Stocks extend rally, Moonpig shares surge, silver retreats, GME sinks

Morning Note
  • Risk is bid as stock markets extend bounce
  • Moonpig prices IPO at 350p, shares surge to 440p
  • Silver retreats from 8-year high, GameStop shares sink
  • Inflationary pressures reappear in manufacturing PMIs

Confidence has returned to global equity markets with stocks in Europe higher again this morning after bouncing back on Monday from a choppy final week of January. We can probably put this down to bears lacking any serious catalyst, the combination of stimulus and vaccines still underpinning a broad confidence, and Chinese repo market stress from last week is fading. The FTSE 100 rallied almost 1% and is up again but trailing European peers with BP down 3% on a collapse in 4th quarter profits to just $115m from $2.6bn last year. The DAX in Frankfurt was up 1.4% and added another 1% in early trade. After its worst week since October, Wall Street had its best day in two months yesterday. The S&P 500 rallied 1.6%, the Dow rose 0.76% and the Nasdaq added 2.55%. The small cap Russell 2000 rose almost 2.7% as reflationary pressure resurfaced and the US 10-year bond yield edged back towards 1.10%. WTI oil surged north of $54 amid signs of tight supply and rebounding manufacturing PMIs. More on inflation below.

Moonpig has priced its London IPO at 350p a share, valuing the company at £1.2bn, before shares surged 27% to 442p in early trade. The deal gives investors a 41% stake in the company with 140m shares sold., Moonpig has been a big beneficiary of lockdowns as card shops have been closed and consumers have found options online to send greetings cards – sales doubled in the six months to the end of October. Its market share is huge (60% of online cards in the UK in 2019) and the trend towards online that will last beyond the pandemic is supportive of future growth. Huge market share, strong growth prospects and good margins – what is not to like? Maybe the valuation, but as we have seen before that is hardly a barrier to online retail stocks. The strong debut, coming amid a flurry of deal activity that last week saw Dr Martens shares surge on debut in conditional dealing, is a sign investors are still willing to pay a premium for growth and a premium for names they are familiar with.

Silver retreated from an 8-year high at $30 to trade under $28 as of this morning. Shares in Fresnillo retreated 3% on the drop after surging yesterday. So far, the fallout in the markets from the Reddit-GameStop shenanigans has not been too large – it seems mainly to have caused some equity repositioning. Shorts have lost over $13bn on their GME positions, so there is bound to be a ripple effect in equities. Other markets not really affected – Treasuries not really doing much, gold, USD etc not really affected There is clearly risk of further repositioning-led volatility as funds de-risk and get out of positions, but for now it seems to be reasonably concentrated and not creating volatility outside of equity markets. We should note as well that the market is not overburdened by shorts – this is not a heavily shorted market by historic standards – the Fed has seen to that.

Outside of the specific market moves, repercussions for the industry are less clear cut at this stage. I would think hedge funds are going to be less inclined to make big naked short bets against single name stocks. They won’t want to stick their heads above the parapet. Presumably, this includes Renaissance Technologies, which reported a 9.5% slump in its equity fund in January. As we reported last week, Citron has already thrown in the towel. RobinHood’s IPO could certainly be a little trickier. But beyond this, it’s not so clear cut whether the Reddit story really leads. Finance is democratized by free trading – I don’t see how brokers who are obliged to raise their collateral at clearing houses to settle trades that are executed on their platforms really deserve the amount of baseless vitriol as they have received. Realisation that the GameStop/Melvin melt-up/blow-up will not leach across financial markets – despite the silver moves – is maybe another factor in the broad risk-on moves. There was something of a shock effect last week but this initial disruption has faded.

What’s next for the Reddit traders? First came GameStop, next was silver. Could Bitcoin be the next to get the Reddit treatment? Hedge funds are extremely net short on Bitcoin futures. According to the latest CFTC Traders in Financial Futures report, the net short position is the largest ever. Add to this the recent move by Elon Musk to put #Bitcoin in his Twitter profile, which sparked a $5k rally in Bitcoin, and you get the raw ingredients for something to happen. It’s not a great leap to make in one’s imagination to see Bitcoin bulls rally to Musk and squeeze shorts. Although we note Musk tweeting this morning ‘Off Twitter for a while’… I’m sure he will be back soon.

