Week Ahead: Markets brace for ugly earnings season

Week Ahead

Coming up this week – just how bad will the Q2 corporate earnings season be and will central banks in Europe and Canada increase stimulus?

Q2 earnings season

Corporate earnings season gets underway on Wall Street as major companies report their Q2 numbers. 

Expectations are very low with total S&P 500 earnings set to be -44.4% on -10.9% lower revenues.  

Bank of America expects S&P 500 companies exceed consensus EPS estimates by 8% after Wall Street lowered profit expectations by around 40% heading into the Q2 season. Analysts have lowered their Q2 bottom-up EPS estimate by 37% over the quarter meanwhile, suggesting that there is a very easy bar for corporates to clear. 

But the market remains forward-looking and therefore with a lot of bad news baked in already, investors will be keen to see what the outlook is for the rest of the year – does corporate America see a rebound? If they do it could bode well for equity indices. 

This week sees Wall Street’s big banks report earnings, with JPMorgan, Wells Fargo, Morgan Stanley and Goldman Sachs all due to update the market.

EU Summit & ECB meeting

EU leaders will meet physically in Brussels July 17th and 18th to discuss the recovery plan to respond to the COVID-19 crisis and a new long-term EU budget. This may be a pivotal moment in shaping the EU’s economic response to the pandemic and hammer out agreement over the proposed €750bn rescue package. Several member states – led by the ‘Frugal Four’ but by no means restricted to them – have expressed concerns about the fund and the plans for the EC to borrow funds directly to bankroll the fund.  

Government borrowing costs have returned to pre-pandemic levels, indicative of the success the ECB has had in underpinning financial markets. However, failure to get agreement at the European Council meeting this week could see yields rise and spreads widen again, which may put pressure on the euro. If German chancellor Angela Merkel manages to get the agreement sealed, whether by strong arming or sweet talking, the euro has some upside to explore. 

Christine Lagarde meanwhile has indicated the ECB will hit the pause button on its easing programme, saying the European Central Bank has ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. This should put to rest any thoughts the central bank would announce fresh easing measures at this week’s meeting. Ms Lagarde wants to stress that it’s time for the EZ member states to step up and sort out the fiscal support rather than leaning ever more on the ECB and lower rates. 

Bank of Canada

The Bank of Canada is expected to leave interest rates on hold at 0.25% when it meets on Wednesday, so we’ll be looking to get an update on how the central bank views the path of economic recovery.  

Business sentiment in Canada is “strongly negative” a Bank of Canada survey showed last week, though half the companies polled expect sales to return to pre-pandemic levels within 12 months. “Softer sales expectations are widespread across all regions and sectors, with firms often expressing a high degree of uncertainty about consumer behaviour and future demand,” the central bank said. 

New governor Tiff Macklem expects growth to return in the third quarter but expects a ‘bumpy’ ride for the economy. In his first speech as governor last month Mr Macklem stressed that the BoC would not take its benchmark rate negative. 

How quickly is the global economy recovering?

Various data releases will help show how quickly economies are recovering. Britain’s latest GDP report is due up on Tuesday alongside Chinese trade figures. Watch for Australian employment data and Chinese GDP, industrial production and fixed asset investment figures on Thursday. On Friday the UK retail sales numbers for June are expected to show more improvement after rebounding sharply in May. Sales rose 12% in May, after plunging 18.1% in April. As ever we will be watching for the US weekly jobless claims numbers on Thursday, whilst the Philly Fed manufacturing index and University of Michigan consumer sentiment report are both due out later in the week.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
11.00 UTC 14-Jul Reading Candlestick Charts: Trading Patterns and Trends
From 15.00 UTC 14-Jul Weekly Gold, Silver, and Oil Forecasts
10.00 UTC 15-Jul The Marketsx Experience: Platform Walkthrough
17.00 UTC 15-Jul Blonde Markets

 

Top Earnings Reports this Week

Here are some of the biggest earnings reports scheduled for this week:

13-Jul PepsiCo – Q2 2020
14-Jul JPMorgan Chase & Co – Q2 2020
14-Jul Wells Fargo & Co – Q2 2020
14-Jul Citigroup – Q2 2020
15-Jul UnitedHealth – Q2 2020
15-Jul Goldman Sachs – Q2 2020
15-Jul US Bancorp – Q2 2020
15-Jul PNC Financial Services Group – Q2 2020
15-Jul eBay – Q2 2020
15-Jul Bank of New York Mellon – Q2 2020
16-Jul Morgan Stanley – Q2 2020
16-Jul Bank of America Corp – Q2 2020
16-Jul Abbott Laboratories
16-Jul Microsoft – Q4 2020
16-Jul Johnson & Johnson – Q2 2020
16-Jul Netflix – Q2 2020
16-Jul AMD – Q2 2020
17-Jul BlackRock – Q2 2020

