FTSE makes new post-pandemic high, Bitcoin up on ETF hopes

Morning Note

GPs will be paid more to do what they used to do before the pandemic, like see patients face to face. This is what dislocation and the ‘new normal’ looks like: same service, costs more. That’s one of the reasons why inflation is not going to be as transitory as central bankers have been telling us.

Markets are not that concerned by this, so it seems. The FTSE 100 has broken out to a new post-pandemic high, stretching its recent range by a few more points on the upside to hit a high of 7,242 this morning. This marks a roughly 400pt reversal from the Sep 20th intraday low. It’s been a very tight range of that size since April but there are encouraging signs the FTSE can yet end the year at its pre-pandemic level of 7,700.

Why the rally? Key is energy – BP and Shell among the top performers of the last month and have a big index weighting. That’s BP and Shell, which are both up more than 20% in the last month as oil and natural gas prices have soared. WTI is back above $82 this morning. Next is the two big reopening stories – IAG and Rolls Royce, they are the best performers of the last month among the blue chips. Reopening of travel has been a major factor and we see more good news today with the move to lateral flow tests for international arrivals. Then third we have the big banks – HSBC, Lloyds, StanChart and NatWest have all rallied over 10% in the last month as rates have risen and the macro environment has held up pretty well. Bets the Bank of England is far closer to raising rates have helped, but global bond yields have also been moving higher. The FTSE is exposed to the winds of the global economy and trade, which despite it all are holding up well, and UK shares remain heavily discounted to peers. The FTSE 250, a better gauge of the UK economy, has ticked higher in the last few sessions but is down by around 5% from its Sep high.

Wall Street closed firmly higher yesterday amid a rush of positive earnings reports from the big banks. Walgreens and UnitedHealth also delivered positive results that indicate the large corporations are still able to deliver earnings growth and higher profits despite the rising costs. Supply chain problems will become more obvious when some more consumer discretionary names report, but so far the storm is being weathered. Meanwhile lower rates lifted the big tech boats. The 1.7% rally for the S&P 500 was its best day since March.

On the data front, US initial jobless claims fell below 300,000 for the first time since the pandemic, but inflation is not going away. US PPI was a tad cooler than expected but still running hot at 8.6% year-on-year, however core PPI ticked up to 6.8% from 6.7%. The headline 8.6% was the largest advance since 12-month data were first calculated in November 2010. Today – US retail sales, Empire State mfg index.

Bitcoin eyes $60,000 as traders bet the SEC is poised to allow the first exchange-traded fund based on BTC futures. The SEC is reviewing around 40 Bitcoin-linked ETFs and a report from Bloomberg suggests the regulator will approve some of these. Bitcoin spiked on the report, which indicated that Invesco and ProShares could be among the providers cleared to start trading on Bitcoin ETFs. With the kick on to the $60k level it may be a matter of time before we see a fresh all-time high.

Gold – pulling back to the 23.6% retracement as it pares gains in the face of the $1,800 test.

GBPUSD: Nudging up to the trend line again at yesterday’s 3-week high.

Stocks rally, inflation sticks, earnings on tap

Morning Note

Stock markets rose in early trade as investors parsed the latest signs of inflation and the central bank reaction function, whilst earnings season has got underway across the pond with some decent numbers from JPMorgan. Wall Street rose mildly, snapping a three-day losing streak. VIXX is off sharply, which maybe reflects increasing comfort that the market has stabilised, if not able to make new highs just yet.

Earnings season gives investors a chance to ignore some of the noise and market narratives and get into actual numbers. Only this time we expect the corporate reporting season to underline the inflation narrative – the question is whether it’s just inflation or stagflation. Probably we get a bit of both – watch for sandbagging. JPMorgan numbers were positive, but as ever the stock fell despite beating on the top and bottom line. Profits were boosted by better-than-expected loan losses. Trading revenues were robust, asset and wealth management strong, loan growth improving and likely to pick up in 2022. Delta Air Lines also posted numbers that topped expectations including a first quarterly profit ex-state aid since the pandemic. But higher fuel costs and other expenses will hit the fourth-quarter profit – shares fell over 5%. Today sees Citigroup, Bank of America, Morgan Stanley and Wells Fargo report.

