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European stock markets split as investors digest rates selloff
Tale of the tape: US stocks plunged on rising rates, softer growth data; European shares broadly lower at the open in sympathy but trying to muster around the flatline. The CAC 40 and Eurostoxx 50 up, DAX and FTSE down a touch in the first hour. Tech damage, rising rates etc not the same worry for European equities and indices. Luxury stocks lifted by good results from Burberry. Ashtead and Ferguson down the most on the FTSE 100 on US weakness as the Empire State manufacturing index turned negative for the first time in 20 months. Asian markets were very weak overnight but Europe seems to be trying to halt the bloodletting.
The S&P 500 closed below the low of last week and just about held its 100-day moving average, whilst the Dow closed below that level. The Nasdaq Composite dropped below its 200-day line for the first time since April 2020. The Nasdaq 100 didn’t quite hit last Monday’s lows but futures this morning suggest it will open lower. The wreck in tech is not an orderly rotation right now, particularly with banks being sold off from elevated levels.
Megacap tech took a beating, with MSFT and GOOGL both down 2.5%. ARKK down another 4%, now –20% YTD. Some gains for energy as oil is trading at multi-year highs, lots of damage being done to banks as earnings flag risks. Goldman Sachs dropped almost 7%: expenses +23% vs +8% for revenues…cost cutting now going to go hand-in-hand with core lending growth. Investment banking revenues are lumpy. Scrubbed some 200pts or so off the Dow, which fell more than 540pts for the session. More from the banks today with Bank of America and Morgan Stanley…should be a story of consumer and business lending growth (BAC) and wealth management (MS). Again watch those expenses.
Bonds are making big moves. US 10yr rates touching 1.9%, highest in two years, German 10yr bund yield turns positive for the first time since May 2019, UK 10yr rates highest since March 2019 as data this morning shows inflation at the highest in 30 years. The December CPI reading rose to 5.4%, core CPI rising to 4.2% vs 3.9% expected. The Bank of England surely needs to hike on Feb 3rd. Some respite for the pound this morning as the dollar bounce pauses for breath…not sure if markets can see the BoE hiking leading to sterling strength. We get to hear from governor Andrew Bailey today as he testifies on the Financial Stability Report at the Treasury Select Committee.
Real rates are key here – US real 30yr almost positive. As for the bund turning positive, it’s a symbolic moment – the bund lives!! This partly reflects thinking the ECB will need to move sooner than it is currently telling us … market pricing 10bps hike by Sep… but also the nature of globally correlated bond markets – the rising tide in the US is lifting all boats. Surveys indicate economists think EZ inflation will ease back to around 2% later this year… good luck with that. FOMC meeting next week – do they bring QE to immediate halt, possibly signal a bold 50bps hike for March to get in front of the market? Rates tend to rise into the Fed’s first hike in a cycle – as previously discussed there is a chance that the Fed lets the market do some of the tightening for it, and hikes less than expected.
BofA’s Jan survey tells us kind of what we knew – investors had cut net overweight positions in tech to lowest since Dec 2008, allocations to banks were at a record high – before earnings landed and positioning seems to have rolled over. Overall the survey noted that investors are still very long equities
Some analyst comments: Credit Suisse raised its price target on Tesla to $1025 From $830. Deutsche Bank hiked its price target on Apple to $200 per share from $175 on strong iPhone 13 demand as 5G upgrade cycle still in early stages. DB also cut its price target on Netflix ahead of earnings this week to $580 from $590. MSFT buys ATVI…big metaverse play, Microsoft pouncing on a wounded beast and clearly not afraid Washington will walk and walk on anti-trust and big tech bashing.
NQ futs– cracked last week’s low, trend line broken.
FTSE 100 makes new high ahead of key US inflation data
Stock markets around Europe rose after an upbeat session on Wall Street driven by a recovery in tech stocks as the rise in bond yields eased. Fed chair Jay Powell offered reassurance in his reappointment hearing, though he talked about the possibility of raising rates faster than expected if inflation remains persistent. All eyes on today’s US CPI print – expected at another 40-year high.
The FTSE 100 had been tracing out a neat new range this year but this morning it’s managed to break free and make a new post-pandemic high at 7,545. The positive march means 7,700 remains the target – the old pre-pandemic peak in Jan ‘20. Up 8% since the November low the move might just be running out of gas – RSI starting to look overbought, MACD a tad stretched though the bullish crossover is still in play. 7,400 is the floor for now – any pullbacks likely to be bid here.
Megacap tech bounced back to flatter the major US indices. What drags the most on the way down will also do the heaviest lifting on the way up. The Nasdaq rallied 1.4%, while the S&P 500 rose 0.9%. The rip in bond yields eased – the US 10yr back under 1.75%. Some of the trashier, spec-tech, loss-making corners also got pulled up – ARKK rallied almost 3%, though it remains more than 10% YTD.
