Omicron fears weigh on crude oil

Previously bullish oil markets are now reacting with fear to the Omicron variant. Its spread could be bad news for crude prices going forward.

Crude Oil trading

Oil prices buckle under Omicron

It’s been another tricky week for crude oil.

Both WTI and Brent benchmarks underperformed, starting the week on the back foot, making small gains across Monday into Tuesday.

As of Tuesday 21st December, West Texas Intermediate futures were trading sideways at around $68.95.

Brent futures were down around 0.5% at the time of writing. They are currently trading for roughly $71.56.

Rising Omicron cases worldwide and a generally uncertainty over lockdown protocols seems to be causing a wobble in a previously confident oil market.

The enhanced volatility may also cause OPEC+ to have a rethink of its output policy in January. The cartel committed to its monthly 400,000 bpd output hike in its December 2021 meeting. But if travel restrictions come into place worldwide, demand for oil could sink again.

OPEC+ said it expects world oil demand to average 99.13 million barrels per day (bpd) in the first quarter of 2022 in its monthly oil market report. That is an increase of 1.11 million bpd from its November forecast.

“Some of the recovery previously expected in the fourth quarter of 2021 has been shifted to the first quarter of 2022, followed by a steadier recovery throughout the second half of 2022,” OPEC said in the report.

“Moreover, the impact of the new Omicron variant is projected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges.”

Rising inflation is playing its part too. With a weaker dollar, prices may struggle.

US rig counts continue to rise too. This may also be contributing to weaker prices as the year comes to a close.

According to Baker Hughes, the count rose by four in the week ending December 10th. 475 oil rigs are now operational across the United States. That said, the States’ crude output is still some one million barrels per day lower than pre-pandemic levels, but it is slowly creeping up.

Either way, the impact of Omicron is yet to be properly felt worldwide. Data from South Africa, where this new COVID strain originated, shows that Omicron is highly infectious, but not necessarily any more deadly than Delta or other strains.

Vaccine booster rollout will take on extra importance for oil worldwide. Let’s hope a third shot can help us all return to normality sooner rather than later.

Tighter inventories give some hope to oil

Helping stop prices falling through the floor were tighter US oil inventories.

The EIA reported a crude inventory draw of 4.6 million barrels for the week ending December 10th.

At 428.3 million barrels, crude oil inventories remain 7% below the five-year average for this time of the year. Last week’s draw compares with a modest 200,000-barrel decline in crude inventories for the previous week.

US gasoline demand seems to be robust too. This is despite prices at the pump rising over 60% across the year. However, high gasoline demand shouldn’t really be too surprising. US city infrastructure and road networks basically necessitate personal vehicle use, so it appears American consumers don’t really have much of a choice but to swallow high costs.

According to the EIA report, Gasoline inventories fell by 700,000 barrels during the review period. This compares favourably with a 3.9m barrel build-up seen in the week prior. Total gasoline inventories are now about 6% below the five-year average for this time of year.

The latest EIA stockpile data, this time for the week ending December 17th, are reported on Wednesday 22nd December.

Mixed open for European equities after strong Wall Street rally

I paraphrase a line from the excellent cartoonist Bob Moran to note there are people out there who are now absolutely certain that the government has been relentlessly lying to them for 20 months, and yet still do exactly as they are bid. There is a ‘market’ theme to this: the seriousness of omicron does not necessarily correspond to the responses of both government and the public to the perceived risk. As my friend Helen Thomas of BlondeMoney explains in our forthcoming Markets.com 2022 preview – The Year of the Fringe; new variants – whatever form they take – means the velocity of people will remain impaired, which has long-term consequences for the economy and, therefore, stocks. Hoping for the best but preparing for the worst will see consumers modify their behaviour and businesses adjust their operations even without mandated restrictions, she writes. Governments will continue to dangle various threats in front of their populaces to keep them in line. Europe has already entered a ‘papers please’ world; let’s pray that during the season of goodwill to all (yes, even the unvaccinated!), we can find a way to simply exist without fear of or from our neighbours.

 

It’s been a cautious start to trade in Europe this morning after a solid rally in the previous session has led markets to pause for breath. After 1.5% gain for the FTSE 100 and a 2.8% gain for the DAX, it’s hardly surprising we are seeing a bit of restraint in early trade – London and Paris were mildly higher, Frankfurt mildly lower. Into the first half hour of trade though the wheels were starting to turn a little more in the right direction with the DAX going green and the FTSE advancing 0.5% to within a few points of its post-pandemic high at 7,400 where there is a fair bit of resistance.  