Chinese producer price inflation rose 10.7% in September, the highest level since 1996. The China PPI number is an important leading indicator for global consumer inflation. On that front, US consumer price inflation accelerated in September to 5.4%, with prices up 0.4% month-on-month. Core rose 0.2% from August, leaving prices ex-volatile items like energy and food at 4%. US PPI inflation today is seen at +0.6%, +0.5% for the core reading.

Minutes from the Fed’s last meeting indicated the US central bank is likely to commence tapering asset purchases next month. “Participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,” the minutes said.

Post the CPI and FOMC minutes we see Treasury yields lower, the dollar lower, gold firmer. Lower bond yields lifted megacap growth, or at least provided some marginal buying excuse to do so. Inflation is still hot but not getting much hotter. Narrative has clearly exited team transitory to support team sticky. The question now is whether we are at peak in/stagflation fears and this allows the market to move on to start pricing for 12-18 months hence, by which time you’d feel a lot of the post-pandemic bottlenecks and pressures will have eased. The problem for this – still team transitory if you like – is that anything that raises the costs of getting goods from source to consumer is inflationary and the pandemic has certainly been that. But so too is the shift in globalisation trends, eg Brexit.

Sterling is firmer as the dollar weakened in the wake of the CPI report. GBPUSD has broken free of the trend resistance and with bullish MACD crossover in play. Bulls would like to see the previous two highs on the MACD cleared (red line) to confirm reversal of the downtrend since May.

GBPUSD Chart 14.10.2021

Chart: Dollar index easing back to the middle of the channel, but faces pressure from bearish MACD crossover.

Dollar Index 14.10.2021

Yesterday I noted that gold was likely to face some volatility and break free from its recent consolidation. CPI numbers were indeed the catalyst and we saw gold prices hit the highest in a month, approaching $1,800 before pausing. Near-term, consolidation again with the 1hr chart showing a clear flag pattern with the lower end capped by the 23.6% line.

Gold Chart 14.10.2021

Chart showing gold price movements on 14.10.2021

Oil has firmed, with WTI recovering the $81 handle, though price action remains sluggish and sideways for the time being. OPEC yesterday cut its global oil demand growth forecast for 2021 but maintained its 2022 view and cautioned that soaring natural gas prices could boost demand for oil products.

OPEC cuts its demand growth forecast for 2021 to 5.82 million barrels per day, down from 5.96 million bpd. As we noted some months ago, it was always likely that OPEC would need to trim its 2021 forecast since it had always backdated so much of that extra demand to come in H2. The original 6m bpd forecast implied 1m bpd in H1, 5m bpd in H2, which always seemed optimistic. Critically, though, it was not wildly optimistic – demand has come back strongly after shrugging off the summer Delta blues. The cartel maintained its 4.2m bpd growth forecast for next year. EIA inventories today – a day late due to the Columbus Day holiday – forecast 1.1m build.

Crude Oil Futures Chart 14.10.2021

Nat gas – holding the trend support and 20-day SMA, bearish MACD crossover still in force.

Natural Gas Chart 14.10.2021

Hays shares +4% as fees rose 41% from a year ago. Strong leveraged play on record numbers of job vacancies and staff shortages. Shares have been flat the last 6 months, though +17% YTD, +45% the last 12 months leaves not a lot of room left on the table.

Dunelm still performing strongly against tough comparisons. Total sales in the first quarter increased by 8.3% against a very strong comparative period in FY21, when sales grew by 36.7%. Gross margins were down 10bps and expected to be 50-75bps lower than last year for the full year. Management warned on supply chain problems and inflation but stressed that good stock levels should provide them some cover. Some way to go to for the shares to recover recent highs but encouraging signs.

Markets primed for US inflation, FOMC minutes, JPM kick off earnings season proper

Morning Note

European stocks were off half a percent this morning in early trade after another fragile day on Wall Street saw selling into the close and another weaker finish. All eyes today on the US CPI inflation number, minutes from the FOMC’s last meeting and the start of earnings season with numbers due out from JPMorgan. Asian equities mixed after Chinese trade data was better than expected.

Markets in Europe turned more positive after the first half-hour but it’s clear sentiment is anaemic The FTSE 100 is chopping around its well-worn range, the DAX is holding on to its 200-day moving average just about. Possible bullish crossover on the MACD needs confirming – big finish required.

Dax Chart 13.10.2021

JOLTS: We saw a marked jump in the “quits rate” with 4.3m workers leaving their jobs, with the quits rate increasing to a series high of 2.9%. Tighter labour market, workers gaining bargaining power = higher wages, more persistent inflation pressures.

