Week Ahead: Pence vs Harris in focus after messy presidential debate

Week Ahead

Vice president Mike Pence and senator Kamala Harris will both be hoping to emerge from this week’s vice presidential debate with more dignity than the presidential candidates did last week. It shouldn’t be hard. Also ahead, there’s plenty from central banks this week, including a rate decision from the RBA and minutes from the latest FOMC and ECB meetings.

US election: More decorum from Pence and Harris in vice presidential debate?

This week sees the second of the US election debates, this time the one and only face-off between vice president Mike Pence and senator Kamala Harris. 

The first presidential debate last week seems to have little impact on the polls, and is viewed as being such an embarrassment that the Commission on Presidential Debates has announced it will make changes to the format of future events in an attempt to make things more orderly. 

One of the changes being considered is to cut candidate’s microphones if they try to interrupt excessively. Although this will impact Trump more than Biden, this might not necessarily disadvantage the President, who didn’t give his opponent much opportunity to slip up last time.

The vice presidential debate gets going at 21.00 ET, October 7th (01.00 UTC, October 8th). The last time Pence appeared in a nationally televised debate was in October 2016. Harris, on the other hand, has had plenty of practice in recent months. 

FOMC and ECB meeting minutes

Sandwiching the vice-presidential debate this week are the Federal Open Market Committee minutes and the European Central Bank accounts. 

The FOMC took the opportunity last month to flesh out its new average inflation targeting strategy, although according to its predictions it’ll be a long time before policymakers are in a position to let inflation run hot. The latest minutes might provide some more clarity, but with the debate following a couple of hours later, markets might not take much notice. 

ECB president Christine Lagarde noted after the latest meeting of the Governing Council that the EURUSD exchange rate had risen notably, although she also stated that “as you know, we don’t target the exchange rate”. The minutes could give more information on how policymakers fear a strong euro might impact their mandate. 

Although EURUSD has retreated after peaking above 1.20 at the start of September, the pairing is trending around the same levels as were seen when the ECB were considering its strength. 

Reserve Bank of Australia interest rate decision

Futures markets are firmly betting that the Reserve Bank of Australia will cut rates to 0% when it meets this week. ASX 30 Day Interbank Cash Rate Futures show a 64% chance of a cut at the time of writing. 

This comes after recent comments from deputy governor Guy Debelle, who used a speech to outline policy tools the RBA is considering to help it meet its twin mandates on employment and inflation. 

Foreign exchange intervention and negative interest rates were both on the list. 

Economic data to watch

In terms of economic data, we’ll be watching the US ISM nonmanufacturing PMI and weekly jobless claims, German industrial production and a slew of data from the UK on Friday, including monthly GDP, industrial production and construction output figures.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

17.00 UTC 05-Oct Blonde Markets
From 15.30 UTC 06-Oct Weekly Gold, Silver, and Oil Forecasts
17.00 UTC 07-Oct Webinar: 10 Trading Rules for Every Level of Trader
17.00 UTC 08-Oct Election2020 Weekly
12.00 UTC 09⁠-⁠Oct Platform Walkthrough

Key Events this Week

Watch out for the biggest events on the economic calendar this week. A full economic and corporate events calendar is available in the platform.

07.15 – 08.30 UTC 05-Oct Finalised Eurozone, UK Services PMIs
14.00 UTC 05-Oct US ISM Nonmanufacturing PMI
03.30 UTC 06-Oct RBA Interest Rate Decision
Pre-Market 06-Oct Paychex – Q1 2021
After-Market 06-Oct Levi’s – Q3 2020
06.00 UTC 07-Oct German Industrial Production
07-Oct Tesco – Interim Announcement 20/21
14.30 UTC 07-Oct US EIA Crude Oil Inventories
18.00 UTC 07-Oct FOMC Meeting Minutes
01.00 UTC 08-Oct US Vice President Nominee Debate
11.30 UTC 08-Oct ECB Monetary Policy Meeting Accounts
12.30 UTC 08-Oct US Weekly Jobless Claims
14.30 UTC 08-Oct US EIA Natural Gas Storage
06.00 UTC 09-Oct UK Monthly GDP, Production, Output

