The Trader: Stocks slide again, EasyJet shares skid

Markets: Yesterday for a third straight session it was a case of the dollar up, gold lower again. Stocks were weaker again and are lower this morning, with the FTSE 100 trading close to the 7,000 mark. US futures weaker after the Nasdaq led the decline yesterday. Trading in Evergrande bonds was halted after drop of more than 30 per cent overnight. Nat gas continues to roof with prices north of $4.9, levels not seen since 2014. In Europe and the UK prices are already at records. Bitcoin steadier around the $46k mark so it’s make or break time – bear flag formed.

EasyJet shares tumbled 10 per cent after announcing a £1.2bn rights issue and disclosing that it had turned down an unsolicited takeover offer. The fact that a leading and – going into the pandemic - well-capitalised airline is, some 18 months or so on from the start of the crisis, still needing to raise fresh capital is a sign of the ongoing trouble in the sector. Demand remains the central problem: in Q4 2021 EasyJet expects to be flying 57 per cent of 2019 capacity, and up to 60 per cent in Q1 2022. Shares in Morrisons (MRW) were steady after interim results showed more good progress, however it’s all about the takeover bids.

US debt ceiling: Treasury Secretary Janet Yellen has laid the gauntlet down to Congress to raise the debt ceiling asap or the Federal government will run out of money. Yellen wrote to House Speaker Nancy Pelosi, saying the government would likely reach its debt ceiling in October. “The Treasury Department is not able to provide a specific estimate of how long the extraordinary measures will last. However, based on our best and most recent information, the most likely outcome is that cash and extraordinary measures will be exhausted during the month of October,” she said. “We have learned from past debt limit impasses that waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short term borrowing costs for taxpayers, and negatively impact the credit rating of the United States. A delay that calls into question the federal government's ability to meet all its obligations would likely cause irreparable damage to the U.S. economy and global financial markets.” 

It’s worth noting that the last time there was a protracted battle over the budget in 2011 the US credit rating was cut. No one actually thinks the US government would actually default on its debt – that would be crazy – but there is the potential risk of turbulence for markets if the battle over raising the ceiling takes a long time and we end up in a situation of government shutdowns.

Stagflation: China’s factory gate inflation is accelerating with official producer price index (PPI) rising by 9.5 per cent in August, a 13-year high. CPI rose by 0.8 per cent last month, which was slightly less than July. Meanwhile in the US, the Fed’s Beige Book showed “deceleration in economic activity…reflecting safety concerns due to the rise of the Delta variant”. 

GameStop shares dropped almost 9 per cent in after-hours trade despite reporting a narrower loss and rising sales. For the second quarter the company reported a loss per share of $0.85, slightly larger than expected, though revenues rose to $1.18bn, which was more than forecast. Management didn’t take questions on the conference call and failed to provide guidance for the coming quarters. The company also said it had provided the SEC with more documents as part of the regulator’s investigation into trading activity involving GME and other stocks, though management say this won’t materially impact the business. 

Today’s ECB meeting is unlikely to produce fireworks. Hawks have been making noises since inflation rose to 3% but the central bank is firmly on the dovish side. It may adjust the pace of PEPP purchases but the real question for the bank is whether, once PEPP is wound down, it expands the regular APP programme. Any tweaks to PEPP would be more of an operational decision and not one that signals a change in policy.

Don’t fight the Fed: Dallas Fed president Bob Kaplan has been trading a bit. Actually, trading a lot. And in big size too. Kaplan was very active and made multiple million-dollar trades last year just as he was calling for the Fed and Congress to do more stimulus. In 2020 he was punting on a variety of stocks, including Apple, Alibaba, Amazon, Delta Airlines, Facebook and many more. He was also trading a bunch of oil stocks. How many transactions are unclear as the filing just says ‘multiple’ for the dates of trades. In most cases he was trading in sizes in excess of $1m. The disclosures show buying and selling over $1 million in 22 individual companies, compared with the more cautious investment strategy pursued by the other regional Fed presidents. The WSJ notes that compared with Kaplan, these other Fed presidents "reported modest holdings of investment funds and little in the way of large stock trading”. 

First of all, we should note these are some good trades. But then anyone who bet that the Fed would come riding to the market’s rescue when others were losing their heads in late Feb, early March would have done very nicely indeed.  

