Sterling HOD, FTSE weaker as markets digest slightly hawkish BoE

After a bit of time to digest the Bank of England decision, it looks to have provided that hawkish pivot we’d anticipated. But I would not say it’s enough to really tell the market that it will fulfil its mandate to keep inflation in check and ensure longer-term inflation expectations remain in check. A missed opportunity, I would say, to get a better grip on inflation expectations.

Key points

• MPC votes 7-2 to maintain QE, unanimous on rates
• Ramsden joins Saunders in voting to scale back the QE programme to £840bn, ending it immediately
• CPI inflation is expected to rise further in the near term, to slightly above 4% in 2021 Q4 – and the BoE signalled greater risk it would be above target for most of 2022
• Overall, Bank staff had revised down their expectations for 2021 Q3 GDP growth from 2.9% at the time of the August Report to 2.1%, in part reflecting the emergence of some supply constraints on output
• Shift in forward guidance: MPC noted ‘some developments … [since the August Monetary Policy Report] … appear to have strengthened’ the case for tightening monetary policy.
• Rate hikes could come early, even before end of QE: “All members in this group agreed that any future initial tightening of monetary policy should be implemented by an increase in Bank Rate, even if that tightening became appropriate before the end of the existing UK government bond asset purchase programme.”

Market reaction thus far

• GBPUSD has rallied to highest since Monday off a month low and is looking to hold above 1.37, having risen one big figure today. Needs 1.3740 for bulls to regain control, big test here with trend support recently tested at the neckline. Question is this mildly hawkish pivot is enough to put the floor under GBP. I would still argue for softer dollar into year end allow GBP (and EUR) some scope to strengthen, particularly if the BoE is progressing towards raising rates sooner than previously thought.
• That sterling strength sent the FTSE 100 lower after a solid morning session, leaving the blue chips flat on the session, around 45pts off the highs of the day. Looking now for a lift from Wall St with US futures indicated higher: S&P 500 around 4420, Dow Jones at 34,460.
• 2yr gilt yields jumped to +0.3435% from around 0.28% earlier in the day as markets moved expectations for the first 15bps rate hike forward to Feb 2022.

GBPUSD chart 23.09.2021

Summary view

The BoE trying to tell what we already know without telling us what we already know; ie, that inflation is way stickier than they thought it would be. The BoE said “there are some signs that cost pressures may prove more persistent. Some financial market indicators of inflation expectations have risen somewhat”. Somewhat what? It’s all a bit wishy washy. The problem is the dogma of transient inflation is hard to shake without admitting that they were plain wrong on a very basic assessment of the economic outlook. “The committee’s central expectation continues to be that current elevated global cost pressures will prove transitory,” the statement from the BoE said.

Earlier, PMIs show across Europe and Britain growth momentum is waning, inflation is sticking. The UK composite PMI revealed further loss of growth momentum as output slowed to the weakest in 7 months, whilst the rate of input cost inflation accelerated and charges raised to the greatest extent on record.

Taken together with the PMIs this morning and the Fed last night we are presented with a very simple picture: growth is slowing, supply constraints are deepening, inflation is proving way more persistent than central banks anticipated. This could have important consequences for monetary policy going forward, but for now the CBs are still waiting it out and getting further behind the curve. A bitter pill today has been avoided, but the medicine required will be harder to swallow when it finally comes. Rates are going to need to rise to tame inflation.

Bank of England maintains dovish stance, raises inflation forecasts

The Bank of England today confirmed it would continue with its economy-boosting measures but said higher inflation is on the way.

Bank of England statement

Staying the course

Today, the Bank of England Monetary Policy Committee (MPC) voted to keep the historic low-interest rate in place. There will be no move from the current 0.1% base rate. Additionally, members voted 7-1 to keep the £895bn quantitative easing programme in place.

Policymakers struck a cautiously optimistic tone at today’s Bank of England press conference. However, Governor Bailey and council members did signal policy will be subject to modest tightening from here on out.

The BoE also raised its inflation forecasts. Economists were expecting this, given CPI has passed targets for two consecutive months.

In its monetary policy report, the Bank of England said: “Overall, Bank staff now expect inflation to rise materially further in the near term, temporarily reaching 4% in 2021 Q4 and 2022 Q1, 1½ percentage points higher than in the May projection.”

The report also outlined that the recent acceleration in CPI inflation is mainly due to volatility in energy and the prices of other goods. In the medium term, the Bank said it expects inflation to peter out and fall back to around its current 2% target.