Stocks slip after Wall St bounce (bull trap?), FX markets tune into Brexit and ECB

Morning Note

Fear casts a long shadow. If the virus doesn’t get you, the fear might. It’s almost a trope in economic and trading circles: it’s not the virus causing the damage to the economy and businesses, but the twin enemies of a chaotic government response and worst of all, fear.

Fear is what gets you in the end. Fear is what cripples the recovery, be that fear of the virus (I won’t go out) or fear of arbitrary knee jerk responses (why bother booking a holiday abroad). Fear of tax raids is another we might add for many investors looking at how public policy may affect their returns.

Dunelm warns over Christmas lockdowns, IAG announces rights issue

There is a fear stalking some companies. Dunelm this morning warned off a ‘severe but plausible’ scenario in which there are further lockdowns over Christmas. Sales might not recovery fully until 2023, management worry.

Meanwhile IAG has warned demand has eased and now expects capacity to decline this year more than previously thought. Available seat kilometres are forecast to drop by 63% in 2020 and still be 27% below 2019 levels in 2021. Previously it had forecast declines of 59% and 24% respectively. The forecasts came as IAG announced a €2.75bn discounted rights issue to strengthen its balance sheet.

Even Morrison’s, which has seen sales surge, is nursing a drop in profits because the new order means more of the lower margin online business is required.

Names like Azhag the Slaughterer and Gorbad Ironclaw are designed to strike fear into people’s hearts, but investors in Games Workshop have had less reason to be afraid than many. Today’s trading update shows continued strong progress despite the pandemic – indeed staying indoors for long stretches is something their customers are not afraid of.

Shares jumped over 10% after the company reported a very strong three months to August 30th, with sales up to £90m from £78m a year ago. Online growth has been strong. It also declared a dividend of 50p. Peel Hunt raised its price target on the stock.

Global equities rebounded – a classic bull trap?

Yesterday saw a big risk rally as global equities recovered from a 3-day sell-off led by US tech shares. Wall Street – equity markets bounced strongly. The Nasdaq added 2.7%, while the S&P 500 was up 2%. The Nasdaq held its 50-day moving average, with this level offering the major support for the rally. The S&P 500 ran into resistance at the 21-day line. There was some selling into the close though, which makes you wonder if it’s a classic bull trap before the next swing lower.

Vix futures (Sep) broke the rising trend line to trade at 28.50, having taken a 37 handle last Friday. The FTSE 100 climbed over 1.3% to recover the 6,000 level, while the DAX added 2%.

Europe soft as markets await ECB decision

European stock markets turned lower this morning as investors look ahead to the ECB meeting today. The meeting comes amid a sharp rally for the euro that has left policymakers concerned. The line in the sand for the central bank was 1.20 on EURUSD – a level that prompted chief economist Philip Lane to comment that “the euro-dollar rate does matter”. Traders should pay attention to any nod to currency worries from Christine Lagarde.

Whilst the consensus is that the ECB will take no further policy action, policymakers may choose to act, albeit any action at all would be around the PEPP programme rather than slicing interest rates lower. As noted earlier this week, the sharp decline in inflation could force the ECB to take swifter action than the market is anticipating. Eurozone inflation turned negative in August, declining to –0.2% from +0.4% in July.

Sources yesterday indicated the ECB is more confident in its economic projections – it was not entirely clear whether they meant they are more confident that they are right about the , or more confident they will improve.

However, even here the ECB probably doesn’t need to push its PEPP envelope, given only €500bn has been used out of €1.35bn available. I think Christine Lagarde may seek talk up this being a target, rather than a ceiling.

