Wall Street fell and Asian equities followed the weak handover even as the Fed stayed very much on script with a dovish lower-for-longer message, whilst also presenting a more upbeat take on the economy in the near term. The Fed put some meat on the new average inflation targeting skeleton that was sketched out by Jay Powell at Jackson Hole, saying it will aim to achieve inflation ‘moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%'. But the rub is that it doesn't see this inflation coming through until 2023 at the soonest. There were no explicit easing measures to get there sooner, so the FOMC has only really filled in some blanks as to what we already knew, and seems content for now to wait for Congress to sort the fiscal side out before it does anything more. The lack of any real determination to get inflation up sooner seemed to disappoint for risk.
Equities peaked after the statement and then progressed lower during the presser with Powell right into the close, with the S&P 500 finishing down half of one percent at 3,385, led by a decline in tech, which is about a quarter of the index, whilst energy – now a tiny c2% weighting of the index – rallied 4% as oil climbed. The 21-day SMA offered resistance and now we are looking again to the 50-day line at 3,335, with futures pointing lower. Meanwhile the Nasdaq finished –1.25% lower with Tesla, Apple, Amazon et al falling, and is likewise trapped between its 21-day and 50-day lines, with big trend line support close. European equity markets took the cue and fell over 1% at the open as the FTSE 100 again tested the 6,000 level.
USD caught a bid as well, with the dollar index lifting from a post-statement low of 92.85 to clear 93.50 overnight, before coming off a touch to 93.30 in early European trade. GBPUSD retreated to 1.2950 having earlier hit the 1.30 level. Gold came off its highs at $1970 to test the $1940 support area.
The Fed sees unemployment at a lower level and a larger economy by the end of the year than it did in June. Real GDP forecast for 2020 was revised down to –3.7% from –6.5% in June. Unemployment is seen at 7.6% compared with the 9.3% anticipated in June. Inflation is seen picking up more than it was in June albeit the rise in breakevens has levelled off at about 1.7%.
The key takeaway from the economic projections is that both core and headline PCE inflation are not seen returning to 2% until 2023 – the Fed even had to add a year to the forecast horizon just to get this in. Given it didn't manage to get to 2% with unemployment under 4%, there is a lack of credibility around this, even though I for one believe inflation will come through. The Fed is in the dark and there is no more it can really do without spiralling into the abyss of negative rates. The Fed is in the dark not just because it has no control over inflation, but also because the political situation remains very unclear with regards to fiscal stimulus and the presidential election in November. So, there is a lot of uncertainty and all the Fed can really do is continue to stress its willingness to do whatever it takes and its willingness to overlook overshoots on inflation should they emerge. I'm in the camp that does expect inflation to feed through due to the massive increase in the money supply combined with supply chain disruption and the fiscal largesse. The Fed's policy shift also raises the prospect of inflation expectations becoming unanchored. However, we cannot ignore the fact that the pandemic has had a chilling effect on confidence and spending may be slow to reappear, pushing down on inflation for a while longer.
US retail sales lost momentum last month, with sales rising just 0.6% versus the 1.1% expected, signalling the effect of the expiration of $600 stimulus cheques that made many at the lower end of the income scale better off out of work than in.
US jobless claims later today will be closely watched for signs of any imrpovement after last week's disappointment. Last week's print of 884,000, which was flat on the previous week, signalled a slow down the recovery in the labour market and worried economists.
The Bank of England delivers its monetary policy statement at midday – will it surprise by going ‘big and fast' with more QE – as governor Andrew Bailey suggested is the best approach for central banks in times of crisis last month? There is also speculation that the Old Lady of Threadneedle St will turn to negative interest rates to stimulate the economy. Speaking to MPs recently, Bailey refused to rule out negative rates – a policy that has systematically failed to deliver the required inflation in the Eurozone – saying that it remains in the box of tools. I'd expect the Bank to tee-up an increase in QE in November and not further rate cuts, but it may choose to fire first and ask questions later.
Snowflake (SNOW) shares made an astonishing stock market debut. After pricing the IPO at $120, the stock flew to almost $280 in the first few hours of trading before settling at $253. The price to sales multiple of about 360 is simply astounding – a lot of future growth was priced into the stock on its first day. It's the biggest software IPO ever and demand was exceptionally high, and the multiples being paid even loftier. It seems to be a story of the scarcity value of growth. It also shows just how much wild, free-flowing money there is in the market right now chasing whatever's seen as hot and whatever offers the most growth. We're almost into the territory of describing these tech stocks as Veblen goods, where demand rises with the price. The IPO market is getting very frothy. oil was a little softer overnight We can blame/thank the Fed for this situation with ultra-low rates assured for a very long time and massive liquidity needing to find a home at whatever price that is. It's like 1999 all over again.
