JPM shares rise on record trading revenues

Equities

Extrapolating too much from a single bank’s earnings is always an easy trap to fall into … but the quarterly numbers from JPMorgan indicate Main Street is not doing nearly as well as Wall Street – this is not a surprise, but it begs the question of when the credit losses from bad corporate and personal debt starts to catch up with the broader market. Moreover, investors need to ask whether the exceptional trading revenues are all that sustainable.

JPM rose in pre-market trade – the shares of JPM and other investment banks (C, GS, MS, BAC) can rally from this because they are relatively cheap and have not participated in the rally since March in the same way as the broad market. However, the implications for the broader market are interesting – do impairments matter for the rest of the market, for consumer cyclicals for example? Given the way the investment bank is doing all the lifting, what are the implications for financials like the XLF ETF? Or Russell 1000 financials? The outlook there must be a lot more challenging.

JPMorgan beat on the top and bottom line. Revenues topped $33.8bn vs the $30.5bn expected, whilst earnings per share hit $1.38 vs $1.01 expected. There was a huge range of estimates so the consensus numbers were always going to be a little out.

The bank earned $4.7bn of net income in the second quarter despite building $8.9 billion of credit reserves thanks to its highest-ever quarterly revenue.

Loan loss provisions were $10.5bn, which was more than expected and the quarter included almost $9bn in reserve builds largely due to Covid-19. The company reaffirmed suspension of share buybacks at least through the end of Q3 2020.

The consumer bank reported a net loss of $176 million, compared with net income of $4.2 billion in the prior year, predominantly driven by reserve builds. Net revenue was $12.2 billion, down 9%. Credit card sales were 23% lower, with average loans down 7%, while deposits rose 20% as consumers deleveraged. The provision for credit losses in the consumer bank was $5.8 billion, up $4.7 billion from the prior year driven by reserve builds, chiefly in credit cards.

Trading revenues were phenomenal, rising 80% with fixed income revenues doubling, which indicates the investment banks on Wall Street are in good shape thanks largely to their trading arms. But the numbers elsewhere don’t suggest Main St is in good shape at all, which indicates the more diversified investment banks are going to be in better shape than many others. As we discussed in the preview to this week, the massive about of investment grade corporate bond issuance and mortgage refinancing as companies and household refinanced to take advantage of lower rates has been a big help, albeit far bigger than we had thought. Assets under management rose 15% but this probably broadly reflects the rally in the equity markets since the last earnings release.

My sense is what while the stock market does not reflect the real economy, and the JPM numbers reinforce this view, this is not a barrier to further gains. The vast amount of liquidity that has been injected into the financial system will keep stocks supported – the cash needs to find a home somewhere and bonds offer nothing. However there is clearly a risk that Main Street starts to bite at the ankles of Wall Street and results in another pullback like we saw in the second week of June. We should remember that there could some very hard yards ahead for the US economy as states pause reopening – loan loss provisions may need to rise a lot more.

Meanwhile Delta Airlines reported an ugly loss of $4.43 vs $4.07 expected, though revenues were a little ahead of forecast. Net loss of $3.9bn with Q2 revenues the lowest since the mid-80s. It has the cash to last 19 months despite burning through $27m a day in cash – down from $100m at the peak of the crisis.

Wells Fargo and Citigroup coming up next….

Risk rolls over in early US trade

Commodities
Equities
Forex

Risk appetite has well and truly rolled over. US stocks moved lower in the first hour of trade and continued to leg it south, while oil prices swan dived amid a very messy picture for global markets on Thursday afternoon.  Walgreens Boots Alliance shares dragged on the Dow as the stock fell 9% after reporting weaker-than-forecast earnings amid some serious weakness in the UK. The dollar found bid as risk appetite turned south, hurting FX majors like GBPUSD and EURUSD.

Supreme Court rules on Trump tax records

Risk sentiment was a bit shaky anyway but it seemed to take a hit as Donald Trump suffered a defeat at the hands of the Supreme Court – not his favourite institution of late. The Supreme Court ruled Donald Trump’s finances and tax returns are fair game and should be seen by the Grand Jury, but it threw out rulings that allowed 3 Democrat-led Congressional committees to obtain Trump’s financial records.

