Stocks steady after tech hit, UK economy resilient, US inflation in focus

Morning Note

Tech stocks have steadied somewhat and shares in Europe are a tad higher this morning, but global stock markets remain in defensive mode. The Dow Jones fell more than 1.3% and the S&P 500 was almost 0.9% lower on the day, even as the Nasdaq composite closed well off the lows to end the day flat. NDX was marginally weaker with the 50-day SMA holding as resistance around 13,375, but the index recovered from the low of 13,094 to finish at 13,351. Apple, Alphabet, Tesla and Microsoft all dipped, weighing on the broader market, but the likes of Exxon, Home Depot and JPMorgan also dragged the broader market down in a day characterised by broad-based selling. European markets were steeply lower on Tuesday, having taken the cue from Monday’s drubbing on Wall Street. The FTSE 100 ended the session –2.5% under 6,950.

Stocks are steadier this morning, with the FTSE nudging 0.7% higher in early trade to 7,000 and the Dax up 0.3%, but investors will be fearful that yesterday’s volatile session is a taste of things to come. For example, the Vix futures term structure is in a fairly steep contango through to October, suggesting investors are concerned about markets going off the boil over the coming months following the strong run-up through the first 4 months of the year. US futures indicate a lower open later.

In early trade today, the FTSE 100 led gains in Europe with miners up on rising prices in China, whilst Diageo rallied as it said profit growth would by 14% this year and restarted a £4.5bn share buyback programme. The FTSE 250 rose 0.4% in early trade as figures showed the UK economy grew by 2.1% in March, meaning it contracted by just 1.5% in the first quarter. The UK economy is far more resilient to lockdowns than at the start of the pandemic, but hopefully, this flexibility will not be tested again. Undoubtedly the true hit to the economy won’t be known until government interventions and the furlough scheme end.

Asian markets have been choppy with Tokyo down 1.6% and the ASX in Australia offer another 0.7%. Shares in Taiwan were hammered, down 8.6% at one stage before ending down more than 4%. Shares in mainland China were higher, and the Hang Seng rose. Iron ore futures hit another record high even after Chinese authorities moved to cool the market earlier this week, whilst coal futures were limit up. Shares in Xiaomi listed in Hong Kong rallied 6% on reports it could be removed from the US black list. Any thawing in US-China relations could be positive for proxies like the AUD.

Oil rose as data showed a drop in inventories, whilst market participants continued to wager on a strong demand-led recovery as OPEC stuck to its forecasts for 2021. API figures showed a decline in US stockpiles of 2.5m barrels. OPEC stuck to its view that demand will rise by 5.95m bpd this year but lowered the immediate Q2 outlook by 300,000 bpd because of rising coronavirus cases in India. The Colonial pipeline shutdown continues but it ought to be restarted almost fully by the end of the week. There have been reports of panic buying of gasoline at US forecourts. Beats loo roll I suppose.

Inflation is the watchword, so today’s US CPI numbers are going to be closely watched. The data, due at 13:30 BST, is expected to show consumer prices up 3.6% year-on-year in April, and +0.2% vs March 2021. Core prices are seen rising 0.3% month-on-month. We were always going to get some hot numbers coming through this summer (base effects, supply chain trouble, higher commodity prices), and the market was always going to freak out a bit. The question is really for later – at what point does transitory turn into something more lasting? Wages are the key. Federal Reserve officials still see the pick-up in inflation as temporary. Fed governor Lael Brainard was the latest to ram this message home, saying yesterday that Friday’s jobs report highlights “the value of patience… remaining patient through the transitory surge [in inflation] associated with reopening will help ensure that the underlying economic momentum that will be needed to reach our goals.”

Jolts job openings figures show the US economy is hungry for labour. A record 8.1m postings were recorded in March, well above the estimated 7.5m. Hiring is not keeping pace – US employers added 770,000 jobs in the month and only 266,000 in April. It underlines a tightness in the labour market that unemployment levels are not truly reflecting. As noted before, this underscores worries about wage push inflation taking hold as businesses struggle to hire workers. The run-off of Federally funded unemployment benefits ought to help – seven US states are ending the support this summer, saying the stimulus cash is preventing people finding work.

US job openings on 12th May 2021.