Investment Bank Outlook: 06-04-2021

Citi No surprises that it was a muted session overnight, with tight ranges going into the ubiquitous NFP. We expect this trend to continue throughout Europe, with choppiness from any last minute positioning going into the event. CitiFX Strategy sees asymmetric risks with a larger reaction on a miss. EURUSD, USDJPY, USDCNH are some of the pairs that are trading at very interesting levels.While NFP is going to be the main event, we highlight that CAD could face pressure given double payrolls risk. It’s also worth flagging that Citi Economics is below consensus for the EUR retail sales print this morning. PEN is likely to trade to its own tune going into Sunday’s presidential elections but MXN should be more vulnerable to broader USD price action. INR saw unchanged rates overnight.RBC Capital Markets Day ahead: The data in focus today are UK construction PMI, US employment report (see USD), US factory orders, and Canada employment report (see CAD). Fed Chair Powell and ECB President Lagarde will be participating in a climate change panel, so they will be unlikely to discuss monetary policy. USD: RBC Economics believes that the last payrolls report suffered far more from technical issues than it did from people making a decision to avoid finding a job because of generous unemployment benefits. As you look through the data from last month, several facts stand out not the least of which is about half of the topline job categories either saw zero job gains or actually shed workers. Given what we know about the thrust of economic activity in Q2, that doesn’t smell quite right. Our hope is that the BLS has figured things out for the coming report, but hope is not how you build a forecast. What we know is that several of the other key labour market metrics have continued to show improvement, but total continuing claims (i.e. including the extended programs) seem to have lost momentum. That injects a cautious tone to our model. As a result, we have pencilled in a below-consensus 500k headline payrolls gain (cons. +674k) and 450k for private jobs.Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Non-Farm Payroll Preview

Recent US economic data can be used an indicator to help estimate non-farm wage reports in general. This week’s data included record highs on the ISM services index, along with the Markit services and composite PMIs, a strong increase in ADP private payrolls, and the lowest print on initial jobless claims since the pandemic began. The ISM Non-Manufacturing PMI Employment Component, fell more than 3% from a reading of 58.8 last month to 55.3, the Employment Component of the ISM Manufacturing PMI, fell more than 4% from a reading of 55.1 last month to 50.9, the ADP Employment Report, came in with 978,000 new jobs, a big increase from last month’s downwardly revised reading of 654,000, and the 4-week moving average of initial jobless claims, which fell to 428,000, sharply down from last month’s reading of 612,000.

So far the US labor market has not been as stable as expected, with inconsistent rising and falling after the unprecedented disruption of COVID. In light of the above data, and more precisely the outsized ADP job gains which increased upside risk for today’s NFP outcome. The headline jobs growth expected at 700k growth, following April’s 266k gain, albeit fraught with greater uncertainty than before given present conditions. Factory jobs should climb 80k after an -18k April drop, while jobless rate  could drop to 5.8% from 6.1% in April and 6.0% in March. Hours-worked are projected rising 0.5% after a 0.5% April increase, while the workweek ticks down to 34.9 from 35.0 in April. The report should support the view that the headline weakness in the April report was an anomaly. Overall, we should see a robust payroll trajectory in 2021 following the winter lull, thanks to stimulus deposits and vaccines.

In Forex market meanwhile, the market is moving more due to worries, issues and rumors rather than the actual conditions. Earlier this week, manufacturing activity picked up, but the US Dollar fell as manufacturing job growth was very slow. However, the initial claims report and the ADP figures led some investors to liquidate their short-term positions. The outsized ADP job gains increased upside risk for Friday’s NFP outcome, with a better print on the BLS report, something that could likely to give the US Dollar further support.

Since yesterday global stock markets traded mixed, as traders wait for US payroll numbers. Treasuries had so far a decidedly bearish tone after stronger than expected data rekindled Fed tapering worries.  The heavy-tech USA100 given the sensitivity in big tech to rising rates by dropping to -1.0%. The USA30 pared its declines and traded either side of unchanged late in the day as cyclical stocks were boosted by the “good” economic news. It finished fractionally lower. The USA500 was down -0.36%.

