-class share strategy – something that has proven unpopular on other London tech listings, such as Deliveroo. Will it prove the same for Wise? 

When will the Wise IPO go live? 

As touched on earlier, the original May 2021 IPO deadline has passed. Even so, the market is expecting Wise to go live on the London Stock Exchange very soon. 

Open your account to start trading Wise IPO CFDs as soon as they go live. 

Trading carries risk of capital loss. Only start trading if you are comfortable taking any potential losses. 

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

Morning Note

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

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

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

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

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

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

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

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

Morning Note

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

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

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

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

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

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

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

EURGBP has cracked the 0.8540 support again.

OPEC+ preview: Saudis continue to take the strain

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

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

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

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

Attention shifts to bond yields as stocks rally, ARKX ETF launch, Deliveroo IPO priced at the bottom

Morning Note

Despite some volatility in individual names associated with the Archegos Capital fallout, chiefly the big banks that had acted as prime brokers to the hedge fund, there was no broad selloff in blue chips. The Dow Jones industrial average wiped out a 160pt loss at one point to finish 98 points higher for a fresh record close, while the S&P 500 and Nasdaq were flat. The DAX notched a record high, whilst the Euro Stoxx 50 hit its highest since the pandemic. European stock markets are broadly higher this morning, with the FTSE 100 eyeing 6,800 again with all sectors but healthcare in the ascendancy. The DAX made a fresh all-time high again. Banking shares in Europe are higher – shrugging off the Archegos episode as yields are on the move higher. Even CS is 1% higher this morning.

Market participants will be glad to see this has so far been contained – though there may be some more trades related to Archegos that need unwinding. Banks left holding the bag – which look to be Nomura and Credit Suisse more than others – will suffer significant losses. Goldman Sachs, surprise, surprise, seems to have escaped cleanly by acting swiftly and decisively to get out first. So far though there has not been a big unwind across assets.

Attention quickly turned to the bonds as the US 10-year yield jumped to 1.76% this morning, towards the top of the recent range. This helped lift the dollar to its highest since November, with the dollar index hitting 93. Gold fell to the bottom of the recent range to test $1,700 again – key trend and Fib support coalesces around $1,690 should the round number go. Bitcoin climbed to $58,000 say Visa offered more ‘corporate support’ by saying it would allow the use of the stablecoin USD Coin to settle transactions on its payment network. WTI (May) eased back from $62, the highest in a week, ahead of the OPEC+ meeting this week at which producers seem all but certain to maintain supply curbs through May.

Deliveroo is pricing its IPO at the bottom of the range, with shares off at £3.90 and valuing the company at £7.6bn. Still it’s the biggest London listing in a decade so it should get plenty of interest once the stock opens for unconditional trading next week. The IPO has not has been as warmly received in the City as found Will Shu might have expected. Numerous funds including giants Aviva, Aberdeen Standard and Legal & General are not taking part amid various concerns about governance (dual class shares), working practices (riders getting £2 an hour) and regulatory concerns. It’s also true to say that the path to profitability remains questionable.

Cathie Wood’s Space ETF – ARKX – is due to start trading today. The first new ETF in two years from the Wood stable is eighth in total. There are several eye-catching elements to the ETF’s holdings.

First, the holdings, which are not aligned very closely to existing space-focussed funds like the Procure Space UFO ETF. Somewhat amazingly, the second biggest holding in the ETF, at more than 6% weighting, is – get this – another ARK ETF, the 3D Printing ETF (PRNT). Loading up ETFs with other ETFs – which you are promoting – seems kind of wrong. You could rightly ask: is it a pyramid? It smacks of the 1920s American experience of the Goldman Sachs Trading Corporation, which in turn set up the Shenandoah Corporation, also an investment trust, which in turn set up Blue Ridge Corporation. Yes, another investment trust. What you had was a lot of trusts with the same people and same investments – cross-investing in one grand pyramid scheme. We all know how that ended up.

Second, it contains a number of names that are not associated with ‘space’. For instance, JD.com is a 5% holding, whilst Virgin Galactic is less 2%. Netflix is a 1.27% holding. True, the prospectus makes it clear that ‘space’ investments would only ever be no less than 80% of holdings, but it is nonetheless noteworthy to package up a load of investments in this way.

And, ARK has changed the language in its ETF prospectuses to remove the limits on single-company exposure. It also added a reference to blank-check companies (SPACs) to the risk section. This will only add to concerns about the concentration in large cap momentum stocks and exposure to high risk SPACs comes with its own set of worries for investors.

Constiuents of the ARKX space exploration ETF

A light calendar for data today – just the US CB consumer confidence report on tap as well as preliminary German inflation numbers. Fed speakers Williams and Quarles are up, too.

Fed governor Christopher Waller offered a robust defence of the central bank’s policy making, refuting suggestions it is keeping rates low to finance government debt. That is one in the eye for MMT supporters. US total government has risen $4.5 trillion, about 20%, since March 2020. In many ways the pandemic brought MMT from the theoretical shadows to the de facto limelight without any debate. However, the Fed is seeking to assert its independence and rejected the idea that the central bank is working in concert with the government to directly finance debt.

“My goal today is to definitively put that narrative to rest. It is simply wrong,” Waller said in prepared remarks to the Peterson Institute for International Economics. “Monetary policy has not and will not be conducted for these purposes.” We shall see.

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.

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