Do Yellen’s rate hike comments matter?

Morning Note

Treasury secretary Janet Yellen said rates might have to rise to cool an overheating economy. Shock, horror. Did no one give her Powell’s script? “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said during an economic forum at The Atlantic. “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”

Economics 101 shouldn’t offend markets or perturb investors – stocks hit session lows off the back of the remarks. But this was seen as a significant remark since it is a break with the Fed’s new policy stance. Now what’s she’s saying is demonstrably true: central banks raise rates to stop economies from ‘overheating’, since this tends to lead to bad things like inflation and misallocation if capital. It’s the kind of thing central bankers would normally say in normal times to signal a tightening cycle is imminent. But we are not in normal times and the Fed has been hammering its message home that its goal is not to quell forecast inflation, but to get back to full employment come-what-may. Some will flag the potential incursion into monetary policy by the Treasury as big no, but in this instance it’s not about central bank independence – Yellen is far too well versed in this topic and far too academic in her approach to be trying to strong arm the Fed.

But it’s very much the antithesis of the way the Fed has been playing things since the pandemic. We’ve all kind of assumed the Fed is happy to let the economy run hot, because it’s implicitly said so: employment is the goal, inflation can be overlooked until enough people have jobs. Now many of us have questioned the sustainability of such a pivot in policy and break with the traditional central bank approach, which has always been to remove the punch bowl before the party got out of a hand (overheating). But we’ve assumed that the Fed was so all-in it wouldn’t change course.

Of course, Janet Yellen is no longer ‘the Fed’. That’s now Jay Powell’s purview. Her comments – seen in isolation – are just the same in reverse as Mario Draghi’s persistent calls for economic, structural and fiscal reform in the EU. But she was the Fed chair so her words carry weight. Moreover, Yellen and Powell have been singing from the hymn sheet – they’re not at odds on this, which could lead some to think it’s part of the ‘masterplan’.

So, the question for market watchers is whether what the Treasury says about monetary policy is all that important. Yellen looks more like an interested outsider than a Fed mole. I don’t think it was choreographed to signal a Fed taper. I think it was a genuinely held belief that multi-trillion-dollar stimulus and infrastructure spending coming at a time of a major cyclical recovery and zero percent interest rates could lead the US economy to get a bit warm. Coming from a central bank background, it’s natural for her to think that ‘well we need to spend this money now, so rates might need to go up to compensate for all this extra money we’re printing at a later date’. It’s not, in my view, scripted policy manoeuvring. Just sensible observation – the Fed could do with this.

Indeed, Yellen later made these comments at the Wall Street Journal’s CEO Council Summit: “It’s not something I’m predicting or recommending … If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”

Market reaction? Rates were unmoved, with the benchmark US 10-year still nestled around 1.60% but richly priced tech stocks fell, leaving the Nasdaq down almost 2%, which would imply that rates might not be moving at the short end (I.e. her comments are not a taper signal), but investors do think cyclical and value areas of the market warrant more attention (rotation). If anything has been clear about the last few months, it’s that some corners of the market that have been overlooked by investors are gaining more kerb appeal as inflation expectations and nominal yields pick up. Yellen’s comments only further underline this trend. The S&P 500 wiped out Monday’s gains, sliding 0.7%. The DAX fell sharply but is up this morning as European markets stage a fightback. The FTSE 100 trades up 1% and making a fist of 7,000 again after pulling back from the 7040 area yesterday to finish well south of 7,000.

Where are stocks headed? We spend a tonne of time chatting about what signals central banks are sending and what vaccines might or might not do for the economy. But all you lot really want to know is where the market is going to be in a week, a month, six months maybe tops.

So given it’s early May and the market is permeated with a sense of trepidation as traders really do take one eye of their screens as summer approaches, now’s as good a time as any to look at the prospects for the broader stock market in the coming months.

The old ‘sell in May’ adage is doing the rounds of course. On seasonality, Stifel says: “We see the S&P 500 flat/down -5-10% May 1st to Oct-31st, 2021: Seasonality is especially applicable at this moment in time”. And Bank of America notes that the May-October period has the lowest average and median returns of any equivalent six-month period, looking at data going back to 1928. Maybe there is something in the ‘sell in May’ trope. Certainly, given the run-up in equities we have seen, the well understood macro picture and the propensity for yields to edge higher, a period of cooling off seems reasonable.

Earnings are powering ahead – we’ve just entering the last stretch of a blowout quarter in both the US and Europe. But this has been largely priced. Can corporates keep up the pace? The second quarter is meant to be even better – stimulus cheques are back, and GDP growth is seen powering ahead. Markets may not truly reflect just how strong this recovery will be. According to the Atlanta Fed Q2 growth is seen at 13.2% and the US economy will exceed its pre-pandemic peak before the quarter is over (as it should when you have pumped something like 20%-30% of GDP into the economy by way of fiscal stimulus and emergency relief packages). The money supply has ballooned; now is the time for the velocity of money to recover. We should be careful; we are already seeing some heinous year-on-year chart crime as economies recover.

Spending seems to be strong as the reopening of the global economy, but companies are experiencing supply chain problems and raw material shortages. This ought to push up inflation, raising nominal bond yields (though not necessarily real rates), which could hinder equity market returns over the coming months.

What about sentiment? Clearly investors are very bullish right now – they’re pretty well ‘all in’. BofA notes that Wall Street bullishness is at a post Financial Crisis high. “We have found Wall Street’s bullishness on stocks to be a reliable contrarian indicator. The current level is 50bp away from triggering a contrarian “Sell” signal,” they write.

And the technicals? In short, the S&P 500 appears very over-extended at current levels and retrace of around 400pts to 3,800 would be considered as the first stop in multi-month reversion to more sustainable levels. The Vix does not suggest market participants are overly concerned and some are making big bets on markets remaining tranquil for the next few months.

