Oversold stocks find some love

European markets rose on Friday morning after a positive handover from Asia in the wake of a solid recovery on Wall Street on Thursday.  Not huge gains on the main bourses but tentative, in the region of 0.15-0.3%. The omicron variant is still the driving force with news flow around its spread and seriousness creating elevated near-term volatility. It’s a bit of a catchup to the US session we are seeing in Europe this morning after a soft close. US futures pointing to flat open after yesterday’s bounce. Fed watchers have the nonfarms today to look forward to but it’s all about inflation now. 

 

Investors are coming back into some oversold names, suggesting they are seeing some buying opportunities if omicron is not as bad as feared: The S&P 500 finished 1.4% higher to recover the 50-day moving average – the area where the market has solidly found support all year. Reopening stocks led the way with big gains for the likes of Delta Airlines, Wynn, Carnival and Norwegian Cruises, suggesting investors thought some of the moves against stocks tied to travel were overdone this week. Banks and energy stocks were strong, helping the Dow to outperform with a 1.8% gain for the day. Not much movement in rates – 10s steady just under 1.5%, 2s nudging higher to flatten the curve.  All in all investors not diving in with both feet to buy this dip but prepared to stick their toes in the water whenever it looks warm enough – ie, oversold enough. Risky game right as this remains a market willing to chop up both bulls and bears.

 

Basic resources lagged in early trade in London with the miners at the bottom, whilst some oversold travel stocks bounced with IAG at the top of the FTSE 100, EasyJet also up. Oil stocks also rose as spot crude prices staged a big fightback in the wake of the OPEC+ decision to press on with raising output by 400k bpd. Oil prices seemed to stabilise as the cartel indicated it could swiftly change policy if there were to be a major hit to fuel demand from the variant. WTI firmly rejected the $62.50 area and now trades around $68.50, yet to recover the Wednesday high around $69.50, the previous 23.6% level. Failure to test the Aug lows could suggest the flush is done and could allow for some consolidation around the $68-71 range. 

 

App-alling: Deliveroo fell 5% in early trade, perhaps on Kynikos Associates founder Jim Chanos revealing a short position in DoorDash, pointing to flawed business models. The argument from Chanos: ‘If you can’t make money as a food delivery firm during the pandemic – then when can you?’, could just as well apply to ROO. Chanos also said he was shorting DraftKings. Also, Thursday saw Asian ‘super-app’ Grab fall 21% on its Nasdaq debut after merging with a special purpose acquisition company. Meanwhile Chinese ride-hailing app Didi Global is to delist its shares in New York and move to Hong Kong following a crackdown by both US and Chinese authorities. 

 

Today’s data sheet focuses on the US nonfarm payrolls report; however, the Fed’s recent hawkish pivot and acknowledgement of inflation risks means the labour market is not the key to guessing monetary policy going forward. Cleveland Fed President Loretta Mester said: “If it turns out to be a bad variant it could exacerbate the upward price pressures we’ve seen from the supply-chain problems.” The comment underlines the sentiment that has emerged in recent weeks from policymakers that the Fed is not about to be more accommodative, even in the short-term, in response to the omicron variant. 

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

Monthly markets recap: Rivian roars, oil falls, Fed lift off?

Here’s a quick look back at some of November’s top market stories.

November 2021 markets recap

Fed lift off soon?

US inflation reached its highest levels for 30-years, prompting markets to ask if a rate hike was on the way.

Federal Reserve Chairman Jerome Powell kept his place after a reshuffle. Lael Brainaird will be taking the Deputy Chair spot. However, that’s not what we’re interested in, although important. Markets want action on high inflation and a tight labour market.

There are indicators that the inflation alarm bell is ringing. As per the Fed’s last FOMC minute releases, policymakers said: “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives”.

Inflation is positively scorching: Month-over-month deflator at 0.6%, up 5% year-on-year, hottest since 1990 and up from 4.4% in Oct. Core up 0.4% m-o-m, up 4.1% y-o-y from 3.7% in Oct, also the highest in 31 years.

The US labour market is tight too. US jobless claims are at their lowest levels since 1969. Jobs are out there, but it looks like there is no one to fill them. With a US nonfarm payrolls print coming, the latest job stats will make for very interesting reading indeed.

Still, markets are now waiting to see what will happen with the Fed when it meets again in mid-December.

