European stocks hit record high, euro highest since Jan

Morning Note

“I have some Bitcoin, and I have a very particular set of skills”.

Ok, Ray Dalio didn’t say the second bit, but it would have been good if he did. The guy hates cash; we know this, but now he hates on bonds too. For the founder of Bridgewater Associates, even the most volatile asset out there is better than picking up dimes from in front of the inflation steamroller. In a recorded interview shown yesterday at CoinDesk’s Consensus 2021 conference, Dalio said he would rather own Bitcoin than bonds. Dalio has a very particular set of skills: he’s good at making investment calls.

Or at least, he has been good for a long time. Last year, his main macro fund, the Pure Alpha II fund, lost 12.6%. Over the course of 2020, Dalio lost over $12bn whilst peers excelled. It was not a great performance in a year in which many investors were able to successfully call the bottom and ride the recovery in the stock market. He also famously said that ‘cash is trash’, which is kind of a pro-crypto statement in that it tells you he thinks that owning a depreciating asset (cash) is pointless. Dalio previously presented his views on Bitcoin in January, saying that Bitcoin “has features that could make it an attractive storehold of wealth”. The only problem with this argument is that anything that can depreciate by more than 30% in 24hrs is demonstrably not a good store of value. That’s a heck of a lot of years of inflation erosion compressed into a single day. Ok, it’s back up now a bit, but who’s telling where it will head next? Bitcoin bounced on Monday after a steep fall over the weekend. Price action ran into resistance at the $40k level and this morning trades a little below around the $39k area, but well above last week’s multi-month nadir of $30k.

Tech and reopening stocks rose in the US on Monday. Big tech gains helped the S&P 500 look at the 4,200 round number again. Apple rose as the judge in its case against Epic retired to consider her verdict. The case could have important implications for App Store margins. Crypto-exposed stocks like Tesla and MicroStratey both rallied 4% as Bitcoin rose, whilst Coinbase added just 0.4% as Goldman Sachs initiated coverage on the stock with a buy rating. That will be welcome news to Cathie Wood, as the stock is now a top-ten holding in her Innovation ETF. Coinbase offers traders the closest thing to real crypto exposure without actually owning any tokens. The crypto exchange recently listed shares on the Nasdaq via a direct listing but its start to life on the public market has been rocky to say the least. Shares opened on April 14th at $381 but closed the first day at $328 and have since slid to $225.30.

The euro hit its highest since Jan 8th this morning as Germany’s Q1 final GDP reading declined to –1.8% from the initial estimate of –1.7%. Forward-looking indicators were more positive – the Ifo business climate index hit 99.2, ahead of forecast and rising from 96.8 a month before. The expectations number rose to 102.9 from 99.5 a month before. EURUSD broke the resistance at 1.2240 to reach a four-month high at 1.2260. The breach calls for a retest of 2021 highs made at the start of Jan at 1.2350. The dollar index trades at its lowest since January, but sterling has not been able to latch on and GBPUSD holds a whisker under 1.42, a little shy of last week’s three-month high.

The DAX and Stoxx 600 both posted record highs in early trade as they returned from a long weekend. Deutsche Wohnen led the DAX’s 0.7% rally this morning as shares rallied 15% on €18bn takeover offer from German rival Vonovia. Shares in Vonovia fell 5% as the deal, which sees Deutsche Wohnen shareholders paid €0.52 per share an retain the rights to a €1.03 per share dividend, amounts to an 18% premium based on the stock’s undisturbed closing price on Friday. The FTSE 100 trades flat, but comfortably above the 7,000 pivot and towards the upper end of the six-week range.

Now two stocks showing two sides of the same rather tarnished coin: Restaurant Group shares rose ~3% as the casual dining operator reported an encouraging recovery in sales in the five weeks to May 16th. Both Wagamama and Pubs, with a combined 200 sites or so now open, reported comparable sales at 85% of 2019 levels. Leisure sites traded at around 60% of 2019 levels, which was in line with expectations. This ought to also be good news for UK plc and recovery in GDP in Q2 and Q3.

Meanwhile, Greencore tumbled ~11% as the sandwich maker reported revenue declined 19% to £577.1m in the six months to the end of March, noting the decline was driven by a reduction in consumer mobility as a result of tiered restrictions and lockdowns in the UK. Certainly, shares have enjoyed a good run so a bit of profit-booking on the results can be expected, but the reaction in the share price looks overdone – this is very much backward-looking data. Indeed, these results kind of underscore what we already know – anything up to the end of March was incredibly tough, but since then things are improving quickly.