 

US markets rose for the best day since March and the best two-day gain for the S&P 500 since May – the market apparently happy to discount any omicron fears. Tech stocks led the way, with a 3% gain for the Nasdaq, and a 2% rally for the S&P 500 to leave it within 1% of its all-time high. Momentum was bid after being oversold – ARRK enjoying a 5% rally, whilst Tesla added 4%. 

 

Too optimistic? Stock markets seem to have decided that omicron won’t be that bad for the global economy. A negative headline can change the mood quickly. Pfizer suggests omicron reduces antibody protection for people who have received its vaccine. Real-world South African data indicates it’s a lot less severe. On the whole, rotation magic can keep the wheels turning in the right direction and dip buyers are still aplenty. Covid has not stopped the market from reaching all-time highs – be that US, European or Global shares. The FTSE 100 remains the laggard here due to its prehistoric makeup, but that can change next year as we look for banks and energy to do well.

 

After the Reserve Bank of Australia shifted its forward guidance to open the door to an earlier rate hike, it’s the turn of the Bank of Canada. A very positive jobs report last week and signs of strong growth and rising inflation suggest the central bank will not veer from its slightly more hawkish messaging. Today is the moment to set its stall out for a rate hike early next year. Also on tap today are the JOLTS job openings in the US, crude oil inventories and a US 10yr bond auction. API figures showed a draw of 3m barrels last week, with the market consensus for today’s EIA data for a draw of 1.5m barrels.

European stocks lower after Wall Street falls on first omicron case in the US

News flow sensitive: It was a strong day for European equity markets on Wednesday – the FTSE 100 rose almost 1.6% for its best day in four months, while the DAX rallied 2.5%, its strongest session in eight months. Bourses across the continent rallied firmly as markets paid back much of the faster-taper/stickier-inflation narrative from Tuesday: getting a grip on inflation is no bad thing. Also, the market seemed to be buying more into the idea that we shouldn’t panic over omicron.  

 

Or is it? European markets declined ~1% in early trade Thursday, taking their cue from a soft session on Wall Street. US markets tried to bounce, rising firmly at the open, but ended sharply lower as California confirmed the first omicron case in the US. Panic? Not quite but certainly concern and uncertainty produced a pretty wild session of swings. The S&P 500 traded through its 50-day moving average where there is supposed to be lots of support around 4,530, closing at 4,513, having traded as high as 4,652. Quite how the market would move so swiftly when it’s a certainty that omicron is everywhere is unclear, but shows the acute sensitivity equity markets have to the Covid news flow – more like 2020 than 2021 in some ways.  

 

Or is it? Australia’s health chief is the latest to say there is no evidence omicron is any deadlier. “Of the over 300 cases that have now been diagnosed in many countries, they have all been very mild or in fact had no symptoms at all,” the chief medical officer, Paul Kelly, said. Hardly a reason to panic – but markets are responding not to the virus itself but the response of governments and of change in people’s behaviour. Monetary policy is heading in the opposite direction to accommodate, ammo well and truly spent, and the fiscal response is not as straightforward as it was in 2020. Just as well it’s not going to have the same economic impact as before…fingers crossed. GSK shares inched up as it said its Covid antibody treatment is still effective against the new variant. Meanwhile, against all this, we have talk of Russian troop build-ups near its Ukraine border and Nato suggesting we should prepare for the worst. 

 

We had more from Jay Powell in his second day of testimony on capitol hill. There was lots more about speeding the pace of tapering, on inflation, about the retirement of the phrase ‘transitory’ and what they meant by that term the first place. But the best for me was: ‘We are not at all sure of inflation forecast’. No, really? You’ve nailed it thus far…I have every confidence.  

 

Before the CDC confirmed the omicron case the market liked a cooling in inflation component of the latest ISM Manufacturing PMI, which overall still showed strong expansion. The prices paid index declined to 82.4 versus 85.7 in October. New orders and employment both rose. A business roundtable index showed overall confidence at a 20-year high – though naturally this was just before the omicron variant emerged to unsettle markets. 

 

As an aside, lots of rotation has been a hallmark of 2021 – most stocks have had a drawdown of 10% or more at some point this year. Just the indices haven’t reflected this because there has been so much internalisation of the buying and selling and this incremental grind higher for various reasons: FOMO, TINA, whatever you call it. Pullbacks or even shakeouts can be useful for the market not only to allow new entrants but also to reset expectations. We’ve now had 2/3 good shakeouts – trapped supply above will prove resistance, but this might be a useful reset ahead of Christmas. 