Looking to GDP, the BoE forecasts 5% growth in Q2 2021 after a 1.6% contraction in the first quarter. This is slightly above what the Bank predicted in its May report. Even so, this would leave UK GDP some 4% lower than pre-pandemic levels.

GDP growth is forecast at 3% for Q3, in response to thousands of workers needing to isolate after Delta variant COVID-19 cases surged across the UK in recent weeks. However, COVID cases and hospitalisations have broadly fallen in the last month, giving some hope that the “pingdemic” is just a bump on the road to recovery.

According to the MPC, the economy will return to its pre-pandemic levels in the last quarter of the year. The pandemic’s impact is expected to have substantially lessened by then. At this time, GDP growth will cool and return to levels more normally seen in mature economies.

Unwinding QE

Quantitative easing-related purchases will be scaled back once the base rate reaches 0.5%, according to today’s policy outlook. At this time, the Bank will stop investing in maturing UK government bonds, but only if economic conditions are good enough.

This rate is substantially lower than the 1.5% rate earmarked in 2018.

In its policy report, the MPC forecast that its main interest rate would reach 0.5% in the third quarter of 2024, after hitting 0.2% in the third quarter of 2022 and 0.4% for the same period in 2023.

This comes after the Bank of England was recently dubbed “addicted to QE” by a House of Lords committee – something which Governor Bailey strenuously denies.

In all, a fairly positive report for the UK then. Sterling was up around the $1.925 level against the dollar after the Bank’s plans were made public and continued to build momentum at writing.

All looks calm ahead of the Fed meeting

Morning Note

Cooler rates and broadly positive risk sentiment helped send the Nasdaq composite to a record high on Monday, whilst the tech sector lifted the broader market as the S&P 500 also notched a fresh all-time closing high. Mega tech names led the gains for the index, whilst financials were the biggest drag. European stock markets are broadly higher in early trade. Growth/tech have come back, whilst the reopening/reflation trade has cooled somewhat.

Ahead of the Federal Reserve meeting this week there is no sign of a tantrum. Stocks are happy to catch the tailwinds higher despite being caught between a super-hot inflation reading last week and the Fed’s policy meeting. Rates have been steady coming into the meeting with the benchmark 10yr yield hovering a little below 1.5% and have been edging lower since the end of March – allowing growth stocks to catch some bid in recent weeks. The calm shows markets are broadly in tune with what the Fed’s views so far, but this can shift if the Fed acts too early or delays too long. Indeed, today’s Bank of America fund manager survey shows 72% think inflation is transitory, which pretty much tells you all you need to know about market positioning. The bottom line: “investors bullishly positioned for permanent growth, transitory inflation & a peaceful Fed taper via longs in commodities, cyclicals & financials,” the FMS report says. On the Fed and policy, 63% expect the Fed to signal a taper Aug/Sept; US infrastructure spending now seen a bit lower at $1.7tn and expectations for a steeper yield curve are at their lowest since Aug 2020.

The Fed’s two-day meeting begins today with markets paying close attention to the language from the FOMC’s statement and what the latest economic projections will tell us. Inflation and growth forecasts for the near-term will likely be revised substantially higher, but this is not going to materially alter the Fed’s position. It’s probably too early to hint at a taper – they can point to the labour market still being some way off where they want it to be and a lack of upwards pressures on inflation expectations. The transitory message will be clear. Chair Powell will seek to tamp down expectations for a taper but as the minutes from the last meeting revealed, he’s allowing it to be known that some policymakers are thinking about thinking about tapering asset purchases. But he will stress that the economy is not there yet: it’s under consideration but more progress is required. The first real signal will be left to Jackson Hole in August, or possibly the September meeting, in preparation to begin tapering in Dec/early 2022.

Yesterday crypto stocks jumped as Bitcoin recovered the $40k handle following a tweet by Elon Musk. MicroStrategy rallied almost 16%, whilst Coinbase added more than 6%. Meme stocks aren’t going away – AMC jumped 15% and Wish added almost 13%. A survey shows hedge funds expect to hold 7% of their assets in cryptos in the next 5 years.

This morning Ashtead slipped a little even as it reported a doubling in profits in the fourth quarter of the year. Operating profits +95% to £264m was a good performance and reflects the recovery in construction in the US as the economy reopened. Shares have risen by 45% this year as it has demonstrated both resilience to the downturn and a positive uptick in activity as economies reopen for business. As chief executive Brendan Horgan puts it: “Our business can perform in both good times and more challenging ones.”

