European shares tread water after Dow hits record

• Dow record high
• US House passes $1.9tn stimulus package

Stocks in London, Paris and Frankfurt opened tentatively higher after fresh records on Wall Street and a decent handover from Asia. The Dow Jones rose 464.28 points, or 1.5%, to notch a new record closing high at 32,297.02, after House Democrats passed Joe Biden’s $1.9bn Covid relief package. Stimulus cheques are coming and there is a realisation that a lot of this cash will go straight into stocks, as well as being spent on goods and things that drive company earnings. Relative calm in bond markets is helping to boost sentiment in stocks – US futures are trading higher. Gains in Europe were a little muted however as trading progressed in the first half hour, perhaps on some caution ahead of the European Central Bank (ECB) meeting later today.

Yesterday’s 10-year Treasury auction was a little soft but not enough to really worry the market. There was enough demand to let the yield on the US 10-year retreat a little.  10s are back under 1.5%, the lowest since March 4^th and the 2s10s spread at 1.34% from a high of 1.47% earlier this month. Maybe it was over-hyped but nevertheless, I think this suggests the market is saying: it’s ok, rates can rise. Long-end yields have jumped a lot this year and we are in consolidation mode for the time being. There are 1.9 trillion reasons why yields can continue to rise. 30-year auction is today. US CPI inflation was in line at +1.7% year-on-year, but this was the last ‘easy’ print as base effects going forward will see the number rise. The Nasdaq 100 was a little softer yesterday following the stunning +4% rally on Tuesday.

Crazy volatile: If ‘stimmy checks’ find their way into the system – and they will – meme stocks will be first in the firing line. GameStop surged yesterday before collapsing 40% all of a sudden, triggering stops all over the place. GME finished up 7% for the day at $265 but traded at a high of $348.50 and a low of $172. Another Reddit favourite, Koss, more than doubled in value before ending up 70% on the day.

A broader recovery: According to Bloomberg, the percentage of NYSE-listed shares at 52-week highs has climbed to 21%, the highest since December 2016 and rising from a low of 0.1% in September 2020. The broadening out of the rally to value and cyclicals is something we’ve been banging on about for months, but it’s yet to really translate to the FTSE. So, we come back a persistent thread – why are UK stocks not making all-time highs when the Dow and DAX are able to do so? The FTSE 100 remains 200 points or so below its January peak and some way short of the all-time high. The rotation into cyclicals and the underperformance of the UK market to peers for some years should be translating into better gains than we have seen so far: is there something wrong with our market? The pound is a lot stronger than has it been, but the prospects for global growth are too. Oil prices are rebounding and metals have hit multi-year highs. The FTSE 100 should be doing better.

One of our underperformers is Rolls Royce: shares rose 2% to 115p despite reporting a larger-than-expected loss as it stuck to previous guidance, reiterating that it expects to turn cash flow positive in the second half. Pre-tax losses amounted to £4bn last year with negative free cash flow of £4.2bn reflects an exceptional year on all fronts for the aerospace giant. Underlying revenues of £11.7bn were down from £15.4bn last year but ahead of the consensus estimate of £11.03bn. The company has sufficient liquidity even if there is no recovery this year, according to the CEO.

Oil is firmer after yesterday’s EIA inventories and a weaker dollar also supported. Bullish data on oil products more than offset another big build in crude stocks – the market is still out of alignment following the weather event in the Southern states. Stocks rose a whopping 13.8m barrels, creating at 6% the widest surplus to the five-year average since Jan. However, gasoline inventories tumbled 11.8m barrels and distillates declined by 5.5m barrels. It looks as though demand is picking up strongly in the US, and this suggests that US crude stockpiles will start to decline in line with global stocks. OPEC has helped create a deficit in the market that should see prices advance further.

Gold has rebounded and broken above the next resistance level we identified as the dollar softened and US yields retreated a touch. Near-term bulls and bears battle on the horizontal resistance around $1,740, with the next leg seen around $1,754.