Tesla sinks, MKS and ITV deliver

Musk things 

 

About those unrealised gains being tax avoidance? What about unrealised losses? I mean, Elon musk is now worth about $50bn less than he was before Twitter poll. Surely that should count for something, too…?! Tesla shares skidded lower by another 12% on Tuesday, taking the two-day losses from Friday’s closing price to approximately 16%. 

 

Clearly, the poll has affected the stock price. But attributing a reason for conducting the Twitter poll is probably a pointless and fruitless exercise, since as we have noted before Musk is regularly doing dumb stuff on Twitter. There are theories – boy, are there theories. Big Short trader Michael Burry flagged personal debts for the reason – «Regarding what @elonmusk NEEDS to sell because of the proposed unrealized gains tax, or to #solveworldhunger, or … well, there is the matter of the tax-free cash he took out in the form of personal loans backed by 88.3 million of his shares at June 30th,» he tweeted. I’ve even heard chatter about Musk seeking to lower the strike price on a bunch of fresh options coming his way… 

 

Whatever… what we know is that several insiders have been selling stock lately, capitalising on the $1tn valuation; Musk probably must sell soon – has said as much – to cover tax liabilities. Among the insiders, Musk’s brother Kimbal sold $109m the day before the tweet. Not an ideal setup – supply is likely exceeding demand, plus ‘optics’ – Musk is very much Tesla personified. He’s previously said he’d be the last money out – selling for whatever reason is problematic, partly because of his cult like status among investors.  When insiders sell, or say they will sell, stock after a huge run up in the shares it’s usually a sign they are not comfortable with the valuation. That is something to bear in mind. Even allowing for the stock’s drop over the last two days, it’s still commanding an absurd valuation – should the stock be worth what it is? Jefferies says more, raising its price target on the stock this week to a Street high $1,400.  

 

Whether it should or shouldn’t, a more pertinent question is can Tesla sustain a valuation that makes it worth more than every other carmaker combined? It seems unlikely. Competition for one. Rivian is an Amazon and Ford-back electric carmaker about to go public today on the Nasdaq with a stonking $66.5bn valuation after pricing shares at $78, well north of expectations. Revenues so far zero, losses high. But it’s got an order from Amazon for 100,000 trucks by 2025 – an actual order with a contract and everything (cf Tesla-Hertz). It’s an ‘exciting’ time for EV investors, for sure.

 

After announcing an order of 100,000 Teslas – well, sort of announcing – Hertz is back on the Nasdaq having been traded over the counter since it went bust last year. As part of the marketing push around this re-IPO it’s enlisted Tom Brady, who is very good a throwing an oval bowl forwards a long distance.  Yesterday Brady tweeted “To the moooooon… @Hertz #IPO #LETSGO.” (the tweet has been deleted, it seems). A fleet of Teslas on order, what could go wrong? Hertz has traded OTC under HTZZ since Oct 2020 following its Chapter 11 filing in May of that year. It’s now back under HTZ on the Nasdaq – shares closed Monday at $32.62 and closed Tuesday down about 9% on relisting. Presumably, Brady will be on CNBC or whatever soon with his take on the 2s10s curve flattening and who should be Fed president. It’s not that celebrities shouldn’t endorse brands, but it’s unclear to me why a celebrity endorsement is required for a stock market thing.  

 

The Metaverse 

 

An ETF called META has doubled its net asset value from $130m to $260m since Facebook changed its name two weeks ago. Volumes have also soared – right place, right time? Sometimes stocks with similar tickers to really buzzy or big names can find investors piling in by mistake. The SEC had to halt trading in Zoom last March because people were buying the wrong Zoom. Sometimes this gets front run by clever hedge fund types in expectation of mistaken identity. In the case of META, I’m not so sure it’s just some punters getting confused – META is designed to give investors exposure to the ‘metaverse’, whatever that is. So, if you think FB is doubling, trebling down on this area then META could be a vehicle for investors to tap the growth in the sector.  

 

Bitcoin eased off its all-time high made early Monday. Apple boss Tim Cook said he owns cryptocurrency and has been interested in it for some time. He said he believes it’s reasonable to own Bitcoin and Ethereum as a part of a diversified portfolio. However, he stressed that Apple would not invest in crypto since that is not why people own the stock. 

 

Shares in Coinbase sank 13% in after-hours trading after the company reported weaker-than-expected revenue for the third quarter. Turns out less volatile crypto markets (isn’t that what everyone wants?) is not so good for the exchange that is touted as the mainstream ticket to the crypto uni(meta?)verse. Monthly users fell from to 7.4m from 8.8m in the second quarter, though was still up from 6.1m a year earlier. Trading volume fell to $327bn from $462bn in the prior quarter.

 

Finally, Naked Brand Group, which makes swimwear and lingerie is merging with Cenntro Automotive Group, which works in the field of autonomous driving. Make sense? Nope, but this is 2021. Shares jumped 30% before trimming gains to end the day up 6%.

 

Markets 

 

European stock markets are tad higher this morning having closed mildly in the red on Tuesday – the DAX and CAC off by 0.1% and the FTSE 100 lagging at -0.3% for the session to sit underneath 7,300. All three are in the green in early trade today with the FTSE 100  recovering 7,300 but looks tentative – possible bearish MACD crossover to consider. Real yields on 30-year U.S. bonds sunk to a record low, of negative 0.57%, but gold pulled back in the face of key resistance levels. Oil prices firmed on tighter supply, strong demand signal from Vitol and JPM. US stock markets finally eased back after a run of gains that was one of the best for several years.

 

Wall Street closed lower, ending one of its best win streaks in years. The decline in Tesla was a factor, but ultimately such a straight charge up will just run out of gas sooner or later. The look-ahead to inflation is maybe a factor so this needs to be assessed with today’s CPI print.

 

Inflation is the order of the day – Chinese PPI – a big leading indicator for global consumer inflation- surged to 13.5% in Oct, hitting a 26-year high. US PPI stands at 8.6%, which was flat on Sep. Today’s US CPI inflation report could show a nudge beyond the 5.4% reported for the last 4 months – consumer prices are seen rising 5.8% on an annual basis in Oct, which would be the highest in 30 years. Core is seen at +0.4% mom and 4.3% yoy. German CPI inflation rose to 4.5% in Oct, +0.5% from the previous month – the highest level in 18 years – driven by an 18.6% rise in energy prices and doubling in heating oil prices. The split between the services inflation (+2.4%) and the inflation in goods (+7%) tells you all you need to know about the dislocation in the post-pandemic global economy. 

 

ITV update: slogging away – reopening of production and revival of ad revenues continues apace, but the longer-term doubts remain about the position of linear broadcasters in an on-demand world and its reliance on cyclical ad revenues. Still the numbers are v. good – ad revenues are forecast to rise 24% and hit the highest in its history. Total ad revenues (TAR) are growing but seeing sequential decline in growth rates that mirror the year-ago impacts. TAR hit 30% for the 9 months top the end of Sep, with July up 68%, August up 24% and September up 16% compared to the same period in 2020. That compared with growth of 115% in June and 87% in May. These numbers should settle down in due course as the effect of last year wash out. Total revenues were up 8% from 2019. Notable that ITV reports profit to cash conversion is expected to be around 60% in 2021, up from the previous guidance of 30%, due to the stronger than expected TAR performance. Shares rallied 6%.  

