Caution sets in with US economy at an “inflection point”

Europe

It’s been a lacklustre start to the week for UK markets despite rising optimism over the prospects for the UK economy, as various surveys showed that business confidence was rising with CFO’s more optimistic now than at any time in the last 13 years.

Both the FTSE100 and FTSE250 have slipped back from last week’s peaks, with some profit taking coming through in the retail sector after several weeks of gains, while markets in France and Germany have been similarly subdued as investors take a pause in a week that will see some important economic reports out of China and the US.

We’ve seen declines in the likes of ASOS and AO World, who do all of their business online, down sharply as non-essential retail shops reopen, with Ocado also feeling the draught.

The weakness hasn’t just been confined to online retailers with the likes of Kingfisher, Next, B&M European retail, JD Sports and Primark owner Associated British Foods all lower on the day in what looks suspiciously like a classic case of buying the expectation of the re-opening, and taking some profit on the fact. If we look at the share price action for most of the sector, we can see that Next and JD Sports were at record highs last week, while ABF saw its shares trade at a 13-month high.

Airline shares have also come under pressure today on the back of a broker downgrade from HSBC, with EasyJet, Ryanair and Wizz Air all slipping back, after HSBC said that the new UK traffic light system would hurt budget airlines earnings expectations.

This shouldn’t have come across as too much of a surprise, given that when the details were released on Friday the logistics of it were only too obvious. HSBC also said it expected EasyJet might need to raise fresh equity. This is something EasyJet has already been doing with the sale of leaseback of 43 of its aircraft already in the last 8 months. It still has another 141 fully owned and unencumbered aircraft, which represents over 40% of its remaining fleet, so it certainly has plenty of room to boost its liquidity.

Hammerson shares initially popped higher on the open on weekend reports that it was in talks to sell its UK retail parks for £350, to Brookfield. While the company confirmed the reports its rather lukewarm response, appears to suggest that a deal is by no means imminent.

In a welcome boost for the London IPO market, after the Deliveroo flop, UK cybersecurity company Darktrace has announced its intention to list in London in the coming weeks. This is great news and an opportunity for London bankers to showcase it has the expertise to price an IPO correctly, as well as for Darktrace management to set expectations accordingly.

A lot has been made of the fact that the continued slide in Deliveroo shares has been a significant setback for the London market, in a lot of ways quite rightly, however if Darktrace can avoid some of the own goals and potholes that came with the Deliveroo listing the outcome has the potential to be very different. Expectations are for the company that was formed in 2013, to issue £250m in new and existing shares, in a float that values the business at around £3bn, and which could come as soon as the end of this month. The company helps clients identify cyber threats within their computer systems by way of AI technology, and regular viewers of Formula One will know the name and branding from seeing the name on the latest McLaren MCL35M driven by Lando Norris and Daniel Ricciardo.

The pain has continued today for Deliveroo shareholders with the price dipping below 250p to a new record low.

US

After closing at new record highs on Friday US markets have opened lower today, as investors look ahead to tomorrow’s US CPI and Thursday’s retail sales numbers, and the start of US bank earnings season at the end of the week. Weekend comments from Fed chair Jay Powell that the US economy is at an “inflection point” appear to have introduced an element of caution into the investor mindset in what has thus far been a slow start to the week.

Alibaba shares opened higher in US trading today despite being fined $2.8bn by Chinese regulators. While this seems an awful lot of money it needs to be remembered that Alibaba’s annual revenues last year were in the region of $99bn, with adjusted net income of $16.7bn. While the fine appears to have drawn a line under Alibaba’s problems, there is a concern that the likes of JD.com, TenCent and Baidu might well also find themselves in the crosshairs of the Chinese regulator.

Uber shares are also higher after the company reported that delivery service in March saw gross bookings, crossing $52bn on an annualised run rate. Gross bookings for March also improved, rising to a one-year peak as more people left home due to increasing confidence on the back of rising vaccination rates.

Microsoft shares have barely moved despite agreeing a $18bn deal to buy Nuance Communications for $56 a share. Nuance Communications is a speech recognition company that caters to the healthcare sector, notarising doctors voice notes from patient visits, as it looks to diversify its cloud business into new sectors.

FX

The pound has shrugged off a weak start to the week, pulling off a three-week low against the US dollar as optimism over the outlook for the UK economy grows, shrugging off weekend chatter about an increase in uncertainty ahead of next month’s regional UK elections.

Talk of an increase in headline risk if the SNP wins next month’s May elections isn’t anything new, and if the UK government has learnt anything from the last five years it’s that binary simple majority referendums cause more problems than they resolve, and can be extraordinarily divisive. If the government is sensible, any new referendum, even if it were granted, would need to command a two thirds majority, something the SNP would find difficult to command.

Commodities

It’s been a slightly softer session for gold prices, with US ten-year yields looking fairly resilient ahead of some key auctions later today and US CPI due tomorrow. Last week US PPI hit its highest levels in nearly ten years and there is a concern it may not be as transitory as central bankers anticipate.

Crude oil prices are slightly firmer, caught between the two stools of rising supply and the risks of slowing demand, due to rising infections in places like Indian and Brazil, and the optimism over the economic reopening that are continuing apace in both the US and UK.