Stocks stumble as investors look to US CPI inflation

Weak start for equities this morning, taking the baton from a mixed bag for indices in the US and Asia. FTSE 100 off about 0.5% in early trade heading towards 7,000 again, whilst the DAX is closer to the flat line. US CPI inflation later is the chief attraction as well as Apple’s product show. Shares in China fell, while Tokyo closed at a 5-year high.

US stock markets showed growth-value divergence: the Nasdaq slipped and the Dow and the S&P 500 rallied as the market attempted to consolidate after a run of five straight losses. We saw a bit of a case of futures pumping, cash dumping: i.e. futures rallying but the market selling off on the cash open, which is never a good setup for the market. Futures are weaker today, whilst the US dollar is weaker, sitting in the middle of the recent range, after running into resistance at 92.85 area for the second time in a week.

Large cap growth/tech dragging a bit, cyclicals and energy doing better. So, some rotation away from tech/growth towards the value/cyclical part of the market. Rotation magic still working on the broader market and keeps it steady in the face of a bigger pullback, for now. Apple up a touch as markets continue to digest the impact of the Epic court ruling and look ahead to today’s product event. Expect new models but I don’t believe there is any game-changing tech about to be revealed.

The market has been conditioned to buy the dip since TINA – there is no alternative. But we have not seen this so much so it’s a market that could be unlearning what it was taught because of things like inflation. Persistent supply problems, labour shortages etc will mean it’s not as transitory as people think and since it’s supply-shock, cost-push (bad) inflation not just demand-pull (good) inflation, it is not good for the market. Today’s CPI will be closely watched of course, but will be enough to change anyone’s thinking about whether inflation is stickier than the Fed tells us?

Big trouble in China: Shares in Evergrande plunged again after the company issued a statement saying it was struggling to offload assets to cover its monster debt pile amid a liquidity crunch. Shares fell more than 11% and trading in some of its bonds were halted.

Crypto pump and dump: Litecoin shot higher in a frenzied spike on a press release purporting to be from Walmart, the retailer telling customers it is introducing a pay with Litecoin function in store. Wow, we all thought, Litecoin has been doing nothing for months and then it’s suddenly in with the biggest retailer in the US. The market obviously felt it was legitimate and was even more assured when Litecoin’s Twitter account share the tweet. It didn’t take long for it to be outed as fake news, however, and Litecoin came crashing down again. Litecoin jumped 35% in the space of 10 minutes before it went south. Pure Wild West – clearly a well-orchestrated bid by one or more holders who wanted to drive the price higher for just long enough to get out with the heads above water.

There was a strong read across for other cryptos (note the spikes on the 5-min charts) but they are mainly starting to regain some momentum.

Ocado shares fell after it reported a 10% drop in revenues, caused by the fire at its Erith site on July 16th. Revenues were down before the fire – tough comparisons with last year – but slumped 19% in the period after. More capacity is incoming for the UK but no update on international progress. JD Sports ramped higher again on yet another strong performance with profit before tax and exceptional items rising to £439.5 million. Management forecast outturn headline profit before tax for the full year of at least £750 million.

Can’t make it up: Last week talked a bit about how Coinbase was getting in a twist over the SEC suing it for launching Lend, a product that would let people earn interest (yield) on their Bitcoin holdings. So, it was quite amusing to see them this week tap the bond market, which lets people earn yield on their assets, ie the bonds. Coinbase said it would offer $1.5 billion in senior bond notes. “This capital raise represents an opportunity to bolster our already-strong balance sheet with low-cost capital,” the company said, though they’ll paying up to 4-5% for the privilege.

MicroStrategy is at it again, the company revealed it has purchased an additional 5,050 bitcoins for about $242.9 million in cash at an average price of $48,099 per Bitcoin. Down about $19m on that deal so far, then. “As of 9/12/21 we #hodl ~114,042 bitcoins acquired for ~$3.16 billion at an average price of ~$27,713 per bitcoin,” tweeted the boss Michael Saylor.

Trouble in the energy markets seems to be getting worse and there is going to be a rough winter as prices seem to be going only way. Call it political insanity led by the green agenda or a perfect storm of short-term factors, it’s not looking pretty right now.

European natural gas benchmarks keep hitting new highs. Henry Hub natural gas prices were up another 4% to $5.20, a fresh 8-year high and a 14-year high for this time of year. Demand for natural gas is actually growing but supply is failing to keep pace. Problem is the drillers can’t get the funding and they’re over geared as it stands so there is not the ability to go big on drilling to take advantage of the higher prices. Which means inventories are going to keep being squeezed and prices are going one way.

Oil is well and truly back to the races for a fresh run at the YTD highs after breaking above the Aug range at long last. As anticipated given it had completely backloaded its prior demand forecast for 2021 with all the growth to appear in H2, OPEC has finally had to cut its outlook. The cartel trimmed its world oil demand forecast for the last quarter by 110k bpd due to Delta.

"The increased risk of COVID-19 cases primarily fuelled by the Delta variant is clouding oil demand prospects going into the final quarter of the year," OPEC said in the report. "As a result, second-half 2021 oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into first-half 2022." OPEC is sticking with the 6m bpd increase in 2021 vs 2020 though, with Q3 showing resilience despite the ongoing problems with the pandemic. But the outlook for 2022 is bullish, with OPEC raising its oil demand forecast for next year by 900k bpd from last month’s outlook, taking demand growth in 2022 to 4.2m bpd. Meanwhile short-term pressure on supply remains with Hurricane Nicholas making landfall in Texas this morning.

WTI made a 6-week high and now clear of the August range and near-term trend resistance.

Stagflation: Industrial giant 3M yesterday warned that inflation is currently higher than company thought in Q3, seeing broad-based inflation, warns on chip shortages.

And it’s not looking like it’s as transitory as the Fed keeps telling us. The Fed reports that consumer 3-year ahead inflation expectations hit 4%, a series high. One-year-ahead inflation expectations rose for the 10th straight month to a median of 5.2% in August. Food prices are expected to grow by 7.9% annually, up from 7.1% in July. Rent is expected to rise by 10%, and the price of medical care is expected to rise by 9.7% over the next year.

Ok so supply chain problems are not the Fed’s fault, but AIT was always going to let inflation expectations become unanchored since it means the market no longer anticipates the Fed will step in. Previous incarnations of the Fed would have sought to guide the market to expect tighter financial conditions by now.