No lift for sterling out of its current moribund range as UK labour market data out this morning showed the number of employees on company payrolls rose by 197k last month, though this remains about 550k below where it was before the pandemic hit. A positive report on the whole. GBPUSD maintains its slightly weaker bias as it slides down the channel looking for a meaningful shift in gear.

Sterling advances to $1.42, shares in Frankfurt hit new record

Morning Note

Shares in Frankfurt rose to a record high in early trade as European stock markets started Tuesday in upbeat fashion after an indecisive session on Monday left the major indices only slightly lower. The DAX rallied almost 1% to 15,540 at the high just after the open. The FTSE 100 is also firmer near 7,100 after last week’s big rejection of the 6800 handle left a path clear to retest the post-pandemic highs. Yesterday saw Wall Street down but only a little and the major indices were well off the lows. Meme stocks had a good day as AMC rallied 7%, whilst GameStop finished up by almost 13% on the day. Airbnb and Doordash were among the big fallers, decaling over 6% and 5% respectively. The S&P 500 closed down 0.25% at 4,163, whilst the Nasdaq was a tad weaker and the Russell 2000 rose marginally. UBS has increased its ear-end S&P 500 forecast to 4,400 citing exceptionally strong earnings growth this year that will more than compensate for valuation headwinds.  

 

Vodafone charged to the bottom of the FSTE 100, declining more than 6% and knocking 9pts off the index, as it said capital expenditure would rise. Full year results show group revenue declined 2.6% to €43.8bn, a little better than consensus, whilst adjusted ebitda fell 1.2% to €14.4bn. Covid’s impact on roaming was a big factor in lower revenues, but a €500m reduction in European operating costs helped offset in terms of earnings. But the higher capex guidance, as Vodafone invests in new tech and services like 5G, is why investors are taking some skin out of the game today. 

 

In the wake of last week’s inflation scare, Fed officials have duly been wheeled out to shore up risk sentiment. Arch hawk Kaplan of the Dallas Fed (non-voting this year) reiterated his belief that rates could rise next year, but we know he’s an outlier with no say this year. Vice-chair Clarida stressed patience as the economy reopens. Minutes from the last FOMC meeting due on Wednesday will be parsed for any kind of dissent beyond Kaplan. At his press conference for the April meeting, chair Powell was adamant that it’s way too early to discuss tapering: “We’ve said we would talk well in advance and it is not yet time to do so.” Minutes will show the Fed is still on course – the question is what the data does to the market over the coming weeks and months and whether it really believes the Fed won’t blink.

 

Sterling trades at its best level against the US dollar since late February, with the cable pair mounting a push back to 1.42 in early trade this morning after a solid employment report from the UK. The 3-month calls for a look again at the post-pandemic peak at 1.4250 struck on Feb 24th, but rejection of this area again may signal a double top and slow grind back to the 1.38 region. The British labour market looks in decent shape for now; the true test comes with the end of the furlough scheme. The unemployment rate declined to 4.8% in the January-March quarter from 5.1% in the preceding three-month period. The employment rate also rose but remains below its pre-pandemic level. Payrolled employees increased in April for a 5th straight month but was down 772k since February 2020. 

 

The dollar remains on the back foot more generally. DXY has flipped under 90 and is now at its weakest since dollar since the Feb 25th drop, whilst EURUSD has hit 1.22 again.  US 10-year yields are a tad firmer at 1.65%, pushing real rates lower with the 10yr TIPS to –0.90%. The combination of weaker USD and lower real rates helped gold continue to advance beyond $1,870 where it is looking at the 50% retracement of the move down since August, as flagged in yesterday’s note. 

 

WTI crude oil futures jumped to $67, breaking clear of the recent range to look again at testing their strongest since before the pandemic, struck on March 8th at $68. Brent hit $70 for the first time since March 5th. This has to be a risk-on move off the back of signs that Europe and the US are moving forward with reopening despite concerns about variants. News that vaccines seem to be effective against the current variants has traders optimistic that reopening plans will largely go ahead as planned. Breakout of the horizontal resistance could see return to $75 WTI. The opening up of travel is encouraging, whilst US airports are seeing more passengers passing through terminals than at any stage since before the pandemic. Whilst worries exist about the situation in India, this is largely a known quantity and the ‘trade’ is to look for a rebound in demand this year. By the mid-summer this may be over as demand might not pick up as expected.