GME shares will return to $10 sooner or later once this has all passed the mania subsided. Yesterday shares dropped 30% and fell another 15% in after-hours trading to under $190 and dipped 30% in Frankfurt this morning to €140. Shorts are covering their positions after taking a $20bn last month. Short interest in GME fell to 39% of free-floating shares, from 114% in mid-January, data from IHS Markit shows. S3 Partners data paints a similar picture. With hedgies covered, the unwind will be brutal.

Commodity prices seem to be heading north. Looking past the current silver craze, we have talked in the past about a series of tailwinds for commodities in 2021 and there are signs that inflation seems to be coming. The latest IHS Markit US manufacturing PMI, which rose to a record high by accelerated expansions in output and new orders. Notably, however, cost pressures worsened amid raw material shortages, but firms passed this on as selling prices rose at the fastest pace since July 2008. The ISM PMI rose to 58.7, signalling healthy expansion, albeit it was a little short of the expected reading. It also noted inflationary pressures as the Prices Index surged to 10-year high last month, indicating continued supplier pricing power. The report showed every commodity bar caustic soda rising in price, with several, including electrical components, semiconductors and steel, in short supply

Consumer demand is picking up, but so too are supply chain troubles. A lack of shipping capacity (we’ve seen container rates go skywards) and shortage of raw materials is seeing lead times stretch way out. IHS chief business economist said: “These price pressures should ease assuming supply conditions start to improve soon but could result in some near-term uplift to consumer goods price inflation.”

Britain’s manufacturing sector is also seeing activity pick up, but more slowly than before. The increase in activity slowed sharply at the start of 2021, with output growth easing and new orders falling slightly as producers faced weaker inflows of new export work and temporary supply-chain disruptions caused by COVID-19 restrictions and transport delays. Again, inflation seems to be coming. Input price inflation rose to a four-year high in January, due to raw material shortages, transport delays and market forces.  This was passed on customers, leading to the steepest inflation of selling prices for 28 months.

The Reserve Bank of Australia left interest rates on hold but added another $100bn to its asset purchase programme in a surprise move that reflects the central bank’s pessimistic view for wage growth. AUDUSD was reasonably steady around 0.76 after the announcement but the near-term downtrend remains in force, looking to test the Jan 28th lows at 0.7590.

Stress in Chinese repo markets is fading and perhaps this is one of the major causes for the equity bounce back. Short-term money rates fell back to two-week lows on Tuesday as stress in interbank money markets seemed to ease. The Shanghai Interbank Offered Rate fell to 2.241% having earlier hit a six-year high of 3.194%.

In FX, sterling continues to trip the range against the dollar. The trend remains positive but GBPUSD keeps failing to break through at 1.3750/60. Meanwhile the euro is facing a big test vs the greenback as EURUSD tests the key horizontal support at 1.2050, having breached the 50-day SMA to the downside. The dollar slipped, however, giving some respite to the euro in early trade, as DXY retreated from trend resistance.

Chart: EURUSD test 1.2050, breach could call for 1.19440 area, then 23.6% retracement.

EURUSD test 1.2050, breach could call for 1.19440 area.

Chart: Dollar faces trend resistance.

Dollar faces trend resistance.

Could Bitcoin be next for the Reddit treatment?

First came GameStop, next was silver. Could Bitcoin be the next to get the Reddit treatment?

Hedge funds are extremely net short on Bitcoin futures. According to the latest CFTC Traders in Financial Futures report, the net short position is the largest ever. Add to this the recent move by Elon Musk to put #Bitcoin in his Twitter profile, which sparked a $5k rally in Bitcoin, and you get a recipe for a potential short squeeze on Bitcoin.

A potential short squeeze on Crypto could be coming.

Over the weekend Musk expanded on his thoughts on Bitcoin. “I am a supporter of bitcoin,” he said in a conversation on the Clubhouse app. “I was a little slow on the uptake.” Musk added: “I think bitcoin is on the verge of getting broad acceptance by conventional finance people.”

So far though the focus is on Ripple, with XRP surging 150% since the end of last week with the crypto featuring heavily in the influential /wallstreetbets Reddit thread.

Ripple token XRP is surging right now.

