Stocks Give Back Gains Ahead Of Powell Testimony

Classic bear market rally head fake in action earlier this week. Today comes the unwind; European stock markets shedding gains and oil off sharply following a broad decline for Asian equities. The FTSE 100 declined 1.5% in early trade, led by 3-4% declines for the oil majors BP (LON:BP) and Shell (LON:RDSa), and the DAX in Frankfurt lost 2% amid a broad-based sell-off. US futures are off sharply this morning after rallying 2.4% on Tuesday as the cash equity markets returned to action following the Monday holiday. All eyes on the start of Jay Powell’s testimony in Congress later.

Oil dived lower overnight and both Brent and WTI are down 5-6% in early trading this morning. There doesn’t seem to be a heap of obvious catalysts – technical breakdown, profit-taking...choose your poison. I put it down broadly to the kind of recession fears that are apparently weighing on the broader market. API figures due today.

Sterling plunged as inflation roared to 9.1% in May, a fresh 40-year high. A core reading of +5.9% was a little lighter than expected so traders have trimmed bets for three 50bps hikes by November. The fear is inflation is crippling consumers, leading to recession, and the Bank of England is not doing enough to defend the currency. Better a short, sharp dose of monetary policy medicine now than prolonged stagnation/stagflation - consumers don’t pay core, they pay headline. In fact, core inflation is minded to slide when non-core is ripping because of inelasticity of demand for food and energy. But it doesn’t matter since RPI is at 11.7%. Whilst the Fed seems to be saying, by its recent actions, that a short recession is better than long-term stagflation, the BoE seems afraid to be so bold.

ECB’s De Guindos says fragmentation is a “significant worry”. By fragmentation, we mean spreads between so-called core and peripheral debt widening too much. The ECB is working on an anti-fragmentation tool, but we await to see how powerful this is and what its market impact will be. The euro is holding up ok versus the dollar compared to peers, but still EUR/USD is under pressure below 1.05.

Meanwhile, the yen has made a new 24-year low near 1.37. Talked yesterday about JGBs and the Bank of Japan, which now owns about half of Japanese government debt.

Musk: “I have never said that people should invest in crypto. In the case of Tesla, SpaceX, myself, we all did buy some Bitcoin, but it’s a small percentage of our total cash assets," Of course he never pumped crypto. Ever. Not recently, anyway. Ok, so some people at the SEC (who are they again?) might think this constitutes ‘investment advice’...but Musk would argue it wasn’t ‘advice’ just his view on things. I could say I like avocadoes but it doesn’t mean you should go long Mexican peso. “I like Bitcoin” is not the same as “buy Bitcoin here”. That is true, but given his incredibly influential position, it’s not like a ‘normie’ saying it. And “I am buying Bitcoin” is not the same as “you should Bitcoin”...for the same reasons though it becomes a whole lot greyer because of his influence….I don’t know but I fail to see how any reasonable person would not take his public statements to mean anything other than ‘Bitcoin/Doge/Crypto is super cool, I am buying it so you should probably too.” But I’m not a lawyer.

Meanwhile, job cuts were confirmed, with Tesla set to shed 10% of its workforce over the next three months. Not such a great quarter then? And finally, the ‘Full-Self Driving’ investigation continues...with Musk facing many, many questions. Last week officials confirmed what we suspected - Tesla accounted for nearly 70% of reported crashes involving advanced driver-assist systems in the last year. Just as well the cars are so well built…