Today's Markets: European stocks heed US tech slump on hawkish Fed minutes

European stocks fall on Wednesday, with London and US losses in the tech space

January 6, 2022

London losses in tech and pandemic winners
Big US tech falls as FOMC members lean towards more hikes
Travel stocks boosted by lifting Covid testing rules

Markets

European stocks fell sharply in early trade Wednesday, taking their cue from a steep selloff in US tech and weak handover from Asian equities in the wake of the latest Federal Reserve meeting minutes. The FTSE 100 traded down 1 per cent around 7,420 at the lows, the DAX down around 1.5 per cent, before trimming losses after the first hour of the session. In London, losses were concentrated in the tech and pandemic winner space, with JustEat (JET) and Scottish Mortgage (SMT) down 3-4 per cent, with Aveva (AVV) and Experian (EXPN) also -3 per cent. Sainsbury’s (SBRY) and B&M (BME) were the leaders though we have some gains for airlines in the wake of the government’s travel testing overhaul.

Details from its December policy meeting indicate FOMC members are leaning towards more hikes and embarking on balance sheet reduction quicker than previously expected. This accelerated the rollover of the big speculative tech positioning that we have seen lately. ARKK, the Innovation ETF that is the embodiment of the high growth, speculative tech bubble, was down 7 per cent. Apple (APPL) declined 2.6 per cent, Microsoft (MSFT) almost 4 per cent, Alphabet (GOOGL) over 4.5 per cent, and Tesla (TSLA) dropped another 5 per cent. The Nasdaq fell by 3.3 per cent, its worst fall in almost a year. The S&P 500 dropped 2 per cent, the more cyclical/value Dow Jones was down just 1 per cent - some rotation but as stressed before it’s never clean and the big banks fell despite the yield picture. Rates rose as bonds sold off on the tougher tightening stance – US 2-years close to 0.875 per cent, 10-years to 1.73 per cent. Gold is weaker below $1,800 again as yields ticked up, Bitcoin also cracked at key support. The dollar is broadly on the front foot against commodity currencies as the risk-off mood affects currency markets, whilst also clawing back ground against sterling after cable hit a two-month high yesterday.

What’s interesting is that what most thought would happen in 2022 – expensive spec tech/high growth pulling back its horns and value/cyclical/energy/financials outperforming has played out a little too obviously and quickly – question is whether there is further for this trade or if it’s kind of spent for the moment. Blowout in speculative tech, meme stocks etc will start to look overdone soon enough. I think there is still a lot of rotation and churn in and out, and back in, growth vs value, cash-flow vs cash-burn names, and as long as the rotation trick works its magic then there are still gains to be had, albeit muted, for the broad indices.

Companies

UK travel stocks got some lift by the government’s scrapping of a range of testing requirements. Big changes to travel rules mean that the need to self-isolate on arrival in UK is dropped; whilst travellers arriving in the UK will not need to take a PCR test. In addition, the need for a pre-departure test prior to coming back into the UK is also being scrapped. Ryanair (RYAAY) and EasyJet (EZJ) both rose about 1 per cent. IAG (IAG) had smaller gains but is up more than 12 per cent in the last 5 sessions.

Highstreet bellwether Next (NXT) saw its shares fall despite predicting its best-ever annual profit. In its closely watched post-Christmas update the company increased full year profit before tax guidance by +£22m to £822m, which would represent a 10 per cent improvement on two years ago. Management also offered initial guidance for the year ending January 2023, expecting full prices sales up 7 per cent versus the current year and profit before tax up 4.6 per cent at £860m. And the board declared a special dividend of 160p per share.

In summary, a statement of two halves from Next: Christmas was bumper with sales up 20 per cent over two years ago, but a customary cautious outlook – warning on higher freight, labour and material costs – left investors vigilant to the risks that continue to surround UK retail. The company had been expecting sales growth in Q4 to be weaker than Q3, however, “a strong revival in NEXT branded adult formal and occasionwear significantly improved sales throughout the final period”.

Avon Protection recruits new finance head

Avon Protection (AVON), the manufacturer of protective equipment for emergency services, is to appoint Rich Cashin as its new chief financial officer.

Cashin, who is currently president of strategy and corporate development at Ultra Electronics, will join the company on March 7. A brief handover period will then take place until March 31, when he will succeed outgoing CFO Nick Keveth, who is retiring.

Avon Protection announced last month it is to wind down its body armour business after two of its products failed US military tests. The company bought the unit as part of its $91m purchase of 3M’s ballistics protection business two years ago. However, after the test failures it said it was “in the best interests of our stakeholders” to shutter it gradually over the next two years.

Problems at the body armour business have dragged down the company’s share price, which has fallen by 65 per cent over the past 12 months. However, since announcing closure plans for the unit on December 15, its shares have rallied from below £9 to £11.72.

The company has forecast sales of between $260m-$290m this year, which, at Jefferies’ forecast earnings margin of 20 per cent, implies earnings per share of about $1.79, meaning its shares currently trade at around 9 times earnings – significantly below their five-year average of almost 21-times earnings.

However, given that the new CFO is likely to make his own assessment of likely revenue and earnings potential, these numbers could well shift. We maintain our hold recommendation.

‘Utopian’ company joins London’s other stock exchange

Thomas More would likely be baffled by much of modern life, but a newly-listed company on the Aquis Exchange might be tougher to grasp for the writer of Utopia and former lord chancellor than iPhones or aircraft. Hydrogen Utopia International (HUI) aims to “become one of the leading new European companies specialising in turning non-recyclable mixed waste plastic into carbon-free fuels (such as syngas, hydrogen and electricity), new materials or distributed renewable heat”. It raised £3m in a placing and has a market capitalisation of £45m after a strong opening session.