This ruling relates to alleged hush money to women who have claimed to have had sexual relations with the president – a story Mr Trump said was irrelevant. That may be so, but his tax returns may interest voters. Whilst US legal proceedings are far from my area of expertise, I understand that if only the Grand Jury sees the documents it is very unlikely that they would become public records, which could have had serious repercussions for the election. Meanwhile Treasury Sec Steve Mnuchin was also on the wires, saying the Federal government would not bail out states that had been ‘mis-managed’.

Stocks, commodities lower despite solid US jobs figures

The move lower came despite some decent jobs numbers. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.

So, the picture in the US labour market is maybe not quite as bad as feared, but still horrendous. There is clearly a long way to go before getting back to pre-pandemic levels. Moreover, as the number of covid-19 cases rises across most US states, the numbers may well start to improve a slower rate.

At send time indices were at session lows, making new lows for the week – we could see further declines as risk appetite appears to have rolled over today. As of send time the Dow was down over 1.8% to 25,559 at the session low, whilst S&P 500 was down 1.5% at a low of 3,120, making it down for the week.

The dip on Wall Street added to pressure on European equities with the FTSE 100 down over 1.7% to a low at 6,046, taking it negative for the week. Having been bid up on Monday towards the higher end of the recent ranges for little reason we are seeing indices pull back closer to the middle of the June ranges – no conviction trade yet.

Dollar firms against pound, euro in risk-off trade

Meanwhile, sterling eased back as risk appetite soured and Michel Barnier said talks this week confirm that significant divergences remain between the EU and the UK. Sterling pulled back from its highs at the top of the new bullish channel on the news as well as the general risk-off tone but remains in a solid uptrend with GBPUSD ably supported above 1.26. Elsewhere in FX the risk rollover boosted the USD so EURUSD pulled back under 1.13.

WTI (Aug) fell sharply from around $40.50 a low under $39.30 in a very swift and long-awaited reversal – albeit probably a day late given yesterday’s inventory build. Expectations of a slower reopening in a number of US states is a worry for near-term sentiment and I have been calling for a reversal based on the technical set-up, which could see a return to the neckline at $35.

US Election, Recession, Brexit: What’s in store for markets in 2020 H2?

Equities
Forex

The first half of 2020 has been a wild ride. We’ve seen unprecedented moves in markets, historic stimulus efforts by both central banks and governments, and record-breaking data that grabbed headlines across the globe.

H1 has already brought plenty of drama, but what should we expect from the next two quarters? Join us for a recap of some of the biggest events in market history and a look at the risks and opportunities that lie ahead.

Coronavirus pandemic prompts worst quarter in decades for stocks

At the start of 2020 the main themes of the year looked to be the US Presidential Election, the trade war with China, and Brexit.

It seems like years ago that markets began to get jittery on fears that the handful of novel coronavirus cases in Wuhan, China, could become something ‘as bad as SARS’. It quickly became apparent that we were dealing with something much worse, and the market was quick to realise the full, brutal, reality of a global pandemic.

The panic reached its zenith towards the end of March. As the sell-off ran out of momentum global stock markets were left -21.3% lower. The S&P 500 had its worst quarter since 2008; the Dow dropped the most since 1987 and set a new record for the biggest single-day gain (2,117 points) and single-day loss (2,997 points). European stocks had their worst quarter since 2002, with a -23% drop in Q1.

Oil turns negative for first time in history after Saudi Arabia sparks price war

Things became even more chaotic in the oil markets when, after OPEC and its allies failed to agree a pandemic response, Saudi Arabia opened the floodgates and slashed prices of its crude oil exports. Oil prices endured the biggest single-day collapse since the Gulf War – over -24%.

It was further strain for a market now seriously considering the risk that shuttered economies across the globe would hit demand so hard that global storage would hit capacity. The May contract for West Texas Intermediate went negative – a first for oil futures – changing hands for almost -$40 ahead of expiry.

Meanwhile US 10-year treasury yields hit record lows of 0.318%, and gold climbed to its highest levels in seven years, pushing even higher in Q2.

Economies locked down, central banks crank up stimulus

Nations across the globe ordered their citizens to remain at home, taking the unprecedented step to voluntarily put huge swathes of their economies on ice for weeks. Even when lockdown measures were eased, the new normal of social distancing, face masks, and plastic screens left many businesses operating at a fraction of their normal capacity.

The world’s central banks were quick to step in during the height of market volatility and continued to do so as the forecasts for the economic impact of the pandemic grew even more grim. The Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand all dropped rates to close to zero. Along with the European Central Bank, they unleashed enormous quantitative easing programmes, as well as other lending measures to help support businesses.

