Wall Street fell and Asian equities followed the weak handover even as the Fed stayed very much on script with a dovish lower-for-longer message, whilst also presenting a more upbeat take on the economy in the near term. The Fed put some meat on the new average inflation targeting skeleton that was sketched out by Jay Powell at Jackson Hole, saying it will aim to achieve inflation ‘moderately above 2 per cent for some time so that inflation averages 2 per cent over time and longer-term inflation expectations remain well anchored at 2 per cent’. But the rub is that it doesn’t see this inflation coming through until 2023 at the soonest. There were no explicit easing measures to get there sooner, so the FOMC has only really filled in some blanks as to what we already knew, and seems content for now to wait for Congress to sort the fiscal side out before it does anything more. The lack of any real determination to get inflation up sooner seemed to disappoint for risk.
Equities peaked after the statement and then progressed lower during the presser with Powell right into the close, with the S&P 500 finishing down half of one percent at 3,385, led by a decline in tech, which is about a quarter of the index, whilst energy – now a tiny c2 per cent weighting of the index – rallied 4 per cent as oil climbed. The 21-day SMA offered resistance and now we are looking again to the 50-day line at 3,335, with futures pointing lower. Meanwhile the Nasdaq finished –1.25 per cent lower with Tesla, Apple, Amazon et al falling, and is likewise trapped between its 21-day and 50-day lines, with big trend line support close. European equity markets took the cue and fell over 1 per cent at the open as the FTSE 100 again tested the 6,000 level.
UK Company Announcements
| Next (NXT) | Next reported interim pre-tax profits of £9m, despite sales falling by a third on last year. The retailer generated surplus cash of £347m, which was helped by the sale and leaseback of sites and the net collection of £241m in customer receivables. Next elected not to award a dividend. |
| Playtech (PTEC) | The gambling technology operator's half-year pre-tax profits slumped to €10.5m from €36m in the prior year. Its TradeTech division, which Playtech is in talks to sell, more than doubled its turnover to €87.3m, but Playtech suffered elsewhere from the effects of the coronavirus pandemic, as sports fixtures were disrupted and gambling sits closed. |
| Trainline (TRN) | Trainline's business travel segment experienced a near wipeout in sales activity over its first half, recording just £6m in turnover. The group recorded overall revenues of £31m, compared with £129m last year, and expects an adjusted cash loss of £14-19m. |
| Brooks Macdonald (BRK) | The investment manager saw all of its operating and key financial metrics move in the right direction in the year to June, as total discretionary funds under management recovered, underlying margins moved ahead and net cash rose by nearly half. The final dividend has been held at 32p, however. |
| IG Group (IGG) | At £209m, first-quarter revenue for the trading platform group is 62 per cent ahead of the same period last year, as the booming retail trading activity continued into August. |
| Begbies Traynor (BEG) | Ahead of its AGM today, the insolvency practitioner is confident of hitting market expectations for its current financial year, owing to a rise in insolvency appointments and a "solid" performance from the property advisory and transaction team. |
| Central Asia Metals (CAML) | After a tailings dam spill earlier this week, CAML has restarted production at its Sasa mine in Macedonia with the permission of authorities. The possible costs of the spill saw the company defer its interim dividend decision. |
| Supermarket Income Reit (SUPR) | The landlord has announced plans to raise £150m by placing new shares priced at 104p, a 6 per cent discount to last night's closing price. Proceeds will be used for further acquisitions. Management also increased the target dividend to 5.86p a share for the 2021 financial year. |
| Keywords Studios (KWS) | Pre-tax profits climbed up by two-thirds to €11m (£10m) in the first half compared to the same period last year, despite some operational disruption because of coronavirus. |
| Clinigen (CLIN) | The pharmaceutical group posted a surge in gross profits by almost a fifth to £215m in 2020, despite a final quarter that was heavily disrupted by the pandemic. Management expects growth in 2021 to be weighted towards the second half. |
| Oxford Biomedica (OXB) | While revenues rose by 6 per cent to £34m for the half-year to June, operating losses came in at £5.8m - slightly better than losses of £6.1m a year earlier, after further investment in the group's Oxbox bioprocessing facility. The potential Oxford/ AstraZeneca Covid-19 vaccine could boost full-year revenues by over £10m, subject to scale-up and the approval of Oxbox’s fourth bioprocessing suite. |
| Hilton Food (HFG) | As more people turned to home cooking during lockdown, the group saw its revenue jump by two-fifths year-on-year in the six months to 30 June, to £1.3bn. While margins were squeezed by Covid-19-related costs, higher volumes meant that adjusted operating profit climbed by 18 per cent to £31.5m. Hilton has increased its interim dividend to 7p a share. |
| Breedon (BREE) | The group has reinstated its 2020 guidance and now expects that second half underlying operating profit for the year to 31 December will be in line with 2019. Breedon says that this would be ahead of current analyst consensus. |
USD caught a bid as well, with the dollar index lifting from a post-statement low of 92.85 to clear 93.50 overnight, before coming off a touch to 93.30 in early European trade. GBPUSD retreated to 1.2950 having earlier hit the 1.30 level. Gold came off its highs at $1970 to test the $1940 support area.