 

Key Events this Week

Watch out for the biggest events on the economic calendar this week:

03.00 GMT 14-Jul China Trade Balance
06.00 GMT 14-Jul UK Monthly GDP / Manufacturing & Industrial Production
09.00 GMT 14-Jul Eurozone & Germany ZEW Economic Sentiment
12.30 GMT 14-Jul US CPI
03.00 GMT 15-Jul Bank of Japan Rate Decision, Statement, Outlook Report
14.00 GMT 15-Jul Bank of Canada Rate Decision
14.30 GMT 15-Jul US EIA Crude Oil Inventories
22.45 GMT 15-Jul New Zealand CPI (QoQ)
01.30 GMT 16-Jul Australia Employment Change / Unemployment Rate
02.00 GMT 16-Jul China GDP
11.45 GMT 16-Jul ECB Rate Decision
12.30 GMT 16-Jul US Retail Sales / Unemployment Claims
14.30 GMT 16-Jul US EIA Natural Gas Storage
14.00 GMT 17-Jul Preliminary University of Michigan Sentiment Index

Stocks choppy after sharp risk reversal, gilt yields strike fresh lows

Morning Note

Stocks continue to chop around their June-July ranges after risk sentiment rolled over at the start of yesterday’s US session. Surging Covid cases, hospitalizations and deaths in several US states continues to weigh on risk sentiment, Donald Trump was dealt a blow by the Supreme Court, and Joe Biden – who may well become the next president – said he would end the era of ‘shareholder capitalism’.

Around 3pm yesterday we saw a sharp reversal in risk appetite as stocks, bond yields and oil fell and the dollar rallied. California, Texas and Florida reported their biggest one-day increase in Covid-19 related deaths. Stocks hit the lows after Florida reported a spike in Covid-related hospitalizations, but recovered somewhat after Dr Fauci, director of the National Institute of Allergy and Infectious Diseases, revealed Moderna’s coronavirus vaccine candidate would enter phase 3 trials soon.

Supreme Court rules on Trump tax returns, Biden announces economic plan

The Supreme Court ruled Donald Trump’s tax returns should be seen by the Grand Jury, but it threw out rulings that allowed Democrat-led Congressional committees to obtain Trump’s financial records. Although this means further litigation, it should mean the documents are not a factor in the election.

Meanwhile, Joe Biden launched his $700bn economic plan by taking aim at Wall Street a threat to ‘end to the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholder’. Whilst no Bernie Sanders, there is little doubt that Biden will raise taxes and regulation risk – equity markets need to start to price in the risk better and there are signs that some investors already are.

Investors need to be wary of a Democrat clean sweep of the House, Senate and White House, which could greenlight some pretty aggressive redistributive policies. ‘During this crisis, Donald Trump has been almost singularly focused on the stock market, the Dow and the Nasdaq. Not you. Not your families,’ Biden added. After 2008 it was fashionable to bash the banks, now all corporate America is fair game if they are not woke enough. ‘Wall Street bankers and CEOs didn’t build America,’ Mr Biden said.

Europe opens weak, turns green

European shares were choppy after Asian markets fell and China’s equity rally finally ran out of steam. The FTSE 100 fell under 6,000 this morning before paring losses, returning to the low end of its June range. After a weak open, European indices were turning green after the first hour of trade.

The S&P 500 struck a low at 3,115 yesterday before closing down 0.5% at 3,152, flat for the week. Energy stocks led the drop, declining 4% as oil prices sank. Futures are lower and indicate a weaker open at the 61.8% retracement of the June-July range. The Nasdaq rose 0.6% to a fresh record as the tech sector continued to be the only real area of safety.

US unemployment numbers were a little better than expected but continue to show just how long the road is ahead. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.

Treasury yields fell, with US 10s back to 0.58% having notched a record low yield on an auction. UK 2- and 5-year gilt yields have hit a record low this morning, following Eurozone and US yields lower. Investors are showing no fears that massive issuance is going to force up borrowing costs as long as central banks remain in full support mode.

WTI through trend support as risk appetite cools

Crude oil fell sharply with stocks as risk rolled over. WTI (Aug) broke down through the trend support and may push lower. From a technical perspective we can start to consider completion of the head and shoulders reversal pattern and look for the move to head towards the neckline around $35. The IEA’s July report this morning suggested oil demand will pick up in the second half and that the worst of the demand destruction is behind us.

