Stocks up, Fed floats trial balloon, Kingfisher sales surge

Morning Note

Markets in Europe have opened broadly higher this morning as they recover some of the losses from the swathe of selling on Wednesday, whilst the Federal Reserve underscored it’s in no rush to tighten monetary policy, minutes from its April meeting showed. Focus remains on the broader pace of inflationary pressures and recovery in the US with the weekly unemployment claims data (f/c +453k) and the Philly Fed manufacturing index. Iron ore and other industrial commodities linked to steel making feel as China said it would step in to curb rampant prices, though copper is rallying this morning. Focus also remains on the volatile crypto space after a dramatic day.

Crypto prices collapsed, with Bitcoin tumbling 30% to $30k on the nose before staging a big rally off this level. Outages at the Coinbase and Binance exchange didn’t help, fuelling a sharp leg lower around midday to the lows at $30k, but chiefly this seems to have been a run on stops triggering margin calls in the wake of China’s regulatory crackdown, which followed a period of steady losses seemingly brought about by a toppy market chart pattern and Elon Musk somewhat walking back his prior enthusiasm for the crypto. Institutional options activity seems to have further accelerated some of the moves as strikes were hit. As of this morning, the rout had stabilised, with Bitcoin trading around 30% off yesterday’s low, above $40k. There will be a lot of stranded longs now selling into any kind of strength. Stocks exposed to crypto prices like MicroStrategy, Coinbase and Tesla, were caught up in the storm, though they too closed well above their low of the day as the market recovered some of the losses.

Michael Saylor of MicroStrategy said he’s not selling. “Entities I control have now acquired 111,000 #BTC and have not sold a single satoshi. #Bitcoin Forever,” he tweeted. I expect him to keep Martingaling until it all unravels. Tesla boss Elon Musk tweeted that the emoji for ‘diamond hands’, following up by saying ‘Credit to our Master of Coin’, aka the CFO, Zach Kirkhorn. (I now check Elon’s Twitter the way I used to check the Donald’s each morning). Cathie Wood stuck to her $500,000 ‘target’ for Bitcoin, and suggested there were multiple signs the market is in a capitulation phase, which is often a good time to buy. Har har, Cathie would say any time is a good time to buy if it’s what she is pumping. The Innovation ETF ended the day down by almost 2%, and is roughly 34% below its all-time high struck in Feb.

The Fed floated a trial balloon, as minutes from its April meeting indicated some policymakers are thinking about thinking about tapering asset purchases. “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said. This was the first pointer – the first signal. It was done on purpose. Members of the FOMC also stressed the importance of “clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases”. Tentative – the question remains: when does the Fed think it’s hit the landing area for the economy, and does inflation take off in the meantime? US 10-year yields looked to test the 1.70% level again, trading at 1.672% this morning. Gold remains held up by technical support at the 50% retracement around the $1,870 mark, though real rates moved slightly higher – taper talk could make life trickier for gold bulls in the near term. Meanwhile the ECB warned of financial stability risks stemming from rising levels of sovereign debt. Vice president de Guindos warned of a “legacy of higher debt and weaker balance sheets which … could prompt sharp market corrections and financial stress”.

Markets were in a broad risk-off mode yesterday. There is talk of greater correlation between crypto and risk assets these days – certainly when you see a big move in either direction they tend to follow each other. The FTSE 100 ended the day down more than 1% at 6,950. The rub for the FTSE 100, as we witnessed from yesterday’s concentrated selling in consumer cyclicals, miners and energy, is that whilst the reflationary environment and reflation trade may still broadly said to be ‘on’, the index is really quite exposed to emerging market growth – so rising cases across Asia – India, Taiwan, Vietnam, Japan and Thailand in particular – may pose a risk to the market’s ability to regain the kind of 7,700 handle we saw pre-pandemic. Whilst the situation in the UK, Europe and US is improved greatly, the risk to emerging markets from the pandemic remains. Stocks like oil majors, miners and big consumer goods companies rely a lot on emerging markets for growth. Materials continued to roll over yesterday but copper firmed this morning after hitting its weakest since May 6th, while WTI  oil is also firmer around $63.50 after hitting its weakest since Apr 26th. However iron ore amid concerns China will act to keep a lid on surging prices. Again I’d be encouraged by the flat rejection of anything sub-6,900.

