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Stocks softer as UK mulls second lockdown
Boris Johnson says a national lockdown would be disastrous, but his scientific advisers are proposing a two-week lock-up in October. A new risk-averse religion with devotees kneeling to the great NHS deity has been born.
The question is whether the government decides to ‘follow the science’ or not. Cases are certainly up, but the number of tests being carried out daily is exponentially higher than it was in March and April. The worry, of course, is that there is a lag of a couple of weeks and the rise in cases we have seen translates into a spike in hospital admissions in a fortnight.
British shoppers are a robust lot. UK retail sales rose 0.8% and are now 4% ahead of February’s pre-pandemic levels. When you can’t do things like go on holiday you can buy stuff, like DIY materials.
Home improvement spending drove sales of household goods to rise by 9.9%. We will see just how this translates into companies when Kingfisher reports half-year results next week.
Consumer spending is a big driver of the economy, but unfortunately a V-shaped recovery in retail sales is only part of the picture and we are yet to see what happens as the furlough scheme ends and real permanent unemployment rises.
Equity markets fell, with chatter about a vaccine more conservative and hopes of any delivery in volume really focused on next year and not by the end of October, despite what Donald Trump says. What we might have by the end of October is some really compelling results from clinical trials, which might be enough for markets.
Donald Trump is pressing House Republicans to up their offer for another round of stimulus.
European stocks were broadly lower on Friday, with the FTSE 100 again looking around the 6,000 level. The S&P 500 down almost one per cent and again testing its 50-day line. The Nasdaq dropped over 1% to close under its 50-day moving average.
Snowflake fell, with the stock declining 10% after the frenzied first day of trade led to some profit-taking. Tesla was down 4% ahead, but remains up this week ahead of the Battery Day event next Tuesday.
Jobless claims in the US improved slightly, the picture remains troubled and one of a slower recovery. Initial claims fell marginally to 860,000, but this is still very high. Unemployment remains high at 8.6%, albeit this was a drop from 9.3% the previous week.
The total number of people claiming benefits in all programs for the week ending August 29 was 29,768,326, an increase of 98,456 from the previous week.
Bank of England edges towards further easing, ponders negative rates
Yesterday, the Bank of England kept rates on hold at 0.1% and the stock of asset purchases at £745bn, but it looks like on the cusp of delivering further accommodation. The Bank ‘stands ready’ to do more, it said, adding that will not tighten monetary policy until there is ‘clear evidence’ of achieving its 2% inflation target in a sustainable way.
With the current QE ammo due to run out by the end of the year, the Bank looks likely to expand the asset purchase programme by around £100bn in November. There were also overt references to the Bank actively considering negative rates, which hit sterling and sank gilt yields and saw money markets pricing in negative rates this year.
Cable recovered some ground after the BoE-inspired drop as the dollar reversed course, with GBPUSD rising back to its 50-day SMA at 1.30. DXY hit resistance at the 50-day and the longer-term downtrend reasserted itself, although for now the dollar remains in a non-trending sideways pattern. We await to see whether this is the bottom or a pause (bear flag) before the next leg lower.
Oil prices climbed again after the OPEC+ meeting revealed Saudi Arabia’s determination to keep the alliance together and conforming with the production cuts. WTI (Oct) rose above $41, the highest in two weeks.
There were words of warning for traders from Prince Abdulaziz bin Salman, the Saudi energy minister, who said anyone gambling on the market would be ‘ouching like hell’, in reference to a question over whether OPEC+ would taper cuts in December.
OPEC+ won’t say whether it will take further action to boost prices, but as mentioned yesterday, this will depend on the price, which largely will be a factor of sentiment based around demand.
Cable jumps to test $1.29 as Nigel hands Boris an early Christmas present
Markets have quickly priced in higher odds of a Conservative Party victory in the coming General Election after the Brexit Party today launched its own campaign.
Party leader Nigel Farage has backed away from his initial aim of fielding 600 candidates and will instead focus on Remainer strongholds; those held by Labour and the Liberal Democrats.
