US oil inventories preview: Crude rebounds after hitting lowest levels since July 1st

Commodities

Crude oil touched the lowest levels since the start of the month today as investors fretted over the pace of reopening in the world’s major economies. WTI fell to $39.27, but has since rebounded to trade $0.54, or 1.3%, higher at $40.29.

Crude oil remains rangebound ahead of this week’s main events, with $41.00 providing resistance and support at $39.00.

Oil unsteady as California orders bars to close

Risk sentiment has been knocked across the board after Californian governor Gavin Newsom ordered bars across the state to close and indoor operations to halt in restaurants, cinemas and museums.

The measures have raised questions over how quickly the world’s major economies can afford to reopen. California’s shutdown was prompted by an increase in the average number of new Covid-19 cases to over 8,000 per day during the past week.

OPEC committee to review production cuts

The timing of the shuttering in California is particularly troublesome for the oil markets, given that OPEC’s Joint Ministerial Committee meets this week to review the level of production cuts. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd.

OPEC Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance. An unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower.

EIA data: Draw expected, but are the forecasts accurate?

Prices are also being kept contained ahead of the US Energy Information Administration’s weekly crude inventories report. The latest EIA data is expected to show a draw of 2.275 million barrels after last week’s surprise build of over 5.6 million barrels.

Data from the American Petroleum Institute is due at 20.00 UTC today and could provide better guidance, given that consensus expectations for the EIA report have been wide of the mark over the past few weeks.

Equities rally ahead of Wall Street’s Q2 earnings season

Morning Note

A positive start to the week for global equities reflected a strong finish on Wall Street on Friday and an unwillingness to get bogged down by record global daily case numbers. A surge in the futures overnight translated into +1% gains for European cash equity markets as they opened, although the immediate move was to retreat off the highs made by the futures.

Whilst indices have chopped around the Jun-Jul ranges, there are divergences in the performance: the DAX is close to its June high, the FTSE 100 has only retraced 38.2%. Meanwhile futures show the S&P 500 is set to open at 3200, just 40 points from its post-March highs, whilst the Dow has only retraced 50%. These discrepancies reflect index composition as much as anything else – what to watch out for this week will be whether the S&P 500 or the DAX break free or move back towards the middle of their ranges.

The WHO said over 230k new cases were recorded in 24hrs, a record. The US recorded over 70k cases but increasingly investors are shrugging off these headlines as it’s felt the country won’t lockdown in the same way again. Nevertheless, the spike in Covid cases has slowed reopening in several states and this could translate into negative rate of change in some of the economic data which could be a problem for bulls.

It’s a big week for data, not least the start of the Q2 earnings season on Wall StreetThe high frequency economic data should continue to point to recovery however it will be the rate of change that matters more – is the recovery gaining momentum or are the easy wins behind us?

Tesla stock surged another 10% on Friday to rise above $1,500. The company is likely to report a fourth straight quarterly profit on July 22nd, which would clear the way for it to enter the S&P 500, and may explain the recent rally as funds have decided they will need to own some of it.

In commodities, gold continues to consolidate on the $1,800 level and with the bullish flag in play it could retrace further before the near-term pullback is complete, with the longer-term support on the trend line coming in around $1788. Speculative net long positioning rose, whilst inflows into gold funds continue to surge.

Crude oil continues to battle with the trend line as it tries to recover the bullish bias after last week’s sharp sell-off. Coming up this week is the U.S. Energy Information Administration (EIA) drilling report (Jul 13th) and OPEC monthly oil market report (July 14th). Speculative net positioning has barely changed in the last week, according to the CFTC COT report, with net longs at 535k vs 543k the prior week.

In FX, the dollar bounced a little of its lows in early trade with the dollar index making a bottom at 96.35 and pushing back up to 96.50. Sentiment for the dollar is a bit softer due to the risk-on trade, which is lifting major peers to drift higher. GBPUSD may have made a near-term top around 1.2670 but remains supported by the bullish channel.

Stocks choppy after sharp risk reversal, gilt yields strike fresh lows

Morning Note

Stocks continue to chop around their June-July ranges after risk sentiment rolled over at the start of yesterday’s US session. Surging Covid cases, hospitalizations and deaths in several US states continues to weigh on risk sentiment, Donald Trump was dealt a blow by the Supreme Court, and Joe Biden – who may well become the next president – said he would end the era of ‘shareholder capitalism’.