Oil takes an Omicron-shaped beating

Crude oil started to slide at the start of November, but towards the end of the month fell off a cliff – all thanks to the newest COVID-19 strain.

The Omicron variant is currently wreaking havoc on global oil markets. WTI and Brent Crude started the week of 30th November on the backfoot after taking a huge tumble on Friday 26th upon the new strain’s detection. At the time of writing, both benchmarks are down around -3.9%.

Traders are now feeling uneasy about oil demand in 2022.

The new COVID-19 strain has also caused a split in OPEC+. The cartel may have to alter or pause its monthly 400,000 bpd production increases upon these lower oil prices. Their passage below $70 is ringing alarm bells for some OPEC members and their allies.

Saudi Arabia and Russia, the cartel’s largest producers, are expected to call for a halt at the December OPEC-JMMC meeting. The UAE, however, is the loudest voice of those member states calling for production to keep going.

Adding to OPEC+’s woes is the fact President Biden has sanctioned some 55 million barrels to be released from the US Strategic Petroleum Reserves. Biden is doing this to cool down rising gasoline prices, which are up over 60% across the year. The UK, Japan, China, India, and South Korea have also dipped into their reserves, bringing the total number of new barrels on the market up to 66m.

A lot of pressure is being exerted on oil right now. It may increase. All depends on the world’s response to the Omicron variant.

Rivian becomes 2021’s largest IPO

California EV start-up Rivian hit the track at high speed when its IPO launched in early November. The carmaker beat expectations by reaching a valuation in excess of $100bn upon its stock market debut on November 11th.

What makes this all the more impressive is the fact vehicle deliveries are exceptionally low at present. Rivian claims it has the capacity to deliver 150,000 vehicles annually, but so far deliveries are less than a third of that.

Rivian also has yet to make any substantial revenue. The company posted net losses of over $1bn in 2020, although much of this can be attributed to the construction of a factory in Normal, Idaho. According to its third quarter results, Rivian said losses for 2021 will come to $1.28bn.

None of this seems to have put off investors. Rivian shares began trading at $106.75 per share – some 37% higher than initial IPO price estimates. The electric vehicle marque was reportedly looking at a $72-74 initial public offering share price before going public.

In the weeks following its public launch, Rivian shares continued an impressive upward trajectory. On the 16th of November, for instance, Rivian reached a high of $179.08. A general slump in EV stocks followed, by the price is still healthy. At the time of writing, Rivian was trading for roughly $120.17.

Where next for Rivian? Tesla is the benchmark, but it will be some years before Rivian can match Elon Musk’s market leader if it ever can. With over $11bn in capital generated from its float, Rivian can now plough on with vehicle manufacturing and factory construction.

Markets spy an $8 trillion metaverse opportunity

You may have heard of Facebook’s parent company changing its name to Meta? This may herald the dawn of a new era – one where the digital and physical worlds begin to blur with the mass adoption of new technologies.

According to Morgan Stanley, the metaverse represents an $8 trillion investment opportunity. Canny tech-savvy stock traders and investors should perhaps be on the lookout for opportunities within this sphere.

But what is the metaverse really? A very quick description would be integrating the digital and the physical through augmented and virtual reality technology. It’s basically a blurring of the internet with everyday life; a highly immersive virtual world where people gather to socialise, play and work.

Morgan Stanley identified several stocks it believes holds the key to the metaverse’s development.

“We remain positive FB primarily because of the still under-appreciated core business growth durability and free cash flow into ’22,” Nowak said. “This is even through an estimated $13.6bn of investment in the metaverse in 2022 to build the next generation version of social networking.”

In addition to Meta/Facebook, Morgan Stanley also earmarked the below stocks, each with an overweight rating, as potential metaverse inroads:

  • Roblox
  • Alphabet
  • Snap
  • Unity Software

Should these 2022 stocks be on your radar?

With December approaching, and 2022 on the horizon, here are some stock ideas to think about in the new year.

2022 stocks

Barclays picks out 2022’s potential big earners

Earnings season has come and gone. According to the latest data from FactSet, it’s been another successful quarter for Wall Street with the latest Q3 earnings report from S&P500 firms showing high growth.

FactSet reports that 82% of reporting S&P500 firms recorded per-share earnings growth above the mean EPS estimate.

Tesla, for example, had a robust third quarter with revenues and vehicle deliveries breaking records. That was just one of many megacaps reporting better-than-expected EPS performance in the third quarter.

Another includes Google parent Alphabet. The tech firm’s latest financials showed an earnings-per-share beat of $27.99 against $23.48 per share forecast.

However, many companies may run into difficulty next year. Earnings growth may be more modest. Recovery in major economies is not expected to match the rates we’ve seen so far this year. A fair few megacaps warned of slowing numbers, such as Disney and Netflix subscribers, in their Q4 guidance.

Wages have also been rising. In the US, for example, wage growth is up 4.9% year-on-year. That may put pressure on margins going forward too.

That said not all businesses are equal. Barclays’ investment division has eyeballed several overweight stocks that could deliver earnings growth in 2022. The banks has scoured the markets to find 35 equities worth looking at as reported by CNBC.

According to Barclays, the selected stocks may offer a 10% upside over their current target prices.

Of those 35, we’ve boiled then down into a further five.

2022 stocks to watch

These equities are drawn from a number of sectors, but the most common are energy, financials, information technology and consumer discretionary.

Halliburton and Schlumberger are two major energy stocks Barclays identifies as having high upsides over the next calendar year. Both are major players within the oilfield services industries and could be poised to make solid gains upon a wider crude oil recovery.

It should be pointed out, however, that COVID is still weighing heavily on the crude oil industry. The pandemic is far from over and rising global COVID cases are putting pressure on oil prices. Demand may take longer than expected to reach pre-pandemic levels.

In terms of price targets, Barclays is optimistic. Schlumberger has been set a $48 price target. At the time of writing, the stock was trading for around $31.25. For Halliburton, the target is $36 with it trading at $23.29 at the time of writing.

Ally Financial may have the biggest potential upside, representing the chief financial stock to watch for in 2022, at least according to Barclays. Upsides maybe as high as 36% for Ally in 2022. Barclays has set a $68 price target. At the time of writing, Ally was trading at around $51.05.

Moving away from financials, Barclays analysts have selected Dick’s Sporting Goods as its 2022 consumer discretionary stock of choice. The stock is already up 130% this year, driven by better-than-expected quarterly financial results.

The stock is down 5% in trading as of Thursday 25th November at around $127.49 – but Barclays believes it may reach as high as $173 across the next twelve months.

While Dick’s 130% year-on-year growth is impressive, it has been positively dwarfed by online personal loan providers Upstart. Upstart by name, upstart by nature it seems. The stock has skyrocketed an incredible 400% y-o-y in 2021.

It may still have plenty of room to grow. Barclays posits 44% share price growth across 2022 with a target price of $285 for Upstart. It is currently trading at $208.21.

Of course, it goes without saying that investing or trading any of the aforementioned stocks holds substantial risk of capital loss. Always do your research prior to committing any capital. Only trade or invest if you are comfortable with any potential losses.

Fed lift-off coming soon?

Will the Fed raise rates sooner than expected? Inflation the highest in 30 years, a labour market tighter than at any point since the great financial crisis and no Fed action – yet. No wonder we are starting to see them talk about a quicker taper, which would provide the ‘optionality’ to maybe raise rates a bit sooner than expected. We’ve been saying for some time that the Fed cannot ignore all this hard economic data, yet it seemed to be turning a blind eye to all the evidence. Recently though we have seen that it can adjust its uber-dovish stance to something less accommodative, albeit the pace of such transition has been glacial.  

 

But the Fed is going up a notch. We got really the first big ‘inflation alarm bell’ if you like from the FOMC, as minutes from the last Fed meeting said: “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives”. Wow, that is a step-change and shows at last the persistence of the inflation and inflation expectations dynamics are starting to worry them.

 

Inflation is super-hot: Month-over-month deflator at 0.6%, up 5% year-on-year, hottest since 1990 and up from 4.4% in Oct. Core up 0.4% m-o-m, up 4.1% y-o-y from 3.7% in Oct, also the highest in 31 years. Consumer spending is strong – was up 1.3% in October, ahead of the 1% expected and up on the +0.6% last month. Consumer inflation expectations are rising, if not particularly market-based measures, with the University of Michigan 5-year outlook up to 3% from 2.9% and the one-year climbing to 4.9% from 4.8%. 

 

Labour market is exceptionally tight: US initial jobless claims fell to 199k, their lowest level since 1969 – jobs everywhere, but no workers to fill them. Things look very tight indeed and such a strong position for the labour market indicates that the Fed, as consistently argued here, has been too slow to react and is now chasing events. Also, yesterday the Fed’s Daly said she sees the case for speeding up the taper – USD liked that and EURUSD sank to a fresh 16-month with 1.11. She also said that while wage inflation is higher than normal, there are no signs yet of a ‘wage price spiral’. 

 

Anyway, the US data and Fed minutes indicate that a faster taper + earlier hike are potentially on the cards: good news is bad news. But it also pointed to relatively robust growth and consumer health: good news is good news. All in, we have seen a big pop in rates already this week and the recent jump in bond yields cooled, so the kind off rotation we saw the last few days flipped a bit and we got some payback for financials. 2yr yields are hovering around 0.65%, not making much further progress, whilst 10s have stalled around 1.64%, from a high of 1.67% post-Powell. Bit of dip buying, bit of positioning for the seasonal tailwinds ahead of the holiday (US basically out of action until Monday). High beta tech recovered a notch, and ARK’s Innovation ETF (ARKK) rallied almost 2%. The S&P 500 rallied a quarter of one percent, whilst the Nasdaq Composite climbed almost half of a percent. The Dow made a tiny retreat, snapping its two-day win streak. Holiday-thinned futures indicate the S&P 500 around the 4,700 again, an area it’s effectively been stalled at since the start of November. Thanksgiving today should keep things quiet. 

 

In Europe, stock markets are trading broadly higher on Thursday morning, with gains of about 0.5% for the Stoxx 50 and CAC 40. Smaller gains for the FTSE 100 and DAX. The dollar is giving back some ground, allowing the euro and sterling to mount mild rallies this morning, though the bullish momentum for the greenback remains intact. We hear from both Christine Lagarde and Andrew Bailey later today. Minutes from the most recent ECB meeting are due to be published. Earlier this morning German consumer sentiment data showed a sharp fall, whilst Q3 GDP figures were revised lower as the supply chain problems facing the global economy affected the country’s manufacturers and exporters. 

 

Oil – OPEC looking to meet fire with fire and respond to Biden’s puny release of crude reserves. OPEC+ is said to be reacting to the SPR release by the US and others by looking at slowing the rate of production increases when it next convenes. OPEC+ meets next week and could easily frame a pause to output hikes as a response to the rising covid problem in Europe and new restrictions to movement. US crude inventories rose by over 1m barrels last week, vs an expected draw of 1.8m barrels. Crude prices have paused, with WTI (Jan) holding around $78.30, from a high yesterday at $79.20. 

Higher rates split the pack, big day for US data ahead of Thanksgiving

Rollover in tech/momentum continues as rising rates splits the pack. Nasdaq lower, S&P 500 and Dow mildly higher on energy and banks. US 10-year rates hit 1.67% yesterday from 1.54% on Friday, before retreating to 1.64% this morning. All this comes in the wake of the reappointment of Jay Powell as Fed and expected path of tightening. Tech, momentum, consumer discretionary names in the firing line – ARKK down big again, -11% the last 5 session, Zoom –25% over the same period, Peloton –18, and Robin Hood is another standout underperformer – down 20% in the last 5 sessions. There are two main things happening – a total pullback from the high growth speculative momentum names, and an unwieldy rotation out megacap quality tech into cyclicals and financials, i.e. those that do well from higher rates. Overall, the broad market is keeping its end up thanks to the rotation – no great signs of stress yet and the market continues to trade near its all-time high, though the Vixx hit a month-and-a-half high above 21.

More of the same? Bank of America forecasts the S&P 500 at 4600 by year-end 2022 (-2% from here). It argues for a higher discount rate for stocks from the Fed’s taper and eventual rate hike plus increased rate and stock volatility. The theme for next year is therefore inflation-protected yield so dividends can keep pace with govt bonds. As such BoA likes energy and financials, which offer inflation-protected yield, and healthcare which offers growth and yield at a ‘reasonable price’. What they are talking about for the year ahead is what we are seeing in this rate-repricing-rotation.