 

Marks & Spencer has smashed expectations as it raised its full-year profit outlook handsomely. Management is guiding profits to be around £500m – which is up from the £300-£350m guided back in May. There clearly must have been a big improvement only in the last few weeks for such a strong upgrade to the profit forecast – as recently as August the guidance was for the upper end of that range only. This upgrade came despite the requisite warning on the ‘supply chain’ – “well publicised cost pressures will become progressively steeper increasing the importance of our productivity plans, store rotation and technology investment in the coming year”. Profit before tax & adjusting items of £269.4m was up more than 50%, with food sales up 10% and ex-hospitality +17%. Ocado partnership is paying off. Shares soared 20% on the profit update before paring gains to trade +15%. Getting back to where it was before the pandemic knocked the stock for six is one thing, but by then it was already nursing years of pain – the recovery from the pandemic is complete, but can it recover 2015-2018-type levels? The restructuring is paying off – the pandemic allowed Marks to accelerate a process that had been taking far too long, and in many ways could have been a blessing. Looking for further progress in the coming quarters to drive positive price action.

Muted start for equities, inflation in focus

Mixed, flattish start to trading for European stock markets after a record again on Wall Street as the S&P 500 closed above 4,700 for the first time. Gains of about 0.1% for the DAX and FTSE 100 keeping risk just in the green but the Stoxx 50 is flat. For US stocks it’s been a straight line up since the middle of October and whilst there is always this sense that ‘it must pull back soon’, that is sometimes when it’s finding the path of least resistance to the upside. Talking of which, Bitcoin has made a fresh all-time high and now could generate further upside now that resistance has been cleared. Read across to Coinbase, Microstrategy and other crypto stocks. Infrastructure stocks performed well as the market reacted to the passing of the $1tn infrastructure spending bill.

 

Risks are starting to take shape around rising covid cases in mainland Europe and the possibility of new lockdowns – something to watch in the coming days as it could play out with weakness for European equities. German infection rate at the highest since the pandemic started. Meanwhile the inflation threat looms as large as ever – tomorrow’s CPI numbers for the US will be closely assessed. Today we get the PPI numbers which are going to show ongoing supply chain pressure and pass through of costs to consumers, with the consensus at +0.6% for the headline number and +0.5% for the core PPI. Recent PMI surveys point in one direction for prices and that’s up.

 

On the whole inflation/rate hike theory…Yesterday, Fed mouthpiece Richard Clarida said conditions for rate rise likely to be met by end of 2022. Markets currently pricing for one by the middle of next year, so the Fed remains ‘behind the curve’. An alternative way to put this – as last week showed – is to say the market is ahead of itself.  

 

He also pointed out there is about $2tn in unspent free money accumulated during the pandemic that is yet to wash through the economy. Does that make inflation likely to be more or less transitory…? 

 

Yet more sticky signs: In August, Jay Powell noted that “if wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of ‘wage–price spiral’ seen at times in the past”. 

 

“Today we see little evidence of wage increases that might threaten excessive inflation,” he added. 

 

Well, the latest NY Fed median projected year ahead household income growth jumped to 3.3% in Oct from 3% in September. That’s just as productivity in the US plunged 5% in the third quarter to its lowest level in 40 years. Ok, so some of it is supply chain-related, but the picture is not the one that the Fed has been describing. Meanwhile, median one-year ahead inflation expectations rose 0.4% to 5.7% in October, reaching a new high for the survey launched in 2013. Clarida noted that the Fed had not anticipated the depth and breadth of the global supply shock. I guessed that but the question is – are you going to try to contain inflation expectations or not?

 

Charts: Sterling has found some near-term support and trying to now hold the 61.8/38.2% levels where there is clear near-term resistance to the bounce – eyes on the speeches of Bailey and Broadbent today.

GBPUSD Chart 09.11.2021

Gold: real rates under pressure again with 10yr TIPS out to –1.11%, testing the first area of resistance at the 38.2% retracement around $1,827, with further resistance at $1,833, the Jul and Sep peaks. Breach to the upside here may call for $1,875. Persistently high inflation and a dovish/patient Fed is a good setup for the metal – the sharp fall real yields since last week’s meeting tells you that. Weaker dollar also a factor with DXY down under 94 again to test its 20-day SMA after once again failing to break out above 94.60 area last week, just as it failed in Sep and Oct.

Gold Chart 09.11.2021

Tesla shares down after Elon Musk Twitter poll

Kind of unusualIf you were the CEO of a large listed company and decided you might like to sell some stock would you a) do it quietly and file it appropriately, or b) ask millions of people on Twitter whether you ought to? Obviously, Elon Musk chose the latter. Ok, so he’s often doing dumb stuff on Twitter and sometimes doing dumber things that regulators should probably look at. And occasionally he does really dumb stuff that regulators do look at.  

 

So, when he asked his Twitter followers over the weekend whether to sell 10% of his stock, lots of us laughed. I mean it’s sort of weird – why not just start selling some tranches, without the fanfare and attention-seeking…hahaha. You could say he just wants to sell some stock now because the valuation has rocketed lately, cash out while the going is good. It’s hard to criticise someone for doing that, is it? And rather than get berated by his fans for selling down his holdings, he can say ‘look, you told me to do it!’. Either way, Musk was due to start selling soon anyway as he faces a monster tax bill on some of his stock options. And since he takes no salary or bonus from being Tesla CEO (he likes to remind us), the only way to cover would be to sell some shares. Seems fair enough, but does it need all the fintwit showbusiness?  

 

Tesla shares in Frankfurt are off about 7% this morning and indicated to fall about 6.66% (!) in US pre-market trading. Now Musk would be aware that advertising his plans to sell $21bn (at Friday’s price) in stock would lead to a fall. It’s a simple bit of supply and demand economics on show. But he probably reckons on it being short term in nature or doesn’t particularly care at these insane valuations which he must think are ‘too high IMO’. Whatever he has said before the stock has risen in the end, and this way he controls the narrative of what amounts to a pretty massive stock sale, which is ultimately at the behest of the taxman. ‘Followers urge Musk to sell 10% of his stock’ sounds way better than ‘Musk dumps 10% of Tesla holdings, cash in at all-time highs, leaves investors as bagholders…et, etc’. I’m not 100% on where this fits, but you could again make a case of sorts for making market-moving statements that you shouldn’t really be doing. Hard to say it’s manipulation, but it’s not normal.

 

Markets 

 

Stocks are largely flat to start the session in Europe after a positive day Friday saw fresh cycle highs. Weak handover from Asia as Chinese import figures indicated weaker domestic demand. US futures are steady after another round of all-time highs on Friday. Earnings are better than were expected, jobs growth is picking up and the Fed’s carried off the taper without undue alarm. Pfizer’s antiviral announcement on Friday is a major positive: Dr Scott Gottlieb said the US is ‘close to the end of the pandemic phase’. After last week’s round of policy meetings, this week we get a lot of jawboning from the likes of Powell, Bailey and Macklem on equality and diversity. We’ll also be watching the US CPI numbers on Tuesday and UK growth numbers for the third quarter on Thursday. 

