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European stocks ticked a tad higher in early trade with the FTSE 100 arresting three days of declines, but the major bourses seemed in no mood to break out just yet as a choppy week continues. Asian shares were mixed overnight with shares in Shenzhen and Shanghai lower, whilst Tokyo and Hong Kong rose. US stocks rallied on Wall Street in yesterday’s session, although the small-cap Russell 2000 retreated from a record high as bond yields nudged lower.

Donald Trump has been impeached (for a second time) but whether he is convicted is another matter. Markets are more concerned about the future and will be focused on president-elect Joe Biden’s stimulus plans, which are expected to be unveiled today. Meanwhile, the Trump administration appears to have withdrawn plans to blacklist Chinese tech giants Alibaba, Tencent and Baidu.

Fed taper talk remains in focus with chair Jay Powell set to speak later today. Federal Reserve Governor Lael Brainard yesterday tried to dial down the chatter about tapering, saying the current pace of bond buying would be needed for some time. “The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress,” she said. “Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time.” This week we have seen several Fed speakers present different views of when a taper might be discussed – Evans, Bostic and Kaplan signalled they could be open to tapering this year, while Clarida, Mester and Barkin did not seem keen. Bullard said ‘not close to tapering’ and Brainard clearly seems uneasy about discussing this just yet. The important thing is to get this discussion out in the open now so the Fed has the foundations to act upon once inflation does feed through and the pro-cyclical fiscal expansion meets vaccines to generate a strong economic rebound in 2021.

In FX markets, GBPUSD ticked up in early European trade after testing and failing to breach the 1.37 level yesterday for the second time this year. A potential double top could be forming, but the upside pressure may be building for a run through to 1.40 if a move beyond 1.37 sticks. With the BoE effectively putting negative rate talk on hold for now, the focus will be on the vaccine rollout in the UK to deliver an economic surprise. Taper talk in the US will also be key – if Powell signals anything about a 2021 taper to the market the dollar could rally.

The euro was relatively unmoved by Italian political strife as Matteo Renzi pulled support for the government, pushing up the yield on BTPs a little. It wouldn’t be Italy without some political disharmony and the market is happy to look right through this for now. Italian bank shares were unmoved and the FTSE MIB ticked higher.

WTI oil prices rose off their lows of the day yesterday but failed to recover the highs near $54 after another EIA inventory report that betrayed near-term weakness in gasoline demand. Crude inventories fell 3.247 million barrels last week, a little more than expected. However distillate stockpiles, including diesel and heating oil, rose by forecast-beating 4.786 million barrels, almost double the expected build. Gasoline inventories were up by 4.4m barrels, also well ahead of forecast, despite production falling. Gasoline production was 7.5m bpd last week vs 8m bpd a week earlier. Over the past four weeks, motor gasoline product supplied averaged 7.8m b/d down by 11% from the same period last year. Nevertheless, the supply figures are encouraging. In the week to Jan 10th US oil demand as measured by total products supplied exceeded that in the year-ago week for the first time since the pandemic began, despite partial lockdowns.

Higher gasoline prices pushed US consumer price inflation up last month, whilst underlying inflation remained relatively subdued as the effect of stimulus on a recovering economy is yet to feed through to higher prices. The print was largely in line with expectations, with the Labor Department saying the CPI index increased 0.4% in December after gaining 0.2% in November. But it was an 8.4% jump in petrol prices, which accounted for more than 60% of the rise in the CPI, that caught the attention. Year-on-year CPI rose to 1.4% last month from 1.2% in November.


A veritable cornucopia of retail updates to plough through this morning. Tesco delivered strong UK sales performance in the third quarter with like-for-like growth of +6.7%, accelerating to +8.1% over the key Christmas period as we all stocked up on smaller turkeys and Champagne. Sales of its Finest range rose 14% year-on-year. Online sales growth was particularly strong at over +80%, which management say is worth £1 billion extra sales over the 19-week period. Guidance for 2020/21 unchanged. Shares ticked 1-2% lower.

Lockdowns are a problem for Associated British Foods (ABF). Sales at its Primark stores were down 30% in the 16 weeks to January 2nd. Unlike several peers, it does not have the online presence to compensate for store closures. Management estimates the loss of sales in the periods of closure during these 16 weeks to be £540m. Shares ticked a tad lower with the market largely geared up for bad news from lockdowns already.

Consumer homeware demand remains buoyant. So says Dunelm, which has been performing well despite lockdowns. Total sales in the quarter were up 11.8%, despite the majority of store being closed for a four-week period during November.

Another winner from the pandemic, Halfords is enjoying cycling’s popularity as a means to get out and about. Retail sales like-for-likes rose +9.8% in the third quarter to the start of January, bolstered by growth of +35% in Cycling, whilst Motoring sales remain depressed (-8.4%) as driving miles have been greatly reduced. Meanwhile, Autocentre sales rose over 30%. Shares rose c1% in early trade with outlook for the next quarter still uncertain.

Shares in strike-hit Centrica rose 3% as it reported UK energy consumers were broadly unchanged, whilst installations of residential boilers recovered in the second half. Net debt is expected to be down 10% over the year at £2.8bn and the British Gas owner expects to report 2020 full year adjusted earnings per share from continuing and discontinued operations ahead of current market consensus (4.8p). 2020 closing Group net debt is expected to be approximately £2.8bn, a reduction of over 10% in the year. The reduction in debt is before including the proceeds of around £2.7bn from the sale of Direct Energy, which will be chiefly used to reduce net debt and bolster the pension scheme.

Finally, shares in IAG rallied well as Norwegian Air Shuttle threw in the towel and exited the long haul fight as part of its plans for recovery. This is good news for IAG, which relies on the lucrative transatlantic routes. It also shows that once the dust settles, the pandemic ought to leave some of the stronger players in even better shape with less competition than before. Consolidation in European short haul has been needed for a while and the pandemic is helping to get the sector to its final destination.

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