The outlook from Greencore is positive, too. Management report ‘encouraging revenue momentum’ in the first seven weeks of the second half with pro forma revenue in food to go categories running at approximately 123% above prior-year levels and approximately 14% below the equivalent pre-COVID levels in FY19, they said. Pro forma revenue was approximately 64% above 2020 levels and approximately 5% below equivalent pre-COVID levels.

Elsewhere, Treasury yields declined, with the benchmark 10yr note under 1.6% again, as Fed officials sought to allay inflation fears. Gold trades near the top of the range close to $1,890. The weak dollar and lower nominal and real rates, plus fears about rising inflation, are all acting as valuable support for the metal. Oil is steady after a strong session on Monday with WTI (Jul) trading around $65.75 this morning. Demand growth is positive with vaccination efforts in major economies progressing well, whilst there is less confidence that Iranian oil will hit the market soon. Even if Iranian exports hit the market later this year, there is still scope for a summer spike in prices.

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.

Top Stocks of 2021

Stock markets are broadly higher this year, with the S&P 500 up more than 10% since the start of January. UK equities have also had a decent start through to the end of May and are up almost 9% this year. In Europe, the Stoxx 600 is 11% YTD. 

Here we look at some of the top performing stocks of 2021. 

UK: Restaurant Group (RTN) leads the way with the stock up more than 90% as the UK enjoys a positive reopening story. Share have risen as investors bet on the company, owner of Wagamama, enjoying strong demand as consumers return. The company has tapped investors for £175m and completed a £500m debt refinancing to cover it over through to the full reopening of the economy and support its delivery network expansion. It had swung to a £127 pre-tax loss last year. Shares are up about 140% from the depths of the pandemic. 

Top performing UK stocks: FTSE 350 

Name  RIC  1d (%)  5d (%)  MTD (%)  1 mth (%)  3 mth (%)  6 mth (%)  YTD (%)  1Y (%) 
FTSE 350 Index  .FTLC  0.95  0.93  0.50  2.14  6.06  11.27  8.77  19.11 
Restaurant Group PLC  RTN.L  3.19  -1.13  2.50  2.16  28.23  94.04  93.74  191.16 
Ferrexpo PLC  FXPO.L  -1.65  -4.13  5.74  13.89  42.83  163.20  82.45  228.11 
Tullow Oil PLC  TLW.L  -2.15  -3.48  -5.58  10.25  49.79  101.34  72.68  101.50 
Future PLC  FUTR.L  9.58  25.61  23.05  27.03  51.09  45.49  67.09  185.27 
Gamesys Group PLC  GYS.L  -0.16  -0.80  -3.62  -2.97  37.94  72.05  63.60  125.24 
Mitie Group PLC  MTO.L  2.15  6.75  6.92  3.75  25.28  69.60  61.95  83.78 
Royal Mail PLC  RMG.L  2.82  4.09  8.83  8.22  12.55  81.93  59.85  213.29 
Investec PLC  INVP.L  3.83  4.79  0.48  18.49  45.72  52.87  56.38  81.81 
Virgin Money UK PLC  VMUK.L  3.14  7.14  2.75  11.65  20.30  41.40  52.86  152.21 
Bytes Technology Group PLC  BYIT.L  1.09  1.69  3.45  4.85  20.06    52.24   
Just Group PLC  JUSTJ.L  -0.47  -1.22  -3.48  1.84  23.96  75.50  50.64  105.66 
TUI AG  TUIT.L  -2.91  5.58  -0.77  13.67  19.79  55.94  48.45  131.46 
Hammerson PLC  HMSO.L  1.10  5.48  -7.76  1.27  77.88  58.47  47.89  25.92 
Ashtead Group PLC  AHT.L  1.52  3.53  9.14  10.88  27.06  59.57  47.64  115.91 
Morgan Sindall Group PLC  MGNS.L  0.00  -2.20  -3.26  17.23  54.73  60.07  45.23  92.14 
Mitchells & Butlers PLC  MAB.L  2.28  1.49  -0.57  7.69  7.63  59.47  44.56  125.17 
Greencore Group PLC  GNC.L  0.18  2.70  5.48  7.58  22.19  47.75  43.69  20.95 
Redde Northgate PLC  REDD.L  0.80  1.33  4.40  9.83  47.00  51.70  42.86  102.13 
EVRAZ plc  EVRE.L  0.94  -0.89  3.99  9.87  20.01  76.77  41.65  153.41 
C&C Group PLC  GCC.L  1.14  11.79  7.56  18.62  35.00  50.28  40.04  69.47 
IMI PLC  IMI.L  -0.06  -0.73  2.13  17.55  21.49  48.27  39.74  87.99 
Greggs PLC  GRG.L  0.93  -0.72  5.81  10.54  19.47  44.67  39.50  44.42 
Indivior PLC  INDV.L  -0.13  1.82  -1.25  11.63  18.10  14.95  38.51  161.18 
Kingfisher PLC  KGF.L  -0.56  3.57  4.73  3.92  35.48  32.23  38.39  121.42 