 

Bond yields are lower than they were last week with US 10s at 1.48%. The UK 2yr gilt yield is now back to 0.42% after trading as high as 0.76% on expectations the Bank of England would be more hawkish than it turned out to be. 

 

Real rates have fallen further with 10yr TIPS down to -1.09% on Friday, lifting gold to break out of the recent range and hit its highest since September. No breakout just yet but looking to the area at $1,827-1,833 to provide near-term test as this corresponds to the 38.2% retracement of the longer-term decline and the Jul/Sep peaks where we saw three attempted breakouts fail.

Gold Chart 08.11.2021

Crude prices are higher but just running into the resistance of the 20-day SMA. Late on Friday Aramco raised selling prices for its crude, whilst the passing in the US of the Biden infrastructure bill is also supportive. 

Oil Chart 08.11.2021

No relief for sterling amid BoE mess

A tale of two central banks

A key part of the central banker role is communication. Meetings take place infrequently, maybe 8 times a year, so in the gaps in-between, when trading days are long, markets lust for guidance in other forms. Policymakers are generally free between meetings to make speeches, give Q&As, do TV interviews etc. Sometimes they are compelled by lawmakers to explain their policies, too. Naturally what they say is comprehended, dissected and assessed by the market as to what their words imply for the course of monetary policy. There is never an absolute: nobody will say ‘we are going to raise rates next month’. That is why you have the meeting and produce an official statement. But you can make it clear to the market what you think about the state of things and where you think is the likely or appropriate course of monetary policy.

After an uneasy start in his job, Jay Powell, the Fed chairman, is very good at doing this. Perhaps not quite as adept as Mario Draghi at carefully steering market expectations, but close. He has spent six months painstakingly guiding the market to expect this week’s announcement on tapering asset purchases. No tantrum, barely much of a reaction even. Talk of rate hikes is scorned.

Contrast this with the performance of Andrew Bailey, the relatively new head of the Bank of England. Loose – in retrospect – remarks over recent weeks led the market to expect an interest rate rise yesterday, only to be confounded by not just a failure to deliver on that but an apparent indifference to the fact that policy was so poorly communicated. “It is not our responsibility to steer markets on interest rates,” he said. Oh, right? That’s kind of the antithesis of the job description, but you’re the man in the hot seat I suppose.

Frequently handing over to Broadbent and Ramsden to answer questions he seemed unable to tackle, Bailey’s remarks were problematic. For example, he cautioned on the scale of rate bets seen in markets – saying he thinks the market has priced in too many rate rises. Maybe he shouldn’t have been stoking those expectations with hawkish remarks on inflation. Then, in response to a later question about whether the market was right or wrong, he said: «None of us are going to endorse the market curve at any point in time.” That is just untrue. Michael Saunders on Oct 9th: “I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.” In response to a question about stagflation he rambled on about its etymology, said the bank doesn’t really use that word, so no before handing over to someone else to actually attempt an answer to the question. Even if you don’t use the word ‘stagflation’, you know the question is about falling growth and higher prices.

It seems like the BoE thinks ‘we’ll say something and the market can make of it what it likes, that’s not our business”. To a degree, that’s true. You can’t account for what others make of your statements. But you can be a lot more careful about those statements in the full knowledge that the market will read something into them since you are the governor of the Bank of England and not just anybody. There were several opportunities in recent weeks to lean against the aggressive market pricing, to gently nudge the market in the right direction, but the governor elected not to do that. The feeling is now that the BoE under Bailey has lost credibility and we will not be able to read as much into his remarks as we have done. This is not a good situation for a central banker to be in. I leave you with this, among the listed candidate requirements from the BoE’s job spec for Governor: “The ability to communicate with authority and credibility internally, to Parliament, the media, the markets and the wider public.”

Anyway, is the December meeting live? Citi and others think so, expecting a 15bps hike at the next meeting. Bailey said the vote at 7-2 was ‘close’, which maybe hints at several members – as I suggested may be the case yesterday – being close to swinging towards hiking but were not persuaded this week. Or not…it’s hard to tell these days. This morning on Today the governor said the BoE would not ‘bottle it’ when it came to raising rates and insisted they will rise. He also said that the Bank wants more time to assess the impact of the end of furlough on the labour market, and that this was the primary reason for not hiking rates yesterday. This could certainly indicate that Dec is ‘live’, since the Bank would not have had time to gauge the scarring, which so far looks small. But, then again, it might not.

Sterling got hit hard and is lower again this morning. GBPUSD blew through the 61.8% retracement area we’d highlighted at the start of the week and looks to retest 1.3410 September low and possible round number support at 1.340. This may mark the bottom though in the medium-term – if not then look to 1.3180, the 38.2% retracement of the 2020 low to 2021 high.

GBPUSD Chart 05.11.2021

Markets

European stock markets are mixed, showing a bit of caution ahead of today’s nonfarm payrolls print in the US. The FTSE 100 is up again and north of 7,300 as the softer pound appears to be delivering a bit of a boost as we witnessed in the aftermath of the Bank of England announcement yesterday. The DAX is flat but the Euro Stoxx 50 is up 0.3%. The dollar is firmer with DXY at 94.40, yields steady with 10s around 1.53%, and gold bashing its head against the $1,800 resistance again support by lower real rates.

Wall Street rallied for a 6th straight day, with the S&P 500 and Nasdaq both notching fresh record highs. The Dow Jones slipped back as financials struggled, with GS and JPM leading the index lower. Broadly speaking the Fed’s patient approach and the removal of any overhanging worry around the tapering is good for risk, whilst fundamentals in the form of earnings are positive. Both US and European equities are trading at record peaks.

We said at the start of the week that the coming days were a big test for central banks. Have they passed that test? After the blowout in the bond market, the spike in front-end yields, central banks have not this week been as hawkish as some feared. Is that a failure to grasp the inflation snake? Maybe, I tend to think so, but many believe that central banks are right to be patient since the inflation is not just a function of demand this time. The transitory inflation narrative remains, and the CBs didn’t really pull the trigger and continue to err on the side of caution.

Shares in Peloton cratered by a third in after-hours trading after it reported a wider-than-expected loss. Pinterest was up 6% after a decent beat, whilst Uber fell after its loss was larger than forecast. Airbnb delivered record quarterly revenues and earnings. The firm posted $2.24bn in revenues versus the consensus of $2.05bn, whilst net income surged 280% to $834m.

The S&P 500 looks a tad overextended however and ripe for a pullback. The 20-day SMA has been a good anchor and a retreat to this area at 4530, a drop of 3% roughly, could be achieved without upsetting the longer-term trend.

