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The Trader: Tobacco stocks fall, Netflix earnings on tap, Cable touches 1.40

Shares across Europe have dipped after US indices retreated from recent highs
April 20, 2021

A soft start to Tuesday’s session after stocks in Europe closed lower yesterday as the early promise of the green boards fizzled. Stocks on Wall Street were lower, with the Dow Jones closing more than 100 points below Friday’s record high and the S&P 500 down 0.5 per cent from its all-time high also set at the end of last week. These are not strong directional moves but there is not a lot of dry powder on the side lines in investors pretty well all-in on stocks. The macro story seems well understood for now vis-à-vis vaccines, the pandemic, the Fed, stimulus – really the question mark is over whether earnings can keep up with expectations to support current valuations. In the current setup it’s hard to see room for multiple expansion – compression is way more likely as rates rise (although this trade has taken a breather for now) - so we need the ‘E’ bit of the PE bit to hold up or we will see losses. Given the reopening this year, a large global savings glut and all the fiscal and monetary largesse, earnings should be strong. But expectations are already pretty high. Where there does seem room for manoeuvre is in the rotation out of growth and into value and back again.  

Netflix earnings today will provide a vital guide to this. The Street expects about 6m net subscriber adds and the market should look beyond the guidance for Q2 since it’s skewed by comps. Content remains king – Netflix needs to continue to produce the goods to remain the number one – primus inter pares – streaming app among households (the last to be ditched if cloth needs to be cut). Long term it remains a structural winner and the accelerated gains from the pandemic should be now be discounted. Focus should be on churn rates, password sharing crackdown, the content pipeline and competition.

Shares in GameStop rose 6 per cent after news the CEO George Sherman would step down by the end of July. This is all playing into the hope and expectation that Ryan Cohen will lead a resurgence in the firm’s fortunes on a wave of ecommerce growth. There have already been several big board moves and this is the latest sign that the activist investor is making his presence felt. Meanwhile famed Redditor Roaring Kitty – aka Keith Gill (‘I’m not a cat’) has doubled his stake GME by exercising 500 $12 call options and purchasing an additional 50,000 shares. 

Following moves in stocks like Altria and Philip Morris in the US yesterday, shares in British American Tobacco and Imperial Brands tumbled after reports the Biden administration is looking to cap nicotine levels in cigarettes. Officials are also looking at whether they will pursue a ban on menthol cigarettes, and whether this ought to be pursued together or separately, according to the Wall Street Journal. I remember a similar report back in 2017 on a proposal from the FDA to lower nicotine levels sending tobacco stocks plunging. Would it really make as big a difference as the share price moves suggest? Lower nicotine cigarettes may be less addictive – so the rationale is that this would make it easier for smokers to quit or switch to other ‘safer’ products and therefore be a ‘good thing’. However, consumers may be tended to perceive lower nicotine cigarettes as safer, which could make them easier to sell, which would be the precise opposite of what the administration intends. A ban on menthol cigarettes is a much more straightforward policy. Both BATS and IMB fell 5-6 per cent in early trade on the developments.

Despite resuming its dividend, AB Foods shares slipped as it offered a very cautious outlook on slower reopening of Primark sites, higher costs at the food business and FX headwinds. Following an ‘exceptional’ performance in the first half of the year, management expect Grocery, Sugar, Agriculture and Ingredients businesses to be softer in the second half. At Primark, ABF expects to be trading from 68 per cent of its retail selling space, (or 79 per cent if stores with restricted trading are included) by the end of April. Reopening dates for France, Ireland and the remaining stores in Germany are yet to be confirmed. 

The real action yesterday was in FX as the dollar continued to unwind its recent gains. Sterling rallied for a sixth day on the bounce, its strongest daily move since January, and is holding onto gains this morning, with GBPUSD touching 1.40 in early trade. The move is very extended and susceptible to a pullback before the next leg back to the recent highs at 1.42. The weaker dollar extended to the EURUSD pair, which is flirting with the 100-day simple moving average at 1.2050. A sustained breach to the upside calls for a return to the 1.22 handle. 

On the sterling story, there are clear signs the UK is getting back to business. Normality, no; but activity is picking up. Hiring is up 17 per cent, unemployment is down from last quarter. Retail footfall and consumer spending is picking up rapidly. Of course, all this data is massively skewed by interventions – furlough masks the true employment situation, arbitrary reopening dates skew spending to the first few days and weeks as the pent-up demand is let out. Nevertheless, these are encouraging signs. 

Oil is drifting higher as markets look to dwindling global inventories and the expected uplift in demand as US driving season comes into view. The success of the vaccination programme in the US is a big plus for the world’s largest consumer. Refinery runs are picking up and stockpiles globally are at their 5-year average. It’s looking like the glut developed last year is over. Reports yesterday pointed to OPEC+ downgrading the April 28th scheduled ministerial meeting to just a JMMC monitoring meeting. Given OPEC+ has already agreed production levels through to July this would make sense as the market remains fairly calm and well supported for now. 

As flagged in yesterday’s note, gold pulled back a touch, hit by rising Treasury yields. The 50-day SMA at $1,750 may offer an area to rest should the move in yields gather steam. The softer dollar is a support but yields matter more for gold.

 

Neil Wilson is chief markets analyst at markets.com