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Tesla to join S&P 500 in one swoop

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Tesla will enter the S&P 500 next month in one swoop, reflecting confidence that Wall Street traders will be able to handle a record-sized new arrival in an index followed by trillions of dollars of passive investment funds.

S&P Dow Jones Indices announced the decision late on Monday, after having previously considered staggering the electric carmaker’s inclusion in America’s blue-chip stock index.

The inclusion of Tesla ranks as the biggest on record and the company will have one of the largest weightings in the S&P 500, prompting the index provider to ask market participants this month whether it should occur in two stages.

In a statement on Monday, it said “it will add Tesla to the S&P 500 at its full float-adjusted market capitalisation weight” before trading opens on Monday, December 21.

“In its decision, S&P DJI considered the wide range of responses it received, as well as, among other factors, the expected liquidity of Tesla and the market’s ability to accommodate significant trading volumes on this date.”

Wall Street estimates suggest up to $100bn of demand for Tesla shares from exchange trade funds and money managers that track and use the S&P 500 as a performance benchmark. In total, $11.2tn of investment fund assets are linked to the S&P 500.

Howard Silverblatt, senior index analyst at S&P DJI, said the carmaker’s “current market value (adjusted for float), of $437bn, would produce $72.7bn in required trades, in addition to the normal rebalancing trades” on the day of its inclusion.

That would dwarf the normal activity required when the S&P 500 is reshuffled. The last 20 rebalancing days had an average of $27.1bn in trades, Mr Silverblatt calculated, with a record of $50.8bn set in September 2018.

Passive investment vehicles such as exchange traded funds are focused on securing their slice of Tesla at the closing price on December 18, so as to minimise a metric known as tracking error. When companies are added or removed from a benchmark, exchange traded funds adjust their holdings in tandem, seeking to mirror the index as closely as possible at the lowest cost possible.

A number of market makers believe there is sufficient liquidity to facilitate an orderly rebalancing of the S&P 500 next month in spite of Tesla’s hefty market weighting.

The company’s shares have surged 40 per cent in the two weeks since S&P DJI announced their inclusion in the S&P 500, and they set an intraday record of $607.80 early on Monday before easing to close at $565.74.

This year, Tesla has gained 600 per cent, giving it a market capitalisation of $535bn, after solidifying founder Elon Musk’s effort to bring electric vehicles into the mainstream and dramatically improving its underlying financial performance.

After the market closes on December 11, S&P DJI will announce the name of the company being replaced by Tesla.



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Wall Street stocks trail European equities ahead of Fed meeting

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Stocks on Wall Street lagged behind European peers ahead of a two-day US central bank meeting that will be closely watched for clues on the future path of monetary policy.

Wall Street’s S&P 500 index was down 0.2 per cent at lunchtime in New York, retreating from an all-time high that the benchmark hit on Friday, while the technology-focused Nasdaq Composite index climbed 0.4 per cent.

Core US government debt sold off on Monday, taking the yield on the benchmark 10-year US Treasury note up 0.03 percentage points to 1.5 per cent. This followed a rally last week in which investors banked on the Federal Reserve looking past high US inflation to maintain its pandemic-era support for financial markets.

The Fed is widely expected to maintain its $120bn of monthly bond purchases when it meets on Tuesday and Wednesday. These asset purchases, which have been followed by rate-setters in Europe and the UK, have lowered the yields on government bonds, reducing corporate borrowing costs and boosting the appeal of riskier assets such as equities.

But after a rapid recovery of the US economy fuelled by coronavirus vaccines and President Joe Biden’s massive stimulus programmes, some analysts see the Fed’s policymakers bringing forward their predictions of the first post-pandemic interest rate rise.

“We expect the Fed to upgrade its outlook for growth and materially revise up the inflation forecast,” Tiffany Wilding, US economist at the bond investment house Pimco, said in a research note. “We think the majority of Fed officials will also pull forward their projections for the first rate hike to 2023 [from 2024].”

Headline US consumer price inflation hit 5 per cent in the 12 months to May. Jay Powell, Fed chair, has maintained that the rises are a temporary effect of the US economy reopening after coronavirus shutdowns. “But others are concerned inflation is more structural,” said Marco Pirondini, head of US equities at Amundi. “I’d say it is 50-50 on either side.”