 

In short the market remains acutely sensitive to anything about omicron and will respond on pos/neg headlines with abandon, which makes positioning difficult – a market that will cut both bulls and bears. Sector wise, healthcare and consumer defensives won out yesterday, quality tech provided some resistance with Apple and Microsoft barely declining. Momentum was a problem with ARKK down almost 7%, almost 40% below the all-time high struck earlier this year. This is mirrored today on the FTSE with the likes of Unilever and United Utilities among the few risers. Shell and BP also higher as crude rallied 1% though oil remains under a heap of pressure with OPEC+ set to meet today to decide on whether to increase output by 400k bpd in January. A pause in the loosening of output controls would help sentiment in the market and is increasingly expected.  

 

WTI (Jan) found new resistance at the new 23.6% retracement area, not indicative of much bid coming in yet. Speculative positioning will remain weak until this clears out.

Oil Chart 02.12.2021

Transitory is retired

So, ‘transitory’ is being retired. At last, you might say. It’s been clear for months that inflation would not prove as transitory as central banks told us. But how come so many of us in the market could see it and they couldn’t? And who knows how much damage has been done? Fed chair Jay Powell said it’s «a good time to retire that word», whilst admitting that the economy is strong and inflation high. He also said the Fed would look to speed up the pace of its tapering of QE – cue expectations the Fed will raise rates sooner. The Fed fell behind the curve and is now in an invidious position where it’s going to need to tighten monetary policy during a slowdown. It should have acted far sooner. Bond yields are on the move and we are seeing a swift flattening of the curve 10s down on economic fears, 2s up on bets the Fed will tighten sooner. Not the prettiest picture for risk assets, so stocks fell. Higher short-term yields are also weighing on gold.

 

Markets have other things to worry about right now – omicron is a big concern, clearly. Powell’s comments did little to soothe market concerns; pointing to how this is very different to March 2020 in more ways than one: CBs don’t have the firepower to call on that they did back then. Just as well that omicron is barely comparable with the first wave. Stocks sold off further, oil retreated with WTI sinking below $65. Both are back up this morning, enjoying something of bounce in early trade on the first day of the new month – though risk appetite is clearly shaky. We need to see at least another sell-stop washout before the low is in. Volatility is high and will remain so until more is understood of omicron – my bet is that’s going to a passing concern and markets can rally. But omicron headlines will drive price action in both directions for a couple more weeks. European stock markets are broadly higher, the FTSE 100 seeing near-term resistance at 7,140, the 38.2% retracement area of the recent selloff. 

 

Indications from Israel suggest people who have had three doses are reasonably well protected from the new variant. Cue the UK and others ramping up their booster programmes. Meanwhile, all the evidence thus far (it can change) says the symptoms are relatively mild – at least not more severe than other variants. Cases in the UK are coming down, as are hospitalisations and deaths. But as we know it’s not so much about the actual impact of the disease as it is about the policy response, which once again has rested on a combination of authoritarianism and stoking fear.  

Stocks trade lower in wake of Powell nomination, Europe’s Covid surge

After a kneejerk bounce to fresh all-time highs, stocks on Wall Street ended the day lower as investors decided that Jay Powell is likely to tighten monetary policy more swiftly than Lael Brainard would have done. Quite how the market is reading so much into this reappointment is kind of hard to work out. Bond yields ticked up, with the policy-sensitive 2yr note rising to its highest since March 2020; the dollar rose to a new 16-month high and has held gains as of this morning; gold tumbled as yields climbed; financials and energy rose and tech stocks fell, dragging the broad market lower. Cyclicals helped the Dow Jones hold on to a tiny gain. European stocks have fallen this morning following the weaker US session, whilst the Covid spread is another factor likely weighing on sentiment. Reasonably upbeat PMIs this morning don’t reflect the shift in Europe we have seen over the last fortnight. Bond markets remain under pressure this morning with the US 2yr note trading at 0.63%, having yesterday jumped 8bps to 0.58%.

 

Markets now price in a full 25bps hike by June 2022. Are markets right to think the Fed is suddenly going to be more hawkish? Richard Clarida suggested last week the Fed could speed up the pace of its tapering – was this more of a signal shift than at first assumed? Yesterday Powell seemed to flag inflation as a concern: “We know that high inflation takes a toll on families… We will use our tools… to prevent inflation from becoming entrenched.”

