Ex-divis hold back FTSE, European stocks steady

Take your pick: Talk down US shale, discourage investment in the oil sector, close key pipelines and virtue signal about climate change, pump vast amounts of cash to stimulate demand and then call on OPEC and its allies to pump more oil because inflation is biting in your country. Or you could be a billionaire who virtue signals about green things but backs a mining operation to dig up one of the last pristine areas of land on the planet to find essential elements to make electric cars. Welcome to the new green agenda. It’s not consistent but it’s dogma so you just better go along with it.

After KoBold Metals, which is backed Jeff Bezos and Bill Gates, signed an agreement with London-listed Bluejay Mining to dig up Greenland for critical materials used in electric vehicles, the White House has come out with another blinder: telling OPEC it needs to pump more oil to keep US consumer prices down. It came ahead of the latest CPI inflation report, which showed energy prices accelerating. The energy index increased 1.6% in July after rising 1.5% in June. President Biden, the White House proclaimed in a statement, “has made it clear that he wants Americans to have access to affordable and reliable energy, including at the pump”. I thought the new administration was all green and cuddly and definitely not pro Big Oil. Or maybe it’s only pro Big Oil when it’s Aramco and not Chevron or Exxon who stand to gain…? Senator John Cornyn summed it up: “If the president is suddenly worried about rising gas prices, he needs to stop killing our own energy production”. He could also have a word with Jay Powell…but there is definitely a point here about countries offshoring their carbon emissions to meet targets.

So, the White House sounds worried about inflation, even if the Fed does not seem to be racing to get on top of it. Yesterday’s report showed headline inflation was steady at 5.4% year on year, with prices advancing 0.5% in July vs the +0.9% in June. Core month-on-month was down to +0.3% from the +0.9% in June and a little light of expectations for +0.4%. It was the smallest rise in four months, and showed some degree of cooling, but the headline rate remains at a 13-year high.

Shelter, food, energy, and new vehicles all increased in June, but used vehicles were a lot cooler at +0.2% vs the +10% we have seen in two of the previous three months. According to the BLS, the deceleration in the used cars and trucks index was a major factor in the smaller monthly increase in the index for all items less food and energy. The WH said there were signs inflation in some items was ‘coming off the boil’. There were signs of recovery in pandemic-affected industries and pointing arguably to the kind of staffing and wage pressures felt in the hospitality sector as the food away from home index rose 0.8% in July, its largest monthly increase since February 1981.

Briefly 

  • The FTSE 100 finished Wednesday +0.82% at 7,219.90, a new post-pandemic high– it’s been slower to recover than some peers which is largely reflective of the make-up of the index and propensity to more value and cyclical global growth plays and much less big tech, growth + momentum names. This has held it back, whilst the persistence of cases globally has left investors a little hesitant. It compares less favourably with the more domestically focussed FTSE 250 which has been smashing out record highs because the vaccine-driven recovery in the UK has been strong, whilst it too was coming from an exceptionally low base, which was driven by the harder hit Britain took initially from the pandemic and the lingering discount from Brexit.
  • European stock markets broadly higher in early trade Thursday after Wall Street set fresh record highs, though the FTSE 100 lags with ex-dividend factors clipping 32.74 pts today, sending the index into the red. Insurers led the way higher in Europe as Aegon reported Q2 numbers well ahead of expectations. Asian shares were broadly weaker.
  • Despite the records for the S&P 500 and Dow Jones, the Nasdaq dipped as the rotation back from mega-cap growth/momentum into cyclicals continued.
  • The UK economy grew 4.8% in the second quarter, exceeding expectations.
  • Bitcoin rose to its highest since May, but is weaker this morning
  • There was a small-than-expected draw on oil inventories, with the EIA reporting a draw of about 450k vs –750k expected. However, oil prices have bounced to regain trend support with WTI again north of $69.
  • Southwest Airlines warned on Delta – not its rival, the covid variant – saying that the spread of the disease has hit bookings and increased cancellations. As hospitalisations hit a 6-month in the US, the carrier became the first to trim its guidance for the third quarter and warned it may not be profitable in Q3. Share erased early losses to end up more than 1%.
  • Moderna shares tumbled, down 16% to wipe out the Monday rally and then some. A bearish Bank of America note didn’t help. BioNTech shares also fell as the European Medicines Agency said it was investigating reports about conditions related to the skin and kidneys following vaccinations. BioNTech shares jumped 10% in Frankfurt this morning however, indicating that investors are still arguing over the valuations of these drugmakers.
  • Cineworld said it is considering a US listing – trying to capture some of the AMC stardust perhaps? Shares +5% after also reporting that first half pre-tax losses narrowed to $576.4m from $1.64bn last year. Confidence returning as lockdown era is past.
  • Coming up today – US PPI inflation seen at +0.6%, core at +0.5%.Also US unemployment claims data (fc +375%).

