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Snap AV: the inflation trade is dead on arrival



If you’re sitting at your desk eyes drooping and mind racing you’re not alone.

The US election, as you might be aware, was yesterday and with the vote now looking like — after quite a bizarre evening, admittedly — it will signal a Biden presidency hamstrung by a recalcitrant Republic senate, it seems markets have decided to return to a familiar narrative.

You might recall that we outlined the Biden blue sweep reflation trade idea last week, and here it is again in case you missed it:

Instinctively in FT Alphaville’s mind — a Biden sweep is really a reflation trade. The logic goes like this: moar spending, combined with tax reform aimed at those with the lower marginal propensity to consume, leads to a higher proportion of national income accruing to those with a higher marginal propensity to consume, pulling prices up. This should be good for cyclicals, consumer goods companies and any business whose fortunes are explicitly tied to interest rates.

On the flip side, it should be bad for discount retailers, luxury good companies and high-end real estate businesses. And perhaps, dare we suggest it, priced-to-perfection high-growth businesses whose growth may not look so rare, relatively, in a reflationary world.

(This is a very loose framework, so do please feel free to pick holes in it.)

Well that narrative seems to be dead in the water, judging by markets today. Treasuries are rallying, and anything that can be characterised as “high duration” is following including the most durationy of duration assets: tech equities. At pixel, the Nasdaq index is up 3.5 per cent – with a host of names including Alphabet, Amazon and Facebook all up over 6 per cent.

Same as it ever was then really.

On the other side, value stocks are getting smashed. The Russell 2000 Value ETF (ticker: IWN) is down 1.88 per cent. Value investors can’t really catch a break can they? (h/t to Jake on Twitter for pointing this out.)

So really, it’s just more of the same. Fiscal policy is going to be hamstrung, which means Grandmaster Jay is once again de facto in charge of the economy.

But like most narratives of the past 24 hours, we’re not sure how long this one will hold either.

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Martin Gilbert returns to dealmaking fray with Saracen acquisition




Martin Gilbert, the acquisitive founder of Aberdeen Asset Management, has returned to the dealmaking fray and scooped up Edinburgh-based boutique Saracen Fund Managers through his new venture. 

AssetCo, the Aim-listed company of which Gilbert became chair in April, said on Friday it had agreed to buy Saracen for £2.75m. The deal marks the first step in its strategy to use its platform to make acquisitions in the asset and wealth management industries.

“We need to acquire a regulated entity,” said Gilbert, who established Aberdeen four decades ago and helped orchestrate the £11bn all-share merger between Standard Life Investments and Aberdeen Asset Management in 2017. “Saracen was typical of a good asset manager that had struggled to grow. That’s where we think we can help.” 

Saracen was founded in the late 1990s and has five full-time employees and three funds, which together manage about £120m in assets. In the financial year ended March 31, the group recorded turnover of £985,364 and a post-tax loss of £15,146.

David McCann, an analyst at Numis Securities, described Saracen as “a nice little business but obviously it’s very small”. He added: “It doesn’t move the needle for AssetCo, but it’s about what they do next. The expectation is that this is used as a building block for something much bigger.” 

Dealmaking is sweeping across the fragmented asset management industry. Gilbert, who stepped down from the board of Standard Life Aberdeen in December 2019 and is also chair of fintech Revolut, said AssetCo was “pretty ambitious, we’re looking at lots of opportunities”. 

“There are lots of opportunities for consolidation at all levels because of headwinds like the move to passive, fee compression, ESG and the move from public to private markets.

“We grew Aberdeen largely by organic growth and acquisitions,” he added. “That is our current strategy but at the boutique end of the market. I’ve told [Standard Life Aberdeen chief executive] Steve Bird ‘you’ve nothing to fear from us’.” 

AssetCo also owns a small stake in UK investment group River and Mercantile. Gilbert and Peter McKellar, who is also a director of AssetCo, will join the board of Saracen once the deal is completed.

Standard Life Aberdeen’s share price has tumbled about a third since the merger was struck.

The group last month cut its dividend by a third after full-year pre-tax profit fell almost 17 per cent and investors yanked money from its funds. It was also widely mocked online after announcing it would change its name to Abrdn.

Gilbert said: “The merger was obviously going to be difficult but the business is not alone in having to look at overheads because of the headwinds the industry is facing. It has the strongest balance sheet in the sector.” 

He added he was “supportive” of the rebrand: “That’s me being diplomatic.”

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Wall Street stocks bounce back after inflation scare




Wall Street stocks went into recovery mode on Thursday, after being pushed lower for three consecutive sessions by fears that central banks will withdraw crisis-era support following a surge in inflation.

The S&P 500 index was up 1 per cent at lunchtime in New York, after falling 2.1 per cent on Wednesday in its worst one-day performance since February. The technology-focused Nasdaq Composite rose 0.6 per cent, having neared correction territory on Wednesday when it closed almost 8 per cent below its record high in April.