It’s a challenging picture regards Covid in Europe, but the main bourses are firmer this morning. The FTSE 100 has reclaimed the 7,300 level and the DAX made an attempt to regain the 16k level before retreating into the red on some soft Ifo business sentiment data. German business sentiment fell in November, and could fall a lot more as the number of Covid cases and the government’s draconian response make life difficult for businesses. Meanwhile Germany’s three coalition partners have agreed a deal that clears the path for Olaf Scholz, the current finance minister, to become Chancellor. A press conference is due later – watch for anything on Nord Stream 2 and potential for nat gas markets.

There is a lot of US data to watch for in the session ahead of tomorrow’s Thanksgiving holiday. First up the second reading for Q3 GDP is expected to be revised up to 2.2% from 2.0%. The PCE deflator, which includes food and energy, rose at a 4.4% in September, the fastest since 1991. Core inflation, the Fed’s preferred gauge as it excludes volatile items like food and energy, increased at 3.6%, which was also the fastest pace in 30 years. We could see the headline print above 5% and core above 4% for the October reading, which is released today. We think the Fed seems to be a little more wary of the risks of persistently high inflation than they were a couple of months ago, which means a super-hot reading will have market reaction. The kneejerk moves higher in the dollar and rates on the Powell announcement have held, but a similar jump today could be one to fade. Finally, we will be watching for the minutes from the last FOMC meeting for clues about the likely path of monetary policy, specifically how worried about inflation are policymakers, and how close do they think the labour market is to being strong enough to warrant raising rates.

FX markets are still anchored by the strong dollar, with DXY holding onto the Powell announcement gains at 96.50. Cable made a fresh yearly low yesterday at 1.3342, as the sellers remain in charge. The euro also continues to come under heaps of downwards pressure and is just holding the key support at the 1.1230 area, but has just made a fresh 16-month low this morning as the bears hold sway. If this area doesn’t get breached soon, though, we could see a bump up to 1.14. Turkey’s lira continued to plunge and traded at 13 this morning, a new record low. New Zealand’s dollar fell against the USD despite the RBNZ hiking rates again. Whilst sounding hawkish about the outlook, some had anticipated the RBNZ to go for more than just a 25bps hike.

Strategic oil reserves were released by the US and others in a coordinated effort, but crude prices rose as the move had been well anticipated and priced in. WTI (Jan) rallied for a third day to retake $79 as the coalition of the willing released 50m barrels – somewhat short of the 100m Goldman Sachs says the market had priced. 50m barrels is about half a day’s worth of demand – it was never going to do much. API data showed oil inventories climbing by 2.3m barrels last week vs the expected decline of 500k.

Gold is trying to hold the $1,790 level but remains under a lot of pressure. A bearish MACD crossover was the big signal on Monday and with rate expectations moving up but cooler energy market (for now) seeing inflation expectations come back a bit, it’s a tough picture. Breach here could open up path to $1,770 area. Recovery of $1,800 (hot inflation reading?) could see retest of old horizontal resistance around $1,834.

Gold Chart 24.11.2021

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. 

Joe sticks with Jay, yields, dollar up

US bid: Stocks on Wall Street rose to all-time highs, the dollar rose strongly and US front-end yields ticked up as the White House confirmed it will stick with Jay Powell as chairman of the Federal Reserve. Lael Brainard will become vice-chair. I think Powell is rightly getting a heck of lot of credit for steadying the ship at the height of the pandemic when credit markets were exploding. What he’s doing with inflation now is another matter but Brainard wouldn’t have moved swifter on rates, that is for sure.

 

Market reaction has been pretty hawkish, which is kind of odd since a) he ain’t no hawk and b) the odds on Brainard were long. Still there seems to have been something of a Brainard trade which is being unwound, or perhaps it’s just the kind of market overreaction to an unpriceable bit of news which is good to fade…

 

Markets are pricing in a rate hike by June vs July before the announcement, with 2s up 5bps to 0.566%, hitting the highest since March 2020 and 10s rising back to 1.6%. Gold extended its drop as yields rose. The dollar index spiked to a new high at 96.50, whilst EURUSD plumbed a new 16-month low at 1.1236. Cable also lower, back to 1.340 support from 1.3450 before the news. S&P 500 and Nasdaq Composite have hit fresh all-time highs, while the Dow is up 170pts. Banks +2% – yields but also Powell is seen as not such a tough sheriff as Brainard was going to be perhaps? 

 

Markets like the continuity – we know what we are getting with Powell, the market is confident in his leadership, and Brainard will be an effective deputy and mouthpiece in a similar fashion to the outgoing Clarida.  

