US Election, Recession, Brexit: What’s in store for markets in 2020 H2?

The first half of 2020 has been a wild ride. We’ve seen unprecedented moves in markets, historic stimulus efforts by both central banks and governments, and record-breaking data that grabbed headlines across the globe.

H1 has already brought plenty of drama, but what should we expect from the next two quarters? Join us for a recap of some of the biggest events in market history and a look at the risks and opportunities that lie ahead.

Coronavirus pandemic prompts worst quarter in decades for stocks

At the start of 2020 the main themes of the year looked to be the US Presidential Election, the trade war with China, and Brexit.

It seems like years ago that markets began to get jittery on fears that the handful of novel coronavirus cases in Wuhan, China, could become something ‘as bad as SARS’. It quickly became apparent that we were dealing with something much worse, and the market was quick to realise the full, brutal, reality of a global pandemic.

The panic reached its zenith towards the end of March. As the sell-off ran out of momentum global stock markets were left -21.3% lower. The S&P 500 had its worst quarter since 2008; the Dow dropped the most since 1987 and set a new record for the biggest single-day gain (2,117 points) and single-day loss (2,997 points). European stocks had their worst quarter since 2002, with a -23% drop in Q1.

Oil turns negative for first time in history after Saudi Arabia sparks price war

Things became even more chaotic in the oil markets when, after OPEC and its allies failed to agree a pandemic response, Saudi Arabia opened the floodgates and slashed prices of its crude oil exports. Oil prices endured the biggest single-day collapse since the Gulf War – over -24%.

It was further strain for a market now seriously considering the risk that shuttered economies across the globe would hit demand so hard that global storage would hit capacity. The May contract for West Texas Intermediate went negative – a first for oil futures – changing hands for almost -$40 ahead of expiry.

Meanwhile US 10-year treasury yields hit record lows of 0.318%, and gold climbed to its highest levels in seven years, pushing even higher in Q2.

Economies locked down, central banks crank up stimulus

Nations across the globe ordered their citizens to remain at home, taking the unprecedented step to voluntarily put huge swathes of their economies on ice for weeks. Even when lockdown measures were eased, the new normal of social distancing, face masks, and plastic screens left many businesses operating at a fraction of their normal capacity.

The world’s central banks were quick to step in during the height of market volatility and continued to do so as the forecasts for the economic impact of the pandemic grew even more grim. The Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand all dropped rates to close to zero. Along with the European Central Bank, they unleashed enormous quantitative easing programmes, as well as other lending measures to help support businesses.

Unprecedented stimulus as unemployment spikes

Governments stepped in to pay the wages of furloughed employees as unemployment spiked – the US nonfarm payrolls report for April showed a jaw-dropping 20.5 million Americans had become unemployed in a single month. In the space of just six weeks America had erased all the job gains made since the financial crisis. The bill for US stimulus measures is currently $2 trillion, and is set to go higher when further measures are approved.

While most of the data may be improving, we’re still yet to see just how bad the GDP figures for Q2 are going to be. These, which will be released in the coming weeks, will show just how big a pit we have to dig ourselves out of.

H2: Recovery, US election, trade wars, Brexit

Markets may have recovered much of the coronavirus sell-off – US and European stocks posted their best quarter in decades in Q2 – but the world is still walking a fine line between reopening its economies and fending off the pandemic. Second wave fears abound. In the US in particular, economic data is largely pointing to a sharp rebound in activity, but at the same time Covid-19 case numbers are consistently smashing daily records.

These key competing bullish and bearish factors threaten to keep markets walking a tightrope in the quarters to come. Because of this, progress in the race to find a vaccine is closely watched. Risk is still highly sensitive to news of positive drug trials. The sooner we get a vaccine, the sooner life can return to normal, even if the world economy still has a long way to go before it returns to pre-crisis levels.

US Presidential Election: Trump lags in polls, Biden threatens to reverse tax cuts

The biggest talking point on the market in the coming months, aside from coronavirus, will undoubtedly be the US Presidential Election. The stakes are incredibly high, especially for the US stock market, and Democrat nominee Joe Biden intends to reverse the bulk of the sweeping tax cuts implemented by president Donald Trump.

Trump is currently lagging in the polls, with voters unimpressed by his response to the pandemic and also to the protests against police brutality that swept the nation. The president has long taken credit for the performance of the stock market and the economy, so for the latter to be facing a deep recession robs him of one of his key topics on the campaign trail.

Joe Biden may currently have a significant lead, but there is a long time to go until the polls, and anything could happen yet.

China trade war in focus, Hong Kong law adds fresh complications

The trade war with China would be a focus for the market anyway, but will come under increasing scrutiny in the run-up to the election. Thanks to Covid-19, anti-China sentiment is running high in the United States. This means Biden will also have to talk tough on China, which could mean that the damaging trade war is set to continue regardless of who wins the White House this time around.

Tensions have already risen on the back of China’s passing of a new Hong Kong security law, and coronavirus makes it virtually impossible that the terms of the Phase One trade agreement hashed out by Washington and Beijing will be carried out. Trump may be forced to stick with the deal, because abandoning it would leave him unable to flaunt his ability to make China toe the line during the presidential race. This would be positive for risk – markets were already rattled by fears that the president’s response to the Hong Kong law would include abandoning the deal.

How, when, and if: Unwinding stimulus

Even if we get a vaccine before the end of the year and global economies do rebound sharply, the vast levels of government and central bank stimulus will need to be addressed. Governments are running wartime levels of debt.

We’re looking at an even longer slog back to normalised monetary policy – something that banks like the Bank of England and the European Central Bank were struggling to reach even before Covid. There will be huge quantitative easing programmes to unwind and interest rates to lift away from zero, or potentially even out of negative territory.

Markets have been able to recover thanks to a steady cocktail of government and central bank stimulus. The years since the financial crisis have proven that it is incredibly difficult to wean markets and the economy off stimulus. There could be some tough decisions ahead, especially as governments begin to consider how they plan to repair their finances in the years to come.

Brexit deadline approaches, impasse remains

There is also Brexit to consider. While the coronavirus forced officials to move their negotiations online, little else seems to have happened so far. Both sides are refusing to budge and both sides are claiming that the other is being unreasonable. The UK does not want an extension to the transition period, and the two sides are running out of time to agree a trade deal.

We’ve seen before that both Downing Street and Brussels like to wait until the last possible moment to soften their stance. However, the risks here are higher because before there was always the prospect of another extension.

The last time negotiations were extended the battle in Westminster shocked the UK to its constitutional core. The Conservative landslide victory of 2019 gave Boris Johnson a much stronger hand this time around – the UK will leave in December, regardless of the situation.

Stay on top of the biggest events in H2

Whatever happens in the coming months, we’ll be here to bring you the latest news and analysis of the top developments and market events via the blog and XRay.

US Election 2020: What happens to the US dollar with a Democrat clean sweep?

There are various permutations of results from this year’s US elections, but polling data increasingly indicates a strong chance of a Democrat clean sweep of the House, Senate and White House.

Obviously, the question for forex traders is what this may mean for the USD.

Traditionally the US dollar performs well in election years. The dollar index (DXY) has only fallen in two of the last 12 elections, with the drop in 2012 only marginal.

According to Morgan Stanley, the key is not who wins but whether you get gridlock in Washington or not. The bank sees USD strength from a Democrat ‘blue wave’, that is a clean sweep of the House, Senate and White House. But they also see USD strength from a Republican full house, as unlikely as that seems now based on the polls. The US dollar would be more likely to soften if Donald Trump wins but the House and/or Senate are controlled by the Democrats.

Pandemic changes everything

Historical patterns may not prove much use, however, due in large part to the massive amount of fiscal and monetary easing that has been carried out not just by the US but also its G10 counterparts. This has created an unusual backdrop to the election and means the waters FX traders are swimming in are murkier than usual.

According to researchers at Sweden’s SEB, the dollar rose in the 100 trading days after nine of the past 10 elections from 1980 to 2016. Democrat wins produced a 4% rally on average, whilst a Republican victory saw a gain of 2%.

So, can we expect the dollar to rally after the election no matter what the outcome? It’s clearly a lot more complicated, not least because of the unique macro-economic backdrop created by the pandemic.

Indeed, foreign exchange analysis from investment banks UBS and Crédit Agricole suggests precisely the opposite. One argument is that Trump’s policies of fiscal stimulus and protectionism have supported the dollar, so a Democrat clean sweep could pull these legs from under the USD.

However, there are not many signs of the Democrats taking a more lenient approach to China, in fact both sides seem to be vying to be seen as tougher than the other on China. Therefore, trade disputes and battles of intellectual property rights will, in all likelihood, persist.

On the fiscal side, it’s hard to see much difference – both camps back massive stimulus to support the economy post-pandemic, whilst the Federal Reserve is very clearly prepared to keep rates at zero for as long as necessary. The usual rules of the game in terms of how the dollar responds to fiscal and monetary policy inputs have to a certain extent been thrown out by the pandemic.

Donald Trump has been a little wayward in his messaging around the dollar’s strength – it’s normal for presidents to underscore the idea that a strong dollar equals a strong USA. The ‘strong dollar policy’ has been in place for at least 20 years and initially Trump was seen moving away from this stance.

Whilst he has been more resolutely in the strong dollar camp lately, there is always the risk that post-pandemic the president again calls for a weaker dollar to make the country more competitive.

Euro matters

Relative economic performance and relative expectations of interest rate differentials will be what matters. Will the euro rebound with a fiscal stimulus package? Will the pound stabilise after Brexit?

The euro matters most when we look at this other side of the dollar equation as EUR has an outsized weighting in DXY – more than 50%. So, when we look at USD, or DXY, strength we are also to a large extent looking at EUR too.

The European Central Bank (ECB) has like the Fed responded to the pandemic with a massive increase in its QE programme. Efforts on the fiscal side have been slower, but in spite of concerns among some member states about the nature of stimulus funding, there seemed to be a broad agreement on the need for support.

