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European markets tumble in catchup trade, Trump bashes China
On the plus side, the UK is sketching out how it plans to end the lockdown. On the minus side, it’s going to take a long time to get back to normal. This, in a nutshell, is the problem facing the global economy and it is one reason why equity markets are not finding a straight line back to where they were pre-crisis.
Indices on mainland Europe are catching up with the losses sustained in London and New York today, having been shut Friday. The DAX retreated 3% on the open to take a look again at 10,500, whilst the FTSE 100 extended losses to trade about 20 points lower. Hong Kong turned sharply lower ahead of its GDP report.
Whilst monetary and fiscal stimulus sustained a strong rally through April – the best monthly gain for Wall Street since 1987 – it’s harder to see how it can continue to spur gains for equity markets. Moreover, US-China tensions are resurfacing as a result of the outbreak, which is weighing on sentiment. Donald Trump spoke of a ‘very conclusive’ report on China – the demand for reparations will grow, and trade will suffer as the easiest policy lever for the White House to pull. This is an election year so I’d expect Trump to beat on the Chinese as hard as he can without actually going to war. Trade Wars 2.0 will be worse than the original.
And as I pointed out in yesterday’s note, equity indices are showing signs of a potential reversal with the gravestone doji formations on the weekly candle charts looking ominous.
Warren Buffet doesn’t see anything worth investing in. Berkshire Hathaway has $137bn in cash but the Oracle of Omaha hasn’t found anything attractive, he said on Sunday’s shareholder meeting. His advice: buy an index fund and stop paying for advice.
In FX, today’s slate is rather bare but there are some European manufacturing PMIs likely to print at the low end. The US dollar is finding bid as risk appetite weakens, favouring further downside for major peers. EURUSD retreated further having bounced off the 100-day SMA just above 1.10 to find support around 1.09250. GBPUSD has further pulled away from 1.25 to 1.2460.
Front month WTI retreated further away from $20. CFTC figures show speculative long trades in WTI jumped 35% – the worry is traders are trying to pick this market and the physical market is still not able to catch up with the speculators. The move in speculative positioning and price action raises concerns about volatility in the front month contract heading into the rest of May.
BT Group shares dropped more than 3% on reports it’s looking to cut its dividend this week. Quite frankly they ought to have cut it months ago. I rehash what I said in January: Newish CEO Philip Jansen should have done a kitchen sink job and cut the dividend from the start. The cost of investment in 5G and fibre is crippling, despite the cutbacks and cost savings. Net debt ballooned to more than £18.2bn – up £7.2bn from March 31st 2019. How can BT justify paying over £1bn in dividends when it needs to sort this debt out, get a grip on the pension deficit and do the kind of capex needed for 5G and mass fibre rollout? Given the current environment, a dividend cut seems assured.
What to watch this week
NFP – Friday’s nonfarm payrolls release is likely to be a history-making event. Last month’s -701k didn’t reflect many days of lockdown, so the coming month’s print will be seismic. However, this is backward looking data – we know that in the last initial jobless claims have totalled around 30m in six weeks – the NFP number could be as high as 22m according to forecasts. The unemployment rate will soar to 16-17%. The main focus remains on exiting lockdown and finding a cure.
BOE – The Bank of England may well choose this meeting to expand its QE programme by another £200bn, but equally it may choose to sit it out and simply say that it stands ready to do more etc. The Bank will update forecasts in the latest Monetary Policy Report, with the main focus likely to be on how bad they think Q2 will be. Estimates vary, but NIESR said Thursday the contraction will be 15-25%.
RBA – The Australian dollar is our best risk proxy right now. The collapse in AUDJPY on Thursday back to 68.5 after it failed to break 70 was a proxy for equity market sentiment. We will wait to see whether the Reserve Bank of Australia meeting on Tuesday gives any fresh direction to AUD, however there is not going to be a change in policy.
Week Ahead: Nonfarm payrolls, China PMIs and Eurozone inflation on tap
Welcome to your guide to the week ahead in the markets. China trade talks are ushered in by PMI data, Eurozone inflation results and US nonfarm payroll reports.
US nonfarm payrolls
The set-piece US labour market report on Friday is the main eco event for market watchers. Signs of a slowdown in employment growth are showing, supporting the doves’ case for further rate cuts. Will we see stronger wage growth though? The NFP report missed expectations on the headline number with employers adding just 130k last month versus the 160k expected.
China data ahead of trade talks
The week gets a kickstart with more economic data from China likely to give more clues about the impact of the trade war. The official manufacturing and services PMIs will be followed by the closely-watched private Caixin manufacturing survey in the early hours of Monday.
The European Central Bank has cut rates, so what now? Inflation has proved stubbornly weak in the Eurozone, with headline inflation in August of just 1%, while core inflation was a meagre 0.9%. Market expectations for inflation remain subdued. There seems little hope that inflation will start to tick higher and give the ECB some breathing space. Euro area CPI preliminary readings will be delivered on Tuesday morning.
MPs are back to business, but we don’t know where this leaves the only thing that matters for sterling right now – will there be a deal or not? GBP pairs will remain exposed to headline risk as the market tries to figure out which way the wind is blowing.
The Reserve Bank of Australia is expected to cut interest rates again when it convenes on Tuesday. Speaking last week, governor Philip Lowe gave a very strong signal that rates would be cut again from the current record low 1%.
There are several corporate data releases this week, here are the main ones to put in your diary.
|Oct 1st||Ferguson||FY 19 Full Year Results|
|Oct 1st||Greggs||Q3 Trading Update|
|Oct 2nd||Tesco||Interim Results|
|Oct 3rd||Pepsico||Q3 Earnings|
|Oct 3rd||Ted Baker||Interim Results|
|Oct 3rd||H&M Group||Q3 Results|
Coming Up on XRay
Don’t miss our upcoming video streams on XRay. You can watch them live directly through the platform or catch-up afterwards when it suits you.
|07.15 GMT||Sept 30th||European Morning Call|
|15.00 GMT||Sept 30th||Charmer Trading talks Forex|
|15.45 GMT||Oct 1st||Asset of the Day: Oil Outlook|
|19.00 GMT||Oct 1st||Live Trader Training|
|18.00 GMT||Oct 3rd||The Stop Hunter’s Guide to Technical Analysis (part 5)|
|12.30 GMT||Oct 4th||LIVE Nonfarm Payrolls Coverage|
Key Economic Events
There’s a lot of data coming out in the next few days, particularly at the start of the week.
|01.00 GMT||Sept 30th||China Manufacturing and Services PMIs|
|01.00 GMT||Sept 30th||ANZ Business Confidence|
|01.45 GMT||Sept 30th||China Caixin PMI|
|08.30 GMT||Sept 30th||UK Final QoQ GDP|
|12.00 GMT||Sept 30th||Germany CPI Inflation YoY|
|03.30 GMT||Oct 1st||RBA Interest Rate Decision and Statement|
|08.30 GMT||Oct 1st||UK Manufacturing PMI|
|09.00 GMT||Oct 1st||Eurozone Preliminary CPI|
|14.00 GMT||Oct 1st||US ISM Manufacturing PMI|
|12.15 GMT||Oct 2nd||US ADP Nonfarm Employment|
|14.30 GMT||Oct 2nd||US Crude Oil Inventories|
|08.30 GMT||Oct 3rd||UK Services PMI|
|12.30 GMT||Oct 4th||US Nonfarm Payrolls|