Hence, today’s US jobs report is one of many important data releases this month that will affect the US Dollar but overall the Forex scene. Updated economic projections are scheduled for release by the major Central Banks this June. The outlook is on inflation and growth forecasts, but the general concern is news of a possible reduction in asset purchases. The Bank of England, the Bank of Canada and the Reserve Bank of New Zealand have cleared this matter, either in the form of reduced asset purchases or projections for an earlier rate hike. The US economy is developing at the same or likely faster pace than other major economies, however the Fed seems reluctant to change their guidelines.

Click here to access our Economic Calendar

Andria Pichidi & Ady Phangestu

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Market Update – June 4 – Dollar bounces ahead of NFP

Market News Today – USD sprang to life after strong ADP (978k vs 645k), Weekly Claims (385k vs 400k) and ISM Services PMI data (64 vs 63). USDIndex has rallied (+0.8%) to 90.57 after closing over 20-day moving average for the first time since April 7. Equity markets sank (USA100 hit hardest; -1%) (USA500 -0.4%, -15pts to 4192, as VIX rallied 1.1%). 10yr Yields have rallied to 1.632%.  Asian markets also lower. All eyes on NFP at 12:30 GMT. USOil down from $69.00 to $69.70 (following a much bigger inventory drawdown of 5.1mb vs 1.2 expected ) Overnight Stronger rebound for Japanese household spending, Fedspeak remained Dovish lead by Williams “not concerned by inflation outlook”. Biden offers 15% min. rate for Corp. Tax and 28% top has post NFP press conference scheduled (14:15 GMT). EUR 1.2107, JPY 1109.25, GBP 1.4100. GOLD (& other commodities (partic. Copper) slumped on the stronger USD – touched $1855, closed at $1870 and holds there now.

European Open – The Sep 10-year Bund future is little changed, as are US futures, while in cash markets the U.S. 10-year rate stabilised. DAX and FTSE 100 futures are fractionally lower, while as are U.S. futures. Strong data releases and tapering musings saw yields moving higher yesterday and investors will likely hold back ahead of key US payroll numbers later today. It seems increasingly likely that central banks will start to reign in monetary support as fiscal stimulus is underway and the growth outlook improves and expectations are that the ECB to start reigning in asset purchases over the summer, in a flexible manner that allows the central bank to keep a close eye on spreads and step in if necessary.

Today – EZ and UK Construction PMIs, US and Canadian Jobs Reports, US Factory Orders, Fed’s Powell, ECB’s Lagarde, Villeroy, de Cos, PBoC’s Yi Gang, BoJ’s Kuroda, SNB’s Jordan & RBNZ’s Orr

Biggest FX Mover @ (07:30 GMT) AUDCHF (+0.26%) has moved up from 15-week lows yesterday (0.6907) to rally to 0.6936. Faster  MAs remain aligned higher,  RSI 54 and spiking higher, MACD signal line and histogram rising but remain below 0 line from yesterday. Stochs. still moving higher and into OB zone. H1 ATR 0.0007, Daily ATR 0.0063.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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ECB Seen Pushing Ahead With Faster Bond Buying Until September

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Daily Market Outlook, June 4, 2021

