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Europe under pressure, as yields continue to edge higher


US Federal Reserve chair Jay Powell’s comments last night, that the Fed was focused on its dual mandate of unemployment and inflation, and that the central bank was a long way from meeting either, would under normal circumstances have been enough to assuage market concerns about a premature tightening of policy.

By not specifically referencing or expressing concern over the recent move higher in longer-term US yields, and looking to hold the markets' hand, it was perhaps not surprising that the bond sell-off continued, however whether the sell-off is sustained is a different matter entirely. The rise in commodity prices does appear to be showing signs of cooling, setting aside the continued strength in oil prices, with base metals prices showing recent signs of weakness.

Nonetheless US 10-year yields closed at their highest level in over a year at 1.564%, while the spread between 2-year and 10-year yields moved to its widest since December 2015: good news for the banks, not so much for consumers, if inflation starts to bleed out into the real economy. At the same time, US markets closed sharply lower, with the Nasdaq giving up all of its gains this year. This weakness has translated into a lower open for markets in Europe this morning, after a lacklustre Asia session, though the rise in oil prices is helping the oil majors outperform, relative to the wider market.

London Stock Exchange has an uphill battle when it comes to leveraging its recently completed $15bn acquisition of Refinitiv which completed at the end of January. Refinitiv’s market share against Bloomberg has been in decline for years, in a three-way market with Dow Jones. Today’s full-year numbers won’t yet reflect any significant net benefit in the short term, and could well act as a drag in the short term, as the integration process takes place, and investment in a new platform starts to be reflected in an upgraded terminal/workstation product. Shareholders certainly like the deal with LSE shares hitting a record high last month. LSE certainly has high hopes that the deal will grow its revenues by up to 7%, which seems ambitious.

For 2020, the business showed that total revenue rose 3% to £2.12bn, driven by a strong performance in information services, which saw a rise of 3% to £882m, while post trade also performed well. Here we saw a gain of 7% to £751m largely due to strong growth in LCH, and record activity in CDS, FX and cash equities clearing. Operating profits increased by 3% to £755m, with the company raising the dividend to 75p a share, a rise of 7%. Despite this the shares have slid back sharply on the open, suggesting that some shareholders may also be sceptical about the ambitious revenue growth targets.

In M&A news, TDR and I Squared have agreed a deal to buy Aggreko for 880p a share, valuing the business at £2.3bn. Mike Ashley, CEO of Frasers Group, hasn’t wasted much time in rubbishing the Budget announcement this week, and the extensions to business rates relief. In particular, he has taken aim at the £2m rates cap which he has claimed will make it nearly impossible to take on ex-Debenhams sites, and could result in more job losses as the company reviews its entire portfolio.

The weakness in the tech sector is also acting as a drag on Scottish Mortgage Investment Trust, given its relatively heavy weighting towards that sector. Its top holdings include Tesla, Amazon and Alibaba, with a 46.85% weighting in consumer cyclical. We’ve also seen some end of week profit-taking in the travel and leisure sector, after big gains in the past two to three weeks, with the likes of IAG and easyJet slipping back from this week’s intra-month highs.

One ray of light in today’s session has been healthcare services provider, ConvaTec Group, who reported their latest full-year numbers showing the business grew annual revenue by 4%, while positing 2021 organic growth of between 3% to 4.5%, with an EBIT margin of 18% to 19.5%.

Crude oil prices have continued to rise after OPEC+ decided not to release their grip on production capacity, despite calls from some smaller producers to allow a modest loosening. This raises the very real prospect that the Saudis, in particular who favour longer curbs, could overplay their hand, and thus risking an element of demand destruction. The surge in prices could also speed up the transition towards renewables if the price rises much above $70 a barrel for an extended period. It’s a bit of a gamble on the part of the Saudis, as they could hasten their own demise in a faster move towards renewables, as well as risking the strength of any post pandemic recovery.

With stock markets on the back foot the US dollar has continued its recent positive bias, rising to its highest level since the beginning of December, with the euro sinking to its lowest levels this year against the greenback.

This afternoon we get the latest US non-farm payrolls report for February, after a January report that saw 49,000 new jobs added, following December's loss of 227,000 jobs. That December decline broke a run of seven consecutive months of job gains, and combined with a similarly negative ADP payrolls report, marked a rather disappointing end to a year that had seen the US economy enjoy a fairly decent, if slightly uneven recovery at a time of considerable political uncertainty. The eventual signing at the end of December of another $900bn stimulus bill does appear to have acted as a positive catalyst for a decent start to the year, however the jobs picture continues to look murky.

The big rebound we saw in US retail sales in January does augur well for a rebound in confidence in what is a big part of the US economy, while the prospect of further fiscal support of $1.9trn also bodes well, however the stimulus is also having another side effect in driving expectations of a strong post pandemic recovery, that is also raising the prospect of higher inflation, with prices paid data in this week’s ISM reports trending near multi-year highs. The various employment components were also encouraging, however the ADP report for February pointed to a much more understated picture around the US labour market, with only 117,000 new jobs added, well below January’s 195,000.

On a more encouraging note, the unemployment rate has still fallen quite sharply from its peaks in April of 14.7%, to 6.3% in December, however a large part of that fall has been down to a weaker participation rate which has fallen sharply to 61.4%, from 63.4% at the end of last February. We really need to see this metric to start showing signs of picking up as an indicator of rising confidence in the US labour market. The recent fall in the participation rate number reflects the fact that people have more or less given up looking for a new role, and as such understates the actual number of people who are out of work. A more accurate measure remains the underemployment rate which currently sits at 11.1%, and is still below the April peak of 22.8%, and still well above the low which we saw at the end of 2019 when it was at 6.7%.

The vaccination programme taking place across the US, along with a slowdown in the rise in virus cases, hospitalisations and deaths is no doubt playing a part in the rise in optimism. Expectations are for a 195,000 jobs recovery in the February numbers, and it would also be prudent to watch for any revisions to the January number as well. The hope is that December was a low point, or an aberration for the jobs market, and subsequent months will see a continuation of the gains we saw in January, given that we are still well below the 21.5m jobs lost in the months of March and April last year.

US markets still look on the soft side ahead of the open with US 10-year yields closing in on their highest level in over a year, and while yields have slipped back a little this morning, a decent payrolls report could act as a catalyst for a further rise, towards this year’s peaks above 1.6%, as optimism rises over a strong economic rebound.

Gap shares slid after the bell, after Q4 sales in its Old Navy operation came in below expectations. Net sales of $4.42bn fell short of the consensus of $4.66bn although profits for Q4 actually beat expectations, coming in at $0.61 a share. This also included a $56m charge, as it undertakes a review of its Intermix business.

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