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Pound at 6-week low, European stocks stabilise but risk sentiment fragile
Tech stocks bled heavily again for a third straight day as trading resumed on Wall Street following the Labor Day weekend. Tesla slumped a whopping 21% to notch its worst day ever. The other major tech giants also dropped heavily as the Nasdaq fell 4% and entered correction territory – down 10% from its recent peak.
Whilst this began as more of a technical correction within tech following the astonishing ramp in August than a broad risk-off move, it is nonetheless bleeding into the broader market and dragged down the majority of stocks. US benchmark yields have retreated and oil prices have rolled over.
SPX not far behind after Nasdaq enters correction territory
There was some rotation going on – Disney, Nike, McDonald’s, Ford and GM rose – but the S&P 500 still declined almost 3% and is not so far off correction territory itself. On the whole there is a sense that this selloff represents that sentiment has become too exuberant and needed to correct.
We may expect the US market now to chop in W-pattern over the coming months and follow the path taken by European equities since June with the loss of momentum in the economic recovery and US election risks likely to become more visible in equity markets.
Asian equities fell with the weak US handover. European stocks opened a little bit higher in early trade but risk sentiment appears very fragile. The FTSE 100 is enjoying the pound’s distress with heavyweight dollar-earners like BP, Shell, Unilever and British American Tobacco among the best risers.
In dollar terms the market is flat. The index got a confidence boost as Barclays raised their call on UK equities to ‘market-weight’ from ‘underweight’.
Increase in coronavirus cases weighs on recovery outlook
Nevertheless, investors are becoming worried again about rising Covid cases across many developed markets which threaten the trajectory of the recovery and may well weigh on demand in a number of sectors.
The evidence is evident in a couple of markets. Oil prices have rolled over with WTI dropping under $37 to hit its weakest since the middle of June. Another tell that this tech-led selloff is more than just a simple technical correction are bond yields.
US 10-year Treasury yields logged their biggest drop in a month, sliding from 0.72% Friday to 0.682%. Despite the move in yields gold prices remain resolutely stuck to the $1930 anchor having tested $1906 and the 50-day SMA yesterday.
There is also some negative headlines around work on a vaccine which may weigh on risk a touch, or at least provide algos with a sell signal. AstraZeneca shares fell after it was forced to pause clinical trials of its Covid-19 vaccine candidate after a participant in the study was taken ill.
Such are the problems with pinning hopes on a vaccine for a return to normal to be possible. The worry is that while we have all kind of assumed that one company will come up with vaccine later this year, it’s not going to be plain sailing.
Tesla tumbles after S&P 500 snub
Tesla shares got well and truly smoked after it was not added to the S&P 500, to some surprise. Tesla stock hadn’t traded below its 50 day average price since April 13 and closed the day at this level at $330 – this level needs to hold or we could see further declines for the stock.
The market was surprised by Tesla not being included in the index. At the time, we talked a lot about how possible inclusion in the S&P 500 was a big driver of the stock’s rally earlier in the year and therefore being snubbed will force some funds to rethink whether they need to hold such a high beta stock if it’s not part of the index.
Pound sinks on Brexit worries, strong dollar
In FX markets, sterling is finding the going very tough, sinking to a 6-week low with the dollar catching a bid and Brexit risks weighing. DXY has advanced to clear 93.50 and test the top of the descending wedge, while EURUSD dropped further under 1.18 ahead of the ECB meeting which might be a lot more dovish than the market thinks.
This is not a pure dollar move by any means – the pound was also at its weakest since the end of July against the euro, too. For cable this has meant the build-up of downside pressure has blown out the stops at 1.30 and GBPUSD is running south with not a lot of support until 1.28.
Brexit risks are a major factor – the UK government admitted it will break international law in order to fix the withdrawal agreement should there be no deal by October 15th. Talks continue today between the UK and the EU and there are clear headline risks as traders see a higher chance of no deal emerging.
However, we should caution that a deal will likely emerge at the last moment after considerable brinkmanship from both sides that makes it seem as though a deal is impossible. Nevertheless, with still 5 weeks to go before the deadline imposed by the British government, there may be a very rough ride ahead for the pound.
Chart: Stops are out as GBPUSD trades below 50-day SMA
Chart: Having pushed clear of the 21-day SMA the dollar tests top of the descending wedge, 50-day SMA above
FX Strategy: Cable drops after stalled Brexit talks get nowhere
Sterling fell back to session lows with a view to the week lows being tested after Brexit talks seem to have gone nowhere. The two sides are still too far apart. Specifically, the EU wants to agree on fisheries and state aid rules before making progress on anything else. EU demands for a level playing field are non-negotiable if there is to be more than a low-level agreement.
