European equities rally as euro, pound crack lower

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Morning Note

European markets were on the front foot on Friday morning despite a weak cue from the US and Asia as currency weakness and expectations for yet lower interest rates fuelled risk appetite. Asian shares plumbed a three-week low but European bourses are trading up again. The FTSE 100 continued the good work from Thursday to hit 7400 and make a clear break out of the recent range. With the move north a decent case to make for the 7450 area, the 61.8% retracement of the August retreat.

The S&P 500 declined quarter a percent to 2977.62 against a back drop of political uncertainty in Washington. Markets won’t like these impeachment hearings but ultimately the risk of Mr Trump being ousted by Congress appears very slim indeed.

Another stinker of an IPO – Peloton shares priced at $29 but were down $2 at $27 on the first tick and ended 11.2% lower at $25.76. First day nerves maybe but this stock has fad written all over it. Think GoPro.

On the matter of dodgy prospectuses and dubious IPOs… S&P has downgraded WeWork debt another notch, and slapped a negative outlook on for good measure.

FX – the euro now looks to be on the precipice, on the verge of breaking having made fresh two-year lows on EURUSD. Whilst the 1.09 level may still hold, the banging on the Sep 3/12 lows at 1.09250 has produced a result with overnight tests at 1.09050. We’ve seen a slight bounce early doors in Europe but the door is ajar for bears. The Euro is under pressure as ECB chief economist Lane said there is room for more cuts and said the September measures were ‘not such a big package’. How much more can the ECB feasibly do?

Sterling is tracking lower against the broader moves in favour of USD. There is a chance as we approach crunch time on Brexit that GBPUSD pushes back to the lower end of the recent range, the multi-year lows around 1.19. Bulls have a fairly high bar to clear at 1.25. At time of publication, the pound had cracked below yesterday’s low at 1.23, opening up a return to 1.2280 and then 1.2230. The short-covering rally is over – time for political risk to dominate the price action.

Bank of England rate setter Saunders made pretty dovish comments, saying it’s quite plausible the next move is a cut. In making the case for a cut now it conforms to the belief in many in the market that the Bank is barking up the wrong tree with its slight tightening bias in its forward guidance. The comments from Saunders are clearly an added weight on the pound.

On Brexit – there’s a lot of noise of course and all the chatter is about MPs’ use of language and how could Boris possibly still take the UK out of the EU by October 31st without a deal. The fact is he can and he intends to. There is some serious risk that GBP declines from here into the middle of October on the uncertainty and heightened risk of no deal. This would then be the make or break moment – extension agreed and we easily pop back to 1.25, no deal and it’s down to 1.15 or even 1.10.

Data to watch today – PCE numbers at 13:30 (BST). If the core CPI numbers are anything to go by, the Fed’s preferred measure of inflation may point to greater price pressures than the Fed has really allowed for. Core durable goods also on tap, expected -1.1%. Plenty of central bank chatter too –de Guindos and Weidmann from the ECB follow Lane and then Quarles and Harker from the Fed. Should keep us busy this Friday.

Oil is in danger of entirely fading the gap back to $54.85, the pre-attack close, having made a fresh low yesterday at $55.40. There’s still a modicum of geopolitical risk premium in there though, but bearish fundamentals are reasserting themselves over the bullish geopolitics. WTI was at $56.10, ready to retest recent lows at $55.40. Bulls require a rally to $57.0 to mark a gear change. However we are now touching the rising trend support line drawn off the August low at $50, so could be finding some degree of support.

Gold is pretty range-bound now, but we are seeing it test the $1500 level which could call for retreat to near $1482, the bottom of the recent range and key support.

WeWork sets the bar lower as existing investors push to postpone IPO

IPO

Co-working firm WeWork is on the brink of IPO, but it seems like We might have some problems.

It seems that being a fast-growing tech company isn’t enough anymore; investors need a well-defined path to profitability as well.

Which has been a real kicker for the likes of Uber, Lyft, and IPO-hopeful WeWork, none of which is anywhere near actually making a cent.

WeWork was last valued at $47 billion during a private round of funding. But now it’s rumoured that WeWork will be seeking a $20 billion valuation or lower at IPO – and that’s if it even goes ahead at all.

Do existing investors want to halt the IPO?

Last week it was reported that CEO Adam Neumann had flown to Tokyo to meet with SoftBank Group – one of the company’s biggest investors. Amongst the ideas floated was the possibility SoftBank could provide another capital injection so that the IPO could be postponed until 2020.

Whether SoftBank will or not remains to be seen. The company might be feeling stung at having committed to investing $4 billion at a valuation of $47 billion when there is no chance WeWork will hit that kind of market capitalisation when it goes public.

SoftBank has to be careful. The company’s largest investment was in Uber – pouring billions into yet another dire tech company float would not reflect well on a company look to raise money to launch a second tech-focussed Vision Fund.

