US Payrolls await as the retail army strikes again

The markets are a strange place at present, vast swathes of financial asset prices are a snooze fest, the dollar is falling but remains trapped in a very tight range and the majority of the global market is waiting for signals on the next move from the Fed, which doesn’t appear to be forthcoming. However, the “retail army” of small traders who use social media for tips and market direction are once again targeting their preferred shares. Last week it was GameStop, this week its AMC Entertainment, a struggling owner of cinema chains. If you want volatility then AMC rose 95% on Wednesday, added to this the CEO wants to “reward” the retail army with free popcorn and invitations to free screenings. Right now, “old fashioned” stocks that don’t seem to have much of a future are more volatile than Bitcoin. Below we ask if the US NFP report that is released on Friday can restore “normal” trading activity back to markets. 

How long will AMC volatility last? 

Unpacking this week’s move in some of the retail favourites, the question is when will AMC Entertainment and others start to turn south and run out of steam? 95% gains in one day is not normal, or healthy and this can be a warning sign for markets, especially when AMC’s fundamentals look shaky – it has $13bn of debt vs. $10bn of assets. The question now is when will the momentum stop, and when it does the decline could be sharp. Thus, as responsible analysts we could not justify recommending a move into GameStop, AMC, Bed, Bath and Beyond and Blackberry, other retail trade favourites who have seen large gains this week, even though the volatility is tempting. There could be further upside but based on past periods of rampant activity in these retail favourites, the uptrend tends to die out within a few days and the sell-off can be brutal. The formula seems to be simple: boost the stock price, then enjoy the downswing if you can find a way to trade it – many retail trading platforms are not offering the retail favourites anymore. We would point out that AMC has recently received $230mn in funding from a hedge fund, also after February’s bout of volatility its stock price never returned to its prior loans. If hedge funds are following in the footsteps of the retail army, then could the sell-off be less brutal this time? That is food for thought, but we will check back in with this stock to update you as only time will tell. 

BP comes good on its green promises as Tesla feels the heat 

While overall global financial markets have been a snooze-fest, there have been pockets of non-retail frenzy volatility that are worth watching closely. For example, BP and Tesla. BP’s share price is currently more than 2% higher on Thursday, and the share price is at its highest level for nearly a year after news that it had acquired solar farms in the US. Reports say that BP has bought a string of US solar farms for $155mn, which may be a small investment by BP’s standards, but it is a significant move in the right direction as the oil major looks to a green future. This investment of capital is being cheered by the market and the stock price is beating the overall FTSE 100, which is currently down more than 0.6%. We have mentioned BP recently because we think that oil majors will be rewarded if they put their green pledges into action, those that fail to do so will suffer the market consequences. Tesla is also worth watching. It’s share price fell more than 3% on Wednesday and we think that there could be more downside to come after it lost market share in the sale of EVs for April. We have noted that growing competition in the EV sector and at better price points, is a big concern for Tesla’s share price, and if we see a further decline in Tesla’s market share then the share price could come under some considerable pressure in the coming months. From a technical perspective, Tesla is testing an important support zone, the 38.2% retracement of the May 2020 low to the January 2021 high. A break below this level could open the way for a prolonged downtrend back to $522, the 50% retracement level of the same move.

NFP report – it’s all about wage growth for the Fed 

We have highlighted the pockets of volatility in the markets this week, which have mostly been individual shares, however, we would also note that Friday’s NFP report in the US is important. The May report will tell us if April’s disappointing figure was a once off or if the labour market in the US is slowing down. One thing to note is that the US labour market is not going into reverse. Over the last 12 months the unemployment rate has fallen from more than 13% to just over 6%. In May, economists are expecting an average of 664k payrolls, which is significantly larger than the 266k recorded for April. The unemployment rate is expected to decline to 5.9% from 6.1%, and wage growth is expected to jump a mere 0.2%, down from a decent 0.7% jump in April. While the overall payroll number will likely garner the most attention, we would point out that wage growth could be more important. If wage growth has peaked, and we only get small gains from now on, then it validates the Fed’s message that inflation will only be transitory and price pressures are not building. Thus, weak wage growth could put fears of an aggressive taper or other monetary policy tightening on hold for some time. US Treasury yields have ticked up this week, and the 10-year yield is trading around 1.6% at the time of writing. The US dollar index has fallen back below 90.00 on Thursday and the technical indicators suggest that further losses could be on the cards in the short term. If the dollar index is going to make a serious attempt at breaking back above this week’s high at just below 90.50, then we will need a very strong payrolls report, preferably one that shows wage inflation is building and the Fed needs to pay attention. 

Chart 1: US dollar index: