Trump returns, big tech faces antitrust concerns

Morning Note

Don’t be afraid: President Trump returned to the White House, but it might not be for much longer. Whilst Trump almost revelled in his victory over the virus, telling Americans not to fear it, Joe Biden’s lead in the polls is rising. Trump has work to do in the battlegrounds to swing back in his favour.

Wall Street climbs on stimulus hopes

Wall Street rallied as we saw decent bid come through for risk that left the dollar lower and benchmark Treasury yields higher amid hopes that policymakers in Washington are close to doing a deal on stimulus. House Democrat leader Nancy Pelosi and Treasury Secretary Steven Mnuchin spoke yesterday but failed to reach agreement on a fresh stimulus package.

Negotiations are due to resume today and whilst the mood seems to be better, getting agreement so close to the election will be tough but not impossible.

The S&P 500 rose 1.8% to close at the high of the day above the  3,400 level but the intra-day high at 3,428 from Sep 16th remains the top of the channel that bulls will look to take out – failure here may call for a retreat towards the middle of the range again.

Stimulus hopes will drive sentiment, but election risk is also a factor. Vix futures for Oct at $30.86 compared with November’s $32.23.

European markets turned lower in early trade on Tuesday as bulls failed to follow through on the relief rally on Monday – still very much range bound.

As noted last week the key is the 3300 level on the Stoxx 50 and 6,000 on the FTSE 100 to signal the market has broken the range. The S&P 500 is closer to doing it.

Benchmark yields rose firmly with 10-year Treasuries breaking out of the recent dull range towards 0.80%, settling at 0.77% near 4-month highs. The 30-year yield also hit its highest since Jun 9th.

With polling and odds improving for a Democrat clean sweep, the market is starting to price in more aggressive stimulus, greater issuance and bigger deficits. Fed chair Jay Powell speaks later today about the US economic outlook at the National Association of Business Economics annual meeting.

Cable eyes Brexit latest Brexit headlines

Brexit talks rumble on – are we closer to a deal? Deadlines are fast approaching and on the whole it seems more likely than not that we at least see a skinny deal or sorts.

EC vice president Maros Sefcovic has been on the wires this morning underlining that ‘full and timely’ implementation of the withdrawal agreement is not up for debate. The British Parliament and government say otherwise.

Meanwhile the European Parliament is not budging on its demands over the EU budget – whilst the recovery fund was announced to much fanfare, it needs to be delivered for Europe’s economy to recover more quickly than it is.

Democrats to target tech giants

Big tech stocks need monitoring after reports that a Democrat-led House panel will call for an effective breakup of giants like Apple, Amazon and Alphabet. It comes after a long anti-trust investigation by the panel led by Democratic Representative David Cicilline.

If approved and legislation is enacted, it would be the most significant reform in this area since Teddy Roosevelt. Certainly, the concentration of capital in a handful of big tech stocks is worrisome for lots of reason. Even if approved, getting from draft to legislation will not be easy. However, if there were a Democrat clean sweep, it could open the door to some aggressive reforms.

As I noted over a year ago, given that the FAANGs have been at the front of the market expansion in recent years, any breakup or threat of it may act as a drag on broader market sentiment. Calls have been growing louder and louder for the authorities to at least look at antitrust issues for the tech giants.

Political pressure is building – lawmakers sniff votes in tackling big tech. The shift really happened two years ago with the Facebook scandals, which really broke the illusion that Silicon Valley is in it for the little guy.

AUDUSD sinks on dovish RBA meeting

The Reserve Bank of Australia left interest rates on hold, refraining from a cut below 0.25% but maintaining a decidedly dovish bias that still indicates a further cut may occur this year.

The RBA said it will keep monetary policy easy “as long as is required” and will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3% target band. It kept its options open and stressed that it will continue to consider additional monetary easing.

After a decent run since the Sep 25th low AUDUSD was smacked down from its 50-day SMA at 0.7210 to trade around 0.7150. Currently contained by its 50- and 100-day SMAs.