It isn’t just in conversation with SoftBank that the idea of shelving the IPO has been raised. Some existing investors, perturbed by the reception the IPO prospectus has garnered are suggesting putting things on hold.

WeHaveConcerns

Executives at WeWork showed they are not entirely unaware of the market reaction to unprofitable tech companies. Both Uber and Lyft are well below their initial offer price. But they were wrong if they thought even more-than-halving the valuation would be enough to placate concerns –especially when similar-sized competitor IWG is profitable and yet only valued at $4.6 billion.

There are other issues bothering investors anyway, who have concerns over the way the business is run, it’s structure, and the huge concentration of power.

WeWork’s share structure includes three classes; CEO Adam Neumann owns 2.4 million class A shares (<1.5%), 113 million class B shares (98%) and 1.1 million class C shares – that’s all of them. Class A shares give one vote, class B and C each grant 20. Neumann’s total holdings equates to 2.27 billion votes.

The co-founder occupies a large amount of space in the Risks section of the company’s S-1 filing due to potential conflicts of interest. Neumann has, or had, significant operational interest in several of the locations WeWork leases. He also charged the company almost $6 million to use the We trademark (WeWork is owned by The We Company – the structure is very complicated and has created further unease amongst investors).

WeWork scrambles to avoid becoming the next IPO flop

At the start of the year, Uber and Lyft seemed like exciting prospects. Markets looked likely to get swept along by the spiel of these cash-burning, lossmaking companies. But it seems Uber and Lyft failed to provide a convincing response to the profitability question.

It shouldn’t be a surprise, then, that when WeWork released its prospectus, complete with an admission it may remain unprofitable ‘for the foreseeable future’, investor response has been cold.

WeWork seems to have realised that its current offering isn’t enough to get the market onboard. But with expectations that its roadshow could begin this week, does the company have enough time to fix such deeply-entrenched issues as corporate structure and distribution of power, let alone its financial outlook, in time to avoid becoming 2019’s next big IPO flop?

Week Ahead: Uber IPO incoming, Lyft reports earnings, Walt Disney awaits the Endgame

Week Ahead

Coming up this week: one of the biggest IPOs in history as Uber goes public, communications and policy decisions from several leading central banks, as well as key company earnings reports.

Traders seem to be in a frenzy ahead of Uber’s highly-anticipated stock market debut, but will the poor performance of rival Lyft have tainted the shares? Earnings season may be slowing, but there are still some top companies left to update. The focus of much of the week for the FX market will be commentary from central bankers. Top tier UK and US data on Friday could be another source of volatility.

Uber: huge demand, high valuations, no profits

How much are markets willing to pay for a unicorn that sucks in cash and has yet to make a profit? Up until Lyft’s IPO, it seemed the answer was ‘a lot’. But despite opening over $15 above its IPO price, Lyft stock quickly tumbled. As happened to Snap Inc a couple of years back, a must-have stock quickly became a damp squib. Those IPO prices seem like distant memories for the languishing share price.

Ride-hailing giant Uber could be different. While also not profitable, the company dominates the domestic market, has a huge international presence, and boasts several other strings to its bow that Lyft doesn’t, such as Uber Eats and Uber Freight. The company is even working to develop flying taxis.

Uber will go public on Thursday 10th, potentially raising up to $10 billion for a valuation in excess of $80 billion. Has the debacle of Lyft shown that markets aren’t really that eager to hold a piece of a loss-making tech startup? Or is this an indicator that in the battle of the ride-hailers, traders are waiting to throw their backing behind Uber?

Forex: central banks dominate the week until Friday’s top tier data

The Reserve Bank of Australia announces its latest official cash rate decision during the Asian session on May 7th. This is just the start of a string of policy communications from some of the world’s biggest central banks. The Bank of Japan publishes its Summary of Opinions and policy meeting minutes in the following session. The Reserve Bank of New Zealand follows with its OCR decision. There’s also a press conference and inflation expectations from the RBNZ to watch.

The European Central Bank publishes the accounts of its latest policy meeting during Tuesday’s European session. As with most of these communications, the risks seem tilted to the downside. The Federal Reserve is still cautious, albeit less so following last week’s FOMC meeting, so it’s hard to see how any of the other world’s central banks could find much room for optimism. We’re certainly not expecting that from the BOJ or the ECB.

Markets are unlikely to be expecting bullishness from President Mario Draghi and colleagues. Even so, there are still downside risks to the euro if it seems that the Governing Council seems in favour of more quantitative easing. A more bullish case for EUR/USD notes the descending impulse wave pattern on the daily chart. Five complete waves in the trend suggesting a potential three wave correction which could push the pairing higher.

Meanwhile, the Aussie is braced for a potential rate cut. Nothing is a given, but there is a strong consensus amongst analysts that a downward move is imminent. Meanwhile, the RBNZ will likely signal that it intends to remain sitting on its hands for a long time to come. Perhaps frozen policy could be an upside for the Kiwi, with traders breathing a sigh of relief that the RBNZ isn’t planning on following the RBA on a more dovish trajectory.