In summary, on the balance of probabilities the ECB will not make any monetary policy changes but will lean hard on jawboning the euro lower and talking up the unused room in the PEPP programme and that it will do whatever it takes to support the recovery and stand ready to expand it if required. EURUSD trades at 1.1820 in a steady pattern ahead of the meeting.

Pound up but Brexit remains key risk

The pound rebounded yesterday afternoon and held gains after the EU said it would not kybosh talks because of the U.K. threat to rip up the withdrawal bill – the internal market Bill. This removed the immediate risk of a collapse in trade talks, which appears to have driven the aggressive move lower in the morning with cable hitting a six-week low. This sent cable hard back to 1.30 in a sharp risk reversal that many newly minted shorts firmly on the wrong side.

But we should caution that sterling remains very exposed to further negative headlines and risks appear still skewed to the downside for the time being and we can only say that sharp moves lower – in the region of one big figure – are to be expected. The EU this morning is said to be considering legal action against the UK over the bill. GBPUSD just traded a little under 1.30 again as morning trading got going in London, possibly with this news weighing on sentiment – again highlighting the headline risk.

Today sees the talks wrap with the usual order of service involving the two sides giving separate press conferences. The focus on the EU side will be to what extent the internal market build has undermined trust.  Remember a deal will always look a lot more distant than it may be in reality.

US jobless claims numbers are also due later. These have become a useful barometer for the US economic recovery and tend to show that the momentum from the initial post-lockdown snapback is waning.

Last week, the initial jobs claims improved but the methodology changed somewhat and the only stat we really cared about was that the total number of people claiming benefits in all programs for the week ending August 15th was 29,224,546, an increase of 2,195,835 from the previous week.

Week Ahead: Brexit talks resume, ECB zones in on exchange rate

Week Ahead

Brexit talks resume this week for another round of horse trading that has so far resulted in very little progress. Will the two sides break the deadlock or will headlines weigh on sterling? Meanwhile the European Central Bank meeting comes after a significant rally for the euro that has got policymakers worried. 

Brexit Talks

The next formal round of talks between the EU and UK are due to take place in London this week and introduce event risk for GBP crosses and the FTSE by implication. The underlying mood is not very positive. The last round of discussions in August produced very little progress.

Afterwards Michel Barnier, the EU’s chief negotiator, 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. 

Informal talks last week delivered nothing more, with Barnier saying he was “worried and disappointed” over the UK’s approach to the talks. 

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. 

ECB Meeting

The European Central Bank (ECB) meets amid a sharp rally for the euro that has left policymakers concerned. It looks like 1.20 was the line in the sand for the central bank – a level that prompted chief economist Philip Lane to comment that while the ECB does not look at the exchange rate “the euro-dollar rate does matter”.

This was the ECB attempting to intervene in the rally – a stronger euro will make it harder to stoke inflation and will hurt growth. Lane simply let the market know the exchange rate does matter. The last thing we need right now is a currency war, but the ECB may be about to start one. We await to see what Christine Lagarde has to say on the matter.

Meanwhile we should also look to see whether the ECB follows the lead of the Federal Reserve and signals its intention to not let inflation (should it ever materialise) get in the way of recovery.  

The big question is whether the ECB strives for a dual mandate like the Fed has. In actual fact, it already has a wider mandate. In addition to its primary objective to support price stability, it has a mandate to support the EU’s ‘general economic policies’. If this is not a green light to support employment, then what is?  

At Jackson Hole the Fed announced a policy shift that has a material impact on expectations around rates and inflation. The Fed has taken a more rational approach. Instead of saying that the economic outcomes need to fit its models – which have always been nothing more than a best guess – it will let the outcomes drive the policy.

Some would say this is a step towards fully embracing MMT, even if Powell has been against this approach in the past. The fact is that the crisis has thrown MMT from the hinterland of economic theory to practice without any real debate. Powell has embraced a central tenet of MMT – why should millions of people be thrown on the economic scrapheap and left unemployed as the price to pay for low inflation.