Crucially right now the more ‘dovish’ policymakers are the more it supports the currency – the worry is that not enough support risks growth, but also creates pressure in bond markets, leading to a widening of spreads between bunds and peripheral yields. The ECB seems to be in ‘whatever it takes’ mode, though we note German resistance to participating in asset purchase programmes. The risk really lies on the fiscal side.

Failure to agree to the fiscal measures being discussed as part of the EU budget talks would be negative for the currency. Whilst an agreement is the base case, it may not deliver fully on its promise and may be a watered-down version to the €750bn rescue fund put forward by the European Commission.

Stocks steady as pubs prepare to reopen

European stocks were steady near the flatline on a quiet Friday session with the US market closed for the Independence Day holiday. Stocks rallied in the prior session after a bumper US jobs report showed 4.8m jobs were created in June.

Despite this, as detailed yesterday, the unemployment rate remains very high at more than 11%, the more up-to-date weekly initial and continuing claims numbers are not improving quickly enough, and the recent spike in cases means several states are re-imposing lockdown restrictions, which will hamper jobs growth in July.

Risk assets gained more support as the Chinese services PMI rose to a 10-year high at 58.4 – the usual caveats about diffusion indices apply, as to the usual caveats about any data out of China, but it’s solidly encouraging for markets.  Australian retail sales bounced back almost 17%. The number of cases in the US continue to surge – more than 55k in a single day the latest total, with the governor of Texas now mandating the wearing of facemasks.

Major indices continue to track around the middle of the June range, though thanks to a decent run this week are now moving towards the upper end of the range having tapped the lower end last week. The S&P 500 cleared the 61.8% retracement yesterday but closed well off its highs, while the Dow is struggling to hold the 50% level.

In Europe the FTSE 100 is holding above the 50% level, while the DAX is facing resistance today at the 78.6% level. After a strong week and with the US shut, it might be a quiet session today. Scratch that – with pubs about to reopen and with every trader planning their weekend engagements, it will be a very quiet one in London.

UK government eases quarantine rules for travellers

Anyone arriving in England from a number of countries including Spain, France, Germany and Italy won’t need to self-isolate from July 10th, whilst the government is also easing international travel restrictions. A full list of countries that people can arrive from without self-quarantining will be published today.

Relaxing the draconian quarantine rules and allowing more ‘non-essential’ travel should come as a shot in the arm for many beaten up travel & leisure stocks, but there’s a long way to go to restore confidence and get people travelling as much as they did last year. It will take years to get air passenger numbers back to 2019 levels.

Pub and restaurant stocks have taken a beating during the pandemic, but investors may be able to raise a glass come Saturday as the various inns and hostelries reopen because share prices have recovered remarkably well. Marston’s has risen threefold from its March low, while JD Wetherspoon and Mitchells & Butlers have both more than doubled in that time. Mine’s a quadruple whisky.

Oil (WTI-Aug) drifted higher to the top of the Jun 8th peak around $40.70 where it’s pulled back to the $40 round number. The move higher has been steadily losing momentum and failure at the $40.70 area suggests perhaps the progression of the double top into a head and shoulders reversal pattern.

GBPUSD hits resistance, EURUSD bullish flag nears completion

In FX, the pound’s bounce ran out of steam and the euro has come back to its anchor. GBPUSD rallied strongly out of the channel but hit resistance at 1.2520 and has consolidated in a very narrow range around 1.2470. As markets opened in Europe the pair slipped this range and started a move lower – it could retrace towards the round number support at 1.24.

Meanwhile EURUSD has come back to 1.1230, the anchor point for the whole of June. This is the 23.6% retracement of the 2014-2016 top-to-bottom rout. As the bullish flag pattern nears completion, we should expect a breakout soon – the swing highs around 1.14-1.15 offering the main resistance.

Risk assets rally on bumper US NFP jobs report

US stock futures jumped, and European equity indices pushed to highs of the day after a stand-out jobs report. Today’s US jobs figures show the economy is bouncing back, but there is a still a long way to go to replace all the millions of jobs lost due to the pandemic. Permanent destruction of demand and productivity will take years to claw back.

US employers added 4.8m jobs in June, which smashed the consensus expectations of around 3m. The unemployment rate declined more than expected to 11.1%. Revisions to Apr and May left employment 90k better than previously thought. Labour force participation improved to 61.5%. Wages are up 5% year-on-year.

US nonfarm payrolls – a closer look

But, a couple of things we should say about this to take the shine off the report.  First, weekly continuing jobless claims were a little worse than expected at 19.3m – this was a little better than last week but the number ought to be improving at a faster rate. Second, the total gains in employment over the last two months total 7.5m – but this is still dwarfed by the –20.8m recorded in April.

Three, the BLS notes that employment in leisure and hospitality increased by 2.1 million, accounting for about two-fifths of the gain in total nonfarm employment. Meanwhile, employment in retail rose by 740,000, so about 2.8m of the 4.8m was in sectors that are highly exposed to fresh lockdowns and the slowing of reopening, which has been the result of the recent spike in cases. So we cannot expect the same contribution from these sectors over the summer if states are in a stop-start reopening scenario.