Infrastructure bill – what to own?

We noted that Caterpillar was the big riser on the Dow as the House passed the $1tn infrastructure bill. But Bank of America has come out with some handy plays. The package includes $550 billion over five years for roads, bridges, airports, waterways, broadband, water systems and the power grid. BoA says engineering firms like Jacobs and AECOM are best placed to benefit from spending on core projects like roads. Meanwhile think along the lines of construction equipment makers Caterpillar and Deere, as well as engine and generator maker Cummins, the bank says.

For UK stocks, we look to the likes of Ashtead, the industrial equipment rental business, which rallied over 1% again on Wednesday to take its 5-day gain to +5%. Likewise building materials business CRH rallied more than 2% for a +5% 5-day performance.

US CPI inflation on the money, futures higher

Dow futures rallied and pointed to a solid opening for Wall Street after another hot inflation print. Inflation remains elevated but the print did not exceed already lofty expectations. Dow being called to open up about 50-60pts, with the S&P 500 seen opening up around 4,442. US 10yr yields slipped and now trade a shade under 1.36%, gold moved up on the print to $1,745 from $1,735, whilst the dollar was offered on the news with EURUSD back to 1.1750 area having tested the YTD lows earlier in the session, before paring gains.

Increasing sense that inflation is here to stay but we’re not sensing the Fed is getting more angsty just yet, so allowing gold to climb. Indeed if anything, deceleration in price growth allows the Fed to take a slower route to the taper, so risk is finding some bid. Elsewhere the bid for equities filtered through to the FTSE 100, which hit a new HOD above 7,200, marking its strongest intra-day level since the pandemic struck.

Headline inflation was pretty much on the money and steady at 5.4% year-on-year, with prices advancing 0.5% in July vs the +0.9% whopper in June. Core month-on-month was down to +0.3% from the +0.9% in June and a little light of expectations for +0.4%. It was the smallest rise in four months. Shelter, food, energy, and new vehicles all increased in June, but used vehicles were a lot cooler at +0.2% vs the +10% we have seen in two of the previous three months. According to the BLS, the deceleration in the used cars and trucks index was a major factor in the smaller monthly increase in the index for all items less food and energy.

Some signs of recovery in pandemic-affected industries and pointing arguably to the kind of staffing and wage pressures felt in the hospitality sector as the food away from home index rose 0.8% in July, its largest monthly increase since February 1981. Ultimately, I would not see this as a narrative-changer for the Fed and the timing of its tapering. Of course, there is ever-present problem for the Fed in trying to balance employment with inflation – real wages, which are declining. Most people have a job, so most people are seeing their purchasing power eroded. What price jobs, jobs, jobs? Real average weekly earnings were -0.1% month-on-month vs -0.9% in Jun, though this was revised to -0.5%.

European stocks to open higher on rebounding risk sentiment

Key European indices are set to open August positively as risk sentiment lightens after last week’s poor close for the markets.