US government debt rallied, with the yield on the benchmark 10-year Treasury sliding 0.03 percentage points to 1.67 per cent.

The S&P 500 hit an all-time high on Friday, fuelled by optimism about a global recovery supported by central banks keeping monetary policies loose. The blue-chip benchmark then lost 4 per cent over three sessions as worries about inflation rippled through markets.

Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast. This increased speculation about the Federal Reserve reducing its $120bn of monthly bond purchases has helped lower borrowing costs and prop up equity valuations.

Fed vice-chair Richard Clarida said this week, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target but the economy remained “a long way from our goals”.

Analysts warned that market volatility would continue as investors swung from believing the Fed to fretting that its policymakers would act too late to combat inflation and then tighten financial conditions rapidly.

Line chart of S&P 500 index showing Wall Street benchmark on track to snap three-session losing streak

“We are at such an inflection point that volatility in markets is likely to be quite persistent,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “Any chance of a change from the story of constantly low interest rates is going to be unsettling.”

The Vix, an index of expected volatility on the S&P 500 known as Wall Street’s “fear gauge”, is running at around its highest level since early March.

“Markets are volatile because they’re not sure which sort of inflation we have at present, or what, if anything, the Federal Reserve may do to bring inflation down,” said Nicholas Colas of research house DataTrek.

Mark Haefele, chief investment officer at UBS wealth management, said the market jitters also presented an opening for traders.

“Given our view that the spike in inflation will prove transitory, and that the equity rally has further to run, investors can use elevated volatility to build long-term exposure,” he said.

In Europe, the Stoxx 600 index ended the session 0.1 per cent lower, paring a loss of 1.7 per cent earlier in the session.

International oil benchmark Brent crude dropped 3.8 per cent to $66.68 a barrel as the Colonial pipeline in the US resumed operations after being shut down last Friday by a cyber attack.

The dollar index, which measures the greenback against major currencies, rose 0.1 per cent.

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Colonial pipeline resumes operations following ransomware attack




The Colonial pipeline resumed operations late on Wednesday, allowing petroleum supplies to begin reaching eastern US states five days after a cyber attack caused a shutdown that precipitated a run on fuel at petrol stations.

Colonial said it initiated a restart at roughly 5pm Eastern time, but cautioned it would take “several days for the product delivery supply chain to return to normal”.

Jennifer Granholm, the US energy secretary, confirmed the resumption of flows in a tweet, writing that she had just spoken by phone with the chief executive of the Colonial Pipeline company.

The 5,500-mile pipeline system has capacity for 2.5m barrels a day of fuel, and is a critical artery delivering liquid fuels from oil refineries to states along the eastern seaboard. It was shut last Friday after what the FBI said was a ransom attack by a hacking group called DarkSide.

The shutdown pushed average US petrol prices above $3 a gallon on Wednesday, their highest level since 2014. Gasoline futures dropped about 1 per cent, to $2.14 a gallon, on Wednesday evening, after Colonial announced the pipeline’s restart.

Panic-buying in some locations of the US south-east led to shortages, with two-thirds of fuel stations in North Carolina reporting that they were without petrol on Wednesday afternoon as motorists hoarded fuel, according to data provider GasBuddy.

“Now finally Americans can have some peace of mind that gasoline, diesel and jet fuel will begin flowing to affected areas once again,” said Patrick De Haan, head of petroleum analysis at GasBuddy.

Colonial pipeline hack leads to tightening in petrol supply. Map showing Colonial pipeline and refineries in the East Coast and Gulf Coast regions

However, returning the pipeline, which previously carried nearly half of the fuel used on the east coast, to its previous level of service will take time. Colonial said some of its markets could experience “intermittent service interruptions during the start-up period”.

“Colonial will move as much gasoline, diesel, and jet fuel as is safely possible and will continue to do so until markets return to normal,” it added.

Jeff Lenard, vice-president of strategic industry initiatives at NACS, a convenience store trade association, warned that fuel travels at between 3-5mph along the pipeline — or about 100 miles a day — meaning it will take some time for fuel shipped in the Gulf Coast to reach the north-east.

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“I mean, it’s walking pace, so if you want to know how long it’ll take, you walk [from New York] to Houston. You’re going to need to wear some serious shoes,” said Lenard.

Richard Joswick, global head of oil analytics at S&P Global Platts, said gasoline stocks in the US north-east would likely fall to five-year lows as panic-buying had exacerbated the shortfall caused by the five-day pipeline outage. 

A return to normal would take “a couple weeks at least” both for the east coast and for Gulf coast refiners that had lost an outlet for their fuel over recent days, he said. 

European fuel exporters had begun chartering vessels to increase shipments to the US, while the Biden administration loosened some rules in recent days to allow for more fuel made elsewhere in the country to be shipped or trucked to eastern states.

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