The FTSE continues to make gains, hitting 7,800 yesterday and pushing up further to 7,848 in early trade on Friday amid a broad rally for European equities after US inflation cooled. The UK bluechip index still has valuation on its side, trading around 10x forward earnings vs 15x for global equities. (for reference the FTSE traded at 17x in 2020). The FTSE is up around 5 per cent this year, a bit behind the +8 per cent gains for European equity markets but reflective of a better starting position – the FTSE 100 was easily the top performer among the big equity indices last year as it shrugged off rising rates and inflation with its defensive and old world mix of stocks.
Only 50pts or so to the May 2018 all-time high at 7,903. A fresh all-time high for the index in this kind of macro environment probably reflects a bit of defensiveness among global investors, a hunt for yield, relative cheapness and a weaker pound (in dollar terms we are a long way off the all-time high), a belief the Fed is almost done with rate hikes as inflation peaks, and hopes that China’s reopening will drive the commodity and energy sectors.
You have to think bulls will make a charge at it if not today then early next week. Traders have also pared bets on the peak Bank of England rate to the lowest since November – top seen at 4.5 per cent – certainly the BoE is loathed to hike too far and may actually begin cutting this year. GBPUSD made a fresh bid to surmount 1.22 as data showed the UK economy unexpectedly expanded in November and the USD came under pressure.
US inflation cools
Traders have also pared bets on how long the Fed stays restrictive, pricing in more cuts this year after the CPI number came in as expected, lifting the euro to a 9-month high against the dollar. US inflation is decelerating, with yesterday’s CPI in line with expectations at 6.5 per cent from 7.1 per cent the prior month. Core inflation still at +0.3 per cent month-on-month, but all from shelter, which ought to be very sensitive to rate hikes down the line, which ought to encourage the Fed somewhat. In fact many have pointed out that the shelter component of the CPI is so lagging an indicator that it’s kind of worthless... has the Fed really slayed the inflation dragon? We shall find out in the next 3-4 months. The Fed’s Harker said it’s time to move to 25bps hikes but also stick with a restrictive policy for a while. Markets seem to be eyeing a slowdown in the pace to 25bps.
As I mentioned a couple of times this week, there was a relatively high bar for bulls with the 6.5 per cent expected. Slowing at that rate is significant and the S&P 500 tried to break 4,000 but could not take this out despite rallying a third of one percent on the day. The Nasdaq rose for a fifth straight day.
Bank earnings – what to watch
The big Wall Street banks kick off earnings season on Wall Street today. The key question for banks ties in with the broader market narrative – inflation, employment and net interest income. Have rates peaked, has inflation peaked? Investment banking revenues probably still subdued though comps will start to get easier after this quarter.
Net interest income likely to be strong (+30 per cent) but can the growth be sustained? Question is whether we have reached the peak in margins and income as yield curves become flatter and inverted.
Across the six largest Wall Street banks profits are seen falling 17 per cent year-on-year, according to Refinitiv data, with loan loss provisions likely to come close to $6bn. We can also expect a further rise in credit card balances, which were +15 per cent in Q3, as consumers run through savings. Expenses are also going to be higher – but banks are now reining in their horns. On a wider note, GS is slashing jobs, Wells Fargo is pulling back from mortgages, other banks are closing units or selling out of areas of business – does this sound like a positive setup? Meanwhile their analysts are all calling the bottom and say the only way is up for stocks... I trust my nose and it smells something whiffy on Wall Street.
Neil Wilson is the Chief Market Analyst at Finalto