The IEA said oil demand this year will average 92.1m bpd, down by 7.9m bpd versus 2019, which is a slightly smaller decline than forecast in the April report, mainly because the decline in the second quarter was less severe than expected. But at this point it remains very hard to say how demand will recover longer-term given we do not know how the virus will progress nor how governments and citizens will respond – at least it seems negative prices were only a blip.

Fresh shutdowns in the populous Sun Belt states remains the worry, albeit we did see a decent draw on gasoline stocks last week, according to the EIA. Nevertheless the IEA noted that the accelerating number of Covid-19 cases is ‘a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside’.

Elsewhere, gold fell with risk assets, with the near-term pullback finding support at $1796 and should look for consolidation around the $1800 level. The outlook for gold remains constructive and we should expect lots of pullbacks along the way – nothing goes up in a straight line, and gold is particularly prone to these tactical retreats. In FX, the dollar rallied on the broad drop in risk sentiment. GBPUSD moved down to test near term trend support formed by the bullish channel. EURUSD pulled back from highs at 1.1370 to chop around the 1.1270 region.

Risk rolls over in early US trade

Commodities
Equities
Forex

Risk appetite has well and truly rolled over. US stocks moved lower in the first hour of trade and continued to leg it south, while oil prices swan dived amid a very messy picture for global markets on Thursday afternoon.  Walgreens Boots Alliance shares dragged on the Dow as the stock fell 9% after reporting weaker-than-forecast earnings amid some serious weakness in the UK. The dollar found bid as risk appetite turned south, hurting FX majors like GBPUSD and EURUSD.

Supreme Court rules on Trump tax records

Risk sentiment was a bit shaky anyway but it seemed to take a hit as Donald Trump suffered a defeat at the hands of the Supreme Court – not his favourite institution of late. The Supreme Court ruled Donald Trump’s finances and tax returns are fair game and should be seen by the Grand Jury, but it threw out rulings that allowed 3 Democrat-led Congressional committees to obtain Trump’s financial records.

This ruling relates to alleged hush money to women who have claimed to have had sexual relations with the president – a story Mr Trump said was irrelevant. That may be so, but his tax returns may interest voters. Whilst US legal proceedings are far from my area of expertise, I understand that if only the Grand Jury sees the documents it is very unlikely that they would become public records, which could have had serious repercussions for the election. Meanwhile Treasury Sec Steve Mnuchin was also on the wires, saying the Federal government would not bail out states that had been ‘mis-managed’.

Stocks, commodities lower despite solid US jobs figures

The move lower came despite some decent jobs numbers. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.

So, the picture in the US labour market is maybe not quite as bad as feared, but still horrendous. There is clearly a long way to go before getting back to pre-pandemic levels. Moreover, as the number of covid-19 cases rises across most US states, the numbers may well start to improve a slower rate.

At send time indices were at session lows, making new lows for the week – we could see further declines as risk appetite appears to have rolled over today. As of send time the Dow was down over 1.8% to 25,559 at the session low, whilst S&P 500 was down 1.5% at a low of 3,120, making it down for the week.

The dip on Wall Street added to pressure on European equities with the FTSE 100 down over 1.7% to a low at 6,046, taking it negative for the week. Having been bid up on Monday towards the higher end of the recent ranges for little reason we are seeing indices pull back closer to the middle of the June ranges – no conviction trade yet.

Dollar firms against pound, euro in risk-off trade

Meanwhile, sterling eased back as risk appetite soured and Michel Barnier said talks this week confirm that significant divergences remain between the EU and the UK. Sterling pulled back from its highs at the top of the new bullish channel on the news as well as the general risk-off tone but remains in a solid uptrend with GBPUSD ably supported above 1.26. Elsewhere in FX the risk rollover boosted the USD so EURUSD pulled back under 1.13.

WTI (Aug) fell sharply from around $40.50 a low under $39.30 in a very swift and long-awaited reversal – albeit probably a day late given yesterday’s inventory build. Expectations of a slower reopening in a number of US states is a worry for near-term sentiment and I have been calling for a reversal based on the technical set-up, which could see a return to the neckline at $35.

Stocks tread water, US jobs numbers on tap

Morning Note

Caution is the order of the day. European stocks are mixed after falling for the second session in a row on Wednesday. Asian share ticked up overnight, with China continuing to charge. Wall Street rose on Wednesday but overall the major indices are still well within their June trading ranges.

Nine-year high for gold, Fed cautious on economic outlook

Gold broke out to its highest level in nine years, breaking free from the $1,800 psychological resistance to clear $1818 at one point. The path is open to further gains, albeit we have just seen real interest rates come back in a touch. Nevertheless, the outlook for gold remains constructive – lower real yields, worries about inflation emerging down the line, and broader economic uncertainty all combine for a perfect environment for gold bugs.

