Today's markets: Muted start for equities, inflation in focus, Rolls Royce revs, housebuilder updates & more

The S&P 500 closes above 4,700 for first time, while the possibility of new lockdowns worry Europe

November 9, 2021

Another record close on Wall Street
Inflation remains in focus
Rolls Royce lifted by nuclear news

Markets latest... Mixed, flattish start to trading for European stock markets after a record again on Wall Street as the S&P 500 closed above 4,700 for the first time. Gains of about 0.1 per cent for the DAX and FTSE 100 keeping risk just in the green but the Stoxx 50 is flat. For US stocks it’s been a straight line up since the middle of October and whilst there is always this sense that ‘it must pull back soon’, that is sometimes when it’s finding the path of least resistance to the upside. Talking of which, Bitcoin has made a fresh all-time high and now could generate further upside now that resistance has been cleared. Infrastructure stocks performed well as the market reacted to the passing of the $1tn infrastructure spending bill.

Covid caution... Risks are starting to take shape around rising covid cases in mainland Europe and the possibility of new lockdowns – something to watch in the coming days as it could play out with weakness for European equities. German infection rate at the highest since the pandemic started. Meanwhile the inflation threat looms as large as ever – tomorrow’s CPI numbers for the US will be closely assessed. Today we get the PPI numbers which are going to show ongoing supply chain pressure and pass through of costs to consumers, with the consensus at +0.6 per cent for the headline number and +0.5 per cent for the core PPI. Recent PMI surveys point in one direction for prices and that’s up.

On the whole inflation/rate hike theory... Yesterday, Fed mouthpiece Richard Clarida said conditions for rate rise likely to be met by end of 2022. Markets currently pricing for one by middle of next year, so the Fed remains ‘behind the curve’. An alternative way to put this – as last week showed – is to say the market is ahead of itself.

Unspent stockpiles... He also pointed out there is about $2tn in unspent free money accumulated during the pandemic that is yet to wash through the economy. Does that make inflation likely to be more or less transitory...?

Yet more sticky signs... In August, Jay Powell noted that "if wage increases were to move materially and persistently above the levels of productivity gains and inflation, businesses would likely pass those increases on to customers, a process that could become the sort of ‘wage–price spiral’ seen at times in the past."

He went on... "Today we see little evidence of wage increases that might threaten excessive inflation."

Projecting ahead... Well, the latest NY Fed median projected year ahead household income growth jumped to 3.3 per cent in October from 3 per cent in September. That’s just as productivity in the US plunged 5 per cent in the third quarter to its lowest level in 40 years. Ok, so some of it is supply chain related, but the picture is not the one that the Fed has been describing. Meanwhile, median one-year ahead inflation expectations rose 0.4 per cent to 5.7 per cent in October, reaching a new high for the survey launched in 2013. Clarida noted that the Fed had not anticipated the depth and breadth of the global supply shock. I guessed that but the question is – are you going to try to contain inflation expectations or not?

Companies news

Rolls-Royce gains funding for small reactor programme

Rolls-Royce (RR.) has set up a Small Modular Reactor business after securing the necessary public and private sector funding to cover the design phase of the project.

The company is leading a consortium that is planning to build a series of small reactors in factory conditions and then assemble them on existing nuclear sites across the country. Consortium members are putting in £195m of funding on top of the £210m of government funding secured last month. Each small modular reactor would be around one-tenth the size of a conventional nuclear plant and produce enough energy to power one million homes. Rolls-Royce chief executive Warren East said the SMR programme could generate up to 40,000 jobs by 2050. MF

Less debt, more lift at Rolls Royce

Covid-19 antivirals roll-out gathers pace

Who knows? Eventually, Covid-19 may turn the received wisdom about treating the cause of illness, rather than its symptoms, on its head. Beximco Pharmaceuticals (BXP) has announced the launch of the world's first generic molnupiravir, an oral antiviral drug aimed at treating Covid-19 infections that was recently developed by Merck (US:MRK) and Ridgeback Biotherapeutics. Beximco's branded generic version of molnupiravir, which came about through Emergency Use Authorisation in Bangladesh, will be marketed as Emorivir. The drug is an antiviral aimed at symptomatic Covid-19 and is under review by several other regulatory bodies, including the European Medicines Agency and the United States Food and Drug Administration. Read our IC commentary from 28 September.

Housebuilders handling inflation

Less than a week ago, an influential group of developers and investors in the UK’s housing market warned of “both labour shortages and materials shortages” and urged a “radical rethink” in the government’s approach to housing delivery.

The latest evidence from two of the country’s largest housebuilders suggests logjams aren’t getting in the way of continued strong trading.

This morning, Persimmon (PSN) said its average private new home reservations since the start of July have been around 16 per cent higher than the same period in 2019. The group added that it expects to increase sales by around 10 per cent for its current financial year, and that the market has taken changes to the Help to Buy scheme and the stamp duty tax “in its stride”.

Persimmon said it continues to “manage” build cost inflation and supply chain issues through higher sales prices, a point echoed by Vistry (VTY) ahead of its capital markets day today. The Kent-headquartered group, formerly known as Bovis Homes, added that it expects build cost inflation to climb between 4 and 5 per cent over the next year, but that spikes in materials would reduce.

Despite the strong trading updates, shares in both groups fell in early trading.

Separately, Savills (SVS) said it had “continued to trade strongly” since it last updated the market in August. The estate agents singled out the UK prime residential and commercial markets, where transactional volumes are ahead of previous expectations and pre-pandemic trading. AN

Watches of Switzerland keeps ticking along

Usually when people are feeling stressed out about life, they take a relaxing holiday to a sunny location. With this option off the table, it seems many have decided to indulge in some luxury retail therapy instead.

In its half year trading update, Watches of Switzerland (WOSG) announced group revenue was up 44.6 per cent to £586.2m year-on-year and it has subsequently raised its guidance for the full-year.

A concern could be that people tend to buy Rolexes for life, so lots of sales last year would mean less demand in the future. However, it is gaining new customers in the more fragmented US, which is its fastest growing market and now makes up 28 per cent of total sales. It acquired five new stores there, bringing the total to 36 stores in 12 states.

The group’s top end revenue forecast for the full-year has been revised up 9 per cent to £1.20bn and adjusted cash profit (EBITDA) is expected to be between £81m and £83m, up around 59 per. These robust figures have enabled it to increase its capex and lower its net debt expectations as well.

HSBC thinks the “valuation still looks compelling” and has raised the target price to 1,430p due to its impressive earnings growth power. On the morning of the announcement WOS’s price rose 11 per cent to 1,262p a share. AS.

Charts

Sterling... has found some near-term support and trying to now hold the 61.8/38.2 per cent levels where there is clear near-term resistance to the bounce – eyes on the speeches of Bailey and Broadbent today.

Gold... Real rates under pressure again with 10-year TIPS out to –1.11 per cent, testing the first area of resistance at the 38.2 per cent retracement around $1,827, with further resistance at $1,833, the July and September peaks. Breach to the upside here may call for $1,875. Persistently high inflation and a dovish/patient Fed is a good setup for the metal – the sharp fall real yields since last week’s meeting tells you that. Weaker dollar also a factor with DXY down under 94 again to test its 20-day SMA after once again failing to break out above 94.60 area last week, just as it failed in Sep and Oct.