Four, while the number of unemployed classed as being on temporary layoff decreased by 4.8m in June to 10.6m, following a decline of 2.7m in May, the number of permanent job losers continued to rise, increasing by 588,000 to 2.9m in June.

Stocks rise on NFP, cable lower on cancelled Brexit talks

Risk assets rose on the report as it was overall bullish. US futures jumped, with the S&P 500 heading above 3150, taking it some or 150 points, or around 5%,  above last week’s lows. The Dow is up 1000 points from last week’s lows. European indices rose the risk rally higher too.

Elsewhere, we saw limited reaction in the dollar, but GBPUSD shot lower shortly after the release on a separate report saying that a meeting between the UK and EU chief negotiators that had been scheduled for Friday had been cancelled.

Gold slipped lower, making a fresh low under $1760 and a possible breakout of the bearish flag signalled this morning, potentially calling for a retreat to around the $1750-$1747 area.

Tesla rally continues on forecast-beating deliveries, Wedbush price hike

Meanwhile Tesla shares just keep on going and are set to gap up $100 after the company said it delivered 90,650 vehicles in the second quarter, well ahead of both what the company had guided and the Street expectation for 83k vehicles. The company has successfully ramped production at its Fremont site and the Shanghai plant also came back online after being forced to shutter in the first quarter due to Covid. China sales are picking up with Tesla selling almost 12,000 Model 3s in May.

The stock also got a lift after Wedbush Securities increased its price target on the stock to $1,250 from $1,000, whilst the bull scenario got a PT of $2,000. Chinese rival Nio delivered 3,740 vehicles during June and beat forecasts with second-quarter deliveries of 10,331 vehicles.

The FTSE 100 was well poised for a move and duly broke out of the descending trend line from the June peak, fresh horizontal resistance seen around 6260.

Stocks steady after Q2 boom, gold breaks higher, economic data uncertain

The S&P rallied 1.5% to finish the quarter up 20%, its best quarter since 1998 and keeping its YTD losses at –4%. The Dow Jones industrial average closed up 200pts as it continued its bounce off the 50-day simple moving average to notch its best quarter since 1987. Things were a little more mixed in Europe but again we saw the major bourses finish their best quarter in years.

Stocks rallied so sharply in Q2 for a number of reasons – chiefly stimulus, both fiscal and monetary, as well as the reopening of economies and better virus rates in most countries, though this trend has somewhat come undone in the US in the last couple of weeks. The aggressive pullback in February and March also left stocks rather oversold on a short-term basis, when considering the stimulus and relative yields to government bonds.

Meanwhile hopes of a vaccine are central if we are to see 2021 look more like 2019 than this year. For gains to be sustained in Q3 stocks require the continued support of stimulus, which remains on tap, as well as a better outlook on the virus spread and for the hard economic data to show a strong bounce from Q2, both of which could be more tricky.

Boeing declined by more than 5% as Norwegian Air cancelled an order for almost one hundred jets and competitor Airbus announced it would cut its workforce by 15,000, whilst Tesla shot 7% higher to a new record that takes its market capitalisation to $200bn for the first time. Shares in Facebook, which has come under fire lately by showboating big brands who are pulling advertising temporarily, rallied 3%.

Protests in Hong Kong signal geopolitical stress – Western powers have expressed dismay at China’s decision to pass the new national security law. The first arrests under the new law have been made – only a few hours after its imposition. The potential for this to create further unrest in Hong Kong and stoke US-China tensions will need to be monitored.

European equities traded cautiously on the first day of July and the third quarter after a mixed bag from Asia as Tokyo fell and Chinese bourses rallied. Australia was also higher as Hong Kong was shut for a holiday. The major indices remain in a broad zone between the 38.2% and 61.8% retracement of the drawdown in the second week of June.

Despite the sharp rise in cases in the US, which Dr Fauci says is out of control, Americans’ confidence is returning. The Conference Board’s index jumped by 12.2 points to 98.1, the best one-month rise in nine years. Chinese data was a little better than expected as the Caixin manufacturing PMI hit 51.2, but the Japanese Tankan survey disappointed at –34. Data points will remain mixed and noisy as we exit the crisis.

PMIs, which are diffusion indices, are particularly challenged by the speed and magnitude of the economic contraction. I would prefer to look at the hard data as it comes out over the third quarter. Economically things have rarely been this uncertain – we could be running way hotter than we think, but equally the long-term consequences could be deeper and longer-lasting than the V-shaped recovery camp would have it.

Looking ahead to today’s session, the ADP nonfarm employment report will provide a taster for Thursday’s BLS nonfarms report, while we will also be looking to the FOMC meeting minutes later for clues as to what else the Fed might be up to – there is unlikely to be anything other than ‘do whatever it takes’ mode on offer.