Fed officials are increasingly sounding cautious. Richmond Fed President Thomas Barkin said whilst businesses might have had decent order books and pipelines of work to keep them going, new orders are not coming on stream fast enough. Fiscal payments are coming to an end and it is not clear what will replace them. The US may well need to extend and pretend.

Boston Fed president Eric Rosengren said: ‘I do expect unfortunately that the economy is going to remain weaker than many had hoped through the summer and fall.’ US cases continue to soar, with the country again reporting its biggest one-day jump in cases, choking the reopening and recovery process at birth.

US jobless claims on tap

The US weekly unemployment claims data will be closely watched following the big nonfarm payrolls report last week. Initial claims are seen at 1.375m, with key continuing claims down to 1.875m. Whilst these numbers have been coming down, they haven’t been contracting at a rate fast enough to warrant great optimism.

Data from Japan at first looked encouraging but masked some nasty surprises. Core machinery orders, a volatile leading indicator of activity, rose 1.7% in May after a 12% drop in April, and ahead of the 5% decline expected. However, the 17.7% rise in orders for non-manufacturers was offset by a 15.5% decline in manufacturers’ orders and 18.5% drop in overseas orders.

Dollar weakens, WTI oil eases back after breaching $41

In FX, the dollar is being offered. GBPUSD cleared resistance and moved above 1.26. Resistance 1.2690, the Jun 16th swing high, is the next target for bulls. EURUSD has cleared 1.13 but pulled back sharply after running into resistance at 1.1370. Eurogroup members to vote on a new president today ahead of the key summit next week at which the EU needs to hammer out agreement on the €750bn rescue fund.

Crude oil pushed higher before pulling back. WTI (Aug) moved above $41 but pared gains and traded around $40.70 at send time. The EIA said US crude inventories rose by 5.7m barrels vs expectations for a draw of around 3m barrels. But the data was not as bearish as it appeared at first glance – stockpiles were up largely on higher imports, whilst gasoline inventories fell by almost 5m barrels, a good sign Americans are back on the road. Refining activity rose to a 14-week high.

Natural gas update – EIA sees rising prices

Commodities

Warren Buffet just made a $10bn bet on natural gas after prices hit a 25-year low. In the long term, he seems to think gas will play a key part in the energy mix. But where will natural gas prices head in the medium-term?

In its latest Short-Term Energy Outlook, the US Energy Information Administration argued that prices could rise further over the coming months.

The EIA expects US natural gas consumption will decline by 3% in 2020, largely due to lower consumption in the industrial sector because of lockdown efforts and ensuing reductions in economic activity, which will mean working natural gas in storage could hit record levels by October.

“Forecast US natural gas consumption declines by 5% in 2021 as a result of expected rising natural gas prices. The rising prices will reduce the use of natural gas in the electric power sector, which will more than offset increases in natural gas consumption in the industrial, commercial, and residential sectors,” the EIA said.

Whilst the spot price briefly hit a 25-year low before the last contract expired, average prices also very weak on an historic basis. The Henry Hub natural gas spot price averaged $1.63 per million British thermal units (MMBtu) in June, which the EIA notes was the lowest inflation-adjusted price since at least 1989. The EIA said it expects falling production to put upward pressure on natural gas prices through the end of 2021, forecasting Henry Hub spot prices to average $1.93/MMBtu in 2020 and $3.10/MMBtu in 2021.

US oil inventories preview: EIA raises WTI price forecast

Commodities

US crude oil inventories are expected to see a draw of 3.2m barrels in the week to July 3rd, whilst gasoline stocks are expected to drop by 1.2m barrels.

Yesterday the American Petroleum Institute (API) reported a build in US crude stocks of 2m barrels, whilst gasoline stockpiles fell by 1.8m barrels. Crude at the Cushing, Oklahoma, hub rose 2.2m barrels.

Meanwhile the U.S. Energy Information Administration presented a more bullish fundamental case and raised its West Texas Intermediate (WTI) price forecast for 2020 to $37.55 a barrel, up almost 7% from the June forecast.  2021 prices are forecast to average $45.70 in 2021, a gain of 4% from before. The EIA said changes in supply and demand have shifted global oil markets from an estimated 21 million barrels per day of oversupply in April to inventory draws in June.

The EIA also said that it expects high inventory levels and surplus crude oil production capacity to cap the upside for oil prices in the coming months. However, as inventories decline into 2021, the upward pressure on prices should increase.