S&P Chart 05.11.2021

Oil prices plunged as Saudi TV reported the country’s oil output would top 10m bpd by December. OPEC+ committed to raising output at 400k bpd, resisting calls from the White House to do more. Speculative positions are being unwound and the market is starting flip from draws to builds. Reuters reported Saudi energy minister Prince Abdulaziz bin Salman as saying that oil stocks will see «tremendous» builds at the end of 2021 and the start of next year because of slowing consumption.

Wide day for crude prices on Thursday highlighted by the $5 candle. Bearish MACD crossover still in charge.

Spot Oil Chart 05.11.2021

Stocks rally after Fed tapers, BoE hike no slam dunk

“We wouldn’t want to surprise markets”

Tapering, so what? Market reaction to the long-awaited start of the Federal Reserve’s trimming of monthly bond purchases has been muted but positive. Stocks in Europe and US are at record highs – tapering is not tightening. The Fed managed to spend months carefully guiding the market to expect this move, by which it will take 8 months to reduce its $120bn-a-month QE programme, at a rate of $15bn-a-month; it’s not about to let market expectations for an interest rate hike get out of control. Still the Fed is still behind the market on this one and could be forced in to raising rates sooner than it expects. Jay Powell urged patience and caution, and seems to have largely pulled of the trick of not tying the tapering timeline to a provisional lift-off date for rates.

“Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate,” Powell said.

Both the dollar and stocks rose, with Wall Street achieving yet another record high and European stocks marking fresh record highs again this morning. Shorter dated bond yields were steady, US 2yr yields up a fraction at 0.47%, whilst the bigger move was seen further out the curve with 10s hitting 1.6%. That would be the kind of reaction Powell wanted – as far from the taper tantrum of the past as you can imagine.  As he said in the press conference, the Fed “wouldn’t want to surprise markets”.

What we did see was the Fed trying to shift the goalposts a bit on the inflation narrative. That’s important since it indicates it’s not rushing to hike to combat inflation, and in no hurry to raise rates. He explained that “transitory” for the Fed does not mean “short-lived” but rather that “it will not leave behind permanently – or very persistently higher – inflation”. This takes us into the arena of ‘long transitory’, which is a convenient intellectual get-out for the Fed without it needing to admit it got the inflation call wrong in the first place. On the labour market, Powell said there is “still ground to cover” to reach “maximum employment”.

Bank of England

Today the Bank of England is expected to raise rates, but that does not mean it will. It’s going to be a tough call as the nine members of the Monetary Policy Committee are not singing from the same hymn sheet. There are possibly three main outcomes from today’s vote – hiking 15bps and no attempt to push back on market expectations for future rate rises; a hike with a pushback against expectations for further hikes; or no hike. The ‘no hike’ outcome could also be split into one in which the Bank signals readiness to move next month, or one without such a signal.

As noted a couple of weeks ago in our preview, whilst some are worried about inflation, it’s all that clear if the hawks have the votes.

The MPC is relatively evenly split in terms of hawks and doves, so it is not abundantly clear if the recent messaging from some members – albeit including the governor – matches with the votes.

Bailey has sounded hawkish, and we know Ramsden and Saunders are itching to act. Huw Pill, the new chief economist replacing Andy Haldane has also sounded hawkish, though less so than his predecessor.

Commenting after UK inflation expectations hit 4% for the first time since 2008, he said: “The rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above 4 per cent into 2022 second quarter.” We place him in the ‘leaning hawkish’ camp.

On the dovish side, Silvana Tenreyro is highly unlikely to vote for a hike next month, calling rate rises to counter inflation ‘self-defeating’.

Deputy governor Broadbent said in July that he saw reasons for the inflation tide to ebb. The spike in energy prices since then could lead him to change his mind but for now we place in the ‘leaning dovish’ camp,

Rate-setter Haskel said in May he’s not worried by inflation, and in July said there was no need to reduce stimulus in the foreseeable future. He goes in the Dovish camp with Catherine Mann, who said last week that she can hold off from raising rates since markets are doing some of the tightening already. “There’s a lot of endogenous tightening of financial conditions already in train in the UK. That means that I can wait on active tightening through a Bank Rate rise,” she said.

That leaves Jon Cunliffe somewhat the swing voter. In July he stressed that inflation was a bump in the road to recovery.

Dovish Leaning dovish Centre Leaning hawkish Hawkish
Tenreyro

Mann

Haskel

Broadbent Cunliffe Pill Saunders

Ramsden

Bailey

We look to see whether the recent spike in inflation and inflation expectations has nudged the likes of Cunliffe, Pill and even Broadbent to move to the Hawkish camp. It seems unlikely that governor Bailey would have pointed the market towards quicker hikes if he did already have a feeling for the MPC’s views on the matter. He had ample opportunity to push back against market expectations but didn’t, which favours a dovish hike today, which is likely to be negative for sterling – though we note the dollar is topping at recent resistance and could pull back.

Sterling looks bearish still and little the BoE can now do for it with the hikes priced in – only disappoint. Near-term resistance offered by the 20-day SMA at 1.37, bearish MACD crossover still in play calling for retest of the 61.8% retracement around 1.3560, which was the mid-Oct swing low the provided the base for the rally through to Oct 21st.

GBPUSD Chart 04.11.2021

Inflation

Inflation is here and here to stay, which is probably why the Bank will ultimately raise rates. Yesterday’s services PMI indicated that while companies reported a sharp and accelerated rise in business activity during October, operating expenses and prices charged by service providers increased at the steepest rates since the survey began in July 1996.

The IHS/Markit report noted (emphasis mine): “Rising costs for energy, fuel, raw materials, transport and staff all contributed to increased prices charged across the service sector. Moreover, the rate of output charge inflation reached a fresh survey-record high in October. Service providers again noted that strong demand conditions and constrained business capacity had resulted in the swift pass through of higher input prices to clients.”

Stocks flat ahead of Fed taper announcement, Tesla stutters

Stock markets were mixed at the open in Europe as investors look ahead to the Federal Reserve announcement later. A rather flat start to the session saw the FTSE 100 test the 7,250 area before easing back towards the flatline around 7,275. The DAX was similarly flat as a pancake after 30 mins of trading – clearly investors are sitting on their hands until the Fed later.

Wall Street closed a new record high for a fourth-straight session as earnings continue to underpin confidence in fundamentals. It appears that fears about inflation eroding margins are so far unfounded. Whilst markets may have concerns about the Fed’s tapering and eventual tightening, these seem to have been well telegraphed thus far with the Fed chasing to catch up with bond markets and not the other way around.

Oil slackened as API inventories were soft – stocks rose by 3.6m barrels last week, well ahead of the 1.5m expected. EIA inventory data is due later, expected to show a build of 1.9m barrels. OPEC+ meets on Thursday amid calls for it to raise output further. Specifically, there seems to be some pressure coming from the White House as Joe Biden blamed the cartel for higher oil and gas prices, saying in Glasgow that he was reluctant to explain what he would do if OPEC doesn’t increase output – presumably he doesn’t mean kill off investment in US fossil fuels?

Shares in high street bellwether Next were down as the cautious outlook remained despite a very strong performance in the last few weeks. Full price sales in the 13 weeks to the end of October were up +17% versus two years ago. In the last 5 weeks full price sales rose 14%, ahead of the 10% expected. Nevertheless, the company stuck to its Q4 full price sales guidance at +10% and full year profit before tax at £800m.