Farage has gone as far as to say that his party will not contest the 317 seats won by Conservative MPs during the 2017 election. He seems to have been persuaded by Boris Johnson’s commitment not to extend the transition period beyond December 2020.
Having knocked on $1.29, cable pared gains to trade around $1.2880. EURGBP dipped below 0.8560 before retracing to around 0.8570. The pound is stronger since a clear, decisive election win for the Conservatives will provide clarity on Brexit – anything else becomes messy.
This is a huge boon for Boris Johnson. Conservatives had reason to fear the Brexit Party before, as it offered a place for Leave voters who felt betrayed by Johnson’s broken promise to get Brexit done by October 31st. The PM claimed he would rather be dead in a ditch than request an extension, but thanks to some legislative arm-twisting, he was forced to do so.
Everyone knew it would have been crazy politics for the Brexit Party to take Leave votes away from the Tories and enable a pro-Remain grouping to take seats.
Now Leavers in many constituencies have a much clearer choice; back the Tories or abandon Brexit.
Brexit Day delayed as UK gears up for another General Election
Today was supposed to be Brexit Day. Instead the whole thing is on pause for another three months while the UK holds another General Election.
We’ll soon be entering the government’s quiet period, known as purdah, during which Downing Street won’t be announcing any major new policies that could influence the campaign.
Sterling is also facing a quiet period as well. The diminished threat of a no deal Brexit – for the time being – is providing solid support, but the upside is limited due to the political uncertainty.
Over the past few days cable has bounced between 1.28 and1.30, but there was a Fed meeting driving the dollar and the pound’s contribution to the volatility looked limited.
The deal on the table makes all the difference
We’ve been expecting an election for weeks now, and the upcoming poll is very different from a market perspective than it would have been if it had been held a couple of months earlier.
Boris Johnson managed to renegotiate Theresa May’s withdrawal agreement, replacing the backstop with something he claims is more palatable. The DUP don’t like it, however, and they’re not alone.
What’s important here is that if Boris gets to return to No.10 with a solid majority it’ll be his withdrawal agreement bill that he attempts to implement. This is a much better outcome for cable than the no deal Brexit he seemed intent on pursuing when he won the leadership contest.
Labour seems less market friendly no now deal off the table
For a while it looked like markets might have been relieved by the prospect of a Labour government due to its aversion to a no deal Brexit.
Back when Boris was talking about no deal, Labour was pretty tight-lipped about what exactly it wanted. Jeremy Corbyn has since come out in favour of a confirmatory referendum on a Brexit deal.
The political landscape has shifted away from a no deal Brexit. A Conservative majority may not be the downside risk it was once perceived to be. Labour still has the more market-friendly Brexit policy, but the Conservative alternate is not nearly as unpalatable as it once was. All parties in this election (other than the Brexit Party) are now offering to avoid a no deal exit.
This may free up traders to look a bit longer term and take into account Jeremy Corbyn’s radical plans for shaking up the system.
What are the risks of a hung Parliament?
The latest YouGov poll shows the Conservatives hold a 15-point lead over Labour at 36%, while Labour, at 21%, are just three points ahead of the Liberal Democrats. But it’s vital to remember that the Conservatives were polling at 44% the day before Theresa May called her disastrous 2017 election. Boris is by no means going to walk this one.
While another huge surge for Labour can’t be written off, perhaps the bigger threat comes from Nigel Farage’s Brexit Party. It could hoover up the votes of both Tory and Labour Leavers, weakening both parties. The other parties have given them the perfect campaign materials; Boris broke his own promise to ‘get Brexit done’ by October 31st, and Labour and the Lib Dems both want a second referendum.
Rather than looking at one established party dominating the others, this could be an election that sees the Brexit Party squeeze its way into Parliament, leaving no one with a majority. Not only would this promise many more months, if not years, of further chaos, but it would also put a no deal exit firmly back on the table, especially if hardcore Brexiters in the Tory party make alliances with Nigel Farage.
There really is a lot to play for, and the outcome will have huge implications for the UK’s future. But until we get more polling data and the candidates start doing things that are seen to dramatically alter their chances, the pound will be paralyzed by uncertainty.
