No Brexit breakthrough, Ocado raises guidance, ECB set to ease again

Morning Note

• European stock markets rise despite a tough session on Wall Street led by a sharp decline in big tech
• Sterling lower as Brexit talks hit brick wall after Boris Johnson and Ursula von der Leyen failed to bridge the gap over dinner
• ECB set to expand and extend emergency asset purchases, US inflation also on tap

The darkest hour is just before the dawn: There was no across-the-table breakthrough on Brexit over dinner last night, after a dinner date between Boris Johnson and Ursula von der Leyen only served up disappointment with a side of ennui. The gaps remain – a Sunday deadline has been set but the chances of a deal being struck are clearly diminishing over time – the acceleration towards the deadline was supposed to create the necessary urgency to land a deal. Looking at the talks from the outside, it seems as though no-deal odds are shortening fast. But we should caution that this is to be expected – the nature of the brinkmanship being pursued by both sides means a deal always seems further away than it may be in reality and will seem furthest away just when it’s within striking distance.

GBPUSD moved lower overnight, dropping from yesterday’s peaks above 1.3470 to test support at 1.33. The lack of any significant moves betrays the fact traders think both outcomes – deal or no-deal – are still very much in the running. This week’s lows at 1.3225 are in sight if 1.330 cracks.

Sterling was also under the cosh as UK GDP figures showed growth slowed to 0.4% month-on-month in October. It was the sixth consecutive month of growth but the rate is slowing down. GDP in October was 23.4% higher than April but the economy remains 7.9% smaller than it was in February 2020, before the full impact of the coronavirus pandemic, and 8.2% smaller year-on-year. Lockdowns in November will not help the overall Q4 picture but markets are only looking ahead to a post-covid world these days, thanks to vaccines.

Wall Street suffered a bruising session, with the Dow and S&P 500 closing down despite striking record highs early in the session. The Nasdaq tumbled 2% as tech stocks took a beating on concerns about a regulatory push in the US. Facebook dropped 2% as the Federal Trade Commission and 48 states filed two antitrust lawsuits against the company centring on its acquisition of Instagram and Whatsapp and what is seen as anticompetitive conduct. New York attorney Letitia James, who is leading the coalition of states, said that ‘Facebook has used its dominance and monopoly power to crush smaller rivals and snuff out competition’. It’s a shot across the bows of big tech – Google, Facebook, Apple all fell a similar level. Regulatory overhang may be a drag on valuations.

But if there were doubts about the market’s appetite for new supply and investors’ willingness to pay a premium for growth, these were certainly dashed yesterday by a remarkable IPO for DoorDash. Shares priced initially at $102 closed the day 86% higher at $189.51. Airbnb goes today and if the DoorDash trading is anything to go by, there could be fireworks again. The company has priced its initial public offering at $68, well above the $44-$50 range estimated only last week.

Revenue growth was slowing for years and it’s never turned an annual profit, but Airbnb has not done as badly as peers during the pandemic and to some extent has made the private getaway more appealing than staying in a hotel/resort. The company made a profit of $219 million in the third quarter, on $1.34 billion in revenue. However, Experiences have not done as well as hoped – there was no breakout of the figures in the filing despite launching four years ago. The outlook is much stronger for 2021 now that vaccines are coming. Having been relatively resilient during the pandemic, Airbnb could kick on and benefit from the get-and-out-travel trend in 2021. Anyone for new highs for the Renaissance Capital IPO ETF?

European markets opened tentatively higher despite the drag from Wall Street and Brexit worries – sentiment remains broadly well supported due to the vaccines. Investors still largely positive on equities and on the whole probably believe that both a Brexit deal and US stimulus package will appear. The FTSE 100 was up 0.4% and testing the 6,600 level again in the first hour of trade on Thursday.

Ocado shares dropped 3% despite raising full-year earnings guidance as revenue growth slowed. Retail revenues rose 35% in the fourth quarter, down from 52% in the preceding quarter. Whilst still very strong, investors are perhaps just booking some profits now on the news. Having previously raised its full-year EBITDA guidance from £35m to £60m, management has again raised its outlook to £70m thanks to a very strong November led by continuing shift to online and lockdowns creating a perfect storm of demand for internet supermarkets. A lot of the immediate questions asked of Ocado have been answered and remaining questions will not be answered until next year and beyond. Profitability in its core UK retail market is not in doubt and capacity increases next year worth 40% will be a positive. M&S seems to be working. Key questions for next year and beyond are whether the shift to online continues as vaccines are rolled out, and can it really justify these enormous multiples based on the promise of future profits from its international deals for much longer?

Markets are looking ahead to a big slate of economic events and data today:

ECB: The European Central Bank is likely to announce fresh stimulus by way of expanding its Pandemic Emergency Purchase Programme (PEPP) by an additional €500bn and extend it beyond the current Jun 2021 cut-off to the end of next year. This is not likely to produce much volatility in EUR crosses as there was a strong pre-commitment at the October meeting to taking additional easing measures in December. As we said at the time, it’s all but a down deal now that France and Germany have locked down and the economy is heading for another recession. Last time Christine Lagarde said staff were working on recalibrating all instruments, which means even interest rates could be cut further in addition to expanding QE envelopes, however any tweak to rates looks unlikely at this stage.
Recent survey data has been soft and hard data for November when it comes is not going to be pretty. Q4 is shaping up badly, though Lagarde and co may now be willing to jump the shark on vaccines and prep for a rosier 2021 – which would suggest no dovish surprise from the ECB. Inflation remains very weak and has been stable at –0.3% since September.

The stronger euro exchange is another headache for the ECB – traders will be closely watching for any jawboning by Lagarde around the recent euro strength. We should also look for extension of TLTROs and upping the tiering facility to help banks. Lagarde will look to show that the ECB will stay super-loose for as long as necessary but will lean hard on the fiscal side too and not want to do too much. Moreover, the advent of vaccines will keep the ECB from over-doing it now. As ever, the announcement is at 12:45 GMT and presser follows at 13:30.

US CPI and weekly unemployment claims: After a tame reading for October, core and headline CPI are seen ticking up marginally to 0.1% over last month and +1.1% year-on-year for the headline number and +1.8% for the core reading. US inflation expectations have hit 18-month highs, but it’s not thought that we will see a material imprint on last month’s figures – expectations seem to be more about the coming Great Monetary Inflation caused by central bank printing and pro-cyclical fiscal stimulus in 2021 as vaccines allow the economy to bounce back. Nevertheless, the latest PMI surveys for November showed the quickest rise in selling prices yet recorded, with the rate of inflation hitting a record high in the service sector and a 25-month high in manufacturing. Inflation may be coming, but probably not until the pandemic is over.