Even London is getting in on the action with The Hut Group getting its IPO off with a swagger and a close at more than £6 after listing at £5. As noted when the listing was announced at the end of August, the valuation it deserves depends very much on your point of view. In 2019 THG achieved year-on-year revenue growth of 24.5% to reach £1.1 billion with adjusted EBITDA of £111.3 million. The float aimed to raise £920m at £4.5bn market cap, which at c40x last year's EBITDA and x4 sales doesn't seem like too much to pay for this kind of growth....or does it?! The answer rests surely on whether it deserves a techy or a retail multiple. Management forecast overall revenue growth of 20-25% over the medium term, with its tech platform Ingenuity (the capital-light growth lever) forecast to grow at 40% primarily as a result of increasing mix of e-commerce revenues as global brand owners accelerate their adoption of D2C strategies. But revenues from Ingenuity remain relatively small - £61m in the first half of 2020, which was flat on last year and less than 10% of total group revenues. As a percentage of group revenues, the contribution from Ingenuity is going down. Again it's the promise of growth that is appealing to investors right now.
Elsewhere, oil was a little softer overnight as risk sentiment came off the boil after the Fed, but this came after a couple of very solid days. WTI for Oct breached $40 on the upside before paring gains but the $39.50 area has held for the time being and offered a springboard in early European trade . EIA data showed inventories fell 4.4m barrels, contrasting with forecasts for a build. Gasoline stocks were drawn down at twice the rate expected. However, we remain concerned about the demand pick-up through the rest of the year - as all the main agencies have recently revised their demand forecasts lower. We note also a report suggesting that OPEC is not about to panic by further cutting production – however that would depend on prices; WTI at $30 again might induce action. OPEC+ members are holding an online meeting today to assess compliance and whether additional cuts may be necessary – I would think for now they will stand pat, with the focus chiefly on compliance with current targets, which currently stands at 101%, according to sources reported yesterday. But if prices come a lot more pressure there would likely be an OPEC+ response.
RISK DISCLOSURE STATEMENT In consideration of Safecap Limited (“Safecap”) agreeing to enter into over-the-counter (“OTC”) contracts for differences (“CFDs”) and spot foreign exchange contracts (“Spot FX Contracts”) with the undersigned (hereinafter referred to as the “Customer”, “you”, “your”), Customer acknowledges, understands and agrees that: 1. Trading Is Very Speculative and Risky. Trading CFDs and Spot FX Contracts is highly speculative and is suitable only for those customers who (a) understand and are willing to assume the economic, legal and other risks involved, and (b) are financially able to assume losses significantly in excess of margin or deposits. Neither CFDs nor Spot FX Contracts are appropriate investments for retirement funds. 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Where the CFD or Spot FX Contract is settled in a currency other than your base currency, the value of your return may be affected by its conversion into the base currency. 12. One Click Trading And Immediate Execution. Safecap’s Online Trading System provide immediate transmission of Customer’s Order once Customer enters the notional amount and clicks “Buy/Sell.” This means that there is no opportunity to review the Order after clicking “Buy/Sell” and Market Orders cannot be cancelled. This feature may be different from other trading systems you have used. Customer should utilize the Demo Trading System to become familiar with the Online Trading System before actually trading online with Safecap. Customer acknowledges and agrees that by using Safecap’s Online Trading System, Customer agrees to the one-click system and accepts the risk of this immediate transmission feature. 13. Telephone Orders And Immediate Execution. Market Orders executed through the Safecap Trading Desk are completed when the Safecap telephone operator says “deal” or “done” following Customer’s placing of an Order. Upon such confirmation of the telephone operator, Customer has bought or sold and cannot cancel the Market Order. By placing Market Orders through the Safecap Trading Desk, Customer agrees to such immediate execution and accepts the risk of this immediate execution feature. 14. Safecap Is Not An Adviser Or A Fiduciary To Customer. Where Safecap provides generic market recommendations, such generic recommendations do not constitute a personal recommendation or investment advice and have not considered any of your personal circumstances or your investment objectives, nor is it an offer to buy or sell, or the solicitation of an offer to buy or sell, any Foreign Exchange Contracts or Cross Currency Contracts. 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It is your responsibility to carefully read these Trading Policies and Procedures and to inform Safecap of any questions or objections that you may have regarding them before entering each and every Transaction. You agree, represent, warrant and certify that you understand and accept Safecap’s Trading Policies and Procedures, as set forth here and as may be amended from time to time by Safecap, in its sole discretion, and you agree to comply with Safecap’s Trading Policies and Procedures. Terms capitalized in these Trading Policies and Procedures are defined in the Glossary as found on Safecap website. 2. TRADING HOURS All references to Safecap’s hours of trading are in Greenwich Mean Time (“GMT”) using 24-hour format. Safecap normally provides access for trading CFDs and Spot FX Contracts via the Website from 21:00 GMT on Sunday to 21:00 GMT on Friday. Please refer to our “Instruments Table” for additional information. 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Where you place Orders with us, the execution factors that we consider and their relative importance is as set out below: 1. Price. The relative importance we attach is “high”. 