False hope from UK growth data, US CPI could dash rate cut hopes further

US CPI figures wrap up the week, which could tilt the US monetary policy outlook ever-so-slightly back towards the hawkish side of the spectrum. A solid consumer price index reading, while not the Fed’s favourite measure of inflation, could give markets reason to expect a little more optimism at the next policy gathering.

The UK’s first quarter GDP print is also due on Friday. This could make interesting reading. While analysts generally agree that the UK economy is likely to slow this year, as Brexit uncertainty and softer global growth conditions weigh on output, companies have been busy stockpiling ahead of the UK’s departure from the EU. This flurry of activity could inflate the first-quarter reading. It’s already helped push some for the PMIs for the January-March quarter higher.

Equities: Lyft to chronicle losses, Disney to pave the way for Q3 strength

Earnings season may be winding down, but there are still some points of interest on this week’s calendar. BMW kicks things off with its Q1 earnings during Tuesday’s European session. The highlight, however, will be the after-market first-quarter results from Lyft.

It’s been a bumpy road for the ride-hailing company since its IPO. The stock has plummeted following the traditional debut surge to trend around 30% lower.

The issue of profitability is key. Lyft will undoubtedly report another large loss for the first quarter. Traders will want to know how quickly the company can slow the cash burn and when management envisions the company entering the black.

Lyft had better make some progress fast, or it could see itself becoming another Tesla – constantly battling the short sellers and limping from quarter to quarter.

There are a trio of euro stocks due on Wednesday: Siemens, Commerzbank, and Wirecard. After being hit by an accounting scandal over the past few weeks, Wirecard will be hoping to return the focus to its fundamentals and away from its business practices. A poor set of numbers could see Wirecard tumble, especially as there is no longer a ban on shorting the stock.

Walt Disney releases prequel to highly-awaited Q3 results

Walt Disney releases its Q2 figures after the US closing bell on Tuesday. The House of Mouse is riding high at the moment, boosted by the recent announcement of its long-awaited streaming service, and the storming box office success of the Avengers: Endgame, the studio’s latest Marvel superhero offering. With the record-breaking film having been released during the company’s fiscal third quarter (a period which also contains the hugely-successful Captain Marvel) management’s latest guidance should make for interesting reading.

Thursday brings fourth-quarter earnings from BT Group and AGMs from Adidas and Ford Motor Co.

Indices: S&P to retreat from highs as rate cut odds dwindle?

The S&P 500 hit a fresh record intraday high last week, as well as notching up a record closing high. The strong number of beats this earnings season (against a particularly low set of expectations) helped push markets that little bit higher.

But equities lost a key fundamental driver last week. The Federal Open Market Committee concluded that the US economy is on a pretty solid footing, even if it is lacking inflation and recent PMI’s have been softer than hoped.

This means the odds of a rate cut this year aren’t as high as the markets have been counting on. Indices were quick to undo some of their previous bullishness. President Donald Trump may be demanding a 1% cut to the federal funds rate and another round of quantitative easing, but the Fed won’t bow to such request and this has left the equity rally looking overextended.

Forget earnings – Lyft set to release Q1 loss report

LYFT caused quite a stir when it held its IPO in March. The offering was quickly oversubscribed (as is Uber’s), and shares eventually hit the market at $87.24 – well above the company’s $72 per share offer price.

Initial public offerings tend to start with a bang – stock often rockets higher before settling down; as Lyft’s did when it closed its first day of trading at $77.75. It only took one more session to drop below its $72 offer price, and the rout has continued ever since. At the time of writing, Lyft is trending 30% below its offer price, languishing sub-$60.00.

More pain incoming for Lyft stock?

It seems that owning a piece of a unicorn that is yet to make a profit but is valued at over $26 billion quickly lost its shine. Tech IPOs are always exciting, because everyone hopes to end up holding a piece of the next Facebook, but so far Lyft looks more likely to follow in the footsteps of Snap Inc, which has never come anywhere close to reclaiming 2017’s starting price and is currently 62% below it.

Profitability is the key issue. Ride-hailers like Uber and Lyft may have disrupted the traditional taxi market, but so far they are burning through cash fast. In its IPO filing, Lyft revealed that it made a net loss of $911 million in 2018, up 23% from 2017. However, revenue was growing faster, with 50% growth to $2.2 billion recorded last year.

Markets will be looking to see whether Lyft can continue the rapid pace of revenue growth, while those losses need to be reined in. A slower pace would be a good start, but really markets want to see that number reversing as the company hopefully moves towards profitability. Will management offer any guidance regarding a timeline for that?

The stock will live and die on those expectations; growing market share or increasing revenue per ride will mean nothing if the company keeps piling up the losses.

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