Although Next continues to perform very well, it remains inherently cautious due to slowing demand, partly due to inflation; as well as the well-worn supply chain issues and labour shortages. The company says pent-up demand will slacken over time and warned that price increases will hurt sales despite consumer finances in decent shape. It also cautioned that while the availability of stock has improved, it “remains challenging, with delays in our international supply chain being compounded by labour shortages in the UK transport and warehousing networks”. Next is always super cautious but continues to deliver strong free cash year after year.

Taper time

The focus today is squarely on the Fed. It’s certain to announce the start of tapering, and push against interest rate hikes. Sounds easy enough but there are details which could affect the market reaction later. The 10yr Treasury yield sits above 1.53% ahead of the Fed statement, whilst 2s are back down around 0.45% having traded above 0.5% for the first time in 18 months in recent days. The dollar index is holding 94 after a stronger session yesterday, though is a tad weaker this morning.

Key questions relate to the pace and timing of tapering, and comments about the path of inflation and jobs from chair Jay Powell.
The Fed is likely to begin tapering its $120-a-month QE programme this month, or potentially wait until Dec. I don’t think this matters a huge amount, though delay could be marginally negative for the dollar and good for risk. It’s the pace of the tapering that really counts as this will determine when bond buying ends and could help shape expectations for when the Fed will begin raising rates. It’s expected that the Fed will reduce asset purchases at a rate of $15bn-a-month, which would mean the taper takes 8 months to complete. However, the Fed could go ahead at $20bn-a-month, ending two months earlier. Markets would likely see $20bn as more hawkish and suggest an earlier rate hike. There is no accompanying dot plot this month, but Powell is likely to reiterate that «a different and substantially more stringent test» is required for interest rates to move up.

Clearly, inflation is proving less transitory than the Fed had originally thought. In his last press conference Powell avoided referring to inflation as being transitory, and recent remarks have generally indicated greater concern about sustained price hikes. If Powell expresses greater concern in Nov than Sep over inflation – which has remained stubbornly high (4% core CPI and 3.6% core PCE are both well above the Fed’s 2% target) – then the market may see this as a tacit acceptance that rates are likely to move higher by the middle of next year. Markets currently forecast a two-thirds chance of a hike by June next year, earlier than current FOMC projections. It’s hard to imagine Powell not sounding more worried – ie hawkish – on inflation.

Overall, today should be fairly straightforward for the Fed and Powell to communicate a taper which has been telegraphed for several months. The problems start to arrive if inflation remains at 4% next year and into the second quarter of 2022.

Electric cars

Electric cars are good, and internal combustion engines are bad, right? Nothing about the lifespan of batteries or the scarcity of rare earth metals or the fact that right now it takes a lot of fossil fuels to charge the batteries … anyway let’s leave all that to the green cops in Glasgow. I am sure they know what is best for us since they usually do.

Anyway, electric car uptake is kind of presumed – it’s just not clear how quickly nor who’s going to win the race. So when a major EV maker seems to get into bed with one of the world’s top car rental firms it is important for the stock of both companies. Tesla stock surged last week and the company hit a $1 trillion market cap for the first time after Hertz announced it was expanding its battery-electric vehicle fleet with “an initial order of 100,000 Teslas by the end of 2022”.

It turns out Tesla has not signed a deal with Hertz to supply the rental firm with 100,000 cars. So, it seems like the rally in Tesla and Hertz shares over the last week or two has been built on a fake news story? Who’d have thought that such a thing could happen in today’s markets…I mean it’s not like Tesla, and Elon Musk, don’t have previous here. Whilst the original statement came from Hertz, it’s not like Musk or anyone else at Tesla refuted it outright when they had the chance. I guess that is what happens when you do not have a public relations team and rely on your CEO’s tweets to deliver corporate messaging.

So, when Musk tweets all innocently yesterday, a full seven days after the Hertz claim, you have to raise an eyebrow at least. In reply to a fan post about the stock price rally, Musk tweeted: “If any of this is based on Hertz, I’d like to emphasize that no contract has been signed yet. Tesla has far more demand than production, therefore we will only sell cars to Hertz for the same margin as to consumers. Hertz deal has zero effect on our economics.”

So, Hertz doesn’t actually need a contract – if Musk is genuine here and Hertz are paying full whack then they can just buy the cars like anyone else would – as such it doesn’t materially alter the fact that Hertz is buying 100,000 Teslas – we just don’t know how or when. Matt Levine makes this point well in his Money Stuff newsletter.

But it does kind of leave you with a sense that they are not playing with the full face of the bat here. Tesla stock is up more than 28% since the Hertz order news broke. There has not been a heck of a lot of other news around the stock so I’d say at the minimum it’s a factor, and probably go as far to say a major one. Analysts got all giddy about the implications for the deal, which is important too. Here’s fanboy Dan Ives of Wedbush: “The Hertz deal we believe will be viewed as a tipping point for the EV industry … We believe this is the biggest transformation to the auto industry since the 1950′s with more consumers heading down the EV path over the coming years.”

Does it matter if it’s a contract or Hertz staffers ordering cars individually? I don’t know, but you could imagine a world close to our own where the SEC thinks that maybe these kind of opaque statements that drive significant increases in stock price valuations amounts to manipulation of some sort, or just carelessness? I don’t think this would be allowed by the FCA.

Yesterday Hertz responded indirectly to the Musk tweet by saying that “deliveries of the Teslas already have started”. The company added: “We are seeing very strong early demand for Teslas in our rental fleet, which reflects market demand for Tesla vehicles.”

Tesla shares fell, Hertz stock trading OTC initially dropped 10% before rallying 7%.

Talking of rental car companies – shares in Avis (CAR) surged in another kind of meme-stock-crazy-type move. The move came as Avis – one of the most talked about stocks on Reddit’s WallStreetBets thread – delivered a record quarterly profit and sales of more than $3bn. Earnings rose to $674 million, or $10.45 a share, in the June-September quarter, up from just $45 million, or 63 cents a share, a year before. Avis closed over 108% at $357, having at one point traded above $545 amid a frenzied day of trading that saw the stock halted on more than one occasion.

Investing Squid pro quo

Last Tuesday SQUID – a cryptocurrency based on the Netflix series Squid Game – launched with a price of $0.01. Over the course of a few days, it rose many thousands of percent to more than $2,860 by yesterday morning. Specifically, in under one week, it rose more than 230,000% to $2,861.80 as of Monday morning.  