Chart showing performance of various indices and commodities.

UK preliminary GDP q/q preview (Wed, 07:00 BST)

Forex

The Bank of England anticipates UK economic output contracted by 1.5% in the first quarter of the year, which should be pretty much our reference point for the print on Wednesday, with the consensus at –1.6%. The –2.2% in January was stronger than expected and was followed by a 0.4% expansion in February. Whilst March data does not capture the reopening of non-essential shops, there is evidence that spending and activity were already picking up before the Apr 12th easing of lockdown restrictions. Moreover, the UK economy has proved to be a lot more resilient to lockdown 3 than lockdown 1. Put that down to the adjustment of people and business to the displacement; for instance the embrace of remote working, as well the lockdown rules themselves being less restrictive to economic activity than the first lockdown a year before. Better and more comprehensive testing has also played an important part in keeping in most economic activity going.

The March IHS Markit / CIPS services PMI showed a strong rebound in March, with the index rising to 56.3 from 49.5 in Feb. The robust PMI coupled with other evidence of increased card spending and mobility suggest a solid bounce back in the final month of the quarter, with a month-on-month expansion of around 1.3% expected. Whilst not a direct read on the Q1 numbers, Barclays today says that April card spending has exceeded pre-pandemic levels.

But this all remains rear-view fare: the market is more interested in the +7% growth expected in 2021 which is going to imply some pretty impressive expansion in the third and fourth quarters in particular. Strongest expansion since WW2 is more eye-catching than a mild contraction in Q1 that has been well and truly priced. Going forward, we are not really going to know what the true size of the economy really is for some time because there has been a huge displacement in economic activity as well as the velocity of people. Adjusting to this new normal will take time and measures of output will always lag what is really happening. Moreover, as Friday’s nonfarm payrolls report in the US evinces, hard data is liable to being way off forecasts because it’s so hard to get a handle on what we are comparing it with; furlough and other emergency schemes masked the true depth of the economic contraction. Just as the pandemic led to an unprecedented contraction, there is not really a playbook for this recovery, so we should be careful not to over-read individual prints.

By way of context, the NIESR this morning estimates that the UK economy will recover 2019 levels by the end of 2022. The recovery is strong but it’s coming from a low base. To add further context, as of Feb the British economy remains 7.8% smaller than it was a year before. Moreover, it is still 3.1% below where it was at the peak of the post-lockdown recovery in October 2020 – evidence that this long third lockdown over the first quarter has set things back some way. NIESR also estimates that UK unemployment will peak at 6.5% rather than 7.5%, reflecting the extent to which government support schemes have masked what is really going on.

Chart showing UK GDP performance.

Miners charge higher on commodity boom, cable breaks 1.40

Morning Note

European markets are off to a slow start with early gains largely erased within the first half hour of trade. The FTSE 100 holds higher than 7100 with miners leading the gains as commodities continue their monster rally on tightening supply and soaring demand. Rio Tinto and BHP are both up more than 3% in early trade, whilst Fresnillo, Antofagasta and Glencore all up around 2%. Commodity prices continue to surge as copper hit a fresh record high, whilst oil prices rose as a ransomware attack shut the Colonial pipeline, which supplies half the fuel for the US east coast. Iron ore in China surged 10% to a record high, whilst steel rose 6% to limit up. There could be a lot of speculative buying and trading pushing commodities higher but for now there does still seem to be a lot of momentum behind the trade and reasons to think fundamentals will continue to support.

 

A weaker-than-expected jobs report in the US caused some waves, but Wall Street rose to record highs as investors wagered slower growth in the labour market would only see the Fed keep policy easier for longer. In short it will allow the Fed to keep its foot to the floor but the wage component indicates trouble as inflation could outstrip employment growth. The more you pay people not to work, the less you incentivize the employment growth you seek. US futures indicate Wall Street will open a fraction higher later today.

 

Sterling jumped to its strongest since late February as the dust settled over the spate of UK elections on Thursday and a weaker dollar resulted from the nonfarm payrolls miss. Boris Johnson’s position looks secure, Labour is in disarray and Nicola Sturgeon has regained control of the Scottish parliament. Near-term worries about a second referendum on Scottish independence appear to have retreated somewhat. The SNP are biding their time not pressing ahead immediately on a referendum (even most pro-indy voters don’t think it’s the most pressing matter). And as argued last week, the current Conservative government will not sanction a referendum. It’s likely to end up in court and see a major constitutional battle before there is even a vote. For now, sterling traders can afford to ignore the noise and focus on the near-term economic trends. With the break of 1.40 at last bulls can consider the Feb 24th peak at 1.4250. 