But… 38% of households across the US report facing serious financial problems in the past few months, a poll from NPR found. Which begs the question – why and how people are not getting back into work and quitting. One will be down to massive asset inflation due to central bank and fiscal policy that has enabled large numbers of particularly older workers to step back sooner than they would have down otherwise. Couple of years left to retire – house now worth an extra 20% and paid off, 401k looking fatter than ever, etc, etc. Number two is something more sinister and damaging – people just do nothing, if they can. Working day in, day out is like hitting your head against a brick wall – you get a headache, you die sooner, and you don’t go back to it once you’ve stopped doing it. Animal spirits – people’s fight to get up and do things they’d prefer not to do – have been squashed by lockdowns.

More signs of inflation: NY Fed said short and medium-term inflation expectations rose to their highest levels since survey began in 2013.

NY Fed inflation expextations 13.10.2021

UoM preliminary report on Friday – will give us the latest inflation expectation figures. This is where expectations stand now. Today’s CPI print is expected to show prices rose 0.4% on the month to maintain the annual rate at 5.4%.

University of Michigan inflation expectations 13.10.2021

The Fed’s Clarida said the bar for tapering was more than met on inflation and all but met on employment. FOMC minutes will tell us more about how much inflation is a worry – we know the taper is coming, the question is how quickly the Fed moves to tame inflation by raising rates.

Watch for a move in gold – it’s been a fairly tight consolidation phase even as rates and the USD have been on the move – the inflation print and FOMC minutes could spur a bigger move. Indicators still favour bulls.

Gold Chart 13.10.2021

US earnings preview: banks kick off the season

Wall Street rolls into earnings season in a bit of funk. The S&P 500 is about 4% off its recent all-time high, whilst the Nasdaq 100 has declined about 6%, as the megacap growth stocks were hit by rising bond yields. S&P 500 companies are expected to deliver earnings growth of 30%, on revenue growth of 14%.

JPMorgan Chase gets earnings season underway with its Q3 numbers scheduled for Oct 13th before the market open. Then on Thursday we hear from Bank of America, Citigroup, Morgan Stanley and Wells Fargo, before Goldman Sachs rounds out the week on Friday. JPMorgan is expected to deliver earnings per share of $3, on revenues of $29.8bn. Note JPM tends to trade lower on the day of earnings even when it beats expectations for revenues and earnings.

Outlook: Nike and FedEx are among a number of companies that have already issued pretty downcast outlook. Supply chain problems are the biggest worry with a majority of companies releasing updates mentioning this. Growth in the US is decelerating – the Atlanta Fed GDPNow model estimates Q3 real GDP growth of just 1.3%. Higher energy costs, rising producer and consumer inflation, supply bottlenecks, labour shortages and rising wages all conspiring to pull the brake on the recovery somewhat. Still, economic growth has not yet given way to contraction and after a global pandemic it will take time to recovery fully.

Trading: Normalisation of financial markets in the wake of the pandemic – ie substantially less volatility than in 2020 – is likely to weigh somewhat on trading revenues, albeit there was some heightened volatility in equity markets towards the end of September as the stock market retreated. Dealmaking remains positive as the recovery from the pandemic and large amounts of excess cash drove business activity.

Costs: The biggest concern right now for stocks is rising costs. Supply-side worries, specifically rising input and labour costs, pose the single largest headline risk for earnings surprises to fall on the downside. The big banks have already raised their forecasts for expenses this year on a number of occasions. It’s not just some of the well-publicized salary hikes for junior bankers that are a concern – tech costs are also soaring.

Interest rates: Low rates remain a headwind but the recent spike in rates on inflation/tapering/tightening expectations may create conditions for a more positive outlook. The 10s2s spread has pushed out to its widest since June. Rising yields in the quarter may have supported some modest sequential net interest income improvement from Q2.

Chart: After flattening from March through to July, the yield curve is steepening once more.

Yield Curve 13.10.2021

Loan demand: Post-pandemic, banks have been struggling to find people to lend to. Commercial/industria loans remain subdued versus a year ago, but there are signs that consumer loan growth is picking up. Fed data shows consumer loan growth has picked up as the economy recovers. However, UBS showed banks were lowering lending requirements in a bid to improve activity, which could impact on the quality, though this is likely a marginal concern given the broad macro tailwinds for growth. Mortgage activity is expected to be substantially down on last year after the 2020 surge in demand for new mortgages and refinancing.