Michel Barnier was not upbeat and whilst reiterating that a deal is possible, he said an agreement seems ‘unlikely’ and is concerned about the state of play. David Frost, his British counterpart, said talks were useful but little progress had been made.
The next round of talks take place the week commencing September 7th. Whilst the market was not positioned for a breakthrough this week, it’s getting closer and closer to the crunch point – the longer we go without a deal the more pressure comes onto the pound.
The two sides are still a long way from agreement on key terms. We should note that Barnier as the EU mouthpiece will always be pessimistic right up to the moment a deal is done. Nevertheless, on certain fundamental principles it looks as though the chasm is too great to bridge.
Grappling with the competing concerns of sovereignty (UK) and integrity of the single market (EU) goes to the very heart of the talks. Both sides need to make philosophical compromises before the practical compromises can follow. This is where I start to become concerned about a big, comprehensive deal being done.
Meanwhile EURUSD has dropped under 1.18 after a weak round of PMIs raised fears about the pace of recovery in the Eurozone and traders are starting to show concern the recent ramp in EUR may be overdone. Net long positioning in EUR has become very stretched and the EURUSD is susceptible to a squeeze lower.
Chart: Weekly GBPUSD – trying to break descending trend line. A close under here opens path back to the roaring 20s. We’ve seen a lot more volatility in GBPUSD this week with larger daily moves than generally seen of late.
Chart: Daily GBPUSD – Competing forces at work. Last week’s MACD bearish crossover still points to lost momentum and near-term weakness despite the throwover this week. Golden cross acted as a bullish confirmation of the thrust higher this week. Bollinger starting to point to break out, with downside in favour following today’s Brexit briefing and generally risk-off tone to the end of the week favouring USD.
Stocks nudge up, GBP breaks higher
Stock markets continued to strengthen as economies re-open but have yet to retest last Thursday’s highs. The unrest in the US is not likely to have a material impact on equity markets in the near term, largely because of the large-cap weighting, but we should caution that it has the potential to delay the economic recovery in the US.
People who would have been going back to work, spending in restaurants and bars, reopening their stores, will not in this febrile environment. President Trump is doubling down on using force to combat the unrest.
There was news on Remdesivir from Gilead – shares fell as the company reported indications that the drug has some positive impact, but it’s a long way from a slam dunk Covid-beater. Shares fell more than 3%.
So far, the situation with Hong Kong and simmering US-China tensions are being shrugged off. News that China was reducing soy imports from the US temporarily dented risk appetite yesterday. Today China’s foreign ministry said there was no information on any soy bean halt. Could be a load of rumours, but we should be very attuned to further developments on this front.
On the whole investors continue to see the glass half full even though the real extent of the economic damage is yet to be really felt. Furlough schemes and government bailouts may insulate people and companies from the shock, but these only delay the pain.
The FTSE 100 had a look at 6200 again this morning having moved added 90pts to 6,166 on Monday. Thursday’s peak at 6,234 remains the bull’s target for the cash market. The DAX moved to 11,900 with bulls eyeing the 200-day moving average at 12,100.
US stocks climbed by around a third of one per cent despite the civil unrest dragging on and drawing some attention. The S&P 500 finished at 3,055, above its 200-day moving average and making a high at 3,062 in the process, just short of last week’s peak at 3,068. The Dow is trading around the 25,500 level with the 200-day SMA in sight at 26,360.
It’s a very light day for data but overnight the RBA left rates on hold at 0.25% and signalled a more optimistic view of growth. ‘It is possible that the depth of the downturn will be less than earlier expected,’ Governor Philip Lowe said. AUDUSD is stronger, moving back to 0.68 and its best level since January.
News this week will be crucial – US services ISM on Wednesday and the nonfarm payrolls on Friday – for getting more of a handle on how much damage has been done and how quickly businesses are recovering.
Crude oil continues to hold the break on hopes that OPEC+ will agree to further extending the deepest production cuts. OPEC is set to meet June 4th now, with market participants expecting the cartel and Russia to rollover the May-Jun level of cuts for another 1-3 months.
Having brought the meeting forward it looks like OPEC+ will extend the most aggressive cuts of 9.7m bpd through to the end of the summer, though an extension for the rest of 2020 looks off the table. As noted yesterday, with compliance at just 75% last month, all else being equal, OPEC will need more time to rebalance the market as it wishes.
In FX, sterling has made a nice move higher, with GBPUSD breaking north above $1.25, after there was talk of a Brexit compromise ahead of the next round of talks this week. According to reports, the UK is making the first move to compromise – let’s see if the EU can be flexible enough to get a deal done. GBPUSD pushed through the 23.6% retracement around 1.251, potentially opening up a move back to the Apr double top above 1.26.
Removing a no-deal risk at this time would be a significant boost to the pound right now and may well take cable back above 1.30.