Daily Market Outlook, June 4, 2021 Overnight Headlines Biden proposes 15% corporate minimum tax to win Republican backing of infrastructure plan Biden order bans investment in dozens of Chinese defense and tech firms • Biden outlines plan to quickly share 25 mln COVID-19 vaccines with world U.S. job growth likely picked up in May, worker shortages still a challenge NY Fed Williams – Now not the time to take action on tapering Foreign CB US debt holdings +$926 bln to $3.536 tln Jun 2 week Duration of USD weakness splits FX analysts – poll Rally in emerging market commodity currencies to roll on – poll Japan's yen set to suffer a while longer as BOJ baulks at tapering JP Apr Household Spending YY 13%, 9.3% f'cast, 6.2% prev, best since comparable data in Jan ‘01 Japan's fiscal blueprint draft to call for fiscal reform – Nippon TV Australia's Victoria detects Delta COVID-19 virus variant in latest outbreak UK’s Sunak hugely optimistic about G7 agreement Russian rainy day fund to get out of all U.S. dollar assets Musk 'trolling' puts brakes on bitcoin's reboundG10 FX Options Expiries for 10AM New York Cut(Hedging effect can often draw spot toward strikes pre expiry if nearby)EUR/USD: 1.2050 (477M), 1.2100-10 (1.4BLN), 1.2120-30 (684M), 1.2150 (1BLN)1.2170-75 (1.2BLN), 1.2200 (1.1BLN)EUR/GBP: 0.8450 (200M), 0.8535-50 (900M), 0.8625 (229M)GBP/USD: 1.4050 (204M), 1.4240 (380M). AUD/NZD: 1.0600 (200M)AUD/USD: 0.7600 (392M), 0.7660-75 (422M), 0.7700 (236M)0.7730-50 (1.8BLN), 0.7780-0.7800 (2.3BLN)USD/CAD: 1.2030-35 (425M), 1.2100 (322M), 1.2150 (290M)USD/JPY: 109.90-110.00 (1.4BLN), 110.20-25 (580M), 110.40-50 (612M)Technical & Trade ViewsEURUSD Bias: Bearish below 1.2150 bullish aboveEURUSD From a technical perspective, the close through 1.2140 suggests a corrective phase developing.Overnight trade: Trades heavy in quiet Asian session ahead of US jobs • EUR/USD opened -.68% at 1.2127 after USD broadly gained on strong US data • EUR/USD maintained offered tone in Asia and traded to a 3-week low at 1.2114 • Heading into the afternoon it was trading around 1.2115 • Short-term trend higher ended yesterday and EUR/USD is vulnerable • Key will be reaction in US yields to US non-farm payrolls later today • Expectations of strong jobs number are riding high after Thursday's ADP • There isn't support until 1.2051 where a 38.2 fibo converges with May 13 low • Resistance at 1.2173 and break eases downward pressureFlow reports suggest downside bids to 1.2080 before weak stops appear and open up a deeper move through to the 1.2000 level with very little congestion until that pointGBPUSD Bias: Bullish above 1.41 bearish belowFrom a technical perspective, below 1.41 concerns the bullish thesis opening the window for a corrective cycle.Overnight trade: steady in Asia after fall yesterday • GBP/USD does little in Asia, 1.4096-1.4108, quiet, few flows • Market hunkering down for potentially big US NFP report tonight • Expectations for non-farm payrolls at +650k, unemployment 5.9% • Cable near base of recent range, decisive break below 1.4100 bearish • Trade thru 1.4075-80 – 1.4078 low May 17 – may see push towards 1.4000 • 1.4000 seen current base with 1.4008 low on May 13Flow reports suggest downside bids likely 1.4090-80 area and opening to the 1.4000 level with very little support other than limited psych bids, however, the move through will then start to see stronger bids into the 1.3950-1.3900 area limiting any further loses.USDJPY Bias: Bullish above 108 targeting 112USDJPY From a technical perspective, as 108.30 supports bulls will target 110.70’s, a closing breach of 108.30 would suggest a corrective move to test 106.30Overnight trade: buoyant into Tokyo fix, off some later pre-US NFP • USD/JPY buoyant into Tokyo fix, off after as demand wilts • From 110.32 high to 110.15 EBS, downside limited however • Market awaiting US NFP/jobs report tonight, to set tone for month • Strong Japan data shrugged off • USD/JPY offers from 110.30-35, bids below from ahead of 110.00 • Large option expiries 109.90-110.00, 110.20-50 to help contain action • US yields steady near yesterday's highs, Treasury 10s @1.626% • JPY crosses mostly buoyant, JPY still weakest of majors, on carriesFlow reports suggest downside light through the 108.50 before opening the market to a new test of the 108.00 level, stronger bids into the 107.80 however, a break through the level is likely to see weak stops and breakout stops appearing and the market free to quickly test 107.50 and an old trendline then nothing until closer to the 107.00 area where stronger bids start to appear but the downside opening to Feb levels, topside offers through to the 110.00 level with light congestion through the figure level and weak stops possibly limited and stronger offers likely increasing on a move higher towards the 111.00.AUDUSD Bias: Bearish below .7790 bullish aboveAUDUSD From a technical perspective, the breach of .7790 refocuses attention on the downside as .7820 contains upside attempts, look for a test of .7680.Overnight trade: Retains offered tone ahead of key U.S. payrolls • AUD/USD opened -1.20% @ 0.7660 after USD broadly gained on strong US data • It traded 0.7651/66 range in Asia and was around 0.7755 into the afternoon • Market awaits US jobs data and the reaction in US yields after it is out • Break lower leaves AUD/USD vulnerable after long period of consolidation • SHS neckline was at 0.7678 and 61.8 fibo was at 0.7669 and both gave way • Next support is at 76.4 of 0.7532/0.7891 move at 0.7617 • Major support is at 0.7530/35 where 200-day MA and 2021 low converge • Resistance is at 0.7725 where 10-day and 100-day MAs converge AUD/USD range break may be beginning of pronounced drop The Australian dollar has finally broken below solid support after 16 straight days of closing on the 77-cents handle. A weekly close below 0.7700 would pave the way to a move towards major support below 0.7550. Strong U.S. economic data on Thursday sent Treasury yields higher and forced U.S. dollar bears to capitulate ahead of the always crucial monthly jobs report later on Friday. If solid U.S. employment numbers continue to underpin Treasury yields, the short-USD conviction trade may further unravel. The AUD has also benefited from surging metal prices since the start of 2021. Thursday's over 3% fall in London copper futures might be the start of an overdue correction lower in key commodities. The AUD/USD technical outlook has turned bearish. Analysts have been warning of a potential 'head and shoulders' pattern on the AUD/USD charts and the neckline of the formation around 0.7680 broke Thursday. The 0.7660 close was also below the 61.8 Fibonacci retracement of the 0.7532-0.7891 move at 0.7669. An obvious objective of an AUD/USD correction lower is 0.7530-35 where the 2021 low and the 200-day moving average converge. A risk to the short AUD/USD trade is if U.S. non-farm payrolls disappoint elevated market expectations of a 650,000 jobs increase. If the AUD/USD breaks above 0.7725 where the 10-and 100-DMAs converge, it would likely revert to sideways range trading.Flow reports suggest below the 0.7680 sees stronger bids to 0.7650 area failure here exposes stops below .7600Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/daily-market-outlook-june-4-2021"
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Dollar Gains After Strong Economic Data; Payrolls Loom Large

