The UK looks like it is in dire straits, with very sticky inflation and whole swathes of the economy in a precarious situation. But yesterday's decision by the Bank of England to raise rates by half a point to 5% took the market by surprise, and served as a reminder that the battle against rising prices is a bitter and complex one. As a result, everyone is a little more uptight, and the advocates of a return to more accommodative monetary policies have lost points. With Fed Chair Jerome Powell reiterating the need to continue raising rates in the U.S., the mood is a little downbeat at the end of a rather prosperous first half of 2023 for financial markets. And there's nothing to suggest that the market can break out of this spiral today. PMI activity indicators, which are being published throughout the day for the major economies, including France, Germany, the UK, have been disappointing so far in Europe. The US PMI is due later today.

In order to escape the monetary news for a while, I'm going to take you to Europe and talk about some short-selling considerations after the bearish hedge fund Gotham City Research's attack on French company SES-imagotag yesterday. If you're not familiar with the company, it's a French success story, a company that became world leader in electronic labels and inventory management, and is very popular with managers and small investors. It has been included in the SBF120 index of the Paris Bourse since last December.

In short, to return to bear fund attacks, this type of raid occurs at regular intervals on the market, and the process is always somewhat identical. I'm going to summarize it here, simplifying it deliberately. Short sellers generally work on information that comes to them or on rumors. When the subject seems interesting enough, they dig deeper. And if the analysis is conclusive, they prepare their capital gains device. They discreetly position themselves for sale, and then they release their bombshell, usually a damning analysis report. More often than not, the target's share price plummets, and the arsonist can cash in. The targeted company then goes into crisis mode, trying to defend itself and dispelling doubts, and threatening to retaliate. But most of the time, the damage is done. Trust is lost and the road to redemption is often long. Sometimes, short sellers also hit the jackpot by identifying a complete hoax. This was the case with the Spanish company Gowex nearly ten years ago, which had already been pinpointed by Gotham City Research and went bankrupt after the revelations.

Mind you, I'm not saying that SES-Imagotag is in the same situation. In fact, the short-seller doesn't say so either, citing incestuous links with the main shareholder, complacent accounting, grey areas and excessive valuation. As is often the case, the report published by Gotham accumulates figures and factual analyses of unequal importance, and it can sometimes look a little childish, but that's the game. It's always difficult to untangle all this, especially in a hurry. But as is increasingly the case, form is more important than substance before the dust settles.

Yesterday, the SES-imagotag share faced a flood of sell orders. If trading had taken place, the stock would probably have been down 30, 40 or 50%. The levels were so far apart that no trading took place in the morning, so the company was able to request and obtain a trading halt by mid-day. In other words, nothing happened, and the stock was still worth EUR 166.80 at the open, with a market capitalization of around €2.6 billion. At 8:30 am ET, it is down 56% to €73.40. Management issued a brief statement refuting the allegations. We're still in the asymmetrical phase of the crisis: Gotham's revelations carry far more weight than SES-imagotag's response, and the company will now have to weigh up every word and refute every attack if it hopes to restore some confidence. And when I say some, I mean it: these attacks always leave their mark.

In the first days or weeks of the event, the salesman has the upper hand, because he is the attacker and drives the narrative: he can use peremptory formulas and suggest hasty conclusions, while the company is condemned to respond rationally. The battle is lost in advance. The tactics of short-sellers border on price manipulation, which always generates a great deal of frustration among shareholders. The counter-argument is that their bearish bets are based on a market anomaly, which they themselves identified in place of the failing players in office (managers, auditors, shareholders...) and before them, without having insider status. They therefore had every right to bet on a fall in the share price. It's hard to take, but it's the reality of the market.

Not much else to report on the markets this morning. U.S. Treasury Secretary Janet Yellen stressed yesterday that the risk of recession is diminishing in the U.S., but that the American consumer must rein in spending to complete the campaign to curb inflation. It's like asking the moon to stop revolving around the earth.

This morning, The Dow Jones Industrial Average futures were down 0.5%, S&P 500 futures were off 0.7%, and Nasdaq futures were 1.2% lower.

No notable change in the US June PMI is expected compared to May, with manufacturing in contraction territory at 48.5 and services in expansion at 53.5, according to Econoday.

 

Economic highlights of the day:

Initial PMI activity indicators for June will be published throughout the day, notably for the eurozone and the United States. The full agenda is here. 

The dollar is up 0.5% against the euro to EUR 0.9182 and 0.1% against the pound to EUR 0.7855. The ounce of gold retreats to USD 1922. Oil fell back, with Brent North Sea crude at USD 73.23 a barrel and WTI US light crude at USD 68.43. The yield on 10-year US debt climbed back to 3.78%. Bitcoin remains in contact with USD 30,000.

 

In corporate news:

  • 3M Company gains 3% in pre-market trading, as the group announces that it has reached a $10.3 billion settlement with a group of US water authorities, who accused the group of pollution linked to "eternal pollutants", or PFAS.
  • Amgen - California, Illinois, Minnesota, Wisconsin and the states of New York and Washington joined the US antitrust regulator's lawsuit against Amgen's $27.8 billion takeover of Horizon Therapeutics.
  • Meta - Malaysia announced on Friday that it would take legal action against the group that owns Facebook, accusing it of failing to moderate content inciting hatred on its platform.
  • Smith & Wesson Brands SWBI.O gained 5.7% in pre-market trading, as the group announced diluted earnings per share of $0.32, against a consensus of 0.27%.
  • Carmax gains 11.3% in pre-market trading following the publication of its first-quarter results, which beat market expectations.
  • Virgin Galactic lost 16.7% in premarket trading after the company announced that it could issue up to $400 million in shares from time to time to finance its operations.
  • Conformis - The medtech company announced on Thursday evening that it had reached a definitive agreement to be acquired by orthopedic equipment manufacturer restor3d, for $2.27 per share. The share price soared 90.52% to $2.22 in pre-market trading.

 

Analyst recommendations:

  • BAE Systems: Shore Capital initiates Buy coverage, targeting GBp 1166.
  • Berkeley: HSBC downgrades to reduce from hold. PT down 23% to 3,000 pence
  • Burberry: Oddo BHF remains underperform with a price target reduced from 2087 to 20260 GBp.
  • Chemring: Shore Capital initiates Buy coverage, targeting GBp 346.
  • Exact Sciences: Stifel raises price target to $120 from $85. Maintains buy rating.
  • Fiserv: B Riley Securities initiated coverage with a recommendation of buy. PT set to $148.
  • Global Payments: B Riley Securities initiated coverage with a recommendation of buy. PT set to $179.
  • Lancaster Colony: Loop Capital Markets initiated coverage with a recommendation of buy. PT set to $237.
  • Persimmon: HSBC downgrades to hold from buy. PT up 7.8% to 1,190 pence.
  • Principal Financial: Jefferies upgrades to hold from underperform. PT down 10% to $65.
  • Qinetiq: Shore Capital initiates Buy coverage, targeting GBp 493.
  • Reinsurance Group: Jefferies downgrades to hold from buy. PT up 12% to $160.
  • Tesla: DZ Bank AG downgrades to sell from buy. PT down 21% to $210.