Around 3pm yesterday we saw a sharp reversal in risk appetite as stocks, bond yields and oil fell and the dollar rallied. California, Texas and Florida reported their biggest one-day increase in Covid-19 related deaths. Stocks hit the lows after Florida reported a spike in Covid-related hospitalizations, but recovered somewhat after Dr Fauci, director of the National Institute of Allergy and Infectious Diseases, revealed Moderna’s coronavirus vaccine candidate would enter phase 3 trials soon.

Supreme Court rules on Trump tax returns, Biden announces economic plan

The Supreme Court ruled Donald Trump’s tax returns should be seen by the Grand Jury, but it threw out rulings that allowed Democrat-led Congressional committees to obtain Trump’s financial records. Although this means further litigation, it should mean the documents are not a factor in the election.

Meanwhile, Joe Biden launched his $700bn economic plan by taking aim at Wall Street a threat to ‘end to the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholder’. Whilst no Bernie Sanders, there is little doubt that Biden will raise taxes and regulation risk – equity markets need to start to price in the risk better and there are signs that some investors already are.

Investors need to be wary of a Democrat clean sweep of the House, Senate and White House, which could greenlight some pretty aggressive redistributive policies. ‘During this crisis, Donald Trump has been almost singularly focused on the stock market, the Dow and the Nasdaq. Not you. Not your families,’ Biden added. After 2008 it was fashionable to bash the banks, now all corporate America is fair game if they are not woke enough. ‘Wall Street bankers and CEOs didn’t build America,’ Mr Biden said.

Europe opens weak, turns green

European shares were choppy after Asian markets fell and China’s equity rally finally ran out of steam. The FTSE 100 fell under 6,000 this morning before paring losses, returning to the low end of its June range. After a weak open, European indices were turning green after the first hour of trade.

The S&P 500 struck a low at 3,115 yesterday before closing down 0.5% at 3,152, flat for the week. Energy stocks led the drop, declining 4% as oil prices sank. Futures are lower and indicate a weaker open at the 61.8% retracement of the June-July range. The Nasdaq rose 0.6% to a fresh record as the tech sector continued to be the only real area of safety.

US unemployment numbers were a little better than expected but continue to show just how long the road is ahead. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.

Treasury yields fell, with US 10s back to 0.58% having notched a record low yield on an auction. UK 2- and 5-year gilt yields have hit a record low this morning, following Eurozone and US yields lower. Investors are showing no fears that massive issuance is going to force up borrowing costs as long as central banks remain in full support mode.

WTI through trend support as risk appetite cools

Crude oil fell sharply with stocks as risk rolled over. WTI (Aug) broke down through the trend support and may push lower. From a technical perspective we can start to consider completion of the head and shoulders reversal pattern and look for the move to head towards the neckline around $35. The IEA’s July report this morning suggested oil demand will pick up in the second half and that the worst of the demand destruction is behind us.

The IEA said oil demand this year will average 92.1m bpd, down by 7.9m bpd versus 2019, which is a slightly smaller decline than forecast in the April report, mainly because the decline in the second quarter was less severe than expected. But at this point it remains very hard to say how demand will recover longer-term given we do not know how the virus will progress nor how governments and citizens will respond – at least it seems negative prices were only a blip.

Fresh shutdowns in the populous Sun Belt states remains the worry, albeit we did see a decent draw on gasoline stocks last week, according to the EIA. Nevertheless the IEA noted that the accelerating number of Covid-19 cases is ‘a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside’.

Elsewhere, gold fell with risk assets, with the near-term pullback finding support at $1796 and should look for consolidation around the $1800 level. The outlook for gold remains constructive and we should expect lots of pullbacks along the way – nothing goes up in a straight line, and gold is particularly prone to these tactical retreats. In FX, the dollar rallied on the broad drop in risk sentiment. GBPUSD moved down to test near term trend support formed by the bullish channel. EURUSD pulled back from highs at 1.1370 to chop around the 1.1270 region.

Risk rolls over in early US trade

Commodities
Equities
Forex

Risk appetite has well and truly rolled over. US stocks moved lower in the first hour of trade and continued to leg it south, while oil prices swan dived amid a very messy picture for global markets on Thursday afternoon.  Walgreens Boots Alliance shares dragged on the Dow as the stock fell 9% after reporting weaker-than-forecast earnings amid some serious weakness in the UK. The dollar found bid as risk appetite turned south, hurting FX majors like GBPUSD and EURUSD.

