Markets look for direction from ECB, US CPI inflation

Morning Note

European stock markets were again lacking direction ahead of today’s closely awaited ECB meeting and a hotly anticipated inflation reading from the US. The FTSE 100 trades a little higher, the DAX a little lower. Wall Street closed lower with the major indices holding to well-worn ranges. The S&P 500 down 0.4% to 4,219.55 but remains just a few points below its all-time high of 4,238.04 set on May 7th.  

Meme stocks attracted the most interest as Clean Energy Fuels – the fourth most talked about stock on the /Wallstreetbets thread yesterday – rallied 31%. AMC fell 10% and Clover Health dropped 23% after a monster rally in the previous session. Today’s most-discussed stocks include WISH, CLF, WKHS, AMC and TLRY. 

 US inflation reading key risk event

If there is a worry about inflation – today’s US CPI print will tell us a lot – then the bond market is not showing it. US 10yr yields fell under 1.49% to the lowest level in 3 months. This is not just a Fed thing – the yield on longer dated paper such as the 30yr is also well off its 2021 highs. Today’s inflation reading still poses a risk to the market. The annual rate is forecast to climb to 4.7% in May, from 4.2% in April, whilst the core reading is seen at 3.4%, with the month-on-month at +0.4%. With the Federal Reserve anchoring its policy goals to employment, another hot reading won’t be too much to worry about. Nevertheless, the print will still lead to some volatility at 13:30 (BST) in index futures, numerous FX crosses and gold. An above forecast inflation reading would reignite market taper fears, albeit this is likely to be short-lived and one to fade as the Fed still has control of this, at least to the extent that the market believes it does.

ECB set to hold steady for now

The European Central Bank (ECB) convenes today amid a much rosier economic outlook than at the start of the year. But with the central bank having communicated its plans to front-load asset purchases, there is not expected to be any material change in policy or communication. It will be hard to avoid taper talk so how the ECB responds to questions around tapering will be of central importance to the market’s expectations and the euro. At the March meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but that it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point. Today it’s likely the ECB will support continuing running PEPP at around €80bn a month before starting to taper in September. 

Yields have been pressing higher but have retreated from the May peaks. The increased pace of asset purchases that was agreed in March came as a response to rising yields at the time. But the economic outlook – chiefly driven by a strong vaccine rollout that was slow to start but is now firing on all cylinders – has improved greatly since then. The ECB has been taking the line that inflation is temporary and rising bond yields reflect better fundamentals, so I don’t think it will be unduly concerned by a higher rate environment now due to the better economic picture. This will make talk of a taper very difficult to ignore. The language around the speed of asset purchases may change somewhat, and this could drive EZ yields + EUR higher. It will be very interesting to see what the ECB says about the state of financing conditions, and it is sure to continue to tie PEPP purchases to maintaining these as ‘favourable’.  

The big risk for EUR crosses around this meeting is: does the ECB silence taper talk with enough vigour to keep yields in check, or does it allow the market to think the more hawkish voices are winning the argument about when the central bank eventually exits emergency mode? With the ECB seen in a holding pattern, there is quite a low bar for a hawkish surprise.

Inflation has picked up since the last meeting, which could see the forecast for 2021 and 2022 revised upwards from the March level. EZ inflation rose to 2% in May from 1.6% in April, the first time it’s been on target in over two years. With growth in Q1 a little light, the rebound in the summer should mean GDP projections remain broadly unchanged. 

ECB speakers have been offering a few titbits since the last meeting. Of particular importance to the speed at which the ECB will exit emergency mode, Christine Lagarde stressed that inflationary pressures will be temporary – sticking to the global central banker script. At the April meeting she said tapering talk was premature. But she remains caught between the hawks and doves. Kazaks and Lane made it clear policymakers will look at the asset purchase programme again in June, which could involve scaling back the programme if the economic situation is better.  There were dovish comments from Panetta in late May, noting that it was too early to taper bond purchases. Banque de France Governor, Villeroy de Galhau, stressed that the ECB is going to be at least as slow to tighten as the Federal Reserve. 

