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Stock markets were mixed at the open in Europe as investors look ahead to the Federal Reserve announcement later. A rather flat start to the session saw the FTSE 100 test the 7,250 area before easing back towards the flatline around 7,275. The DAX was similarly flat as a pancake after 30 mins of trading – clearly investors are sitting on their hands until the Fed later.

Wall Street closed a new record high for a fourth-straight session as earnings continue to underpin confidence in fundamentals. It appears that fears about inflation eroding margins are so far unfounded. Whilst markets may have concerns about the Fed’s tapering and eventual tightening, these seem to have been well telegraphed thus far with the Fed chasing to catch up with bond markets and not the other way around.

Oil slackened as API inventories were soft – stocks rose by 3.6m barrels last week, well ahead of the 1.5m expected. EIA inventory data is due later, expected to show a build of 1.9m barrels. OPEC+ meets on Thursday amid calls for it to raise output further. Specifically, there seems to be some pressure coming from the White House as Joe Biden blamed the cartel for higher oil and gas prices, saying in Glasgow that he was reluctant to explain what he would do if OPEC doesn’t increase output – presumably he doesn’t mean kill off investment in US fossil fuels?

Shares in high street bellwether Next were down as the cautious outlook remained despite a very strong performance in the last few weeks. Full price sales in the 13 weeks to the end of October were up +17% versus two years ago. In the last 5 weeks full price sales rose 14%, ahead of the 10% expected. Nevertheless, the company stuck to its Q4 full price sales guidance at +10% and full year profit before tax at £800m.

Although Next continues to perform very well, it remains inherently cautious due to slowing demand, partly due to inflation; as well as the well-worn supply chain issues and labour shortages. The company says pent-up demand will slacken over time and warned that price increases will hurt sales despite consumer finances in decent shape. It also cautioned that while the availability of stock has improved, it “remains challenging, with delays in our international supply chain being compounded by labour shortages in the UK transport and warehousing networks”. Next is always super cautious but continues to deliver strong free cash year after year.

Taper time

The focus today is squarely on the Fed. It’s certain to announce the start of tapering, and push against interest rate hikes. Sounds easy enough but there are details which could affect the market reaction later. The 10yr Treasury yield sits above 1.53% ahead of the Fed statement, whilst 2s are back down around 0.45% having traded above 0.5% for the first time in 18 months in recent days. The dollar index is holding 94 after a stronger session yesterday, though is a tad weaker this morning.

Key questions relate to the pace and timing of tapering, and comments about the path of inflation and jobs from chair Jay Powell.
The Fed is likely to begin tapering its $120-a-month QE programme this month, or potentially wait until Dec. I don’t think this matters a huge amount, though delay could be marginally negative for the dollar and good for risk. It’s the pace of the tapering that really counts as this will determine when bond buying ends and could help shape expectations for when the Fed will begin raising rates. It’s expected that the Fed will reduce asset purchases at a rate of $15bn-a-month, which would mean the taper takes 8 months to complete. However, the Fed could go ahead at $20bn-a-month, ending two months earlier. Markets would likely see $20bn as more hawkish and suggest an earlier rate hike. There is no accompanying dot plot this month, but Powell is likely to reiterate that “a different and substantially more stringent test” is required for interest rates to move up.

Clearly, inflation is proving less transitory than the Fed had originally thought. In his last press conference Powell avoided referring to inflation as being transitory, and recent remarks have generally indicated greater concern about sustained price hikes. If Powell expresses greater concern in Nov than Sep over inflation – which has remained stubbornly high (4% core CPI and 3.6% core PCE are both well above the Fed’s 2% target) – then the market may see this as a tacit acceptance that rates are likely to move higher by the middle of next year. Markets currently forecast a two-thirds chance of a hike by June next year, earlier than current FOMC projections. It’s hard to imagine Powell not sounding more worried – ie hawkish – on inflation.

Overall, today should be fairly straightforward for the Fed and Powell to communicate a taper which has been telegraphed for several months. The problems start to arrive if inflation remains at 4% next year and into the second quarter of 2022.

Electric cars

Electric cars are good, and internal combustion engines are bad, right? Nothing about the lifespan of batteries or the scarcity of rare earth metals or the fact that right now it takes a lot of fossil fuels to charge the batteries … anyway let’s leave all that to the green cops in Glasgow. I am sure they know what is best for us since they usually do.

Anyway, electric car uptake is kind of presumed – it’s just not clear how quickly nor who’s going to win the race. So when a major EV maker seems to get into bed with one of the world’s top car rental firms it is important for the stock of both companies. Tesla stock surged last week and the company hit a $1 trillion market cap for the first time after Hertz announced it was expanding its battery-electric vehicle fleet with “an initial order of 100,000 Teslas by the end of 2022”.

It turns out Tesla has not signed a deal with Hertz to supply the rental firm with 100,000 cars. So, it seems like the rally in Tesla and Hertz shares over the last week or two has been built on a fake news story? Who’d have thought that such a thing could happen in today’s markets…I mean it’s not like Tesla, and Elon Musk, don’t have previous here. Whilst the original statement came from Hertz, it’s not like Musk or anyone else at Tesla refuted it outright when they had the chance. I guess that is what happens when you do not have a public relations team and rely on your CEO’s tweets to deliver corporate messaging.

So, when Musk tweets all innocently yesterday, a full seven days after the Hertz claim, you have to raise an eyebrow at least. In reply to a fan post about the stock price rally, Musk tweeted: “If any of this is based on Hertz, I’d like to emphasize that no contract has been signed yet. Tesla has far more demand than production, therefore we will only sell cars to Hertz for the same margin as to consumers. Hertz deal has zero effect on our economics.”

So, Hertz doesn’t actually need a contract – if Musk is genuine here and Hertz are paying full whack then they can just buy the cars like anyone else would – as such it doesn’t materially alter the fact that Hertz is buying 100,000 Teslas – we just don’t know how or when. Matt Levine makes this point well in his Money Stuff newsletter.

But it does kind of leave you with a sense that they are not playing with the full face of the bat here. Tesla stock is up more than 28% since the Hertz order news broke. There has not been a heck of a lot of other news around the stock so I’d say at the minimum it’s a factor, and probably go as far to say a major one. Analysts got all giddy about the implications for the deal, which is important too. Here’s fanboy Dan Ives of Wedbush: “The Hertz deal we believe will be viewed as a tipping point for the EV industry … We believe this is the biggest transformation to the auto industry since the 1950′s with more consumers heading down the EV path over the coming years.”

Does it matter if it’s a contract or Hertz staffers ordering cars individually? I don’t know, but you could imagine a world close to our own where the SEC thinks that maybe these kind of opaque statements that drive significant increases in stock price valuations amounts to manipulation of some sort, or just carelessness? I don’t think this would be allowed by the FCA.

Yesterday Hertz responded indirectly to the Musk tweet by saying that “deliveries of the Teslas already have started”. The company added: “We are seeing very strong early demand for Teslas in our rental fleet, which reflects market demand for Tesla vehicles.”

Tesla shares fell, Hertz stock trading OTC initially dropped 10% before rallying 7%.

Talking of rental car companies – shares in Avis (CAR) surged in another kind of meme-stock-crazy-type move. The move came as Avis – one of the most talked about stocks on Reddit’s WallStreetBets thread – delivered a record quarterly profit and sales of more than $3bn. Earnings rose to $674 million, or $10.45 a share, in the June-September quarter, up from just $45 million, or 63 cents a share, a year before. Avis closed over 108% at $357, having at one point traded above $545 amid a frenzied day of trading that saw the stock halted on more than one occasion.

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