Speaking at his Senate banking committee confirmation hearing, Powell said the Fed would not shy away from raising rates more than forecast. He also suggested balance sheet run-off decision would be worked through in the next 2-4 meetings – implying QT could start in June. Regional Fed presidents Mester and Bostic were also on the wires backing a hike in March. None of this is new – we know the Fed is in tightening mode now. The question lingers none on what the Fed’s position is right now, but what it might end up doing should inflation persist.
On that…US CPI inflation is due today at 13:30 GMT. Expect a print above 7%, with the month-on-month increase expected at +0.5% (core +0.4%). Markets will be especially focused on signs of peaking – don’t bet on that happening soon. As repeated several times here, inflation pressures are broadening and becoming more entrenched. The Fed is still chasing and not on top.
The dollar was softer yesterday on the Powell comments and yields eased back. GBPUSD made the move above 1.36 stick and can look up the channel to 1.38 next.
US bank earnings kick off Friday – looking for the Wall Street beasts to post a record-breaking year for profits. 2021 was defined really by two things – the release of loan loss provisions flattering the bottom line, and surging investment banking revenues. No one is really going to pay too much attention to the figures for the last quarter – we know they’ll be good; the focus is now on how banks do as the Fed starts to tighten policy. Rate hikes this year should foster higher net interest income and margins from banks’ core lending activity. So, we could see 2022 mark a period of lower bottom line profits but growing core revenues from lending. Fed figures indicate lending is picking up – as long as the Fed doesn’t go too big too fast (inflation this week could see another bumpy ride for bonds). GS were out Monday with a prediction for 4 hikes this year, up from 3…consensus for more hikes is mainly +ve for bank stocks. Piper Sandler yesterday said that Bank of America (BAC) is the large cap bank to own in 2022 – which fits if the year is about a rise in core lending revenues as it has the biggest national footprint.
In London this morning, Sainsbury’s shares rose 2% after the supermarket group raised its full-year profit guidance after a very good Christmas. For the year to March, SBRY expects to deliver underlying pre-tax profits of £720m, up from £660m in prior guidance. General merchandise – Argos – and the bank performed well. Cost savings and higher volumes are offsetting higher operating inflation and competitive pressures, aka matching discounters on price (see Aldi this week).
Meanwhile, Whitbread shares were steady after it reported a solid Q3 marked by ‘resilience’ to Omicron. Total UK sales rose 3.1% vs last year, but lockdowns are wrecking German occupancy rates, which have declined to 36% in the last 6 weeks from 60% in the third quarter. Tough gig until more corporate travel returns and weddings, stags/hens really pick up properly.
Dunelm Group jumped 5% after yet another strong showing: Total sales of £407m in the second quarter were up £46m compared to FY21 and £84m compared to FY20. Gross margin in the second quarter increased by 160bps compared to the same period last year, ahead of expectations, driven by higher full price sell through of seasonal ranges.
Outlook also good: Management expects profit before tax (PBT) for the first half to be approximately £140m, up from £112m last year and £84m in 2020. And they say that absent any significant Covid-related disruption, they expect that full year FY22 PBT will now be materially ahead of market expectations, which was about £180m.
European stocks heed US tech slump on hawkish Fed minutes
European stocks fell sharply in early trade Wednesday, taking their cue from a steep selloff in US tech and weak handover from Asian equities in the wake of the latest Federal Reserve meeting minutes. The FTSE 100 traded down 1% around 7,420 at the lows, the DAX down around 1.5%, before trimming losses after the first hour of the session. In London, losses were concentrated in the tech and pandemic winner space with JustEat and Scottish Mortgage down 3-4%, with Aveva and Experian also -3%. Sainsbury’s and B&M were the leaders though we have some gains for airlines in the wake of the government’s travel testing overhaul.
Details from its December policy meeting indicate FOMC members are leaning towards more hikes and embarking on balance sheet reduction quicker than previously expected. This accelerated the rollover of the big speculative tech positioning that we have seen lately. ARKK – the Innovation ETF that is the embodiment of the high growth, speculative tech bubble, was down 7%. Apple declined 2.6%, Microsoft almost 4%, Alphabet over 4.5%, and Tesla dropped another 5%. The Nasdaq fell by 3.3%, its worst fall in almost a year. The S&P 500 dropped 2%, the more cyclical/value Dow Jones was down just 1% – some rotation but as stressed before it’s never clean and the big banks fell despite the yield picture. Rates rose as bonds sold off on the tougher tightening stance – US 2s close to 0.875%, 10s to 1.73%. Gold is weaker below $1,800 again as yields ticked up, Bitcoin also cracked at key support. The dollar is broadly on the front foot against commodity currencies as the risk-off mood affects currency markets, whilst also clawing back ground against sterling after cable hit a two-month high yesterday.
What’s interesting is that what most thought would happen in 2022 – expensive spec tech/high growth pulling back its horns and value/cyclical/energy/financials outperforming has played out a little too obviously and quickly – question is whether there is further for this trade or if it’s kind of spent for the moment. Blowout in speculative tech, meme stocks etc will start to look overdone soon enough. I think there is still a lot of rotation and churn in and out, and back in, growth vs value, cash-flow vs cash-burn names, and as long as the rotation trick works its magic then there are still gains to be had, albeit muted, for the broad indices.
QT vs QE: Policymakers not only discussed wrapping up Quantitative Easing more quickly (March) but talked about Quantitative Tightening straight after the first rate hike earlier than predicted. “Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate”, the minutes said. And they said it would be done with a sense of urgency: “Many participants judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode.”
The minutes painted a picture of policymakers being much more concerned about inflation and much more ready to turn hawkish. These minutes underscore the total about turn the Fed took at the tail end of last year. It wasn’t that long ago policymakers thought they wouldn’t hike until 2024 and QT wasn’t being uttered. Now they are about to hike faster and trim the balance sheet. From here I think the Fed can only underdeliver on its hawkishness – and selloffs on the back of such caprice is probably best faded.
Elsewhere… UK travel stocks got some lift by the government’s scrapping of a range of annoying testing requirements. Big changes to travel rules mean that the need to self-isolate on arrival in UK is dropped; whilst travellers arriving in the UK will not need to take a PCR test. In addition, the need for a pre-departure test prior to coming back into the UK is also being scrapped. Ryanair and EasyJet both rose about 1%. IAG had smaller gains but is up mover than 12% in the last 5 sessions.
Highstreet bellwether Next saw its shares fall despite predicting its best-ever annual profit. In its closely watched post-Christmas update the company increased full year profit before tax guidance by +£22m to £822m, which would represent a 10% improvement on two years ago. Management also offered initial guidance for the year ending January 2023, expecting full prices sales up 7% versus the current year and profit before tax up 4.6% at £860m. And the board declared a special dividend of 160p per share.
In summary, a statement of two halves from Next: Christmas was bumper with sales up 20% over two years ago, but a customary cautious outlook – warning on higher freight, labour and material costs – left investors vigilant to the risks that continue to surround UK retail. The company had been expecting sales growth in Q4 to be weaker than Q3, however, “a strong revival in NEXT branded adult formal and occasionwear significantly improved sales throughout the final period”.
Today’s data focuses on the weekly unemployment claims from the US, forecast at 199k, and the ISM Services PMI, predicted at 67 for the headline reading. Yesterday’s ADP jobs data was strong, hitting 807k for the month, well ahead of the estimate for 375k and the November gain of 505k. Jobs were broad based and indicate a positive NFP number on Friday, currently seen at +426k. ADP suggests higher, but never easy to base predictions on.
Some not-so-interesting stuff on Bitcoin from Goldman Sachs, who’ve come round to the digital gold way of thinking. Analyst Zach Pandl suggests Bitcoin will cannibalize more of the gold-as-investment store of value market. Currently account for 20% of this market, Bitcoin could hit $100,000 if its share rose to 50%. It’s not the first time we’ve talked about Bitcoin eating gold’s lunch, particularly among younger investors, including millennials who are getting older and richer. As noted in 2020, given how big the investment in gold is – some $2.6tn or thereabouts, it would not take much of a shift by investors (millennials) to “exert a very powerful lever on Bitcoin prices”.
Also in crypto land, Nasdaq-listed BTCS announced they will pays dividend in Bitcoin, calling it a “Bividend.” Shares in the company leapt 44%. If you want Bitcoin you can just go out and buy it, but it’s good headline-grabbing stuff from a small company. Meanwhile prices in Bitcoin fell with rollover in stocks – liquidity being pulled is not good for crypto.
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 higher, Ocado pops, German factory gate inflation soars
European stock markets rallied on Friday morning, spurred on by solid bounce on Wall Street that saw the S&P 500 and Nasdaq close at fresh record highs. Big tech drove the steers with strong hand, with Apple up +2% and now +6% for the week; whilst energy and financials were lower. Losses for Cisco weighed on the Dow, which closed in the red. This morning, miners led the way higher on the FTSE 100, whilst Ocado caught the eye with a 6% pop, apparently on speculation Marks & Spencer could be saving its pennies to buy out Ocado’s UK retail arm, of which it is a 50% shareholder. Could happen, seems like a natural evolution to ultimately split the two businesses once the international deals actually start delivering some free cash.
It should be noted that we are not seeing a lot of real thrust in the market, rather a bit of chopping around the cycle/record highs. Path of least resistance is upwards for the US market with real rates providing only one option in stocks. Momentum in EV darlings Rivian (-15%) and Lucid (-10%) skidded to a halt and reversed as abruptly as a Tesla on autopilot trying to make a left turn. EM has been weak, underscored by the record low for the Turkish lira. China tech still under pressure after Alibaba plunged 10% after warning on slower growth, though Asian shares were mainly higher.
Bonds are steady with US 10s at 1.6%, whilst the dollar is firmer this morning after a pullback yesterday following Wednesday’s 16-month high. Gold is a tad light at $1,850, whilst crude prices are recovering some ground with WTI touching $79 after taking a $76 handle yesterday. Bitcoin is weaker again with sellers still in control and prices testing the $55k support area.
Later today the US House of Representatives will vote on Biden’s roughly $2tn Build Back Better social spending plan. Fed speakers today include Waller and Clarida, after Bostic yesterday said the Fed would be likely to raise rates next summer.
More inflation: This time German producer price inflation surging by 3.8% in October – factory gate inflation now stands at 18.4% on an annual basis. I’m sure that fresh lockdowns in Germany (only for the unvaccinated) will only add to the kind of pressures that businesses are reporting, so inflation remains sticky. Stripping out energy (+48.2% yoy), the print came in at 9.2%.
No relief for the euro though, despite the huge PPI print, as the single currency fell in early trade after Christine Lagarde, the European Central Bank chief, once again sought to kill off any last vestiges of speculation that they might hike next year. Lagarde is ruling out 2022, which given the economic recovery, fiscal stimulus and super-high inflation (CPI running at 4.1%), kind of beggars belief. Lagarde layered it on pretty thick: “Supply bottlenecks cannot be solved by the ECB’s monetary policy.” But of course, but at the same time you are completely dissociating ECB policy from any kind of inflationary impulse we are seeing now. Kind of cognitive dissonance that is peculiarly central bank in nature. It underscores the divergence in mon-pol among global CBs that is going to drive increased FX volatility – you may be pleased to see it.
South Africa’s Reserve Bank yesterday raised the main repo rate by 25bps to 3.75%, with the prime lending rate rising to 7.25%. Market participants had been split on whether the central bank would tighten monetary policy ahead of the decision, after the SARB had flagged inflation risks last month. In the end the vote was 3-2 in favour of hiking rates, the first time they have risen in three years.
In a statement the bank noted that “inflation risks have increased and the level of policy accommodation remains high”. This describes the situation in the US, UK and Europe aptly but so far only the Bank of England is close to hiking – governor Lesetja Kganyago said the decision was not an attempt to pre-empt what advanced economies will do.
Indeed, the decision underscores the fact that global CBs are entering a multi-speed phase where we will see divergence in monetary policy and, as a result, divergent bond yields and greater volatility in FX markets. As economies exit the pandemic at different speeds and with a different set of inflationary pressures, central banks are in a less coordinated policy stance than at any time for the last 18 months. This is clearly on show in the directional pivot we have witnessed in the EUR as markets push back their rate hike expectations.
The implied policy rate path of the Quarterly Projection Model (QPM) from SARB indicates an increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022, 2023 and 2024. That is one heck of a hiking cycle. SARB said that “a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates”.
This is important – as inflation takes off – even for reasons that are beyond your control (supply side), then the role of the CB is to make sure that inflation expectations do not become unanchored, which in turn fuels further, more persistent inflation.
Contrast this with Turkey, where the CB has gone into full crazynomics by slashing interest rates again. Yesterday the central bank cut its one-week repo rate by 100bps to 15%, a third cut since the 19% in September. It came after president Erdogan said on Wednesday he’d fight to keep rates down. The lira tumbled, with USDTRY hitting 11 for the first time. Rates will have to go back up at some point, hopefully around Christmas time so we get some good headlines.
What is Forex trading and how can you start?
If you’re a newcomer to the world of forex trading, it might seem a bit intimidating. In this beginner’s guide, we run through the basics so you can start your FX trading journey.
What is forex?
Forex, also shortened to FX, stands for foreign exchange. In practice, it’s the exchanging and trading of different currencies.
FX is the most popular trading activity in the world. Every day, $6 trillion – more than the GDP of the UK and France put together – exchanges hands.
A number of different types of traders are involved in the FX trader, including banks, companies, individual retail investors, and even governments.
There is no centralised exchange when it comes to Forex. It’s typically done over-the-counter. Essentially, anyone can get involved – but please only commit any capital if you are comfortable taking any losses.
In our case at Markets.com, we offer FX trading via contracts for difference (CFDs). With CFDs, you do not own the underlying asset. These are leveraged products. That means you gain exposure for a fraction of the total trade’s value. However, profit and loss is gauged by the total size of your position, not your deposit, and can far outweigh your initial deposit. Your risk of loss is higher.
What makes FX trading appealing?
There are lots of reasons why foreign exchange is so popular, such as:
- Market size – roughly $6 trillion changes hands every day!
- Variety – We offer over 60 different currency pairs to trade at Markets.com
- Accessibility – Unlike stocks and other assets tied to exchanges, currency can be traded 24/7
- Leverage – As mentioned above, currency pairing CFDs allow you to open a trade at a fraction of the trade’s total value
There is also a degree of flexibility with forex.
CFDs allow speculation on price movements in both directions. If you think the currency pairing is going to lose value, you will take a short position. If you think it will gain value, you’ll take a long position.