 

On this front, the jobs report on Friday has dollar vulnerable even as the bond market recovered from the initial kneejerk. Whilst we should not be reading too much into a single jobs report, if the market is taking it at face value, then it means easier Fed policy for longer. We’re looking at the ECB and BoE tightening before the Fed, despite the monster economic recovery in the US and injection of enormous fiscal stimulus.  The prospects of a hawkish Jackson Hole taper move by Powell have clearly diminished. Minneapolis Fed president (and arch dove, we should note) Neel Kashkari said the labour market remains in a ‘deep hole’ with somewhere between 8 and 10 million jobs still lost since the pandemic started. ECB speakers (Kazaks and Lane) have made it clear policymakers will look the asset purchase programme again in June and this could involve scaling back the programme if the economic situation is better.  

 

A couple of items for the ‘you can’t make it up’ category: Bill Hwang, whose Archegos Capital family fund recently spectacularly blew up, provided seed funding to Ark Invest, the fund’s founder Cathie Wood revealed in an interview. Meanwhile Dogecoin – beloved canine ‘joke’ crypto – tumbled by a third after Elon Musk’s appear on Saturday Night Live, a comedy programme in the US. The technoking of Tesla and self-proclaimed Dogefather called the coin a ‘hustle’.  

 

Oil rose with the cyberattack on the Colonial pipeline sparking the US government to enact emergency legislation to enable fuel products to be transported by road. This won’t be enough to match the pipeline though and we could start to see some serious backing up in refined products. With any clear details or timetable for reopening we could see pressure build in some of the refined products. Heating oil gapped up to its highest in more than a year, currently up more than $2 at $203, having opened more than $5 higher for a new post-pandemic high. 

 

Shares in Greggs rose 8% as it raised its profit guidance for the year after it saw a strong recovery in sales at the start of the year. The company said it believes that “profits are likely to be materially higher than its previous expectation and could be around 2019 levels in the absence of further restrictions”. Sales picked up noticeably in the weeks since the reopening of non-essential shops on April 12th, whilst the company has also been buoyed by delivery sales. But with 40%+ gains YTD and the stock trading at a record high, good news may be well and truly baked into this one. 

European stocks hit record high, Jes Staley wins out, monster US jobs report expected

Morning Note

European markets rose handily on Friday, with the Stoxx 600 hitting a record high head of the hotly-anticipated US jobs report. The FTSE 100 rallied to take out 7,100, hitting a new post-pandemic high, and the DAX is buoyed by some positive earnings from German firms, with Adidas advancing 8% as it hiked its 2021 sales outlook and Siemens up 2% as it too raised its net income guidance for 2021. Combined the two stocks are adding 70pts to the DAX this morning.

The overriding market themes remain pretty well unabused: A monster commodity rally continues as the global economy heats up, and massive but messy rotation out of the tech/growth/momentum plays into more cyclical/value parts of the market. Copper rallied to an all-time high, aluminium is extending gains. Palm oil 13-year high, iron ore and steel at all-time highs. There is yet room to run higher in the commodity space.

It was a messy session on Wall Street: After some big moves early doors, the Nasdaq composite managed to stage a comeback to close up by 0.37% as dip buyers took up the reins on some of the bigger names. After opening lower, Apple, Microsoft, Facebook and Amazon managed to rally and do the heavy lifting on the index. ARK Innovation ETF declined almost 3% and is down 10% this week alone. By the end there were 75 advancing stocks to 26 decliners on the Nasdaq 100. But there was a clear wobble. The S&P added 0.82% as financials led the way and the Dow Jones added another 300+ points for another record high. Pandemic favourite Etsy tumbled 15% on earnings, whilst reopening favourites MGM and Norwegian were both down more than 6%.

Zoom was down again, back to levels last seen in August last year – is the WFH boom over? DocuSign is also trading at a level not seen since the summer of 2020 just before it really took off on some strong revenue growth and expectations for a new normal. Things have changed – vaccines mean we are getting back to the old normal. Bosses are demanding workers make plans to get back in the office.

