Invest-ability Bulletin 15/02/22: Back From the Edge?

Smart moves at the start of trading on Tuesday for European stock markets: After a tepid start the FTSE 100 rose around 1% back above 7,600 as it looked to reclaim some of yesterday’s losses, whilst shares in Frankfurt and Paris were up around 1.5% as all sectors rallied on some positive reports out of Russia regards Ukraine.

Asian stocks were mixed overnight as the situation in Ukraine weighed, but some news on the wires is helping lift risk sentiment and sent oil down more than $1 in short order, with Brent back to $94 and WTI under $93. Risk currencies also caught the tailwind as GBP and EUR advanced against the USD. EURCHF rallied on the news. European rates rose with the 10yr bund at 0.3%, Italy’s 10yr paper at 2% for the first time in two years.

Headlines from Interfax flashed saying that a number of drills have finished and troops are expected to return to bases; some units of western and southern military districts have started returning to bases. This seems to be helping risk catch some more bid in early trade….shows risks of trading headlines and shows market sensitivity to the situation over there. Far from clear what is going on – beware. The reports also said the Russian military is continuing with military drills alongside Belarus starting Feb 19th. The details emerged from defence ministry spokesman Igor Konashenkov, so appear legit, but it is unclear what it all means with regards Russia’s intentions. German Chancellor Olaf Scholz is in Moscow later today. 

As regards the situation regards Ukraine and Russia – UK warning Russia could invade in days, repeating the US line. Lavrov, the Russian foreign minister, says diplomacy can still work…Ukraine keeps saying no invasion imminent… then president Zelensky says date is known and set for Feb 16th… then officials say he was being ironic… I’m not sure I really know what to make of it all. So, does the geopolitical noise still drive price action? Absence of fresh news you see fading of the recent selling and this is what we are seeing in early European trade, buoyed by the headlines.   

European stocks closed off the lows on Monday but still had a bruising session. US stocks were also broadly lower, though again well above the session lows. The Nasdaq Composite was up 1% at point as investors sought some sanctuary in large cap tech, but finished flat. Futures are indicated higher.  

US stocks are back to where they first reached in July last year. So is this cause for optimism? Valuations less extreme than they were and investors have already reacted to a very hawkish Fed jarring the front end of the yield curve…so not all bad. Healthy reset or the start of further bear market weakness? E-mini futures are testing the 200-day moving average this morning, which is now acting as resistance to the upside at 4,454.

Gold is still bid, catching some geopolitical premium, though dipped a bit on the Russian troop movement headlines. Would Russia sell down chunks of its massive gold reserves to prop up the currency should sanctions bite? Rates are going up, inflation expectations are moderating a touch…how can this be bullish? Real yields are still moving higher to create structural headwind. 

On rates: Commentary from James Bullard was again hawkish…other policymakers might be coming round? The front end is not going to be a fade. Ten-year Treasury yields shot back above 2%. Stocks futures fell, the yield on 10-yr Treasury paper rose from about 1.91% to 1.98% as he was talking and continued up north of 2%, where they trade this morning. The implied volatility in Treasury yields has climbed to the highest since March 2020, according to Bank of America’s MOVE index. 

Bullard pointed to the last 4 CPI reports showing signs of broadening and accelerating inflation. And while he is “just one person” and would “defer to the chair” he’s making a strong case for 100bps in hikes by Jul 1st and reiterated the need to frontload policy moves. Bullard also noted the surprise to the upside on inflation – numbers that Greenspan never saw – much higher than expected even 6 months ago. Inflation reports since Oct calls into question the idea that prices will moderate on their own. 

He also stressed that the Fed’s credibility is on the line, that policy would still be accommodative…even current path is rather ‘cheap’ …Fed will be in a ‘pickle’ if inflation does moderate later this year. Still expects 3.5-4% growth in 2022. US rate futures implied a 66% chance of the Fed raising rates by 50bps in March. 

US producer price inflation on tap at 13:30 GMT, expected to be hot again at +0.5% month-on-month , having risen 9.7% year-on-year in Dec. Empire State manufacturing index and German ZEW sentiment reports are also on the calendar today. 

NY Fed reported January year-ahead inflation expectations fell to 5.8% from 6% in December…signs that the Fed’s pivot is already working? It was the first decline since Oct 2020, whilst three-year inflation expectations fell to 3.5% from 4%, which was the largest monthly decline since the survey started in 2013. 

Meanwhile in the UK, the 2s10s spread – the difference between the yield on 2yr gilts and 10yr gilts is close to inverting….recession indicator. Wage data this morning shows it’s failing to keep pace with inflation which is -ve for consumption of course. 

Companies in the news

Mining profits: BHP declared a record $7.6bn dividend as it reported a 57% jump in underlying attributable profit of $9.7bn in the six months to December. Glencore also declared a $3.4bn dividend and £550m share buyback plan on a record profit. In an inflationary environment of shortages, hard assets are worth owning. 

Blackstone leads a €21bn recapitalisation of its European warehouse investment…doubling down on e-commerce and logistics. Look at Warehouse REIT, Wincanton, Safestore? 

Tesla (TSLA) price target upped to $1350 from $1300 by Piper Sandler, which forecasts 1.58M deliveries in 2022, which would amount to 69% growth over 2021. Tesla’s sales in China fell -15.5% in January – tough comps vs record Dec but also mounting competition. Shares are up over 3.5% in pre-mkt trading on broader risk rally. ARKK ETF also up 3% pre-mkt.

Buffett moves: Warren Buffett’s Berkshire Hathaway bought $1bn in Activision shares weeks before Microsoft announced its acquisition of the video games maker. Timing is everything! 

He upped his Chevron position by over 30% to make it his ninth biggest holding, having first bought the stock at the end of 2020. Chevron is up 16% YTD and rallied 39% last year. 

Berkshire pared its holdings in credit card companies, slashing its Mastercard stake by 7% to 4 million shares, and cutting its Visa holdings by 13% to 8.3 million shares. It also disclosed a stake in Nu Holdings, the parent company of Brazilian digital bank Nubank. 

Finally, Tower Semiconductor, an Israeli chip company, surged 50% in pre-market trading in New York as Intel announced it will acquire the company for $53 per share in cash…more consolidation to come in the chip space? 

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