After an initially negative start, which saw the FTSE 100 open below 7,000, hitting a one-month low of 6,949, European markets have regained some of their equilibrium after the Bank of Japan was reported to be buying Japanese equity ETFs for the first time since early April, a move that appears to have prompted a decent amount of bargain hunting, as well as a reassessment of where we are with the timeline for the withdrawal of central bank stimulus.
Europe
In some respects, investors are behaving as if the US Federal Reserve is about to call a full-scale halt to its support for the US economy, even though nothing could be further from the truth. With Fed chair Jay Powell set to testify to Congress tomorrow, markets will be looking for evidence that all of this talk about the prospect of rate rises and tapering is merely finessing a timeline rather than any underlying concerns that inflation is anything other than transitory.
Unsurprisingly, supermarkets have outperformed after the surprise £5.5bn weekend bid from US buyout firm Clayton Dubilier and Rice, for Morrisons. While the bid was rejected, it has given the entire sector a boost in anticipation of a bidding war, not only for Morrisons but also for the likes of Sainsbury's, which has outperformed this year due to Czech billionaire Daniel Kretinsky increasing his stake in the business, while Tesco has become much cheaper since it returned over £5bn to shareholders in February.
The renewed interest in this sector is likely to be painful for the short sellers, and short positions in Sainsbury’s in particular, however few will shed many tears about that, as this undervalued sector undergoes renewed scrutiny. Morrisons' shares are up over 30% in anticipation of another higher bid, while Sainsbury's is also outperforming as investors start to look more closely at the entire sector, as well as other areas of the UK stock market as well. Ocado shares are also doing well, buoyed by an upgrade from Morgan Stanley who lifted it to overweight, with a price target of 2,825p, sending the shares to their best levels this month. Even with today’s gains the shares are still down over 30% from their February peaks.
It has been notable this year how the FTSE 100 and UK companies in general have underperformed relative to their European counterparts. You only have to look at the FTSE 100 and where it is relative to its recent record highs of 2018. It’s also notable that overseas investors appear to see more value in UK assets than UK investors appear to, rather begging the question why we continue to sell ourselves short as a nation in finding value in UK-listed businesses, leaving them vulnerable to the predatory gaze of private equity.
Travel stocks are underperforming after UK prime minister, Boris Johnson, said that trying to go abroad this year will be very difficult with the priority being on keeping infection rates down from current variants of the virus, as well as possible future variants, with TUI underperforming more than most. Airlines have pushed back on this, asking for fully vaccinated travellers to be allowed to leave the country in order to help the sector move forward its recovery process.
GlaxoSmithKline shares are also lower on reports the company could be set to cut its dividend by as much as 50%, in order to divert cash towards new investment opportunities at its capital markets day later this week. CEO Emma Walmsley is also expected to outline the timing of a possible demerger of its consumer business.
US
US markets have reacted to the slightly steadier tone from today’s rebound in European markets with a higher open, and a strong rebound though there are still pockets of weakness.
US 10-year yields also appear to be recovering after sliding to a two-month low earlier this morning. The snap back has been whiplash inducing, rebounding from a low of 1.353% to be trading back above 1.45% heading into the European close.
The rebound in markets also appears to be being driven by falling US 5Y5Y inflation expectations, which despite the shenanigans of the past few days are now at their lowest levels since the lows in February.
With the crackdown on bitcoin mining and transactions by Chinese regulators, Coinbase shares are slightly lower, while MicroStrategy a business analytics company which owns large amounts of cryptocurrency, is also retreating. Other big losers include Uber, after the company announced it was acquiring the remaining 47% interest in Chilean online grocer Cornershop for 29m shares.
FX
The US dollar has lost some steam today after the gains of the last few days losing the most ground against the higher beta currencies of the Norwegian kroner and other commodity currencies, while the pound is also having a good day.
Some of the rebound in the pound may also be down to Thursday’s Bank of England monetary policy meeting, where we could well see outgoing chief economist Andy Haldane leave a parting gift for those who think the MPC needs to start reducing its weekly bond buying program further.
Commodities
A crackdown by China on crypto mining and crypto speculation has seen bitcoin prices hit a two-week low. China’s banks were also reminded of the rules that prohibit transacting in crypto assets.
Crude oil prices have retained their recent resilience after Iranian elections prompted a halt to negotiations over the nuclear deal. It is becoming increasingly apparent that there won’t be a swift resolution, which means oil prices look set to continue their upward drift towards $80 a barrel.
The weaker US dollar is helping to stabilise gold prices after last week's big fall to a seven-week low.
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