CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US agency questions AstraZeneca vaccine, GameStop earnings on tap
You could be forgiven if you suffer value fatigue; it can be a long slog, all this ‘vaccine optimism’ and ‘reopening hopes’, for the beleaguered value investor. You’d also be forgiven for Covid fatigue; I think we have all done more than our bit to ‘protect the NHS’ over the last 12 months. And on this sorry topic there’s another headache this morning for AstraZeneca bosses as a US health agency questioned the Oxford vaccine with the ink barely dry on the company’s press release announcing the very high safety and efficacy of the jab in long-awaited US phase 3 trials. Shares fell 1% in early trade.
The National Institute of Allergy and Infectious Diseases (NIAID) said late Monday it was notified about concerns about initial data from the trials. The Data and Safety Monitoring Board (DSMB) ‘expressed concern that AstraZeneca may have included outdated information from that trial, which may have provided an incomplete view of the efficacy data’. I may have left the toilet seat up, I may not have. It didn’t say much else, except urging AstraZeneca to work with the DSMB to ‘review the efficacy data and ensure the most accurate, up-to-date efficacy data be made public as quickly as possible’. More doubts won’t do the vaccine any favour – another PR problem that will cost lives. This will not do any favours for getting this shot into people’s arms – it’s not just the rollout by government, it’s people’s willingness to get it. And on that note Europe sits on large stockpiles of the Astra vaccine as countries cannot get the jab into arms.
European shares are lower this morning after a muted Asian session with the major bourses off about half a percent in the opening minutes. Travel & leisure stocks were near the bottom of the Stoxx 600 as the UK extended a foreign holiday ban until the end of June. IAG, TUI and Carnival fell about 3-4%. WH Smith – dependent on travel earnings more than the high street these days – also declined more than 3%. US markets closed higher on Monday, led by the Nasdaq gaining 1.2% and the S&P 500 up 0.7%. Futures point to a weaker open later. Powell and Yellen are in front of the House Financial Services Committee to talk about stimulus. FOMC member Lael Brainard also talks later today.
MOAR: Joe Biden’s team is looking a $3 trillion plan for the US economy that will feature massive investment in infrastructure, green energy and education, as well as tax hikes. This fits in with his manifesto pledge, but I thought he may have taken longer to get to this point given the $1.9tn stimulus package for Covid relief has just been launched. This package would be another enormous injection of stimulus to the economy.
Tesla rose 2%, but at one point traded about 10% higher, after a bullish report from ARK Invest. Tesla is a 10% holding in the Innovation ETF (ARKK). ARK says Tesla will reach $3000 by 2025. That is not even the bull cash ($4,000), whilst the ‘bear’ case implies a mere doubling or more to $1,500. ARK uses a Monte Carlo simulation to get there, which is aptly named since it is basically a case of spinning the wheel and see what number you land on. Actually it’s more like keep spinning until you get the number you want. Investing should not be a game of roulette. You can read the full report here. If you like this I have a bridge to sell you.
GameStop reports earnings tonight. Analysts expect revenues to rise 2% year-on-year to $2.2bn, with earnings per share seen up 15% at $1.46. Dry earnings figures don’t really do it justice; these are the first earnings since the Reddit-inspired trading frenzy sent the stock skywards, sank Melvin Capital, put RobinHood in the dock and made Roaring Kitty famous well beyond the /wallstreetbets crowd. No one really cares about these earnings; they do care about what resource will be required for turning GameStop into the ‘Amazon of gaming’ – the more the board seeks to raise the better in many ways. Traders will be wanting to hear about any plans for capital raising, and more about the new ecommerce strategy.
Meanwhile, the FT reports WeWork announced losses of $3.2bn last year as it pitched for a SPAC listing and $1bn investment. Get this though: WeWork’s losses narrowed from $3.5bn burnt in 2019 because it slashed capex to the bone because of the pandemic. Investors who might have got swept up in a WeWork IPO in 2019 will be grateful the listing got pulled. Now SPACs mean it’s even easier to go public and I’m sure they will find some willing backers for this serviced office provider tech platform. Barge pole springs to mind.
