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.

US pre-mkts: Bank earnings strong, Cat upgrade

Equities
Investments

Very strong bank earnings coming through this morning – JPM led the way yesterday and the latest numbers from peers also look strong. Real good signs of improving loan growth in particular is a positive for BAC.

US pre-market key pointers

Bank of America (BAC)

Strong performance from Bank of America.

  • Net income of $7.7bn, EPS of $0.85 vs $0.71 expected
  • Revenues up 12% year-on-year – JPM was just up 2.2%
  • Net interest income up 10% to $11.1bn – most rate-sensitive of the big banks
  • Record M&A activity – Noninterest income up 14% to $11.7bn, driven by record asset management fees, strong investment banking revenue and higher sales and trading revenues
  • Expenses down on the quarter, flat on the year
  • $624m clawback from bad loan provisions – bottom line flattered less than the JPM numbers.
  • Stock up pre-mkt to tune of 2.5%, having fallen 0.92% yesterday in sympathy with JPM, which is trading mildly higher in pre-mkt.

Wells Fargo (WFC)

Wells Fargo results showed:

  • Net income of $5.1bn, EPS $1.17 vs $0.98 expected
  • Net interest income was down 5%, due to lower loan balances that reflect soft demand, also higher prepayments, lower yields
  • Results include $1.7bn decrease in credit loss provisions – equivalent to $0.30 per share.
  • Pre-mkt trades +1%, having slipped 1.3% yesterday.

Meanwhile, ahead of the cash open on Wall Street, US futures indicate all the major averages will open higher. SPX seen opening up 30+pts at just under 4,400, Dow Jones +200pts at 34,610, NDX at 14,900. Risk looking solid.

  • Walgreens Boots Alliance reported earnings $1.17, vs $1.02 expected, revenues $1bn ahead of expectations, cost-cutting programme a year ahead of schedule. US comparable sales up 8.1% from a year before.
  • UnitedHealth shares +2% pre-mkt after reporting earnings beat and raised guidance.
  • Caterpillar +1% pre-mkt, bouncing of its weakest level since Jan, as Cowen advises clients to buy ahead of the first ‘megacycle’ in 14 years, initiates with ‘Outperform’ rating and PT of $241.
  • Tesla shares are up pre-mkt to their best level in 7 months.
  • Boeing down 1% pre-mkt after report says co. dealing with new Dreamliner defect, production problems
  • FTSE 100 at HOD just a whisker under 7,200
  • Dollar continues to struggle. GBPUSD making a fresh 3-week high at 1.37334.
  • Gold also trades at HOD at $1,800, sitting on its 100-day SMA.
  • Treasury yields lower, 10s at 1.532%

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

Stocks drop, Bitcoin weaker again

Morning Note

You couldn’t really have set it up better. On the day El Salvador made Bitcoin legal tender, the asset plunged by 16%. It’s almost as if the inherent volatility in Bitcoin makes it really bad at being a currency that people use to spend and save. After hitting a fresh high above $52,000 overnight, prices dropped to under $44,000 before finding some stability around the $45,000 area. Not a good start to its life in the mainstream. It simply underscores the fact that it is not a good means of payment or reliable store of value. The El Salvadoran government apparently bought more Bitcoin on the dip.

 

Cathie Wood of Ark was talking on Bitcoin – responding to comments by investor John Paulson. She wheeled out the Bitcoin-bro case that it’s not just digital gold, it’s new global monetary system. She said it’s not subject to the whims of policymakers – in fact it’s a hedge against the whims of policymakers. That may be or may not be, investors should be extremely cautious. The impoverished people of El Salvador don’t have much choice.

 

Stagflation: inflation plus a tax rise plus slowing growth is probably not a great setup for the UK economy. The Tories are pushing on with a regressive tax hike for workers, plus increase the tax on dividends which is going to be an extra blow to investors. It means the overall tax burden is the highest in this country since the second world war. The question that needs to be asked is a bigger one – if you can print money to pay for furlough, test and trace and the rest, why can’t you print money for social care reform?  