What are currency pairs?
Currency pairs are the financial instrument used in foreign exchange.
It is a quotation for two different currencies. It’s basically the amount you would pay in one currency for another.
Let’s look at an example.
The currency pair is GBP/USD at 1.15.
That means you could exchange 1 GBP for 1.15 USD.
If one of the paired currency’s value changes, then the currency pair’s value will change too.
For example, GBP/USD has started the day at 1.15. By the end of the day, it has risen to 1.16. That is because the strength of pound sterling has risen in value against the US dollar.
If the currency pair starts the day at 1.15, then drops to 1.13, for instance, that means the value of pound sterling has weakened against the US dollar.
At Markets.com, our currency trading offer is split into three categories: Majors, minors, and exotic.
Majors are some of the most popularly traded pairs on the market, coming from the largest global economies. They’re essentially the engines of global commerce and economics. Major currency pairs include:
- GBP/USD – Pound sterling to US dollar
- EUR/USD – Euro to US dollar
- JPY/USD – Japanese yen to US dollar
- USD/CHF – US dollar to Swiss franc
- AUD/USD – Australian dollar to US dollar
- NZD/USD – New Zealand dollar to US dollar
- CAD/USD – Canadian dollar to US dollar
The minor pairings are still from important economies but do not include the US dollar. These are still popular trading assets. Take a look at some examples below:
- AUD/CAD – Australian dollar to Canadian dollar
- CAD/JPY – Canadian dollar to Japanese yen
- EUR/GBP – Euro to pound sterling
- USD/DKK – US dollar to Danish kroner
Exotic pairings are pairings featuring potentially more volatile currencies. In the past, such currencies may also have had unique or difficult conversion requirements. Many come from emerging economies.
- CHF/PLN – Swiss franc to Polish zloty
- EUR/RUB – Euro to Russian rouble
- GBP/TYR – Pound sterling to Turkish lira
- USD/ZAR – US dollar to South African rand
What factors affect the currency market?
Like any financial instrument, currency pairs are affected by numerous external factors. If you’re looking to enter the world of forex trading, be aware of the following:
- Central bank policy & interest rates – It’s the job of central banks to essentially watch over all aspects of a nation’s monetary policy. That will give it oversight over many things that can affect currency prices. Interest rates are a key part of this. If a central bank increases its overnight rate, then currency traders looking to enjoy higher yields may end up buying more. This can make currency prices rise.
- Economic releases – Big economic releases, such as monthly, quarterly, and annual GDP growth figures, manufacturing and services PMIs, employment figures, and inflation all have an influence on FX prices.
- Politics – It goes without saying that political tussles can affect a currency pairing’s valuation. Think how the pound slid dramatically after the Brexit vote, or how the USD wobbled in the wake of the US/China trade war under the Trump administration.
- Volatility – The above factors will have an impact on price volatility, which can then affect how traders trade. Some may prefer to trade on volatile currency pairs; others may wish to hold off until markets fall back to normal. Be aware that some currency pairings are more volatile than others.
Some currency trading tips for beginners
- Research – Don’t commit any of your money until you’ve done your research. Study the markets. Take time to head over to our news and analysis section. You’ll find plenty of pieces on what’s moving markets and how major currency pairs are currently fairing. The old adage fail to prepare; prepare to fail runs true here. Make sure you’re informed before placing a trade.
- Practice – A com demo account lets you practice trades with $10,000 in demo credit to play about with. That way you can get a feel for currency markets, familiarise yourself with our platform, and see how tools can help impact your trades, in a risk-free environment. You won’t be spending any money.
- Tools – We have a suite of powerful trading tools designed to help you. From various different charts to sentiment indicators, and much more besides, these are all designed to give you a potential trading edge. Click here to learn more about our tools.
- Know your limits – Only trade if you are comfortable taking losses. Don’t be afraid to cut your losses either if you feel you are losing too much. Do not overextend. At the same time, don’t be tempted to take all of your potential profit out the first time it appears. You can be confident – but only you will know your own limits.
Remember: trading is inherently risky. The value of your trades can down as well as going up. Bear this in mind if you decide to take the forex trading plunge.
Stocks firm, oil runs into technical problems
European stocks moved higher in early trade Tuesday after a sizeable down day in the previous session and a rather limp handover from Asia. The FTSE 100 recaptured 7,100, rising 0.5%, after slipping below this level yesterday, having closed down 0.9%. European indices continue to trip along recent ranges having set post-pandemic highs earlier this month as the market looks for more direction re inflation and bond yields. Everyone seems happy to buy the line that inflation will be transitory: the super-hot peaks we are getting right now will be, we knew that as base effects and pent-up demand played out; the question is what sort of new inflation regime persists beyond this summer. Once the inflation genie is out the bottle it is hard to put back in easily.