 

Markets also probably like the fact that the decision to keep a Trump appointee helps to depoliticize the role of Fed chair. This is a good thing – central bank chiefs should not be political appointments, selected by whatever administration in power to suit their partisan ends. Investors will be happy that the left wing of the Democrat party didn’t get their pick – again apolitical appointment is important. But also the fact the ‘progressives’ haven’t got their way this time is good for USD. Biden’s got an eye on opinion polls going south so side-lining the progressives in his party here is probably seen as a good thing, too.

 

Meanwhile, the pressure on EURUSD remains on both sides of the cross as Germany seems to be heading into lockdown – Merkel said situation with Covid is the worst it’s ever been, new restrictions needed. Reaction to the Powell announcement at 2pm is clear to see.

EURUSD Chart 22.11.2021

Telco stocks up on Telecom Italia bid

Stocks in Europe started mildly higher, shrugging off some of the caution that we saw at the tail end of last week on lockdowns in Austria and elsewhere. Telecoms stocks rallied as KKR made a bid for Telecom Italia; BT and Vodafone led the FTSE 100 higher with help from BP and Antofagasta. Vivendi, a major shareholder in Telecom Italia, led the Stoxx 50 higher. Telecom Italia itself rallied 22% on the news. There has been a lot of speculation about a possible takeover of BT of late, so the move by KKR creates some further excitement that Altice’s Patrick Drahi could launch a bid. A no-bid clause preventing Altice offering for BT expires Dec 10th More broadly, if private equity is starting to sniff around this sector then it suggests there could be value to be found in other names; it underlines just how unloved a corner of the market it has become.

 

Inflation remains on everyone’s minds – for now, the benign approach of the Federal Reserve and European Central Bank is keeping real yields pinned to the floor, which is supportive of risk, and both European and US stock markets continue to trade around their all-time highs. The market got a little frightened last week as European nations started to crank up their lockdown mechanisms again. This probably doesn’t amount to kind of economic impact as previous ones, even if Germany locks down its Christmas markets and so on. Meanwhile, the US has put all that nonsense behind it, so the market is not overly concerned about a winter of localised Covid restrictions. Also, consumer sentiment does not equal market sentiment when their liquidity is so ample and monetary and fiscal policy so loose.

 

Strong earnings from the US retailers helped the S&P 500 eke out a gain last week, whilst megacap tech lifted the Nasdaq Composite to a gain of 1.2%. In contrast, the pressure on energy/financials left the Dow nursing a loss of 1.3% for the week. Futures are pointing higher on Monday.  

 

Oil is a tad higher to start the week but looking cautious, with WTI holding a $76 handle as sellers remain in charge. Gold trades around $1,850 as deeply negative real rates do battle with the dollar’s strength. EURUSD is testing last week’s 16-month lows again this morning. 

 

This week is a holiday-curtailed one – the US stock market will be closed for Thanksgiving on Thursday, and it’s a half-day on Friday. The key focus during the week will be president Biden’s pick for the Fed chair – does he stick with Powell or opt for Brainard? Brainard could be even more dovish than Powell is, and possibly a lot tougher on bank regulation. But more importantly, does she have a strong enough commitment to climate?  

 

On the data front we are looking to Wednesday’s US PCE inflation, durable goods orders, Q3 GDP 2nd reading and minutes from the last Fed meeting, which will be parsed closely for two things: a) how worried are policymakers about inflation and b) how do they view how near the US labour market is to the level at which they can start thinking about thinking about raising rates. Richard Clarida – stepping down in a couple of meetings – said on Friday that the Fed could speed up the rate at which it tapers QE. 

 

Also this week, we should hear from the Bank of England’s Haskel, with traders looking anything solid on whether a December rate hike is a goer or not.  We haven’t heard from Haskel since the summer. In May he said he’s not worried by inflation, and in July said there was no need to reduce stimulus in the foreseeable future – we make him a dove and his vote not required for a hike – so this needs to be considered when reading his comments. On Friday chief economist Huw Pill said he doesn’t know which way he will vote in Dec.  