2. Speed. The relative importance we attach is “high”. 3. Likelihood of execution and settlement. The relative importance we attach is “high”. 4. Size. The relative importance we attach is “high”. 2. We are the principal to every Order you place with us and therefore we are the only execution venue. 4. ORDERS 1. Orders Placement. All Orders must be placed through the Safecap Online Trading System or by telephone to the Safecap Trading Desk. Telephone Orders are accepted in the sole discretion of Safecap. 2. Types of Orders Accepted. Some of the types of Orders Safecap accepts include, but are not limited to: 1. Good till Canceled (“GTC”) - An Order (other than a Market Order), that by its terms is effective until filled or canceled by Customer. GTC Orders do not automatically cancel at the end of the Business Day on which they are placed. 2. Limit - An Order (other than a Market Order) to buy or sell the identified market at a specified price. A Limit Order to buy generally will be executed when the Ask Price equals or falls below the Bid Price that you specify in the Limit Order. A Limit Order to sell generally will be executed when the Bid Price equals or exceeds the As Price that you specify in the Limit Order. 3. Market - An Order to buy or sell the identified market at the current market price that Safecap provides either via the Online Trading System or over the telephone through one of the dealers. An Order to buy is executed at the current market Ask Price and an Order to sell is executed at the current market Bid Price. 4. One Cancels the Other (“OCO”)- An Order that is linked to another Order. If one of the Orders is executed, the other will be automatically cancelled. 5. Stop Loss - A Stop Loss Order is an instruction to buy or sell a market at a price which is worse than the opening price of an open position (or worse than the prevailing price when applying the Stop Loss Order to an already open position). It can be used to help protect against losses. Please note that because of market gapping, the best available price that may be achieved could be materially different to the price set on the Stop Loss Order and as such, Stop Loss Orders are not guaranteed to take effect at the price for which they are set. 6. Trailing Stop - A Trailing Stop is the same as a Stop Loss Order with the only difference being that, instead of setting a price at which the Order is activated, the Trailing Stop Order is activated at a fixed distance from the market price. For example, if Customer has purchased a long open position and the market Ask Price increases, the Trailing Stop price will also increase and will trail behind the market Ask Price at the fixed distance set by Customer. If the market Ask Price then decreases, the Trailing Stop price will remain fixed at its last position and if the market Ask Price reaches the Trailing Stop price, the Order will be executed. Please note that because of market gapping, the best available price that may be achieved could be materially different to the price set on the Trailing Stop Order and as such, Trailing Stop Orders are not guaranteed to take effect at the fixed distance for which they are set. 3. One Click Order Entry/One Click Execution of Market Orders. 1. Electronic Order entry for Market Orders equals Order execution. To enter an online Order, Customer must access the Markets window, then click on “BUY/SELL” for the relevant market. A new window will appear in which the Customer enters the price and lot size. The Order is filled shortly after the Customer hits the OK button provided the Customer has sufficient funds in his Account. Orders may fail for several reasons including changing dealer prices, insufficient margin, unspecified lot size or unanticipated technical difficulties. 2. One-Click Trading. To use one-click trading, Customer must go to the “Settings” menu and choose “View and Edit”. Customer should check the “One-Click Trading” box. To enter an online Order with one-click trading, the Customer must access the Markets window and enter the price and lot size. The Order is filled shortly after the Customer clicks the BUY/SELL button provided the Customer has sufficient funds in his Account. Orders may fail for several reasons including changing dealer prices, insufficient margin, unspecified lot size or unanticipated technical difficulties. One-Click Trading can also be used when closing positions. 3. Immediate Execution of Orders Through the Safecap Trading Desk. Orders executed over the telephone with the Safecap Trading Desk are completed when the Safecap telephone operator says “deal” or “done.” At that point Customer has bought or sold and cannot cancel the Order. When placing Orders through the Safecap Trading Desk, Customer acknowledges and agrees to such immediate execution and accepts the risk of trading in this way. 4. Order Cancellation. Non-Market Orders may be cancelled via the Safecap Online Trading System. However, there is no guarantee that Customer will be able to cancel an Order before it has been executed and Safecap shall have no liability for any claims, losses, damages, costs or expenses, including legal fees, arising directly or indirectly out of the failure of such Order to be cancelled. 4. 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In cases where the prevailing market represents prices different from the prices posted by Safecap, Safecap will attempt, on a best efforts basis and in good faith, to execute Market Orders on or close to the prevailing market prices. This may or may not adversely affect Customer’s Realized and Unrealized Gains and Losses. 5. CUSTOMER ACCOUNTS AND INITIAL DEPOSITS 1. Documents. Before you can place an Order with Safecap, you must read and accept the Customer Agreement, including the Risk Disclosure Statement and these Trading Policies and Procedures and all applicable addenda, you must deposit sufficient clear funds in your Account and your Customer Registration Form and all accompanying documents must be approved by Safecap. Upon the approval of your registration, you will be notified by e-mail. 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