Finally, London’s IPO market is showing signs of fatigue. Broker Marex has pulled its planned listing, while fuel cell company Elcogen and miner Tungsten have both delayed planned floats. Whilst there may be more to the Marex decision than simply ‘challenging IPO market conditions’, it does rather seem there is some amount of investor fatigue after a deluge of new issuance in the first quarter. Wise to pause. In the case of Marex, it may be wise to steer clear. 

What are meme stocks & why should you care?

Equities
Investments

The power of social media sentiment over stock prices is rapidly strengthening. The meme stocks are rising. Unsure of what they actually are? Here’s a look at what meme stocks are and whether they’re worth investing in. 

What are meme stocks? 

Meme stocks: the background 

Whether you like it or not, we live in an age dominated by social media. Instagram; Twitter; Facebook; Reddit; whatever the platform, you go there, and you’ll find memes aplenty. 

Memes are basically images or videos that go viral. Going viral is the key here. With millions of users, the power of social media in spreading information and instigating trends is massive. Whether that’s the latest funny cat video, a trend like planking, or sending certain stocks to the moon, memes are common social currency these days. 

So, where do stocks fit in? Meme stocks, also playfully called stonks, are basically stocks that are popular with Millennial investors. They trade more on hype rather than their underlying fundamentals.  

Did you get caught up in the GameStop frenzy? This is the perfect example of meme stocks in action. For those unfamiliar, investors operating out of the /r/Wallstreetbets forum on Reddit backed GameStop heavily, sending its price to the moon, before shorting the stock. Other stocks given the Reddit touch include AMC and American Airlines. 

Beyond Reddit and Twitter, those investing in stonks might also use Stocktwits, a Twitter-like platform devoted entirely to stocks. Online investor communities have millions of members. The now infamous /r/Wallstreetbets has over 9.4m subscribers – known by themselves as ‘degenerates’.  

As well as pure stocks, ETFs are emerging around the stonk space. The recently launched VanEck Vectors Social Sentiment ETF, listed on the NYSE under the BUZZ ticker, is the most prominent example. BUZZ will reportedly use an algorithm based around finding the 75 large-cap stock names that are getting the most positive discussion on the internet, principally on social media like Twitter, Reddit and so on. All companies in the ETF must have a market cap of $5bn. 

So why should you care? The GameStop experience in January showed how investing is changing amongst younger age groups. One of the main drivers for these investors was to try and instigate a big change in the whole culture of investing and trading. More cynical observers may say it was instigated to try and take advantage of Millennial naivety, but it’s unlikely that such a frenzy will happen in the way it did with GameStop stocks.  

But January 2021’s events showed how social media is shaping the way people trade and invest, and the stocks they choose to trade and invest in. That makes meme stocks a very interesting phenomenon to observe going forward. 

Should you invest in meme stocks? 

That is the big question. 

If you want to invest in meme stocks, you should be aware of their common characteristics. As mentioned earlier, they tend to be popular with the younger, Millennial investor crowd: tech-savvy investors who rely on social media platforms to find the latest tips.  

Stonks – as meme stocks are referred to sometimes – tend to be very volatile: one second, they could be soaring, the next they’re crashing back to earth. Their valuations aren’t based around fundamentals, more a collective belief in ramping them up. Looking to the future is a key part of Millennial investors’ strategies. Fear of missing out (FOMO) is also a key driver, hence why so many people hopped aboard the GameStop rocket ride. Panic selling at even the slightest headwind is a prevailing trend, which only adds to meme stock volatility.  

The risks of trading or investing in meme stocks can be very high as a result. It’s always advised any traders or investors look into doing proper research and analysis before committing any capital when picking stocks. 

But that doesn’t necessarily mean all meme stocks are pariahs worth avoiding. Some may have actual potential, whether through a visionary CEO, being at the forefront of a new industry like companies listed in ARK innovation ETFs, or at the forefront of a megatrend about to go viral worldwide.  