A rise in used car and truck prices, after a global semiconductor shortage lowered production of new vehicles, accounted for about a third of the increase in May’s CPI, according to the Bureau of Labor Statistics.

US wages could also “go up in a more sustained way”, Pirondini said, after Biden signed an executive order in late April to increase government pay, pressuring private industry to also raise salaries.

Across the Atlantic, the pan-regional Stoxx Europe 600 gained 0.2 per cent to another record high with energy the top-performing sector following a further lift in oil prices.

Brent crude climbed as much as 1.3 per cent on Monday to $73.64 a barrel, a two-year high for the international oil benchmark.

Line chart of Indices rebased showing UK’s travel and leisure stocks trail wider market

Elsewhere in the region, the UK’s travel and leisure companies lagged behind the wider market on reports that the planned lifting of Covid-19 curbs in England on June 21 would be delayed by the UK government.

The news left the FTSE 350 Travel & Leisure sector down 1.4 per cent compared with a rise of 0.2 per cent for the broader FTSE 350 index.

The dollar index, which measures the US currency against peers, dipped 0.1 per cent. The euro was up 0.2 per cent against the greenback, purchasing $1.212. Sterling was up 0.1 per cent at $1.411.

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BNP under fire from Europe’s top wine exporter over lossmaking forex trades

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BNP Paribas is facing allegations that its traders mis-sold billions of euros of lossmaking foreign exchange products to Europe’s largest wine exporter, the latest accusations in a widening controversy that has also enveloped Goldman Sachs and Deutsche Bank.

J. García Carrión, founded in Jumilla in south-east Spain in 1890, is in dispute with the French lender over currency transactions with a cumulative notional amount of tens of billions of euros. It claims the lossmaking trades were inappropriately made with one of its former senior managers between 2015 and 2020, according to people familiar with the matter.

BNP is one of several banks facing complaints from corporate clients in Spain over the alleged mis-selling of foreign exchange derivatives, which pushed some companies into financial difficulties.

Deutsche Bank has launched an internal investigation of the alleged mis-selling that this week led to the departure of two senior executives, Louise Kitchen and Jonathan Tinker.

An internal investigation at JGC found that BNP conducted more than 8,400 foreign exchange transactions with the company over the five-year period, equivalent to about six each working day.

That level of activity was far higher than what the company would have needed for normal hedging of exchange-rate risk on international wine exports, the people said, adding that the Spanish company had shared the results of its internal probe with BNP.

While the vast majority of the lossmaking trades related to euro-dollar swaps that moved against the bank, some were in currency pairs where JGC has little or no operations, such as the euro-Swedish krona.

As a direct result, the €850m-revenue company made about €75m of cash losses in those five years, while BNP could have made more than €100m of revenue from transactions, the people added. Many of the deals were made through trading desks in London.

Executives have demanded compensation for at least some of the losses, arguing that BNP’s traders or compliance department should have spotted and reported the disproportionately high level of transactions and profits from a single client, according to multiple people with knowledge of events.

JGC says the deals were designed as bets on currency markets, rather than for hedging, and is considering a lawsuit to try to recover some of the money, one of the people said.

“BNP Paribas complies very strictly with all regulatory obligations relating to the sale of derivatives and foreign exchange instruments,” the bank said in a statement. “We do not comment on client relationships.”

JGC declined to comment.

Separately, the Spanish wine producer is suing Goldman Sachs in London’s High Court for a partial refund of $6.2m of losses caused by exotic currency derivatives. Goldman has maintained the products were not overly complex for a multinational company with hedging needs and were entered into with full disclosure of the risks.

In Madrid, the wine company has also brought a case against a former senior executive who was responsible for signing off the lossmaking deals. JGC alleges this person conducted the deals in secret and covered them up internally by falsifying documents and misleading auditors.

In the London lawsuit, JGC alleges its executive was acting “with the encouragement and/or pursuant to the recommendations” of Goldman staff “for the purposes of speculation rather than investment or hedging”.

Deutsche Bank has been investigating for months whether its traders in London and Madrid sidestepped EU rules and convinced hundreds of Spanish companies to buy sophisticated foreign exchange derivatives they did not need or understand.

The Financial Times has reported that the German bank has settled many complaints brought against it in private and avoided going to court.

People familiar with the matter told the FT that the departures of Kitchen and Tinker were linked to the probe into the alleged mis-selling, which appears to have occurred in units that at the time were overseen by the two.

