Primark sales recovering, sterling eyes Brexit talks

Morning Note

Is there a better guide to the health of the high street than Primark? The cheap-as-chips clothing jumble sale is about as good a barometer as any for what’s happening, with Next going increasingly online and M&S not what it once was in clothing and more of a grocer than ever. Primark also doesn’t do online so we get an unmuddied view.

So, it’s good news that AB Foods reports Primark sales have bounced back strongly since reopening. Sales to the year-end since reopening are due to hit £2bn, but in the UK sales are still likely to be down 12% from last year on a like-for-like basis. Shopping centre and regional high street stores are trading broadly in line with last year.

Large destination city centre stores, which rely on tourism and commuters, have seen a significant decline in footfall. Exclude the big 4 city centre stores and the LFLs are only -5%. Perhaps there is life in the British high street after all? A lot of this will be pent-up demand, but Primark’s low-pricing model makes it very resistant to cyclical downtrends.

ABF shares rose 4% at the open before paring gains to trade around 2% higher.

European stocks move higher, US markets shut

Stocks in Europe were broadly higher on Monday after a pullback at the end of last week seemed to run out of steam. US markets are shut for Labor Day, which will keep volumes thin. The FTSE 100 notched its weakest close since May on Friday, a whisker under 5,800. Early trade on Monday took the index back to the 38.2% retracement at 5850 and we are looking for this level to hold for the market to build any upside momentum.

Tech shares led the worst two-day decline for US stocks in some time, but the bulls fought back late in the day on Friday. The S&P 500 closed down 0.8% at 3,426 but this was some 75 points above its lows. Futures show weakness though at 3,400 on our indicative cash market.

Vix futures (Sep) have come down sharply from the highs hit last week in the depths of the sell-off, but are holding the rising trendline and the October contract remains solidly in contango implying election risk remains a problem.

Is the European economic rebound losing steam?

On the data front, Chinese exports rose a healthy 9.5% in August as its trading partners reopened their economies and pent-up demand for goods fed into the figures. However, imports declined 2.1%, indicating softer domestic demand.

Meanwhile German industrial production rose in August but at a much slower pace than July. Output climbed by just 1.2%, short of the 4.7% expected and the +9.3% recorded in the prior months. There are clearly signs that the bounce back in the Eurozone is running out steam – lots for the European Central Bank to consider when it meets this week.

GBPUSD trades above 1.32 despite Brexit focus

Brexit talks also resume this week (The Week Ahead: Brexit talks resume, ECB frets over exchange rate contains a full preview). Of course, we remain a long way from getting a deal done – at least if the pessimism from Michel Barnier is to be believed.

A lot of the chatter and commentary is very downbeat. But this should be expected – the nature of the brinkmanship means a deal always seems further away than it may be in reality. News that the UK is drawing up legislation to override the withdrawal agreement’s requirements for new Northern Ireland customs arrangements is likely to set a fire under the EU.

To me this looks like the Johnson government’s brinkmanship designed to show they mean it when they say that no-deal is an option. Expect negative headlines to weigh on sterling; although this morning it’s put in a decent opening trade, with GBPUSD finding bid north of 1.32. However, the near term downtrend remains in force unless bulls can regain the rising trend line at 1.3250 and push clear of Friday’s swing high at 1.33190.

Crude prices continued to slide after Aramco said it would cut prices in October as the pandemic keeps a lid on demand. WTI (Oct) declined towards $38.56 before paring losses to hold the $39 handle after a letter on Saturday said Aramco would cut its US-bound crude by 50-70 cents, with pricing for Asia discounted by 90 cents to $1.50. Gold remains a very narrow range at $1930.