European shares stutter after Wall Street’s all time high

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Morning Note

US stocks closed at record highs but European stocks remain a lot more subdued, with the FTSE 100 struggling at the open today after suffering a sharp reversal in the latter part of the session yesterday. Bulls did try to wrestle control from bears in the first hour of trading, but it looks like it will be another volatile day and a lot will depend on how Wall Street performs in the first hour or two of the NY session. House speaker Nancy Pelosi said the Democrats could be willing to agree to a scaled-down stimulus package, which has helped soothe risk muscles. Asian shares were mixed and US futures are flat.

 

Whilst the S&P 500 notched record intra-day and closing highs, the FTSE 100 is tracking close to the lower end of the June range and is –20% YTD. Sterling’s strength has not helped but European equity markets just haven’t matched expectations. The DAX has done better but remains some way off its highs. While we focus on the broad market in the US, the fact is it has been driven largely by a rather narrow group of stocks and the rest of the market has not enjoyed the same bounce. Tech is up 50% for the last 12 months, whilst Energy is down 30 per cent.

 

The question is whether this is early cycle or the death throes of the last bull market. Either you read this as a sign that the market could go a lot higher as we enter a cyclical bull market with lots of cash sitting on the side lines still to pour into value, or you worry that this is a Fed-fuelled tech bubble with forward earnings multiples looking enormously stretched at around 25x on a forward basis. I would be concerned that volatility will increase as we head into the autumn with the election looming and there is at least a chance of a technical pullback for the S&P 500. And how much more stimulus can you throw at this? The Fed has killed the bond market and lifted the boats – but how much more can it do? If the market tests the Fed again, what is left in the tank?

 

For the FTSE 100, the near-term downtrend is starting to approach important support levels.

 

USD can’t catch bid

In FX trading, the US dollar was offered yesterday and was the chief driver of the market, sending the euro to its highest versus the greenback in more than two years. The break above 1.19 for EURUSD leaves bulls in control after two previous attempts failed. EURUSD eased back from these highs today but remains supported above 1.19 with bulls eyeing a recapture of the May 2018 swing high at 1.20.  

 

GBPUSD was a little softer this morning after shooting clear of the 1.32 level yesterday to hit its best level since the election last December. The move clears important technical resistance of the long-term downtrend and opens a path back to 1.35, last year’s peak, with the golden cross (50-day SMA rising through the 200-day SMA) considered a bullish confirmation of the rally. Near term the higher-than-anticipated CPI inflation reading this morning has not been able to lift the pound, although it ought to help quell immediate speculation the Bank of England will resort to negative rates. 

 

Meanwhile the pound remains exposed to significant headline risks this week. Brexit talks have not gotten off to the best start as the EU rejected British proposals for truckers’ access to the continent. I would anticipate that the longer this drags the more we see pressure come back on GBP. FOMC minutes tonight will be watched for any signs the Fed feels the need to lean even harder on rates. For now the dollar can’t seem to catch a bid with the dollar index now barely holding the 92 handle and the last line of defence before a return to the 80s sitting at 91.60 (the 78.6% retrace of the two-year uptrend) now firmly in view. 

Oil prices slip ahead of OPEC+ meeting

Crude prices were a little lower this morning ahead of an OPEC+ meeting to review after touching a 5-month high yesterday on improving risk sentiment as US equities rose, whilst the softer dollar is offering ongoing support to commodity markets. 

 

OPEC and allies are likely to stick with 7.7m bpd supply cut – what we don’t know is whether the demand side really picks up into the back end of the year. On that front a lot will depend on the containment and control of the virus in Europe – rising cases raises real risk that hamstrung governments simply revert to a wide lockdown and restrict movement again. Airlines and travel stocks will face a tough time. 

 

Gold was softer after breaking back above $2k in yesterday’s volatile session. Near-term support appears to rest on the 23.6% retracement around $1980. Whilst bulls are still just about in control, their momentum is not what it was and we would prefer to see the next swing clear $2015 for the bullish trend to be fully reasserted. A further corrective move lower should still be considered a real possibility.