Today's Markets: European stock markets split as investors digest rates selloff

US stocks plunge on rising rates with megacap tech taking a hit

January 19, 2022

Tale of the tape: US stocks plunged on rising rates, softer growth data; European shares broadly lower at the open in sympathy but trying to muster around the flatline. The CAC 40 and Eurostoxx 50 up, DAX and FTSE down a touch in the first hour. Tech damage, rising rates etc not the same worry for European equities and indices. Luxury stocks lifted by good results from Burberry (BRBY). Ashtead (AHT) and Ferguson (FERG) down the most on the FTSE 100 on US weakness as the Empire State manufacturing index turned negative for the first time in 20 months. Asian markets were very weak overnight but Europe seems to be trying to halt the bloodletting.

The S&P 500 closed below the low of last week and just about held its 100-day moving average, whilst the Dow closed below that level. The Nasdaq Composite dropped below its 200-day line for the first time since April 2020. The Nasdaq 100 didn’t quite hit last Monday’s lows but futures this morning suggest it will open lower. The wreck in tech is not an orderly rotation right now, particularly with banks being sold off from elevated levels.

Megacap tech took a beating, with Microsoft (MSFT) and Alphabet (GOOGL) both down 2.5 per cent. ARKK down another 4 per cent, now –20 per cent YTD. Some gains for energy as oil is trading at multi-year highs, lots of damage being done to banks as earnings flag risks. Goldman Sachs (GS) dropped almost 7 per cent: expenses +23 per cent vs +8 per cent for revenues... cost cutting now going to go hand-in-hand with core lending growth. Investment banking revenues are lumpy. Scrubbed some 200pts or so off the Dow, which fell more than 540pts for the session. More from the banks today with Bank of America (BAC) and Morgan Stanley (0QYU)… should be a story of consumer and business lending growth (BAC) and wealth management (MS). Again watch those expenses.

Companies

Liontrust growth eases but remains robust

Liontrust Asset Management’s (LIO) growth slowed in the final three months of last year, but net flows remained positive, with assets under management rising 4.4 per cent over the quarter. Over the first nine months of its financial year, assets have risen over 20 per cent - driven almost as much by net flows (46 per cent) as market performance (54 per cent).

Nearly all of the company’s flows have come from the UK retail market, with modest outflows from institutional and multi-asset clients over the past nine months. While Liontrust’s share price has fallen by 20 per cent year to date it continues to trade at a premium to the sector. Brokerage Numis says the price/earnings ratio has come down to about 14.5x, which looks more reasonable than a previous valuation in excess of 20x given signs that appetite for ESG funds is beginning to ease along with relative performance. For now, Liontrust’s performance remains ahead of peers and while the outlook seems to be turning more difficult, its growth trajectory could well fit its current valuation. MM

Diploma assesses growth prospects

Underlying growth at Diploma (DPLM) is expected to slow down over the coming months, as Covid-related sales fall away.

In a trading update published this morning, the technical product supplier said it remains “very positive” about its prospects for 2022, after a promising first quarter. However, it expects underlying growth to “moderate” as comparators become more demanding. (Diploma exceeded its financial targets in 2021, reporting pre-tax profit growth of 45 per cent).

Covid-related revenues which boosted its life sciences division in 2021 are unlikely to recur, for example. Meanwhile, higher year-on-year copper prices added around 5 per cent to its underlying growth in the first quarter of 2022.

Underlying revenue was up 16 per cent in the three months ended 31 December 2021, while reported revenue rose by 28 per cent, fuelled by acquisitions and two small disposals. However, supply chain disruption and a tight labour market could cause problems in the future.

Shares in Diploma have fallen by 18 per cent since it published its full year results at the end of November. JS

WH Smith eyes the skies

WH Smith (SMWH) has consoled investors with promises of recovery for over a year now. Its loss-making 2020 accounts - which cited multiple “signs of recovery” - did little to reassure investors after a painful lockdown. However, things gradually seem to be picking up for the retailer - particularly in its travel division.

In a trading update for the 20 weeks to 15 January 2022, group revenue reached 85 per cent of 2019 sales for the period. While not brilliant, it is a notable improvement on earlier months. Travel revenue - which was recovering well in November - was also skewed by the Omicron variant, which is not expected to impact sales long term.

Travel is now the retailer’s primary focus. WH Smith has opened 16 InMotion technology stores in UK airports, and is winning new tenders in the US - most recently in Kansas. This could help to counter the threat digitisation poses to its high street shops, with their physical magazines, newspapers and books.

Over the next three years, the retailer intends to open 99 new stores in locations such as airports and railway stations to make the most of this promising market. Let’s hope travel restrictions don’t make a reappearance. JS

Bonds are making big moves. US 10yr rates touching 1.9 per cent, highest in two years, German 10-year bund yield turns positive for the first time since May 2019, UK 10yr rates highest since March 2019 as data this morning shows inflation at the highest in 30 years. The December CPI reading rose to 5.4 per cent, core CPI rising to 4.2 per cent vs 3.9 per cent expected. The Bank of England surely needs to hike on February 3rd. Some respite for the pound this morning as the dollar bounce pauses for breath… not sure if markets can see the BoE hiking leading to sterling strength. We get to hear from governor Andrew Bailey today as he testifies on the Financial Stability Report at the Treasury Select Committee.

Real rates are key here – US real 30yr almost positive. As for the bund turning positive, it’s a symbolic moment – the bund lives!! This partly reflects thinking the ECB will need to move sooner than it is currently telling us… market pricing 10bps hike by September... but also the nature of globally correlated bond markets – the rising tide in the US is lifting all boats. Surveys indicate economists think EZ inflation will ease back to around 2 per cent later this year… good luck with that. FOMC meeting next week – do they bring QE to immediate halt, possibly signal a bold 50bps hike for March to get in front of the market? Rates tend to rise into the Fed’s first hike in a cycle – as previously discussed there is a chance that the Fed lets the market do some of the tightening for it, and hikes less than expected.

BofA’s Jan survey tells us kind of what we knew – investors had cut net overweight positions in tech to lowest since December 2008, allocations to banks were at a record high – before earnings landed and positioning seems to have rolled over. Overall the survey noted that investors are still very long equities

Some analyst comments: Credit Suisse raised its price target on Tesla (TSLA) to $1025 from $830. Deutsche Bank hiked its price target on Apple (APPL) to $200 per share from $175 on strong iPhone 13 demand as 5G upgrade cycle still in early stages. DB also cut its price target on Netflix (NFLX) ahead of earnings this week to $580 from $590. Microsoft (MSFT) buys video game company Activision Blizzard (ATVI)... big metaverse play, with Microsoft pouncing on a wounded beast and clearly not afraid Washington will walk and walk on anti-trust and big tech bashing.

Neil Wilson is the Chief Market Analyst at markets.com