Supreme Court rules on Trump tax records

Risk sentiment was a bit shaky anyway but it seemed to take a hit as Donald Trump suffered a defeat at the hands of the Supreme Court – not his favourite institution of late. The Supreme Court ruled Donald Trump’s finances and tax returns are fair game and should be seen by the Grand Jury, but it threw out rulings that allowed 3 Democrat-led Congressional committees to obtain Trump’s financial records.

This ruling relates to alleged hush money to women who have claimed to have had sexual relations with the president – a story Mr Trump said was irrelevant. That may be so, but his tax returns may interest voters. Whilst US legal proceedings are far from my area of expertise, I understand that if only the Grand Jury sees the documents it is very unlikely that they would become public records, which could have had serious repercussions for the election. Meanwhile Treasury Sec Steve Mnuchin was also on the wires, saying the Federal government would not bail out states that had been ‘mis-managed’.

Stocks, commodities lower despite solid US jobs figures

The move lower came despite some decent jobs numbers. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.

So, the picture in the US labour market is maybe not quite as bad as feared, but still horrendous. There is clearly a long way to go before getting back to pre-pandemic levels. Moreover, as the number of covid-19 cases rises across most US states, the numbers may well start to improve a slower rate.

At send time indices were at session lows, making new lows for the week – we could see further declines as risk appetite appears to have rolled over today. As of send time the Dow was down over 1.8% to 25,559 at the session low, whilst S&P 500 was down 1.5% at a low of 3,120, making it down for the week.

The dip on Wall Street added to pressure on European equities with the FTSE 100 down over 1.7% to a low at 6,046, taking it negative for the week. Having been bid up on Monday towards the higher end of the recent ranges for little reason we are seeing indices pull back closer to the middle of the June ranges – no conviction trade yet.

Dollar firms against pound, euro in risk-off trade

Meanwhile, sterling eased back as risk appetite soured and Michel Barnier said talks this week confirm that significant divergences remain between the EU and the UK. Sterling pulled back from its highs at the top of the new bullish channel on the news as well as the general risk-off tone but remains in a solid uptrend with GBPUSD ably supported above 1.26. Elsewhere in FX the risk rollover boosted the USD so EURUSD pulled back under 1.13.

WTI (Aug) fell sharply from around $40.50 a low under $39.30 in a very swift and long-awaited reversal – albeit probably a day late given yesterday’s inventory build. Expectations of a slower reopening in a number of US states is a worry for near-term sentiment and I have been calling for a reversal based on the technical set-up, which could see a return to the neckline at $35.

Stocks tread water, US jobs numbers on tap

Morning Note

Caution is the order of the day. European stocks are mixed after falling for the second session in a row on Wednesday. Asian share ticked up overnight, with China continuing to charge. Wall Street rose on Wednesday but overall the major indices are still well within their June trading ranges.

Nine-year high for gold, Fed cautious on economic outlook

Gold broke out to its highest level in nine years, breaking free from the $1,800 psychological resistance to clear $1818 at one point. The path is open to further gains, albeit we have just seen real interest rates come back in a touch. Nevertheless, the outlook for gold remains constructive – lower real yields, worries about inflation emerging down the line, and broader economic uncertainty all combine for a perfect environment for gold bugs.

Fed officials are increasingly sounding cautious. Richmond Fed President Thomas Barkin said whilst businesses might have had decent order books and pipelines of work to keep them going, new orders are not coming on stream fast enough. Fiscal payments are coming to an end and it is not clear what will replace them. The US may well need to extend and pretend.

Boston Fed president Eric Rosengren said: ‘I do expect unfortunately that the economy is going to remain weaker than many had hoped through the summer and fall.’ US cases continue to soar, with the country again reporting its biggest one-day jump in cases, choking the reopening and recovery process at birth.

US jobless claims on tap

The US weekly unemployment claims data will be closely watched following the big nonfarm payrolls report last week. Initial claims are seen at 1.375m, with key continuing claims down to 1.875m. Whilst these numbers have been coming down, they haven’t been contracting at a rate fast enough to warrant great optimism.

Data from Japan at first looked encouraging but masked some nasty surprises. Core machinery orders, a volatile leading indicator of activity, rose 1.7% in May after a 12% drop in April, and ahead of the 5% decline expected. However, the 17.7% rise in orders for non-manufacturers was offset by a 15.5% decline in manufacturers’ orders and 18.5% drop in overseas orders.