Kingfisher trades at highs not seen since 2017 after raising guidance for the first half of the 2021/22 year. After a particularly strong first quarter, management now expect mid-to-high teens group like-for-like sales growth, having previously guided for growth of low double-digit growth. As a result they’ve hiked adjusted pre-tax profit guidance to between £580m and £600m. This comes after a stonking first quarter in which group  LFLs rose 23% from 2019 levels and were up 64% year-on-year. Stunning year-on-year stats can be misleading, but the performance against the 2019 comparison is noteworthy and shows how Kingfisher has not only put integration problems behind it but also managed to successfully adapt to the pandemic. Execution of the ecommerce strategy has been exceptional – online sales up 258% from two years a Of course, DIY has been a popular pandemic past time, but nonetheless, group growth is ahead of the market.

EasyJet shares fell as it reported a 90% drop in revenues and a headline loss of £701m for the six months to the end of March. Passenger numbers for the 6-month period decreased by 89.4% to 4.1 million. I’d like to know who these 4m people are and what they are doing.

Stocks attempt rally after selloff, sterling down on Bailey remarks, Kingfisher enjoys DIY boom

Morning Note

Stock markets firmed in early European trade but remain battered and bruised by yesterday’s sell-off as fears of a second wave of cases and new lockdown measures dealt a blow to risk sentiment. Selling pressure has been building for some time and the dam broke yesterday.

A recovery in the final hour of trade lifted the market off the lows so it wasn’t full capitulation, but there could yet be more downside as the S&P 500 approaches correction territory.

SPX, Dow tumble, tech strength stems Nasdaq losses

The S&P 500 declined by 1.2% and the Dow dropped 1.8% but tech stocks fared better with the Nasdaq flat for the day. Shares in Apple rose 3% and Microsoft was up 1% as some of the Covid winners showed more resilience to fears over second waves of the pandemic and fresh lockdown measures, which seemed to be the trigger.

Despite the heavy selling, bulls put in a strong finish – the Dow was down over 900 points at the low before ending –500pts. At its lows the S&P 500 plunged by as much as 2.7%. Nevertheless, the broad market is now already –6% for the month of September, has notched four straight daily declines for the first time since March, and is over 8% off its all-time high.

The FTSE 100 fell over 3%, breaching the 21-day simple moving average line. Despite the pressure the bulls just held the 5,800 round number and closed above the Sep 4th low of 5,799. The Stoxx 50 breached the July lows and is now close to its Jun bottom having sunk under its 200-day SMA. The move follows a clear period of congestion that was calling for a breakout, having been caught in an ever-narrower range.

The DAX fell almost 4.5% with heavy selling into the closing bell seen as bears tried but failed to crack the 12,500 round number as the 78.6% retracement of the Feb-Mar rout held. There were modest gains in early trade on Tuesday but the rally looks a little wobbly.

Fading hope for another round of stimulus in the US is another weight, with the death of Ruth Bader Ginsburg over the weekend seen as a decisive blow against a bipartisan deal being achieved before the election, since it materially magnifies the polarisation in Washington. A deal will need to wait until after November 3rd.

In addition, a heavy ramp up in August with far too much hot money chasing too few shares, increasingly stretched valuations, the lack of a vaccine on the horizon and the rising risk of volatility around the US Presidential Election – and uncertainty over whether we will get a clean result – seems to have caught up with the markets.

UK government set to introduce new Covid curbs, Kingfisher gets DIY boost in Q2

The UK government is set to introduce fresh measures to ‘control’ the virus – curfews and working from home if possible. What a difference a month makes – only a few weeks ago we were being implored to get out and about to help out. It’s almost like they don’t know what they are doing.

While pub shares fell on curfew news, several earnings reports today highlight the uneven nature of the recovery so far, and the uncertain path ahead.

Tui – uncertainty over the course of lockdowns and quarantine rules is leaving holidaymakers unsure about booking in the coming months. The winter 20/21 programme has been further reduced by 20% since the Q3 update, to around 40% adjusted capacity, reflecting ‘the current uncertainty relating to travel restrictions’. TUI says it is currently 30% sold for the adjusted winter capacity.

Compared to the normal levels of prior year, bookings are currently down 59%, in line with adjusted capacity. Consumers are much happier to assume things will be ‘back to normal’ by summer 2021. Tui says bookings are up 84% but at 80% adjusted capacity, however we should caution that much of this will be pushback demand from this summer as consumers changed travel dates to next year.

Cost-cutting has helped TUI weather the storm – that and some whopping bailouts from the German government, but it and the entire travel industry needs governments across Europe to give far greater clarity over restrictions and quarantines. Shares rose a touch but the rest of the travel sector was weaker with Carnival off another –4% and IAG down –3% after a drubbing yesterday.

Kingfisher enjoyed a strong recovery in Q2 as DIYers tackled their jobs lists. This recovery has continued into Q3 to date, management say, with growth across all banners and categories. Q3 20/21 group LFL sales to Sep 19th are up 16.6%.