The trick is identifying what is pure hype and which stocks may actually have potential beyond meme status. For instance, GameStop’s rally is partly driven by an attack on the whole system of short selling, and millennial nostalgia for a company that may have had a lot of significance to them growing up, rather than good financial performance and a solid business model.  

If you do want to invest in meme stocks, then it must be stressed again there are high risks and major price volatility here. Investing in stonks may not be for the inexperienced, despite attempts by apps like Robinhood to “democratize finance”. Please do careful analysis and research before trading or investing. 

Are there any meme stocks you should watch? 

Nasdaq has identified some meme stocks it believes could offer solid returns. Whether they do or not remains to be seen, but these could be solid additions to your portfolio, should the meme momentum continue. 

Nokia 

Remember the bulletproof brick of a phone the 3310? Nokia used to be king of the mobile phone world with phones that could seemingly withstand an apocalypse scale event. The transition to smartphones hasn’t been very healthy for Nokia, but due to huge brand recognition from its glory days, and unintended US governmental boosts in an effort to curb Chinese phone maker Huawei, have given Nokia stock a bit of a boost. 

In January, NOK rose from $4.00 to topping at $6.50, although they have subsequently fallen back to $4.00. Its latest earnings report saw Nokia beat expectations, so the telecoms company may be one to watch in other quarters this year. 

Sundial Growers  

Cannabis stocks have been growing in popularity recently as its expected Joe Biden’s White House may push ahead with federal decriminalisation legislature during his four-year presidential tenure. While other more mainstream stocks like Tilray or Canopy entice traditional investors, meme stock buyers are looking to cannabis penny stocks to get their investment fix. 

Sundial Growers is one of these. While it’s high of $1.30 per share may be seen as overpriced, the company is undergoing a shift from low-margin wholesaler supplier to high-margin retail firm. The Canadian company could be one the watch for stonkers if it can pull off its transformation.  

Palantir 

Palantir and its many links to the Biden Administration have investors hoping to benefit from a solid four years for the data analytics firm.  

High revenue growth in the last quarter and better earnings have outlined why meme stock investors are looking to Palantir. If it continues to have a healthy relationship with the White House and other governments, revenues should stay strong, thus the Palantir share price should stay strong too.  

The company is looking to expand its retail offering, as most of its clients now are government bodies. If it does so, but fails to meet earnings expectations in this new direction, its meme stock shine might be tarnished. But with governments increasingly capturing and sifting through citizens’ data, Palantir may have a solid future ahead. 

Naked Brand Group 

Struggling retailers are a target for stonks investors and Naked is no different. The group is currently not doing well in the bricks-and-mortar space, so it’s winding down its physical retail side to concentrate purely on e-commerce.  

However, its current market cap of $81m makes it a bit of a small fry in the online retail world. Last year, it generated sales of $54.7m: a pittance against some of the major e-commerce giants. But it’s still very early days, and if it can grow with its renewed focus on digital, Naked could be a stock to watch. For some investors, it’s more of a gamble than others, but that is par the course for those investing in meme stocks. 

Churchill Capital Group 

Some meme stocks are part of industries looking to change the world. Electric vehicles is one of these. We’ve all seen the rapid rise of Tesla for instance. Other EV makers are trying to establish themselves before traditional car brands step up their own electric efforts. 

Churchill Capital Group is eyeing up an acquisition for luxury EV brand Lucid Motors with the aim of turning it into a Tesla competitor. A tall order, given Tesla’s head start, but as electric vehicles become the norm, Lucid Motors could establish itself as a key player. Its $69,900 Lucid Air model is already substantially cheaper than the equivalent Tesla Model S, but still sits in the same high-end sedan space. 

This deal is yet to be concrete, but CCPG is getting heavy backing from the Saudi sovereign wealth fund, which shows its Lucid ambitions might not just be the stuff of dreams. As a result, the stock is on meme stock investors’ hotlist. 

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