Dollar weakens, WTI oil eases back after breaching $41

In FX, the dollar is being offered. GBPUSD cleared resistance and moved above 1.26. Resistance 1.2690, the Jun 16th swing high, is the next target for bulls. EURUSD has cleared 1.13 but pulled back sharply after running into resistance at 1.1370. Eurogroup members to vote on a new president today ahead of the key summit next week at which the EU needs to hammer out agreement on the €750bn rescue fund.

Crude oil pushed higher before pulling back. WTI (Aug) moved above $41 but pared gains and traded around $40.70 at send time. The EIA said US crude inventories rose by 5.7m barrels vs expectations for a draw of around 3m barrels. But the data was not as bearish as it appeared at first glance – stockpiles were up largely on higher imports, whilst gasoline inventories fell by almost 5m barrels, a good sign Americans are back on the road. Refining activity rose to a 14-week high.

US oil inventories preview: EIA raises WTI price forecast

Commodities

US crude oil inventories are expected to see a draw of 3.2m barrels in the week to July 3rd, whilst gasoline stocks are expected to drop by 1.2m barrels.

Yesterday the American Petroleum Institute (API) reported a build in US crude stocks of 2m barrels, whilst gasoline stockpiles fell by 1.8m barrels. Crude at the Cushing, Oklahoma, hub rose 2.2m barrels.

Meanwhile the U.S. Energy Information Administration presented a more bullish fundamental case and raised its West Texas Intermediate (WTI) price forecast for 2020 to $37.55 a barrel, up almost 7% from the June forecast.  2021 prices are forecast to average $45.70 in 2021, a gain of 4% from before. The EIA said changes in supply and demand have shifted global oil markets from an estimated 21 million barrels per day of oversupply in April to inventory draws in June.

The EIA also said that it expects high inventory levels and surplus crude oil production capacity to cap the upside for oil prices in the coming months. However, as inventories decline into 2021, the upward pressure on prices should increase.

Other highlights from the EIA Short Term Energy Outlook:

  • Brent crude prices forecast at $40.50 in 2020 and $49.70 in 2021
  • Average US crude oil production to fall in 2020 and 2021 as forecast WTI spot prices remain less than $50/b through 2021. EIA forecasts that U.S. crude oil production will average 11.6 million b/d in 2020 and 11.0 million b/d in 2021.
  • US liquid fuels consumption will average 18.3 million b/d in 2020, down 2.1 million b/d from 2019. Declines in US liquid fuels consumption vary across products. From 2019 to 2020, EIA expects jet fuel consumption to fall by 31% and gasoline and distillate fuel consumption to both fall by 10%.

Crude oil has been stuck in a tight range around $40 in recent days but continues to exert an upwards bias despite the potential head and shoulders reversal pattern evident on the chart.

Investors eye UK mini budget, gold heads to $1800 as stocks slip again

Morning Note

Stock markets remain in choppy trading ranges. The optimism that fuelled the rally at the start of week has fizzled out, leaving indices back towards the middle of the June range and back close to where they finished up at the end of last week. Investors continue to look at soaring case numbers on the one hand and on the other the pace of recovery and massive stimulus which has already been administered.

Asian markets slipped, albeit China stood out as it continued to rally on some good stoking by the state-run press. The ASX fell 1.5% as investors reacted to the lockdown in Victoria. European stocks followed suit and were softer on the open on Wednesday. The FTSE 100 pulled back further below 6200 where it has found some degree of support at 6153 on the 38.2% retrace of the pullback in the second week of June that has formed that range of the last month and a half.

Gold climbs towards $1800, US yields hit fresh lows

Treasury yields slipped on a broad risk-off mood. US 10s went to 0.655% which left 10yr TIPS – our favourite gold indicator – at fresh seven-year lows at –0.78%. This gave further succour to the gold bulls and lifted prices to fresh seven-year peaks above $1797 and it looks like $1800 can be taken out. The gold bull thesis rests not only on the requirement for safe assets given the economic uncertainty, but also longer term on fears of a surge in inflation caused by the massive increase in the money supply caused by central banks. In large part due to the corresponding fiscal actions, unlike the QE that occurred after the financial crisis, this time the excess cash is not going to get lost in the banking sector.

