The Trader: Stocks up as earnings optimism wins, inflation expectations higher, Trump launches social media

Markets latest... European stock markets rose in early trade Friday, set to finish the week largely flat after a little wobble but not a huge amount of movement. Churn seems to the be order of the day after a decent run up for the FTSE 100, which hit its best level in about 18 months last Friday. It’s not far off that level this morning. Bit of a double whammy for UK this morning with the Bank of England chief economist warning inflation will exceed 5 per cent and retail sales falling again. Stagflation vibes but sterling holding on ok and 2-year gilts back off their recent highs, though the wires just flashed the UK 10-year breakeven inflation rate has risen to its highest in 25 years. A GfK report showed consumer inflation expectations jumping to a record high. That’s what the Bank of England is expressly trying to avoid. Asian shares were up as Evergrande (3333) repaid a missed dollar interest payment. IHG shares off 2 per cent despite a rebound in bookings thanks to Brits doing more holidaying in the UK, Sainsbury’s also lower as it abandons plans to sell its bank.

Record highs... The S&P 500 closed at a record high and made it seven straight days of gains amid a mood of positivity around earnings. It ends a two-month pullback that saw it decline a modest 6 per cent before recovering. Rates are higher – US 10s at their highest since May at 1.7 per cent and 2s at a year high, curve flatter. The 10-year TIPS breakeven inflation rose above 2.61 per cent to hits its highest since 2012. But investors are shrugging off inflation and expected central bank policy moves because of earnings growth being more positive than thought. Tesla (TSLA) shares rose to a record after earnings beat expectations. Energy and financials lagged, megacap tech did the lifting +1 per cent (FANG+TM up 1 per cent). Again slower growth, higher inflation supports growth stocks as real growth is at a premium. A steep drop for IBM prevented the Dow Jones from rallying.

Not a huge move in FX this morning... Dollar index around the 93.60 area, major pairs stuck to well-worn levels. GBPUSD is trying to regain 1.38 and make a fresh stab at what looks like a near-term top around 1.3830 - the high of each of the last three days.  

Roll back the clocks... Donald Trump + social media + SPAC. It feels like a kind of reassuringly volatile mix. Trump is launching his own social media platform called TRUTH Social. It needs capital letters, of course. I’d maybe even suggest ‘TRUTH! SOCIAL!’ might be more appropriate. Banned by Twitter and Facebook, Trump is taking on the Silicon Valley elite and fake news in the way he knows best. Shares in Digital World Acquisition Corp. (NASDAQ: DWAC), the Spac that merged with the platform company, soared as much as 400 per cent and had to be halted at one point amid very heavy volume. Trump still sells. The stock finished up 357 per cent at $45.50.  

Will it take off? I can’t see the majority of people ditching their FB and Twitter accounts for this. But you can see a large chunk of disaffected Americans, chiefly Republican/Trump voters, giving it go. I don’t think this ends the dominance of the other platforms, but tells you a lot about what a lot of people think about the platforms they use. “I created TRUTH Social and TMTG to stand up to the tyranny of Big Tech,” says DT. “We live in a world where the Taliban has a huge presence on Twitter, yet your favorite American President has been silenced. This is unacceptable.” He’s got a point. 

Snap out of it... If you don’t have a controversial ex-President to back your social media platform, you have to rely on more mundane things like advertising revenues to drive cash flow. So poor Snap (SNAP) shares collapsed overnight as third quarter revenue expectations missed expectations after Apple’s iPhone privacy changes hit the advertising business. Daily active user growth was sluggish and the company warned of the global supply chain problems and labour shortages hitting advertising demand. Shares plunged by more than 21 per cent after hours. Facebook (FB) and Twitter (TWTR) both dropped by more than 4 per cent in sympathy.  

So Fed up... The Federal Reserve has banned individual stock purchases by top officials and outlined a broader set of restrictions on their investing activities. These will ‘prohibit them from purchasing individual stocks, holding investments in individual bonds, holding investments in agency securities (directly or indirectly), or entering into derivatives’.

The move came as... it emerged that Fed officials were warned on 23 March last year to observe a ‘trading blackout’ for a period of ‘several months’ due to recent and likely upcoming actions by the Fed. The same day, the Fed did its ‘everything it takes’ moment by committing to open-end bond purchases “in the amounts needed to support smooth market functioning”. If you, say, knew the Fed was about to provide the ultimate backstop to the stock market, it would be useful, I assume. I figure that if you owned a tonne of stocks you’d find it valuable to know what the Fed was about to do or not do. Which is why it obviously stinks that Fed members have been allowed to trade individual stocks at all. Messrs Kaplan and Rosengren were trading again within weeks, not months, of the memo date. 

Some good advice... If you read the memo a certain way it just sounds like the ethics people were actually just trying to offer some good advice – don’t do any unnecessary selling, we got this: “In light of the rapidly developing nature of recent and likely upcoming (Federal Reserve) System actions, please consider observing a trading blackout and avoid making unnecessary securities transactions for at least the next several months, or until FOMC (Federal Open Market Committee) and Board policy actions return to their regularly scheduled timing.”

Neil Wilson is the Chief Market Analyst for Markets.com