Unprecedented stimulus as unemployment spikes

Governments stepped in to pay the wages of furloughed employees as unemployment spiked – the US nonfarm payrolls report for April showed a jaw-dropping 20.5 million Americans had become unemployed in a single month. In the space of just six weeks America had erased all the job gains made since the financial crisis. The bill for US stimulus measures is currently $2 trillion, and is set to go higher when further measures are approved.

While most of the data may be improving, we’re still yet to see just how bad the GDP figures for Q2 are going to be. These, which will be released in the coming weeks, will show just how big a pit we have to dig ourselves out of.

H2: Recovery, US election, trade wars, Brexit

Markets may have recovered much of the coronavirus sell-off – US and European stocks posted their best quarter in decades in Q2 – but the world is still walking a fine line between reopening its economies and fending off the pandemic. Second wave fears abound. In the US in particular, economic data is largely pointing to a sharp rebound in activity, but at the same time Covid-19 case numbers are consistently smashing daily records.

These key competing bullish and bearish factors threaten to keep markets walking a tightrope in the quarters to come. Because of this, progress in the race to find a vaccine is closely watched. Risk is still highly sensitive to news of positive drug trials. The sooner we get a vaccine, the sooner life can return to normal, even if the world economy still has a long way to go before it returns to pre-crisis levels.

US Presidential Election: Trump lags in polls, Biden threatens to reverse tax cuts

The biggest talking point on the market in the coming months, aside from coronavirus, will undoubtedly be the US Presidential Election. The stakes are incredibly high, especially for the US stock market, and Democrat nominee Joe Biden intends to reverse the bulk of the sweeping tax cuts implemented by president Donald Trump.

Trump is currently lagging in the polls, with voters unimpressed by his response to the pandemic and also to the protests against police brutality that swept the nation. The president has long taken credit for the performance of the stock market and the economy, so for the latter to be facing a deep recession robs him of one of his key topics on the campaign trail.

Joe Biden may currently have a significant lead, but there is a long time to go until the polls, and anything could happen yet.

China trade war in focus, Hong Kong law adds fresh complications

The trade war with China would be a focus for the market anyway, but will come under increasing scrutiny in the run-up to the election. Thanks to Covid-19, anti-China sentiment is running high in the United States. This means Biden will also have to talk tough on China, which could mean that the damaging trade war is set to continue regardless of who wins the White House this time around.

Tensions have already risen on the back of China’s passing of a new Hong Kong security law, and coronavirus makes it virtually impossible that the terms of the Phase One trade agreement hashed out by Washington and Beijing will be carried out. Trump may be forced to stick with the deal, because abandoning it would leave him unable to flaunt his ability to make China toe the line during the presidential race. This would be positive for risk – markets were already rattled by fears that the president’s response to the Hong Kong law would include abandoning the deal.

How, when, and if: Unwinding stimulus

Even if we get a vaccine before the end of the year and global economies do rebound sharply, the vast levels of government and central bank stimulus will need to be addressed. Governments are running wartime levels of debt.

We’re looking at an even longer slog back to normalised monetary policy – something that banks like the Bank of England and the European Central Bank were struggling to reach even before Covid. There will be huge quantitative easing programmes to unwind and interest rates to lift away from zero, or potentially even out of negative territory.

Markets have been able to recover thanks to a steady cocktail of government and central bank stimulus. The years since the financial crisis have proven that it is incredibly difficult to wean markets and the economy off stimulus. There could be some tough decisions ahead, especially as governments begin to consider how they plan to repair their finances in the years to come.

Brexit deadline approaches, impasse remains

There is also Brexit to consider. While the coronavirus forced officials to move their negotiations online, little else seems to have happened so far. Both sides are refusing to budge and both sides are claiming that the other is being unreasonable. The UK does not want an extension to the transition period, and the two sides are running out of time to agree a trade deal.

We’ve seen before that both Downing Street and Brussels like to wait until the last possible moment to soften their stance. However, the risks here are higher because before there was always the prospect of another extension.

The last time negotiations were extended the battle in Westminster shocked the UK to its constitutional core. The Conservative landslide victory of 2019 gave Boris Johnson a much stronger hand this time around – the UK will leave in December, regardless of the situation.

Stay on top of the biggest events in H2

Whatever happens in the coming months, we’ll be here to bring you the latest news and analysis of the top developments and market events via the blog and XRay.