Stocks limp into weekend, tech bid, bond yields lower

Week-end run-down:

  • Stocks are ending the week in a bit of a mixed mood, but more half empty than half full. Value/cyclicals on the back foot with bond yields down, tech bid for the same reason. Losses in Europe running around 0.3-0.5% for the main bourses. Looks like the sluggishness in Europe is driving some profit-taking in the US outside of the tech space, energy under pressure from residual weakness in oil.

 

  • Austria’s lockdown and likely lockdowns in Germany put European stock markets into a downwards gear shift earlier in the session and we are holding losses into the close. Austria is also going to make vaccination mandatory, which has so far not inspired much concern about civil liberties from the people you normally hear from when government’s overreach. Across the pond the House has passed Biden’s BBB social spending plan.

 

  • US markets are mixed – Big Tech lifting Nasdaq up 0.5% to a record high and helping the S&P 500 fend off any meaningful decline. Dow is down 0.7%.

 

  • Bonds are telling the story at the moment – 5bps drop in the 2yr is the biggest drop since March 2020 – which seems to be down to the Austria lockdown read across. 10s declined to 1.52%. That move lower in rates only supports growth/tech etc so Nasdaq record high = good for US, but it’s headwind for Europe – which prefers higher rates and is more value sensitive.

 

  • More mixed messages from the Bank of England as chief economist Huw Pill said he doesn’t know which way he will vote in Dec…is there much more data to come before then? Seems odd, only reinforces the unreliable nature of the BoE comms and uncertainty around the future path of monetary policy. If you don’t have something useful to say don’t say anything. GBPUSD is chopping around the 1.3450 area after pulling back from the 1.35 area earlier in the session, 1340 offering near-term support.

 

  • Oil tried to rally today but WTI (Jan) is back to a $76 handle – likely mainly on the lockdown situation in Europe, but sentiment remains bearish amid broader concerns of oversupply.

 

  • Euro is weaker – Lagarde comments earlier + lockdowns cement belief in ECB being slowest to normalise and potential for anti-Goldilocks scenario for Europe into 2022. Anti-Goldilocks but not sure if big bear or little bear…are you playing weaker euro and weaker EZ stocks…or just one? Normalisation of real yields next year ought to be supportive for value/cyclicals, particularly autos and banks, but this is definitely not what we are seeing today. Weaker euro on CB divergence + economic divergence between the US and EU has been and remains the simplest play.

EURUSD is off the lows of the day but still under pressure at 1.13 and conspicuously made a fresh 16-month low.

EURUSD Chart 19.11.2021

Finally, notable that The Economist is leading with something about how no one predicted all this inflation, which is simply untrue. So I leave you with this from me, dated August 26th, 2020: 

 

I find this idea of AIT [average inflation targeting] being a better anchor for inflation expectations problematic. Whilst I don’t pretend to being an economist, regular readers will be familiar with my view that a sharp bounce back in growth (albeit to a level still below pre-pandemic potential) combined with unlimited Fed accommodation, a vast increase in the money supply (if not yet the velocity of money) and a massive fiscal put is basically inflationary. Remember, as Friedman put it “inflation is always and everywhere a monetary phenomenon that arises from a more rapid expansion in the quantity of money than in total output”. The rate of expansion in the monetary base is consistent with past bouts of high inflation in the 1930s, 1940s and the 1970s. Whilst post-GFC QE led to money printing, it was gobbled up by a financial system hungry for capital and balance sheet repairing. The fiscal stimulus this time makes it a very different environment. 

 

Layer on top of that the disruption to supply chains and fundamental shift in deglobalisation trends, and you create conditions suitable for inflation to take hold. If the Fed also indicates it does not care if inflation overshoots for a time – indeed is actively encouraging it – there is a risk inflation expectations become unanchored as they did in the early 1970s, which led to a period of stagflation 

 

…My concern would be that once you let the inflation genie out of the bottle it can be hard to put back in without aggressively tightening and likely as not engineering a recession. Nonetheless, this seems to be the way the Fed is going.   

 

Paul Tudor Jones put it best back in May when he said that the question of whether the current bout of money printing will ultimately prove inflationary comes down to how reasonable is it to expect that in the recovery phase the Fed will be able to deliver an increase in interest rates of a magnitude sufficient to suck back the money it so easily printed during the downswing? Most agree it won’t be easy – in fact AIT would effectively kick the can down the road for many years. The Fed is not even thinking about thinking about sucking the money back in. This ought to stoke inflation, but it could be more than the Fed wants – the genie is coming out. 

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