Valuations are harder to get a handle on – the Case Shiller PE ratio is at 37, its highest since the dotcom boom – indeed it has only ever been this high during that period of ebullience and irrational exuberance. But given the rebound in the economy and earnings taking place and expected to continue, this backwards-looking metric is probably less reliable now than at other times (the Fed has already made somewhat outdated as a gauge of stress in the market). Forward multiples are less exaggerated – about x22 the next 12 months earnings. This is still relatively high but until the Fed removes the punchbowl, it can be sustained. Margin debt has exploded, suggestive of a large amount of leverage in stock markets that could be exposed to a sharp correction, making a pullback self-sustaining.

Should you worry? A lot depends on monetary policy reaction function. In other words, how do central banks respond to changing economic circumstances. More simply, when does the Fed remove the punchbowl? To be even more precise, at what point does the Fed start to signal it might start thinking about turning the music off. Yellen may have fired the starting pistol, but I now think Powell and co will work hard to row that back and reiterate their commitment to employment goals – I don’t think that has changed.

It’s like a game of musical chairs where everyone has worked out that it’s better to rush for a seat when the compere is looking like he might press stop than wait until the music actually finishes. US economic growth and spending this year could be even stronger than expected – this could push the Fed to tighten policy sooner than markets expect – or as we might surmise from Yellen’s remarks, the fiscal impetus could force the Fed to move sooner than it thinks it needs to. But only if employment recovers to pre-pandemic levels. If it does not, the Fed could keep administering kool aid for longer. Inflation remains the big unknown and has the potential to derail growth. Either way, yields should tend to move higher over the summer as data comes in, this could drive up rates and hurt equities even if it also means a weaker dollar as real rates in Europe move up.

Fed sticks to its guns, Apple and Facebook earnings blowout

Morning Note

The Federal Reserve remains resolutely firm. Jay Powell reiterated that the central bank is not even close to talking about tapering bond purchases, a move that would begin to unwind some of the extraordinary accommodation delivered in the wake of the pandemic. The Fed chair said the US economy is still a long way from achieving the progress required to dial back stimulus – over 8m jobs are still lost and that means we need several blowout jobs reports to get there. Powell also stressed that policymakers are not worried about inflation and think any price pressures will prove temporary.  The Fed is doubling down here and sticking to its guns. Advance GDP numbers due to today should show the US economy roaring back. 

 

All this should be a green light for stocks, but the markets are wary right now as they tread record highs and all this stimulus is priced in and the macro outlook well understood. The US 10-year bond yield moved to test the 1.65% level. US stock markets closed marginally lower, though the small cap Russell 2000 managed to eke out a small gain. Futures point to solid gains for Wall Street later today when the cash equities open. European stock markets are largely higher in early trade today, with the FTSE 100 popping its head above 7,000 again on a raft of largely positive corporate updates.

 

Apple reported another stunning quarter, with sales soaring from last year and a fresh round of buybacks. The company raised the dividend by 7% to $0.22 per share and announced $90 billion in share buybacks. Apple revenues grew more than 50% year-on-year, with total sales of $89.58bn vs around $77bn expected. EPS came in at $1.40 vs $1.00 expected. At all levels, we can see Apple outperforming even the most bullish expectations. The core iPhone business saw sales up 65% to $47.94 billion vs. $41.43 billion estimated. This was stunning – the iPhone remains the golden goose and way in which consumers become part of the Apple ecosystem. Services – a higher margin business that includes things like the Cloud, App Store, Apple Music – grew revenues by 26.7%. Revenues in China rose 87% – albeit this was in comparison to a quarter last year in which China was most affected by the pandemic. Shares rose 2% in the after-hours market. A really exceptional quarter – it’s not a surprise that it exceeded quite a low bar, but noteworthy just by how much.

 

Facebook shares advanced 6% in after-hours trading as the company reported posted forecast-beating revenues and earnings. However, the company warned investors that growth could slow as new Apple privacy policies would make it harder to targe ads on social media. I’m fairly used to Facebook using earnings calls to warn that rates of growth could slow in future, and I think investors are too. Earnings per share came in at $3.30 vs $2.37 expected on revenues of $26.17bn, which were about $3bn more than expected and up 48% on a year before. Net income rose 94% to $9.5bn. Average revenues per user came in at $9.27 vs. $8.40 expected. 

 

BT confirmed it is looking to sell its TV business.  This has been a long time coming – the vast sums BT paid to secure football rights was always at odds with the core business. In a statement responding to press speculation, the company says “early discussions are being held with a number of select strategic partners, to explore ways to generate investment, strengthen our sports business, and help take it to the next stage in its growth”. Whilst clearly the pandemic has badly hit sport, BT has never set too well in the content space; there are many with deeper pockets who do content. Ballooning costs left BT paying a hefty bill for sports that wasn’t being covered. It’s further evidence of chief executive Philip Jansen ripping up the Gavin Patterson era playbook to focus squarely on the Openreach rollout and modernise BT. 

 

Shell raised its dividend after beating expectations thanks to higher oil prices and improved margins in its chemicals business. Adjusted net income rose 13% from a year before. Net debt fell $4bn. Meanwhile French firm Total said profits are back to pre-pandemic levels as adjusted net income hit $3bn, higher than the pre-crisis first quarter of 2019. 

 

Unilever shares rose over 2% as the company announced it will commence a €3bn share buyback scheme next month after a 5.7% jump in sales in the first quarter. Most (4.7%) came from higher volume, with just 1% from stronger pricing. For 2021 Unilever stuck to its target of underlying sales growth to be within 3-5%, with the first half at around the top of this range. Management also pointed to additional supply chain costs, with rising commodity and freight prices a factor as margins are seen declining a touch in the first half before picking up later in the year. Ongoing covid restrictions in some areas of the world continued to support in-home sales, whilst the slackening of restrictions in some geographies boosted out of home sales. Mayonnaise and ice cream were strong sellers. India and China both posted strong double-digit growth against a backdrop of strict lockdown measures which impacted the prior year. 