I think the ECB will be following this direction and this meeting will prove very interesting. 

Economic data to watch

Besides the above, watch out first for the US Labor Day holiday on Monday which will keep cash equity markets closed. The UK house price index from Halifax is published the same day just before the Eurozone Sentix investor confidence report.

On Tuesday look for the NAB Business Confidence report for Australia as well as spending and GDP data for Japan. Wednesday sees the Bank of Canada interest rate decision and Japanese preliminary machine tool orders, an interesting leading indicator of demand. Aside from the ECB meeting on Thursday there is the US PPI inflation numbers and weekly crude oil inventories. Friday ends the week with UK GDP figures, US CPI inflation numbers and the start of Eurogroup meetings of European finance ministers.

Earnings to watch

Among the major companies reporting earnings this week are Lululemon, Oracle, Richemont and Slack. But perhaps the main focus should be on Covid-winner Peloton, whose shares have surged in recent weeks to all-time highs. 

JPMorgan last week raised its price target to $105 from $58 and added the stock to its top picks list.  

“Peloton’s biggest near-term challenge in our view is keeping up with elevated demand, with Bike order-to-delivery times of ~6-7 weeks on average across the top 20 US DMAs as of our checks on 9/1,” said analyst Doug Anmuth. 

A full economic and corporate events calendar is available in the platform.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

17.00 UTC 07-Sep Blonde Markets
From 15.30 UTC 08⁠-⁠Sep Weekly Gold, Silver, and Oil Forecasts
13.00 UTC 09⁠-⁠⁠⁠⁠Sep Indices Insights
14.45 UTC 10-⁠⁠⁠⁠Sep Master the Markets
17.00 UTC 10-⁠⁠⁠⁠Sep Election2020 Weekly

European equities bounce, dollar fights back

Morning Note

What is the right multiple when the Fed is stoking inflation and says it will not withdraw accommodation? What price should stocks carry in a world of ZIRP and QE-4-ever? It’s very hard to say: the usual model for forming a judgment on how richly or poorly valued stocks should be – using interest rates and earnings – is becoming out of step with the reality of unlimited central bank support. How do you derive the right discount rate?

We have always assumed that central banks will withdraw accommodation as the economy gets hot and inflation picks up. Or in other words, it’s always been there to take away the punch bowl whenever the party got a little rowdy. Indeed, often it was too quick to turn the music off just as people started to dance.

Now the Fed says it won’t do that and the ECB and others are set to follow – where the Fed goes usually the rest of the world needs to follow. If it’s unlimited Fed support, who cares if the forward multiple on the S&P 500 is x25? If there is no hiking cycle on the horizon, then stocks could continue to rally from these already very stretched levels.

Vix points to uncertainty as US Presidential Election nears

Of course, as repeated nearly every day, near term I worry that this extended rally is ripe for a pullback as the US election approaches, and I am not alone. Whilst retail investors rich on stimulus cheques still think ‘stonks only go up’, there are signs investors are worried about how far this has gone.

Vix futures keep moving in an upwards trajectory that suggests investors are paying more for downside protection on the S&P 500. Vix futures settled above 28 and contracts expiring in Oct are north of 33, signalling a lot of uncertainty around the election. The race will be far closer than polls show. Our election tracker shows Trump narrowing the gap.

FTSE lags global stocks

Such concerns about stretched valuations and ever-higher multiples are not a concern for UK investors. The FTSE 100 has rather majestically shrugged off the rally in global stocks and serenely plunged to its weakest since May. A stronger pound undoubtedly took the wind out of the sails and a bit of a catchup trade was in play after the market was closed for the bank holiday on Monday, meaning it didn’t take part in the mild sell-off across Europe yesterday.

