Shein may ditch New York for London, but don’t assume this is a trend

Stocks opened slightly higher in Europe on Tuesday, with small gains for the FTSE 100, the Eurostoxx index and the Dax. Momentum in European and US stocks that drove indices to record highs last week has definitely slowed, but it does not signal that the rally is dead, instead we think that this is a function of month-end rebalancing. The FTSE 100 is up a notch on Tuesday after Shein, the Chinese discount clothing retailer, said that it was investigating switching its IPO from New York to London. This is largely down to regulatory issues with its New York IPO, its preferred location, rather than the LSE becoming a destination for multi-billion dollar companies. Hence any euphoria at Shein potentially listing in London is likely to fade quickly.

If Shein does list in London, it is unlikely to lead to a surge in Chinese firms listing in the capital, instead it could be a temporary measure until trade relations between the US and China improve, or it chooses to list in Singapore or Hong Kong. The UK IPO market raised a mere £1bn last year, as big firms shun listing in the UK. If Shein does list here it could have a valuation of $50bn, which would be one of the biggest IPO listings London has ever seen.

UK inflation moderates, but there could be more upward pressure ahead

Elsewhere in the UK, the BRC shop price index fell to 2.5% in February from 2.9% in January. The BOE is expecting a large decline in inflation this quarter, largely due to energy prices, but this is another sign that pressure on households could be easing. The 2.5% reading is the lowest level in nearly 2 years and is the ninth straight monthly decline. The drivers of this decline were easing supply chain pressures, falling input costs and fierce competition between retailers. Food costs were the main driver of lower shop prices, according to the BRC. However, higher furniture and electrical appliance prices could be coming down the line due to disruptions around the Suez Canal. Firms are also flagging that higher business rates and an increase in the minimum wage could also push up costs for consumers in the coming months, so the UK is not out of the woods yet when it comes to inflation. This is one reason why the market continues to expect the BOE to be the last of the major central banks to cut interest rates this year, with the first cut expected in August.

UK stocks to keep an eye on

The FTSE 250 is higher on Tuesday, reversing losses in recent days, after Abrdn, the investment company, announced earnings and beat profit estimates. Operating profit for 2023 was £249mn, vs £244.2mn expected. Dividends were in line with expectations at 14.6p per share, while earnings per share were higher than expected at 13.9p, vs. 12.5p expected. There was good news about its Interactive Investor stock broking arm, although its forecast for 2024 was that margins would be flat, and further headwinds could hit the firm. The stock price is up nearly 6% at the open on Tuesday, suggesting that investors have brushed off news that Abrdn saw outflows of £17.6bn last year, and although profits beat estimates, they were 5% lower than a year ago. The company recently announced another round of cost cutting, including getting rid of 10% of staff. In the longer term, Abrdn was demoted to the FTSE 250 last year, and its share price is still lower by nearly 20% in the last 12 months, so it has an uphill battle to get back to top tier of UK stock indices.

Elsewhere, Flutter is the top performer on the FTSE 100 so far on Tuesday after Barclays upgraded the stock to overweight and expects a 20% gain in the share price. Rio Tinto and Smith and Nephew are also higher, the latter upgraded their profit margin forecast for 2024 to 18%, which is higher than the 2023 level and the market is lapping up this news. In contrast, Unilever is the biggest decliner on the FTSE 100, after Morgan Stanley downgraded the stock to a sell.

There is a sense of wait and see mode for the markets at the start of this week. Markets are gearing up for a heavy week of economic data and also central bank speakers, which could give us a steer about what will happen to interest rates. We are also watching closely to see if there could be some divergence in the rate paths for the major central banks on the back of the economic data releases due this week.

BoJ watch: Will the BoJ raise interest rates after higher than expected CPI print?

Japan is now expected to normalize interest rates in April, with a 10 basis point rate hike now expected. This comes after stronger than expected national CPI for January. The core rate of inflation moderated to 3.5% from 3.7% in December, but it was higher than the 3.3% expected by economists. This is the 13th consecutive month that core inflation in Japan has been above 3%, which is why investors are rushing to price in an April exit from negative interest rates from the BOJ. Japanese stocks have paused their uptrend in line with their US and European counterparts, and the 2-year Japanese government bond yield has risen a notch on the back of this inflation print, and 2-year yields are near their highest level since 2013.

The yen fails to react to higher Japanese CPI

The most puzzling piece of the Japanese rate normalization path is the performance of the yen. It is not jumping on the back of the BOJ hiking bandwagon. It is the worst performing currency in the G10 so far this year. It has lost the most vs, the pound, down 6.4%, and then the dollar, USD/JPY is lower by 6% so far this year. The yen is undervalued by approx. the most in its entire history, and it has decoupled from other Japanese asset classes. There are multiple reasons for this. Firstly, there is uncertainty about what the Fed will do next, with some arguing that the strength of the economic data means that it could hike rates. This may be why some FX traders may prefer to wait for a decisive decline in US inflation before they sell USD/JPY. This makes the US PCE data that is due for release on Thursday an important data release for USD/JPY, and we could see volatility in this pair later this week. Until then, it remains stuck in a tight range around the 150.00 mark, and we don’t expect it to break this range until we get more clarity on the strength of the disinflation trend in the US later this week.

GBP/JPY turned a touch lower on Tuesday, yet this pair is close to its highest level since 2008, as the pound is benefitting from a rate differential due to the fact that the BOE is not expected to start cutting rates until August.

Watch demand at US Treasury auction

Elsewhere, S&P 500 futures has turned higher at the European open, and now signals that US stocks will also open stronger later today. There is a huge number of US economic data due on Tuesday, including durable goods orders, regional manufacturing indices and house price data. There are also some key bond auctions to watch out for. The US is attempting to sell $42bn of 7-year notes later this evening. The 10-year Treasury yield fell a notch on Tuesday; however, yields are still higher by more than 45 basis points so far this year, suggesting that the market is reacting to the higher Treasury issuance scheduled for this year.