Cable softens as UK nears general election – and that’s when the real pain begins
Markets usually know what to do in a general election – hope a right-leaning party takes the day. But what happens when the socialists are the ones who could have the best approach to the economy?
In other circumstances, Boris Johnson would be the perfect election candidate. Sterling would surge on expectations that he would stroll comfortably to a majority. He’s charismatic, respected by many, and is facing up against Jeremy Corbyn – the perennial fence-sitter who struggles to keep his own party united.
But, as far as the markets are concerned, the current Prime Minister has a major flaw. He seems determined to take the UK out of the European Union without a deal on October 31st. He may make claims to the contrary, but his extended proroguing of Parliament and his refusal to budge on the Irish border backstop make negotiating and ratifying a new deal virtually impossible.
GBP/USD rallies hard after Boris Johnson Parliamentary defeat
It was for this reason that Sterling rallied hard this week as the opposition, with the support of 21 Conservative rebels, forced through a bill that would allow them to take control of the Parliamentary agenda and table new legislation obligating Johnson to get an extension.
Cable shot up 1.3% in overnight trading, and pushed 0.6% higher the following session to rebound from “flash crash” lows to its highest levels ($1.2350) in nearly six weeks. EUR/GBP was forced lower, falling from €0.9080 to €0.8940.
Johnson responded by calling for a snap general election, but his efforts were thwarted. Labour abstained from the vote, meaning the motion failed to receive the two-thirds majority required.
Parties fight over election date, but a vote is coming
So, we currently have Boris Johnson, who has repeatedly stated he doesn’t want a general election, desperately pushing to dissolve Parliament. He’ll try again on Monday with another vote. Meanwhile, Jeremy Corbyn, who has been calling for an election for months now, has refused the offer.
Welcome to Brexit politics.
There will be a vote though, the question remains when. Labour and the Liberal Democrats want to ensure the new legislation that prevents a no deal exit has been passed before they agree to a vote. Otherwise Johnson, who would have the power to set the actual date of the election, could simply opt for November 1st – after the UK has left the EU. It’s for the same reason that Johnson is so keen to get the opposition to agree to it now.
Even that isn’t the end of it. There’s a risk for the opposition in waiting for an election. If Boris Johnson does set the voting date after the UK’s departure, he will have been the Prime Minister who successfully delivered ‘the will of the people’. Boris couldn’t ask for a better string to his electoral bow.
Markets forced to choose between anti-economy and anti-business
But those are problems for the parties to concern themselves with. The issue for markets is do they back anti-EU Johnson, or anti-business Corbyn? In this poll, both candidates threaten the UK economy.
The business world has been largely outspoken against a no deal exit – if it does deal huge economic damage, a pro-business Conservative might not be enough to repair the damage.
But is it better to soften Brexit and then leave the nation in the hands of Jeremy Corbyn, a man who intends to completely transform the economy anyway? His plans include nationalising rail, water, electricity and mail companies. He wants to increase taxes for the rich, vastly increase public spending, and redistribute powers from corporations to workers.
Again, in a straightforward election, this would be a simple call for the markets: go for the man who doesn’t want to come after their investments. But, although Corbyn has them firmly in his crosshairs, he is at least committed to keeping as much of the status quo in terms of trade intact for business as possible.
Are markets comfortable to have the same percentage of a smaller pie, or a smaller percentage of the same pie?
Boris Johnson will suspend Parliament ahead of Brexit deadline
Opponents of Brexit are furious after Prime Minister Boris Johnson secured the Queen’s permission to suspend Parliament for over four weeks in the run-up to the October 31st Brexit deadline.
Those fearing a hard Brexit have been dealt another blow this week. The Prime Minister will suspend Parliament between mid-September and October, drastically limiting the amount of time opposition MPs have to block his attempts to walk away from the EU with no deal in place.
Although Parliament does traditionally close before the annual Queen’s Speech, this year scheduled for October 14th, the proximity to the Brexit deadline has caused outrage amongst the opposition.