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Dollar Up Over Upbeat U.S. Employment Data, but Taper Concerns Remain

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Musk tweet dents bitcoin, but weekly gain in prospect

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Dollar jumps as strong run of data turns all eyes to payrolls

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The biggest threat to crypto comes from stablecoins

• SEE MORE How are my cryptocurrency gains taxed in the UK?
• SEE MORE The biggest long-term threat to bitcoin and cryptocurrencies
• SEE MORE Bitcoin plunges after China cracks down on crypto – what does this mean for investors?

Bitcoin and other cryptocurrencies have endured a rollercoaster ride in recent weeks, partly because authorities across the world appear to be paying them more attention.

Yet, judging by the US Federal Reserve’s recent comments, it’s not so much bitcoin but another type of crypto that worries central banks more than any other: “stablecoins”.

We explain stablecoins in more detail below, but in short, the ideas is to create a cryptocurrency with a “stable” value, which means it can actually be used in practical day-to-day transactions as money – very much like government-issued or “fiat” currencies, such as the pound or dollar. While scepticism about crypto’s aspirations abounds, it’s very clear that central banks are taking these potential competitors seriously.

In a recent speech, Lael Brainard, one of the Federal Reserve’s more influential governors, noted that “if widely adopted, stablecoins could serve as the basis of an alternative payments system oriented around new private forms of money”.

Brainard warns of a lack of regulatory oversight and “the risk of run-like behaviour” – whereby the value of a private currency collapses because people lose confidence in it (something which has, of course, happened to plenty of fiat currencies over time).

Brainard has a point. The best-known and largest stablecoin is Tether. Tether is “pegged” to the US dollar – in theory you should always be able to swap one Tether for one US dollar. However, to make such a promise you need to be able to back it up, and as Jemima Kelly points out on FT Alphaville, Tether’s story has changed on this over time.