 

Sounds cool! What a ride to be on! If you had put $100 in this coin when it launched you’d be really rich by now. Ah, but there is a sting in this tale: out of nowhere and even quicker than it rose it abruptly crashed to 0, or $0.003161, to be precise- check the chart. The website for the cryptocurrency is now offline and it looks like a classic ‘rug pull’ – a scam that sees developers abandon a crypto project with investors’ cash. Although touting an official sounding ‘whitepaper’,  there were a couple of clues that should have made it obvious it was a scam. Aside from the very dodgy looking website and no affiliation with Netflix, plus a made-up endorsement from Elon Musk, the fact you were unable to sell tokens you had purchased from the company was a pretty major sign that something was amiss. If you can’t sell it, it ain’t a market, lads, even if it’s wrapped up in clever-sounding language such as ‘innovative anti-dump mechanism’ (seriously?). The white paper explained that buying released “selling credits,” (again, seriously?) but if there were no more selling credit left “in the pool,” you wouldn’t be able to sell. So maybe it wasn’t a scam, just really badly designed. It looks, feels and smells like a scam but whatever, lots of people will have lost lots of money hoping this ‘Memecoin’ would deliver mega returns. Over $3m, it’s thought. A case of frenzied hot money flows looking for any kind of home. In this case, it looks like a scam, but it could have dumped for any other kind of reason – once the selling starts on this sort of mania-fuelled asset it’s hard to stop it. 

 

Lots of people invest in things they don’t really understand. They might know a bit, or a lot, or nothing at all. This is the case with most stocks and most retail investors. It’s generally a good idea to at least know a little about what you are putting your money into. And generally, a bad idea to invest in something we know nothing about but have heard good things about. Most of us understand that Diageo manufactures alcoholic drinks and markets and sells them around the world. IAG flies people in aeroplanes. These are two pretty simple businesses, easy to get, even if few could tell you about the complex manufacturing processes and supply chains that deliver your glass of Johnnie Walker at 25,000 feet over the Gulf of Mexico. Not all companies are easy – in a loose sense – to understand. But most are usually pretty clear about what they do and why they want money.  

 

In the crypto space, that just isn’t the case at all. Few people can really explain or define what cryptocurrencies are, nor why one token should be worth more than the next. I say a few people since I’m guessing that while there are thousands or even millions of people who do know what it’s all about (or think they do), there are several times as many people who don’t but are still invested in some form of crypto. All of which makes it way easier to scam people. There have been countless numbers of crypto scams over the last few years as the space boomed. Being a discerning crypto investor is tricky – how do you know if one coin is a scam or not. Dogecoin was created as a joke and is now worth $35bn, or three times more than Rolls-Royce.  

 

And it’s not just that people don’t really get what it is they are investing in, like, intrinsically ‘get’ what it is. I mean I can invest in shares in a company I know nothing about, for instance – just as an example – Upstart Holdings. Who cares what they do? They are absolutely roofing, and I heard some guy on CNBC in a suit talking about them so what the hell, I’ll go in on that. I may not know they do some kind of lending to people who probably shouldn’t be borrowing money (a sure way to make money), but I do know what I get when I buy shares in a publicly listed company. I get a percentage of the company and draw on future cash flow. With a crypto sometimes it’s not that easy to work out what you are buying – is it a currency, part of a network, play-to-earn tokens, etc etc .  

 

And when a company goes public there are registration documents, audits and accounts to file. There is a lot of infrastructure to make it straightforward for investors to decide whether to put money in. With crypto, it seems that an error-strewn website and dodgy white paper is all it takes. More regulation is coming, but there will always be gaps – it’s supposed to be decentralised, after all. The crypto space is nowhere near as evolved and is kind of meant to not have the infrastructure – it’s decentralized bro. So when a new coin comes along there’s just not the infrastructure for investors to decide whether it’s all OK or not.  

 

And even if you do think that you’re onto a winner, then are other ways in which you might find it hard to know what you are investing in. Bloomberg notes that a search for “Floki” on CoinGecko produced Floki Inu, Floki Musk, Shiba Floki, Baby Moon Floki, FlokiSwap and FlokiMooni”.

 

SQUID is small fry, but it tells you a lot about what is going on in crypto land – it’s still the Wild West, as the SEC’s Gary Gensler put it. The fact is that fake/dodgy coins can moon and become worth a lot more than actual, serious DeFi projects built on years of proper research, which is kind of crazy. Who’s next? Some point to something like Shiba Inu, the self-declared Doge killer had a tremendous October, rising over 700% for the month. Memecoins are now a problem. And even if it’s not a scam, we all know any crypto can fall just as quickly as it will rise. 

 

Markets 

Stocks are mixed in early on Tuesday in Europe amid a batch of earnings reports and after fresh records on Wall Street. The FTSE 100 peeled back from yesterday’s post-pandemic peak, with a drop of about 0.5% at the start of the session as BP and Shell fell more than 1% despite a rise in profits at the former and higher oil prices. EU markets are a tad firmer. Flattish in FX at the moment, with the dollar index unmoved on the day at its 20-day SMA at 93.90. Oil is higher with WTI north of $84 after reports showed OPEC didn’t increase output as much as it could have last month. The cartel meets with allies later this week, API inventories are due later today. Gold close to $1,800, while bond yields remain fairly static ahead of key central bank meetings. The focus is very much on the Fed meeting, which kicks off today, followed by the Bank of England announcement on Thursday. 

 

Ahead of these the Reserve Bank of Australia (RBA) bowed to market pressure and abandoned its policy of yield curve control. The central bank said it will not try to maintain the yield on its 3yr paper at 0.1% after last week’s blowout in the bond market left the policy in tatters. It will continue to buy bonds at a rate of A$4bn a week at least through to Feb 2022 and left the cash rate on hold at 0.1%. It looks like the RBA is happy to let markets believe it will raise rates a tad sooner than the previous target of 2024, but it’s also keen to stress that ditching YCC does not mean a rate hike is imminent – perhaps late 2022 at the soonest, though it could be made to do so sooner than that. 

 

Finally, the US manufacturing PMIs pointed to slowing growth, continued supply chain disruption, rising costs for raw materials and manufacturing raising output prices. The UK manufacturing PMI ticked higher but still pointed to similar pressures.

Staley out, stocks up ahead of massive test for central bankers

So, farewell Jes Staley. You ran a good investment bank but are not as Teflon-like as it seemed. Back in February 2020, when news of the investigation into his historic links to Jeffrey Epstein broke, I commented how anything relating to the disgraced financier was surely toxic and said Staley should probably go. It was a reputational thing for Barclays and Staley did not have an immaculate record. After the whistleblower incident and KKR thingy with his brother-in-law it seemed the cat was on his last life; it seemed a question of judgment, or lack of it. I said: “It turns out he’s being investigated by the FCA over his known links to Jeffrey Epstein. The board says he’s been transparent enough, so he has their backing. Coming after the whistleblowing fine, it’s looking like the cat may be running out of lives. I wonder if he can survive this.” 