The FTSE100 starts on the front foot, tracking over 70 points higher this morning. The DAX jumps up 112.27 points, while the CAC40 is up by 55.08.

It’s good to see the markets in a broadly confident mood this morning. Asian equities, which performed stolidly last week following a spate of new Chinese regulatory crackdowns, also begin August with strong positive movements. The Hong Kong Hang Seng, for instance, has taken big strides to reach 26,195 at the time of writing – up 270.

Elsewhere, a number of confident earnings reports from global large caps is helping power positive stock market sentiment.

HSBC, for example, reported at the start of Asian trading it had grown profits fourfold this quarter, reaching $5.1bn. Europe’s largest lender’s H1 profits are up 150% year-on-year, totalling $10.8bn. Total revenues, however, are down from $13.1bn in Q1 to $12.6bn. Even so, a very strong quarter for HSBC has been seen.

Rolls-Royce and Taylor-Wimpey are amongst the European firms reporting quarterly earnings today. On Wall Street, technology provider Arista Networks kicks off another busy earnings week later on, while Uber, scandal-rocked Activision Blizzard, GM, and Virgin Galactic all due to share quarterly figures later this week.

Check our US earnings season calendar for more information.

The USD continues its bearish form, with the Dollar Index dropping to the 92 level, after dipping below that. This is the greenback’s worse performance since May and hasn’t been helped by the Fed’s dovish stance on rate hikes.

The weaker dollar has been fairly good news GBP/USD, however. The pairing has climbed to fresh daily tops of 1.3925, helping reclaim territory that slide away on Friday. The pound has been supported by falling Delta variant COVID-19 case numbers in the UK, as well as the softer dollar.

UK PMI data is due this morning although the markets may be anticipating a slowdown in both services and manufacturing output. Labour shortages and higher input costs, similar to those in the US market, may have stymied July’s growth.

Crude oil, both WTI and Brent, drop away from gains made over the weekend. WTI futures are currently trading at around $73.11, while Brent is hovering around the $74.60 area.

Bitcoin has cleared $40,000 this morning, but it did so several times in the last week before falling away again and staying in the $39,000 range. The world’s most popular cryptocurrency has had a tough time sustaining incremental gains last month, so it’ll be interesting to watch BTC price action as August progresses.

European stocks pull back while dollar feels weak

European equities edged lower on opening this morning as investors respond to the flurry of earnings season reports from across the week.

A range of European-listed large caps are reporting today. Renault, Air France-KLM, BNP Paribas and IAG are some of the headliners today. It’s also a fairly busy day for US earnings too, with the likes of Proctor & Gamble, Chevron and ExxonMobil sharing their latest quarterly financials.

It will be interesting to see how Chevron and ExxonMobil perform. Oil prices have strengthened across 2021, despite recent dips due to OPEC+ wrangling, so this may have fed into resurgent revenues for the oil supermajors.

In terms of European earnings, BNP Paribas has shared headline profits of €2.9bn – a 26% annual rise – this quarter. Renault has also shared some insights already, noting €345bn in first half profits for 2021. It’s a major reversal for the French automaker, which posted a €7.3bn loss during the same period in 2020 after the Covid-19 caused mass factory shutdowns.

Looking at indices, we can see drops on the key European bourses. The FTSE 100 was down 73 points at the start of Friday at 7,005.2. Germany’s DAX is about 117 points lower, at 15,492, and the French CAC40 dropped 28 points at 6,605.

Conversely, the NASDAQ was at 14,778, showing a small 15.8 jump. The Dow Jones was up 153 points too at 35,083. The S&P 500 continues the positive trend for US indices, up by 18.51 to reach 4,419.

Asian markets were performing lower, especially Hong Kong’s Hang Seng, which had dropped nearly 1.56% at 24,905 at the time of writing. Shares in Asia are possibly on course for their worst month since May 2020 as trading volatility steps up.