In the wake of the Archegos blow-up, many are rightly looking to the very high levels of margin debt as a potential red flag. The Federal Reserve – cheerleader in chief for the market rally – agrees. In its semi-annual report on financial stability the central bank warned that existing gauges of hedge fund leverage “may not be capturing some important risks”. It also helpfully said risk assets could decline if risk appetite falls. They might as well say stocks can fall is there are more sellers than buyers, too…

Sterling has failed to make any real headway in the wake of the Bank of England decision despite softer Treasury yields, which are holding under 1.57%, removing some support for the greenback, with the dollar index slinking back under 91. Although it significantly upgraded its near-term economic forecasts and announced a form of ‘technical’ taper’ of bond purchases, the Bank’s outlook on inflation suggests it will be in no rush to raise rates this year. That could act as a headwind for sterling bulls. GBPUSD looks a little perky in early trade today above 1.3920, having fallen to 1.3860 yesterday shortly after it hit a one-week high above 1.3940 at the time of the MPC’s statement. Watch for the Scottish election results coming in over the next 24 hours for a signal on how much pressure for a second independence referendum we might expect. UK breakup remains a tail risk underpriced by the market but one that can probably be confidently kicked down the road for at least 8 years – the current Tory government won’t grant a referendum. Today’s Hartlepool by-election result underlines how far Labour still need to travel to mount any kind of challenge to Boris at the next election.

Jes Staley’s disposition might be likened to the Cheshire cat this morning. Sherborne Investors, the vehicle led by activist investor Edward Bramson, announced it had sold its 6% stake in Barclays. The move ends a high-profile battle over the direction of the venerable British bank, and particular Staley’s pursuit of investment banking success. Barclays shares rose 2% in early trade on the news. It reflects a couple of things. First, the investment banking arm at Barclays has been doing rather well. Earnings from the investment banking arm rose 22% to £12.5bn last year, its best since 2014. The Q1 performance was also solid, with growth in equities trading revenues of 65% ahead of US peers, although Staley admitted FICC ‘wasn’t where we wanted it to be’. The 35% drop in FICC trading was mainly down to tough comparisons with last year – not a terminal problem.

Staley was mainly right, Bramson was mainly wrong. There were always doubts about the whole ‘shrink to grow’ concept that has underpinned the strategy of the likes of Deutsche Bank. Barclays rightly pursued a different course and maintained a more diversified revenue stream. When consumer and business growth markets are strained – like during the pandemic – volatility in financial markets creates a good environment for trading revenues to prosper. Moreover, the stock has enjoyed some decent returns in the last year, getting back to around the level it was at before the pandemic, so it’s a handy time to exit. Sherborne also notes that it has found another target that it did not name. A prize to whoever finds out what it is.

It’s nonfarm payrolls day. ADP numbers were good, but a little light of expectations. Unemployment claims were under 500k for the first time since the pandemic hit. The readings prove the US economy is positively purring. So, the outlook is good and expectations high – something like 1m jobs are expected to have been created by US employers last month, topping the total for March. The question really is how fast the labour market can make up the still roughly 8m jobs lost since the pandemic, at which point the Fed will, by its own policy stance, considering tightening monetary policy. Atlanta Fed president Raphael Bostic said he’s expecting “a really strong number, and that would be encouraging,” but said a 1m+ number would not trigger a debate among policymakers on tapering the Fed’s $120bn-a-month bond buying programme. A couple of monster jobs reports do not make a for a taper discussion, but give it a few months and – at the current expected pace of expansion – the Fed will be in a position to tighten. Markets are already working on this – beware linear thinking.

The kitty roars, Vlad gets impaled, GME doesn’t stop sliding, sterling hits $1.40

Morning Note

“I’m not a cat”. If there are aliens on Mars, I think this would be a suitable gambit to commence our inter-planetary communication. Yesterday we reached a moment of meme perfection when Keith Gill, aka Roaring Kitty, aka DPV (look it up), told the House Financial Services Committee that he is no feline. He also stressed he is not an institutional investor, nor a hedge fund. The politicians were instantly on side. GameStop shares popped higher as he started talking and set out his fundamental bull thesis on GME, but by the close it ended the day down another 11% to $40. 