 

NatWest reported Q1 2021 operating profit before tax of £946 million and an attributable profit of £620 million. This was boosted by the reversal of provisions for bad loans as government support schemes reduced the amount of loan delinquency banks had anticipated. NatWest booked at net impairment credit of £102m. But shares fell as the total income was a slight miss, coming in at £2.66bn vs £2.7bn expected. Net interest margin fell 2bps to 1.64%. Shares declined more than 3% in early trade. Standard Chartered continued the run of positive news from the large banks as it recorded underlying pre-tax profit rising 18% to $1.4bn as lower impairment charges and strong cyclical recovery in the global economy offsetting lower interest margins. Return on tangible equity rose 220bps to 10.8% and management reaffirmed their view that income will start growing again in the second half of the year and for impairment charges to reduce significantly.

 

Smith & Nephew shares rose 6% to the top of the FTSE 100 after reporting Q1 revenue up 6.2% on an underlying basis (11.5% reported) to $1.264bn. This included 3.4% from foreign exchange and 1.9% from acquisitions, whilst the quarter also included two more trading days than the equivalent 2020 period. 

Learn the stock market: understanding stocks

In this guide, we’ll help you understand stocks, what they are, and how they’re grouped, so you can enter the world of stock market trading and investing.  

Understanding stocks & how they work 

What are stocks? 

Understanding stocks is simple. When you buy stocks and shares, you are buying a small piece of a company. This is called equity ownership and another name for stocks or shares is equities.  

Buying them means you’re a shareholder and are now entitled to capital appreciation and dividends if the company pays them. Dividends are payments made to shareholders as a share in a company’s profits. However, not all companies pay them. 

Essentially, you hold onto stocks in the hope they will increase in value. This is investing. You would physically own the shares you have bought. 

Stock market trading, on the other hand, is trading on a stock’s price movements. This is done using financial products called derivatives, such as contracts for difference (CFDs) or spread betting. Here, you don’t own the underlying asset you are trading. Any profit made is generated from movements in share prices. 

Asset sectors 

Another key part of understanding stocks is understanding asset sectors. To properly learn the stock market, you will have to learn what sectors equities are usually grouped into. Different sectors tend to move in different cycles, falling in and out of favour with traders and investors, and changing performance levels, throughout the year. 

A lot of investors and traders diversify their portfolios by picking equities from across the sectors. This helps them mitigate their risk. We’ll take a look at portfolio diversification later on. 

For now, we’ll look at the main sectors stocks are grouped into. 

Consumer discretionaryStocks that offer non-essential services. Think luxury goods, or consumer goods outside core needs. Examples of consumer discretionary stocks include: 

  • Nike 
  • McDonald’s  
  • Disney 

Consumer staplesThese are stocks in companies that produce products that are considered essential. Think items like food, drinks, agricultural products, tobacco, and pharmaceutical products. Non-durable household goods and personal products, including grocery stores and supermarkets are also included in this asset category. 

Examples of consumer staple stocks include: 

  • Nestlé 
  • Tesco 
  • Proctor & Gamble

EnergyThese are stocks companies who produce energy. Oil & gas tends to dominate here, but this class also includes started to include renewable energy stocks, nuclear and coal power. 

Examples of energy stocks include: 

  • ExxonMobil 
  • Royal Dutch Shell 
  • Canadian Solar  

FinancialsFinancials are stocks that cover financial services for retail and commercial customers. This includes banks, insurance companies, savings plans, investment managers, mortgage companies, and real estate. 

  • ING 
  • HSBC 
  • Allianz 

HealthcareCompanies that deal with medical goods and services fall into the healthcare stocks sector.  This includes hospital management firms, medical equipment, and medical products. It also includes research, development, production, and marketing of medical equipment, pharmaceuticals, and new biotechnology. Examples of healthcare stocks include: 

  • Bayer 
  • GlaxoSmithKline 
  • AstraZeneca 

IndustrialsIndustrial stocks cover a lot of different sub-sectors. In this case, we’re looking at aerospace, industrial machinery, and military & defence equipment. It includes cement, metal fabrication, pre-fab houses, and waste management. Industrials also include airlines and transport & logistics. Examples of industrial stocks include: 

  • IAG 
  • EasyJet 
  • BMW 

MaterialsCompanies in this sector are involved in the production or extraction of materials, as well as chemical production. Paper, containers and packaging also fall under the materials umbrella. Examples of Materials stocks include: 

  • BASF 
  • Rio Tinto Group 
  • Anglo American  

TechnologyThis sector includes IT businesses and companies that research, develop, produce, and distribute communication equipment such as cell phones, towers, cable, etc. It includes computer hardware and software, home entertainment, office equipment, data management, processing systems, and consulting services. Examples of technology stocks include: 

  • Apple 
  • Microsoft 
  • Spotify 

UtilitiesThis sector distributes electricity, oil, gas, water, etc.  Example of utility stocks include: 

  • E.ON 
  • Engie SA 
  • SSE 

How are the different asset classes affected by different economic cycles? 

Different asset classes behave differently depending on how the economy is performing. A good example of this is the difference between how consumer staples and consumer non-discretionary stocks behave.  

In tough economic times, the share price of non-discretionary stocks will likely go down. That’s because consumers won’t necessarily have the spare cash to spend on luxuries. Conversely, the share price of staples might go up because their services or products are considered essential. 

Utilities are also considered essential, so the share prices, in theory, should remain relatively stable. Until very recently, oil & gas stocks used to be very strong too. However, they are susceptible to volatility caused by market conditions. Oil prices crashed during the Covid-19 pandemic, and thus oil companies have seen their share prices fall in line with that. On the other hand, with governments investing heavily in renewable energy, green energy stocks are rising. 

Essentially, the principle of supply and demand is at play here. More on that later. 

Understanding stocks: Portfolio diversification 

Diversifying your portfolio is a way of mitigating your risk. In practice, it basically means building a portfolio of stocks from different sectors. The theory goes that if a sector is underperforming, any losses created as a result can be offset by gains in stocks in other sectors that are performing well. 

All investing and trading are risky. You can make a profit, but you can also make losses. Any steps to help lower your risk should be taken. Understanding stocks and learning how stock trading works will help you do just that. Remember to do careful research when picking equities to add to your portfolio. 