Front-month oil sinks, equities tentatively higher
Oil prices for the near (May) contract have tumbled. WTI sunk under $15 for the first time in 21 years, but the May contract is not really where the action is. All the volume has moved into the June contract as the May contract expires tomorrow. This has created a super contango in the two closest months that is the largest I can recall. June is trading almost $10 higher at a little under $24.
No one wants to take delivery of oil now and the hope is that US regulators in states like Texas can agree on controlled production cuts. Brent is not quite going through the same dislocation as the market is hopeful OPEC+ cuts will start to have an effect and storage constraints are less than they are for US oil. But for now the OPEC+ cuts are not enough to rebalance the market when demand is evaporated.
European equities were tentatively higher early on Monday but really going nowhere fast right now without any new drivers. The FTSE 100 is attempting to secure the 5800 beachhead. Near-term support seen at 5600. The index is starting to look pretty range-bound after rallying hard off the lows. Direction will start to come as we get a clearer estimate of the economic damage, how quick the recover is and whether the stimulus efforts have prevented a 1930s-like depression.
Overnight, the Nikkei 225 closed down more than 1% in a mixed Asian session after data showed Japan’s exports fell 11.7% in March from a year earlier, while imports were down 5%.
US equities enjoyed their first back-to-back weekly gains since February. The S&P 500 rose 2.7% on Friday, securing a move through the 50-day moving average for the first since February 21st. The rally failed to test the resistance at 2885. The S&P 500 is now just 10% lower YTD and is 30% off the lows. It’s no longer looking that cheap. Earnings continue this week to tell us more about how fairly valued the market is. Futures are pointing lower for Wall Street today. I think we could see some real volatility again, at least short-term, on earnings worries. But investors tend to be quite positive in general and may well look through the short-term damage to EPS as long as they think we get a fairly swift recovery.
In terms of the data, the broad picture is that the curve is flattening, but the economic damage is huge, though not surprising. Various additional stimulus packages are being worked on governments spot where the gaps were in their initial efforts.
Gold is holding the break below $1700 and is testing the 23.6% retracement around $1678.
Gold, 1-Day Chart, Marketsx – 08.16 UTC, April 20th, 2020
In FX, sterling is pretty steady against the dollar in the 1.24-1.25 range we’ve been in for 5 days. Near term suggests a potential push back to support at 1.2410, but price action is now at the lower Bollinger Band, suggesting possible bullish push back to the topside of the range.
GBP/USD, 1-Hour Chart, Marketsx – 08.41 UTC, April 20th, 2020
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.
Cable drops as UK economy contracts
The UK economy contracted by 0.2% in the second quarter of the year, its worst performance since 2012.
Figures from the Office for National Statistics showed the surprise contraction, which was significantly lower than the flatline economists expected. It also follows strong growth of 1.8% seen in Q1.
“PMI data had indicated we were set for a contraction, albeit not so severe,” explained Neil Wilson, Chief Markets Analyst at MARKETS.COM.
Much of the growth in the first quarter was attributed to panic buying and stockpiling before the original March Brexit deadline. Indeed, Head of GDP Rob Kent-Smith, also blamed the 2.3% drop in Manufacturing output in the Brexit delay. The initial strong start to the year included production brought forward ahead of the UK’s departure from the EU.
The services sector was the only positive contributor to GDP growth in the quarter to June 2019 – but only just at 0.1%. This marks the weakest quarterly growth in this sector since Q2 2016.
Output from the production and construction sectors also contracted at -1.4% and -1.3% respectively.
Cable dropped sharply on the news, before recovering slightly. Having fallen below 1.2090, GBPUSD was last recovering above 1.21 but remains under pressure and a good 30 pips away from its highs of the day. Having breached yesterday’s lows we may see further testing of the downside.
“Clearly the unwind of stockpiling carried out in Q1 ahead of the aborted March 31st Brexit deadline has had an impact. Also, we can point to plenty of data around the world that shows we are in the middle of a broad global slowdown,” Wilson said.
“But you do have to admit that the pervasive uncertainty around Brexit is acting as a brake on the economy.”
Rolling three-month growth was negative 0.2% in the three months to June 2019, the first time since Q4 2012. This continued a steady decline in three-month growth since the start of the year.
So, was there anything positive in the latest GDP figures?
“Well, a lot of the decline seems to be down to the fall in car making as companies brought forward usual summer shutdowns of factories. The sharp fall in manufacturing output was led by a 5.2% decline transport equipment, which the ONS says largely reflected the partial closures of various car manufacturing plants. This may be partially recovered in the second half, while we may see further stockpiling ahead of the October 31st deadline that leads to a boost to Q3 numbers,” said Wilson.
However, he added, “but on the whole the figures make for worrying reading”.
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.