Risk assets rally on bumper US NFP jobs report

Equities
Forex

US stock futures jumped, and European equity indices pushed to highs of the day after a stand-out jobs report. Today’s US jobs figures show the economy is bouncing back, but there is a still a long way to go to replace all the millions of jobs lost due to the pandemic. Permanent destruction of demand and productivity will take years to claw back.

US employers added 4.8m jobs in June, which smashed the consensus expectations of around 3m. The unemployment rate declined more than expected to 11.1%. Revisions to Apr and May left employment 90k better than previously thought. Labour force participation improved to 61.5%. Wages are up 5% year-on-year.

US nonfarm payrolls – a closer look

But, a couple of things we should say about this to take the shine off the report.  First, weekly continuing jobless claims were a little worse than expected at 19.3m – this was a little better than last week but the number ought to be improving at a faster rate. Second, the total gains in employment over the last two months total 7.5m – but this is still dwarfed by the –20.8m recorded in April.

Three, the BLS notes that employment in leisure and hospitality increased by 2.1 million, accounting for about two-fifths of the gain in total nonfarm employment. Meanwhile, employment in retail rose by 740,000, so about 2.8m of the 4.8m was in sectors that are highly exposed to fresh lockdowns and the slowing of reopening, which has been the result of the recent spike in cases. So we cannot expect the same contribution from these sectors over the summer if states are in a stop-start reopening scenario.

Four, while the number of unemployed classed as being on temporary layoff decreased by 4.8m in June to 10.6m, following a decline of 2.7m in May, the number of permanent job losers continued to rise, increasing by 588,000 to 2.9m in June.

Stocks rise on NFP, cable lower on cancelled Brexit talks

Risk assets rose on the report as it was overall bullish. US futures jumped, with the S&P 500 heading above 3150, taking it some or 150 points, or around 5%,  above last week’s lows. The Dow is up 1000 points from last week’s lows. European indices rose the risk rally higher too.

Elsewhere, we saw limited reaction in the dollar, but GBPUSD shot lower shortly after the release on a separate report saying that a meeting between the UK and EU chief negotiators that had been scheduled for Friday had been cancelled.

Gold slipped lower, making a fresh low under $1760 and a possible breakout of the bearish flag signalled this morning, potentially calling for a retreat to around the $1750-$1747 area.

Tesla rally continues on forecast-beating deliveries, Wedbush price hike

Meanwhile Tesla shares just keep on going and are set to gap up $100 after the company said it delivered 90,650 vehicles in the second quarter, well ahead of both what the company had guided and the Street expectation for 83k vehicles. The company has successfully ramped production at its Fremont site and the Shanghai plant also came back online after being forced to shutter in the first quarter due to Covid. China sales are picking up with Tesla selling almost 12,000 Model 3s in May.

The stock also got a lift after Wedbush Securities increased its price target on the stock to $1,250 from $1,000, whilst the bull scenario got a PT of $2,000. Chinese rival Nio delivered 3,740 vehicles during June and beat forecasts with second-quarter deliveries of 10,331 vehicles.

The FTSE 100 was well poised for a move and duly broke out of the descending trend line from the June peak, fresh horizontal resistance seen around 6260.

Short sellers triumph as Wirecard collapses – but who’s next?

CFD Trading
Equities

Those shorting Wirecard will have been rubbing their hands with glee after the events of the past few days.

The company, once one of Germany’s tech darlings, last week filed for insolvency after admitting that almost €2 billion in cash missing from its balance sheet likely didn’t exist.

In the space of 11 days the stock price collapsed from just over €100 to as low as €1.15. In the week ending June 26th, Wirecard short sellers made $1.2 billion, with hedge funds accounting for the bulk of that.

Wirecard has been a heavily-shorted stock for a long time, thanks in part to negative coverage by the Financial Times, which has long warned that the company’s finances don’t add up. The stock was so heavily shorted that in February the German financial regulator took the unprecedented step of banning new short positions on Wirecard for an entire month.

Wirecard stock is a fraction of its former value after the 95% drop witnessed over the past 12 days. While hedge funds are still piling in to short the stock, many shorts have already locked in their profits. So what might be the next big target for short sellers?

GSX: Inflated revenues and fake users?

GSX Techedu is a tech company and online education provider focusing on after-school tutoring for primary and secondary school children, as well as courses in foreign language, and professional development amongst others.