Gold prices rallied to fresh 8-year highs near $1790 on a technical breakout from the bullish flag formation. Real US rates remain at 7-year lows, while benchmark 3yr, 5yr and 7yr Treasury yields notched record low closes. As expressed in recent notes, gold looks to be a long-term winner from the pandemic as social and economic uncertainty favours the safe haven, whilst the vast increase in M1 and M2 money means there is a high chance – though not a certainty – of an inflation surge. Fading momentum on the CCI with a bearish divergence to the price action suggests a near-term pullback may be required – perhaps at the $1800 round number resistance – before the next significant leg higher can be made.

The rally on Wall Street upset the emerging downtrend and reasserted the range trade for the time being, with the S&P 500 finishing at 3100 in the 50% area of the June pullback.

In FX, cable bounced sharply off the 1.2250 support on the second look but remains constrained by the upper end of the channel.

Stocks head for best quarter in years, Powell testimony weighs on yields

The UK’s economy shrank a little more than expected in the first quarter – the 2.2% plunge was the joint worst since 1979. Of course, it will be dwarfed by the Q2 drop, with April already printing 20% lower. Meanwhile China’s PMI data showed a slight improvement and Japan’s industrial production plunged over 8%.

Does any of this tell us much as investors and traders? In normal times, yes of course, as it might make a difference of a few points on the margins, but in the time of coronavirus there is an awful lot of noise around the data which makes it a lot more challenging, as well as of course all the stimulus, which muffles the notes that the data is trying to sound. Boris Johnson will launch an FDR-like New Deal infrastructure package today to distract us from the harsh reality of rising unemployment and ongoing restrictions on our liberties.

Powell’s economic outlook weighs on US yields

US Treasury yields declined as Federal Reserve chair Jay Powell said the outlook for the economy is ‘extraordinarily uncertain’. In prepared remarks for today’s Congressional hearing alongside Treasury Secretary Steve Mnuchin, Mr Powell said output and employment remain ‘far below their pre-pandemic levels’, adding: ‘The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.’

He also noted that ‘a full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities’. San Francisco Federal Reserve President Mary Daly said it’s too early to tell and is just ‘watching the data’. Aren’t we all.

A strong quarter for stocks, but risks of a sharp pullback abound

Stocks rallied on Monday despite a wobbly start, as US pending home sales jumped the most on record in May, whilst Boeing surged 14%, heaping dozens of points on the Dow as it restarted test flights on the 737 MAX aircraft yesterday.

But as I keep stressing, this is a very rangebound market. The S&P 500 rose 1.5% but is caught between the 38.2% and 50% retracement of the pullback in the second week of June. The Dow added more than 2% but couldn’t even achieve the 38.2% line. Whilst indices are still trading this range, there is a downside bias evident lately and emerging down trend channels as we’ve made a couple of lower highs and lower lows. If this trend strengthens it could gain enough momentum to retest of the June lows.

Indeed, during cash equity trading hours the last 5 sessions has produced a lower low and lower high on the S&P 500. Valuations still look too high and based on a far-too-optimistic view of an earnings rebound in 2021 and does not account for permanent productivity and demand destruction. Of course stimulus is making a big difference here, but risk assets are exposed if we see the pandemic get worse from here. World Health Organisation boss Tedros said the worst is yet to come. Cases across states like Arizona, Texas and Florida continue to surge and look to be completely out of control.  A short, sharp pullback is a very real possibility.

Nevertheless, it’s been a solid month and an exceptionally strong quarter. US equities have enjoyed their best quarter in 20 years, whilst stocks in Europe have fared pretty well too as investors participated in the rebound off the March lows. It’s mirrored elsewhere in risk assets – copper is up a fifth, but is slightly weaker for the year. For instance, the S&P 500 is up 18% QTD, but down 5% YTD. The FTSE 100 is up almost 10% QTD, but down over 17% YTD.

On the open on Tuesday, European stocks were mixed and lacking direction as they traded either side of the flatline. The FTSE 100 was trading around the 50% retracement of the June pullback and took a little hit as Shell downgraded its oil outlook and warned it will need to take up to write down the value of its assets by as much as $22bn. This follows a similar move by BP, which moved lower apparently on the Shell read-across.

Chart: Dow tests 50-day SMA support, downtrend starts to gain momentum.

Elsewhere, gold was supported around $1770 but slightly below the recent 8-year high as the flag pattern starts to near completion following the leg up on Friday. Needless to say, we can look to US real rates and 10yr Treasury Inflation Protected Securities (TIPS) dipping to –0.7%, a new seven-year low. Across the curve real rates are more negative than they have been a decent while.

Crude oil recovered the $39 handle but has failed to ascend all the way to $40 and has peeled back this morning. The near-term rising trend is offering support but the double top still exerts its influence and may well result in a further pullback to $35.

In FX, the dollar continues to find bid and the dollar index is making a nice little move off its lows still in a strong uptrend channel but is just running into horizontal resistance around the 97.65 area – breakout could see 98 handle again in short order. The downtrend dominates for cable as the pair continued south down the channel to test 1.2250. Whilst this held, the failure to recover 1.23150 on the swing higher may call for a further decline to the 1.22 round number support, and thence our old friend 1.2160 may come into play.