Europe: Spain’s Banco Sabadell (SABE) is the top performer, with shares up 80% YTD and +140% in the last 12 months. The bank’s TSB unit swung to a profit in the first quarter as cost-cutting measures helped offset a 22% drop in earnings. Banco reported net profit of €73m, beating forecasts as like most banks it was able to book fewer bad loss provisions.  

 Stoxx 600 


  Percentage Change 
Name  RIC  1d (%)  5d (%)  MTD (%)  1 mth (%)  3 mth (%)  6 mth (%)  YTD (%)  1Y (%) 
STOXX Europe 600 EUR Price Index  .STOXX  1.27  1.05  1.03  1.87  6.51  13.42  10.74  28.90 
Banco de Sabadell SA  SABE.MC  0.85  -4.55  20.82  39.43  63.18  54.66  80.00  140.18 
Evolution AB (publ)  EVOG.ST  5.99  0.15  -14.04  3.03  33.32  117.76  72.16  172.61 
Kindred Group PLC  KINDsdb.ST  3.91  -2.37  -5.73  -9.80  9.00  96.11  71.43  185.04 
Royal Mail PLC  RMG.L  2.82  4.09  8.83  8.22  12.55  81.93  59.85  213.29 
Nordic Semiconductor ASA  NOD.OL  9.80  10.42  3.88  20.84  26.25  76.57  55.07  229.23 
Bank of Ireland Group PLC  BIRG.I  -0.20  -2.05  3.81  19.50  50.21  91.53  53.58  210.54 
Societe Generale SA  SOGN.PA  0.48  1.61  10.33  21.38  31.85  61.56  53.42  105.21 
Virgin Money UK PLC  VMUK.L  3.14  7.14  2.75  11.65  20.30  41.40  52.86  152.21 
Porsche Automobil Holding SE  PSHG_p.DE  1.68  1.27  -3.20  -8.35  30.55  50.37  50.32  83.75 
Getinge AB  GETIb.ST  2.53  3.05  0.31  6.29  27.45  55.02  49.61  63.16 
Banco BPM SpA  BAMI.MI  -2.17  4.08  13.97  19.88  24.82  39.30  49.39  150.21 
Bank Polska Kasa Opieki SA  PEO.WA  0.89  7.30  13.44  19.47  35.16  59.30  48.61  76.52 
TUI AG  TUIT.L  -2.91  5.58  -0.77  13.67  19.79  55.94  48.45  131.46 
Valmet Oyj  VALMT.HE  -0.06  1.79  -0.26  3.06  25.66  63.46  48.42  56.24 
Ashtead Group PLC  AHT.L  1.52  3.53  9.14  10.88  27.06  59.57  47.64  115.91 
Bankinter SA  BKT.MC  0.23  0.23  3.45  15.61  25.58  51.64  47.39  83.36 
Natixis SA  CNAT.PA  0.02  -1.31  0.47  0.77  0.59  62.60  46.40  105.18 
Kuehne und Nagel International AG  KNIN.S  2.09  5.97  7.33  3.53  39.46  49.11  45.92  106.70 
Compagnie de Saint Gobain SA  SGOB.PA  1.81  -0.49  3.75  4.03  25.94  37.76  45.25  119.11 
Dialog Semiconductor PLC  DLGS.DE  0.25  0.15  -0.37  1.09  -0.46  75.79  45.22  85.32 
ING Groep NV  INGA.AS  0.70  2.98  2.75  7.67  22.03  41.64  42.94  104.72 
DSV Panalpina A/S  DSV.CO  3.14  4.03  4.75  10.94  27.31  40.43  41.67  95.32 
EVRAZ plc  EVRE.L  0.94  -0.89  3.99  9.87  20.01  76.77  41.65  153.41 
Tenaris SA  TENR.MI  -0.62  -2.96  4.62  6.23  29.52  49.95  41.49  60.15 

US: Nucor (NUE) is the YTD top performer for the S&P 500 as the steel maker is expected to benefit from a big increase in infrastructure spending in the US. The company reported record earnings in the first quarter and CEO Leon Topalian said he expects the whole of 2021 to be strong. The Charlotte, North Carolina company posted $7 billion in revenue, which was up 25% year-onyear and up 15% compared with the same quarter in 2019. 