Turning to the dollar, the Dollar Index, which weighs the greenback against six other major currencies, looks like it’s on track for more dismal performance following a dovish Fed outlook. It is currently rated at 91.88, after reaching a low of 91.85 – the lowest level seen since June 29th.

The Fed committed to boosting its monthly Treasury securities purchases by $80bn at its meeting on Wednesday July 28th. An accommodative approach to the economy, despite hot inflation and disappointing Q2 GDP performance, appears to be Chairman Jerome Powell and the Fed’s direction.

US GDP grew at 6.5% in the quarter ending June, falling way below the Dow Jones estimated 8.4%. A combination of higher consumer prices, high commodities prices, and falling manufacturing and services output contributed to the worse-than-expected second quarter growth rate.

WTI oil contracts started this morning at $73.48. Brent has dipped just below $75 at $74.99 but could be on course to crack that threshold by the end of the day. At week’s end, oil should have gained around 2%, with higher demand in the US and tighter supplies cited as supports.

Bitcoin had cleared $40,000 earlier in the week, but as of today had fallen back to $39,677 at its lowest. The world’s most popular cryptocurrency has had a bit of a torrid July and looks like it’s struggling to establish a breakout.

Stocks pick up, bonds remain bid ahead of Fed minutes

European stocks edged higher early Wednesday after taking a sharp tumble in yesterday’s afternoon session. Bonds and the dollar rallied, leaving benchmark yields at their lowest in some months, knocking the wind out of the cyclical recovery trade. The FTSE 100 ended the day down 0.9% at 7100 but has regained some poise in the early part of today’s session to trade at 7,130. European markets remain very much stuck in month-long ranges. Shell shares rose more than 2% on a promise if higher shareholder returns.

Mega cap growth helped the US market keep a more level head as the S&P 500 declined 0.2%, easing away from a record high set last week, whilst the Nasdaq rallied by almost the same amount. The Dow Jones fell 0.6% as economically sensitive names like Caterpillar, Chevron, Home Depot and JPMorgan slipped. US 10yr yields are under 1.34% this morning, a five-month low. Similar story for gilts, with the yield on 10yr paper at 0.627%, the lowest since Feb.

Yesterday’s pullback and the sharp drop in bond yields reflected doubts about the pace of growth, and the extent to which costs are going up for businesses. The talk is that peak growth is behind us and The ISM services PMI reflected the trouble for growth is not on the demand side; quite the reverse. Businesses anecdotally reported ‘supply chain outages, logistics delays and employee- and management-staffing constraints’ and that ‘business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous. We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market’. I fail to see how this implies inflation will be transitory.

A run-up in the S&P 500 of 5% in the last two weeks looks to be unsustainable and at the very least I’d anticipate we see a pause and trading sideways, if not a deeper correction over the summer. For now, though, Tuesday’s dip is not a sign of reversal. The market is narrowing, too. The S&P 500 would have had a much sharper drop (~1%) had it not been for the 14 index points added by Apple and Amazon. Shares in Amazon rallied almost 5% as the US Defense department cancelled its $10bn JEDI contract with Microsoft, with the Pentagon saying it will seek a new multi-vendor contract. It will seek proposals from both Microsoft and Amazon.

The narrative and the ‘macro picture’ seem a little less understood – has growth peaked, will inflation wipe out economic gains, has the Fed really got inflation angst? We get to find out a lot more about that with today’s release of the minutes from the last FOMC meeting. Earnings season is coming up but it’s well known we are going to see some monster numbers and it is less obvious how Q2 reporting will drive the market higher – if anything it could lead to a round of profit taking and recalibration. Expectations are already so high. But we can’t ignore the bond market and equity market concentration in growth stocks – if bonds find more bid and the 10yr pushes yet lower to 1%, then the stock market can keep gliding higher.