Where do stocks get their value? 

A stock’s value comes from the principles of supply and demand. High demand usually means a higher price; low demand usually means a lower price. Another factor that gives a stock value is the ROI it can give to investors and traders.  

Investors might look at stocks with strong fundamentals. Other this smaller, under-appreciated businesses are the best companies to invest in, as they might have great growth potential. What you choose is up to you, but a blend of technical and fundamental analysis will give you a clearer view of the markets and help inform your choices. 

There are some methods you can use to find out a stock’s valuation and whether it has been under or overvalued. 

Which cap fits? 

Away from asset classes, stocks can also be grouped according to their market capitalisation or market cap. This is a key part of learning the stock market.  

This is how market cap is calculated: 

  • Total outstanding company shares x share price 

There are no official market cap groupings. However, the market generally divides companies into the following groups. 

Group  Value 
Mega cap  $200 billion or over 
Large cap  $10-200 billion 
Mid cap  $2-10 billion 
Small cap  $300 million – $2 billion 

 

There are also micro and nano cap stocks, covering up to $300 million. 

Mega and large cap stocks are generally thought to have less growth potential but are more likely to weather challenging market conditions. Smaller stocks may offer higher returns, but this is tempered by potentially high volatility.  

Dividend stocks 

A dividend is a portion of a company’s profits it can choose to return to shareholders. Dividend stocks are those that pay out this little reward.  

Not all companies pay dividends, but those that too tend to be popular stock picks. You might consider them if you’re going for a long-term investment strategy. They may be some of the best shares to invest, so if you’re learning the stock market read up on dividend stocks. 

Investing, trading & risk 

Trading and investing are both risky. You can make money, but you can also lose it if stocks turn against you. Only pursue these activities if you can afford any potential losses. 

Cryptocurrency update: BTC leads fight back, Binance stocks tokens & PayPal predictions

In today’s look at crypto markets, we’re seeing some old familiars: market volatility and institutional support from one angle set against regulatory-headache inducing moves from another.

Cryptocurrency update

Bitcoin stages comeback after massive losses

What a week it’s been for Bitcoin. The bellwether crypto dropped considerably from record highs last week, falling to $47,655.

At the time of writing, however, BTC was staging a bit of a comeback. Starting on Sunday evening, Bitcoin has started changing hands for above $53,200, driven by Asian bulls.

Speculators are trading BTC with hopes of a decent correction. Last week’s price crumble was precipitated by a couple of big issues. One was Joe Biden flirting with the idea of raising US capital gains tax. Regulatory reform and straight up bans in some countries also caused a wobble, alongside frothy market conditions caused by the Coinbase IPO.

However, when prices dropped, investors may have seen that as a green light to buy. Many saw value in purchasing BTC at the $47-48,000 level. The fact buyers have apparently been quick to snap up tokens during the price lull may have helped cause the upswing we’re seeing today.

Global cryptocurrency markets are up 8% overall. Bitcoin’s rally has caused a jump in other tokens. ETH is up 10% and knocking on the door of all-time highs. Ripple is surging too, rising 11%. However, Dogecoin continues to slide. Dogecoin is basically run on the power of memes and internet culture, but it looks like even that power source is running out of steam. Dogecoin has dropped 5.7%.

One thing is clear: volatility looks like it’s here to stay in the Bitcoin and the wider cryptocurrency market.

PayPal CEO heralds massive crypto demand

Dan Schulman, PayPal CEO, has said demand for crypto tokens has far outstripped the payment platform’s expectations.

Speaking in an interview with TIME Magazine, Schulman suggested cash may be on the way out, with digital currencies ready to overtake traditional currency soon.

“Demand on the crypto side has been multiple-fold to what we initially expected,” Schulaman told TIME. “There’s a lot of excitement. We’ve been looking at digital forms of currency and DLT for six years or so. But I thought it was early, and I thought the cryptocurrency assets at the time were much more assets than they were currency.”

PayPal added a “Checkout with Crypto” service to its platform in March 2021. US-based consumers can now pay merchants via digital tokens using PayPal. It’s reckoned PayPal will begin rolling this service out to global audiences across 2021. Its subsidiary Venmo also started accepting crypto assets like BTC and ETH last week.

Schulman’s comments come in a year when institutional acceptance of cryptocurrencies is reaching new levels. Tesla snapped up billions of BTC; banks like Deutsche Bank and Goldman Sachs have stepped up their crypto offers; Visa allows settlement in digital currencies. This is a very small chunk of the institutions upping their crypto game.

But while demand is high, it’s worth reiterating that regulatory issues remain. As mentioned above, crypto trading is banned in some countries and others are clamping down too, or reshuffling regulations to be more restrictive. UK bank Natwest has also said it will not engage with customers who accept Bitcoin or other cryptocurrencies as payment, as part of its commitments against money laundering.

But the fact remains that interest in crypto trading is still exceptionally high worldwide, despite consternation from some angles.

Binance adds Microsoft, MicroStrategy & Apple stocks to exchange

China’s largest cryptocurrency exchange Binance has added more tokenised stocks to its exchange.

Users will be able to get exposure to Microsoft (MSFT), MicroStrategy (MSTR) and Apple (AAPL) tokens, paired against Binance’s own token Binance Coin.

Each of these tokens allows its owner to hold or trade fractionalized shares of the stocks they are associated with. The minimum trading amount is set at 100th of a token, equating to 100th of a stock. These are backed by a depository portfolio of underlying securities held by CM-Equity AG, Germany, according to Binance.

Coinbase and Tesla were the first two stock tokens available on Binance.

It’s an interesting move, but one that is open to regulatory scrutiny. Does Binance have the relevant license to start dealing equities to customers?  According to the Hong Kong Securities and Futures Commission (SFC), no.

Binance said it is “monitoring demand” and may add further tokens in the future.

Could this be the future of stock trading? Maybe. It will depend on how Binance’s stock offer performs.