US markets are grinding higher along the path of least resistance but on lower vols and declining breadth. As bond yields remain in check and inflation expectations cool, big tech and other bond proxies are providing the heavy lifting for the indices. The S&P 500 inched to a new all-time high with just healthcare and utilities up and twice as many advancers as decliners. Energy was smoked, registering a decline of 3%, with Valero, Halliburton, Phillips 66, Occidental and Marathon all down 5%. Cruise operator stocks sank 6-7% as Carnival announced an additional stock sale of $500m, whilst Disney delayed a planned test voyage. Growth is beating value right now as the reflation trade unwinds: the Nasdaq rallied 1%, whilst the Dow fell 151pts as the likes of Chevron and Boeing pulled back. US 10yr yields are back under 1.5%, and this morning US stock futures are flat. After a pause, AMC rallied more than 7%. SoFi (Nasdaq: SOFI) is the most talked about stocks on Wallstreetbets, with WKHS, WISH, CLOV, BB, SPCE and GME also still garnering some of the most mentions.
Among the big tech leaders making gains was Facebook, which rallied 4% to take its market capitalisation above $1tn for the first time as it saw off a monopoly legal threat. A judge rejected two antitrust lawsuits brought by the Federal Trade Commission and a coalition of 46 states. The news removed a significant headwind for the stock, though the FTC has a month to refile its complaint. It seems that the judge’s rejection of the case was based on the lack of evidence, or the way it was presented, which could be remedied with a new lawsuit.
Elsewhere, in FX the dollar is mildly bid with GBPUSD testing the Jun 22th low around 1.3860 and EURUSD creeping back to 1.1910. Chart pattern looks a bit bearish and flaggy.
Crude oil turned lower through the day after touching its best levels in almost three years. So far this market has been a buy-the-dip affair, and market fundamentals seem solid as supply remains tight, but we just need to be mindful from a technical perspective. Yesterday’s outside day bearish engulfing candle is one red flag, the bearish MACD crossover on the daily chart is another. Not necessarily the top but would call for a potential near-term pullback such as a ~10% correction as seen in Mar/Apr this year. Anyway, market fundamentals remain firm and OPEC+ has scope to increase in August – it would be about 1.5m bpd short of demand without any additional output from OPEC or Iranian oil coming back online.
Bitcoin – still holding under the 200-day SMA but the selling may be done now as bears tire and weak hands are out; there is a potential rip higher incoming.
ECB preview: no big changes ahead of Jun 10th meeting
- No material changes expected
- More hawkish (EUR positive) more likely than more dovish
- Brighter economic outlook since March
The European Central Bank (ECB) convenes on Thursday (Jun 10th) amid a much rosier economic outlook than at the start of the year. But with the central bank having communicated its plans to front-load asset purchases, there is not expected to be any material change in policy or communication. It will be hard to avoid taper talk so how the ECB responds to questions around tapering will be of central importance to the market’s expectations and the euro.
At the March meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but that it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point.
Yields have been pressing higher but have retreated from the May peaks. The increased pace of asset purchases that was agreed in March came as a response to rising yields at the time. But the economic outlook – chiefly driven by a strong vaccine rollout that was slow to start but is now firing on all cylinders – has improved greatly since then. The ECB has been taking the line that inflation is temporary and rising bond yields reflect better fundamentals, so I don’t think it will be unduly concerned by a higher rate environment now due to the better economic picture. This will make talk of a taper very difficult to ignore. The language around the speed of asset purchases may change somewhat, and this could drive EZ yields + EUR higher. It will be very interesting to see what the ECB says about the state of financing conditions and it is sure to continue to tie PEPP purchases to maintaining these as ‘favourable’.
The big risk for EUR crosses around this meeting is: does the ECB silence taper talk with enough vigour to keep yields in check, or does it allow the market to think the more hawkish voices are winning the argument about when the central bank eventually exits emergency mode.
Inflation has picked up since the last meeting, which could see the forecast for 2021 and 2022 revised upwards from the March level. EZ inflation rose to 2% in May from 1.6% in April, the first time it’s been on target in over two years. With growth in Q1 a little light, the rebound in the summer should mean GDP projections remain broadly unchanged.
What has the ECB been saying lately?
ECB speakers have been offering a few titbits since the last meeting. Of particular importance to the speed at which the ECB will exit emergency mode, Christine Lagarde stressed that inflationary pressures will be temporary – sticking to the global central banker script. At the April meeting she said tapering talk was premature.
Kazaks and Lane made it clear policymakers will look at the asset purchase programme again in June, which could involve scaling back the programme if the economic situation is better. There were dovish comments from the Panetta in late May, noting that it was too early to taper bond purchases. Banque de France Governor, Villeroy de Galhau, stressed that the ECB is going to be at least as slow to tighten as the Federal Reserve.
But we’ve also had warnings about financial stability risks stemming from rising levels of sovereign debt. Vice president de Guindos warned of a “legacy of higher debt and weaker balance sheets which … could prompt sharp market corrections and financial stress”.