“Tether used to claim all its tokens were backed one-to-one by US dollars held in cash reserves.” However, last month Tether revealed that in fact, just under 76% of its reserves are in “cash or cash equivalents” and overall, just under 3% in total is in actual dollars. This is unaudited, so you also only have Tether’s word to go on.

Yet while the idea of an economy in which private currency issuers compete with one another (rather than the state monopolising the currency), is alien to us today, there have been periods of successful “free banking” in the past.

Regulators will talk disparagingly of “wildcat” banks in the US in the 1800s, but academics generally agree that Scotland’s free banking system worked well between 1716 and 1845.

It’s right to be sceptical of many of the utopian promises and rickety structures coming out of cryptoland. But you should be equally clear-eyed about the position of governments: they have no intention of giving up their monopoly currency issuer status.

Dabble in crypto by all means – but don’t invest money you can’t afford to lose and watch the regulators closely. Ironically, the more popular crypto becomes, the greater the risks.

from Moneyweek RSS Feed https://moneyweek.com/investments/alternative-finance/bitcoin-crypto/603337/the-biggest-threat-to-crypto-comes-from
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What Biden’s blockbuster budget means for inflation

• SEE MORE What’s in Biden’s global corporation tax proposals?
• SEE MORE Global stockmarkets rattled by US inflation surge
• SEE MORE What will Joe Biden’s “build back better” plan mean for markets?

On Friday, US president Joe Biden announced a $6 trillion budget for the year ahead. 

Inflation has been the biggest threat lurking at the back of investors’ minds in recent months.  

Biden’s budget is unlikely to reassure them... 

Spending will rise by higher levels than during World War II 

The US budget proposal is Biden’s first. It includes spending for areas such as climate change, education and infrastructure. In all, Biden is targeting a $6.01 trillion spending for the fiscal year of 2022. 

To be clear (because there have been a lot of numbers and plans flying about), this includes previously announced spending for two flagship infrastructure proposals – the $2.3 trillion for the “American Jobs Plan” and the $1.8 trillion for the “American Families Plan”. The budget also earmarks $1.5 trillion for operating expenditures for the US Department for Defence, the Pentagon. 

How is he going to pay for it all? The president also proposed a 39.6% tax rate on capital gains and dividends for millionaires in the budget, an idea he floated in recent weeks. The rise in the top tax rate of capital gains is proposed in order to fund the American Families Plan. 

All in all, the plan would put the world’s biggest economy on track to face its largest levels of both taxation and spending in peacetime history, with the national debt expected to hit 117% of GDP by 2031, outpacing levels even seen during World War II. 

The embrace of big spending marks a very clear change of political tone. While former president Donald Trump also ran deficits for each year of his tenure, even compared to that and accounting for the extra spending prompted by the pandemic, calling Biden’s proposals hefty would be an understatement. 

Biden’s American Jobs Plan, first announced in April, focuses on vital physical infrastructure such as broadband, water pipes, and roads; while the American Families Plan provides money for improving the quality of lives for American in areas such as childcare. 

Will Biden’s budget get past Congress?

This is the big question. The Republicans, who are generally opposed to tax rises in most instances, and oppose increased spending when it’s being done by the other team, balked at Biden’s $6 trillion figure. 

Given how closely split the Congress is, it’s unlikely that Biden will succeed in getting the $6 trillion figure in its entirety. 

It’s not just the Republicans. Biden also faces the spectre of a backlash from centrist members of his own Democratic party, because his budget didn’t include the Hyde Amendment. This marks the first time in 30 years that the Hyde Amendment – an anti-abortion law that prohibits the use of taxpayer funding to support abortions (barring rape and incest) – was missing from any budget announced by a US president. 

Biden supported the Hyde Amendment as recently as last year, but changed his mind on the issue. As Ethan Adams, senior analyst at BlondeMoney points out: “President Biden will have to haggle with members of his own party if he is to make progress on any of his legislative goals.”

Biden managed to drive through the $1.9 trillion Covid-19 stimulus package – known as the Great Rescue Plan – by 51 to 50 votes in a process known as “budget reconciliation” earlier this year with no Republican support. “Democrats have one last chance to advance their agenda before the midterms, which they will use on this infrastructure bill,” says Adams. 