But the interest in Bitcoin won’t diminish. Indeed it seems more likely that the #silversqueeze will not last. There are many reasons for this, principally the sheer size of the market.

Saifedean Ammous, author of The Bitcoin Standard, summarized why trying to squeeze silver may be costly.

Saifedean Ammous says trying to squeeze silver may end up costing shorters.

Silver-tongued Redditors drive up prices

Morning Note
  • Silver jumps on Reddit interest
  • European shares rally
  • Fresnillo lead silver miners higher

We’re not in Kansas anymore: Silver prices jumped to 8-year highs as investor interest turned on the metal due to expectations Reddit traders will attempt to squeeze prices higher. Retail traders are herding into silver in the same way they have driven the likes of GameStop over the last week. Prices gapped up from Friday’s settlement at $26.914 to north of $28 and quickly cleared out the daily resistance from the Sep 1st high at $28.91 and then kicked on to $30 by the start of the European session. At send time spot silver was trading +9% around $29.70. That’s about 20% since Thursday and there is clear divergence from gold, which has remained range-bound at $1,865. Could gold be next? I doubt it, but we live in interesting times. What we don’t know is exactly how this is happening – clearing out of shorts by worried hedge funds, retail-driven bid, ETFs flows driving the physical market, smart-money front-running the trade, or a combination of all these.

APMEX released a statement saying it has seen a “dramatic shift” in silver demand in recent days. The US bullion broker said: “For example, the ratio of ounces sold per day was running about two times earlier in the week and closer to four times the average demand by the end of the week. Once markets closed on Friday, we saw demand hit as much as six times a typical business day and more than 12 times a normal weekend day. Combined with the extremely high demand levels, we are also seeing a surge in new customers. On Saturday alone, we added as many new customers as we usually add in a week.”

The fact that such a large and liquid market as silver can be targeted by retail investors says much about the shift we are witnessing., though despite appearances this morning it’s going to a lot harder to squeeze silver shorts as the market is so much deeper and more liquid. We should also note that some bigger smart money may have be front-running this trade to piggyback the rally and further fuelling the move up. (George Soros: “When I see a bubble forming, I rush in to buy, adding fuel to the fire.”) Targeting physically backed ETFs like SLV may be smart, as it will drive physical demand and push up spot prices perhaps more acutely than just by trading futures. I would reiterate that this kind of herding to coordinate a squeeze up is risky and likely to create a bubble that will hurt more than helps on the way down. Whether GameStop or silver, these are purely speculative bubbles that rely on the Greater Fool to keep it going. Examples of these manias litter the history of financial markets: it’s just the same, only in a different wrapping.

Fresnillo, the silver miner, saw its share jump 15% in early trade as a result of the squeeze on the underlying price. Polymetal rallied 6%, whilst Hochschild rose 13%. Tiny Australia-listed Argent rose 60%. Watch the likes of Canada’s Pan American Silver and Fortuna Silver Mines later. BlackRock  iShares Silver Trust (SLV) saw a stunning $944 million net inflow on Friday.

GameStop meanwhile opened up more than 30% in Frankfurt having closed up over 67% on Friday in New York to $325. AMC Entertainment finished 53% higher at $13.26. Both will be open for trading at 14:30 when the US cash markets open.

European stock markets were broadly higher on Monday morning as investors try to arrest a decline over the last fortnight that has wiped out YTD gains made during the first week of January. Wall Street had a tough session on Friday, closing down by around 2%. Meanwhile we have a coup d’etat in Myanmar, strife in Chinese repo markets and a raging pandemic to deal with. This week the focus is on the Bank of England, Alphabet and Amazon earnings, and US nonfarm payrolls.

Chart: Silver gap open, backing off at $30

Silver gap open, backing off at $30

Equity markets continue September slide

Morning Note

Stock markets in Europe turned lower Thursday after tough day on Wall Street left the S&P 500 close to correction territory. Six months on and with some big gains locked in, investors are starting to fret over the recovery ahead, with the Fed warning that the US economic recovery would suffer if there is no further stimulus and the UK set for a longer winter of discontent.

On Thursday morning, European equities traded lower but pared early losses after the first hour of trading. Asia was notably weaker. German business confidence improved a fraction. Donald Trump said he could overrule the FDA’s plans to introduce tougher standards for authorising a coronavirus vaccine.