The dollar is holding higher against peers ahead of the minutes from the June meeting. The meeting revealed a couple of things we had pretty well expected: a) Fed officials are talking about tapering, b) dots are coming in due to the rapid economic rebound and, less well anticipated, c) the Fed is a little bit concerned about letting inflation off the leash. The minutes should provide some further clarity/explanation about the Fed’s likely position but ultimately we don’t see any change until Jackson Hole in late August or the September meeting. The trouble for the market is dealing with the Fed’s reaction function in terms of yields: a hawkish Fed and quicker taper/hike ought to drive yields higher, but the reaction to the June meeting saw the reverse as the statement and projections implied the Fed wouldn’t let inflation get out of control. So now we know this, we are likely to see a more considered market reaction that, all else equal, should see rates move higher this year as the Fed lays down the tapering agenda and inflation remains more persistent than central banks think.

EURUSD made a fresh 3-month low in a further extension from the bear flag downside breakout.

EURUSD price action on July 7th 2021.

GBPUSD: firm rejection of 1.39 yesterday and continues to stick to the downtrend. For now, continues to scrap around the 1.38 area, felling just below this morning and eyeing a break to 1.3660 area, the 200-day SMA and Mar/Apr double bottom.

GBPUSD price action on July 7th 2021.

Crude oil futures catching a little bid in early trade this morning after yesterday’s reversal. Concerns remain that the failure by OPEC to agree to gently increase production could lead to the output agreement unravelling, which could lead to more crude coming on the market. But there is a lot of uncertainty – if OPEC+ stick to the current quotas global inventories will draw down further and the market will further tighten, squeezing prices higher.

Chart showing crude oil price action.

Gold is getting a filip from lower yields, though the stronger greenback is checking its advance. 10yr TIPS have slipped to –0.94%, the lowest since the middle of February as nominal rates fell. Price action remains above $1,800 with the bullish crossover on the MACD confirmed.

Gold chart showing price action 07.07.2021

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.

 

EURUSD price action chart.

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.

Oil price movement chart.

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.

Bitcoin price action chart.

Stocks search for direction after Monday turnaround, MicroStrategy doubles down again

When you’re all in, you’re all in. Michael ‘diamond eyes’ Saylor revealed MicroStrategy (MSTR) has doubled down on its double down by purchasing yet more Bitcoin. The company has bought an additional 13,005 Bitcoins for roughly $489 million in cash at an average price of $37,617 per coin. “As of 6/21/21 we #hodl ~105,085 bitcoins acquired for ~$2.741 billion at an average price of ~$26,080 per bitcoin,” he tweeted. Shares declined almost 10% as investors fretted over this decision and watched Bitcoin prices skid to near the $30k support before paring losses to trade in the $32k area – 50% down from its all-time high in April. Whether he’s making the call of the century or he’s dead wrong is kind of irrelevant – how on earth can the CEO of a public company be allowed to take such a massive gamble on such a volatile asset? $30k will be defended to the death – if it goes expect a bloodbath, and Saylor’s bet will look like a monumental mistake. Meanwhile China continues its clampdown with the PBOC telling Alipay and other banks not to provide any services such as trading, clearing and settlement for crypto transactions and to do more to prevent speculation on cryptocurrencies. Whilst not a new policy as such, it underlines how China is taking a very hard line on this, particularly in the wake of the mining clampdown.

Stocks recovered their poise on Monday with the Dow up 586pts and the S&P 500 rallying 1.4%. The FTSE 100 is back above 7,000 this morning as the unwind in reflation bets reversed and higher oil prices helped the majors. WTI rose above $73 and Brent above $75, levels not seen since Oct 2018. Benchmark US 10-year yields traded back at 1.5%, having slipped as low as 1.36%. A lot of the unwind we saw last week post the FOMC has been clawed back after a sterling Monday session – I fear there is too much uncertainty to have much conviction and we back in a market that will chop up both longs and shorts, just as we were in March.