S&P 500  

  Percentage Change 
Name  RIC  1d (%)  5d (%)  MTD (%)  1 mth (%)  3 mth (%)  6 mth (%)  YTD (%)  1Y (%) 
S&P 500 Index  .SPX  1.06  1.13  -0.53  0.58  6.46  16.91  10.73  39.96 
Nucor Corp  NUE  -0.39  0.33  22.94  28.84  74.24  92.45  90.13  148.60 
L Brands Inc  LB  -3.91  -1.63  -1.85  0.87  28.51  61.82  73.92  429.30 
Marathon Oil Corp  MRO  -0.69  4.16  2.40  14.05  22.01  105.89  72.86  93.78 
EOG Resources Inc  EOG  -0.02  1.18  9.34  17.43  28.81  77.40  61.46  52.93 
Gap Inc  GPS  -4.01  -2.75  -1.57  2.52  34.91  33.69  61.37  343.87 
Devon Energy Corp  DVN  -0.08  2.06  8.04  20.46  22.21  93.44  61.01  109.31 
Capital One Financial Corp  COF  0.42  0.97  5.86  20.01  31.99  88.81  59.65  156.69 
Freeport-McMoRan Inc  FCX  1.23  -1.79  9.31  14.88  9.95  93.98  58.42  351.97 
Diamondback Energy Inc  FANG.O  -1.78  0.43  -6.36  3.04  16.71  92.09  58.12  75.29 
Seagate Technology Holdings PLC  STX.O  -2.75  11.12  4.29  17.49  32.38  74.11  55.76  86.73 
Hess Corp  HES  -0.93  3.15  10.00  21.01  28.91  76.11  55.26  73.13 
Invesco Ltd  IVZ  -0.60  -1.81  -1.33  3.30  18.56  69.47  52.84  261.47 
Mosaic Co  MOS  -1.05  0.78  -0.65  8.51  20.19  78.23  51.89  198.21 
Wells Fargo & Co  WFC  -0.95  -1.44  1.51  7.50  20.88  79.47  51.52  86.50 
Applied Materials Inc  AMAT.O  4.42  8.66  -1.81  1.34  9.08  69.84  51.00  129.10 
Fifth Third Bancorp  FITB.O  -0.38  -1.07  2.44  13.97  20.24  64.22  50.63  134.63 
News Corp  NWSA.O  4.00  3.05  3.26  2.11  20.22  54.39  50.53  136.24 
Mohawk Industries Inc  MHK  0.05  -5.03  1.20  6.07  20.98  63.55  47.54  150.46 
Iron Mountain Inc  IRM  2.09  2.67  7.18  8.89  33.66  67.38  45.86  80.07 
Lumen Technologies Inc  LUMN.K  -1.53  0.28  10.68  11.99  18.93  41.43  45.64  43.43 
Schlumberger NV  SLB  -0.72  0.03  17.45  25.82  21.63  57.20  45.53  74.46 
People’s United Financial Inc  PBCT.O  -0.69  -1.16  3.75  8.35  19.96  47.76  45.48  65.00 
APA Corp (US)  APA.O  -0.91  1.13  3.15  21.35  14.48  80.33  45.38  72.64 
Snap-On Inc  SNA  -0.39  -1.91  4.44  5.79  27.28  43.50  44.99  85.57 


*Source: Refinitiv, prices correct as of May 21st. 

This page is updated from time to time to reflect changes in the market: last updated 24/05/21 

NFP review: numbers disappoint but stimulus drives sentiment

  • Stock futures hold gains, yield curve steepens
  • Second straight disappointing payrolls number
  • Move to fast-track Biden stimulus package drives sentiment

Stocks are set for fresh record high opens on Wall Street and a 5th straight day of gains – something we haven’t seen since August. A soft jobs report has done little to upset the underlying risk-on sentiment that stems from the milking stool of equity market strength: vaccines, stimulus and earnings growth.

Although in line with expectations, really it was another disappointing number from the US jobs market. Nonfarm payrolls rose +49,000 in January, following the -227,000 decline in December, which was revised down from the initial -140,000 print last month. So things look worse in the labour market than maybe we thought but futures are looking right through this with Joe Biden’s $1.9tn stimulus package coming over the hill. The dollar is offered and the yield on US 10-year Treasury notes has leapt with spreads widening along the curve.  2s10s spread at 1.06%, highest for four years, with 5s30s at 150bps,  the widest since 2015.