The S&P 500 closed near its lows of the day, falling over 2.3% to 3,236 on broad market weakness as both tech/growth declined alongside cyclicals. The index is close to correction territory again – from its intra-day high at 3,588 the 10% corrective move sits at 3,229, Monday’s low point. On a closing basis, it’s 3,222.

What’s remarkable is that through all this selling, Treasuries are unmoved – 10s continue to print around the 0.67% region – why are bonds just not moving through all this equity market selling?

Risk sentiment deteriorating?

Whilst we can look at the rampant speculation and excessive valuations in big tech stocks unwinding over the course of September, we are seeing broader declines in other sectors that indicates deteriorating risk sentiment as we head into the autumn.

There may be several reasons behind this – less certainty over a vaccine emerging soon, second wave fears, the realisation that consumer confidence and spending in the economy will slump unless governments continue to inject stimulus and the usual volatility before the US election.

Trump continues to tease with comments around not committing to a smooth transition of power – of course there is no risk that he would somehow carry out a coup, but equally I fear there is almost no chance the election result will be confirmed on the night. Gore/Bush 2000 seems likely to be repeated but things are far nastier, far more polarised now than then.

More broadly perhaps we can put the sell-off in equities down to fading momentum in the economic recovery – PMIs are showing weakness, whilst other measures of economic activity indicate a levelling-off after the bounce back over the summer – at the same as there is no fresh stimulus emerging either on the fiscal or the monetary side.

Fed officials warn over US economic recovery, call for government support

Whilst central banks continue to stress that they will do whatever it takes, few additional concrete steps have been taken lately.  Washington appears gridlocked over fiscal support.

Fed speakers issued a series of warnings about the path of recovery in the US. Jay Powell warned Americans would burn through savings and find it harder to sell their homes. Boston Fed president Rosengren warned of a ‘credit crunch’ by the end of the year with community and regional banks likely to come under pressure from more bad loans as businesses are forced to close.

Cleveland Fed president Mester also called for more fiscal stimulus to support the fragile recovery. Goldman Sachs lowered its quarter-on-quarter GDP growth estimate for Q4 to 3% from 6%, implying the economy contracting 2.5% in the quarter. Powell and Treasury Sec Mnuchin speak later today. Also watch the weekly jobless claims numbers, with initial claims seen at 845k.

UK chancellor abandons Autumn Budget

In the UK, chancellor Rishi Sunak is abandoning his planned Budget for a short-term round of targeted measures, which he will announce later today.  This is likely to featured more targeted support for sectors like hospitality and travel. It’s clear on both sides of the pond that unless there is more fiscal support, the economic recovery will go into neutral and stall.

Only three weeks ago the government implored us to get back to the office to support city centres – what’s strange is that they did this without realising that cases would rise. Their risk tolerance for the spread is extremely low, which indicates a government operating on the fly.

Strong dollar pressures pound and precious metals lower

Dollar strength is weighing on its major peers as well as gold and silver, although the greenback’s advance just paused for a while this morning. Sterling has retreated to its weakest level for two months and is current sitting on the 38.2% retracement with the 100-day line turning into near-term resistance.

The pound remains exposed to several strong headwinds, including the risk of a no-deal Brexit, negative rates and a deeper and longer-lasting economic collapse than peers. Meanwhile gold fell below $1850 and has retreated 10% from the recent all-time high but found support at the 100-day DMA. Silver has broken the trend line after some very nasty price action over the last few days, but it too has found support around its 100-day line.

Chart: Cable holds 1.2690 for now, 100-day line becomes resistance

Chart: Dollar index advances with three white soldiers candle formation and possible gap close to 96?

Chart: Silver test 100-day line

Broad rally for equities as UK goes for lockdown-lite, Tesla fails to spark, precious metals under pressure

Morning Note

European markets rose 1% in early trade on Wednesday, extending mild gains from the previous sessions following the steep selling on Monday. Yesterday, the S&P 500 rose 1%, and the Nasdaq climbed 1.7%, whilst markets across Europe were a little more mixed with London and Frankfurt higher but Paris lower.

