European stocks in broad decline, oil weaker after OPEC deal

Risk is firmly off this morning with European stock markets slipping in early trade, led lower by the travel and energy sectors. US futures are weaker after Friday saw the first down week on Wall Street in four. Bank earnings were strong, but markets have already discounted an exceptionally strong reporting season. Meanwhile concerns about variants, rising cases and declining vaccine efficacy are all conspiring to knock confidence. The FTSE 100 slumped to a 2-month low in early trade as it retreated well south of 7,000. US 10yr Treasury yields hover around 1.28% but are off the low hit earlier close to the 200-day SMA. I think we are already in a high summer lull for stock markets. 

Inflation was the big story last week and remains the big question mark hanging over markets. Consumer expectations have shot higher – the University of Michigan released its report on Friday showing consumers think prices will rise 4.8% over the next year. Earlier in the week the CPI print hit 5.4%. As expressed in these columns on many occasions, the risk was always that expressing a tolerance for inflation to run hot via average inflation targeting, the Federal Reserve was letting inflation expectations become unanchored, leading to a period of sustained high inflation. 

Ocado shares slipped 3% in early trade as investors assessed the impact that a fire at one its fulfilment centres will have. There is the immediate operational impact at Erith with orders being cancelled following the blaze, which was caused by a three-robot crash. There is reputational risk from cancelling swathes of orders – small I’d say – but nonetheless to be considered. But the main thing investors are concerned about is the safety of the technology – will this be repeated? It is only two years since the Andover facility burned down. Will this impact on future deals with international partners?

Oil prices slipped to their weakest level in a month as OPEC+ finally reached accord over production increases. With Saudi Arabia and the United Arab Emirates making up, it removes the kind of pump-at-will tail risk for the market, but it’s a fragile peace. OPEC+ will now start incrementally raising production by an additional 400k bpd each month through to December, adding 2m bpd to output by the year end. Production will continue to rise next year at a rate of an extra 400k bpd each month through to the end of 2022. Baseline changes make it a bit it bit of a muddy picture in the latter part of next year, but front month pricing chiefly reflect the apparent success for OPEC in showing it will continue to work hard to manage oil markets. The broad risk off tone in the market amid concerns of variants, rising cases and declining vaccine efficacy is also contributing to the soft price action this morning for oil. WTI (Sep) is flirting with the Jun lows around the $70 level, where the 50-day SMA is offering support for now.

Looking ahead to this week we are interested in some speeches from Bank of England rate setters. Inflation in Britain spiked to 2.5% recently, raising the prospect that the Monetary Policy Committee will be forced into an earlier tightening of conditions than it has guided so far. Last week both Ramsden and Saunders sounded the hawkish alarm over inflation – so look to comments today from Haskel and Broadbent on Thursday for more of a steer. Central banks like to communicate policy direction ahead of time, so we would consider these statements likely to signal the MPC is about to tighten. 

There is a light economic calendar today – Haskel tops the bill along with the German Buba report, whilst later in the US session we await the NAHB housing market index. 

Bitcoin futures: Price action is frankly horrid – expecting another leg lower soon.