Chart: Consumer loan growth improving

Consumer Loan chart 13.10.2021

Other stocks we are watching

The Hut Group (THG) – tanked 30% yesterday as its capital markets day seems to have been a total bust. Efforts to outline why the stock deserves a high tech multiple and what it’s doing with Ingenuity and provide more clarity over the business seemingly failed in spectacular fashion. The City has totally lost confidence in this company and its founder. No signs of relief for the company as investors give it the cold shoulder. Shares are off another 5% this morning.

Diversified Energy – the latest to get caught in the ESG net – shares plunged 19%, as much as 25% at one point after a Bloomberg report said oil wells were leaking methane. Rebuttal from company seemed to fall on deaf ears. Shares recovering modestly, +3% today.

Analysts are lifting their Netflix price targets, partly on the popular “Squid Game.” Netflix will report its third-quarter earnings next week.

Stocks lower, rates on the move

Morning Note

Stock markets declined on Tuesday morning following on the heels of a wobbly session on Wall Street, with losses of around 0.5% for the broader European Stoxx 600. The FTSE 100 continues to chop in a sideways direction, trading just below 7,100 it is held firmly within the range of the last 6 months, whilst the DAX is back to the lower end of the recent range to test the 200-day moving average once more. Inflation worries persist, though our tradeable US natural gas and oil prices have edged back from the highs. Yesterday saw WTI rise above $82 for a fresh multi-year peak, before paring gains to take an $80 handle this morning. Coal prices in China meanwhile have risen to a new all-time high. Copper has rallied 7% this month, though it’s still ~10% below its May peak.

 

Rates are on the move again with the 10-year US Treasury note at 1.63%, a four-month high. The 2yr note yield also notched an 18-month high. Earlier we saw UK gilt yields spiked on markets believing the Bank of England could act early to tame inflation. The simple way of looking at this is higher energy costs = higher inflation expectations = early, faster central bank tightening. Later today we hear from the Fed’s Clarida and Bostic, whilst a 10yr bond auction in the US will be watched for demand. US CPI inflation numbers are due tomorrow.

 

On Wall Street, sentiment looked fragile as early gains reversed the market closed at the session low. The S&P 500 fell 0.7%, with similar losses for the Nasdaq and Dow Jones. Lots of churn, little real direction to this market right now until the macro picture on inflation and CB reaction function is better understood. Asian shares were broadly weaker as another deadline for Evergrande bond coupon payments has passed.  

 

EasyJet shares declined more than 2% despite sounding a confident tone over the reopening of the travel sector. The company reported Q4 headline losses decreased by more than half with positive operating cash generated. Management now expects a headline loss before tax of slightly more than £1.1bn. However, on a more upbeat note the company says it sees positive momentum carried into FY22 with H1 bookings double those of the same time last year. 

WTI: Finding support at the 23.6% retracement of the move up off the Oct 7th swing low.

Oil Chart 12.10.2021

GBPUSD: Pulling back from yesterday’s 2-week high, where it retreated from our trend line, now sitting on the 23.6% retracement of the Mar ‘20 to May ‘21 rally at 1.35950.

GBPUSD Chart 12.10.2021

Slow start for equities, Asos tumbles

Morning Note

Soft and sluggish start for European equity markets – typical Monday morning feel until we all get out of bed. FTSE 100 is out the traps better at +0.2%, with banks, basic resources and oil & gas leading the way higher this morning, DAX lower at -0.3%. Rates are up – US 10yr Treasury note north of 1.6% and 2s and 5s highest since around March 2020. Last week’s nonfarm payrolls missed expectations, but Fed chair Powell says it’s about accumulated progress, not a blowout month. After the first flush of summer and two very strong prints, jobs growth is slowing and wages are up sharply at 4.6% – the stagflation bears may point out. US stocks froze somewhat in the headlights of the miss, declining mildly on Friday but nevertheless posting a positive week. The S&P 500 posted its best since August, the Dow Jones its strongest since June.

US and inflation on deck this week will be the focus, but so too earnings season as it gets underway on Wall Street. Earnings on tap this week include JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Wells Fargo, Citigroup, Delta Airlines and Walgreens Boots Alliance.