How you can invest in emerging markets

Emerging economies can offer investing and trading opportunities you may have missed. As such, you might want to consider investing in emerging markets to diversify your portfolio. Here’s how to do it.

Investing in emerging markets

What are emerging markets?

Emerging markets (EMs) are simply economies that are becoming more involved with the global market as their prosperity and GDP grows. They usually share, or are starting to show, characteristics common with developed economies.

That means they will have some liquidity in local debt and equity markets, increasing trade volumes and foreign direct investment, and internal development of domestic financial and regulatory institutions, and stock exchanges.

How are EMs different to developed markets?

While they are on track to reach the same levels of economic complexity as their developed peers, there are some differences that set emerging markets apart from their developed peers:

Characteristic Developed economy Emerging economy
Industrialisation Developed nations tend to have already heavily industrialised and have transferred into service-led economies. Emerging markets tend to rapidly expand their industrial base.
Growth Growth in developed economies is often slow but steady. Emerging economies’ GDP growth is usually higher-than-average.
Demographics Population growth has slowed in most developed markets while the middle class has been firmly established. GDP per capita tends to be high. Emerging markets usually have rapidly growing populations and a developing middle class, however GDP per capita is lower than the developed average.
Currency Developed market currencies are less volatile than their emerging counterparts and are easily exchangeable. Currencies in emerging markets are more volatile. Exchange rate mechanisms are being developed to discourage citizens from sending cash overseas and encouraging FDI.
Commodities Developed economies are not as vulnerable to swings in commodity prices. Many emerging markets are dependent on commodities for their economic prosperity, thus are susceptible to price swings.

 

One of the key takeaways here is rapid growth but high volatility. Take Russia for instance. Its economy is intrinsically linked to oil & gas.

40% of government revenues come from its hydrocarbons industries. While it has prepared measures to encourage financial investment, such as localisation deals for car manufacturers and oil & gas equipment producers, its economy is still highly susceptible to oil price volatility.

PwC forecasts the Emerging 7, i.e. the most prominent emerging economies, will experience annual average growth of around 3.5% between 2016 and 2050, well ahead of the G7’s forecasted growth of 1.6%.

Which countries are considered emerging markets?

Developing economies are found across the globe, but if you’re looking to invest in emerging markets, you may want to start with the Emerging 7. These are seven countries identified by PricewaterhouseCoopers in 2006 as future global economic powerhouses, as a counterpoint to the traditional Group of Seven (G7) economies that dominated the 20th century (US, UK, France, Germany, Canada, Japan & Italy).

The Emerging 7, and their current GDPs, are:

  • China – $14.9 trillion
  • India – $2.59 trillion
  • Russia – $1.72 trillion
  • Brazil – $1.36 trillion
  • Mexico – $1.32 trillion
  • Indonesia – $1.08 trillion
  • Turkey – $761.4 billion

Certainly, these countries grab the emerging economy headlines – especially China. Investors are increasingly looking at how to invest in China because it’s predicted that the country will overtake the US as the world’s preeminent economic power at some point this century.

How to invest in emerging markets

There are plenty of options open to invest and traders who are looking at investing in emerging economies.

As ever, it’s very important to do thorough research if you plan on trading and investing. Doing thorough analysis on stocks, emerging market ETFs, and so on will help you pick stocks or assets suitable for your investment or trading strategy.

Historically, returns from EM equities have been relatively low. According to JPMorgan, EM equity returns have only averaged +3.6% per year from 2010 to 2019. But 2020 was different.  The MSCI Emerging Markets Index outperformed the S&P 500 for the first time since 2017 (EM gained +18.5% versus the S&P 500’s +18.4%).

Past performance is not indicative of future results, but the above rise could be encouraging for investors looking to put capital into emerging economies.

So, how can you get involved? You may wish to invest in companies based in emerging markets. Taking South Korea as an example, Samsung and Hyundai are viable, internationally renowned large caps helping power the South Korean economy.

In China, Alibaba, Tencent, and Geely Motors are all tech-related stocks that have performed well over the past year.

Emerging markets investors may also use ETFs. Exchange traded funds group together stocks and assets into a single fund, giving investors exposure with lower risk.

On our Marketsx trading platform, for instance, we offer the Wisdom Tree Emerging Markets High Dividend ETF (DEM). This draws its constituents from a Wisdom Tree index that measures the performance of EM stocks that offer high dividend returns.

It is composed of mainly Russian and Chinese firms, including Rosneft and the Industrial Commercial Bank of China, but also includes other big hitters like Brazil’s Vale, one of the largest mining companies in the world, Taiwanese plastics giant Formosa Plastic Group.

You may also consider bonds. Bonds are fixed-income instruments representing a fixed amount of debt. They are most often issued by governments or corporations, paying regular interest payments until the loan the bond is drawn from is repaid.

There are several different varieties of bond, so you could potentially create a diverse portfolio of just bonds issued by governments of emerging economies. Bonds are generally considered a more secure investment than equities too.

Risks of investing in emerging markets

One important thing to remember is volatility is more likely in emerging economies than developed ones. Economic conditions may change more suddenly in an emerging market than a developed one, so bear that in mind when investing. You may end up losing more than you initially invested.

We spoke earlier about how emerging markets are often more susceptible to commodity price swings. Russia is a good case study here. In 2015, the oil price dropped significantly.

As mentioned earlier, Russia relies heavily on oil & gas for revenues and the performance of its hydrocarbons industry has major ramifications for its economy as a whole. During this time, the value of rouble effectively halved, making Russia less attractive for oil & gas investment and development for international firms.

It’s these type of market trends you have to fully consider when investing in emerging markets. However, the purpose of investing in emerging markets is to trade higher risk with potentially higher rewards.

If you are planning on investing in emerging markets, it’s a good idea to ensure you have a diverse portfolio of stocks and assets. You may wish to include an emerging market ETF, plus several stocks from one country, a mixture of stocks from one country and so on.