While yields dipped and gold is at multi-year highs, the prospect of more stimulus may keep markets relatively buoyant for the time being. The worry is that as the support packages roll off, particularly the kind of financial aid for employees from the likes of the UK’s furlough scheme, the pace of recovery slows drastically. The economic data could really start to crunch as temporary layoffs become permanent and the pressure for governments to continue to ‘do whatever it takes’ will increase.

UK coronavirus ‘mini budget’ on tap

Today, Britain’s chancellor Rishi Sunak will respond with a ‘mini budget’, to be delivered at 12:30 BST after PMQs. This will aim to shift the support on offer from the emergency to the more lasting with measures such as cash for training young people to prevent the risk of mass youth unemployment, a stamp duty holiday to goose the housing market, a maybe a VAT cut to help the hospitality sector. Housebuilders ought to be among the main beneficiaries of the budget, but shares in Barratt and Taylor Wimpey slipped this morning after rallying this week ahead of the statement. Meanwhile Marston’s and Mitchells & Butlers shares plunged around 5% this morning ahead of the statement which may not have as much for the hospitality industry as some had hoped.

Sterling held gains above 1.2540 ahead of the statement, having gained sharply yesterday arguably on some hopes that the budget will get the economy moving a bit quicker. GBPUSD remains well within the recent range and shows little signs right now of mounting a serious ascent to 1.30, however having created a bottom at 1.2250 the recent move higher can continue and the bullish bias persists – the Jun high at 1.28 is the key.

A huge part of the problem facing investors in this market is figuring out what the data is telling us. As noted many times in recent weeks, the economic data is noisy and difficult to interpret because the speed and magnitude of the collapse was like nothing we have ever seen. For example, France’s statistics body, Insee, says the French economy will rebound 19% in Q3, but still be down 9% in 2020. This points to the difficulty in reading too much into the easy part of the recovery process as lockdowns end. The longer-term recovery to activity levels comparable with 2019 will take a lot longer.

Key Eurogroup vote on new president tomorrow

Eurogroup members to vote on a new president tomorrow. The vote comes at an important moment for the Eurozone as it tries to agree on financial aid package as part of budget talks. The summit of July 17th and 18th is the date for your diaries.  Christine Lagarde said the ECB may hit the pause button on its easing programme, telling the FT that the ECB has ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. This should put to rest any thoughts the central bank would announce fresh easing measures at its meeting next week. Ms Lagarde wants to stress that it’s time for the EZ member states to step up and sort out the fiscal support rather than leaning ever more on the ECB and lower rates.

Meanwhile, the White House is said to be looking at ways to undermine the Hong Kong dollar peg to the US dollar as a potential way to hit China. If such a tactic were to be deployed, it could raise risks for Hong Kong banks to access dollars and we could feasibly see ripple effects across the FX space – albeit I don’t see the US embarking on any kind of outright manipulation to weaken or strengthen the dollar. It’s probably not a tactic that will be considered seriously or pursued by the administration, but it’s one to watch.

Oil steady after API data shows oil storage build, gasoline draw

Crude oil (WTI for August) was steady still around the $40 handle. API data showed a build in US crude stocks of 2m barrels, whilst gasoline stockpiles fell by 1.8m barrels. Crude at the Cushing, Oklahoma, hub rose 2.2m barrels. Meanwhile the U.S. Energy Information Administration presented a more bullish fundamental case and raised its WTI price forecast for 2020 to $37.55 a barrel, up almost 7% from the June forecast.  2021 prices are forecast to average $45.70 in 2021, a gain of 4% from before. The EIA said changes in supply and demand have shifted global oil markets from an estimated 21 million barrels per day of oversupply in April to inventory draws in June. EIA crude oil inventories later today are forecast to see a draw of 3.2m barrels, but the consensus estimate has been wide of the mark for several weeks now.

Banks lead European stocks higher

Morning Note

Asian shares soared overnight on Monday, lending a positive start to the European session as equities rode a broad risk rally. The very strong US nonfarm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus.

Hong Kong rose 4%, Tokyo 2%, while shares on mainland China were up around 5% on, among other things, some bullish commentary in state press. Shanghai shares jumped 5.7%, the best one-day gain in five years.

It looks like local investors are chasing the market and the spill-over has lifted the boats across Asia. China’s rally sparked a broad risk-on move. Escalation of US-China tensions don’t seem to be a major worry.