The bank declined to comment. Kitchen and Tinker did not respond to requests for comment.



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Will the Fed dare to mention tapering?

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Will the Fed dare to mention tapering?

When Federal Reserve officials convene on Tuesday for their latest two-day monetary policy meeting, questions over whether the central bank should start talking about tapering its $120bn monthly bond-buying programme will lead the agenda.

Since the US central bank last met in late April, several senior Fed policymakers, including vice-chair Richard Clarida, have cracked the door more widely open for a discussion about eventually winding down the pace of those purchases, which include US Treasuries and agency mortgage-backed securities.

The recent comments align with those referenced in the latest Fed meeting minutes, which indicated that “a number of participants” believed it might be “appropriate at some point in upcoming meetings” to begin thinking about those plans if progress continued towards the central bank’s goals of a more inclusive recovery from the pandemic.

Recent economic data support this timeline. Consumer prices in the US are rising fast, with 5 per cent year-on-year gains in May revealed in last Thursday’s CPI report — the steepest increase in nearly 13 years. Additionally, last month’s jobs numbers, while weaker than expected, still showed signs of an improving labour market.

Most investors still expect the Fed to only begin tapering in early 2022, with guidance on the exact approach delivered in more detail around September this year at the latest. Goldman Sachs predicts a more formal announcement will come in December, with interest rate increases not pencilled in until early 2024.

“The Fed is signalling they are going to start talking about it,” said Alicia Levine, chief strategist at BNY Mellon Investment Management. “They are softening up the market to expect [something] this summer.” Colby Smith

Are inflation risks rising for the UK?

Consumer prices in the UK have risen at an annual rate of less than 1 per cent for most of the pandemic due to low demand for goods and services and weak wage pressure.

However, with the recent easing of Covid-19 restrictions releasing pent-up consumer demand, the nation’s headline inflation figure doubled in April from the previous month.

When core consumer price inflation data for May are released on Wednesday, some analysts expect an even bigger leap, predicting that annual CPI growth will jump to the Bank of England’s target of 2 per cent.

Robert Wood, chief UK economist at the Bank of America, said such an inflation surge would add to the BoE’s hawkishness. He also forecast further rises later this year as commodity price increases continued to elevate energy and food costs.

Additional price pressure would come from supply chain disruptions and higher transport costs that push up input costs.

“The upside risks to our inflation forecast are growing from all angles,” said Paul Dales, chief UK economist at Capital Economics, who expected consumer price levels to peak at 2.6 per cent in November.

“The reopening may result in prices in pubs and restaurants climbing quicker than we have assumed,” Dales added, while labour shortages in some sectors, such as construction and hospitality, were also starting to push up wages and prices.

However, both analysts expect the increased price strain to be temporary.

“Once higher commodity prices have fed through to consumer prices, inflation will fall back again,” said Wood, forecasting that UK inflation would drop back below the BoE’s target in late 2022. Valentina Romei

Line chart of Annual % change on consumer price index showing UK consumer price inflation is set to rise above target

Will the BoJ keep its rates policy on hold?

Japan’s economic recovery has diverged from Europe and the US this year as it struggles with its Covid vaccination campaign and big cities such as Tokyo continue to be partially locked down under states of emergency due to the pandemic.

Although the nation’s wholesale prices rose at their fastest annual pace in 13 years last Thursday on surging commodity costs, Japan has otherwise faced a lack of price pressures compared with the US.

That means that when the Bank of Japan concludes its two-day meeting on Friday, analysts believe it will not alter monetary policy.

“I don’t expect any change in policy,” said Harumi Taguchi, principal economist at IHS Markit in Tokyo. “They increased flexibility in March and I expect they will continue to watch that.”

After a policy review, Japan’s central bank in March scrapped its pledge to buy an average of ¥6tn ($54.8bn) a year in equities, and the pace of its exchange traded fund purchases dropped sharply in April and May. The moves signalled a shift away from aggressive monetary stimulus in favour of what the BoJ termed a more “sustainable” policy.

“Japan is one of the few countries whose property prices have not risen, and since rent is a major component of the consumer price index, it is not likely to see much inflation ahead,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“Interest rates can remain extremely low, which in turn keeps the yen on a weak trend,” Vail added. Robin Harding

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