 

As noted yesterday, the hawkish reaction to the news seemed odd, for a couple of reasons. Firstly, Powell has hardly been a hawk and the appointment means continuity; secondly the odds on Brainard were quite long. Nevertheless, the market seems to have taken the Powell nomination as something of a signal; broadly speaking we might say that the Fed and, more importantly maybe the White House, are starting to recognise the danger of inflation the longer it stays high. Janet Yellen, Treasury Secretary, told CNBC that inflation has reached a level that “concerns most Americans” and that the Fed needs to play an important role to make sure that inflation “doesn’t become endemic”. I guess we could be in the middle of a policy adjustment of sorts, but it’s mainly tinkering at the margins – whether the Fed hikes by June or July is kind of irrelevant. We must also consider a degree of ongoing uncertainty around a number of open governor and regional chair positions, which makes the outlook for 2022 a little harder to read than usual. Ultimately I don’t see how the Powell-led Fed is more hawkish today than it was last week, but we should always beware linear thinking: even the Fed can adapt and learn from the persistently high inflation. You never know perhaps the Fed – and the White House – are starting to heed some warnings about what untethered inflation can do. In summary, you could say there’s been a whiff of a hawkish tilt at the Fed in recent weeks and the administration is OK with that.

 

Crude remains under pressure, with WTI taking a $75 handle, as the US and other nations are set to release oil from strategic reserves to cool prices. Although such moves are unlikely to exert much of a long-term influence on prices, there is already worries about oversupply into the year end and start of 2022. Rising covid cases and new restrictions are a factor. OPEC+ could adjust its production plan to absorb the excess crude from strategic reserves, but it’s unclear as yet what they plan to do.

 

Profits warnings seldom come alone: AO World shares fell by a quarter after a sharp downgrade to guidance issued only two months ago, which was a also downgrade.  The company warned that growth in the UK has been impacted by the shortage of delivery drivers and the ongoing disruption in the global supply chain, whilst Germany has seen significantly increased competition. Availability of some new products is poor and inflation is biting with higher shipping costs, material input prices. As a result, management warn that current peak trading period is “significantly softer” than was anticipated only eight weeks ago. Full year group revenue is now guided to be flat to -5% year on year, with group adjusted EBITDA in the range of £10m to £20m. As noted of this stock in Oct, it needs high double-digit revenue growth. Margins in a highly commoditized business are wafer thin at the best of times. Now supply chain woes coupled with a shortage of drivers creates some serious headwinds for the stock, which benefitted greatly from the surge in online demand last year. It now faces some new challenges which seem set to perform the double trick of hammering margins and lowering revenue growth. 

 

Pets at Home shares rose on a decent set of interim results as the company posted group like-for-like (LFL) revenue growth of 22.2%, or 28.6% on a 2-year basis. Total group revenue growth of 18% to £677.6m. Profit before tax rose 77.2% to £70.2m, with growth of 68.3% on a 2-year basis. Free cash is up more than 50% to almost £92m. Basically, everyone was bored in lockdown and bought a puppy and most people have been decent enough human beings to continue to look after them. Or as management put it today: “The stronger than expected and continuing growth in the pet population over the past eighteen months is materially increasing the size of our addressable market.” 

 

Shares in Compass Group fell despite the company saying it should be back to pre-Covid operating margins next year. Margins improved to 5.8% in the fourth quarter (4.5% for the FY) and the company said it anticipates FY22 underlying operating margin to be over 6%, hitting 7% by the end of the year. Still revenues are stubbornly low despite the Healthcare & Senior Living and Defence, Offshore & Remote sectors performing well above pre-pandemic volumes. Underlying revenue recovered to 88% of 2019 revenue by Q4. FY underlying revenue is at 77% of 2019. Still nursing the lingering effects of the pandemic – a long Covid sufferer as people, particularly in business, office work, spend less time face to face. 

Vaccination shares: GSK vs Moderna

Moderna and GlaxoSmithKline represent two interesting paths pharmaceutical stocks have taken this year. We examine the GSK share price and Moderna shares to see which has come out on top – and what the future holds for both.

GSK shares & Moderna

Examining the GSK price

GlaxoSmithKline’s fortunes in 2021 have been up and down. While competitors like Pfizer and AstraZeneca have enjoyed major share price growth across the pandemic, GSK stock hasn’t been so reactive.

At the time of writing, the GSK share price is around £14.35. Before the pandemic, GlaxoSmithKline shares had peaked at £18.42 in January 2020. Since then, it’s been a tale of ups and downs. Shares fell to a new low in February 2021, but as we can see from the current price, progress has been made since then.