Bank stocks surge as Europe opens higher

European shares took the baton and opened roughly 2% higher in early trade on Monday led by a surge in bank stocks. HSBC rallied 6% apparently on the China trade read across, but elsewhere we saw broad gains as investors looked to new leadership at Lloyds and Commerzbank, whilst hopes of a fiscal lift in Europe may be a factor. Broadly it looks like the Chinese rally has lifted cyclicals like banks and autos.

Eco data was better but not as good as hoped – German factory orders jumped 10.4% in May, although the rebound was less impressive than the 15% expected. Orders remain almost a third below where they were a year before. Bank of France Governor Francois Villeroy de Galhau said on Sunday the country’s economy was bouncing back quicker than expected.

Meanwhile, Andrew Bailey, the governor of the Bank of England, has written to UK banks warning of the operational challenges of negative rates (new computer systems, lower net interest margin). This could be taken either way; either it’s an explicit message to get ready, or it’s way of saying to them not to worry because we know it’s a massive pain. The letter said negative rates remain “one of the potential tools under active review” should the Bank think more stimulus is required.

The rally left the DAX close to the top of the June range, trading above 12,800. The FTSE is close to the 61.8% retrace of the pullback in the second week of June. US futures point towards strong gains when Wall Street reopens after the three-day weekend, with the S&P 500 moving clear of the 78.6% retracement. June peaks are starting to come into view and will be a key test for whether this rally has further to run or whether it’s time for a pullback.

Bets of further stimulus boost stocks

Whilst markets face a wall of worry, investors are confident of getting a leg up from further stimulus. Britain’s chancellor Rishi Sunak will set out a mini-Budget this week focused on jobs. A meeting of Eurozone finance ministers on Thursday will set the tone for the key July 17th-18th summit. Whilst the various countries disagree over the composition of grants and bailouts, on conditionality and over how the funds are divided up, Germany’s Angela Merkel is bound to make sure that a deal is done: the squabbling needs to stop.

Meanwhile the US Congress is set to work on a second stimulus bill this month. At the same time, Covid-19 cases continue to soar – markets are getting used to the numbers – but the pace of recovery in the US will flatten if rising cases means states re-impose lockdown restrictions. As noted last week, the headline number in the jobs report masked some ills, so we will again be very much focused on the weekly initial and continuing claims numbers this week.

Dollar softens, oil edges higher, Buffett bets on natural gas rebound

Elsewhere, the broad risk rally sent the dollar lower, with DXY at 96.80. Sterling pushed a little with GBPUSD back about 1.25, looking to break last week’s peak a little short of 1.2530. EURUSD was a whisker short of 1.13, entering the resistance formed by the July 2nd peak. Clearing this opens up the path to the Jun 23rd swing high at 1.1350. Market positioning remains quite aggressively short, with net speculative positions on the euro the most bearish in three years.

Crude oil was a little higher, with WTI (Aug) just about nudging the $41. Gold is steady at $1776, with the latest CFTC figures showing speculative net longs at the highest in two years. Finally, Warren Buffett is making a $10bn bet on natural gas prices rebounding – the veteran investor thinks the market, which hit a 25-year low last month, has bottomed, making assets cheap and is on course for a rebound.

US Election, Recession, Brexit: What’s in store for markets in 2020 H2?

Equities
Forex

The first half of 2020 has been a wild ride. We’ve seen unprecedented moves in markets, historic stimulus efforts by both central banks and governments, and record-breaking data that grabbed headlines across the globe.

H1 has already brought plenty of drama, but what should we expect from the next two quarters? Join us for a recap of some of the biggest events in market history and a look at the risks and opportunities that lie ahead.

Coronavirus pandemic prompts worst quarter in decades for stocks

At the start of 2020 the main themes of the year looked to be the US Presidential Election, the trade war with China, and Brexit.

It seems like years ago that markets began to get jittery on fears that the handful of novel coronavirus cases in Wuhan, China, could become something ‘as bad as SARS’. It quickly became apparent that we were dealing with something much worse, and the market was quick to realise the full, brutal, reality of a global pandemic.

The panic reached its zenith towards the end of March. As the sell-off ran out of momentum global stock markets were left -21.3% lower. The S&P 500 had its worst quarter since 2008; the Dow dropped the most since 1987 and set a new record for the biggest single-day gain (2,117 points) and single-day loss (2,997 points). European stocks had their worst quarter since 2002, with a -23% drop in Q1.