Other highlights from the EIA Short Term Energy Outlook:

  • Brent crude prices forecast at $40.50 in 2020 and $49.70 in 2021
  • Average US crude oil production to fall in 2020 and 2021 as forecast WTI spot prices remain less than $50/b through 2021. EIA forecasts that U.S. crude oil production will average 11.6 million b/d in 2020 and 11.0 million b/d in 2021.
  • US liquid fuels consumption will average 18.3 million b/d in 2020, down 2.1 million b/d from 2019. Declines in US liquid fuels consumption vary across products. From 2019 to 2020, EIA expects jet fuel consumption to fall by 31% and gasoline and distillate fuel consumption to both fall by 10%.

Crude oil has been stuck in a tight range around $40 in recent days but continues to exert an upwards bias despite the potential head and shoulders reversal pattern evident on the chart.

Investors eye UK mini budget, gold heads to $1800 as stocks slip again

Morning Note

Stock markets remain in choppy trading ranges. The optimism that fuelled the rally at the start of week has fizzled out, leaving indices back towards the middle of the June range and back close to where they finished up at the end of last week. Investors continue to look at soaring case numbers on the one hand and on the other the pace of recovery and massive stimulus which has already been administered.

Asian markets slipped, albeit China stood out as it continued to rally on some good stoking by the state-run press. The ASX fell 1.5% as investors reacted to the lockdown in Victoria. European stocks followed suit and were softer on the open on Wednesday. The FTSE 100 pulled back further below 6200 where it has found some degree of support at 6153 on the 38.2% retrace of the pullback in the second week of June that has formed that range of the last month and a half.

Gold climbs towards $1800, US yields hit fresh lows

Treasury yields slipped on a broad risk-off mood. US 10s went to 0.655% which left 10yr TIPS – our favourite gold indicator – at fresh seven-year lows at –0.78%. This gave further succour to the gold bulls and lifted prices to fresh seven-year peaks above $1797 and it looks like $1800 can be taken out. The gold bull thesis rests not only on the requirement for safe assets given the economic uncertainty, but also longer term on fears of a surge in inflation caused by the massive increase in the money supply caused by central banks. In large part due to the corresponding fiscal actions, unlike the QE that occurred after the financial crisis, this time the excess cash is not going to get lost in the banking sector.

While yields dipped and gold is at multi-year highs, the prospect of more stimulus may keep markets relatively buoyant for the time being. The worry is that as the support packages roll off, particularly the kind of financial aid for employees from the likes of the UK’s furlough scheme, the pace of recovery slows drastically. The economic data could really start to crunch as temporary layoffs become permanent and the pressure for governments to continue to ‘do whatever it takes’ will increase.

UK coronavirus ‘mini budget’ on tap

Today, Britain’s chancellor Rishi Sunak will respond with a ‘mini budget’, to be delivered at 12:30 BST after PMQs. This will aim to shift the support on offer from the emergency to the more lasting with measures such as cash for training young people to prevent the risk of mass youth unemployment, a stamp duty holiday to goose the housing market, a maybe a VAT cut to help the hospitality sector. Housebuilders ought to be among the main beneficiaries of the budget, but shares in Barratt and Taylor Wimpey slipped this morning after rallying this week ahead of the statement. Meanwhile Marston’s and Mitchells & Butlers shares plunged around 5% this morning ahead of the statement which may not have as much for the hospitality industry as some had hoped.

Sterling held gains above 1.2540 ahead of the statement, having gained sharply yesterday arguably on some hopes that the budget will get the economy moving a bit quicker. GBPUSD remains well within the recent range and shows little signs right now of mounting a serious ascent to 1.30, however having created a bottom at 1.2250 the recent move higher can continue and the bullish bias persists – the Jun high at 1.28 is the key.

A huge part of the problem facing investors in this market is figuring out what the data is telling us. As noted many times in recent weeks, the economic data is noisy and difficult to interpret because the speed and magnitude of the collapse was like nothing we have ever seen. For example, France’s statistics body, Insee, says the French economy will rebound 19% in Q3, but still be down 9% in 2020. This points to the difficulty in reading too much into the easy part of the recovery process as lockdowns end. The longer-term recovery to activity levels comparable with 2019 will take a lot longer.

Key Eurogroup vote on new president tomorrow

Eurogroup members to vote on a new president tomorrow. The vote comes at an important moment for the Eurozone as it tries to agree on financial aid package as part of budget talks. The summit of July 17th and 18th is the date for your diaries.  Christine Lagarde said the ECB may hit the pause button on its easing programme, telling the FT that the ECB has ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. This should put to rest any thoughts the central bank would announce fresh easing measures at its meeting next week. Ms Lagarde wants to stress that it’s time for the EZ member states to step up and sort out the fiscal support rather than leaning ever more on the ECB and lower rates.

Meanwhile, the White House is said to be looking at ways to undermine the Hong Kong dollar peg to the US dollar as a potential way to hit China. If such a tactic were to be deployed, it could raise risks for Hong Kong banks to access dollars and we could feasibly see ripple effects across the FX space – albeit I don’t see the US embarking on any kind of outright manipulation to weaken or strengthen the dollar. It’s probably not a tactic that will be considered seriously or pursued by the administration, but it’s one to watch.

Oil steady after API data shows oil storage build, gasoline draw

Crude oil (WTI for August) was steady still around the $40 handle. API data showed a build in US crude stocks of 2m barrels, whilst gasoline stockpiles fell by 1.8m barrels. Crude at the Cushing, Oklahoma, hub rose 2.2m barrels. Meanwhile the U.S. Energy Information Administration presented a more bullish fundamental case and raised its WTI price forecast for 2020 to $37.55 a barrel, up almost 7% from the June forecast.  2021 prices are forecast to average $45.70 in 2021, a gain of 4% from before. The EIA said changes in supply and demand have shifted global oil markets from an estimated 21 million barrels per day of oversupply in April to inventory draws in June. EIA crude oil inventories later today are forecast to see a draw of 3.2m barrels, but the consensus estimate has been wide of the mark for several weeks now.

Equities feel the hangover

Morning Note

Equity markets look a tad bleary-eyed and hungover this morning after a bit of binge. Call it exuberance, but the strong rally in China stoked by the state-run press left markets with only way to travel on Monday and now the price has to be paid. Meanwhile we continue to monitor the rising cases in the US and an emerging spat between the UK and China over Hong Kong and Huawei which simply evinces the fact that Covid is reshaping the world.

European stocks handed back some of Monday’s gains on the open on Tuesday after the strong start to the trading week pushed the FTSE 100 back above 6200. Energy and financials led the fall but all Stoxx 600 sectors dropped in the first hour of trade. Tokyo and Hong Kong fell, but shares in China continued to rally on very high volumes.

Nasdaq hits fresh record high, but is a correction incoming for Wall Street?

Wall Street also rallied after the bump up in China, with the Nasdaq hitting a fresh all-time high, but yesterday had a feel of a frothy move based on nothing but fumes. The put/call ratio for the S&P 500, which reflects market positioning and sentiment, has fallen to levels that have in the past indicated a correction is in the offing. Speculators have also lately aggressively cut their net long positioning on S&P 500 futures.

The upcoming earnings season will be crucial, and investors may see earnings estimates reduced given that many companies simply scrapped guidance, which could call for a rethink of valuations. Indices continue to track the ranges of June, so until we break out in either direction the pattern is one of a choppy but sideways market as investors try to figure out the balance on offer between reopening & stimulus vs cases & permanent economic damage from falling confidence and increased saving.

Recovery is happening, but is it fast enough: German industrial production rose 7.8% in May, but the figure was short of the 11% that was expected. Meanwhile, BMW Q2 sales in China rose from the same period a year ago, which might be down to the pent-up demand from the shutdown in the country in Q1, but nevertheless indicates a decent pace of recovery in the world’s second largest economy.

The UK’s Halifax mortgage survey showed prices fell for a fourth month in a row in June, but activity levels are rebounding, with enquiries up 100% from May. It’s too early to tell if this rebound can be sustained – a truism across the economic data prints we see right now.

Fed’s Bostic cautious over US recovery

Meanwhile we got another dose of salt from Raphael Bostic, the Atlanta Fed president, who warned of signs the US recovery is levelling off. Indeed, the headline nonfarm payrolls number last Thursday masks a lot of ills. Not least of which, permanent job losses are on the rise: 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.

Additionally, the data for the June report was collected largely before the spike in cases in several of the big economically important states like Texas and California. Dr Fauci said the US is still ‘knee-deep’ in the first wave.

RBA holds rates, notes increased uncertainty on rising Covid-19 cases

The Reserve Bank of Australia left interest rates on hold at the record low 0.25%, but noted households and businesses are worried about the state of the economy after the jump in cases in Victoria raised doubts about the country’s handling of the outbreak, which had been assumed to be as good as New Zealand.

“The downturn has been less severe than earlier expected,” RBA governor Philip Lowe said in a statement, but added that “uncertainty about the health situation and the future strength of the economy is making many households and businesses cautious, and this is affecting consumption and investment plans”. Scott Morrison’s government will deliver a statement on July 23rd outlining further support on the fiscal side.