News came in June from CEO Emma Walmsley that GlaxoSmithKline is currently in the progress of separating its core pharmaceuticals business from its consumer goods side. New GSK, taking over pharmaceuticals, and the spin off, which will be listed on the London Stock Exchange, will remain linked with New GSK taking a 13.6% share of the new entity.

The whole plan could put GSK share price back on a growth footing. After the separation, New GSK is aiming at annual sales growth of over 5% between 2021-2026. Underlying profit growth is targeted at 10% in the same period, hoping to generate £33bn in sales by 2031.

That’s the mid-to-long term outlook. One thing that may put off investors is the GSK’s updated dividend payment scheme. The company has stated it will pay shareholders a dividend of 55p per share in its new form – down from the 80p investors used to enjoy.

Shares rose 2.8% after the demerger plans were announced at the tail end of June. The plan is ambitious, but some analysts believe this may not be enough to support GSK share prices in the long run. Questions over CEO Walmsley and her senior team are being raised as, under Walmsley’s tenure, GSK has struggled to take off compared with some of its competitors.

What about Moderna shares?

Moderna shares, on the other hand, are having a much better 2021 than GSK’s.

Share prices have risen 125% across the first six months of the year. Moderna’s mRNA-1273 vaccine is one of the most widely distributed inoculants used to combat the Covid-19 virus.

Moderna is nearing an $100bn market capitalisation. Its product revenue has grown from virtually nil at the start of the pandemic to around $1.7bn – purely driven by vaccine sales. Given the company is just 11 years old, Moderna can be considered one of the biggest beneficiaries of the Covid-19 pandemic.

Moderna shares are currently trading at $246.66 – up 4.8% in daily trading as of 15th July 2021.

While this is all amazing in the short term, what about the longer view? Moderna product-generated revenues were small to low at the beginning of the pandemic. While it was able to create a product in huge demand quickly and effectively, there are concerns that revenue growth, flagged at a $21bn top end for 2021, could not be sustainable.

However, Moderna’s executives are hopeful its technologies and research can help provide solutions for other diseases in the future. The company is looking to leverage its Covid expertise into other respiratory disease vaccines such as Respiratory syncytial virus (RSV) and cytomegalovirus (CMV).

Betting on other pandemics, however, is possibly not a smart bet. While Moderna is pushing ahead with trials on some vaccinations that could prove effective should we see other wide-scale breakouts, a lot of its experimental products are still in the early stage.

Comparing Moderna shares & GSK

What can we glean from the above?

A couple of things. Moderna’s ability to capitalise quickly on the Covid-19 situation, helped by emergency authorisation of its vaccine, has led to huge yearly and 6-month gains. The company is close to reaching a new all-time high market cap and will probably remain so.

It’s during the transition out of the pandemic and if Moderna can swing into sustainable revenue generation from its product side to bolster regular operations that will be really telling here.

Switching to GSK, it has come out with a fairly radical plan of action. It has set itself goals that, while ambitious, are fairly achievable for the company’s size and scope. Crucially, in the long term, GlaxoSmithKline doesn’t seem as tied in with the pandemic and its progression as Moderna.

If you are looking into trading or investing in Moderna or GSK stock, then be aware of the current market conditions, share price, and other variables. Only invest if you can potentially afford to take any losses as trading and investing both present risk of capital loss.

US agency questions AstraZeneca vaccine, GameStop earnings on tap

You could be forgiven if you suffer value fatigue; it can be a long slog, all this ‘vaccine optimism’ and ‘reopening hopes’, for the beleaguered value investor. You’d also be forgiven for Covid fatigue; I think we have all done more than our bit to ‘protect the NHS’ over the last 12 months. And on this sorry topic there’s another headache this morning for AstraZeneca bosses as a US health agency questioned the Oxford vaccine with the ink barely dry on the company’s press release announcing the very high safety and efficacy of the jab in long-awaited US phase 3 trials. Shares fell 1% in early trade.

The National Institute of Allergy and Infectious Diseases (NIAID) said late Monday it was notified about concerns about initial data from the trials. The Data and Safety Monitoring Board (DSMB) ‘expressed concern that AstraZeneca may have included outdated information from that trial, which may have provided an incomplete view of the efficacy data’. I may have left the toilet seat up, I may not have. It didn’t say much else, except urging AstraZeneca to work with the DSMB to ‘review the efficacy data and ensure the most accurate, up-to-date efficacy data be made public as quickly as possible’. More doubts won’t do the vaccine any favour – another PR problem that will cost lives. This will not do any favours for getting this shot into people’s arms – it’s not just the rollout by government, it’s people’s willingness to get it. And on that note Europe sits on large stockpiles of the Astra vaccine as countries cannot get the jab into arms.