Oil turns negative for first time in history after Saudi Arabia sparks price war

Things became even more chaotic in the oil markets when, after OPEC and its allies failed to agree a pandemic response, Saudi Arabia opened the floodgates and slashed prices of its crude oil exports. Oil prices endured the biggest single-day collapse since the Gulf War – over -24%.

It was further strain for a market now seriously considering the risk that shuttered economies across the globe would hit demand so hard that global storage would hit capacity. The May contract for West Texas Intermediate went negative – a first for oil futures – changing hands for almost -$40 ahead of expiry.

Meanwhile US 10-year treasury yields hit record lows of 0.318%, and gold climbed to its highest levels in seven years, pushing even higher in Q2.

Economies locked down, central banks crank up stimulus

Nations across the globe ordered their citizens to remain at home, taking the unprecedented step to voluntarily put huge swathes of their economies on ice for weeks. Even when lockdown measures were eased, the new normal of social distancing, face masks, and plastic screens left many businesses operating at a fraction of their normal capacity.

The world’s central banks were quick to step in during the height of market volatility and continued to do so as the forecasts for the economic impact of the pandemic grew even more grim. The Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand all dropped rates to close to zero. Along with the European Central Bank, they unleashed enormous quantitative easing programmes, as well as other lending measures to help support businesses.

Unprecedented stimulus as unemployment spikes

Governments stepped in to pay the wages of furloughed employees as unemployment spiked – the US nonfarm payrolls report for April showed a jaw-dropping 20.5 million Americans had become unemployed in a single month. In the space of just six weeks America had erased all the job gains made since the financial crisis. The bill for US stimulus measures is currently $2 trillion, and is set to go higher when further measures are approved.

While most of the data may be improving, we’re still yet to see just how bad the GDP figures for Q2 are going to be. These, which will be released in the coming weeks, will show just how big a pit we have to dig ourselves out of.

H2: Recovery, US election, trade wars, Brexit

Markets may have recovered much of the coronavirus sell-off – US and European stocks posted their best quarter in decades in Q2 – but the world is still walking a fine line between reopening its economies and fending off the pandemic. Second wave fears abound. In the US in particular, economic data is largely pointing to a sharp rebound in activity, but at the same time Covid-19 case numbers are consistently smashing daily records.

These key competing bullish and bearish factors threaten to keep markets walking a tightrope in the quarters to come. Because of this, progress in the race to find a vaccine is closely watched. Risk is still highly sensitive to news of positive drug trials. The sooner we get a vaccine, the sooner life can return to normal, even if the world economy still has a long way to go before it returns to pre-crisis levels.

US Presidential Election: Trump lags in polls, Biden threatens to reverse tax cuts

The biggest talking point on the market in the coming months, aside from coronavirus, will undoubtedly be the US Presidential Election. The stakes are incredibly high, especially for the US stock market, and Democrat nominee Joe Biden intends to reverse the bulk of the sweeping tax cuts implemented by president Donald Trump.

Trump is currently lagging in the polls, with voters unimpressed by his response to the pandemic and also to the protests against police brutality that swept the nation. The president has long taken credit for the performance of the stock market and the economy, so for the latter to be facing a deep recession robs him of one of his key topics on the campaign trail.

Joe Biden may currently have a significant lead, but there is a long time to go until the polls, and anything could happen yet.

China trade war in focus, Hong Kong law adds fresh complications

The trade war with China would be a focus for the market anyway, but will come under increasing scrutiny in the run-up to the election. Thanks to Covid-19, anti-China sentiment is running high in the United States. This means Biden will also have to talk tough on China, which could mean that the damaging trade war is set to continue regardless of who wins the White House this time around.

Tensions have already risen on the back of China’s passing of a new Hong Kong security law, and coronavirus makes it virtually impossible that the terms of the Phase One trade agreement hashed out by Washington and Beijing will be carried out. Trump may be forced to stick with the deal, because abandoning it would leave him unable to flaunt his ability to make China toe the line during the presidential race. This would be positive for risk – markets were already rattled by fears that the president’s response to the Hong Kong law would include abandoning the deal.

How, when, and if: Unwinding stimulus

Even if we get a vaccine before the end of the year and global economies do rebound sharply, the vast levels of government and central bank stimulus will need to be addressed. Governments are running wartime levels of debt.

We’re looking at an even longer slog back to normalised monetary policy – something that banks like the Bank of England and the European Central Bank were struggling to reach even before Covid. There will be huge quantitative easing programmes to unwind and interest rates to lift away from zero, or potentially even out of negative territory.