The company has been the focus of short sellers for some time now. As of mid-May over a fifth of its publicly traded stock was sold short – 27.3 million shares, worth $815 million at the time. This makes GSX the fourth largest Hong Kong or Chinese equity traded short on US exchanges after Alibaba, Pinduoduo and JD.com.

The company faces claims from Citron Research and Muddy Waters that it has inflated its revenue figures. Citron, which has called GSX “the most blatant Chinese stock fraud since 2011”, has questioned the 431% year-on-year revenue surge reported by GSX in 2019. Additionally, Muddy Waters believes that around three quarters of the company’s reported students are actually bots rather than paid users.

GSX listed on the New York Stock Exchange on June 6th 2019 with an initial offer price of $10.50. The stock is now trading at around $58, and has surged 146% this year.

You can trade this hotly-watched stock on the Marketsx platform.

Tesla shorts down but not out

Tesla founder Elon Musk has been battling against short sellers for a long time. The huge rally seen in the stock price in recent months, while dealing a painful financial blow to short sellers, seems to have only hardened their resolve. Back at the end of January, a stronger than expected earnings report from Tesla saw shorts lose $1.5 billion in a single day. Then, at the beginning of March as the pandemic panic set in, Tesla’s tumble netted shorts $2.8 billion.

Tesla is the most shorted US stock, with the value of its float out on loan rising around $3 billion in the last two months to over $16 billion. That’s around 11% of its publicly available stock. The stock recently rose to trade above $1,000 per share for the first time, helped by resilient demand for its vehicles in China and progress towards a one million mile battery, which could revolutionise the electric vehicle market.

However, shorts believe there is still a large disconnect between where the stock is now and the fundamentals of the company – it went public ten years ago and, while the stock is up over 4,000% since then, Telsa has never delivered a full year of profitability. Shorts are betting that a lot of the recent gains seen in Tesla stock is because of momentum traders, and that the bubble will eventually burst.

Will Hammerson follow Intu into administration?

In the UK, shopping centre owner Hammerson attracted a lot of attention from short sellers during the height of the pandemic panic in March. It’s the most shorted UK stock, with 13% of its publicly traded shares out on loan. A total of nine hedge funds are betting against the stock, as the impact of the lockdown to battle Covid 19 and the prospect of a sluggish reopening hampered by social distancing measures, threatens the outlook for the company.

Rival Intu, owner of some of the UK’s largest shopping centres, entered administration this month. The company was already heavily laden with debt, and the coronavirus pandemic proved to be the final straw.

The fate of Intu shows just why short sellers are interested in Hammerson: as of the end of last week the collapse in its stock price left Intu valued at just £16 million, down from £13 billion in 2006.

While Hammerson raced higher from its mid-May low as its tenants prepared to reopen their stores, the stock has since lost nearly half its value again.

These are the most popular stocks for day trading

CFD Trading
Equities

Goldman Sachs recently reported that a basket of stocks favoured by retail day traders had outperformed their hedge fund basket by nearly 20% when the coronavirus sell-off was at its worst.

Retail day traders have helped fuel the market recovery from the March 23rd low, struck as fears over the economic impact of the Covid-19 pandemic reached their zenith.

Here’s what our signals tools have to say about some of the most popular stocks amongst day traders.

Moderna

Moderna is a hotly watched biotech company whose stock has seen a surge in popularity as markets try to bet on the winner in the race for a Covid-19 vaccine.

The stock is up 144% since March 23rd and over 230% year-to-date. Our Analyst Recommendations tool shows a consensus “Strong Buy” rating amongst Wall Street analysts, with the average price target of $87.64 representing a 35% upside even after months of incredible growth.

Tesla

Even CEO Elon Musk tweeting that the stock in his own company was overvalued couldn’t put the brakes on the Telsa stock rally this year. Day traders have helped drive this stock up 131% since March 23rd. Since January 1st the stock is up 140%.

The stock broke above $1,000 for the first time on June 10th, although it has since struggled to hold this level. The rally has left Wall Street analysts struggling to catch up – the average price target of $678.82 represents a -32% downside. Hedge funds snapped up three million shares in the last quarter, and news sentiment around the stock has been almost evenly split between bullish and bearish.

Snap

Snap is up 106% since March 23rd, although on a year-to-date basis the stock is up a more ‘modest’ 35%.

Our signals tools are sending bearish signals, however. Although the consensus rating amongst analysts is a “Buy”, at $19.91 the average price target represents a downside of -14%. Hedge funds dropped five million shares in the last quarter, and company insiders sold $206 million worth of shares.