 

So, what have we learned from the hearing? Gill comes out of this rather well; intelligent, well-informed, a true deep value investor. But he still faces a class action lawsuit. The focus point for lawmakers’ ire was Robinhood and its rather uncomfortable-looking boss Vlad Tenev, who was forced to admit to making mistakes. A $3bn margin call sounds like Robinhood wasn’t prepared for this kind of event. Melvin Capital’s Gabe Plotkin admitted that in future you won’t see the kind of enormous short interest in single stocks like there was on GME before the squeeze. Real time settlement will one day happen, but not yet.  

 

You got a sense that the main thrust of some Representatives was: why aren’t customers entitled to a refund when they lose money on stocks? There also seems to be an inordinate amount of attention on why Robinhood blocked buy orders on some stocks like GME but not sell orders at the peak of the frenzy in January. Like, why did you stop Redditors buying at the very top and losing even more money? Even more so, you got a sense most politicians don’t understand how markets function. It’s not a retail shop. You don’t get a 14-day money back guarantee. Lawmakers focused on the payment for order flow, when this is what allows the free trading in the first place – markets don’t make themselves. There are costs. If you’re not paying for lunch, either your dining partner, or the restaurant owner, is. 

 

Grandstanding: As usual this seemed more about chastising some Wall Streeters to look good in front of voters. Maxine Waters, the Democrat chair of the committee, insisted Tenev answer ‘yes or ‘no’ to  a series of convoluted questions that required some explaining, and in the end she cut off answers because of the time rather than allowing anyone to explain themselves in full. One lawmaker raised a question about a 2004 options market filing…which had nothing to do with the current situation. Patrick McHenry, the senior Republican on the Committee, pursued a bizarre line of attack asking why Robinhood traders could not purchase stock in Robinhood, a private company. Now there may be a case for individual investors to be able to participate in private markets – albeit a shaky one since the disclosures and reporting requirements are much less rigorous than they for listed entities. But it was not in any way related to GameStop, Citadel or Reddit. There is always the risk that this will lead to some bad regulation, but it could be good. Quicker settlement times would reduce problems. Indeed, you could argue that this episode was the market working efficiently to highlight stress points like aggressive shorting practices (more than 100% of stock on loan is clearly problematic) and settlement times. 

 

Diamond hands: Gill said he’d buy the stock now at $46. But we kind of know this already – it’s never been in question that a bunch of the /wallstreetbets crowd are a) very aggressive investors and b) prepared to YOLO their savings on a single stock. That’s up to them. But it is the duty of market watchers to point out that these things tend to end one way, with most losing out.  

 

Elsewhere, Wall Street closed lower and could head for a choppy finish with options expiries today. European shares are wobbly this morning, chopping around the flatline. The FTSE 100 is just about holding on 6,600. US 10-year yields crept back above 1.3%. US initial jobless claims were worse than expected, pointing to a more sluggish recovery than retail sales numbers would indicate. New claims totalled 861,000, the highest level in a month. UK retail sales fell in January for the first time in months as the never-ending permanent lockdown started to gnaw at confidence.

 

In FX, sterling broke through an important psychological level at $1.40 for the first time since April 2018. After some likely profit taking around this region you can now see GBPUSD start to look to edge up to around 1.44-45. Partly it’s a sign of emerging confidence in the UK’s economic recovery thanks to vaccines – and the end of the Brexit cliff-edge – but also just plain old dollar weakness. Looking forward, sentiment wise a lot will depend on Boris’s unlocking plan on Monday. So far, he has stressed caution and said reopening will be gradual and conducted in stages. Schools will undoubtedly be first, pubs likely last. Pound strength will be a partial headwind to the FTSE 100 thanks to the dollar earners, but as stated previously overall I think we are back into a stronger correlation between sterling and UK equities now that the Brexit risk has been removed. We will also pay attention to the pace of vaccinations, which may already be starting to slow after the government scrambled to hit their 15m target by Feb 15th. 

 

Bitcoin: Yet more institutional support. DoubleLine Capital LP chief and long-time gold bug Jeffrey Gundlach is backing Bitcoin as the asset to insulate investors against the great monetary inflation. He tweeted: “I am a long term dollar bear and gold bull but have been neutral on both for over six months. Lots of liquid poured into a funnel creates a torrent. Bitcoin maybe The Stimulus Asset. Doesn’t look like gold is.” Prices remain supported above $51k this morning with near-term resistance marked around the $51,800 level. 

 

Gold bugs beware: gold keeps looking like it wants to break under the key support at $1,763, but holds a little above this level in early trade today.  