Diversifying your portfolio is way to help you mitigate risk. You’re aiming to lower the effects of under or negatively performing assets. Gains in one asset may help offset losses in another. An example diversified portfolio, based around EMs, might look something like this:

  • 20% developed economy stocks
  • 22% foreign stocks from emerging markets
  • 22% bonds from emerging markets
  • 22% bonds from developed markets
  • 9% commodities
  • 5% long-term investments

This example portfolio draws heavily on stocks from EMs, but it also balances that out with capital allocated to equities and bonds in developed markets. In theory, any losses caused by market volatility in emerging economies could be offset by steady performance from the developed economies.

Investing vs trading: what’s the difference?

Before investing in an emerging market, it’s important to know the difference between investing and trading as distinct practices.

The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments. You hold onto them in the hope they will grow in value over the long-term.

Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. Many trading services, such as ours, run using products like CFDs or spread betting.

Unlike investing, you do not own the underlying asset here. Instead, you are trading on its price movements. CFD trades use leverage, so you can get exposure to a stock or market for the fraction of the initial cost it would take to invest. However, because you are trading on margin, your losses can be increased too.

Both practices require you to mitigate risk as best you can. Trading and investing are risky and can result in capital loss. Always do your research and due diligence prior to committing any funds, and always ensure you can afford any losses you may occur.

Biden tax plan weighs on stocks, Bitcoin tumbles

Morning Note

European equity indices opened a tad lower on Friday morning after stocks fell on Wall Street on reports Joe Biden is planning to slap much higher capital gains taxes on the wealthy. This was always part of the equation when we looked at the implications of a Biden presidency, but markets have been pepped up on a mix of fiscal stimulus, the Fed’s extraordinarily accommodative stance, a strong cyclical impulse from the vaccine-led reopening and a bounce back in earnings. The major averages fell in lockstep, dropping by almost 1% , though the Russell 2000 ended the session flat as the selling was led chiefly by the longer-term growth names like Tesla and Amazon. The Dow Jones finished the day at 33,815, a decline of more than 300 pts. The S&P 500 closed down 0.92% at 4,134 and the Nasdaq Composite notched a similar decline to finish at 13,818. The FTSE 100 opened lower and is heading for a decline of more than 1% for the week. As of send time the CAC 40 had inched into the green. I would not describe risk as being offered as such; it’s been a pretty choppy week and I would be equally unsurprised if stocks turned around this afternoon and ended the week higher as I would if Wall Street led a sharp decline into the weekend.

The Biden administration is looking to raise the top marginal income tax rate to 39.6% from 37%, whilst also doubling capital gains tax to 39.6% for people earning more than $1 million. Tax the rich, hand it out to the poor. Sounds like furlough, but on a permanent basis. The big problem (one of many) in all this is the Senate – it would require support of all the Democrats in the upper chamber and this is far from assured. Stocks would probably be a lot lower if investors were really worried, and I think markets can overcome this move, even if it manages to pass through the Senate, which I don’t think it will. Nevertheless, coming off record highs and a good run up through the start of the year, the macro picture not really changing, rising Covid cases globally, strong earnings and other supportive factors largely priced in and the extent to which investors are ‘all in’ equities, we could be set for a downwards move in equities over the coming weeks. Beware seasonal factors (I dare not say ‘sell in May’…)

The economic picture continues to improve in the US. Initial claims for unemployment insurance fell to 547,000 last week, down from 576,000 the prior week and below the roughly 600,000 estimated. The number of continuing claims also fell.

Likewise, UK retail sales numbers were very positive in March as consumers opened their wallets ahead of the reopening of non-essential shops. Sales rose by 5.4% from February, well ahead of the 1.5% expected. Clothes, gardening goodies and specialist food items from bakers and butchers were in vogue.

Even Europe is showing immense resilience in the face of lockdowns – France’s Services PMI came in at 50.4 against 46.7 forecast, whilst the manufacturing survey surged to 59.12. The composite PMI rose to 51.7 from 50 previously, with the outperformance in services meaning it easily beat the 49.4 expected. Germany’s composite PMI came in at 56, still in expansion territory, but short of the 57 expected and down from the 57.3 in March.

The dollar is offered in early trade, with EURUSD jumping to 1.2050, Yesterday’s ECB presser high of 1.2070 is the main target for bulls. GBPUSD also tried to sustain a rally to 1.39 but hit resistance at 1.3890 and reversed a touch.

The euro remains steady following yesterday’s ECB meeting, which left markets on an even keel as the central bank managed to maintain its dovish stance and fend off chatter about wrapping up its emergency bond buying programme. Christine Lagarde played down any taper talk, saying this was ‘premature’ and that the recovery still has a long way to go. The yield on 10-year German bunds moved lower.

Bitcoin prices have tumbled. Spot trades under $48k this morning, meaning it’s down 25% from last week’s all-time high. The low tested several times in Feb at $44k is the big support. Basically, it seems to have been bid up on a lot of speculation (even more than usual) ahead of the Coinbase IPO and all this froth has evaporated like a lot of hot air. There has also been a cluster of regulatory reports and rumours that point to a clampdown and tighter regulation. JPMorgan analysts led by the closely-followed Nikalous Panigirtzoglou say the rollover in prices has been led by a steep liquidation in speculative futures positions. “Momentum signals will naturally decay from here for several months, given their still elevated level,” he says.

Shares in Coinbase are in for a hit should cryptos go further south. Also, Cathie Wood’s ARK Innovation ETF is still loading up on COIN – watch this one ,too. The Coinbase listing – the ultimate poacher-turned-gamekeeper moment – might have been the high watermark for Bitcoin.

I refer to two points we highlighted when Coinbase registered to go public:

1. Earnings are inextricably tied to crypto prices. This may be obvious, but it is interesting to see in black and white. “Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected.”

2. More than anything it’s highly dependent on Bitcoin. A majority of Coinbase’s net revenue is from transactions in just two crypto assets: Bitcoin and Ethereum. For the year ended December 31, 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of assets on the platform respectively. “If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected” says the filing.

Caveat emptor and all that.