New York Fed president John Williams reiterated that the US central bank is not moving quickly, despite what most saw as a hawkish statement last week. “It’s clear that the economy is improving at a rapid rate, and the medium-term outlook is very good. But the data and conditions have not progressed enough for the FOMC to shift its monetary policy stance of strong support for the economic recovery,” he said. The usually hawkish Dallas Fed president Robert Kaplan said making an adjustment to asset purchases sooner rather than later be “healthier”.

Meanwhile in prepared remarks ahead of his Congressional testimony today, Fed chair Jay Powell reiterated that the Fed is not unduly concerned that hot inflation readings are here to stay. “[As] transitory supply effects abate, inflation is expected to drop back toward our longer-run goal,” he says. His testimony from 7pm (BST) is likely to be market-moving – particularly if he says anything considered as hawkish. We will want to see whether he seeks to row back on the messaging the market took from last Wednesday.

It’s worth remembering that the bout of selling we saw in equity markets on Friday came after St Louis Fed president James Bullard said the Fed could raise rates as early as next year. There is a lot of uncertainty about the recovery – both its pace and duration – and what the Fed is thinking and where it should be a year, two years from now. For some time, the market had bought hook, line and sinker into the lower-for-longer mantra that average inflation targeting and the employment focus implied – without adjusting to the economic (and health) realities of the last three months that has brought forward the timing of tightening. Beware linear thinking – things change.

A lot of dollar shorts will have been cleared out by the rally but this is now on pause after a small pullback in yesterday’s session. Bullish crossover on the hourly MACD but it’s close to the zero line so not as forceful an indicator. 92 now acting as the near-term resistance.

Chart showing dollar performance on 22nd June 2021.

S&P 500: watch the bear traps at the 50-day line.

Performance of S&P 500 displayed on chart for 22.06.2021.

 

Fed fallout, Morrisons shares jump

The reverberations from the Fed’s policy meeting last week continue to be felt across global markets. Stocks have fallen, bond yields too, amid a sharp repricing of the risks of the Fed raising rates. Asian shares fell as global markets continue to react to the Fed’s willingness to raise rates in the face of higher inflation and its admission that members are talking about talking about tapering. US stocks suffered their worst week in several months, with the Dow Jones declining the most since October. European markets followed suit with a broad sell-off in early trade Monday. US 10yr yields have fallen below 1.4%, whilst the dollar is surging. The funny thing about all this is that given the data coming out of the US the Fed didn’t do anything terribly surprising, it just seems to have caught some by surprise by saying it wasn’t going to keep things super easy forever. Let’s be clear – this is not a shift away from average inflation targeting or somehow the Fed abandoning its employment-first approach: only a realisation that two and a half years from now the economy should be pretty well recovered, and inflation will have been running above 2% for a good amount of months, so some tightening would be warranted. Yields declining after a ‘hawkish’ Fed is frankly odd, and indicates the market thinks the stance is appropriate to keep a lid on inflation.

Shares in Morrisons jumped 30% to 234p after it said it rejected an informal offer from Clayton, Dubilier & Rice at 230p, saying that the bid undervalues the business. CD&R has until July 17th if it wants to make a formal offer, though this could flush Amazon out to finally make an approach. MRW has been undervalued for a while and before today not got nowhere near recovering its pre-pandemic valuation. Owning the bulk of its store estate outright makes it an attractive asset for private equity intent on gearing it up (think Toys R Us…). There is a lot of PE money sniffing around the UK as valuations are low – we knew this before the pandemic. But its market share of the UK grocery market, its growing wholesale business and its existing tie-up with Amazon surely means it is not impossible the US tech giant will make an offer. However, if Amazon were interested, you’d assume that an offer would have come by now. A PE bid seems more likely and ultimately may be the best way to unlock value for shareholders who’ve gone through a lot but ultimately not seen any appreciation in years (before today). Shares in Tesco and Sainsbury’s were up strongly partly on the read-across, partly on expectations that a PE buyout would see MRW less able/willing to compete.