Bitcoin is lower, testing the bottom of the recent range around the 23.6% retracement level after Federal Reserve chair Jay Powell warned that the asset is not a good store of value. “They’re highly volatile and therefore not really useful stores of value and they’re not backed by anything,” Powell said at a digital banking panel. “It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar.” ‘More a substitute for gold’ supports a certain bullish thesis we’ve been noting for some time, albeit the only reason you own Bitcoin is in the hope it will rise in value.
Gold is trading sideways as yields are not doing an awful lot so far this week.
Cautious start to trade ahead of FOMC’s game of join the dots
Boy the food at this place is really terrible – and such small portions! France’s suggestion it could sue AstraZeneca over a lack of vaccine deliveries rather smacks of not wanting a cake and not eat it. Cases across France and Germany are rising fast and with the vaccine rollout so shambolic across the Eurozone, it creates worry about the pace of economic recovery in the bloc. That has not massively dented the mood in the markets yet – stocks are not the real economy etc, plus rebounding car sales are a boost (see BMW, VW) and plans for a vaccine passport should spur travel this summer – but it could be a problem for the currency.
A cautious mood prevails in global stock markets this morning ahead of the Federal Reserve meeting. Stocks are hugging the flatline in early trade, whilst US futures are flat as really nothing matters today except the Fed, its dots and what Jay Powell says in the presser after.
Uber shares are lower in the pre-mkt after it announced some measures to comply with the UK Supreme Court by offering drivers employee-like status. I say some measures since it looks like drivers won’t be entitled to a minimum wage whilst logged on waiting for a client, but only when they have a fare or are going to pick them up. I don’t think this complies fully with the court’s ruling and Uber could face fresh action. Sticking with cars and it is very interesting to see VW and BMW come back strong and this poses very clear challenges to a certain Tesla stock, which fell another 4%.
Yesterday the FTSE 100 managed to close above 6,800 for the first time since mid-January. The Dow Jones industrial average declined 130pts, or 0.4%, from its record high. The S&P 500 was 0.16% lower, ending a 5-day win streak. The Russell 2000 small cap index fell 1.7% and the Nasdaq rose. US 10-year rates nudged up above 1.63% despite strong demand at a 20-year auction. The Vix – the ‘fear gauge’ – declined to its lowest in a year.
Fed preview: Join the dots
The market will be watching this very closely indeed. This is going to be a tough one for the Federal Reserve and its chair as it’s going to be a hard sell to contain yields and inflation expectations. The problem is that the market is already pricing in a big recovery but the Fed is trying to say ‘not yet’, we’ve still got some way to go. This dichotomy exists largely because employment has become the Fed’s go-to measure of monetary policy outcomes, which is new, and not really what markets are looking at (earnings, GDP). Doublespeak is a risky game – the ECB has been tying itself in knots over its communication. Jerome Powell has been much clearer and has been sticking to his guns ahead of this meeting, despite the greatly improved economic outlook, the rapid rollout of vaccines in the US and – crucially – a spike in bond yields. Coming into the meeting we note 10-year Treasury inflation-protected securities breakeven inflation rate hit 2.303%, the highest since July 2014. 5-year breakevens are at the highest since 2008.
Overall, the Fed is still in very much in accommodation mode – keeping the punchbowl filled up and will want to not let the market think it is bringing forward its rate hike expectations or tapering bond purchases. The Fed has made it clear that its goal is maximum employment and will keep the punchbowl filled up until it gets there. Powell will stick to the script but the market will make up its own mind about what this means for the path of rates and inflation – and the US dollar.
Key questions for the Fed today
Do enough members move their dots to a point where the market sits up and reacts? It seems unlikely that enough members will bring their dots forward to move the median plot much nearer than the first hike of 25bps occurring before the end of 2023, which is still short of the current market positioning which indicates a hike in 2022. An additional 5 members of the total 18 would need to pencil in a hike 2023 to move the median dot. So really this ought not to have much impact on the market – a signal that more than 6 policymakers – say around half or even a majority – are thinking early 2023 would be noteworthy.