Markets have been able to recover thanks to a steady cocktail of government and central bank stimulus. The years since the financial crisis have proven that it is incredibly difficult to wean markets and the economy off stimulus. There could be some tough decisions ahead, especially as governments begin to consider how they plan to repair their finances in the years to come.

Brexit deadline approaches, impasse remains

There is also Brexit to consider. While the coronavirus forced officials to move their negotiations online, little else seems to have happened so far. Both sides are refusing to budge and both sides are claiming that the other is being unreasonable. The UK does not want an extension to the transition period, and the two sides are running out of time to agree a trade deal.

We’ve seen before that both Downing Street and Brussels like to wait until the last possible moment to soften their stance. However, the risks here are higher because before there was always the prospect of another extension.

The last time negotiations were extended the battle in Westminster shocked the UK to its constitutional core. The Conservative landslide victory of 2019 gave Boris Johnson a much stronger hand this time around – the UK will leave in December, regardless of the situation.

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Whatever happens in the coming months, we’ll be here to bring you the latest news and analysis of the top developments and market events via the blog and XRay.

Stocks steady as pubs prepare to reopen

Morning Note

European stocks were steady near the flatline on a quiet Friday session with the US market closed for the Independence Day holiday. Stocks rallied in the prior session after a bumper US jobs report showed 4.8m jobs were created in June.

Despite this, as detailed yesterday, the unemployment rate remains very high at more than 11%, the more up-to-date weekly initial and continuing claims numbers are not improving quickly enough, and the recent spike in cases means several states are re-imposing lockdown restrictions, which will hamper jobs growth in July.

Risk assets gained more support as the Chinese services PMI rose to a 10-year high at 58.4 – the usual caveats about diffusion indices apply, as to the usual caveats about any data out of China, but it’s solidly encouraging for markets.  Australian retail sales bounced back almost 17%. The number of cases in the US continue to surge – more than 55k in a single day the latest total, with the governor of Texas now mandating the wearing of facemasks.

Major indices continue to track around the middle of the June range, though thanks to a decent run this week are now moving towards the upper end of the range having tapped the lower end last week. The S&P 500 cleared the 61.8% retracement yesterday but closed well off its highs, while the Dow is struggling to hold the 50% level.

In Europe the FTSE 100 is holding above the 50% level, while the DAX is facing resistance today at the 78.6% level. After a strong week and with the US shut, it might be a quiet session today. Scratch that – with pubs about to reopen and with every trader planning their weekend engagements, it will be a very quiet one in London.

UK government eases quarantine rules for travellers

Anyone arriving in England from a number of countries including Spain, France, Germany and Italy won’t need to self-isolate from July 10th, whilst the government is also easing international travel restrictions. A full list of countries that people can arrive from without self-quarantining will be published today.

Relaxing the draconian quarantine rules and allowing more ‘non-essential’ travel should come as a shot in the arm for many beaten up travel & leisure stocks, but there’s a long way to go to restore confidence and get people travelling as much as they did last year. It will take years to get air passenger numbers back to 2019 levels.

Pub and restaurant stocks have taken a beating during the pandemic, but investors may be able to raise a glass come Saturday as the various inns and hostelries reopen because share prices have recovered remarkably well. Marston’s has risen threefold from its March low, while JD Wetherspoon and Mitchells & Butlers have both more than doubled in that time. Mine’s a quadruple whisky.

Oil (WTI-Aug) drifted higher to the top of the Jun 8th peak around $40.70 where it’s pulled back to the $40 round number. The move higher has been steadily losing momentum and failure at the $40.70 area suggests perhaps the progression of the double top into a head and shoulders reversal pattern.

GBPUSD hits resistance, EURUSD bullish flag nears completion

In FX, the pound’s bounce ran out of steam and the euro has come back to its anchor. GBPUSD rallied strongly out of the channel but hit resistance at 1.2520 and has consolidated in a very narrow range around 1.2470. As markets opened in Europe the pair slipped this range and started a move lower – it could retrace towards the round number support at 1.24.

Meanwhile EURUSD has come back to 1.1230, the anchor point for the whole of June. This is the 23.6% retracement of the 2014-2016 top-to-bottom rout. As the bullish flag pattern nears completion, we should expect a breakout soon – the swing highs around 1.14-1.15 offering the main resistance.

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