But after that, “the US government will be effectively paralysed.” 

What’s the likely impact on inflation? 

With all that in mind, how will the plan affect investors? The level of public spending is not news, but it is still very high. Inflation is already rising. The core personal expenditure index, an inflation indicator closely watched by the Federal Reserve, rose by 3.1% in May compared to last year, marking the highest rise since the 1990s. 

Consumer prices also rose by 4.2% in April compared to the previous year, marking the biggest such rise since September 2008. Core consumer price inflation (which excludes volatile food and energy prices), rose by 3% on the year, and 0.9% month on month, the highest since 1981.

Yes, this all makes sense given the slide we saw last year, but there’s no guarantee that this will be “transitory,” as the Fed keeps hoping. Commodity prices are shattering new records, for example. It’s also worth noting that Biden’s budget assumes that the Fed won’t be raising interest rates any time soon – as The Wall Street Journal spotted, the budget assumes that “real” interest rates will be negative (ie below inflation) for the next ten years.   

It’s another sign that governments see “financial repression” as part of the solution to our post-Covid debt woes. Investors should bear that in mind while planning their asset allocation.

from Moneyweek RSS Feed https://moneyweek.com/economy/us-economy/603336/what-bidens-blockbuster-budget-means-for-inflation
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What oil majors' climate battles tell us about shareholder democracy

Last week was a tough week for Big Oil, with ExxonMobil, Shell and Chevron all losing climate-related battles with varying consequences. 

Perhaps not coincidentally, the last couple of weeks have been rather positive for the oil price itself. A barrel of Brent crude will now cost you more than $70. This is partly due to growing confidence in the strength of the recovery, as well as ongoing caution on the part of the Opec oil cartel about pumping more oil.

But I suspect it’s also got something to do with the fact that if you make it harder for big oil companies to produce more oil, then eventually you’ll get less of it coming to market. And as our cars don’t yet all run on hydrogen or solar power, that might be a bit premature.

It rather backs up the argument that investors should see Big Oil companies
in a similar light to Big Tobacco – an unpopular, controversial sector whose long-term growth prospects are limited or non-existent, but which still has a decent medium-term horizon ahead of it during which it will throw off buckets of cash to be harvested by shareholders, and which might surprise on the upside if it turns out that oil demand hasn’t quite peaked yet.

An interesting wider point is what this all says about shareholder democracy, a topic that Merryn has been writing about a lot recently. Many people in the finance industry – some more self-interested than others – have raised the alarm over the impact of the growth in passive investing over the past few decades.

Passive ownership has been accused of everything from encouraging monopolistic behaviour to driving bubbles. There are varying degrees of merit in these arguments, but one thing is very clear: the big three passive players – BlackRock, Vanguard, and State Street – own an awful lot of stock.

They are the top shareholders for the vast majority of companies in the S&P 500 index. That gives them a lot of power in theory, and – as it turns out in Exxon’s case – in practice.

For example, Tiny activist investor Engine No. 1 owned just 0.02% of Exxon’s shares. But with the backing of the big three passive players alongside US pension funds, it managed to get two of its own climate activist candidates elected to the board.

In effect, it’s acted as a Trojan horse for passive owners to turn active. You may or may not agree with the idea that Big Oil should be doing more to cut its carbon emissions.

But I’m pretty sure that not everyone who owns Exxon via a passive index tracker shares your view either way. We’re only going to see this happen more often, and as it does, it’ll be ever harder for passive funds to maintain the illusion that they are just neutral, cheap tracker funds.

One solution is for big passive asset managers to embrace digital shareholder democracy to allow end-owners to tell them how to  vote on key issues. Alternatively, it might
be a good time for a new wave of “vice” funds to allow those with different views
to take the opposite side of the passive trade. 