Today sees solid bid across sectors and bourses with a slate of manufacturing and services PMIs in focus. The FTSE 100 recovered the 5,900 level, with even IAG and easyJet getting in on the action, rising 6% each. Safe-haven play Fresnillo was off by a similar margin as silver and gold prices come under a good deal of pressure again today.

There is no clear evidence for the airlines to rally except that perhaps there was an overreaction earlier in the week.

PMIs underline the fragility of the recovery

I will issue the usual caveat about extrapolating too much from these diffusion indices, but they do highlight an interesting trend. The manufacturing sector can sustain a recovery as firms can work out how to function in the new environment, but it’s harder for many service sector businesses to operate at all, which drags on the number.

Service sector companies are also much more exposed to the caprice of lockdowns. Both German and French services PMIs came in under 50, indicating contraction (survey respondents think things are worse than the month before), while both countries’ manufacturing PMIs pointed to expansion.

The UK is heading for a second lockdown-lite

This will dent the recovery and hit some sectors especially hard, but perhaps more importantly this is spurring the chancellor into action. With the furlough scheme slated to end in October, there is a risk of a jobs calamity even without further lockdown restrictions, which are a possibility.

Rishi Sunak is reported to be working on new plans to support jobs, which may ease worries among investors that the UK economy could fall off a cliff for a second time just as the Brexit process reaches its finale.

Individual stocks are putting some very big moves daily which only indicates the kind of dislocation in market pricing, uncertainty about the path of the pandemic and the fact that no one really knows where a lot of these securities ought to be trading.

Whether it’s value or growth, tech or travel, the unevenness of both the recovery and government policy means it’s hard to know what a fair value is. Trying to extrapolate a narrative to fit all of this is often a fool’s errand.

Tesla stock tumbles after Battery Day reveals fall flat

A case in point: Tesla shares fell over 5% and extended their decline by a further 7% in after-hours trading, despite Elon Musk outlining the company’s plans to halve the cost of battery manufacturing and market an electric car at $25,000. The new battery tech would deliver 16% more range and x6 more power, but the company said production in volume is three years away.

There is some debate about whether Tesla’s Battery Day announcements amount to incremental or revolutionary changes to battery technology, but two things are clear: Tesla has not suddenly acquired warp speed capability, but clearly the company has a roadmap to cheaper, longer life battery technology that it will make itself and will allow it to lead the EV field for a while longer.

Panasonic and other suppliers were hit with Tesla planning to make its own battery. Nevertheless, given all the anticipation around a potential game-changer in battery technology, investors were a little underwhelmed by the news. Tesla’s Frankfurt-listed shares declined 7% at the open, before paring losses a touch.

Nike climbs as online sales surge, Ant Group takes another IPO step

Nike shares shot higher after-market following an 82% rise in online sales, with the company expecting to benefit from a permanent shift to direct online sales. EPS of $0.95 beat the $0.47 expected, on revenues of $10.6bn vs the $9bn expected. Nike continues to benefit from its strong brand presence that is akin to Apple in the smartphone space, as well as large investments in its web and mobile platforms. Shares in Adidas and Puma rose about 4% on the read-across.

Ant Group took a step closer to its mega-IPO after it submitted documents for registrations of the Shanghai side of the listing. The company plans to list both on Shanghai’s STAR Market and in Hong Kong, with valuation estimates in the region of $250bn-$300bn.

Cable softens, BoE Baily fails to quell negative rate fears

In FX, GBPUSD traded under 1.27 in early European trade after the downside breach of the 200-day EMA presented bears with an obvious momentum play. Yesterday’s move under the 1.2760 level has opened up the path to further losses and today the pair is trading through the 100-day line and testing the 38.,2% retracement at 1.2690.

Whilst Andrew Bailey attempted some push back on negative rates, saying they are not imminent, the takeaway from his comments was that this unorthodox and dangerous tool is very much being actively considered by the bank’s Monetary Policy Committee.

Chart: GBPUSD downside exposed

The USD continues to find bid, which is weighing on gold. DXY extended its push out of the channel, forcing gold to trade under $1,900 and test the 50% retracement around $1875, corresponding with the horizontal support of the descending triangle formed by the August lows. Silver has a bearish bias after breaching the August low.

Chart: Dollar continues breakout

 

Chart: Gold tests 50% retracement

Chart: Silver breaks August lows

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