The dollar index broke the horizontal support and the 21-day SMA, with the price action testing the trendline off the September lows. After the RSI trend breach and the MACD bearish crossover flagged yesterday was confirmed. 50-day SMA around 93.25 is the next main support.

The softer dollar gave some support to GBPUSD as it tests the top of the range and big round number and Fibonacci resistance at 1.30 this morning. Markets are also pushing back expectations for negative rates in the UK, which may be feeding through to a stronger pound.

Brexit risks remain but the odds of a deal seem to be better than evens, at least a ‘skinny’ deal that keeps dollar-parity wolves from the door.

The weaker dollar, higher inflation outlook is pushing up gold prices, which have broken above $1,900 but faces immediate resistance at the 21-day SMA on $1,916. Yesterday’s potential MACD bullish crossover has been confirmed.

Sell in May and go Huawei: US-China ad nauseum

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Morning Note

When can we stop talking about the US and China? European stocks called to open higher after a robust session in Asia showed investors are weighing the latest US-China spat over Huawei for what it is. SPX closed down 0.67% yesterday on the broad US-China-Huawei-Google spat, with tech stocks the worst hit. The Nasdaq 100 shipped 126 points to close 1.7% lower. Chip makers were rocked but look set to bounce back today – these rose in after-hours trading and Asian peers were much firmer overnight. 

US-China, Google-Huawei

After blacklisting the Chinese firm, the White House has issued three-month reprieve to allow US companies continue to do business with the group. It’s all rather like the way Trump slaps on tariffs but delays the execution to allow room for negotiation. Whether it’s Huawei or tariffs, I would see all of this in the broader context of giant tug-of-war between the two superpowers being played out in front our eyes. As such, the more this goes on the lower the chance of a meaningful resolution to any of it. Trade disputes ad infinitum, ad nauseum. 

China has vowed to retaliate but stocks in China rose overnight – the more damage the US tries to do the more the market expects stimulus from Beijing.

Brexit continues

We don’t even have a lot on the Brexit front to worry about today. Euro elections are centre stage this week – as noted in yesterday’s FX note, the Brexit Party is set to win in the UK, whilst Eurosceptics and populists of various hue will sweep about a third of the vote across the continent.  Watch therefore for action in EUR and GBP crosses, as well as Italian spreads.  

Economic indicators overnight have been less than stellar. South Korean exports shrunk by nearly 12% in May, having decline more than 8% in April. Singapore’s government has downgraded growth forecasts for 2019. Thailand GDP growth hit a 4-year low. Lots of trade related effects being felt, clearly.

Fed chair Jay Powell spoke yesterday but did not really go into monetary policy. His remarks were focused on financial stability, stressing that ‘business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm … should conditions deteriorate’.  He added though that ‘the level of debt certainly could stress borrowers if the economy weakens’. Move along, nothing to see here. Fed governor Richard Clarida speaks later – will have a lot more on policy and will be closely watched. FOMC minutes are due tomorrow.

Forex – dollar bid

The dollar continues to find bid, with the dollar index touching on 98 again, its strongest since May 3rd. Meanwhile EURUSD has also sunk to its weakest since May 3rd. US 10yr has risen above 2.4% again, having been as low as 2.35% last week. Firmer US yields and the safe haven appeal of the USD in the current trade war situation is keeping the dollar supported.

Yesterday’s emerging three inside up formation on the GBPUSD daily chart fizzled out, with the pound under the cosh still and threatening now to break below 1.27. The 1.2710 region is acting as support for now but the downwards pressure could eventually tell. 

RBA set to cut

The post-election bounce in the Australian dollar proved short-lived as anticipated. AUDUSD was back trading on the 0.68 handle as the RBA gave us a very clear signal it’s ready to cut rates. In fact, this was about as dovish Philip Lowe could be without actually saying ‘I will cut rates in June’.

The June 4th meeting will likely see the central bank move to cut the cash rate to 1.25% from the current 1.5%. The RBA is really tying its policy outlook to the labour market. Unemployment rose to 5.2% in April and the risk is that exposure to China and trade will act as a drag in the coming months. Low inflation currently gives it ample scope to cut rates.

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