But the FTSE’s troubles are not a new phenomenon – a complete absence of tech and growth is a major problem. Dividend cuts have also vanquished income investors, albeit the yield of almost 4% doesn’t seem too bad today. Last night the FTSE 100 settled on the 38.2% retracement of the March to June rally which has offered near-term support for today’s bounce – dollar strength this morning is helping too.

Record closes for SPX and Nasdaq fuel rally in Europe

European stocks rallied in early trade on Wednesday, including the FTSE 100, after the S&P 500 and Nasdaq both hit fresh records. Apple rallied another 4%, seemingly unstoppable. Tesla declined 5% after it announced a $5bn stock sale, which though a bit of a surprise is not a complete shock given Tesla’s vast capex requirements and share price accretion – as it did in February, Tesla is taking advantage of favourable market conditions to raise fresh cash early on in the cycle.

Meanwhile, we are not getting much further on stimulus – US Treasury Secretary Steve Mnuchin rejected the Democrats’ latest $2.2tn coronavirus relief package, but we are set for more spending, more printing until inflation becomes a problem.

The dollar came back fighting with DXY back above 92.50 as both GBP and EUR retreated off key resistance levels. Could be a dead cat bounce for USD. GBPUSD made a run to 1.35 but failed this test and backed off further this morning to take a 1.33 handle.

Watch for the Bank of England’s Andrew Bailey, who will be giving oral evidence to the Treasury Committee in Parliament on the economic impact of coronavirus. Obviously it’s bad, but house prices have hit a record high so that is good if you own one, not so good if you don’t. Messrs Haldane (he of the V) and Broadbent are speaking later, too.

Euro struggles after strong US manufacturing data, US ADP jobs report in focus

The euro – has a line in the sand been drawn? EURUSD pushed up to have a run at 1.20 but got knocked back as the US ISM manufacturing came in better than expected at 56. This could be a line in the sand for the euro bears defending the roaring 20s? Eurozone inflation turned negative in August – a clear signal of the disinflationary pressures wrought by the pandemic.

Inflation fell to –0.2% from +0.4% in July. It lays bare the mountain the ECB needs to climb and simply tells us that the central bank will need to keep monetary policy exceptionally loose for a very long time. It’s worth noting that the much-hyped EU rescue deal has yet to be delivered. EURUSD pulled back under 1.19 in early trade on Wednesday as the dollar caught a bid.

Today, we are looking ahead to the ADP nonfarm employment report ahead of Thursday’s weekly claims count and Friday’s main nonfarm payrolls print. The ADP number is expected to show a gain of 1m jobs from a paltry 167k in July.

US factory orders and crude oil inventories on tap this afternoon, expected to show a draw of –2m barrels. Later we also have the Fed’s Beige Book, while the Fed’s Williams and Mester are speaking.

Blonde Money ECB and EU Summit Preview

Equities
Forex

What can we expect from this week’s European Central Bank monetary policy decision? Blonde Money CEO and founder Helen Thomas takes a look at what could be in store for markets on the back of the latest announcements, and why the ECB will be watching the upcoming EU Summit as intently as the markets will.

Get the latest macroeconomic and political insight from Helen every week on XRay.

Week Ahead: Markets brace for ugly earnings season

Week Ahead

Coming up this week – just how bad will the Q2 corporate earnings season be and will central banks in Europe and Canada increase stimulus?

Q2 earnings season

Corporate earnings season gets underway on Wall Street as major companies report their Q2 numbers. 

Expectations are very low with total S&P 500 earnings set to be -44.4% on -10.9% lower revenues.  

Bank of America expects S&P 500 companies exceed consensus EPS estimates by 8% after Wall Street lowered profit expectations by around 40% heading into the Q2 season. Analysts have lowered their Q2 bottom-up EPS estimate by 37% over the quarter meanwhile, suggesting that there is a very easy bar for corporates to clear. 

But the market remains forward-looking and therefore with a lot of bad news baked in already, investors will be keen to see what the outlook is for the rest of the year – does corporate America see a rebound? If they do it could bode well for equity indices. 