This morning the FTSE 100 declined half of one percent to trade under 7,000 following from Friday’s drubbing on Wall Street that left the S&P 500 down 1.3% on the day and the Vix rose towards 22. As flagged last week, the UK market was liable to a pullback as it approached the top of the rising wedge.

Chart showing FTSE 100 movements on 21 June 2021.

Dollar looks stretched and liable to pullback but lots of speculative short USD/long EUR/GBP positions need to be unwound. This is a big dollar short squeeze.

21st June 2021's Dollar Index performance

Gold tested $1,760 where it has found some near-term support, but it’s going to be tough to avoid a flirt with $1,675.

Gold performance 21.06.2021.

Stocks dip as Fed shakeout continues

How do you trade the Fed? Not easily, is the simple answer. US has ripped higher as the Fed signalled it won’t let inflation run riot, but bonds have been pretty steady – 10yr yields have slipped back under 1.48%. Stocks have come off their record highs since the Wednesday meeting, but yesterday the Nasdaq Composite – composed of tech and growth companies that ought to do less well in a rising rate environment – gained 0.87%. That may be because investors are retreating to a form of quality right now. NDX rose 1.3% as the mega tech names enjoyed solid gains. The broader market was weaker with small caps -1%, commodities slipped with palladium -10%, platinum -7%, oil lower and the dollar was bid up to its best day in over a year.

European indices saw a mixed start to the session on Friday but have mostly turned red as investors dial down their risk in the wake of the Fed’s slightly hawkish meeting. What the Fed’s meeting also told us was that once inflation expectations become unanchored, it’s a tough job to re-anchor them. I continue to envisage higher yields by the end of the year but the Bank of America Flow Show report today stresses that cyclicals face a ‘perfect storm’, with ‘excess positioning, China tightening, US fiscal hopes fading, and now hawkish Fed’ combining against them.  Metals are a tad firmer this morning after steep losses Thursday, but copper is still ~14% off its recent peak and set for its worst week in 15 months. A combination of a tighter Fed and China’s efforts to lower prices have worked. Gold is also set for its steepest weekly loss in more than a year as a stronger dollar and Fed’s hit job on inflation works its way through some stretched speculative longs.

UK retail sales indicated the direction of the post-pandemic economy. Sales fell 1.4% between April and May as shoppers ditched stuff for experiences, dining out more and hitting the pub again. Tesco Q1 numbers this morning evidence this, with the company reporting that sales growth peaked in March at +14.6% and moderated in April/May as restrictions eased.  Tesco is starting to hit some extremely tough comparisons with last year’s pandemic-driven surge in sales. Shares in the retailer declined more than 1% towards the bottom of the FTSE 100.

Dollar strength continues to dominate the FX narrative in the wake of the Fed. GBPUSD is lower again with a break of the 100-day moving average to 1.3860.  The washing out of longs maybe has some way to go yet and a test of the April double bottom at 1.3660 may be on if there is further for this to correct. Fairly stretched GBP longs and shorts on the USD mean this could have further to unwind. USDJPY trades lower at 110 support after the BoJ kept monetary policy unchanged and extended its pandemic relief programme. EURUSD is also on the back foot and trying to hold onto the 61.8% retracement of the Mar-May rally around 1.1920. AUDUSD is through the April low and testing the 200-day SMA at 0.7550. Very light data day but EU finance ministers are meeting for a second day in Brussels.

Shares in EasyJet, Ryanair and Wizz Air all rose after an upgrade for budget airlines from HSBC, which says ‘the process of reopening borders and enabling travel is assuming momentum within the EU, and the UK may follow’. EasyJet and Ryanair were both upgraded to buy from hold, whilst Wizz was given a hold rating having previously held a reduce tag. HSBC adds that whilst UK policy is ‘not easily predicted’ (you don’t say), it expects UK travel restrictions to ease.