MGM Resorts

MGM Resorts has been hit hard by the coronavirus pandemic, with its stock down 44% for the year. However, traders who bought it at the depths of the March sell-off would have netted a return of 103%.

The average price target amongst analysts of $17.92 represents an upside of just 1%, and the stock has a “Hold” rating. Hedge funds scooped up 48 million shares in the last quarter, while company insiders bought $24.5 million worth of the stock.

Spirit Airlines

SAVE is another stock that is down heavily on the year, but has surged from the March low. Since the market bottomed out, Spirit Airlines has recovered 102%, although it remains down -51% since January 1st.

Analysts rate the stock a “Hold”, although it has an average price target 11% higher than the current price of $20.56. Hedge funds trimmed their holdings by one million shares in the last quarter.

Day traders are beating Wall Street pros

CFD Trading
Equities

Some of the world’s top money managers have been outperformed by retail day traders recently.

Goldman Sachs reports that a portfolio of stocks traded by retail investors grew 61% in March, compared to just 45% for a basket of hedge fund picks.

Watch our video to find out more and discover how Marketsx stock trading tools can give you the edge when trading the most popular stocks amongst both retail investors and hedge fund bosses.

Find out more about our stock trading tools here.

Stocks weaker as US continuing claims rise, ECB goes big

Equities
Forex

European shares held losses and Wall Street opened lower as the June rally in stocks paused for a wee breather, with tensions around Hong Kong resurfacing and US jobs data indicating a lacklustre recovery in the labour force.

The ECB seems to have passed the test today but we are still unsure on OPEC’s moves and the ensuing effects on oil prices, which could affect other risk assets. Meanwhile US jobs numbers were disappointing.

US initial jobless claims fell to 1.9m but the key continuing claims number rose 650k from last week to 21.5m, which was ahead of expectations. It’s a worry that we are not seeing this number coming down as it suggests employers are not calling their staff back as quickly as had been hoped.

Tomorrow is nonfarm payrolls day, of course, with expectations for the headline print to come in at –8m jobs but we note the ADP number yesterday was just –2.76m vs –9m expected.

Meanwhile risk sentiment looked to be a little weaker as scuffles were reported in Hong Kong as protestors try to mark the Tiananmen Square anniversary. The situation in Hong Kong and related US-China tensions remain a significant, under-appreciated tail risk for equity markets.

The S&P 500 opened about a third of one percent lower but held 3100 even as the Vix declined to take a 25 handle. After the ECB meeting the DAX tested lows of the day at 12,321 before recovering to the 12,400 support.

The ECB surprised with a slightly bigger expansion of its Pandemic Emergency Purchase Programme (PEPP) than was expected, perhaps as it saw this as a good opportunity to front load the scheme rather trying to top up later down the line as limits approach. This does provide it ample room for the rest of the year without the market chatter resurfacing about whether and when it needs to do more.

The ECB took three steps: the PEPP envelope is being widened by an additional €600bn to €1.35bn, the scheme will last at least until June 2021 and it will reinvest proceeds at least until the end of 2022. This is emergency QE forever – or at least we are in a situation where the ECB has no option but to be on a war footing just to keep the show on the road. What price peace?

Staff projections were interesting – inflation is now seen at just 0.3% in 2020 vs 1.1% expected in March before magically picking up over the next two years. May showed outright deflation in 12 of the 19 countries using the euro and the weakest HICP inflation in four years. Growth is seen –8.7% under the ECB’s baseline scenario.

Christine Lagarde said she expects a rebound in Q3 and the staff projections indicate growth bouncing back to 5.2% in 2021. But she cautioned that weaker demand will exert a longer-lasting pressure on inflation. Inflation for 2022 is seen at just 1.3%, down from 1.5%, despite this massive amount of stimulus.

This is already well short of the 2% target and of course the ECB is very good at missing its target when the stimulus as ever has decreasing marginal effects. What’s clear is that we are at the limits of monetary policy efficacy.

More interesting perhaps for the future of the EZ – Finland has just said it cannot accept the EC’s recovery package as it stands – it will be a long slog getting this budget and bailout fund approved by all members.

German bund yields reversed their earlier fall to trade flat, whilst the euro pared some of its gains after spiking through the important Fibonacci level at 1.1230, with EURUSD last at 1.1350. GBPUSD was off its lows having bounced off the 1.2510 support to move back to 1.2540.