Sterling plunged yesterday on the news, dropping as low as 1.2155 before paring losses, although not enough to prevent it from wiping out all of Tuesday gains by the close of trading. The weakness in the pound has been a small factor today in pushing the FTSE 100 up 1.1% to a five-day high just under resistance at 7,200.
Is this the final nail in the coffin for softer Brexit hopes?
The gloves are really coming off now. Such was the outrage caused by Johnson’s move to suspend Parliament that rebel MPs from his own party joined forces with the opposition to call for a legal injunction to stop it from happening.
With just a couple of weeks to make a move, opponents of a no deal Brexit may have to strike hard and fast. Markets may bet that the opposition will finally be compelled to act decisively – Labour leader Jeremy Corbyn has suggested he will call a vote of no confidence in the government when the time is right. He may not have much time left to choose from.
Even if a vote is called though, Johnson could refuse to hold an election until after Brexit has taken place. Remain-supporting MPs are running out of time and options. The markets are firmly pricing in a no deal Brexit, and this seems to be an almost-certainty unless the EU caves at the last second.
However, the latest developments suggest that tensions could continue after the UK has officially departed. A general election could be on the way. The battle for Brexit looks almost won, but the battle for No. 10 may be just about to start.
Week Ahead: Fed set to cut rates
Your essential guide to the week ahead
The Federal Reserve is widely anticipated to cut interest rates this week, but there are still big unanswered questions that would help the markets understand the longer-term plan.
1) Will the FOMC cut by 50bps or 25bps? Markets suggest a roughly 25% chance for a 50bps cut.
2) Is this an insurance cut or the start of a sustained easing cycle? While Jerome Powell has signalled a cut in July, it’s lot less clear whether we should expect more cuts are we progress through the latter part of 2019.
Earnings season continues and Apple is the main focus for traders this week.
Analysts are broadly bullish on Apple ahead of the results – check the Analyst Recommendations tool in the platform for more information.
Boris first week
Britain’s new prime minister enjoys his first full week at the helm. The market will be wondering if there is any likelihood for changes to Brexit deals and deadlines based on his initial talks with the EU. Sterling pairs should remain on edge.
Bank of England
The Bank of England is still shackled by Brexit – and all the related uncertainty – but it increasingly seems to be moving with the rest of the world. Instead of the next move likely to be a hike, it looks much more likely the central bank is leaning towards cutting interest rates. We’ll find out more on Thursday at noon, UK time.
Coming shortly after the Fed meeting these payroll numbers will be scrutinised as closely as ever. Job creation bounced back last month, dampening expectations for a 50bps cut – another strong print, combined with improving wage growth, may tell the market that the Fed is not under pressure to do any further easing
We’re in the thick of earnings season, so let’s look at the releases in the coming week:
|29th July||Ryanair – Q1 2020 Earnings|
|After-Market||30th July||Apple – Q3 Earnings|
|Pre-Market||30th July||Samsung – Q2 Earnings|
|Pre-Market||30th July||Pfizer Inc – Q2 Earnings|
|Pre-Market||30th July||Proctor & Gamble – Q4 Earnings|
|Pre-Market||30th July||Sony – Q1 2020 Earnings|
|30th July||Bayer – Q2 Earnings|
|Pre-Market||30th July||BP Plc – Q2 Earnings|
|Pre-Market||31st July||General Electric – Q2 Earnings|
|31st July||Airbus SE – Q2 Earnings|
|After-Market||31st July||Kraft-Heinz – Q2 Earnings|
|Pre-Market||31st July||Spotify – Q2 Earnings|
|13.00 BST07.00 BST||31st July||Fiat Chrysler – Q2 Earnings|
|31st July||BAE Systems Plc – Q2 Earnings|
|Pre-Market||1st August||Shell Plc – Q2 Earnings|
|07.15 BST||1st August||Rio Tinto – Q2 Earnings|
|Pre-Market||1st August||General Motors – Q2 Earnings|
|1st August||BMW AQ – Q2 Earnings|
|07.00 BST||1st August||Barclays Plc – Q2 Earnings|
|07.00 BST||2nd August||Royal Bank of Scotland – Q2 Earnings|
|2nd August||Berkshire Hathaway – Q2 Earnings|
|Pre-Market||2nd August||ExxonMobil Corp – Q2 Earnings|
|2nd August||BT Group Plc – Q1 202 Earnings|
Coming up on XRay this week. Tune in Live or watch on catch up.