Hydrogen Utopia is a “development partner” of Powerhouse Energy (PHE), an Aim-listed company that makes the waste-to-energy technology. Hydrogen Utopia will focus on Poland, Hungary and Greece while Powerhouse is still working on commercialising the technology, with a planned startup date for its UK plant in 2023. AH

M&C Saatchi might cash in on approach from listed investment vehicle

Marketing agency M&C Saatchi (SAA) might be about to cash in on a strong 2021. AdvancedAdvT (ADVT), a listed investment vehicle, purchased 10 per cent of its shares yesterday and today M&C Saatchi confirmed it has received a preliminary approach which may result in an offer for the company. The advertising agency’s share price was up 9 per cent this morning.

M&C’s revenue was hit in 2020 when a lot of its clients cut discretionary spending during the uncertainty at the beginning of the pandemic. However, clients’ accelerated shift to digital and the recovery of the economy has driven a bounceback in 2021. In a trading update before Christmas, management announced a strong final quarter and now expects full-year results to be materially ahead of expectations.

Executive chair of AdvancedAdvT, Vin Murria, is also a director of M&C. This means if an offer is received an independent committee will be convened to consider it. In a statement, AdvancedAdvT said it viewed the acquisition as a “good investment opportunity”. M&C’s trading update may support this view however the fact that AdvancedADVT’s share price was down 1.68 per cent this morning suggests the market may not agree. AS

Change at the helm at Greggs

Greggs (GRG) reported sales for the financial year to 1 January 2022 of £1.23bn, a two-year increase of 5.3 per cent compared with the equivalent period in 2019.

Figures weren’t quite as positive in its company-managed outlets and the bakery group flagged increased trading pressures in the last two months of the year due to the rise of the omicron variant. Despite commercial disruption, Greggs opened 131 new shops (including 50 franchised units) and closed 28, growing the estate to 2,181 outlets.

The group also revealed that retail and property director Roisin Currie will replace Roger Whiteside as chief executive.

The group expects that full-year results will be slightly ahead of previous expectations and management has flagged a possible additional distribution to shareholders of £30m-£40m in 2022. A decision on the size and timing of any special dividend distribution is expected to be made in the first half of the year. However, cost issues are likely to figure further in 2022. MR

Mishcon fined by regulator

Law firm Mishcon de Reya, which announced plans to float on the London Stock Exchange last year, has been fined £232,500 by the legal regulator.

In an agreed outcome with the Solicitors Regulation Authority (SRA), Mishcon de Reya admitted to breaching money laundering regulations, including failing to secure adequate due diligence in four matters. The SRA described the breaches as serious and said the conduct “had the potential to cause significant harm”. However, it concluded that the risk of repetition was low.

In September 2021, Mishcon de Reya confirmed that plans for a public listing had passed a major partner vote. However, the firm has yet to disclose any further details.

A spokesperson for the firm said: “We are pleased to have come to a settlement with the SRA relating to two separate and historic investigations in relation to which we have made appropriate admissions”. The firm added that corrective action has since been taken. JS

Dr Martens backer resizes stake

Permira, the private equity group which floated Dr Martens (DOCS) last year, has sold a further 65m shares in the iconic footwear brand in a discounted secondary placing.

At 395p, the disposal was priced at a 7 per cent premium to last January’s initial public offering, and netted Permira £257m. Following the placing, the sponsor has a 36.4 per cent residual stake in Dr Martens worth £1.4bn, meaning it remains the largest investor in the company.

Though the latest sale was priced 10 per cent below Tuesday’s closing price, the float has been a success for Permira, which acquired Dr Martens for £300m in 2014. Since listing, however, market interest in the investment case has faded as investors have digest the group’s sizeable debts. AN

QT vs QE

Policymakers not only discussed wrapping up Quantitative Easing more quickly (March) but talked about Quantitative Tightening straight after the first rate hike earlier than predicted. "Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate", the minutes said. And they said it would be done with a sense of urgency: "Many participants judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalisation episode.”

The minutes painted a picture of policymakers being much more concerned about inflation and much more ready to turn hawkish. These minutes underscore the total about turn the Fed took at the tail end of last year. It wasn’t that long ago policymakers thought they wouldn’t hike until 2024 and QT wasn’t being uttered. Now they are about to hike faster and trim the balance sheet. From here I think the Fed can only underdeliver on its hawkishness.

Elsewhere...

Today’s data focuses on the weekly unemployment claims from the US, forecast at 199k, and the ISM Services PMI, predicted at 67 for the headline reading. Yesterday’s ADP jobs data was strong, hitting 807k for the month, well ahead of the estimate for 375k and the November gain of 505k. Jobs were broad based and indicate a positive NFP number on Friday, currently seen at +426k. ADP suggests higher, but never easy to base predictions on.

Some not-so-interesting stuff on Bitcoin from Goldman Sachs, who’ve come round to the digital gold way of thinking. Analyst Zach Pandl suggests Bitcoin will cannibalize more of the gold-as-investment store of value market. Currently accounting for 20 per cent of this market, Bitcoin could hit $100,000 if its share rose to 50 per cent. It’s not the first time we’ve talked about Bitcoin eating gold’s lunch, particularly among younger investors, including millennials who are getting older and richer. As noted in 2020, given how big the investment in gold is – some $2.6tn or thereabouts, it would not take much of a shift by investors (millennials) to “exert a very powerful lever on Bitcoin prices”.

Also in crypto land, Nasdaq-listed BTCS announced they will pay dividend in Bitcoin, calling it a "Bividend." Shares in the company leapt 44 per cent. If you want Bitcoin you can just go out and buy it, but it’s good headline-grabbing stuff from a small company. Meanwhile prices in Bitcoin fell with rollover in stocks – liquidity being pulled is not good for crypto.