As mentioned a couple of times last week, the question facing investors is whether earnings calls are positive – supply chain woes, labour shortages, etc etc. And this takes us to the point also made last week – are we at peak inflation/stagflation/supply chain fear? The macro outlook still seems somewhat cloudy in terms of growth, policy and inflation, but that does not mean equities cannot make gains – climb the wall of worry, as the saying goes. Indeed, there are signs that some of the worst of the container shipping problems are rolling over. The stagflation shadow may be around for a while, but this may now be fully ‘priced’. What we don’t know is whether equities – particularly US and megacap growth which has dominated and is now a large part of the S&P 500 by weighting – will roll over as the Fed starts to taper and we see rates move higher. Whilst it has been choppy and volatile, so far the move to 1.6% on 10s from the August lows at 1.17% has not produced panic. Since peaking in early September, the broad market is down ~3%, whilst the Nasdaq 100 is about 6% lower. Not without damage, for sure, but the move has been fairly orderly, rotational, and is seen has a ‘healthy’ type of correction that is generally supportive for equities in the longer run.

Of course, don’t expect companies to waste a good crisis. Remember the warnings due to Covid that generally turned out to be fake news. This quarter’s earnings schedule should feature some pretty heavy expectation management that may create good opportunities for entry points. Corporate sandbagging might weigh on individual names temporarily though the broad market should be able to withstand this.

Asos shares tumbled this morning as CEO Nick Beighton steps down and the company warned of continued supply chain problems. Revenues also missed expectations, but undoubtedly the departure of Beighton, who has steered the company through an incredible period of growth, is a contributing factor. A big loss for the company. The search is on for a successor who can deliver £7bn of annual revenue within the next 3 to 4 years. Annual results were impressive with sales growth of +22% and profits +36%, but expectations for the next year are being massaged down to 10-15% with first half sales in mid-single digits. Asos is not wasting this supply chain crisis to lower the bar. Zalando down more than 3% in sympathy.

Energy markets remain in sharp focus with all-time highs for Chinese coal echoing loudly this morning. Nat gas is steady around $5.70, though European prices remain volatile. Oil is higher again with WTI north of $81. Declining inventories, supply kept in check, demand recovering post the big summer Delta wave fear = bullish for oil. CFTC data shows speculators getting longer oil.

Oil Chart 11.10.2021

Sterling on the move: GBPUSD has broken resistance and cleared the recent range to reach its best level in two weeks. The pair has broken out to 1.3670 in early trade this morning with a clear bullish bias having cleared out the ranges. Sterling is firmer thanks to increased speculation the Bank of England will raise rates sooner than previously expected. MPC member Michael Saunders said households should prepare for “significantly earlier” interest rate rises as inflation pressure rises – though he didn’t necessarily signal that November is on the table. Remember markets were pricing for Feb hike of 25bps and Saunders said that “markets have priced in over the last few months an earlier rise in Bank Rate than previously and I think that’s appropriate”. This morning the money markets have brought this forward to Dec – arguably on Saunders remarks, arguably were heading that way anyway. We should note that Saunders is on the hawkish end of the committee and voted to halt the BoE’s bond buying programme early.

GBPUSD: MACD bullish crossover, just now running into trend resistance.

GBPUSD Chart 11.10.2021

Bitcoin: momentum positive but pulling back at $57k, the 78.6% retracement.

Bitcoin Chart 11.10.2021

Mixed start for European equities ahead of NFP

Morning Note

Mixed start in Europe after another positive session on Wall Street as the US Senate approved raising the debt ceiling until December. Treasury yields are higher, with the 10yr hitting 1.6%, which may cool megacap tech’s recovery. All eyes today on the nonfarm payrolls report and what this means for the Fed and tapering. 

 

Whilst European bourses are mainly in the red the FTSE 100 is trying to break above 7,100, but as noted yesterday there is moving average congestion to clear out the way just underneath this and it’s still firmly within the range of the last 6 months. The S&P 500 was up 0.83% on Thursday and has now recovered a chunk of the Monday gap and is now just 3% or so off its all-time high. Momentum just flipping in favour of bulls (we note bullish MACD crossover for futures) – has the supply chain-stagflation worry peaked? Maybe, but rising rates could undermine the big weighted tech sector in the near-term and it is unclear whether there is enough appetite among investors to go more overweight cyclicals when the macro outlook still seems somewhat cloudy in terms of growth, policy and inflation. Next week is earnings season so we either get more bullish conference calls for the coming quarters or a bit of sandbagging re supply chain issues, inflation – for the index a lot will depend on whether the C-suite is confident or cautious about their outlooks.