 

Today Barclays says Staley is out. It all hinges on his “characterisation to Barclays of his relationship with the late Mr Jeffrey Epstein and the subsequent description of that relationship in Barclays’ response to the FCA”. It appears his characterisation of the relationship is not exactly how the FCA and PRA see it. The board thought Staley was «sufficiently transparent” to keep his job last year – a statement at the time that already hinted a bit of a rift between CEO and board. Having seen the preliminary findings of the FCA and PRA report, either they think he wasn’t that transparent enough and/or just don’t want a mucky fight with the regulators to distract, since Staley will contest the findings. It should also be pointed out that “the investigation makes no findings that Mr Staley saw, or was aware of, any of Mr Epstein’s alleged crimes, which was the central question underpinning Barclays’ support for Mr Staley following the arrest of Mr Epstein in the summer of 2019”, the statement from the company said. The FCA and PRA simply said they “do not comment on ongoing investigations or regulatory proceedings beyond confirming the regulatory actions as detailed in the firm’s announcement”. Barclays is right to pull the plug now. It probably could have done it earlier. As I said in February last year: “He’s got to go now as he risks tarnishing Barclays’ reputation.”

 

Shares in Barclays fell more than 1% after the announcement, whilst peers rose – Lloyds rallied about 2% and NatWest over 1%. CS Venkatakrishnan, previously head of global markets, will take the reins. A safe pair of hands but we probably need to see a bit more. Today’s release mentions that “the Board has had succession planning in hand for some timewhich if you had Jes Staley as your CEO would have been a prudent step to take.  

 

Stocks are higher in early trade on Monday, with the Stoxx 600 in Europe hitting a record high. The FTSE 100 trades up 0.5% or so amid a generally positive start to the session, the first of the month. Wall Street closed out Friday with its best month since November 2020 as all three major averages hit fresh all-time highs. Bets that central banks will raise rates to fight inflation may have caused a wipe-out in the shorter end of the bond market last week, but the gyrations are not affecting stock markets too much at the moment. Corporate earnings are strong with about 80% of US firms reporting delivering profits ahead of expectations. A slew of key central bank decisions this week has the potential to up-end the sense of calm but so far, we think policy moves are reasonably well telegraphed. Nevertheless, there are lots of questions facing the central bankers this week. 

 

The Bank of England faces a big test of credibility after a series of hawkish messages from key policymakers in recent weeks. As noted a couple of weeks ago, the situation is finely balanced. Senior policymakers like governor Bailey and chief economist Huw Pill have chucked some fairly hawkish words around. Others remain sensitive to what many believe would be a policy mistake in raising rates into a period of economic slowdown and higher taxes. The BoE will be keen to bill any hike as a dovish one that is designed to get ahead of the inflationary impulse and show it means business, but is not about to start an aggressive tightening cycle. It will be about reducing some of the distortions created post-pandemic and the need to act early before inflation expectations are off the leash and inflation itself becomes more persistent. Sterling is struggling to catch much in the way of a lift from the BoE’s apparent hawkishness and now GBPUSD looking to turn lower with a bearish MACD on the daily chart.

 

The Federal Reserve looks set to announce tapering of bond purchases but will be leaning hard on any notion that tapering is tightening. Powell is likely to reiterate that «a different and substantially more stringent test» is required for interest rates to move up. The team sticky and team transient inflation match is still happening, though team sticky is clearly winning easily and the referee should call it off shortly. On Friday data showed US inflation running at its hottest in 30 years – headline PCE at 4.4% and core at 3.6%.

 

The Reserve Bank of Australia will need to figure out if it wants to abandon yield curve control. Last week saw a broad bond market selloff that saw the yield on Australian 3-yr paper jump above 1.25%, miles above the 0.1% target. It’s all but given up on this, it seems, though the RBA has still been active in 5- and 7-year paper to drive down yields. The question is whether the ditching of YCC begets a change in forward guidance – does it surrender to market expectations and signal it will likely raise rates before 2024? 

Stocks up as earnings optimism wins, inflation expectations higher

European stock markets rose in early trade Friday, set to finish the week largely flat after a little wobble but not a huge amount of movement. Churn seems to the be order of the day after a decent run up for the FTSE 100, which hit its best level in about 18 months last Friday. It’s not far off that level this morning.  Bit of a double whammy for UK this morning with the Bank of England chief economist warning inflation will exceed 5% and retail sales falling again. Stagflation vibes but sterling holding on ok and 2yr gilts back off their recent highs, though the wires just flashed the UK 10-year breakeven inflation rate has risen to its highest in 25 years. A GfK report showed consumer inflation expectations jumping to a record high. That’s what the Bank of England is expressly trying to avoid. Asian shares were up as Evergrande repaid a missed dollar interest payment. IHG shares off 2% despite a rebound in bookings thanks to Brits doing more holidaying in the UK, Sainsbury’s also lower as it abandons plans to sell its bank.

 

The S&P 500 closed at a record high and made it seven straight days of gains amid a mood of positivity around earnings. It ends a two-month pullback that saw it decline a modest 6% before recovering. Rates are higher – US 10s at their highest since May at 1.7% and 2s at a year high, curve flatter. The 10yr TIPS breakeven inflation rose above 2.61% to hits its highest since 2012. But investors are shrugging off inflation and expected central bank policy moves because of earnings growth being more positive than thought. Tesla shares rose to a record after earnings beat expectations. Energy and financials lagged, megacap tech did the lifting +1% (FANG+TM up 1%). Again slower growth, higher inflation supports growth stocks as real growth is at a premium. A steep drop for IBM prevented the Dow Jones from rallying.

 

Not a huge move in FX this morning – dollar index around the 93.60 area, major pairs stuck to well-worn levels. GBPUSD is trying to regain 1.38 and make a fresh stab at what looks like a near-term top around 1.3830 – the high of each of the last three days.  

 

Donald Trump + social media + SPAC. It feels like a kind of reassuringly volatile mix. Trump is launching his own social media platform called TRUTH Social. It needs capital letters, of course. I’d maybe even suggest ‘TRUTH! SOCIAL!’ might be more appropriate. Banned by Twitter and Facebook, Trump is taking on the Silicon Valley elite and fake news in the way he knows best. Shares in Digital World Acquisition Corp. (NASDAQ: DWAC), the Spac that merged with the platform company, soared as much as 400% and had to be halted at one point amid very heavy volume. Trump still sells. The stock finished up 357% at $45.50.  

 

I can’t see the majority of people ditching their FB and Twitter accounts for this. But you can see a large chunk of disaffected Americans, chiefly Republican/Trump voters, giving it go. I don’t think this ends the dominance of the other platforms, but tells you a lot about what a lot of people think about the platforms they use. “I created TRUTH Social and TMTG to stand up to the tyranny of Big Tech,” says DT. “We live in a world where the Taliban has a huge presence on Twitter, yet your favorite American President has been silenced. This is unacceptable.” He’s got a point. 

 

If you don’t have a controversial ex-President to back your social media platform, you have to rely on more mundane things like advertising revenues to drive cash flow. So poor Snap shares collapsed overnight as third quarter revenue expectations missed expectations after Apple’s iPhone privacy changes hit the advertising business. Daily active user growth was sluggish and the company warned of the global supply chain problems and labour shortages hitting advertising demand. Shares plunged by more than 21% after hours. Facebook and Twitter both dropped by more than 4% in sympathy.  

 

The Federal Reserve has banned individual stock purchases by top officials and outlined a broader set of restrictions on their investing activities. These will ‘prohibit them from purchasing individual stocks, holding investments in individual bonds, holding investments in agency securities (directly or indirectly), or entering into derivatives’.