|17.00 GMT||29th July||Blonde Markets|
|15.30 GMT||30th July||Asset of the Day: Bullion Billions|
|13.00 GMT||31st July||Asset of the Day: Indices|
|09.00 GMT||1st August||Bank of England special|
|12.30 GMT||2nd August||Nonfarm Payrolls LIVE|
Mark these events in your calendar this week:
|Tentative||30th July||Bank of Japan interest rate decision|
|01.30 GMT||31st July||Australia CPI inflation|
|18.00 GMT||31st July||FOMC interest rate decision|
|01.45 GMT||1st August||China Caixin manufacturing PMI|
|11.00 GMT||1st August||Bank of England interest rate decision|
|14.00 GMT||1st August||US ISM manufacturing PMI|
|01.30 GMT||2nd August||Australia retail sales|
|12.30 GMT||2nd August||Nonfarm payrolls|
Does Boris mean bad news for cable?
The UK is less than a day away from finding out who the next Prime Minister will be. The winner of the Tory leadership contest will lead the UK in its exit from the EU later this year, and Boris – who has refused to rule out closing Parliament to secure a no-deal Brexit – is favourite to win.
Cable is unsurprisingly jumpy on the topic of Brexit, and it pushed higher last week when MPs made it harder for the future PM to force through a no-deal Brexit by suspending Parliament.
The new bill states that even if Parliament is suspended, it must sit for a few days in September and October to consider issues in Northern Ireland. It also requires ministers to make reports every fortnight on progress towards re-establishing Northern Ireland’s collapsed, devolved executive and to give lawmakers an opportunity to debate and approve those reports.
While the legislation would not prevent a Parliament being suspended, it would make it harder to sidestep lawmakers.
A poll of Tory members suggested that Boris has two-thirds of the vote. More than half of those who voted Conservative in the last general election would vote for Boris, compared to just 27% for Hunt. Voting is currently taking place and closes at 5pm today, with the winner expected to be announced tomorrow.
However, Boris is the firm favourite to win and, barring something spectacular, will take over the reins as Prime Minister on Wednesday. So, while markets are likely to react to the news, it’s likely that much of the turbulence has already been factored in.
What to expect
The pound is already weaker, with cable losing about 50 pips today in morning trading.
Concerns about Brexit – and, therefore, the leadership contest – continue to drag the currency down. GBP/USD had started the session north of 1.25 but was last making new lows around 1.2460. It’s likely that if hard-brexiteer Boris is announced as the next PM, sterling will take a knock.
However, leading thinktank National Institute for Social and Economic Research (NIESR) has warned that the dampening impact of Brexit over the last three years could have dragged the UK into recession already.
Overall, the think tank sees a 30% chance Sterling will decline over the course of 2020, and that probability will be higher if Britain crashes out of the EU.
Even if a no-deal Brexit is avoided, NIESR predicts the economy will grow just 1.2% this year and 1.1% next year as uncertainty about Britain’s future trading relationship with the bloc will hold back investment and slow growth.
Cable higher on plans to thwart no deal Brexit
Members of Parliament yesterday voted in favour of legislation that will make it harder for the next prime minister to push through a no deal exit from the European Union.
The move comes as we move closer to finding out whether Boris Johnson or Jeremy Hunt has won the Tory leadership contest and will therefore replace Theresa May as Prime Minister.
MPs fear hard Brexit under Boris
As one of the key figures in the Brexit campaign, Boris Johnson has been unsurprisingly vocal on his commitment to taking the UK out of the European Union. He has said that he would prefer to leave with a deal, but is prepared to make a clean break from the EU if no new deal is forthcoming. Officials on both sides have until October 31st to negotiate new changes to Theresa May’s Withdrawal Agreement.
MPs are concerned that Boris Johnson may even attempt to suspend Parliament in order to force through a no deal Brexit in October. Lawmakers have been tenacious so far in their efforts to avoid the UK leaving the European Union without a deal, although a series of indicative votes left it clear that there is no majority in Parliament for any of the Brexit options (including a second referendum).