Table: Current dots from December
Is the Fed more likely to lean on long yields (eg a Twist operation) or appear happy to let then run higher and then chase with hikes? The economic fundamentals and cyclical upswing in growth and inflation suggest the latter – the Fed has been talking more about yields being a function of recovery than worrying about inflation. But it won’t want to signal that it’s really bringing forward hike expectations too rapidly, either.
Does it extend supplementary Leverage Ratio (SLR) relief for banks beyond the March 31st deadline. I think it’s unlikely but there may be some action to try and prevent dumping on Treasuries onto the market and the volatility this could generate. I should note that the excellent Zoltan Pozsar of Credit Suisse argues that it won’t be a problem anyway since the vast bulk of Treasuries which are currently exempt from SLR are booked at bank operating subsidiaries, not broker-dealer subsidiaries. “The market assumes that the SLR exemption is what has ‘glued’ the rates market together since 2020, and that the end of exemption means that large US banks will have to sell Treasuries. That view is wrong.” We will find out.
What does transitory really look like in an inflation context? How much above 2% and for how long would warrant action? I think on this we will find out more come June when the prints start shooting higher.
Stick: On March 4th, Powell said the Fed would need to see a broader increase across the rate spectrum before considering any action and stressed that the current policy stance is appropriate. He didn’t signal the Fed was in any rush to do anything about rising yields – there was not the slightest hint the Fed was looking to control the yield curve or carry out a twist operation. The closest hint of concern was this: “We monitor a broad range of financial conditions and we think that we are a long way from our goals,” Powell said, adding: “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.” Powell stressed that the Fed is a long way from achieving its goals of full employment and averaging 2% inflation over time.
GDP and inflation expectations have risen since the last dot plot in Dec, and this should be reflected in the forecasts. The OECD raised its growth outlook for the US this year, as have some investment banks. Goldman Sachs raised its forecast to 8% this year, while Deutsche Bank raised its forecast to 6.6% growth, up from 4% seen in November. The 4.2% projection for 2021 GDP growth projection looks outdated for sure.
But a much stronger economic outlook is not going to stop the Fed from holding fire for now. Powell has spoken enough times about the ‘real’ unemployment rate being closer to 10%. And the Fed is no longer looking at the inflation dynamics and Philip’s Curve – it’s on a mission to right wrongs and get employment back. The Fed will not move on rates and will continue to purchase $80bn of Treasuries and $40bn of mortgage-backed securities each month. Any significant move is unlikely to occur before June, when we might start to see the Fed respond to rising employment levels by voicing a more optimistic economic outlook that warrants a tapering of asset purchases.
Does the Fed signal that inflation will be more than just transitory? If not, can it convince us it will be temporary? Inflation remains the elephant in the room – does it materialise in force and how long does that last. Things could get uncomfortable for the Fed from a market perspective over the coming months as base effects lead to a pickup in inflation readings, which will undoubtedly create upwards pressure on yields whatever amount of rationalising about the data. The Fed will want to use this meeting to reiterate that it is happy with this – indeed AIT implies running a hot economy/inflation to counterattacks years of systematic undershooting of its target.
The other big elephant in the room is issuance – if the Fed really is eyeing a tapering of asset purchases this year (not to be signalled today), then where does that leave long-end yields as Biden – fresh from his $1.9tn Covid relief- swivels his attention to a potential $3tn green/infrastructure bill. How is the market going to absorb all this extra issuance if the Fed is not there to hold the bag? As I suggested yesterday, I think this implies structurally higher bond yields and inflation.
So, it’s interesting to come to the latest BoA Fund manager survey, which reports that the biggest risk seen by investors is inflation or a taper tantrum. This is the first time the pandemic has not been the chief risk for markets in over a year. We have turned a corner for sure – but shouldn’t investors be welcoming economic growth? The consensus from the survey seems to be that 10s hitting 2% would spark a 10% correction in equities and that a 2.5% yield makes bonds more attractive than stocks.
