Stocks in Europe were weaker in early trade Monday, following a fresh record high being set on Wall Street on Friday as equity markets rebounded from a Thursday sell-off. The Dow Jones, S&P 500, and Nasdaq composite all rose by around 1% to set new all-time closing highs. European bourses by contrast are tripping well-worn ranges. Bond markets are steady with US 10s around 1.35%, oil a tad lower this morning, but WTI remains above $74. Gold holds above the $1,800 level for now. The dollar is steady this morning after a couple of big down moves in the previous two sessions.
In the US, the big banks kick off earnings season on Wall Street this week. Thanks to the vaccine roll-out that has facilitated a broad reopening of the US economy, unleashing an apparent torrent of pent-up demand, as well stimulus and other enhanced Federal payments, expectations are very high for Q2. We can ignore the year-on-year numbers and the % gains – this is all fully priced anyway.
Financials give us a pretty good steer for the rest of the season. Banks have been buoyed by the broad reflation/reopening rotation this year but in the last couple of months we have seen this trend moderate and a flattening in the yield curve is a drag. This could become more of a problem if the Fed starts to talk about tapering and hikes start to come into view. Do banks see any impact on net interest margin as the curve flattens out? Moreover, where do we stand on growth and the booming economy that JPMorgan boss Jamie Dimon said three months ago “could easily run into 2023”. And with peak growth already behind us, where does that leave equity markets: “While equity valuations are quite high (by almost all measures, except against interest rates), historically, a multi-year booming economy could justify their current price,” Dimon said in his last shareholder letter. Watch for how his views might have softened.
Investors will also be looking at share buybacks and dividends after the Fed gave all 23 major institutions the green light to up shareholder returns again. Trading revenues won’t be as strong as we have been used to, but loan loss provisions should continue to be written down, boosting headline EPS. Very strong numbers are expected, so banks have a lot of work to do and will require a major upside surprise this earning season.
It’s a busy corporate calendar in the UK this week. Wednesday sees Dunelm’s Q4 results after the company raised its full-year profit expectations back in May. Pent-up demand has been a boon, but we look for further guidance on how the company plans to adapt to reopening and a shift from consumers spending on homeware (lockdown favorite) to experiences/holidays.
Barratt Developments (BDEV) – FY21 trading update. Looking to see what one of the top UK house builders makes of the pricing in the market right now and reservation rates. Investors will also be looking for a guide on FY22 post the stamp duty holiday. Questions remain over whether the end of the stamp duty holiday and help to buy will lead to a shift lower in housebuilder shares, so this update will be useful for the broader market picture.
Also, Thursday is a trading update from Hays – recent updates from Page and Robert Walters suggest a constructive backdrop for recruiters. Page recently reported a 2% rise in gross profit from the same quarter in 2019 and raised operating profit guidance for the year by up to 30% to between £125m n and £135 million. The post-pandemic hiring boom should continue to offer support to results and the stock. Watch also the same morning for the UK unemployment and claimant count change figures.
Burberry – AGM Wednesday, a trading update on Friday, coming off the back of the announcement of the departure of CEO Marco Gobbetti. This created near-term uncertainty about the leadership, corporate strategy, and creative direction, but investors have not taken fright too badly. Goldman last week raised its rating on the stock to buy, raising the price target to 2,475p from 2,135p. A new CEO will allow a refresh and expectations are too low. The stock has significantly underperformed luxury peers. As noted previously, given the consolidation in the luxury sector, and the current valuation vs peers, it could be a target, so the stock should continue to trade with a slight bid premium. And whilst there are some pandemic-related issues still being washed out, Burberry remains a strong brand in the luxury space with room to appeal to a broader consumer base over the coming years.
On the economic data front, US consumer price index inflation on Tuesday, followed by the UK reading on Wednesday, are the key events this week.
First, the US. Last month’s report was a whopper: 5% annual inflation in May and 3.8% for the core reading – a 30-year high. Month-on-month showed cooling from +0.9% in Apr to +0.7% in May but remains elevated. Since then, however, we had the Fed sounding a little more attentive to inflationary risks and let it be known that it’s not going to let inflation get out of control. That’s capped yields that had been moving higher on expectations of rampant inflation – the reflation trade. Anyway, the focus is not just on the Fed but whether inflation is here to stay – it’s probably too soon to make that call but I will be paying close attention to the core MoM reading for the best signal. It also about the types of assets, stock market sectors that should be doing well if inflation persists. We will also be watching Fed Chair Powell’s testimony in Congress this week.
In the UK, last time we got 2.1% and the Bank of England has said it’s ready to act if inflation goes too high. It does not have the same explicit AIT mandate. As noted on June 24th, the PMI report pointed to strong inflationary pressures that will take CPI above the bank’s 2% target. The question is how far above and for how long – and how does the Bank respond. Governor Andrew Bailey has made clear the MPC won’t tolerate above-target inflation for long and whilst I thought the last BoE meeting in June was too soon to pull the hawkish card, I don’t think it will be long until it does.
Finally, there is a Bank of Canada meeting this week and in the wake of a very strong jobs report on Friday it seems likely it will taper the CAD$3bn in weekly asset purchases.
SOURCES: FXSTREET and LOTUS ACADEMY