Chart: Downward trend dominates for cable

Coronavirus outbreaks leave stocks stuck in their ranges

Virus outbreaks in the US continue to weigh on the mood, as it suggests the run-up in stocks on hopes of a V-shaped economic recovery may be overly optimistic. Several states, mainly in the south, have been forced to re-impose lockdown restrictions after being the first to reopen. Dr Fauci described it as a ‘serious problem’. The dangers of reopening too quickly seem all too apparent, but investors are also keeping an eye on outbreaks in Tokyo, Australia and China.

European equities were a touch softer but trading near the flatline on Monday morning, with a general lack of direction about today’s trade. Major indices tracking around the middle of their June ranges after Asian equities fell. US equities were lower Friday and finished down for the week but, as the month ends, stocks have enjoyed a very strong quarter.

The FTSE 100 is up over 8% quarter-to-date, while the S&P 500 has rallied over 16% in Q2 and the DAX has surged 21%. Valuations remain the concern as we head into earnings season with the S&P 500 still trading at more than 22x on a forward basis.

Coming up this week – Powell testimony, US nonfarm payrolls

Of course stocks haven’t only rallied because of reopening economies – enormous liquidity thanks to the coordinated action of central banks has been key. Central bankers have been striking similar notes in terms of the response to the crisis and Jerome Powell, the Federal Reserve chairman, will testify in Congress again this week. The Fed’s rather downbeat assessment of the economic recovery helped to stop the rally in its tracks and since then indices have been trading ranges.

The US jobs report – on Thursday this week due to the July 4th holiday – will provide an important view on the pace of recovery, but we should note that the weekly unemployment claims numbers are proving a more sensitive and up-to-date barometer, not least since there are problems with the data gathering for the monthly nonfarms report.

Facebook shares tumble on ad boycott, but how long can brands stay away?

Facebook shares tumbled more than 8% on Friday as a growing number of companies join a boycott of the platform over hate speech. We saw how a boycott of Facebook by users failed to move the needle on earnings, but this time it’s different – it’s the big brands that pay the big bucks and the loss of Unilever, Starbucks, Coca-Cola, Levi’s and Diageo among others will create a headwind to revenue growth in the coming quarter.

I would think Facebook can and will do a lot more and will be able to take steps to assuage brands’ concerns, allowing the stock to recover. Moreover, will brands be able to avoid Facebook for very long? Virtue signalling is one thing, but they also need to shift product.

Crude oil was steady with WTI (Aug) around $38 after rallying off the medium-term support around $37.50. OPEC+ compliance in June is expected to be higher than in May, mainly because Saudi Arabia, Oman, Kuwait and the UAE are cutting above their quotas. In FX, cable continues to track its channel lower with a new low put in at 1.2315, with the previous support in the 1.2390 region now acting as resistance.

Tesco dips on bank bad loan provisions, US banks flip on Fed stress tests and Volcker Rule change

Tesco shares slipped on the open despite surging sales online and in-store. Due to the economic situation and expected rise in unemployment, the company has increased provisions for bad debts at Tesco Bank, which will result in a loss of £175m-£200m for the 2020/21 financial year. In April management had flagged a likely loss at the bank this year versus £193m in operating profit last year. This will weigh on group profits for the year and while grocery sales are much better, profits may struggle to follow the kind of yoy progress.

At the core business, sales are of course exceptionally strong online (+48%) and roaring ahead in-store too. Total sales in the core UK & ROI business increased by 9.2%. Booker was up 6%, with the –32% decline in catering offset by a +24% increase in retail. The decision to match Aldi on prices means lower margins for core consumer division, whilst online operations are costly to maintain, particularly as the business has responded to such a surge in demand. But in big retail you have to keep running. Shares are down 11% YTD.

Fed tells US banks to suspend buybacks, cap dividends after stress test results

Talking of banks and bad loans, the Federal Reserve’s much-anticipated stress tests on US banks  were published. The central bank warned that under certain scenarios some banks’ reserves would fall close to minimum capital thresholds, with lenders suffering up to $700bn in loan losses in the worst case. The Fed instructed the 33 largest banks to suspend share buybacks and cap dividend payments until the fourth quarter of this year, at the soonest.

However, all will need to resubmit plans later in the year. Shares in Goldman Sachs, JPMorgan Chase and Wells Fargo all fell in extended trade after hours, all three having rallied by around 3-4% in the normal session ahead of the results. So, all the banks have, in essence, ‘passed’, but we know that is only because of the massive injection of Fed liquidity provisions and monetary easing, as well as Congressional stimulus.

Earlier, financials (+2.26%) had led the way higher as the S&P 500 climbed more than 1% and the Dow added 300 points after Federal Deposit Insurance Commission officials in the US said they would ease the Volcker Rule, a post-financial crisis era regulation designed to rein in banks’ risk-taking. Some argue this kind of regulation, which has completely curtailed prop trading, has been a drag on bank profits as much as low interest rates.