European shares are lower this morning after a muted Asian session with the major bourses off about half a percent in the opening minutes. Travel & leisure stocks were near the bottom of the Stoxx 600 as the UK extended a foreign holiday ban until the end of June. IAG, TUI and Carnival fell about 3-4%. WH Smith – dependent on travel earnings more than the high street these days – also declined more than 3%. US markets closed higher on Monday, led by the Nasdaq gaining 1.2% and the S&P 500 up 0.7%. Futures point to a weaker open later. Powell and Yellen are in front of the House Financial Services Committee to talk about stimulus. FOMC member Lael Brainard also talks later today.

MOAR: Joe Biden’s team is looking a $3 trillion plan for the US economy that will feature massive investment in infrastructure, green energy and education, as well as tax hikes. This fits in with his manifesto pledge, but I thought he may have taken longer to get to this point given the $1.9tn stimulus package for Covid relief has just been launched. This package would be another enormous injection of stimulus to the economy.

Tesla rose 2%, but at one point traded about 10% higher, after a bullish report from ARK Invest. Tesla is a 10% holding in the Innovation ETF (ARKK). ARK says Tesla will reach $3000 by 2025. That is not even the bull cash ($4,000), whilst the ‘bear’ case implies a mere doubling or more to $1,500. ARK uses a Monte Carlo simulation to get there, which is aptly named since it is basically a case of spinning the wheel and see what number you land on. Actually it’s more like keep spinning until you get the number you want. Investing should not be a game of roulette. You can read the full report here. If you like this I have a bridge to sell you.

GameStop reports earnings tonight. Analysts expect revenues to rise 2% year-on-year to $2.2bn, with earnings per share seen up 15% at $1.46. Dry earnings figures don’t really do it justice; these are the first earnings since the Reddit-inspired trading frenzy sent the stock skywards, sank Melvin Capital, put RobinHood in the dock and made Roaring Kitty famous well beyond the /wallstreetbets crowd. No one really cares about these earnings; they do care about what resource will be required for turning GameStop into the ‘Amazon of gaming’ – the more the board seeks to raise the better in many ways. Traders will be wanting to hear about any plans for capital raising, and more about the new ecommerce strategy.

Meanwhile, the FT reports WeWork announced losses of $3.2bn last year as it pitched for a SPAC listing and $1bn investment. Get this though: WeWork’s losses narrowed from $3.5bn burnt in 2019 because it slashed capex to the bone because of the pandemic. Investors who might have got swept up in a WeWork IPO in 2019 will be grateful the listing got pulled. Now SPACs mean it’s even easier to go public and I’m sure they will find some willing backers for this serviced office provider tech platform. Barge pole springs to mind.

Bitcoin is lower, testing the bottom of the recent range around the 23.6% retracement level after Federal Reserve chair Jay Powell warned that the asset is not a good store of value. “They’re highly volatile and therefore not really useful stores of value and they’re not backed by anything,” Powell said at a digital banking panel. “It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar.” ‘More a substitute for gold’ supports a certain bullish thesis we’ve been noting for some time, albeit the only reason you own Bitcoin is in the hope it will rise in value.

Bitcoin is lower, testing the bottom of the recent range.

Gold is trading sideways as yields are not doing an awful lot so far this week.

Gold is trading sideways as yields are not doing an awful lot so far this week.

Soft start for stocks, Deliveroo sets price for IPO, Turkish lira falls

European stocks stumbled out of bed this morning after a weak close on Wall Street on Friday and mixed picture in Asia, whilst rising coronavirus cases and fresh lockdown measures are sapping confidence. Germany is considering extending lockdown as the number of new cases exceed the rate at which ICU bed start to run out, whilst France has already reimposed restrictions. But after an hour of trade the DAX traded about 100pts off its lows, just in positive territory, whilst the FTSE 100 also recovered some poise over the first hour of trade but remains negative. On Friday, the Dow closed more than 234pts lower as JPMorgan and Visa weighed. The Nasdaq rose 0.8% as investors chose to buy the dip in tech stocks. US 10-year Treasury yields rose to 1.72% after the Federal Reserve said it would not extend SLR exemption but are a tad under 1.69% this morning. 