Gold still bullish, EUR and GBP drift lower

Elsewhere, gold’s bullish bias remains intact as it consolidates around $1780 and may be preparing for a fresh run towards $1800 – first up it needs to clear the seven-year highs at $1789. WTI (Aug) is steady at $40 for now and in FX we see the majors still trading within recent ranges as the dollar recovers a little from Monday’s risk-on sell-off.

EURUSD failed to break the June swing high at 1.1345 yesterday and has pulled back towards the middle of the bullish pennant. GBPUSD has also drifted lower after several failed attempts in the last session to clear the 1.2520 resistance, finding some immediate support on the 200-period SMA on the 4-hr chart. Sterling has that RoRo feel.

Banks lead European stocks higher

Morning Note

Asian shares soared overnight on Monday, lending a positive start to the European session as equities rode a broad risk rally. The very strong US nonfarm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus.

Hong Kong rose 4%, Tokyo 2%, while shares on mainland China were up around 5% on, among other things, some bullish commentary in state press. Shanghai shares jumped 5.7%, the best one-day gain in five years.

It looks like local investors are chasing the market and the spill-over has lifted the boats across Asia. China’s rally sparked a broad risk-on move. Escalation of US-China tensions don’t seem to be a major worry.

Bank stocks surge as Europe opens higher

European shares took the baton and opened roughly 2% higher in early trade on Monday led by a surge in bank stocks. HSBC rallied 6% apparently on the China trade read across, but elsewhere we saw broad gains as investors looked to new leadership at Lloyds and Commerzbank, whilst hopes of a fiscal lift in Europe may be a factor. Broadly it looks like the Chinese rally has lifted cyclicals like banks and autos.

Eco data was better but not as good as hoped – German factory orders jumped 10.4% in May, although the rebound was less impressive than the 15% expected. Orders remain almost a third below where they were a year before. Bank of France Governor Francois Villeroy de Galhau said on Sunday the country’s economy was bouncing back quicker than expected.

Meanwhile, Andrew Bailey, the governor of the Bank of England, has written to UK banks warning of the operational challenges of negative rates (new computer systems, lower net interest margin). This could be taken either way; either it’s an explicit message to get ready, or it’s way of saying to them not to worry because we know it’s a massive pain. The letter said negative rates remain “one of the potential tools under active review” should the Bank think more stimulus is required.

The rally left the DAX close to the top of the June range, trading above 12,800. The FTSE is close to the 61.8% retrace of the pullback in the second week of June. US futures point towards strong gains when Wall Street reopens after the three-day weekend, with the S&P 500 moving clear of the 78.6% retracement. June peaks are starting to come into view and will be a key test for whether this rally has further to run or whether it’s time for a pullback.

Bets of further stimulus boost stocks

Whilst markets face a wall of worry, investors are confident of getting a leg up from further stimulus. Britain’s chancellor Rishi Sunak will set out a mini-Budget this week focused on jobs. A meeting of Eurozone finance ministers on Thursday will set the tone for the key July 17th-18th summit. Whilst the various countries disagree over the composition of grants and bailouts, on conditionality and over how the funds are divided up, Germany’s Angela Merkel is bound to make sure that a deal is done: the squabbling needs to stop.

Meanwhile the US Congress is set to work on a second stimulus bill this month. At the same time, Covid-19 cases continue to soar – markets are getting used to the numbers – but the pace of recovery in the US will flatten if rising cases means states re-impose lockdown restrictions. As noted last week, the headline number in the jobs report masked some ills, so we will again be very much focused on the weekly initial and continuing claims numbers this week.

Dollar softens, oil edges higher, Buffett bets on natural gas rebound

Elsewhere, the broad risk rally sent the dollar lower, with DXY at 96.80. Sterling pushed a little with GBPUSD back about 1.25, looking to break last week’s peak a little short of 1.2530. EURUSD was a whisker short of 1.13, entering the resistance formed by the July 2nd peak. Clearing this opens up the path to the Jun 23rd swing high at 1.1350. Market positioning remains quite aggressively short, with net speculative positions on the euro the most bearish in three years.

Crude oil was a little higher, with WTI (Aug) just about nudging the $41. Gold is steady at $1776, with the latest CFTC figures showing speculative net longs at the highest in two years. Finally, Warren Buffett is making a $10bn bet on natural gas prices rebounding – the veteran investor thinks the market, which hit a 25-year low last month, has bottomed, making assets cheap and is on course for a rebound.

Week Ahead: Pressure builds on RBA to go negative, high hopes for US ISM

Week Ahead

Coming up this week – can Eurozone retail sales follow in Germany’s forecast-shattering footsteps; will the US ISM Nonmanufacturing Index return to growth against expectations, and is the pressure mounting on the RBA to push interest rates into negative territory? 