Right now, the price action has flipped above the 5-day moving average (RHS), so we look for a confirmation of this move (close above today and a green candle again tomorrow) for a bullish signal. On the LHS, the longer-term view of the daily MACD divergence is raising a warning flag.
WeWork to go public via BowX SPAC
WeWork is to go public via a SPAC merger with BowX Acquisition Corp in a deal valuing the company at around $9bn. Shares in BowX (NASDAQ: rose 5% in pre-market trade to above the nominal $10 it listed at. The move will allow WeWork to trade a publicly-listed stock without the kind of scrutiny that kyboshed its abortive 2019 listing. The $9bn is substantially below the roughly $47bn discussed when it filed for its 2019 IPO.
The deal is funded by $483m in cash raised by BowX plus $800m in private investment from investors including Fidelity, BlackRock and Starwood Capital. The deal provides WeWork with about $1.3bn in capital “which will enable the company to fund its growth plans into the future”, it said. Upon completion, the company will have approximately $1.9 billion of cash on the balance sheet and total liquidity of $2.4 billion, including a $550 million senior secured notes facility to be provided by SoftBank Group.
As noted on Tuesday, WeWork announced losses of $3.2bn last year as it pitched for a SPAC listing and $1bn investment. This was a narrowing from $3.5bn burnt in 2019 because it slashed capex to the bone, cutting investment from $2.2bn to $49m. Occupancy fell to 47% from 72%, but the company expects to rebound to 90% next year, which seems optimistic. As does an expected doubling of revenues to $7bn by 2024. We looked at the leasing structure back in 2019 in some depth and it hard to see how WeWork will gain more customers as the effects of the pandemic seem set to linger. In particular, having had experience of the WeWork goldfish bowl cubicles, they are exactly the opposite of what workers will desire as they return to offices – more open plan please.
As noted on Tuesday: Investors who might have got swept up in a WeWork IPO in 2019 will be grateful the listing got pulled. Now they get another chance to get burnt by WeWork’s ambitions. 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. The pandemic has radically transformed the services office landscape from 2019 but WeWork has also been forced to change for other reasons too and is more streamlined than the bloated entity it once was, but it remains overly optimistic both about its prospects and those of the market in which it operates. It’s just all too easy with a SPAC and only underlines the concerns about this craze and the misallocation of capital it is fostering.
Elsewhere, GME stock trades +6% in pre-market after yesterday’s 52% jump. Dow and S&P 500 futs suggest Wall Street will add to Thursday’s gains. European stocks are holding onto early gains and trade broadly positively. Eyes on US bank stocks after the Federal Reserve said Thursday they can accelerate dividend and buybacks after June 30th as long as they pass the latest round of stress tests. US 10s trade up at 1.675% post the 7-year auction yesterday.
In FX EURGBP is the one to watch as the pair takes a fresh look at the key 0.8540 support, with little in the way below this to block a move to an 82 handle.
Stocks wobble again, oil up, Musk tweet lifts Bitcoin
Stocks are looking a bit wobbly again this morning, whilst the US dollar is bid and the euro trades at a four-month low. European bourses are broadly lower as indices continue to retreat in the face of rising cases, a recovery that could be already priced in, doubts about the sustainability of monetary and fiscal support etc, etc. If you look at this we are just seeing a bit of a pullback from the recent highs (record highs for the DAX, US, Global), whilst the FTSE 100 is simply around the middle of its 4-month range. One year into the bull market – the S&P 500 had its best 12 months since the 1930s – US markets were lower yesterday as Treasury Secretary Janet Yellen said Biden’s $3tn economic would need to be paid for by tax rises. RobinHood has confidentially filed documents with the SEC in preparation to list, whilst GameStop shares fell after-hours following the company’s first earnings since the January frenzy.
Just as Britain’s excess death level falls below the 5-year average for the first time in months, the EU is set to announce fresh rules to allow it to control vaccine exports. Officials are playing down the importance of it, saying it’s nought but a scrap of paper to let governments take action if required, but it smacks of protectionism and is not going to down well in Britain. Meanwhile, after questions were raised by the US National Institute of Allergy and Infectious Diseases (NIAID), AstraZeneca said it will reissue vaccine data within 48 hours, saying that the numbers released Monday were based on a “pre-specified interim analysis” with a cut-off date in mid-February. The all-seeing Dr Fauci said the press release from AstraZeneca could be misleading. Another blow to confidence, another PR nightmare for Astra, which has been dogged by doubters ever since it released its preliminary results for the vaccine last year. It’s a lesson in how, no matter how good you are, you need to be good at communicating this to people or they just won’t believe it.
Suez crisis: Oil prices moved higher today after a massive container ship blocked the Suez Canal in both direction, which followed the sharp demand-driven fall on Tuesday amid doubts about the demand-led recovery from Europe this summer and another build in oil inventories. The API said crude oil stockpiles rose 2.9m barrels last week – EIA figures on tap later are expected to show a build of 1.4m barrels.