The Fed sees unemployment at a lower level and a larger economy by the end of the year than it did in June. Real GDP forecast for 2020 was revised down to –3.7 per cent from –6.5 per cent in June. Unemployment is seen at 7.6 per cent compared with the 9.3 per cent anticipated in June. Inflation is seen picking up more than it was in June albeit the rise in breakevens has levelled off at about 1.7 per cent.
The key takeaway from the economic projections is that both core and headline PCE inflation are not seen returning to 2 per cent until 2023 – the Fed even had to add a year to the forecast horizon just to get this in. Given it didn’t manage to get to 2 per cent with unemployment under 4 per cent, there is a lack of credibility around this, even though I for one believe inflation will come through. The Fed is in the dark and there is no more it can really do without spiralling into the abyss of negative rates. The Fed is in the dark not just because it has no control over inflation, but also because the political situation remains very unclear with regards to fiscal stimulus and the presidential election in November. So, there is a lot of uncertainty and all the Fed can really do is continue to stress its willingness to do whatever it takes and its willingness to overlook overshoots on inflation should they emerge. I’m in the camp that does expect inflation to feed through due to the massive increase in the money supply combined with supply chain disruption and the fiscal largesse. The Fed’s policy shift also raises the prospect of inflation expectations becoming unanchored. However, we cannot ignore the fact that the pandemic has had a chilling effect on confidence and spending may be slow to reappear, pushing down on inflation for a while longer.
US retail sales lost momentum last month, with sales rising just 0.6 per cent versus the 1.1 per cent expected, signalling the effect of the expiration of $600 stimulus cheques that made many at the lower end of the income scale better off out of work than in.
US jobless claims later today will be closely watched for signs of any improvement after last week’s disappointment. Last week’s print of 884,000, which was flat on the previous week, signalled a slow down the recovery in the labour market and worried economists.
The Bank of England delivers its monetary policy statement at midday – will it surprise by going ‘big and fast’ with more QE – as governor Andrew Bailey suggested is the best approach for central banks in times of crisis last month? There is also speculation that the Old Lady of Threadneedle St will turn to negative interest rates to stimulate the economy. Speaking to MPs recently, Bailey refused to rule out negative rates – a policy that has systematically failed to deliver the required inflation in the Eurozone – saying that it remains in the box of tools. I’d expect the Bank to tee-up an increase in QE in November and not further rate cuts, but it may choose to fire first and ask questions later.
Snowflake (SNOW) shares made an astonishing stock market debut. After pricing the IPO at $120, the stock flew to almost $280 in the first few hours of trading before settling at $253. The price to sales multiple of about 360 is simply astounding – a lot of future growth was priced into the stock on its first day. It’s the biggest software IPO ever and demand was exceptionally high, and the multiples being paid even loftier. It seems to be a story of the scarcity value of growth. It also shows just how much wild, free-flowing money there is in the market right now chasing whatever’s seen as hot and whatever offers the most growth. We’re almost into the territory of describing these tech stocks as Veblen goods, where demand rises with the price. The IPO market is getting very frothy. We can blame/thank the Fed for this situation with ultra-low rates assured for a very long time and massive liquidity needing to find a home at whatever price that is. It’s like 1999 all over again.
Even London is getting in on the action with The Hut Group getting its IPO off with a swagger and a close at more than £6 after listing at £5. As noted when the listing was announced at the end of August, the valuation it deserves depends very much on your point of view. In 2019 THG achieved year-on-year revenue growth of 24.5 per cent to reach £1.1 billion with adjusted EBITDA of £111.3 million. The float aimed to raise £920m at £4.5bn market cap, which at c40x last year’s EBITDA and x4 sales doesn’t seem like too much to pay for this kind of growth….or does it?! The answer rests surely on whether it deserves a techy or a retail multiple. Management forecast overall revenue growth of 20-25 per cent over the medium term, with its tech platform Ingenuity (the capital-light growth lever) forecast to grow at 40 per cent primarily as a result of increasing mix of e-commerce revenues as global brand owners accelerate their adoption of D2C strategies. But revenues from Ingenuity remain relatively small - £61m in the first half of 2020, which was flat on last year and less than 10 per cent of total group revenues. As a percentage of group revenues, the contribution from Ingenuity is going down. Again it’s the promise of growth that is appealing to investors right now.
Elsewhere, oil was a little softer overnight as risk sentiment came off the boil after the Fed, but this came after a couple of very solid days. WTI for Oct breached $40 on the upside before paring gains but the $39.50 area has held for the time being and offered a springboard in early European trade . EIA data showed inventories fell 4.4m barrels, contrasting with forecasts for a build. Gasoline stocks were drawn down at twice the rate expected. However, we remain concerned about the demand pick-up through the rest of the year - as all the main agencies have recently revised their demand forecasts lower. We note also a report suggesting that OPEC is not about to panic by further cutting production – however that would depend on prices; WTI at $30 again might induce action. OPEC+ members are holding an online meeting today to assess compliance and whether additional cuts may be necessary – I would think for now they will stand pat, with the focus chiefly on compliance with current targets, which currently stands at 101%, according to sources reported yesterday. But if prices come a lot more pressure there would likely be an OPEC+ response.
Neil Wilson is chief markets analyst at Markets.com