 

Inflation nation: We can keep banging on about inflation, but it’s well understood now. Even the Bank of England has woken up – BoE chief economist Pill warned that inflation looks to be more persistent than originally anticipated. UK inflation expectations have hit 4% for the first time since 2008 – soaring gas and fuel bills not helping. “The rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above 4 per cent into 2022 second quarter.” said Pill. Tax hikes and labour shortages also featuring in the inflationary mix. There was a rumour doing the round yesterday that BoE’s Broadbent has “taken Nov off the table”. However, with inflation racing higher it’s clear the Bank should be acting to hike in Nov to get ahead. Markets currently pricing a first 25bps rate hike fully by Feb 2022, another 70bps by the end of that year. 

 

Nonfarm payrolls watch: US employers are expected to have added 490k jobs in September, up from 235k in August, which was a big miss on the forecast. NFPs are important and could be market moving later since the Fed has explicitly tied tapering + subsequent rates lift-off to the labour market. A weak number could just dissuade the Fed from announcing its taper in Nov, but I see this as a low-risk outcome. More likely is steady progress on jobs (ADP was strong on Wed) and the November taper announcement to follow. The persistence of inflation and rising fuel costs in particular has changed the equation for the Fed entirely. Benign inflation that we were used to is no longer to be counted on to provide cover for trying to juice the labour market. The problem is not demand side, it’s supply side. Central banks are seeing rising inflationary pressures that are proving more persistent than thought. Slowing economic growth and risks to the outlook stem from the supply side not the demand side – so pumping the demand side even further into a supply side crisis is not helping matters much. 

Stocks climb but price action still choppy

Morning Note

Choppy: Stocks are firmer in early trade following yesterday’s losses. For all the movement we have seen, the FTSE 100 is tracking slap in the middle of its 6-month range. But now it’s facing near-term resistance from its 50-day and 100-day averages at 7,092/7,078, which seem to be capping any rallies at the moment, whilst the 200-day support at 6,913 is looking good for a retest. The DAX moved up more than 1%, or about 170pts, to around 15,150 as it looks to recover its 200-day moving average at 15,037. You are in ranges now where you feel it could break either way – as noted earlier this week you need to feel that the repricing for risk from a different macro outlook and rate environment (higher yields) has bottomed, that the valuations are looking healthier, earnings can deliver beats not misses and that we’ve passed peak inflation/stagflation ‘fear’ (if not the actual environment, which could last for many months).

Wall Street reversed early losses to rally on signs of progress on the US debt ceiling. The Dow Jones industrial average erased a drop of 400pts to end the day up 100pts. The S&P 500 rallied 0.4% as mega-cap tech rallied as bond yields didn’t really push on and investors thought they’re close to being oversold. But it’s still all rather indecisive. The S&P 500 continues to chop around its 100-day SMA and the 4,300 area. Futures are indicating higher with 10yr yields back down to 1.52% from 1.57% hit yesterday, the highest since June.

Senate Minority Leader Mitch McConnell said Republicans would back a short-term motion to raise the debt ceiling. “To protect the American people from a near-term Democrat-created crisis, we will also allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December,” he tweeted.

ADP reported that private payrolls increased by 568k jobs last month, easily topping expectations. Allowing for the usual ADP caveats, this is a positive signal ahead of the nonfarm payrolls report on Friday – remember a key release ahead of the Fed’s November meeting re tapering.

Natural gas was the big story as prices spiked out of control in Europe/UK. US Henry Hub prices did reach a new multi-year high before reversing, apparently on comments from Vladimir Putin who said Russia would seek to stabilise the market and pump more gas. There is a lot going on there – political machinations aplenty and questions over whether much of the problems in the market have been Russia’s doing in the first place (weaponization of gas), but it did seem to cool the market. Prices are down 15% from yesterday’s $6.46 peak and now testing lowest in a week around $5.50 and possible bearish MACD crossover in the offing could signal a top.

Oil was weaker too as it also seemed to consolidate after extending the rally into overbought conditions – as highlighted on Tuesday. Inventories were mildly bearish too, rising 2.3 million barrels last week. The US said it was considering releasing oil reserves to cool prices – always a political hot potato in the US as much as in Europe. WTI is close to 5% below yesterday’s high at $76, possible test of near-term Fib and trend support around the $75.60 area.