The decision to move on stimulus without Republican support really changes the game. As I said yesterday, Biden wants to act fast and does not want to spend his first 100 days in office horse trading with the GOP over relief plans. The price of this could be any hopes of bipartisanship in future and we may need to wait until 2022 for the big green/infrastructure package as a result, and it may prove harder to deliver. For now thought dumping an extra 10% of GDP in stimulus is being lapped up by the market.

Unemployment fell to 6.3% from 6.7% but the decline in the participation rate is a concern. U6 unemployment fell to 11.1% from 11.7%. Average hourly earnings rose +5.4% year-on-year vs 5% expected. The two month net revision took the total down by -159k. The US still has some 9.8m fewer jobs than it had in February 2020 before the pandemic struck. Permanent job losses are a concern – the number of permanent job losers, at 3.5 million, changed little in January but is 2.2 million higher than in February.

S&P 500 not bothered: Biden is going for it on stimulus.

S&P 500 not bothered: Biden is going for it on stimulus.

Cable higher and hugging the trendline.

Cable higher and hugging the trendline.

Brexit, US stimulus deal hopes fuel risk appetite ahead of Fed meeting

Morning Note
  • European markets edge higher after strong session on Wall Street
  • US lawmakers move towards striking stimulus deal, Fed meeting tonight
  • Brexit deal still hanging by a thread but signs of optimism support sterling
  • Dollar offered, highest for euro since Apr 2018, cable above 1.35

Stocks moved broadly higher in early trade on Wednesday as investors pin their hopes on a double helping of deal-making before Christmas: a UK-EU trade deal and a US fiscal stimulus package. The dollar was offered this morning as the euro rose above $1.22, hitting its best level in almost three years with Eurozone flash December PMIs stronger than expected. UK inflation fell in November thanks to the second national lockdown, with CPI declining to an annual rate of +0.3% from +0.7% in October.

It’s a bit of a Ctrl + c, Ctrl + v job this morning re Brexit. Sterling jumped on hopes the UK and EU are close to a deal, with Ursula von der Leyen giving a broadly upbeat assessment of talks. GBPUSD advanced to 1.35 with the December 4th peak at 1.3540 offering the near-term resistance. To borrow central banker phrasing, clearly the trade deal risks are skewed to the upside with asymmetric risks to the pound on the outcome of talks. GBPUSD could move to 1.40 on a comprehensive deal, but risks collapsing to 1.20 on a no-deal cliff edge exit, before likely seeing some recovery towards 1.25. No deal is not an end state, but it would obviously spark massive volatility in sterling crosses. The spot market is inclined to think a deal is coming, while options markets also show traders are scaling back bets on a no-deal collapse.

Yesterday, stocks on Wall Street advanced amid hopes Congressional leaders are close to agreeing to a fiscal stimulus package before Christmas. The S&P 500 finished up 1.3% at a session high 3,694, close to its all-time record peak just above 3,700. The Dow Jones industrial average added over 1%, while the small cap Russell 2000 rose more than 2% for the day. The Nasdaq composite rose 1.3% for another record closing high.  Apple led the way with a 5% pop that helped lift broader market sentiment, after a Nikkei report indicating the company will increase iPhone production by 30% in the first half of 2021. It’s a bullish indicator for iPhone demand, and highlights the potentially very strong upgrade cycle driven by the iPhone 12 update. I noted in October that the launch of the iPhone 12 was going to be the moment many Apple users have been waiting for and it could mark a step-change in the device upgrade cycle as we saw with the X.

On the other big deal that needs to be struck, there are clear signs of progress. US Senate Majority leader Mitch McConnell said lawmakers wouldn’t leave Washington this year without a Covid package “no matter how long it takes”. It may be a smaller package – worth $748bn – but it least it would be something. It does look like the main Democrat and Republican chiefs are almost in agreement.

Look out for the final Fed meeting of the year later in the session – expect the central bank not to increase support but make sure the market knows it’s not about to reduce it and stands ready to more if required. The Fed is expected to pin its asset purchases to economic outcomes, assuring the market it is not going to prematurely taper its $120bn-a-month bond-buying programme. Anchoring expectations around policy support will be key for the Fed as it seeks to play down any signs of economic recovery amid worries that the roll-out of vaccines and a strong bounce back next year will call for it to withdraw some accommodation earlier than expected. The weakness in the latest nonfarm payrolls report will underline the need for continued policy support in the near-term and I expect Jay Powell will not wish to veer from a very dovish stance.

