European stock markets are firmer in early trade on Tuesday after a turbulent session on Wall Street saw tech stocks stage a late fightback following a steep decline. Buy the dip lives! The FTSE 100 almost managed to close the gap to 7,500 before pulling back, the DAX is back to 15,900. Sterling is firmer with GBPUSD breaking the 1.36 resistance at last, meaning the bulls are still in charge and still headed to 1.38. Oil is a tad firmer after yesterday’s drop, with WTI at $78, gold continues to hover around the $1,800 mark.

Capitulation and recovery: S&P 500 banks at an all-time high, tech smashed to pieces, Bitcoin tumbled below $40k – rates marching higher as the story of 2022 played out again on Monday. Or so it appeared. Some energy stocks were holding onto some gains but bleed across from tech was starting to hit the rotation narrative, which is the kind of flushing out and capitulation we need before leadership can be taken up again. It started to look like indiscriminate selling, typical of the end of the flush not the start. This sorted itself out a bit by the close (are you really selling Apple because the 10yr might hit 2% or the Fed might hike 4 times this year?!).

At the depths of yesterday’s plunge, the Nasdaq declined over 2% to hit a three-month low before reversing to end just in the green…ARKK –5% at one point, -17% YTD – it and all the other ARK ETFs at 52-week lows. ARKK ended +3% as dip buyers came in. Damage building up in megacap tech as well – not just the more speculative corners of the market. NYSE FANG+ Index –7% YTD, but also ended just in the green. The S&P 500 and Dow Jones both finished lower but well off their lows of the day. A bounce but damage is being done.

Bitcoin lurching under $40k … opens up the possibility that this floor isn’t so sound after all and possibly rotten, could sink to $29,500. Knock-on to the Crypto Stocks; at the lows MSTR wsa down 5%, -18% YTD; COIN down 7%, and -14% YTD. This morning Bitcoin has stabilised to $42k. 

NDX – kept on dropping after cracked the 15,500 support zone and breached long-term trend support – and lost the range of the last almost 3 months – looking to see if 14,600 area is a potential target. That would mark a 12% decline similar to the Feb/Mar ‘21 pullback. Despite the firm rejection on the daily candle, I’m not convinced that sellers are flushed out yet. The S&P 500 cracked around the 50-day moving average where many bulls were leaning against, but found support closer to the 100-day line as it broke into the Oct-Dec range (pre Santa rally zone) of danger that was marked by Omicron volatility.4500 is the big level but we didn’t get to that yesterday.

So, yields…narrative squarely on the idea that higher rates is –ve for tech stocks that have dominated the broad market for years. Interesting contrary from Blackrock analysts who say what matters is the total sum of rate hikes; disagree with notion that higher rates is bad for stocks, should focus on total sum of hikes being historically small. I like this take but it oversimplifies this kind of messy rotation and indiscriminate purge that was saw at the lows yesterday. 

Which leads us onto to thinking about this in terms of a much talked-about theory that the Fed walks rate hikes up, only to let the market do the tightening for it…then walks it all back and doesn’t hike/tighten as much as forecast. This is the playbook and one I’ve discussed here recently. Unanswered question about this is inflation – the unknown quantity is how high and the duration when labour market is close to maximum employment. Does a wage price spiral take hold due to, in addition to the various inflation pressures, a shortage of workers? Risk here – reflected in the market price action for tech/growth – is that the Fed has more lifting to do to shore up inflation.

Today sees Jay Powell testify – hence the rather swift resignation of vice Richard Clarida yesterday on murky trading activity at the height of the pandemic. Insider trading doesn’t get any bigger – he moved between $1m and $5m from a bond fund into a stock fund a day or two before the Fed announced a thumping package of measures to save financial markets.

Amid this mass rates-induced selloff and rotation it’s easy to forget that fundamentals still matter … cannabis stock Tilray jumped by over a fifth, before finishing up 13% after earnings beat expectations. The company posted a Q2 net loss of just $201,000, vs a net loss of $99.9 million, or 41 cents a share, in the same quarter a year before. Revenue increased to $155m from $129m. Let’s go Omicron: Lululemon shares fell after it said fourth-quarter sales and profit will be at the low end of its guidance ranges. Blamed Omicron variant hitting staffing. 

Which brings us on to some earnings to watch this week… 

MKS – This is not just a trading update, it’s the key Christmas trading update from Marks and Spencer on Thursday…Investors will be looking for reinstatement of the dividend after management raised the full year profit outlook to £500m, from the £300m-£350m guided back in May.  

There clearly must have been a big improvement in the last quarter for such a strong upgrade to the profit forecast – as recently as August the guidance was for the upper end of that range only. Supply chain trouble likely still a theme but not as bad as feared. At the last update, MKS said profit before tax & adjusting items of £269.4m was up more than 50%, with food sales up 10% and ex-hospitality +17%. We know the Ocado partnership is paying off and look for more of this in the Christmas update.  

As far as the share prices goes, the recovery from the pandemic is complete, with the stock up 95% in the last 12 months, but there are yet questions about whether it can reach 2015-18 levels. Reinstating the dividend would help. The restructuring is clearly paying off – the pandemic allowed Marks to accelerate a process that had been taking far too long, and in many ways could have been a blessing for the business.  

TSCO + SBRY – Big theme from the retailers is that the supply chain thing probably wasn’t that bad, although it’s still a ‘thing’ and they won’t miss an opportunity to keep a lid on expectations. A lot of the worries about supply chain trouble, shortages etc were likely overblown to a degree, though we expect warnings about rising costs – labour, material, transport – to be a major theme for retailers in the coming months. Tesco though was notable last year for saying it was doing just fine.  Against very tough comparisons, it looks like supermarkets saw a slightly weaker 2021 Christmas than 2020. However, the sharp recalculation by consumers to stay in more and cancel restaurant bookings and the like may have just delivered a late bump that the data doesn’t show yet. Tesco looks like it has experienced less of a decline in Christmas sales than competitors: -0.9% for Tesco, -4.4% for Sainsbos. 

At its half-year results in October, Tesco upgraded its full-year adjust operating profit guidance to be between £2.5bn and £2.6bn. Looking for some moderation in retail growth but much stronger recovery at Booker as restaurants and events had some semblance of normality – albeit the collapse in the Christmas trade may have had an impact on wholesale. 

Meanwhile….ze Germans. Or rather ze Discounters. Aldi’s price pledge this week points to potential for lower margin growth for the majors as they are bound to keep in line. The problem they have today is that pricing pressures are acute – higher cost of commodities, raw materials, labour and transportation mean supermarkets can ill afford a price war as it could stuff their margins. They had it good over the last two years in terms of sales as they benefitted from the pandemic – but with pandemic tailwinds to growth turning into headwinds, there is already huge pressure on pricing anyway. What supermarkets would like is just to inflate prices in line with costs (or a little more) but the Aldis of the world make this impossible so it’s going to be a) cut costs and b) endure lower margins.