Ugly, ugly, ugly. That could be the description of yesterday’s brutal sell off in tech stocks which led a broad market decline. The selling in some of the big tech darlings yesterday was spectacular: Tesla –9 per cent, Apple –8 per cent, Microsoft –6 per cent, Zoom –10 per cent. The Nasdaq settled down -5 per cent for the day but off its lows and it's only back to where it was last week, which simply shows what an extreme melt-up it’s been. The S&P 500 closed down -3.5 per cent. Ugly is the only word.
Ugly is also the description of the general state of the economy and politics in the US and, arguably to a somewhat lesser extent, the U.K. The US presidential battle is getting nasty as hell. We should have expected this - it will likely get much worse. But the implications for the market need serious consideration. I worry there is an increasingly grave risk the election result is contested to a point where the concept of a smooth handover of power is tested - well beyond ‘hanging chads’. American democracy is in peril and this should worry us all. Neither Democrats nor Republicans have covered themselves in glory thus far and the fighting will only become more acrimonious. The election is now by far the most serious risk to markets in that it could fatally undermine faith in the American system that has underpinned the West for 80 years.
US Markets under Trump's Presidency
Meanwhile the US economy remains in serious trouble. Jobless claims remain exceptionally high. Although yesterday’s initial claims was better the only stat that really mattered after the Department of Labor changed the way it measured things was this: The total number of people claiming benefits in all programs for the week ending August 15th was 29,224,546, an increase of 2,195,835 from the previous week. Today’s nonfarm payrolls – expected at +1.375m - may well surprise to the downside, as the ever-insightful Christophe Barraud argues in his blog. The U.K. economy is hardly in better shape with the furlough scheme setting up the prospect of a wave of unemployment.
Whilst this is happening, all the central banks can do is further inflate the bubble. Yesterday’s sell off was about excessive buying in a handful of stocks, bad money in the markets chasing an ever-decreasing number of stocks, and a volatility skew that told us things were not right and heading to a rollover. Excessive call option volumes leading to market makers needing to buy the underlying stocks seemingly chased the markets higher, but retail buying has played a strong part too. It’s all been rather unseemly and a correction is required – there may be further to run lower ahead of the election as risk ramps up.
We’d been worried by spiking Vix futures whilst the market was making all-time highs and so it proved to be a red flag. The question longer term for this market is whether we should be confident earnings will recover. That remains a problem, but not intractable - a vaccine would help a lot. On the interest rate side of the equation, the Fed remains on side and will keep rates on the floor - as discussed earlier this week, stretched valuations may not matter if the Fed is never going to raise rates.
European equities were dragged lower by the tech-induced sell-off on Wall Street yesterday but steadied in early trade on Friday morning. With sentiment rolling over in the big US names, any rally may prove to be a selling opportunity. Shares in Spanish banks Bankia and Caixabank shot higher on plans to merge, lifting the entire Spanish banking sector. UK house builders were under pressure after the Competition and Markets Authority (CMA) announced enforcement cases against Barratt Developments, Countryside Properties, Persimmon Homes and Taylor Wimpey. The CMA said it found ‘troubling evidence of potentially unfair terms concerning ground rents in leasehold contracts and potential mis-selling', adding that it is worried leasehold homeowners ‘may have been unfairly treated and that buyers may have been misled by developers’. Shares in the four accused dipped though TW recovered as of send time.
UK Company announcements
| Berkeley (BKG) | Sales prices remained above management expectations between May and August and the sales split is expected to be more evenly spread betweeen the first and second half, after production was also hugher than anticipated during the period. As previously announced, a 107p a share dividend will be paid on 11 September. |
| Ryanair (RYA) | The airline has raised around €400m via a share placing, which has been conducted to strengthen its balance sheet ahead of what is set to be tough winter for the aviation industry, and position Ryanair to take market share from ailing competitors. |
| Hutchison China Meditech (HCM) | Late-stage, or ‘phase three’ trials have started for Chi-Med’s fruquintinib treatment for patients with metastatic colorectal cancer in the US, Europe and Japan. |
| Eurocell (ECEL) | With its business forced to close for a month from mid-March, revenue dropped by 31 per cent year-on-year in the six months to 30 June, to £93.6m. The group swung to a £16.5m pre-tax loss versus a £10.4m profit a year earlier. Demand has improved since reopening and like-for-like sales in July and August were 12 per cent ahead of a year earlier. |
| Capita (CPI) | Investors bid up the shares yesterday morning following reports that private equity group CVC Capital Partners is considering a takeover. But these gains fell away across the rest of the day after Capita announced that it has not received an offer from CVC. That’s not to say the private equity sharks aren’t still circling to purchase all or part of the business. Watch this space. |
| Renew Holdings (RNWH) | The group is guiding that its adjusted operating profit for the year to 30 September will come in ahead of market expectations at £39m-40m. That’s versus the £38.3m is generated a year earlier. It also expects to swing from £10.2m of net debt to a net cash position. The shares were up around 8 per cent in early trading. |
Vix futures, which we’ve been tracking higher with some trepidation as a sign of a toppy market, spiked. Oct futures settled above 38.
The weekly S&P 500 chart, which I said yesterday morning was starting to push the envelope to breaking point, looks a little different but still stretched.
FTSE100 last night closed at the 38.2 per cent retracement level at 5850 before the selling in the US dragged the futures even lower. Higher this morning but susceptible to a pullback should the US selling continue for a second day ahead of the Labor Day weekend.
Neil Wilson is chief markets analyst at Markets.com