The move would free up a lot of bank capital and make it easier for lenders to make large investments into venture capital. It would also end the need for banks to set aside capital for derivatives trades between different affiliates of the same firm. This idea has been floated in the past of course – but seems to have found new support since the crisis.

Stimulus is good, but it’s not sustainable; better to unleash animal spirits and let people get on with the business of taking risk and making money. We ought to be mindful of any implications of a Democrat White House and Congress on this change.

Oil rebounds off lows, natural gas tumbles to 25-year low

Energy stocks also rose (+1.96%) as oil prices rebounded off the lows. Crude oil (Aug) touched lows close to $37 as risk assets were offered earlier on during Thursday but recovered as stocks turned green later in the session. WTI has recovered to $39 but slipped a little this morning; bulls require the recovery to $40 first and then a push above $41.50 to reassert the uptrend. Natural gas prices plummeted to a 25-year low, amid a rise in stockpiles and declining demand.

The rally on Wall Street lifted the boats around the world. European stocks had begun shaky but turned positive for the day and have opened higher again on Friday morning. The rally in global equities continued into the Asian session overnight and has sent the major indices back towards the middle of the June range. Stocks rallied despite the growing signs that several large and economically important US states are going through significant rises in cases of Covid-19 and some are halting their reopening.

The market does seem to be able to live with rising cases better than it did, partly because there is not the sense that anyone wants to lockdown the entire economy again. Longer-term we are looking at the data over the summer providing a much clearer view of how economies are doing, and we need to see what the next corporate earnings season tells us. If investors start to think EPS forecasts are not about to improve drastically then the S&P 500 cannot handle the kind of multiple it currently trades on. 

Chart: FTSE 100 and S&P 500 move back to middle of their June ranges

In FX, the majors are holding ranges. GBPUSD continues to slide down the channel but bulls will be hoping to put in a new higher low close to 1.2390, yesterday’s bottom. We’re getting to the point where this channel either reverses course of makes fresh lows towards 1.22. At the open the pair slipped to test the near-term support (pink line), which may guide the path to the top of the channel. Failure here suggests a retest of yesterday’s lows.

Equities in retreat as Covid-19 cases advance, oil drops

Equity markets have come under pressure again as a spike in new Covid cases across the US has investors worried, whilst the IMF drastically cut its growth forecasts for the year. Major equity indices have retreated towards the lower end of the range traded in June but have yet to make fresh lows for the month – when they do it will get very interesting and could call for another leg lower.

Stocks in Europe were down 3% on Wednesday, whilst Wall Street dropped 2.6%. European markets opened lower again Thursday, with a risk-off trade seeing all sectors in the red and telcos, healthcare and utilities declining the least.

Investors are pulling their heads in a little as the surge in cases raises concerns about how quickly the US economy can emerge from the ashes. There are also clusters in Germany of course but the focus is on the divergence between the European and US experience.  The FTSE 100 retreated close to 6,000 round number but found support around the 23.6% retracement at 6,066.

The S&P 500 closed at 3,050, on the 38.2% retracement. With softness on the open in Europe and futures indicating a lower open, we may see SPX test its 23.6% level on the 3,000 round number. A retest of the June lows looks increasingly likely.

IMF cuts global outlook, US-EU trade tensions simmer

Meanwhile the IMF lowered its 2020 outlook, warning the global economy would shrink a lot more this year than it had forecast in April. Global output is forecast at –4.9%, vs –3% in April. The UK and EU will decline 10%, whilst the US economy will shrink 8%. Tellingly, the IMF also lowered its 2021 bounce-back forecast – growth globally is expected to rally 5.4%, vs the 5.8% forecast in April.

In other words, the decline will be deeper and the recovery slower; that is, no V-shaped recovery. We can also add US-EU trade tensions into the mix hitting stock market sentiment, as the White House has threatened fresh tariffs. I’d also suggest that the closer we get to the election and the more polls show Biden leading Trump, the greater the risk of a Democrat clean sweep, which will need to be priced into equity markets.

Improved virus response, central bank stimulus lowers risk to equities

Although we see clear headline risk around spikes in Covid cases for equity markets, any second wave is not going to result in the same level of lockdown restrictions endured in the first wave: it’s just too costly economically and because we have learned a lot in how to cope with this virus, both in terms of treatment and prevention. This means any further pullback we see, whilst potentially quite sharp, is unlikely to see a retest of the lows in March.

Meanwhile central bank stimulus is still strong. The Fed has shifted materially – it now has a $7tn balance sheet, setting a floor under the bond market that pushes up equities. The risk to equities comes later in the year when we get a real insight into both the pace of economic recovery and, by extension, corporate earnings – does the S&P 500 still justify x23 forward PE, or should it start to trade at more like x19? The current forward PE of around x23 suggests hope of a bounce back in earnings next year that may not come to fruition.

US weekly jobless claims in focus

On the pace of economic recovery, today’s weekly jobless claims report will be of great significance. Last week’s underwhelmed. Following the surprisingly strong nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m. The slowing in the rate of change was the main concern – hiring not really outpacing firing at a fast-enough pace to be confident of a decent recovery. I would like to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.