Simple folks like myself would automatically think policymakers shouldn’t be trading individual stocks, but actually it’s perfectly legitimate. No one could criticise central bankers for owning some stocks and funds, albeit you could argue that they are conflicted given their policies of the last 13 years have down nothing but pump up the value of stocks.

Nancy Pelosi, the Democrat Speaker of the House, got some flak for buying a bunch of call options on Tesla, which could stand to benefit from the Biden administration’s policies. There is potentially a conflict of interest. Should lawmakers even be allowed to own individual stocks? I can’t believe people who make laws should be able to own stock in a particular company, but they can so we accept it’s all above board. ‘Honest guv, I bought Tesla calls because I think Elon is a genius, not because I know my party is going to hand him lots of cash and not prosecute the company for multiple deaths caused by its dodgy auto pilot system... ‘

Kaplan, as a Fed policymaker, doesn’t have the power to, say, pass legislation that will benefit company A over company B. But as a member of the FOMC he does have a say over monetary policy decisions, which clearly has an impact on the broad market. There could be a point to make here about how policy decisions tend to favour certain sectors over others, but probably a stretch to say that would matter much. 

But there are potential problems with the disclosure, First, the timing of trades: when did he make the transactions? Because we know the Fed pumped the market by a series of emergency measures that stabilised things when funding markets seized. So, was he privy to market-moving policy decisions and did he act on them? Two, the bond ETF: Kaplan was buying and selling the Ishares Floating Rate Bond ETF (FLOT). Given he was a voting member of the FOMC in 2020, he had what could justifiably be described as a direct influence on bond markets. And, therefore, on the floating rate ETF he was trading. If I were a Fed president I’d be pretty mindful about the stocks I was trading which might be likely to benefit from monetary policy decisions, but I’d be minded to steer well clear of trading securities with a direct relationship with the fed funds rate, like a bond ETF. 

It should be stressed that a spokesman said Kaplan’s trading was reviewed and approved by the Dallas Fed’s general counsel. No one is suggesting illegality, as such, only there is a general sense of disbelief mixed with a heap of ‘what more do you expect, the whole game is rigged’ attitude to the story. 

Mark Spiegel of Stanphyl Capital tweeted: Why would a guy such as Robert Kaplan- smart, hawkish (compared to the other Fed idiots) & conservative- own a bubble-fraud such as $TSLA unless maybe, as the S&P 500 is the Fed's 3rd mandate, he occasionally speaks to people on the 500 admissions committee? 

Also let’s look at Tesla. The aforementioned Pelosi owns Tesla, Gary Gensler, the head of the SEC, a body which is supposed to regulate trading and investing, has a big investment portfolio and was until recently an owner of Tesla shares, though is now fully divested. You would not be out of bounds to wonder how a company that treads such a fine line with the rules and a boss who frequently oversteps that line, seems to have so many backers in high places…

SEC threatens to sue Coinbase: The US Securities and Exchange Commission slapped Coinbase with a Wells notice, the official way a regulator tells a company that it intends to sue the company in court, over its plans to launch a scheme to let users earn interest on their crypto holdings. Lend lets users earn yields on USDC, a stable coin linked to the price of the dollar. 

In a blog post, the company said it was surprised by the SEC’s decision and had not been told as to why the regulator was taking this action. “The net result of all this is that we will not be launching Lend until at least October,” wrote Paul Grewal, Coinbase’s chief legal officer. He says: “Despite Coinbase keeping Lend off the market and providing detailed information, the SEC still won’t explain why they see a problem. Rather they have now told us that if we launch Lend they intend to sue. Yet again, we asked if the SEC would share their reasoning with us, and yet again they refused.” 

Coinbase CEO Brian Armstrong also went on the offensive with a series of tweets.  

New SEC boss Gary Gensler has taken aim at the crypto space lately and called for better regulation of the industry. Last month he called on Congress to give the regulator new powers to tame what he described as a ‘Wild West’ environment. 

While the SEC clearly wants to get at crypto, actually a lot of this comes down to something more mundane, the definition of a ‘security’, which Lend clearly is, meaning it’s subject to SEC rules, even if the crypto tokens underlying the scheme are not securities, which means they are not under the SEC’s current purview. Shares in Coinbase fell 3 per cent.

Read more:

Could a Coinbase IPO push crypto into the mainstream? 

The IC guide to cryptocurrencies

Neil Wilson is chief market analyst at Markets.com