Trading strategies: how to pick stocks

With thousands of stocks out there for you to invest your cash in, finding the best stocks to invest in is all part of successful investing and trading strategies. But where to begin? Here’s how to choose stocks for your portfolio.

Picking the best stocks to invest in

How to start choosing stocks

Let’s be clear: there is no right or wrong way when it comes to picking the best companies to invest in. Adding stocks to your portfolio really boils down to personal preference. But we can give you some key guidelines on how to get started.

  • Research – It’s an obvious one, but make sure you do your research first. Have a look at company performance, or the general sector performance. There’s a couple of ways you can do this, which we’ll have a look at in more detail later.
  • Make your portfolio diverse – You don’t have to just invest in stocks. There are other options out there. You might consider foreign currency (forex), commodities, or invest in exchange traded funds (ETFs). The idea behind creating a diverse portfolio is to cast a wide net so you’re minimising risk. You can lose money when investing or trading. It’s inherently risky.
  • Cut out the emotion – Use your head, not your heart. Just because there is hype around a particular stock or asset does not mean it is suitable for you. Do not rush into buying or selling decisions. It’s important to remember trading and investing is risky so try and keep a clear head.

What do you want to get out of investing?

The most effective investing and trading strategies are based on achieving well-defined goals. That also feeds into finding the best companies to invest in for your personal preferences.

Obviously, everyone invests to make money, but there are different reasons for doing so. You may be looking to put away a nest egg for retirement, for instance, or you might just be looking to preserve your existing wealth. You might also just be wanting to build your wealth.

Think about this deeply before you commit any capital.

Doing your research: fundamental analysis

Let’s look at research. Picking the best stocks to invest in revolves around research. Generally, successful investors use quantitative and qualitative analysis to help them select equities. It’s an investing fundamental.

Fundamental analysis is based on estimating a stock’s intrinsic value, i.e. how it is worth. This is where we measure qualitative and quantitative factors relating to the economy, industries, and companies. Understanding these factors might give you an idea of the best companies to invest in for your individual goals.

Qualitative factors

Qualitative factors are things like company news, personnel changes within businesses or major financial events. Think the Covid-10 pandemic. All of them factor into share price movements. For instance, many companies, like cinema chains or cruise liners, have struggled in the pandemic, thus their share prices have dropped. That’s an example of how qualitative factors should be considered before investing.

Quantitative factors

Quantitative factors help investors pick stocks by looking at aspects of a business that are quantifiable. Earnings releases are important here. Publicly traded companies release quarterly financial reports detailing their earnings for the last quarter. If a company’s earnings drop and the share price does not move in line with the new earnings level, then the stock price might not reflect true value.

Likewise, balance sheets are important too. These list a company’s liabilities and assets. Generally, a stronger balance sheet means a strong stock price, because it reflects a company’s earnings potential.

Then there are dividends, which we’ll go into in a bit more detail later on.

Doing your research: using technical analysis to choose equities

Technical analysis looks at stock price data and movements. It includes analysing patterns and trends that may show future market movements. There are a lot of indicators to be aware of if you’re taking a technical approach to selecting stocks, such as moving average, morning average, and so on. If you’re a beginner, have a look into these if you’d like to take a more technical stock selection approach.

What makes stocks valuable?

A stock’s value comes from the principles of supply and demand. High demand usually means a higher price; low demand usually means a lower price. Another factor that gives a stock value is the ROI it can give to investors and traders.

Investors might look at stocks with strong fundamentals. Other this smaller, under-appreciated businesses are the best companies to invest in, as they might have great growth potential. What you choose is up to you, but a blend of technical and fundamental analysis will give you a clearer view of the markets and help inform your choices.

There are some methods you can use to find out a stock’s valuation and whether it has been under or overvalued.

How to tell if a stock is over or undervalued

It’s important to note that when analysing stocks in this way you’re not looking for cheap or expensive stocks.

You should be trying to find quality stocks that are priced below or above their fair valuations. Assuming market prices correct themselves over time to reflect stocks’ true values could potentially make you a profit. You might work on this assumption by taking a long position on an undervalued stock, or by going short on an overvalued one.

Stocks may also be over or undervalued if market conditions change due to shifting dynamics, news, cyclical fluctuations, or misjudged results.

Let’s talk about dividends

Dividend stocks are often found in a long-term investor’s portfolios. A dividend is a portion of a company’s profits it can choose to return to shareholders. Investors can either take those dividends for themselves, but many choose to reinvest the dividend payment, which in turn can lead to higher gains down the line.

Not all companies pay dividends, but those that tend to be popular stock picks. You might consider them if you’re going for a long-term investment strategy. They may be some of the best shares to invest.

Investing & risk

Investing is inherently risky. You can make money, but you can also lose it if stocks turn against you. Only invest if you can afford any potential losses. Make sure to diversify your portfolio too, so you’re more protected against risk.

How to diversify your portfolio for 2021

Equities
Investments

Portfolio diversification is something all successful traders practice. Unsure where to start? Here’s a look at how you can diversify your stocks portfolio this year.

Diversifying your portfolio

What is portfolio diversification?

Essentially, portfolio diversification is about protecting yourself against risk. The concept can also help you improve your risk adjusted returns. Those are how much profit can you potentially make against your inherent risk.

A diverse portfolio contains open positions across a range of instruments and assets. This way, you’re not overly exposed to a single type of risk. Investors and traders use a multi-asset portfolio to balance potential risks, which can help create higher returns in the long run.

Why should you diversify your portfolio?

In an ideal world, all of your trades will turn a profit. Unfortunately, that’s not always the case. If you’ve put all your eggs in one basket, and gone all out on a single asset, you’re opening yourself up to a potential major loss.

This is especially true if you’re trading CFDs. Because these use leverage, you can open a position using a fraction of the total trades value. Great, but while that can multiply your profits, it can heavily multiply your losses too.

By spreading your capital across a wide variety of assets and sectors, you can protect yourself against this. Potential losses from one area of your portfolio that is underperforming can be offset by profits from other sectors.