This week sees Wall Street’s big banks report earnings, with JPMorgan, Wells Fargo, Morgan Stanley and Goldman Sachs all due to update the market.

EU Summit & ECB meeting

EU leaders will meet physically in Brussels July 17th and 18th to discuss the recovery plan to respond to the COVID-19 crisis and a new long-term EU budget. This may be a pivotal moment in shaping the EU’s economic response to the pandemic and hammer out agreement over the proposed €750bn rescue package. Several member states – led by the ‘Frugal Four’ but by no means restricted to them – have expressed concerns about the fund and the plans for the EC to borrow funds directly to bankroll the fund.  

Government borrowing costs have returned to pre-pandemic levels, indicative of the success the ECB has had in underpinning financial markets. However, failure to get agreement at the European Council meeting this week could see yields rise and spreads widen again, which may put pressure on the euro. If German chancellor Angela Merkel manages to get the agreement sealed, whether by strong arming or sweet talking, the euro has some upside to explore. 

Christine Lagarde meanwhile has indicated the ECB will hit the pause button on its easing programme, saying the European Central Bank 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 this week’s meeting. 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. 

Bank of Canada

The Bank of Canada is expected to leave interest rates on hold at 0.25% when it meets on Wednesday, so we’ll be looking to get an update on how the central bank views the path of economic recovery.  

Business sentiment in Canada is “strongly negative” a Bank of Canada survey showed last week, though half the companies polled expect sales to return to pre-pandemic levels within 12 months. “Softer sales expectations are widespread across all regions and sectors, with firms often expressing a high degree of uncertainty about consumer behaviour and future demand,” the central bank said. 

New governor Tiff Macklem expects growth to return in the third quarter but expects a ‘bumpy’ ride for the economy. In his first speech as governor last month Mr Macklem stressed that the BoC would not take its benchmark rate negative. 

How quickly is the global economy recovering?

Various data releases will help show how quickly economies are recovering. Britain’s latest GDP report is due up on Tuesday alongside Chinese trade figures. Watch for Australian employment data and Chinese GDP, industrial production and fixed asset investment figures on Thursday. On Friday the UK retail sales numbers for June are expected to show more improvement after rebounding sharply in May. Sales rose 12% in May, after plunging 18.1% in April. As ever we will be watching for the US weekly jobless claims numbers on Thursday, whilst the Philly Fed manufacturing index and University of Michigan consumer sentiment report are both due out later in the week.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
11.00 UTC 14-Jul Reading Candlestick Charts: Trading Patterns and Trends
From 15.00 UTC 14-Jul Weekly Gold, Silver, and Oil Forecasts
10.00 UTC 15-Jul The Marketsx Experience: Platform Walkthrough
17.00 UTC 15-Jul Blonde Markets

 

Top Earnings Reports this Week

Here are some of the biggest earnings reports scheduled for this week:

13-Jul PepsiCo – Q2 2020
14-Jul JPMorgan Chase & Co – Q2 2020
14-Jul Wells Fargo & Co – Q2 2020
14-Jul Citigroup – Q2 2020
15-Jul UnitedHealth – Q2 2020
15-Jul Goldman Sachs – Q2 2020
15-Jul US Bancorp – Q2 2020
15-Jul PNC Financial Services Group – Q2 2020
15-Jul eBay – Q2 2020
15-Jul Bank of New York Mellon – Q2 2020
16-Jul Morgan Stanley – Q2 2020
16-Jul Bank of America Corp – Q2 2020
16-Jul Abbott Laboratories
16-Jul Microsoft – Q4 2020
16-Jul Johnson & Johnson – Q2 2020
16-Jul Netflix – Q2 2020
16-Jul AMD – Q2 2020
17-Jul BlackRock – Q2 2020

 

Key Events this Week

Watch out for the biggest events on the economic calendar this week:

03.00 GMT 14-Jul China Trade Balance
06.00 GMT 14-Jul UK Monthly GDP / Manufacturing & Industrial Production
09.00 GMT 14-Jul Eurozone & Germany ZEW Economic Sentiment
12.30 GMT 14-Jul US CPI
03.00 GMT 15-Jul Bank of Japan Rate Decision, Statement, Outlook Report
14.00 GMT 15-Jul Bank of Canada Rate Decision
14.30 GMT 15-Jul US EIA Crude Oil Inventories
22.45 GMT 15-Jul New Zealand CPI (QoQ)
01.30 GMT 16-Jul Australia Employment Change / Unemployment Rate
02.00 GMT 16-Jul China GDP
11.45 GMT 16-Jul ECB Rate Decision
12.30 GMT 16-Jul US Retail Sales / Unemployment Claims
14.30 GMT 16-Jul US EIA Natural Gas Storage
14.00 GMT 17-Jul Preliminary University of Michigan Sentiment Index

Stocks tread ranges ahead of FOMC, pound at 3-month high

Morning Note

Some of the biggest share price gains registered this week have been among companies that have filed for Chapter 11 bankruptcy protection – the likes of Hertz, JC Penney, Pier 1, Whiting Petroleum, as well as firms like Chesapeake Energy and California Resources which are about to file for bankruptcy. This is downright speculation, gambling by any other way of it looking at it.

Retail investors – many trading for free with Robinhood accounts – are snapping up penny stocks and driving up the shares of companies whose stock is essentially worthless. Most of these investors probably don’t realise that common stock comes precisely bottom of the pecking order in bankruptcy proceedings. Even if they don’t go bankrupt and restructure, shareholders get wiped out. It’s a sign of a frothy market – just make sure you are not the greater fool holding the stock when the music stops.

Europe opens higher, stock markets await clarity on recovery and policy support

Stocks took a breather yesterday with a decent pullback, though European bourses opened a little higher this morning ahead of the Federal Reserve statement this evening. Asian shares were mixed, with Tokyo a tad higher and Chinese shares a little weaker.

Chinese inflation figures were soft, with producer prices down 3.7%, the worst drop in 4 years, and consumer prices rising by 2.4%, down from 3.3% in April. Meanwhile data crossing this morning showed French industrial production declined 34% in April – but the market long ago chose to ignore any backward-looking data.

European stocks opened higher after yesterday’s selloff, now bouncing around ranges before there is more clarity on economic recovery and any further policy support.  On the former, there are concerns about two-consecutive days of record numbers of hospitalisations in Texas as lockdown restrictions lift, but broadly optimism about reopening is trumping doubts about second waves and a slow, lacklustre recovery.

It turns out pubs won’t reopen by Jun 22nd, but the bigger worry is how you get children back to school – that should be a priority. Meanwhile, I have grave doubts about the state of the UK employment market come the autumn as furlough schemes end and businesses have reopened to a big fall in demand. Such circumstance don’t bode well for civil order, which is already looking strained in places.

Markets await FOMC statement, Nasdaq above 10,000

On the latter, the FOMC statement is due later today (see yesterday’s note). There has been chatter about yield curve control and more dovish forward guidance, but the Fed may prefer to wait until September before it strikes. The recent recovery should give it time to think, albeit it will be keeping a close watch on longer-dated yields moving up, which may be a worry.

However, I think its focus is keeping a lid on the front end and allowing some steepening should not be a concern. I think I said a year ago that we should no longer pay any attention to the dots – they’re meaningless guesses. But there could be some optimists on the FOMC seeking to pencil in a hike in 2022. More broadly, I think the Fed will signal it accepts there will be no V-shaped recovery even if the recent data has been encouraging.