Oil – WTI futures dipped under $64 for a week low yesterday as the nearest months flipped into contango, indicating a slightly looser market than we have been discussing. That seems in large part down to inventory builds in the US as the effects of the weather event in Texas etc refiners were shut in. It may also reflect some worry about tax hikes and global demand worries in light of the European situation. On the whole, the market remains pretty tight this year and should be reflected in higher prices after this period of consolidation. Futures recovered the $65 handle though as the API reported a draw in crude oil inventories of 1 million barrels for the week ending March 12th. Draws on gasoline and distillates were also reported, though much smaller than in previous weeks. This could indicate the US situation is stabilized and we return to a period of healthy draws on inventories as the market tightens.
Ahead of the Fed, gold will be one to watch – continues to trade in a narrow range and failing to break the upside resistance at $1,740. The Fed is likely to deliver action here.
Brexit talks go to extra-time, AstraZeneca drops on takeover
- Sterling rises as Brexit talks are extended again
- European markets opened higher and US futures up
- US stimulus in focus, Fed meeting later this week
Brexit talks are going into extra-time; neither side want it to go to penalties. Both the UK and EU say they will continue talking and want to go the ‘extra mile’. The market read this as progress towards a deal, although the two sides remain far apart on the last big issues. Sterling gapped higher at the Sunday night open, with some shorts maybe covering their positions on the extension. GBPUSD advanced to 1.34, bouncing on hopes of a deal, while the 200-day simple moving average offered the near term support. The pound also strengthened versus the euro as EURGBP dipped from the 0.92 area traded on Friday back towards 0.90. Those gaps may offer some decent intraday support but unless hopes rise in the next day or two would be liable for a fill. Sterling still trades with headline risk, but the truth is the ranges remain very tight and the failure to break out in either direction reflects the fact that the outcome remains very binary and both deal and no-deal are still very much in play. It’s probably a toss of the coin now whether we get a deal or not.
British banks with high exposure to the UK economy and property market remain high beta Brexit stocks – Lloyds and Natwest both rose 5% in early trade having taken a bit of a thumping at the end of last week. Likewise, housebuilders popped 5% higher on Brexit deal hopes. These stocks are a leveraged bet on the UK economy, which in the near-term at least is going to be at the mercy of a Brexit trade deal and the vaccination programme. Markets have also pushed back expectations for interest rate cuts by the Bank of England, which meets later this week.
AstraZeneca shares dropped 6% – seemingly on fears it’s paying too much for the US biotech company Alexion. Whilst the 45% premium may seem high, it’s probably not that significant when you consider the sector and the cash flow generation and revenue growth that it will bring. Debt taken on to buy the company will be repaid quickly. Richly-valued AZN shares needed to do some work too. It’s a big turnaround from the dark days of six years ago when Pfizer tried to land AstraZeneca.
Elsewhere it’s a familiar story of hope around fiscal stimulus in the US and vaccines being rolled out, with the Pfizer/BioNTech jab being rolled stateside today as part of a programme that will see 100m people inoculated by the end of March. Vaccines will continue to support risk sentiment and provide succour to the stock market as it enables investors to look past the current situation to a more normal 2021. For the time being Main Street needs help and as far as stimulus goes, getting a deal through Congress is proving as difficult as Brexit. The $908bn bipartisan package is being put forward today, but it’s uncertain whether it will pass.
The Federal Reserve meets later this week, with attention on its emergency $120bn monthly bond buying programme. It’s expected that the Fed will anchor expectations around the longevity of the asset purchases to make it clear it’s in this for the long haul. With 10-year Treasury yields rising in recent weeks, and coming close to 1% again, it may also choose to switch its focus to longer dated debt in order to better anchor interest rate expectations for a longer duration.
Global equities up on vaccine, trade hope
You just can’t keep ‘em down: Stocks surged again as vaccine hopes and positive language around US-China trade lifted the boats. The S&P 500 closed at a new record high at 3,431, led by Energy and Financials, two of the most beaten-up sectors, with Technology and Healthcare were at the bottom. European stocks caught a strong bid with the major bourses rallying around 2% on Monday. Asian markets followed the lead overnight, with Tokyo up more than 1% and although Shanghai and Hong Kong were a tad weaker.