 

The US trial of AstraZeneca’s vaccine shows the jab is both safe and very effective. Astra reports this morning that the phase 3 trial showed 79% efficacy at preventing symptomatic COVID-19, and importantly delivered 100% efficacy against severe or critical disease and hospitalisation. This ought to help the rollout in Europe, but you can take a horse to water and all that…a survey from YouGov shows that the constant undermining of the vaccine has hurt confidence in the jab among people in Spain, Germany, France, and Italy. Hopefully, this puts to bed any doubts, but I suspect it won’t. Shares rose about 1% in early trade.  

 

Airlines and travel stocks fell as it becomes increasingly likely that the travel season will be impaired by the pandemic as cases in Europe stubbornly rise and the UK could extend its international travel ban. Government aides have suggested that summer holidays this year will be ‘extremely unlikely’ because of the risk of bringing variants home. The current roadmap for exiting restrictions has May 17th as the earliest start date for foreign travel to resume, however it looks as though this may be pushed back by some weeks and may well depend on the vaccination progress in Europe above all. IAG –6%, EasyJet –6%, TUI –7%, Ryanair –6% in early trade. A lot of these travel stocks have had a healthy run up in recent months due to hopes that the summer season would be fine – increasingly it seems international travel is going to be badly affected this year despite the vaccine success.  

 

At the other end of the FTSE 100 this morning, Kingfisher rose over 3% following another strong set of results as consumers continue to focus on DIY during lockdown. Sales rose 7% in the year to January, while adjusted profits were +44% higher. This was a very strong performance across both the UK & Ireland and France. However, management warn that sales growth will slow this year. 

 

Deliveroo set the price range for its initial public offering in a range of £3.90 to £4.60 per share, implying an estimated market capitalisation of between £7.6 billion and £8.8 billion. This is higher than previously expected and makes it the biggest IPO in London for some time. The prospectus will be released later today. Accompanying this update, Deliveroo said the total value of transactions (GTV) were up 121% year on year in January and February. This marks a significant acceleration from the +64% growth run rate through 2020 and indicates that the £5bn estimated GTV in 2021 could be easily exceeded. (GTV is one of those new metrics that tech firms like that you will need to get used to for Deliveroo – it is defined as the total value paid by consumers, excluding any discretionary tips. GTV comprises the total food basket, net of any discounts and consumer fees. 

 

Trouble in Turkey: the Turkish lira tumbled after president Erdogan removed the country’s hawkish central bank chief. USDTRY rose to a high of 8.20, up 14% from Friday’s close around 7.20. The sacking of Naci Agbal raises fears about the path economic and monetary policy, with market participants prepared for rates to be cut and for the re-emergence of ‘Erdonomics’. It raises all sorts of questions about the government’s ability and competence to handle the economic issues facing Turkey. Agbal’s efforts to raise rates to counter inflation, which is still running at above 15%, helped to boost confidence more generally in the country’s assets. The Turkish central bank raised rates by 2% last week on top of 675bps of hikes last year. Shares in some banks with big Turkey exposure like UniCredit, BBVA and ING fell. 

 

Looking ahead to this week, the focus will remain on bond yields and inflation. In the wake of the FOMC last week the market is toying with just how far rates can go and how fast. This week we have Jay Powell’s testimony on the CAREs Act with Janet Yellen, as well as speeches from Fed members Lael Brainard and Richard Clarida, both of which deal with the “Economic Outlook and Monetary Policy”. They will reiterate how the Fed plans to stay in full accommodation mode until its employment goal is achieved. 

Rotation trade unwinds on new Covid fears, Sterling gaps lower on lack of Brexit progress

  • Pound gaps lower on lack of Brexit deal, border closures
  • US Congress set to pass $900bn stimulus package
  • Rotation trade reverses on new Covid fears

No Brexit deal, a new strain of the coronavirus, stricter lockdowns and the closure of key trade routes to the EU: Merry Christmas everyone. First up sterling and it’s been a very rough start to the Christmas week for the pound, as the lack of a Brexit deal and the closure of key freight routes to Europe knocked sentiment. Brexit talks continue today but key sticking points remain, whilst several European countries have blocked travel from the UK due to a mutant strain of the coronavirus rife in the southeast of England. GBPUSD gapped down from the 1.35 close on Friday to trade under 1.33 again but near-term support emerged at 1.32650. The pound remains on the hook for a severe downside shock if there is no deal by Christmas.