The question for the Fed is starting to pivot towards the reflation trade and rising long-term rates, with US 10-year yields attempting to break 1% lately. Rising inflation expectations may be a problem for the Fed, but not yet – it’s made it abundantly clear it will look through overshoots with average inflation targeting. The problem is the Fed risks allowing inflation expectations to become unanchored at a time of a massive cyclical bounce back in the economy. Rising bond yields at the longer end of the curve will likely push the Fed towards moving the focus of its bond buying to longer-dated debt, to keep a lid on yields and corporate borrowing costs.

Rising economic optimism is helping crude oil prices make fresh multi-month highs. WTI (Jan) advanced close to $48, reversing an earlier slip on a surprise build in inventories. API data on Tuesday showed crude oil stocks rose by 1.973m barrels in the week ending Dec 11th, vs expectations for a draw of a similar magnitude. EIA data on tap later expected to show a draw of 2.8m barrels after a massive 15.2m-barrel build last week. It seems the market is prepared to overlook near-term demand weakness and inventory build-ups with sentiment underpinned by hopes for a vaccine-led recovery next year.

US Election Risk: Corporate Tax Rates

US Presidential Election

The passage of the Tax Cut and Jobs Act (“TCJA”) in December 2017 lowered the US federal corporate income tax rate to 21% from 35%.

This recent decline in tax rate has been a major contributing factor to profit growth for US companies. For example, S&P Global found that, since the TCJA was enacted, the median effective tax rates for information technology companies in the S&P500 dropped from 21.1% in the first quarter of 2017 to 15.5% in the same period of 2019.

However, Democratic nominee and former Vice President Joe Biden has proposed a partial reversal of the TCJA. The Tax Foundation sees the plan as raising the corporate income tax rate to 28%, reversing half of the TCJA cut.

With the 2020 US Presidential Election just five months away and prediction markets starting to price in an increased likelihood of Democratic victories in the House, Senate and Presidential races, it may be worthwhile considering if the market is pricing in the risk of an increase in tax rates.


Data source: “Yes Price”

In a note earlier this week, Goldman Sachs strategists saw the plan put forward by Democratic nominee Biden as reducing S&P 500 EPS by as much 12% in 2021, while this week has also seen the index trading with a forward PE multiple above 23, levels last seen around the time of the dotcom bubble.

Of course, much uncertainty remains about the specifics of any potential tax reform, as well as five more months of uncertainty before the election race is completed, which could ultimately remove the likelihood of any tax reform.

Equity indices clear big hurdles even as Hong Kong tensions simmer

Morning Note

Tensions between the US and China are worsening, with the two sides clashing at the UN over Hong Kong. China rejected a US proposal for the Security Council to meet over the issue, whilst US secretary of state Mike Pompeo declared that Hong Kong is no longer autonomous from Beijing. China’s ‘parliament’ this morning approved the controversial national security legislation for the territory.

We also note reports this morning that China escorted a US navy ship out of its waters. Meanwhile Taiwan is to buy Harpoon anti-ship missiles from the US, which is likely to further rile Beijing. Tensions are showing signs they could boil over – we cannot play down the importance of an embattled US president facing a national crisis at home in an election year – one he can blame on his chief geopolitical adversary. Expect more sabre rattling.

Shares in Hong Kong and Taiwan fell, whilst Japanese equities rose by more than 2% in a mixed session overnight in Asia. The FTSE 100 rallied towards 6200 on the open, but shares in Standard Chartered and HSBC fell, signalling investor concern about what’s going on in Hong Kong.

Nevertheless, equity markets continue to strengthen and move out of recent ranges and clear important technical resistance. Confidence in equity markets is strong thanks more stimulus and signs economies are reopening quicker.  A resurgence in cases in South Korea is a worry.

Yesterday, US stocks surged with the S&P 500 closing above 3,000 for its best finish since March 2nd, whilst the Dow added over 500 points to clear 25k at stumps. The S&P 500 cleared the 200-day moving average and is now trading with a forward PE multiple of about 24x – making it look decidedly pricey.

European followed Wall Street higher with broad-based gains. The DAX yesterday closed above the 61.8% retracement around 11,581 and extended gains through the 11,700 level. The FTSE 100 thrust towards 6200 this morning, hitting its highest intra-day level since March 10th. The 50% retracement around 6250 is the next target before bulls can seek to clear the gap to the March 6th close at 6,462.

EasyJet is planning to reduce its fleet by 51 and cut up to 30% of staff. This is the big fear playing out – temporary furlough becomes permanent firing once businesses figure out that demand has vanished. Whilst airlines will feel this more than just about any other sector, this trend will be seen in a wide range of industries, albeit to a lesser extent.