Germany Q2 GDP slump revised, European stocks firm
Today, the narrative is much the same as yesterday. European stocks continued to advance with gains of around 1% as risk sentiment remained robust after official figures showed Germany’s economy shrank less than previously thought in the second quarter. The numbers are still terrible: output declined by –9.7%, but this was an improvement on the –10.1% drop in the original release. Germany’s Ifo business survey showed sentiment is on the rise too.
The euro caught some bid after these two releases to advance above 1.1830 and test trend resistance having come under a bit of pressure yesterday evening again as the near-term downtrend remains the dominant force. Yesterday’s high at 1.1850 is the bulls’ target and this needs to be cleared to suggest the bears have lost control.
The DAX rose above 13,200 to take it near the post-trough high at 13,313 hit on July 21st. The FTSE 100 advanced towards 6,200 with beaten up travel & leisure stocks among the leaders. Both pared gains after the first hour of trading however. US futures point to further gains on Wall Street.
Apple continues to surge, US and Chinese officials discuss trade
Apple shares rose over $500 as investors continued to pile in and analysts noted that its forward earnings multiples are not that rich after all, and certainly not as expensive as rivals. Apple has transformed itself from a pure hardware manufacturer to a full service led tech platform and therefore the stock has rerated.
Top US and Chinese officials discussed the phase one trade agreement after a meeting scheduled for earlier this month was postponed. Both sides are seeing progress in areas like the increase in purchases of US products by China.
The two sides also discussed how China will ensure greater protection for intellectual property rights, remove impediments to American companies in the areas of financial services and agriculture, and eliminate forced technology transfer, the US Trade Representative said in a statement. This came after the US and EU agreed to reduce tariffs on some goods.
AstraZeneca begins antibody trials, economists concerned over double-dip recession
Meanwhile vaccine news is still helping rather than hindering risk sentiment. AstraZeneca said today it has begun the phase one clinical trial of its monoclonal antibody combination for the prevention and treatment of Covid-19. However, Hong Kong has reported its first confirmed coronavirus re-infection, with a man found to have been infected months apart by different strains of the virus.
Economists remain concerned about the double dip: according to the National Association for Business Economics, there is a one in four chance the US economy could fall into a double-dip recession. Two-thirds of economists surveyed think the world’s largest economy remains in recession.
Republican convention kicks off with warnings of election rigging
President Trump got the Republican convention off to a belligerent start as he warned of a rigged election as he sought to cast doubt over the voting process ahead of the election. I don’t think the market really needs to worry about there not being a smooth handover of power, but I would think that a close result could see Trump launch multiple legal challenges which would create the kind of uncertainty markets don’t like.
Elsewhere, gold continues within the near-term downtrend but is yet to make a new low since the $1911 trough last week and is catching support from the longer-term rising trend line. US real rates (10yr TIPS) slipped further into negative territory again.
Week Ahead: Tesla earnings and vaccine hopes to drive sentiment
Coming up this week – can Tesla do enough to justify its massive valuation with its second quarter earnings release?
Tesla Q2 earnings
Tesla (TSLA) has enjoyed a stunning rally in 2020, rising 270% year to date. In the last 12 months, the stock has risen more than 500% in what can only be described as one of the most amazing turnarounds in corporate history. Over this period the S&P 500 has gained around 7%. Valuations are out the window and the stock is trading on tech multiples – some would say for good reason, but short interest in the stock – the percentage of shares out on loan to traders betting the stock will fall – remains relatively high at 7.5%.
Tesla stock has soared in the last year
But it’s back to basics this week as Tesla reports its Q2 2020 financial results. The company is likely to report a fourth straight quarterly profit on July 22nd, which would clear the way for it to enter the S&P 500, and may explain the recent rally as funds have decided they will need to own some of it.
The stock pushed to all-time highs close to $1,800 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 83,000 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.