Bitcoin jumped above $56,300 from under $54,000 earlier this morning as Elon Musk shilled, I mean tweeted, about it again. It’s not a clear break and not that big a deal given how much Bitcoin moves around at these levels but there was a discernible sustained rally after Musk tweeted:
You can now buy a Tesla with Bitcoin.
Tesla is using only internal & open source software & operates Bitcoin nodes directly. Bitcoin paid to Tesla will be retained as Bitcoin, not converted to fiat currency.
European flash manufacturing and services PMIs show bullishness despite rising infection rates. I think this is interesting since although new restrictions in some of the major economies, businesses remain upbeat. The survey data was collected between March 12th and 23rd, so it is very much up to date. Whilst compilers IHS Markit note that the outlook as deteriorated amid rising infection rates, business activity is strong, particularly in manufacturing. (read DAX outperformance in the cyclical recovery). The flash Eurozone composite PMI rose to an 8-month high at 52.5, with a clear two-speed recovery evident with Services still in contraction territory at 48.8, albeit this was a 7-month high, whilst manufacturing hit a record high at 62.4.
Inflation, inflation, where art thou, inflation? Inflation in the UK fell last month as cars, clothes and games dragged the consumer prices index (CPI) lower. CPI rose by 0.4% in the 12 months to February 2021, down from 0.7% to January 2020. As with the recent US data, this is going to be the last easy print ahead of the spring as base effects and –fingers crossed – cyclical recovery boost inflation readings. The pandemic has skewed a lot of the usual seasonal data so we need to be careful about reading too much into any one print.
Everyone’s favourite stock, GameStop shares fell over 12% in after-hours trade as fourth quarter earnings missed on the top and bottom line. EPS came in at $1.34 on $2.12bn in revenues, both a little light. But e-commerce sales rose 175% – woohoo the next Amazon of gaming is here. Well not quite. There was not a whole lot of detail about the strategy, though it does seem they will raise capital by selling shares. This may have hit the stock after-market as it initially rose on the earnings release. Meanwhile many investors were left disappointed by a lack of a Q&A session. GameStop has been pretty tight-lipped through all of this frenzy, but you would have thought that this earnings call would have afforded management the opportunity to speak to investors openly. YTD gains remain solid at +864%.
On the tape today there are several Fed speakers, including Williams, Daly and Evans, as well as Jay Powell and Janet Yellen’s second day of testimony in Congress on the CARES Act. ECB chief Christine Lagarde is also due to speak. On the data front watch for the US flash manufacturing and services PMIs and durable goods orders.
Powell and Yellen did their double act yesterday, delivering testimony to lawmakers about the economic response to the pandemic. It wasn’t quite Kris and Rita, but the way Treasury and Fed are in harmony is new. Full MMT? Not quite. Biden’ $3tn stimulus plans on top of the $1.9tn just launched – and all the stimulus last year – suggests the government just doesn’t care a heck of a lot about deficits. Except Yellen stressed that the $3tn economic plan would require tax hikes. Investors sat up, the Dow sold off in the afternoon after trading flat in the morning. What is unclear is the degree to which this could be debt-funded, and to what extent increasing taxes could amount to fiscal tightening (the idea is that it won’t as it will be targeted at those who exert the lowest marginal impact on spending, in other words, the rich). Powell said that the economic recovery from the pandemic had “progressed more quickly than generally expected and looks to be strengthening.” Yellen thinks the economy will be back to full employment next year.
Fed governor Lael Brainard said the central bank will show “resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance” rather than taking “pre-emptive” action.
Dallas Fed president Robert Kaplan said he expects rates to back up further, but this would be a healthy signal and he would not want to get in the way. Kaplan also came out of the closet to say he was one of those on the FOMC calling for a rate hike in 2022 – hardly a surprise given he is one of the most hawkish members. Also worth noting he is not a voting member this year or next, so his hawkishness won’t have any real effect on Fed policy over the next 22 months. The Dallas Fed president also said: “the first step for withdrawing accommodation would be to reduce the Fed’s asset purchases,” which matches our expectations that the Fed will seek to taper its $120bn bond buying programme before it looks to think about thinking about raising rates. If the current market positioning is right, this would indicate that the Fed may need to start the tapering wheels in motion as early as its June meeting. Kaplan reiterated the Fed’s central stance that inflation will rise this year but not be sustained, and that it’s good to do a lot now rather than waiting. And he suggested than anything to distort the yield curve any more than the Fed is already doing by its massive bond buying programme would be less helpful – ie no Twist.
No one can escape dollar strength right now. The Dollar index has popped above the recent swing high to its highest since November with the 200-day SMA firmly within the bulls’ sights at 92.6720, which should offer resistance near term at least.
The euro trades this morning at its weakest in 4 months after breaking down at the 200-day SMA at 1.1850.
GBPUSD has cracked key trend support and now bears will eye a squeeze back to the 100-day moving average a little above 1.36.