Gold keeps looking like it wants to break under the key support.

Cable drops as UK economy contracts

Forex

The UK economy contracted by 0.2% in the second quarter of the year, its worst performance since 2012.

Figures from the Office for National Statistics showed the surprise contraction, which was significantly lower than the flatline economists expected. It also follows strong growth of 1.8% seen in Q1.

“PMI data had indicated we were set for a contraction, albeit not so severe,” explained Neil Wilson, Chief Markets Analyst at MARKETS.COM.

Much of the growth in the first quarter was attributed to panic buying and stockpiling before the original March Brexit deadline. Indeed, Head of GDP Rob Kent-Smith, also blamed the 2.3% drop in Manufacturing output in the Brexit delay. The initial strong start to the year included production brought forward ahead of the UK’s departure from the EU.

The services sector was the only positive contributor to GDP growth in the quarter to June 2019 – but only just at 0.1%. This marks the weakest quarterly growth in this sector since Q2 2016.

Output from the production and construction sectors also contracted at -1.4% and -1.3% respectively.

Cable dropped sharply on the news, before recovering slightly. Having fallen below 1.2090, GBPUSD was last recovering above 1.21 but remains under pressure and a good 30 pips away from its highs of the day. Having breached yesterday’s lows we may see further testing of the downside.

“Clearly the unwind of stockpiling carried out in Q1 ahead of the aborted March 31st Brexit deadline has had an impact. Also, we can point to plenty of data around the world that shows we are in the middle of a broad global slowdown,” Wilson said.

“But you do have to admit that the pervasive uncertainty around Brexit is acting as a brake on the economy.”

Rolling three-month growth was negative 0.2% in the three months to June 2019, the first time since Q4 2012. This continued a steady decline in three-month growth since the start of the year.

So, was there anything positive in the latest GDP figures?

“Well, a lot of the decline seems to be down to the fall in car making as companies brought forward usual summer shutdowns of factories. The sharp fall in manufacturing output was led by a 5.2% decline transport equipment, which the ONS says largely reflected the partial closures of various car manufacturing plants. This may be partially recovered in the second half, while we may see further stockpiling ahead of the October 31st deadline that leads to a boost to Q3 numbers,” said Wilson.

However, he added, “but on the whole the figures make for worrying reading”.

Does Boris mean bad news for cable?

Forex

The UK is less than a day away from finding out who the next Prime Minister will be. The winner of the Tory leadership contest will lead the UK in its exit from the EU later this year, and Boris – who has refused to rule out closing Parliament to secure a no-deal Brexit – is favourite to win.

Cable is unsurprisingly jumpy on the topic of Brexit, and it pushed higher last week when MPs made it harder for the future PM to force through a no-deal Brexit by suspending Parliament.

The new bill states that even if Parliament is suspended, it must sit for a few days in September and October to consider issues in Northern Ireland. It also requires ministers to make reports every fortnight on progress towards re-establishing Northern Ireland’s collapsed, devolved executive and to give lawmakers an opportunity to debate and approve those reports.

While the legislation would not prevent a Parliament being suspended, it would make it harder to sidestep lawmakers.

Already Decided?

A poll of Tory members suggested that Boris has two-thirds of the vote. More than half of those who voted Conservative in the last general election would vote for Boris, compared to just 27% for Hunt. Voting is currently taking place and closes at 5pm today, with the winner expected to be announced tomorrow.

However, Boris is the firm favourite to win and, barring something spectacular, will take over the reins as Prime Minister on Wednesday. So, while markets are likely to react to the news, it’s likely that much of the turbulence has already been factored in.

What to expect

The pound is already weaker, with cable losing about 50 pips today in morning trading.

Concerns about Brexit – and, therefore, the leadership contest – continue to drag the currency down. GBP/USD had started the session north of 1.25 but was last making new lows around 1.2460. It’s likely that if hard-brexiteer Boris is announced as the next PM, sterling will take a knock.

However, leading thinktank National Institute for Social and Economic Research (NIESR) has warned that the dampening impact of Brexit over the last three years could have dragged the UK into recession already.

Overall, the think tank sees a 30% chance Sterling will decline over the course of 2020, and that probability will be higher if Britain crashes out of the EU.

Even if a no-deal Brexit is avoided, NIESR predicts the economy will grow just 1.2% this year and 1.1% next year as uncertainty about Britain’s future trading relationship with the bloc will hold back investment and slow growth.

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