Crude Oil Futures 07.10.2021

Talking of rising fuel costs, these are feeding into rising inflation expectations. UK inflation expectations topped 4% for the first time since 2008. A gauge of US inflation expectations has moved to its highest since June.

In FX, the euro made fresh YTD lows yesterday but is steadier this morning, with EURUSD back to 1.1560. Looking a tad oversold but the fresh low needs to mark a bottom soon or further selling can take off on another leg lower.

EURUSD Chart 07.10.2021

European stocks steady after big tech rout on Wall St.

Morning Note

Wall Street declined as the selloff in the tech sector picked up pace, though European stock markets have opened up in the green this morning. The DAX eased up from its 200-day SMA support – it’s not traded below this since Nov 2020. The FTSE 100 is mildly higher around 7,050 and remains well within the 6-month range still, marking time. Index composition explains some of the relative performance of US vs European markets – higher oil prices was a positive in Europe at the start of trade, absence of mega-cap momentum tech working out to be a positive. More cyclical, more defensive, more value all doing the FTSE a bit of a favour today – it’s not participated in the ride up, so it’s not swept up in the payback.

The S&P 500 dipped below last week’s low at 4,288.52, hitting 4,278.94 at one point before paring losses to finish the day at 4,300, its weakest finish since July and it’s now down 6% from the all-time high and well below its 100-day SMA. The Nasdaq bore the brunt of the selling, declining more than 2% with MSFT, AMZN, AAPL all –2-3%, and the index is 8% below its high. Index composition is playing a big role here – the heavy tech weighting in the S&P 500 has built on itself, so when it sells off it pulls it down fast. This very large corner of the market drove the index higher over July and August and is paying it all back now. Interesting to see rates not doing anything – US 10yr yields hovering under 1.5% still so this is a technical/momentum selling in equities rather than the bond market-leading stocks by the hand; though expectations for higher inflation/higher rates has clearly been a factor in the initial trip-up.

Big tech under pressure but in particular Facebook on mounting regulatory/reputational damage – FB shares fell on the whistle-blower reveal, which threatens to do some damage to the company’s already well-tarnished reputation. We’ve been here before with FB and nothing has really stuck – but its Teflon character will be tested with these revelations. Twitter and Snap shares also fell in sympathy – regulators are coming for social media companies, mark it.

ARKK – the Innovation ETF – took a pounding as the big-tech growth names were in the firing line, especially some of the more growthy-momentum names. The fund is now roughly 31% below its Feb all-time high.

Interesting to see just how far off their record highs some of the largest-cap stocks are now, roughly: Microsoft: -7%, Alphabet: -9%, Apple: -11%, Tesla: -10% (though had a better day on Monday), Facebook: -15%, Amazon: -14%, Shopify: -20%, Twitter: -25%, Twilio: -30%, Peloton: -50%, Zoom: -56%.

Tesla shrugged off the trouble for big tech as a strong quarterly delivery report buoyed the stock and took it past $800 again the slow and steady grind higher off the Mar-May double bottom continues to find headroom. However, it closed well off the daily high at $781, up less than 1% for the session as the drag from the broader tech rout pulled it down.

We’re at a point where the pessimism over the supply chain problems is probably nearing a peak, and expectations for growth have washed out. Likewise, we may be at peak inflation/stagflation fears – the reopening is apace. Cyclicals/value are not doing enough to compensate for what amounts to a pretty sizeable pullback for the tech sector now, but there could be room for this area of the market to rally again as the economic situation starts to feel like it could pick up. Still this selloff looks like it has a little further to run before the equilibrium is restored.

OPEC+ gave oil bulls a red rag to bid up futures contracts as it stuck to the planned increase in production for November at 400k bpd. Some had thought it could raise output a little more than the summer plan had set out, or frontload the increase in output in December by bringing into Nov (ie, 800k bpd in Nov), but the cartel stuck to the script. WTI and Brent both surged on the news and made a 7-year high. It’s not that demand is suddenly forecast to improve, it’s more that OPEC+ is keeping such a tight grip on supply and the US rig count just isn’t there to mop up excess demand. So, the market is going to be tight for a while yet – at least until well into 2022.

MACD crossovers still proving to be a sound indicator for oil trades. WTI now starting to look a little overbought.