This is why investors and traders use a multi-asset portfolio to balance potential risks, which can help create higher returns in the long run.

Picking instruments & assets to diversify your portfolio

There is a wealth of different diversified instruments available to traders who want to create a wide-ranging portfolio.

Equities

The most obvious choice for investors are equities, i.e. shares. It’s important to select a number from across different sectors and geographies, so as to create diversification in your shares. By doing so, you can avoid historic pitfalls.

For instance, tech stocks were hammered when the dotcom bubble burst around 2000. Financial stocks were hit hard during the Great Recession of 2008, thanks to the subprime mortgage crisis. Flash forward to 2020, and hospitality and travel stocks have taken a beating due to Covid-19 pandemic induced lockdowns. Investing across a further of stocks in broad number of sectors can help you mitigate losses.

CFDs

CFDs or contracts for difference let you trade shares without owning them. Instead, you’re trading the difference between price points when the underlying asset moves up or down. The same principles that apply to stocks also apply here: trade CFDs across a number of different sectors or asset classes to mitigate against potential losses. It’s diversification 101.

ETFs

ETFs are exchanged traded funds. They are investment instruments that track a group of markets, instantly offering diversification in one package. ETFs can include a variety of assets, including shares, commodities, currencies, and bonds. They are passive instruments, so they mirror the returns of the underlying market and will not outperform it. They can help diversify your portfolio by giving exposure to numerous assets with a single position, potentially lowering risk.

Bonds

Bonds are fixed-income instruments representing a fixed amount of debt. They are most often issued by governments or corporations, paying regular interest payments until the loan the bond is drawn from is repaid. There are several different varieties of bond, so you could potentially create a diverse portfolio of just bonds.

They are generally considered a more secure investment, due to their comparative low risk. Warren Buffet is a big fan. In a 2013 letter to Berkshire Hathaway shareholders, the investment ace instructed his wife to put 10% of his $80bn fortune into government bonds as a secure way of hedging bets against the future.

Commodities

Commodities are bulk tradeable assets. Think products like oil, natural gas, metals, gold, crops, and so on. Rather than straight up buying the asset in question, you can trade futures contracts, i.e. agreements to exchange an asset for a set price on a set date, to get exposure to commodities. ETFs are often used to provide diversification in commodity trading, as they bundle together a group of commodities together, but you can also explore further by investing in companies involved in the production, mining, and selling of companies.

Asset allocation

Another important part of diversifying a portfolio if asset allocation. A good rule of thumb is not to put too much capital into any one specific sector or asset class. Again, this is all about mitigating your risk. If you had 80% of your capital tied up in a single stock, and 20% spread across multiple asset classes, then the potential losses from the single stock may completely outweigh any profits from the remainder of your portfolio. You could thus end up taking a heavy net loss.

It’s all about balance, which the example diverse portfolio below will show.

An example diversified portfolio

David Swenson, the investor in charge of overseeing Yale University in the US’ investments, is a good example to follow. According to the New York Times, David has managed to get 16.3% annualised ROI on his investments over the past 20 years of managing Yale’s endowment, worth around $20bn.

In that 20 years, we’ve seen some tough market conditions. The Great Recession, for example, put massive, massive pressure on financial markets globally. Through diversification, David’s portfolio has been able to weather such storms, and continues to deliver significant returns.

Here’s what David’s diversified portfolio looks like:

  • 30% – US stocks
  • 15% – International stocks from Developed economies
  • 5% – Emerging markets stocks
  • 20% – Real estate funds
  • 15% – Government bonds
  • 15% – Treasury inflation-protected securities

You’ll note no single choice represents an overwhelming section of David’s portfolio. Any underperforming sector’s losses will potentially be covered by the other parts of the portfolio, thus mitigating the risk factor.

How to diversify your portfolio

Step 1: Open your account

Firstly, you’ll need to create an account with Markets.com.

That way you can get access to our trading platforms and instruments.

You can use the Investment Strategy Builder to power your own investment strategy or use one of our ready-made options to invest with a little extra help.

Alternatively, use Marketsx to select and trade thousands of CFDs across commodities, shares, and more diversified instruments.

Step 2: Choose your assets

Remember, variety is the spice of life, and the same is true with portfolio diversification.

Over 2,200 CFDs are available on our platform, covering all the major asset classes.

Think about what you want to achieve, and also your commitments and budget. You may want to diversify your portfolio without investing too much. Consider your risk too. Do you have enough capital to trade comfortably?

With that in mind, consider your assets. Do you like the look of oil futures and gold? What about US technology stocks on the Nasdaq vs FTSE 100 performers from the UK? Geography and sector will all play into your decision making here, but as we’re talking about diversification, it’s an idea to take a broad brush and choose from a range.

Always do your due diligence before investing though.

Step 3: Open your positions

Use our platforms to place your first trade.

Step 4: Monitor your positions

Monitoring and evaluating your diversified portfolio very important if you want your trades and investments to succeed. This is not a one-time thing. You must keep things balanced.

Keep an eye on your investments to ensure you’re not exposing yourself to risk you are uncomfortable with.

You might have personal matters that impact your risk tolerances, such as a change in financial circumstances, or your long-term goals might change. In more extreme cases, the risk profile of your assets might change, i.e. a stock market crash.

It’s also necessary to know when to close a position. Be sure to keep up to date with any changes in market conditions, so that you know when it’s time to close your trade. Once you close one position, it’s a good idea to look at how you will readjust your portfolio.

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.

OPEC+ preview: Saudis continue to take the strain

Commodities

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. Prices declined since the March meeting amidst liquidation of speculative long positions as the pandemic worsened in Europe and lockdown restrictions were reimposed. Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, has made it clear that the country is not willing to bet on a post-pandemic rebound in demand. It’s likely that given the retreat in prices OPEC+ and particularly the Saudis will feel vindicated and will stay the course. Saudi Arabia will keep cutting the additional 1m bpd and continue to do the heavy lifting for the market.

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.

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.

WTI (May) showing double bottom support around the $57.40 level

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