As the odds on a victory for Johnson have increased, cable has come under greater pressure as markets price in larger odds of a hard Brexit scenario. On Tuesday cable slipped below the levels seen during the October 2017 flash crash, although news of the victory for new legislation yesterday pushed GBP/USD up 0.5% to trend above 1.2485.
Legislation recalls Parliament, even if suspended
The bill states that even if Parliament is suspended it must sit for a few days in September and October to consider issues in Northern Ireland. On top of this, new legislation requires ministers to make reports every fortnight on the progress made towards re-establishing the collapsed executive in Northern Ireland, and states the lawmakers must have the ability to debate and approve those reports.
It effectively calls for Parliament to be present to debate unrelated issues so that MPs coincidentally happened to be sitting just as the UK is due to leave the European Union.
It does not prevent Parliament from being suspended, but it is another spanner in the works for Boris Johnson, should he become Prime Minister and attempt to force through a no deal Brexit.
Gold & bitcoin firmer, stocks and dollar softer
Stocks and the US dollar were softer whilst gold and Bitcoin continued to drive higher as markets look ahead to the G20 meeting.
Stocks have eased as markets look ahead to the G20 meeting – optimism is fading a little and we would expect investors to perhaps take some risk off the table ahead of the meeting, particularly given the recent bump. Bear in mind also this is a weekend meeting that implies gap risk.
The S&P 500 eased 5pts yesterday to finish on 2,945. Asia has been softer overnight. Futures indicate European shares are lower today since there is really little fresh catalyst for bulls before we learn more about the Trump-Xi meeting in Osaka and what this means for global trade, tariffs et al.
US trade supremo Robert Lighthizer spoke to Chinese Vice Premier Liu He on Monday, at least paving the way for talks to take place in Japan. The FTSE 100 might struggle to hold the 7400 level today.
The US has hit Iran with more sanctions. No sense of de-escalation, but also no material worsening in the situation. The tensions offer short-term support for oil still with Brent steady around $64 and WTI shade below $54.
Gold firmed again overnight as we see the path to more gains being cleared. Gold hit a fresh six-year high amid a perfect blend of supporting factors. Four things are really driving gold – falling yields, a weaker dollar, a soft macroeconomic outlook and geopolitical risks rising in the Middle East.
Prices hit $1438, breaking resistance on $1433 before paring those gains to trade around $1426 at send time. Looking to break $1446 next.
Gold has huge negative correlation with real yields, which have come right down. US 10yr around 2%, now back to where they were in 2016 – if it goes lower, we would expect further gold strength. The surge in negative-yielding debt is undoubtedly key to the rally, and can be viewed as similar to the rise in gold prices and negative yield assets in 2016.
The dollar remains on the defensive. The dollar index has dropped further to trade around 95.50.
Sterling can’t catch much bid – GBPUSD remains off its lows around 1.2750 but is failing to make real inroads versus the greenback as Brexit uncertainty weighs heavily. Short positioning has eased but this remains a crowded trade.
We have the no-deal exit risk of course – Boris Johnson has said he is prepared to take Britain out without a deal come October 31st. But we also have General Election risk – chatter about a no-confidence vote being supported by a dozen or so Tory rebels could lead to the government falling and inevitably an election. Boris Johnson could end up the Lady Jane Grey of Downing Street if that were the case. This introduces risks of a) Brexit delay and ongoing political uncertainty, b) a hung parliament with no clear route out of Brexit, and c) a Corbyn-led Labour government that would be very risky for UK assets and equites.
The euro is faring better, with EURUSD up to regain the 1.14 handle, trading at 3-month peaks.
Bitcoin firmed again, cementing the gains above $11k. I would reiterate the comments from yesterday – it’s a hard market to stand in front of when it builds momentum like this. The buzz and the hype has returned. You can talk about Libra, or the halving next year, more and more institutional interest and so on, but ultimately this is a bubble again. Look for $11,600, the highs from Feb last year as offering the big test.