Morning Note

Stocks rally, dollar offered, OPEC meeting may be brought forward

Morning Note

European markets nudged up on Monday as the cash opens followed the futures higher and bulls try to recover last week’s highs. Stocks across Europe finished Friday sharply weaker on US-China fears that eased a bit after the cash markets closed, but still the major indices rose last week.

On Monday, the FTSE 100 rose over 1% at the open to 6,176, with bulls eyeing Thursday’s peak at 6,234. The DAX also faded later on in the session to rest on the 61.8% retracement – although Frankfurt is shut for Whit Monday, futures are trading higher. US futures are in the green. The Hang Seng led Asia higher and shot up by more than 3%.

US stocks edged higher on Friday as Donald Trump’s press conference on China was not as bad as feared, albeit the US is to end preferential status for Hong Kong for trade and travel and is ending ties with the WHO. This rally completed a very solid month for Wall Street as both the Dow and S&P 500 finished 4% higher, while the Nasdaq was up almost 7%.

Market nerves were calmed as Trump held something back and did not reignite the trade war, but we should nevertheless stress that US-China tensions are expected to deteriorate over the coming months as Trump doubles down ahead of the presidential election.  China has responded this morning with comments from the foreign ministry this morning offering the usual non-descript warnings of ‘countermeasures’ and advice to the US to just butt out.

Looking at the economic damage from Covid, today’s focus is the US ISM manufacturing PMI, which is seen rebounding to 43.5 from 41.5. Overnight data showed South Korean exports tumbled 23.7% in May, which was worse than expected but an improvement on April’s 25% decline.

Manufacturing activity in the country declined at the second fastest clip since 2009, marginally improving from April. Japan’s factory activity contracted at the sharpest pace since 2009, the final PMI showed. China’s manufacturing PMI showed a tiny amount of expansion but the damage to global trade from the pandemic left new export orders still in contraction.

Remember, PMIs only ask if survey participants think things are better or worse than the previous month, so they give a pretty imperfect snapshot of economic activity in times of crisis. A reading over 50 only tells us things are better than last month – not a high bar to clear. The real hard economic data we want to see will look at the period after lockdown restrictions end.

In FX, the dollar is offered at the start of the trading week with momentum continuing against the greenback. The dollar index is lower, taking a 97 handle and breaking down through the 61.8% retracement of the Covid-inspired rally.

GBPUSD hit 1.24, clearing the 50% retracement at 1.23750. EURUSD advanced as high as 1.1150 running into resistance at this level, the March 27th swing high. The ECB meeting this week is the chief focus for the euro, with most anticipating the central bank to push its PEPP envelope wider by another €500bn whilst the going is good – see our ECB Preview: Welcome to Japan?

Brexit risks come to the fore again this week as talks resume on Tuesday. The language last week from the UK’s chief negotiator David Frost was not optimistic, saying the EU mandate is not likely to produce a deal. Michel Barnier hit back, telling The Times that the UK has taken ‘three steps back’. The next few days will be crucial to break the deadlock and we will be paying close attention to whether the two sides think that progress has been made this time around.

OPEC may bring its June meeting forward to this Thursday at the request of Algeria, which holds the rotating presidency. Algeria says this is to facilitate crude sales for Saudi Arabia, Iraq and Kuwait. Russia, the key lynchpin of OPEC+, is reported to have no objections.

This may suggest an energy and enthusiasm to get a deal on maintaining deeper cuts for longer. July is currently set to see a gradual tapering of cuts down from 9.7m bpd in May and June, but there has been a lot of chatter that Saudi Arabia is trying to bring Russia around to backing an extension to make the deeper cuts last longer – perhaps for the rest of 2020.

Whilst OPEC production hit 20-year lows last month, compliance with the agreed cuts stood at around 75% as Iraq and Nigeria failed to meet targets. Crude prices rebounded sharply in May and are cautiously holding gains ahead of the OPEC+ talks. WTI for August was up at $35.73, although front month contracts have pulled back on Monday.

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