And if you’re still enamoured of expensive technology firms with potential lottery- ticket style pay offs, David Stevenson thinks you might be interested in the ultimate futuristic bet – investing in space

from Moneyweek RSS Feed https://moneyweek.com/investments/commodities/603335/what-oil-majors-climate-battles-tell-us-about-shareholder-democracy
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Share tips of the week

Five to buy

Daily Mail and General Trust

The Times

Shares in this sprawling media group have been buoyant recently amid optimism over the forthcoming flotation of Cazoo, the “hotshot online car dealer” in which DMGT holds a $1.35bn stake. The group’s exhibition business

is still weighed down by reopening uncertainty, but
the outlook for the publishing side is brightening. Known
for mid-market and freesheet newspapers such as the Daily Mail and Metro, the group is now moving into more specialist titles, recently acquiring New Scientist magazine for £70m. Such “knowledge-based and comment-heavy titles... may prove lucrative in the digital future”. A healthy balance
sheet gives it the firepower to continue expanding. Risk- tolerant investors may want to get onboard. 866p

SmartSpace Software

The Mail on Sunday

Research finds that over 80% of office workers want to continue working from home for at least part of the week. Businesses are also keen to promote the trend towards such “hybrid working”, given the potential cost savings from cutting back on office space. This IT- services group helps businesses digitalise services such as “desk management, meeting room bookings and visitor check-ins”. The group added 1,500 new accounts between March and June last year and growth has continued since. Although the company is currently loss- making, strong revenue growth should see it become profitable from next year. 145p

Pfizer

Investors’ Chronicle

Despite the success of its vaccine, Pfizer’s share- price performance has underwhelmed over the past year. The Biden administration’s push to scrap Covid-19 vaccine patents may herald an era of tighter government regulation of the pharmaceutical industry. Pfizer was already facing a “patent cliff” in the middle of this decade as several key patents expire. But the gloom is overdone. The group’s emergence as a global leader in mRNA-technology opens the way to other therapies in the future, boosted by the Pfizer’s high spending on research and development. On just nine times 2022 earnings this could prove a “buying opportunity”. $40.12

Supreme

Shares

Aim-listed Supreme licenses and distributes batteries and lighting products as well as serving the nutrition and vaping markets. Its in-house 88vape brand is the UK leader in vaping “e-liquids”. It also leverages  its “extensive retail distribution network” and design know- how to distribute products on behalf of other brands, including Duracell batteries and Panasonic. Business areas such as “nutrition and wellness” are experiencing strong growth, while the vaping market may be about to consolidate. On an “undemanding 14 times forecast earnings” and yielding a prospective 3.6%, this is a promising “growth and income play”. 188p

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The Daily Telegraph

For all the talk of a housing bubble, ultra-low interest rates, ongoing government support and population growth should keep the market chipper for the foreseeable future. This housebuilder has reacted to changing demand among consumers, shifting

its activity out of London as digital working encourages many people to escape to the country. On a lowly forward price/earnings (p/e) ratio of ten the shares trade at a discount to other firms in the sector and offer a “margin of safety” if things go wrong. 680p

and the rest...

Shares

Ongoing demand for Covid-19 PCR tests and the global semiconductor shortage mean Aim-listed science-kit specialist SDI Group still has plenty of growth potential. Buy (175p). Mr Kipling-cakes owner Premier Foods is enjoying a strong recovery and could attract takeover interest. “Keep buying” (112p).

The Times

Energy supplier SSE is investing in the UK’s renewable future of offshore wind farms and is also exploring carbon-capture and hydrogen technologies. That leaves it well positioned, while the 5% dividend yield is a reward for waiting. Buy (1,540p). Denmark’s Rockwool produces insulation products by “heating volcanic rock until it is liquid and then spinning it into fine threads”. The resulting product is non-flammable, long-lasting and also provides sound insulation. The shares aren’t cheap but there will be massive demand in the coming years as Europe invests heavily in renovating buildings (DKr2,929).

Motley Fool

Theatres in the UK and US have reopened, but Cineworld’s shares are still down over
the past year. Why? The problem is the debt pile, which “ballooned” during lockdowns to over eight times earnings before interest, tax, depreciation and amortisation (EBITDA). Ratios over two are seen as risky. Steer clear (92p).

The Mail on Sunday

Law firm Gateley’s focus on “mergers, acquisitions and property deals” seemed a lost cause when the pandemic began but the group has proved unexpectedly robust. This is an income stock with encouraging growth prospects (199p).