The move came as it emerged that Fed officials were warned on March 23rd, 2020, to observe a ‘trading blackout’ for a period of ‘several months’ due to recent and likely upcoming actions by the Fed. The same day, the Fed did its ‘everything it takes’ moment by committing to open-end bond purchases “in the amounts needed to support smooth market functioning”. If you, say, knew the Fed was about to provide the ultimate backstop to the stock market, it would be useful, I assume. I figure that if you owned a tonne of stocks you’d find it valuable to know what the Fed was about to do or not do. Which is why it obviously stinks that Fed members have been allowed to trade individual stocks at all. Messrs Kaplan and Rosengren were trading again within weeks, not months, of the memo date. 

 

If you read the memo a certain way it just sounds like the ethics people were actually just trying to offer some good advice – don’t do any unnecessary selling, we got this: “In light of the rapidly developing nature of recent and likely upcoming (Federal Reserve) System actions, please consider observing a trading blackout and avoid making unnecessary securities transactions for at least the next several months, or until FOMC (Federal Open Market Committee) and Board policy actions return to their regularly scheduled timing.”

Stocks look heavy, Barclays down despite beat, Unilever rallies on prices

Caution is the order of the day…European stock markets fell moderately in early trade as the risk-on rally that powered Wall Street to fresh all-time highs ran out of steam overnight. Major bourses –0.5%, with the FTSE 100 under 7,200 again and the DAX under 15,500. The yen rose and Japanese equities fell, leading a broad decline in Asian equities overnight as Evergrande shares resumed trading and promptly plunged 13%. US futures are lower after the Dow Jones industrial average recorded a fresh all-time high and the S&P 500 notched is sixth daily gain on the bounce as investors looked through inflation and central bank fears to better earnings.

The Dow rose to a record intra-day high of 35,669.69, but finished the day 0.1% off its record close, gaining 0.4% for the session. As noted here recently, it might just be that the market has passed peak in/stagflation worries, even if the situation is going to be evident in the real economy for many months to come. Earnings are generally beating expectations – 84% so far according to FactSet. As commented on last night, growth is stalled – the Atlanta Fed’s Q3 GDP estimate is down to just 0.5% from +6% in the summer; inflation is running at +5% at least – German producer price inflation is running above 14%; and the yield curve is inverting, but ‘stonks’ just keep on rising. Rates flattish close to multi-month highs today – as noted yesterday there has been some mild steepening in yields, 2s/10s at 1.25%, 5s30s at 0.96.

Travel stocks are doing a little better in early trade with IAG, EasyJet +1% after posting sizeable losses yesterday as the UK signalled it could reintroduce some restrictions, whilst rising case numbers will make the country less accessible to many foreigners.

Oil is a little lower this morning after moving to fresh multi-year highs overnight – WTI just a shade under $84, Brent hitting $86 a barrel. US inventories were bullish with big draws for distillates and gasoline. Global inventories still falling, India is again calling on OPEC to pump more. Reports indicate Exxon is debating abandoning some of its biggest oil and gas projects.

Tesla earnings beat expectations, but the stock fell. Insiders have been selling the stock ahead of the earnings release, which maybe tells you something. EPS rose to $1.86 vs $1.59 expected on a record revenue quarter. gross margins improved – 30.5% for its automotive business and 26.6% overall. Vice president of vehicle engineering Lars Moravy struck a more conciliatory tone about the NHSTA than his boss: “We always cooperate fully with NHTSA.”

Unilever products are just about everywhere in just everyone’s homes. So, when they raise prices it usually affects a lot of people. Unilever raised prices by an average 4.1% in the third quarter across all its brands, helping it to achieve underlying sales growth of 2.5% despite sales volume declining 1.5%. Turnover rose 4%. The company said it is taking action to “offset rising commodity and other input costs”. Share rose over 2%, delivering a boost to the FTSE 100.

Barclays said profits doubled in the third quarter as a strong performance at its investment bank and further reduction in Covid-era impairments boosted earnings. Attributable profit rose to £1.45bn, up from $611m for the same quarter last year. Return on tangible equity returned to a more normal 11.9% from the 18.1% in the previous quarter. Provisions for loan losses fell to £120m as the economic recovery continues to ease pressure on banks.

CEO Jes Staley touted “the benefits of our diversified business model” as Barclays posted its highest Q3 YTD pre-tax profit on record in 2021. Pre-tax profits at the investment bank rose a mighty 51% to £1.5bn, well ahead of expectations. Staley also pointed to consumer recovery and better rate environment. But does Barclays get enough credit for the investment bank earnings? Despite driving the performance in a fashion similar to some of the big Wall Street beasts it seeks to emulate, shares continue to trade at a hefty discount. Barclays trades at a price to book of about 0.5, whilst US peers are above 1, with BoA at about 1.5 and JPM closer to 2. But if investment banking revenues were not that sustainable and ‘can’t be counted on for future quarters’, why do it? Certainly they are more volatile quarter to quarter – revenues from equity trading, M&A and advisory fees cannot be counted on in the coming quarters to the same extent that mortgage fees and credit card fees might be. But discounting these entirely seems like a mistake by investors. Barclays rightly touts its 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. Barclays is reaping the benefits.

After a softer day on Wednesday, the dollar is a tad firmer this morning as risk is on the back foot. Yen also stronger. GBPUSD tests 1.38 support – daily candles suggest near-term top put in at 1.3830 area and maybe calling for pullback towards lower end of the rising channel. Hourly chart points to declining momentum. Test at 1.3740 for bulls.

GBPUSD Chart 21.10.2021

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  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Programa de Indemnización para los Inversores (ICF) de hasta 85.000 GBP
    * en función e los criterios y la idoneidad
  • Cobertura del seguro de 1.000.000£**
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Cotizaciones de spread
  • Creador de estrategias

Markets.com, administrada por Finalto Trading Limited Regulada por la Autoridad de Conducta Financiera («FCA») con número de licencia 607305.

ASIC (Australia)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Verificación electrónica
  • Protección de saldo negativo
  • Cobertura del seguro de 1.000.000$**

Productos

  • CFD

Markets.com, administrada por Finalto (Australia) Pty Limited. Tiene el número de Licencia de Servicios Financieros Australianos 424008 y está autorizada para prestar servicios financieros por la comisión del Mercado de Valores de Australia («ASIC”).

Al seleccionar uno de estos reguladores, se mostrará la información correspondiente en todo el sitio web. Si desea ver información para otro regulador, selecciónelo. Para obtener más información, haga clic aquí.

**Sujeto a los Términos y condiciones correspondientes. Consulte la política completa para obtener más información.

Marketsi
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Whether you’re investing for the long-term, medium-term or even short-term, Marketsi puts you in control. You can take a traditional approach or be creative with our innovative Investment Strategy Builder tool, our industry-leading platform and personalised, VIP service will help you make the most of the global markets without the need for intermediaries.

Share Dealing in the Markets Group is only offered by Safecap Investments Limited regulated by CySEC under license number 092/08. We are now re-directing you to Safecap’s website.

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