 

European stocks saw brisk selling in early trade after a drop for Wall Street and a weak handover from Asia. All sectors in the Stoxx 600 are down in early trade and the major bourses trade -1% to the downside. But it was another record high for the Nasdaq and again there is a slow growth feel to the stock market – things that don’t need cyclical economic growth doing well like Netflix – new all-time high – and Tesla. Cruise liners, casinos and Disney were the best performers though – signs that it’s all doom and gloom with regards Delta and vaccines. Industrials were weak but so too some of the bond proxies like real estate and utilities as bond yields rose. The Dow fell 270pts to 35,100, while the S&P 500 declined 0.34% to 4,520. It seems like the kind of uptick in consumer spend and consumption into the back end of the year will not be as strong as thought due to delta. James Bullard, a relative hawk, said tapering should go ahead soon. US futures heading lower – definite pullback mode so watch out – question is how quickly the market is to buy the dip, so schooled in doing so it is.

 

Time to sell bonds? The 10yr Treasury yield approached 1.4%, hitting a two-month high and breaking above its 200-day SMA. The July high of 1.42% and the 100-day SMA at 1.44% are in view. Gold fell as yields moved up along with the US dollar, which is recovering some ground lost over the last fortnight. USD/JPY ticked up to its best in 3 weeks, while sterling is weaker again after a sharp fall yesterday.

 

Morrisons shares are trading up a touch as the company said it will engage with the panel on a possible auction. Neither Fortress nor CD&R have declared their offers final, so a ‘competitive situation’ exists still. Shares ticked up by about half of one percent at the start of the session.

Stocks start the session weaker

Morning Note

Stocks in Europe are a tad weaker at the open after Monday’s rally, sticking to the recent well-worn ranges. US trading returns today with futures indicating a flattish open. There was a decent session in Asia overnight spurred on by strong data from China with the Nikkei 225 touching 30,000 for the first time since April, and the Topix hitting a 31-year high as the technical breakout from last week continues. Stocks in Shanghai and Shenzen were also up +1%. Despite all the worries about supply chains and Delta, Chinese exports surged in August by 25.6% year-on-year, up from the 19.3.% increase in July and beating the forecast of 17.1%. Sticking with China for a moment, shares in Evergrande, the indebted real estate giant, sank further to the weakest since 2015 as the fallout from its default risk continues to ripple through the property sector, where bond yields are rising fast. 

 

With stock futures doing little in the US and coming off the back of a three-day weekend, the focus will be on the cash equity open later on Wall Street in the wake of Friday’s disappointing jobs report and the lapsing of those last $300 stimulus cheques.  Still the relentless low-vol grind up is holding and Barclays today has lifted its S&P 500 price target to 4600 from 4400. Question is whether Sep/Oct produces a spike in volatility. A 3% drawdown – mild by anyone’s standards – takes you back to the 50-day SMA support that has held up so well this year, while a 10% correction tests the 200-day SMA. Technicals at the moment indicate sideways action and a loss of upwards momentum – merely a question of timing as to when we get a rollover. 

 

Interesting comments from the Bank of England’s Michael Saunders this morning, who said it might be right to think of rates going up in the next year or so. He indicated that the economy was already about the same size as it was before the pandemic, that inflation has been stronger than expected, and that the country does not need as much stimulus as previously. However, it should be noted that Saunders is about the most hawkish on the nine-member MPC so does not speak for the central consensus. I don’t think it tells us much we don’t already know but it underscores the conundrum facing central banks today as to when to ease off the gas. Saunders makes an important point in noting that continuing asset purchases when inflation is 4% might cause medium-term inflation expectations to drift higher, which could cause a more severe monetary policy response down the road. If central banks don’t get a grip on it now, they could be faced with bigger problems later – but they are all deeply paranoid about choking off recovery too soon. GBPUSD tried to rally on the comments but quickly reversed to hit its weakest since Sep 2nd. 

 

E-commerce winner DS Smith shares rose after the company said trading remains strong with solid box volume growth over 2019 levels, particularly in the US and southern Europe. But input costs continue to rise with management mentioning notable increases in the cost of energy and transportation. ‘Given the strong demand for our packaging we have seen good progress towards recovering these increases,’ the company said. Shares rallied over 2% in early trade.

 

The Reserve Bank of Australia stuck to its taper but will extend the purchase of bond purchases at $4bn a week from Nov 2021 to Feb 2022.  The RBA said the decision ‘reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak’. Looks like the RBA is trying to neutralise the taper they announced recently without actually rowing it back.  

 

Oil prices just tracking sideways after running into the near-term trend resistance last week. Bullish MACD crossover is still in play but momentum clearly drifting. Saudi price cut has tamed bulls but growth in Chinese exports is a +ve.

Spot Oil Chart 07.09.2021

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