Analysts remain divided on Tesla…
…but hedge funds have been increasing their holdings
Other earnings this week to watch come from Microsoft, Coca-Cola and Unilever.
AstraZeneca and Oxford University vaccine results
Hopes for a vaccine continue to underpin equity market sentiment despite signs of a slower recovery than the V-shaped rebound everyone had hoped for. Much hope is being pinned on a candidate vaccine being developed by AstraZeneca and Oxford University – results from phase one clinical trials are due on Monday and could set the tone for the rest of week in equity markets.
Also watch for a reaction in AstraZeneca shares, which have rallied strongly this year to make it the largest stock on the FTSE 100.
Economic data to watch
As ever on Thursday we are anticipating an important update from the US which will help show the pace of reopening and economic recovery in the shape of weekly initial and continuing unemployment claims.
On Friday we have UK retail sales for June, which are expected to show improvement after rebounding a healthy 12% in May following the –18% decline in April at the height of the lockdown.
Friday also sees the release of the latest flash PMIs for the Eurozone, which a month ago showed a decent rebound. PMIs, which are diffusion indices, are particularly challenged by the speed and magnitude of the economic contraction. So, whilst they may make a V-shape, it does not mean the recovery is V-shaped. PMIs only ask if survey participants think things are better or worse than the previous month, so they give a pretty imperfect snapshot of economic activity in times of crisis. A reading over 50 only tells us things are better than the prior month, which right now is not a high bar to clear.
Highlights on XRay this Week
Read the full schedule of financial market analysis and training.
|07.15 UTC||Daily||European Morning Call|
|17.00 UTC||20-Jul||Blonde Markets|
|From 15.30 UTC||21-Jul||Weekly Gold, Silver, and Oil Forecasts|
|14.45 UTC||23-Jul||Master the Markets with Andrew Barnett|
|17.00 UTC||23-Jul||Introduction to Currency Trading – Is it For Me?|
Top Earnings Reports this Week
Here are some of the biggest earnings reports scheduled for this week:
|After-Market||20-Jul||IBM – Q2|
|07.00 GMT||21-Jul||UBS – Q2|
|Pre-Market||21-Jul||Coca-Cola Co – Q2|
|Pre-Market||21-Jul||Philip Morris – Q2|
|Pre-Market||22-Jul||Biogen – Q2|
|After-Market||22-Jul||Tesla – Q2|
|After-Market||22-Jul||Microsoft – Q2|
|After-Market||22-Jul||Gilead Sciences – Q2|
|07.00 GMT||23-Jul||Unilever – Q2|
|Pre-Market||23-Jul||AT&T – Q2|
|Pre-Market||23-Jul||Twitter – Q2|
|After-Market||23-Jul||Intel – Q2|
|23-Jul||Southwest Airlines – Q2|
|Pre-Market||24-Jul||Verizon – Q2|
|Pre-Market||24-Jul||American Express – Q2|
Key Events this Week
Watch out for the biggest events on the economic calendar this week:
|01.30 GMT||21-Jul||RBA Monetary Policy Meeting Minutes|
|02.30 GMT||21-Jul||RBA Governor Lowe Speech|
|12.30 GMT||21-Jul||Canada Retail Sales|
|00.30 GMT||22-Jul||Japan Flash Manufacturing PMI|
|01.30 GMT||22-Jul||Australia Retail Sales|
|12.30 GMT||22-Jul||Canada CPI|
|14.30 GMT||22-Jul||US EIA Crude Oil Inventories|
|06.00 GMT||23-Jul||German GfK Consumer Climate|
|12.30 GMT||23-Jul||US Weekly Jobless Claims|
|14.30 GMT||23-Jul||US EIA Natural Gas Storage|
|06.00 GMT||24-Jul||UK Retail Sales|
|07.15-08.00 GMT||24-Jul||Flash Eurozone Services, Manufacturing PMIs|
|08.30 GMT||24-Jul||Flash UK Services, Manufacturing PMIs|
|13.45 GMT||24-Jul||US Flash Manufacturing PMI|