Spot Oil Chart 05.10.2021

Elsewhere, Bitcoin moving higher again in the wake of the bullish MACD crossover – a generally solid indicator for the near-term trend. Looking for the recent swing high at $53,000.

Bitcoin Chart 05.10.2021

Watch for more downgrades, AO World sinks

Morning Note

Stock markets in Europe fell sharply in the first day of trading in the new quarter, taking the cue from a dismal finish on Wall Street. It’s a sea of red for European bourses, though hefty early losses were pared after the first hour of trade. The FTSE 100 briefly dipped back under 7,000 – remains fully range bound. Banks and cyclicals bore the brunt, whilst utilities is the only sector in the green as defensives find some bid. The S&P 500 dropped steeply into the close, shedding about 40pts in the last 20 minutes of the session and ensuring the broad market’s worst month since March 2020 – remember it? It’s now through the 100-day SMA and well south of its 50-day line, about 6% off the all-time high – another 4% takes you to the 200-day support and almost a 10% correction. Stocks in Asia were broadly weaker, with the Nikkei off by 2.3% and the ASX down by about 2%. China and Hong Kong were closed for holidays.

I’ve been warning for a long time about stagflation – now this is at the heart of the market’s selloff. We can pin it on worries about persistent inflation, supply chain trouble making things more expensive, labour shortages in key areas because no one wants to work, central banks tightening to avert inflation becoming unanchored and slowing growth. It’s recalibration for a macro outlook that seems to be less optimistic than it was in the first half of the year. Yields were actually down, with US 10s back below 1.5%, though these have just picked up in the early European session again. Tech stocks were outperformers so the Nasdaq fell less than peers. It’s all rather messy, volatile and indicative of a kind of negative rotation taking place. Gold rallied as yields pulled back and the dollar treaded water for a second day after Wednesday’s big rally. Oil steadied as markets look ahead to Monday’s OPEC+ decision on production increases. No reason for the cartel to open the taps any more than they have already indicated they will through to Dec.

S&P 500 – looking like a rerun of 2020 for Sep/Oct?

S&P Chart 01.10.2021

Bed Bath and Beyond joined the likes of Boohoo, Nike, FedEx and Kingfisher in warning on supply chains, rising costs etc – this is how it’s going to go in Q4 and we can expect more downgrades, decelerating earnings growth and lower margins – not a great setup for equity markets into a volatile month.

AO World is the latest as it warned of “challenging market dynamics in both the UK and Germany” which resulted in lower volumes than expected and affected operational leverage. Management said UK growth was hit by the nationwide shortage of delivery drivers and ongoing disruption in the global supply chain. The company also noted “industrywide issues relating to ongoing supply chain disruption”. Shares took right at the update, plunging 17% with the growth rates in Germany of 3% in particular well below market expectations for +30% for the full year. AO World needs high double-digit revenue growth to justify its valuation. Margins in a highly commoditized business were always a problem and now the supply chain woes coupled with a shortage of drivers creates some serious headwinds for the stock, which benefitted greatly from the surge in online demand last year. It now faces some new challenges which seem set to perform the double trick of hammering margins and lowering revenue growth.

JD Wetherspoon shares fell 4% at the open before recovering as it warned off the chilling effect of lockdowns and problems in finding staff. The pub group said like-for-like sales in the first nine weeks of the current financial year were 8.7% lower than the same weeks in August and September 2019, before the pandemic started.

Today we look ahead to US inflation and the PCE personal income and expenditure report which is expected to hold steady at 4.2%. Core month-on-month is forecast to slow to +0.2% from +0.3% registered in July. Year-on-year core inflation has been steady at 3.5/6% for three months, but the headline PCE number has been on the march higher from 2.5% in March to 4.2% in July. It’s unclear whether this can change the narrative, which seems to have evolved from inflation being transitory to it being far more persistent. Input cost pressures and the supply chain problems don’t suggest we will see consumer inflation ease.

Finally, it seems Tesla bulls are getting out. Cathie Wood of Ark has dumped about 20% of its holding. Chamath Palihapitiya said he’s sold his Tesla stake, despite once being one of its biggest cheerleaders. Now he likes offline highly cash generative businesses. So I assume by that he means miners and oilers…Meanwhile, ARK investors are also getting out – third-biggest daily outflow ever on Wednesday…

Stocks rally into quarter end

Morning Note

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

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

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

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

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

Briefly:

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

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

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

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