Was it all that hawkish? Markets recovering poise after Fed meeting

European stocks fell slightly in early trade Thursday, following Asia (ex-China) and the US into the red after the Federal Reserve signalled it thinks rates will rise a year earlier than previously forecast. Bonds fell, with US 10yr yields up to 1.59% before easing back a touch to 1.56% this morning, and the 2yr hitting its highest in a year. The dollar rallied on expectations of tighter US monetary policy, with sterling back under $1.40 and the euro under $1.20. Gold is weaker amid the strong USD, higher yield picture. Oil remains bid after another bullish inventory report.

 

The Fed’s much-maligned dot plot signalled policymakers believe there will be two rate hikes by the end of 2023, vs the previous zero moves until 2024. The interest rate on excess reserves was raised by 5bps – worries about inflation perhaps.  It’s a technical move, but it points to the direction of travel: tighter not looser. The forecasts for this year were a lot punchier – 7% GDP growth and 3% core inflation. The market took all this as unvarnished hawkish – certainly it paves the way for an Aug/Sep taper announcement. Powell also dialled back the transitory language around inflation. 

 

So, was it all that hawkish? I thought we’d stop bothering with the dots a long time ago – Powell said you should take them with a “big grain of salt”. As I said a couple of years ago, “decisions to cut or hike are binary and tangible; dots are like dreams; imaginary and fluid. They also cannot account for things when there is very great, and very real, uncertainty in the economy”. None of the policymakers know what’s going to happen tomorrow, let along in 2023 – they are not fortune tellers. I don’t think it told us much we shouldn’t already have expected – the April meeting minutes showed the Fed is thinking about thinking about tapering, while rates are going to remain anchored at zero for a couple more years. Powell said this meeting was the talking about talking about tapering (and said this phrase should be retired). Lift off not until after 2023 always seemed unlikely given the pace of the reopening and Fed is reflecting this – we can all see the data coming in every week – these dots only get wheeled out every quarter and since the March projections things have clearly improved – it is not a surprise that Fed policymakers have noticed.

 

But the meeting did signal a shift on inflation: confidence in the labour market + economy is still there but they are just a shade more concerned about inflation, which might be seen as odd since they were expecting it and some hot readings this summer were guaranteed. But there is a clear sense they are less confident in the transitory narrative. Indeed, the shift in the number of policymakers forecasting hikes in 2023 can probably be attributed to a couple of hot inflation prints we have had since the last projections. Whilst growth and inflation forecasts for 2021 were raised substantially, projections for growth, unemployment and inflation for 2022 and 2023 were almost unmoved. It’s saying – we saw those CPI numbers, don’t worry.

 

“Inflation could turn out to be higher and more persistent than we expect,” Powell said in the presser. In some ways this tells us less about the Fed’s view of 2023 and more about the concerns of some policymakers right now, that they are presiding over an overheating economy, and they need to get back in front of the curve PDQ.  They’re not saying the economy is going to be booming in 2023, it’s just that the dots are a way to express concern about inflation today.

So far not much damage: The S&P 500 closed just half a percent lower. European markets are a shade lower this morning but hardly tumbling. The Fed is communicating its views reasonably well and has managed to signal its intent to tighten without actually doing anything. The question remains over whether inflation becomes more troublesome before labour market recovery is established, which could force the Fed into tightening before it would like and forcing a recession.

Amid all this, bank stocks liked the hawkishness as higher yields help them, with shares in Barclays and Lloyds both up about 2% this morning. Airline stocks are also higher this morning amid reports ministers are looking to ditch quarantine rules for Brits travelling to amber list countries who have had both jabs. IAG rose 3.5%, EasyJet +4% and Ryanair +3.8%. Finally CureVac stock dropped 50% after its vaccine candidate showed an efficacy of just 47%.

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