Gold eases back as dollar recovers

Gold eased back off 8-year highs as the US dollar gained on the risk-off trade, but at $1765 in early European trade had bounced off lows around $1753 struck overnight. Short-term we see a stronger dollar exerting some pressure on gold prices; longer term the focus is on US real rates, which have just risen a touch off the lows. 10yr Treasury Inflation Protected Securities (TIPS) eased away from 7-year lows at –0.66 to –0.64, providing another little headwind to gold prices in the near term. 

Oil slides on rising stockpiles

Crude oil declined with the broader risk-off trade. Rising US stockpiles – which hit a record high for the straight week – have also started to spook traders. Crude inventories climbed 1.44m barrels in the week to June 19th, to 540.7 million barrels. Gasoline stocks were down 1.7m barrels, giving encouraging signals about driving demand. US crude oil refinery inputs rose 239,000 bpd to 13.8m bpd. Total US production rose 500,000 bpd to 11m bpd due to the return of Gulf of Mexico output following Tropical Storm Cristobal. 

WTI (Aug) retreated off the $40 level to trade just above $37 – as suggested whilst the fundamentals have started to build in favour of stronger pricing, the market will not be immune to a technical pullback on overbought conditions and/or a decline in sentiment among traders due to rising US cases. The emerging double top is less nascent than it was and increasingly calls for the $35 neckline to be touched. A breach here calls for $31.50, the swing lows touched in the second half of May.

In FX, we can see a downwards channel for GBPUSD. The cross has pulled back to 1.24 as the dollar found bid, before paring losses a little this morning. Bulls need to clear the swing high at 1.2540 to break the downtrend, but trend resistance appears around 1.25 first. Bears can eye a pullback to under the Jun 21st low around 1.2334, with the channel suggesting we may see a 1.22 handle should the bulls fail to break 1.25 next.

Equity markets whipsaw on US-China trade uncertainty

It’s over, it’s not over: The White House looked to be as dysfunctional as ever as Peter Navarro, trade adviser to President Trump, said the US-China trade deal was over, prompting a sharp fall in risk assets in trading during the Asian session. He was forced to retract the statement, saying it was taken out of context, before Donald Trump himself quickly tweeted:

The reality is of course the US-China relations are exceptionally poor, but on paper at least, the trade deal lives. The market wouldn’t like fresh open conflict on trade between the two world’s largest economies, as it would make recovery from the pandemic even slower. Navarro may speak the truth, but it’s an inconvenient truth that the White House would prefer to avoid right now. Markets are happy to nod along as long as the Fed has their back.

Overnight, equity markets were whipsawed by the comments from Mr Navarro, but Asian stocks eventually rallied. US stocks edged higher on Monday but stayed well within the recent ranges; futures were all over the place overnight.

Europe opens higher, but second-wave risks cloud outlook

European stocks opened firmer having slipped yesterday, again though sticking to the near-term ranges. Whilst the FTSE is trading in the range and favouring the 61.8% level over the 38.2%, the market has made a series of success lower highs that may indicate bulls are not feeling very confident about recovering the post-pandemic highs any time soon. Rallies are still lacking conviction, but dips are still being bought.

Further increases in cases across big economies make the outlook uncertain. US cases continue to surge, while South Korea says it is in the midst of a second wave that arrived sooner than previously thought. Meanwhile England is set for reopening of pubs, restaurants and more on July 4th.

Pound hits resistance at 1.25, BoE governor Bailey due to speak later

In FX, the pound is higher having apparently found a near-term trough around the 1.2340 area. GBPUSD pushed up to 1.25 but hit resistance here and has retraced a little to the 1.2450 support area on the 50% retracement of the May-Jun rally. Andrew Bailey, the governor of the Bank of England, speaks today after giving some policy hints yesterday in an article in which he said the Old Lady was more likely to reduce its balance sheet before raising rates.

He also was widely reported to have said the Government could have run out of cash had it not been for the central bank, which is patently untrue, since governments which borrow and print their own currency cannot run out of money – what the Bank did was smooth out the functioning of bond and currency markets.  Indeed what Mr Bailey said was not that the government would run out of money – he knows it cannot; his comments were widely misreported and misinterpreted in the press.

Euro spikes on French PMI strength

The euro took off higher after French PMI data went over 50, signalling expansion. The PMIs are a bit of a wonky indicator right now given they are entirely sentiment-based and ask only a narrow question – whether things are better, worse or the same as the prior month.

Given the reopening of the economy in the last few weeks, it would be very strange indeed if the PMIs were not improving – it does mean the economy is out of the woods. EURUSD drove up to 1.13 but hit resistance here and turned back.

Gold eased a little off its highs above $1760 but looks well support around $1750. US benchmark real rates – 10yr Treasury Inflation Protected Securities (TIPS) – fell again, slipping to –0.63%, the lowest level in 7 years. Crude oil was firmer above $40 and managed to make a fresh post-negative-pricing high.

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