Worries about Brexit and the emergence of a more transmissible new strain which has led to tighter lockdowns unnerved investors as the start of the European session saw heavy selling in cyclical names and a broad 1-2% decline for the main bourses. British banks and others with the most exposure to the UK fell the most on the lack of a Brexit deal and the uncertainty over the UK economy, whilst travel stocks were whacked by the new restrictions on movement. A tougher lockdown in the southeast is also a nightmare for retailers, though those listed entities with a decent online platform will do much better than the family-run shops forced to close. The rotation trade unwound – Ocado and Fresnillo jumped while the likes of Lloyds and IAG fell sharply. Shell shares fell over 3% as it announced it would write down $3.5bn-$4.5bn in oil and gas assets next year, dragging BP lower by 5%.

This is the kind of near-term volatility we can expect until the full force of vaccines is felt. There has been a lot of hope already priced in with the vaccine-inspired November rally so we cannot expect a straight line higher for stocks. Unfortunately, tougher Tier 4 restrictions may be in place until the spring, so corrections of this nature are to be expected. The cavalry may be coming but the homesteaders need to batten down the hatches and face another onslaught before they arrive.

The risk-off tone emerged despite US Congressional leaders achieving a breakthrough on a Covid relief package. The $900bn, which lawmakers think has enough support to pass today, includes $600 stimulus cheques for every individual and enhanced unemployment benefits. US futures traded lower despite the news. Meanwhile, the FDA approved the use of Moderna’s vaccine in the US. Watch for US banks after the Fed said they could resume share buybacks.

Big falls for reopening stocks in the early part of the session.

Big falls for reopening stocks in the early part of the session.

Stocks shrug as Brexit, US stimulus deals remain elusive

  • European stock markets higher after Wall Street sets new record high
  • German business confidence, UK consumer sentiment recovering
  • Brexit and US stimulus deals remain elusive

The two big pre-Christmas deals remain elusive. Brexit talks have hit a roadblock with only a handful of days until the deadline. The European Parliament set a Sunday deadline to see the text in order to ratify it in time. Meanwhile, Congressional leaders say they will work into the weekend to hammer out a Covid relief deal for the US. Rising optimism on both fronts has had to be tempered by the fact there is still nothing on paper.

On the Brexit front, Boris Johnson told European Commission president Ursula von der Leyen that a deal is “drifting away from us” but one could be done if the EU gives ground of fisheries and state aid. Sterling made fresh two-and-a-half year highs against the broadly weaker USD yesterday but has lost steam and pulled back a touch since. The spot market still believes a deal is coming although odds on a no-deal have shortened in the last 24 hours.

Meanwhile, it’s a similar story across the pond as the fiscal stimulus package remains slippery. Senate Majority leader Mitch McConnell said he is no stranger «to December funding deadlines or the occasional pre-Christmas cliff-hanger». Sentiment remains positive though. US markets set fresh record highs again and European markets turned higher again this morning. The German Ifo business climate exceeded expectations at 92.1, while the expectations index also improved to 92.8 vs 92.5 expected. The Ifo noted that the confidence goes beyond manufacturers with even services and wholesalers doing well.

UK consumer sentiment rebounded the most in 8 years according to a survey this morning, indicating how vaccines are already acting to support confidence in getting things back to normal. The GfK consumer confidence rose to –26 from –33 in November. Yet retail sales fell in November as the effects of lockdowns on the economy were felt. Retail sales volumes decreased by 3.8% when compared with October as many shops were forced to close. Despite the monthly fall, overall sales remain above their pre-pandemic levels, the ONS said.

Data was soft yesterday: US unemployment claims exceeded expectations again. Initial claims rose to 885,00 for the week ended Dec 12th, up from 862k in the previous week and ahead of the roughly 800k expected by economists. Claims remain above the level seen in 2008/09 but are down from the >6m or so we saw at the peak of the pandemic. Meanwhile, the Bank of England left rates on hold and delivered no surprises for the market. The MPC voted unanimously to keep the main lending rate at 0.1% and the stock of asset purchases at £895 billion. There was not a lot in this meeting for the market, though there was a clear signal the Bank would ease policy in the event of a no-deal Brexit.

Chart: GBPUSD off its highs struck yesterday but remains well supported as long as a deal is still possible. Asymmetric downside risks in event of no-deal.

GBPUSD off its highs struck yesterday but remains well supported as long as a Brexit deal is still possible.

Chart: EURUSD tests top of the channel, path to 1.25 remains open.

EURUSD tests top of the channel, path to 1.25 remains open.

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