Shares in EZJ rose 8% – cost cuts are welcome of course for investors, but also the indication of running at 30% of capacity over the summer is better than had been feared. Efforts by the likes of Greece and Spain to salvage the summer season will help a lot. IAG and Ryanair shares rose 2-3%.

Twitter shares fell and were down more in after-hours trading after Donald Trump threatened to shut down social media sites that stifle conservative voices. Having been sanctioned by Twitter with fact-check warnings, the president is very unhappy. It hurts his ego and it blunts his most effective tool.

The White House said the president will sign an executive order on social media today. Facebook shares were also lower yesterday and extended losses in after-hours trade. Will Trump try to silence Twitter and Facebook? No, but he can put more of a regulatory squeeze on them and raise their costs.

Europe’s bailout proposals were greeted with optimism, but the frugal four countries of Austria, Denmark, Sweden and the Netherlands did not seem terribly impressed at plans that will raise their budget contributions. They will need to be brought round. Estonia has also said it won’t vote for the proposals. Work to be done – getting all countries on board with a complex budget takes a long time in the best of circumstances, let alone amid a dreadful recession.

The euro has largely held gains after rising on the EU’s budget plans. EURUSD firmed above 1.10 but is struggling to clear the 200-day moving average around 1.1010. Bulls need to see a confirmed push above this to unlock the path back to 1.1150, the March swing high. Failure calls for retest of recent swing lows at 1.0880.

Sterling was steady with GBPUSD around 1.2270 after yesterday giving up the 1.23 handle and testing support at 1.220 following Britain’s chief Brexit negotiator gave a pretty downbeat assessment of trade talks to MPs.

Today’s data focuses on the US weekly unemployment claims, which are forecast at +2.1m. As we enter the summer and states reopen, the hiring will gradually overtake the firing but we are not yet there. Durable goods orders – an important leading indicator of activity – are seen at –19% month-on-month with the core reading seen at –14.8%. A second print of the US Q1 GDP is seen steady at –4.8%.

Oil dived and took a look at last week’s lows as API figures showed a surprise build in crude inventories in the US. Stocks rose by 8.7m in the week ending May 22nd, vs expectations for a draw of 2.5m barrels. The build in stocks means the EIA data today will be more closely monitored than usual, given that expected drawing down of inventories has underpinned the resurgence in crude pricing. WTI (Aug) slipped back to $31.60, just a little short of the May 22nd swing low.

Stocks stage fightback, Trump raises China stakes

Morning Note

US stocks staged a mighty comeback and closed at the highs as beaten-up financials managed to recover ground. The S&P 500 traded under the 50% retracement level at 2790, dipping as low as 2766 as US jobless claims rose by another 3m, before rallying to close up 1% at 2852. Financials, which have failed to really take part in the rally since March, led the way as Wells Fargo rose 6.8% and Bank of America and JPMorgan both rallied 4%. Energy stocks also firmed as oil prices rallied.

European indices were softer on Thursday but managed to recover a little ground in early trade on Friday. The FTSE 100 rose over 1% to clear 5,800, with the DAX up a similar amount and trying gamely to recover 10,500. Asian shares have largely drifted into the weekend with no clear direction.

The rally for Wall Street snapped a 3-day losing streak but the indices are still on for the worst weekly performance since mid-March. We’re still in this tug-of-war phase as the real-world impacts of Covid-19 run up against the stimulus and central bank support. Markets are still trying to figure it all out.  SPX needs to rally to 2915 today to finish the week flat, while the FTSE 100 requires 5,935.

The deterioration in US-China relations is another worry for investors, with Donald Trump saying he doesn’t even want to speak to President Xi and threated to ‘cut off’ China ties. He’s not angry, he just ‘very disappointed’. As I’ve pointed out in a past note, in an election year with the economy suffering from the worst recession in memory, Trump is likely to go very hard against China, particularly as this has bi-partisan support and polls indicate anti-China feeling running high. This will be partly a political game, partly what the US ought to be doing anyway, but either way it will likely provide yet another downside risk for investors.

Neckline support of the head and shoulders pattern is feeling pressure but yesterday’s rally is positive for bulls. Expect further push-and-pull around this region.

Overnight data showed Chinese factory output rise while consumer demand slowed. Retail sales declined 7.5% vs 7% expected in April. US retail sales today  are forecast at -12%, or -8.6% for the core reading.

Oil put on a good show with front month WTI rising above $28. The August WTI crude oil contract trades a little higher than $29, meaning the contango spread has narrowed by two-thirds in the last week. Price action suggests traders are far less worried about the underlying demand and storage constraints that have dogged prices for the last couple of months.