IPO market coming back to life?

Equities

The Covid-19 pandemic rocked global capital markets, creating seismic volatility in equity markets and leaving many planned IPOs Covid casualties. But as risk appetite recovers and there is still a lot of cash sitting on the side lines we are seeing the frozen IPO market starting to thaw.

JDE Peet raised €2.25bn last week in what was Europe’s biggest IPO since 2018, with shares pricing at the upper end of the proposed range and then quickly rallying from the IPO price to trade around €37. This was a very encouraging debut and may well for companies seeking to list this year – or at least in June.

Warner Music Group is due to IPO tomorrow (Jun 3rd), leading a group of companies that are expected to raise over $3bn. Warner Music is aiming to raise $1.8bn, selling 70m shares, or about 14% of the company. Shares are due to be priced at between $23 and $26 each. Plans for the IPO were shelved in February due to the coronavirus pandemic.

ZoomInfo is also due to IPO this week (Jun 4th) and will price the stock between $19 and $20, having previously expected to price between $16 and $18.

Pliant Therapeutics expects to IPO tomorrow with shares offered at between $14 and $16. It has also increased the offering from 6m shares to 9m shares, indicating decent demand.

Legend Biotech will IPO on Friday (Jun 5th) with an offering of 18.4m shares priced at $18-$20, which is expected to raise $350m.

These IPOs will be important tests for capital markets in the wake of the coronavirus pandemic, which needless to say rattled investor confidence. Clearly though, whilst sentiment is still a little frayed, we are seeing improved risk appetite and investors are sitting on chunks of cash that need to be put to work.

The S&P 500 is above 3050 and its 200-day moving average, whilst the Vix is under 30. The market is significantly calmer than it has been, albeit on forward valuations it does look rather pricey, which demands a pullback.

Nevertheless, now that central banks have all but killed bond markets, the action is shifting back to equity markets and cash needs to find a home.

We will be watching these closely to see whether it encourages some of the larger names and ‘unicorns’ such as Airbnb, Robinhood, Instacart or Palantir to come back to the IPO table this year in spite of the pandemic.

May’s top Blends: Einhorn rises, Corona falls

CFD Trading
Equities

The top performing Blends in May and the latest YTD performance.

May’s Star Performer: Einhorn Blend

David Einhorn led the way in May as global stocks continued their bounce back. The hedge fund boss – founder of Greenlight Capital – enjoyed a strong month as holdings like General Motors and Green Brick Partners rose along with other holdings such as AerCap and Chemours. The Einhorn Blend rose 15% in May but remains down 23% for the year.

 

The second-best performing Blend in May was the Cannabis Blend, which rose almost 14%. Earlier in the month it had been down but recovered strongly in the last two weeks. The blend is flat for the year, at -0.11%. Tilray (40% of the blend by weighting) and Canopy Growth (33%) both rallied in May but remain significantly off the 2018 peak.

Third place goes to the Gerstner Blend, which climbed 12% last month. As the Analyst Recommendation tool shows, the portfolio is made up of a stocks rated as ‘strong buys’ by Wall Street analysts.

As risk appetite improved across the month of May, some of the better performers lagged. Notably, the Corona Blend, which had been doing well, was the only basket to record a fall over the month of May.

The Social Media Blend rose over 5% in May despite the sector attracting the ire of Donald Trump. Twitter, which makes up 10% of the index, came in for the most brutal attack by the president but shares in Facebook (45% weighted) also slipped in the final week of May.

YTD, the leaders remain the ESG, Corona, Crypto and Warren Buffett Blends. Buffett continues to do well despite admitting to ditching airline stocks after a bad call on the sector.

The worst performer this year is the UK High Street Blend, which is hardly surprising given the structural shift in retail coming up against the lockdown measures enacted by the British government which has slashed footfall.

Blends 2020 Leader Board

Blend YTD
ESG 194.01%
Corona Blend 118.86%
Crypto 29.15%
Warren Buffett 28.63%
Ecommerce 26.79%
US Tech 10.04%
Bill Ackman 2.33%
Trade War Winners 2.21%
Cannabis -0.11%
Soros -2.12%
Social media -5.22%
Brexit Winners -6%
Fashion -6.06%
Dogs of the Dow -11.90%
Gerstner -14%
Trade War Losers -14.36%
David Einhorn -23.08%
Icahn -24.11%
Brexit Losers -30.06%
Oil and Petroleum -32.32%
High Street -35.88%

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