DIYers are driving the recovery – sales at B&Q rose 28% in Q2 on a like-for-like basis. Trade less so – Screwfix LFL sales were up just 2.4%, though they are +9.9% in Q3 so far – as the construction industry struggles to get going again. Overall UK & Ireland sales rose 2.4% in the first half despite lockdown as people rediscovered their homes and their desire for improving them. French bounced back strongly, with Q2 sales +27% vs the –41.5% decline in Q1.

First half sales were –5.9% lower. Overall H1 sales were a tad lighter but cost reductions meant adjusted pre-tax profit rose 23% to £415m, with retail margins +140bps to 9%. Shares rose 6% in early trade and have more than doubled off the March low.

Dollar climbs on Fed jawboning, BoE’s Bailey to speak today

In FX, the rollover in risk sentiment and some interesting Fed jawboning played into the dollar bulls, with DXY sustaining a breach of the channel on the upside and clearing its 50–day SMA, which had been a key point of resistance last week. Gold retreated under $1,900 at one point with the stronger dollar weighing.

The Fed’s Bullard said the US has done enough on the fiscal front, whilst Dallas Fed president Kaplan stressed that the Fed should not keep its hands tied by committing to ZIRP forever even if the economy bounces back. Powell stressed that the Fed will use all its tools to do whatever it takes.

More Powell today plus Bank of England governor Andrew Bailey, who said in remarks this morning that the recovery in Q3 has been ahead of expectations but stressed that the hard yards are ahead.

All the market wants to know is whether negative rates are coming or not – he said the Bank has looked ‘very hard’ at the scope to cut rates further, including negative rates. So this was not the attempt to distance the MPC from the negative rate comments in last week’s release to give the central bank more flexibility. As the MPC indicated last week, Bailey wants to leave negative rates on the table.

GBPUSD was under fresh pressure under 1.28 and could be set up for a bear flag continuation with a possible dive back to 1.22. If this holds, bulls need to clear 1.30 to be encouraged. The key test is the 200-day EMA around 1.2760 which was tested last week and held, encouraging a rally back to 1.30. Cable shed this support in the early European session as Bailey got on the airwaves – one to watch today with the 100-day the last line of defence.

Retail crisis? British Land and Kingfisher highlight troubles

Equities

British Land writes down property value

As we’ve said before, who’d be a landlord right now? (Intu warning signals more high street trouble, 03/05/19). British Land today follows Land Securities in writing down its assets due to the collapse in the high street retail sector. The firm has written down its portfolio by 4.8%, with the retail part of that written down by 11.1%. Management notes candidly that difficulties were most pronounced in department stores – no great surprise there. Elsewhere things are strong – offices +1.1%, other developments +10.8%. LFL rental growth of £15m offset the £14m impact from CVAs.

As a percentage of its portfolio, department stores down have been cut to 1% from 5% in 2014, highlighting just how far the sector has fallen in just a few years. Overall the retail portfolio is being downgraded substantially – hardly surprising given the rate of store closures and well-documented problems for a number of large and small players in the sector. 

Property companies like British Land – just like Land Securities yesterday – need to react to this and protect their interests. Land Securities wrote down the value of its property by £557million to £13.8bbn, with retail parks asset value -15.5%, and shopping centre assets -11.7%.

Earlier this month Intu said LFL net rental income will be down 4-6% this year. Previously it had guided for incomes to decline by 1-2%. As we said at the time, it may not be the last time that the company has to disappoint the market. In February it took a big write down on its property values, which dragged the company into the red. Clearly tough times for landlords, but tougher for retailers.

Kingfisher struggles in France

Kingfisher is today hosting an Innovation Day for investors and analysts in London today where it will show off some spangly new products. All very nice, but one rather feels that investors would prefer to see what the new strategy is going to look like and who the next CEO will be first. 

Trading remains tough in France, but things are improving in the UK, where B&Q enjoyed a decent bump in like-for-like sales. 

UK & Ireland total sales rose 5%, or 3.4% on a LFL basis. B&Q LFLs rose 2.8%, a good performance driven by weather-related sales. A rare event where a retailer says the weather helped. Screwfix remains a real stalwart and growth shows no real tailing off – sales up 9.6% and LFL +4.5%. 

France is much tougher – total sales -3.4% (LFL -3.7%). Castorama sales were down 2.4%, with Brico Depot –4.5%, or –5.1% LFL. Romania and Poland sales were very strong still. 

Pressure on management to come up with a new plan will mount and this could well include a look at breaking up this company into smaller parts. Sometimes you are not greater than the sum of your parts. 

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