In FX, as flagged sterling tested the Apr 6th low, which has held for the time being and GBPUSD has recovered the 1.22 handle. Risks look to the downside, but short-term momentum looks like we could see a nudge up.

Gold has driven off the support and was last up a $1736. Whilst Covid-19 is initially a deflationary shock (negative for gold), the extent to which governments have fired up the printing presses and the fact that monetization of this debt seems the only way out, a significant period of inflation could be around the corner. Gold is still the best hedge against inflation. The Apr 23rd high at $1738 is first test before a retest of the previous top at $1747 and then $1750 to call for a breakout to $1800.

Three reasons why the next move in the S&P 500 may be lower


Following a March 23 move to lows around 2180, the S&P 500 recovered to trade at highs near 2973 at the end of April. With the market 160 points lower than this swing high at time of writing, we wanted to outline several reasons why the next leg for the index may be lower.

It may not be a single event that leads to a pullback, but rather a combination of many, including:

1. The reopening process may take time

The index fell sharply in the final hour of trading Tuesday, on the news that Los Angeles County’s stay home order would be extended “with all certainty” for another three months, while Dr Fauci warned of the risks of reopening businesses too early.

This saw the S&P 500 fall 2% and close at the session low at 2870, a move that was continued yesterday, testing the 2790 level at the lows.

2. A resurgence of US-China tensions

A leading cause for investor concern in 2019 was the US-China trade relationship, which is again showing signs of increasing tensions. There have been recent comments from both sides, with Chinese media reporting on calls rising in China to rework the deal with the US and US media reporting that the White House has directed the federal pension fund to halt investments in Chinese stocks.

Ratcheting up the rhetoric from here could lead to this issue once again coming to the forefront of investor minds.

3. Dividends and share buybacks at risk

Share buybacks, reducing the number of shares outstanding and increasing the value of those that remain, have been the only net demand for shares in the past decade. However, many firms have now stopped their buyback programs to preserve liquidity. Similarly, to preserve cash, many firms have suspended or reduced their dividend payments.

Both developments could negatively impact the demand for shares and prices.

Equity markets track lower after Wall St falls

Morning Note

Public Health England has approved an antibody test from Roche, which could mean easing lockdown restrictions sooner. A junior health minister described it as a ‘game changer’. We shall see – the record on testing so far has been sketchy but it’s a step in the right direction. Russia has also announced positive trials of a treatment drug favipiravi, which was first developed under the name Avigan in Japan. Despite some good news around these drugs however, it seems markets are waking up to the economic reality at last.

US Treasury yields fell and equity indices rolled over, with the S&P 500 down 1.75% at 2820 and the Dow dropping 500 points as hopes for a swift recovery from the Covid-19 recession faded.

Fed chair Jay Powell painted a pretty gloomy picture, He warned that additional policy measures may be needed to avoid an extended period of low productivity. He is erring towards doing more not less. Nothing explicit on negative rates, just repeating the preference for not using them.

As we near the end of earnings season, the recent gains look like over exuberance. David Tepper, a billionaire hedge fund guy, said it’s the second-most overvalued market ever – only ‘99 was worse. Certainly at 20 times forward earnings, it looks pricey – the priciest in 18 years. Earnings in Q1 for S&P 500 companies are down 14% and are seen weaker all year, with Q2 especially hard hit. Already this is the 4th quarter in 5 of year-over-year earnings declines. Valuations are starting to look exceedingly optimistic at these levels – 2600 on SPX is a lot more realistic than 3000.  We may not retest the lows, but a significant pullback from the post-trough highs around the 61.8% level seems likely.

At the lows SPX tested the 2790 level, the 50% retracement. MACD crossover confirmed.

Asian markets tracked the fall on Wall Street and European bourses traded broadly weaker on Thursday.

WTI and Brent futures spiked after a surprise draw on US oil stocks but have pared gains. EIA figures showed a 745k barrel drawdown vs an expected build of more than 4m barrels. Stocks at the key Cushing, Oklahoma hub fell by 3m barrels, the first such draw since February.

The Commodity Futures Trading Commission warned brokers and clearing houses “to prepare for the possibility that certain contracts may continue to experience extreme market volatility, low liquidity and possibly negative pricing”. The June WTI contract expires on May 19th.

In FX, the pound weakened further as the risk-off trade hit currency markets. Andrew Bailey, the Bank of England governor, said markets’ basic assumption was that there would more QE.

GBPUSD breached the 1.2250 support and headed for the bottom of the range and is now on track to knock on the Apr 6th low around 1.2160.


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