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Eur

A new month and more signs that European economies are recovering fast, with the manufacturing sector increasingly struggling to cope with the jump in demand and services benefiting from the lifting of restrictions. There is some concern that the latest Covid-19 variant may delay the full re-opening of the UK economy (planned for June 21), but on the whole, things clearly are looking up.

Today, for instance, European stock markets have been under pressure as strong data confirms a strengthening and broadening of the recovery. The upward revisions to Eurozone and UK PMI reports, which essentially confirmed a broadening and strengthening of growth, also mounting capacity constraints, while flagging the risk of higher wage growth ahead.

The UK’s final May composite PMI was unexpected revised higher, to 62.9 from the preliminary estimate of 62.0. The headline is a new record high for the data series going back to January 1998. The improvement was driven by a much stronger than expected manufacturing PMI, which rose to a record (since 1992) 65.6. The surveys showed the quickest pace of private sector employment since June 2014. New orders rose by the most since October 2013. Cost pressures rose by the quickest rate in almost 13 years, which were passed on to customers, with prices charged rising the most in over 21 years.

Eurozone Services and Composite PMIs revised higher. Final data for May showed the services reading jumping to 58.2 from 50.5. Survey compiler Markit highlighted that a “resurgent services economy helped to drive private sector growth higher” and national data confirmed that the recovery is not just broadening across sectors, but also countries, with Germany (56.2), France (57.0), Italy (55.7) and Spain (59.2) now all reporting very growth expansion in overall activity.

Private sector new work rose to the strongest degree since June 2008, with new export business lifting for a sixth successive month and the net increase the sharpest since the start of comparable data in September 2014. Companies are struggling to keep on top of the workload, which is also boost job creation and employment.  That latter point will be of interest to the ECB, as if it persists, there is the risk that higher inflation could feed through to wage growth, which in turn could see transient wage pressures becoming entrenched.

The ECB suggested that it will review monthly purchase volumes under the PEPP program at the June 10 meeting. The doves have been out in force last month, but Executive Board member Schnabel sounded somewhat more balanced last week and seemed to play down the rise in yields against the background of the recovery. We have seen before the dovish and the hawkish camps at the ECB taking extreme positions ahead of the official meeting – sticking with the “significantly” enhanced monthly purchase levels is one end of the spectrum, the other will be calls to phase out PEPP purchases early as economies move towards a further easing of restrictions and confidence data indicates a very strong recovery.

There are however still rising odds that the ECB will commit to the existing PEPP envelope and ongoing purchases through to the end of the program, but with monthly volumes being reduced at least to some extend.

On the other hand, the BoE managed to pull this off without scaring markets too much, although the BoE has a fixed QE target, rather than an envelope and Lagarde will have to make a strong delivery to prevent markets from running too far ahead with a tightening story that could see spreads moving out further than officials would want to see.

Overall in contrast with ECB’s division, BoE officials not surprisingly seem increasingly optimistic on the recovery and BoE MPC member Vlieghe last week did actually raise the possibility of an early rate hike. However, he stressed that hiking too early would be much costlier than tightening too late. Vlieghe suggested that it remains to be seen whether there will be a smooth transition from the government’s furlough scheme. Until there is proof then that the labour market can cope with the withdrawal of support measures the t policymakers are anticipated to continue to downplay recent spikes in price pressures as being transitory.

The unlocking of UK economy has released pent-up demand, and consumer confidence has improved markedly amid the evident success of the UK’s Covid vaccination program. Nearly 75% of the adult population in the UK have now received at least one dose of a vaccine. Overall, a stellar report. While the pace of improvement has slowed over the last month, the private sector of the UK economy is amid a robust recovery expansion. The prognosis for the months ahead is looking good. While there has been a creep higher in new Covid cases in the UK, which has caused the prime minister to publicly ruminate that the fourth and final phase of reopening, scheduled for June 21, might be delayed, there are good grounds to expect the prevailing lift in new Covid cases won’t develop into a full blown wave. The spread, which is being driven by the Indian variant, is mostly among younger, unvaccinated people, the vaccinated majority proving to be resistant.

 

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Andria Pichidi 

Market Analyst

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