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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. 

Bitcoin Chart 06.01.2021

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