Read on for your full breakdown of the key events to watch this week.

Eurozone confidence and retail sales 

Investor confidence in the Eurozone improved last month, although the Sentix index missed expectations with a rise from -41.8 to -24.8 against forecasts of a rebound to -22.5. 

It still represented a solid rebound after May’s index barely moved, and participants reported a much more positive outlook than before. Since then we’ve had a lot of positive data in terms of PMIs and forecast-crushing German retail sales, which grew 13.9% on the month in May, against expectations of 3.9%, which could prompt another uptick in confidence when the next reading is published on Monday. 

Eurozone retail sales figures are also due on Monday. Forecasts are for growth of 7.8% on the month after May’s -11.7% decline. 

Surprise return to growth on the cards for US ISM Nonmanufacturing Index? 

Last week’s US ISM Manufacturing Index smashed expectations with a surprise leap back into growth territory. Economists had expected the index to recover to 49.5, just shy of the 50 level that shows no change, but the index instead jumped to 52.6, with the majority of industries surveyed reporting expansion, in particular improvements in employment, production, and new orders. 

This week’s nonmanufacturing index is predicted to improve from 45.4 to 49, but after the strength seen in the manufacturing counterpart, markets will be hoping to see a reading above 50 here as well to reinforce hopes of a quick recovery for the US economy. 

Markets bet on Reserve Bank of Australia rate cut 

The Reserve Bank of Australia held interest rates at 0.25% during its last policy meeting. ASX 30 Day Interbank Cash Rate Futures show the market is pricing in a 60% chance that the RBA will cut rates to 0% during the next board meeting. Doing so would effectively take rates negative, which policymakers have been reluctant to do. 

However, pressure is mounting after localised spikes in coronavirus infections forced the government to lockdown parts of Melbourne. A further spread of infections could hamper Australia’s economic recovery, forcing the RBA to unleash more stimulus. 

Corporate earnings: Paychex, Walgreens Boots Alliance 

Paychex is expected to report earnings of $0.61 per share for the quarter ended May 2020, down -3.1% on the same period the previous year. Revenue is projected -7% lower compared to Q4 of the previous fiscal year at $911 million. The stock has moved largely in tandem with the S&P 500 all year, although since the March selloff Paychex has struggled to recoup losses as quickly, leaving it down -10% on the year, compared to -4% for the S&P 500. 

Walgreens Boots Alliance stock is up 11% from its year-to-date low, but remains over 30% lower since January 1st. According to research from Thompson Reuters, the stock has an average “Hold” rating amongst 21 analysts – you can download the full report from the Key Statistics tab in the platform. Q3 earnings are due ahead of the market open on July 9th. 

Weekly US jobless claims remain in focus 

US weekly jobless claims figures have proven stubbornly high over the past few weeks, despite having come down significantly from the record high of 6.6 million reported on April 5th. However, while initial claims have continued to disappoint forecasts, the number of continuing claims has come down a bit more than expected – although at 19.5 million it remains remarkably high and shows just how far there is to go to restoring anything like normal levels of employment. 

The latest figures are due on Thursday.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
20.00 UTC 06-Jul 10 Trading Rules to Live By
From 15.30 UTC 07-Jul Weekly Gold, Silver, and Oil Forecasts
17.00 UTC 08-Jul Blonde Markets
09.00 UTC 09-Jul How to Use the 200-day Moving Average Indicator

 

Key Events this Week

Watch out for the biggest events on the economic calendar this week:

08.30 UTC 06-Jul Eurozone Sentix Investor Confidence Index
09.00 UTC 06-Jul Eurozone Retail Sales
14.00 UTC 06-Jul US ISM Nonmanufacturing
14.30 UTC 06-Jul CA BOC Business Outlook Survey
04.30 UTC 07-Jul RBA Official Cash Rate Decision
06.00 UTC 07-Jul German Industrial Production
Pre-Market 07-Jul Paychex – Q4 2020
After-Market 07-Jul Levi’s – Q2 2020
05.00 UTC 08-Jul Japan Eco Watchers Survey
14.30 UTC 08-Jul US EIA Crude Oil Inventories
08-Jul FirstGroup – Q4 2020 (Preliminary)
Pre-Market 09-Jul Walgreens Boots Alliance – Q3 2020
12.30 UTC 09-Jul US Weekly Jobless Claims
14.30 UTC 09-Jul US EIA Natural Gas Storage
12.30 UTC 10-Jul Canada Employment Change & Unemployment Rate

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