US stocks were weaker as the rally paused for breath with the S&P 500 down 0.78% at 3207. The Dow snapped a 6-day winning streak with a 1% fall. The Nasdaq was of course still higher and broke 10,000 for the first time ever. Boeing shares have been on a tear lately but tripped up with a 6% drop as it revealed it delivered just four jets in May and saw another 18 orders cancelled.  IATA says 2020 will be the worst year in the history of the aviation industry. Vroom went zoom with a 117% gain on the first day of trading to $47.90. Apple shares rose another 3% to a fresh all-time high on reports it would use its own chips in its devices, helping to drag the Nasdaq into record territory.

Dollar offered, cable hits fresh 3-month high

In FX the dollar is offered across the board with both risk proxies and the yen making gains. The pound has broken out to fresh 3-month highs with GBPUSD clearing 1.2760. EURUSD was higher around 1.1350, trying to take out the Jun 5th peak at 1.1382. The ECB’s Muller said PEPP needs to be temporary and should not be increased if at all possible. He also said low inflation expectations are a short term risk, so take what he says with a pinch of salt.

Expectations for a dovish Fed may be a factor but we are seeing this as part of an unwinding of the strong dollar pandemic trade that was built on USD liquidity squeeze. Nevertheless, the dollar index continues to make new lows and may well take 95 handle before long having broken down through the last Fib support. Key support is seen around the 94.50/60 area.

Oil steadies ahead of EIA inventories data after surprise API build

Crude oil (Aug) was steady a little above $38, about $2 off Monday’s highs, after API data yesterday showed a surprise build in US crude inventories that has reignited oversupply fears. US crude stocks climbed 8.4m barrels in the week to Jun 5th, vs expectations for a draw of 1.7m barrels. The EIA data today is forecast to show a draw of 1.8m barrels. But the forecasts have been way out for weeks, with an average consensus miss of about 5m barrels, so I wouldn’t be putting too much faith in the expectations.

Natural gas prices spiked aggressively lower overnight and though paring losses are still trading down by around 2% today after the IEA said 2020 would see the largest demand shock in the history of the market.

Equities head for strong finish, all eyes on the bond market, NFP jobs report

Morning Note

No V? The lack of a V-shaped recovery may not be worrying stock markets too much, but it is a source concern for consumers who lost confidence over the course of May. Perhaps this was due to the glacial pace of easing of lockdown restrictions and annoyance at the government; or perhaps it was economic – worries about job losses and a big drop in house prices finally sinking in and offsetting the novelty of being furloughed.

Whatever the cause, GfK’s UK consumer confidence index slipped to –36 in the second half of May, down from –34 in the first half and near the –39 printed in July 2008. Meanwhile, Japanese household spending fell even further in April, declining more than 11%. This was the fastest drop in spending since 2001 and built on a 6% drop in March.

Stock markets fell yesterday, pausing what’s been a robust risk-on rally in June, whilst bond yields snapped out of their funk. European stock markets suffered a broad decline. The Nasdaq hit a record intra-day high but ended down 0.7% on the day. The Dow eked a small gain, but the broad S&P 500 index declined 0.34%, though held the 3100 handle after dropping as low as 3090.

European stock markets rebound, eyes on bonds after ECB QE hike

Today, European stock markets rallied back to their highs of the week in the first half hour of trading, with the FTSE rising above 6400 and the DAX at 12,700. Both set to complete a very strong week of gains, with a German stimulus package and ECB bond buying helping to lift sentiment. The DAX’s breach of the 61.8% retracement was a very good bullish signal –  since then, in the last week it has cleared the 200-day line and advanced through the 78.6% level, up close to 10% since last Friday’s close. The FTSE is over 5% higher this week.

Eyes on the bond market again: after being somewhat subdued by central bank actions for many weeks US 10yr yields broke out to 0.85% even as stocks slipped up, whilst 2s couldn’t move beyond 0.2%. I think you have to look deeper into what the central banks are doing here as well as the amount of issuance. The Fed is reducing the pace of asset purchases, but investors think it will need to keep a lid on the front end of the curve for a long time by keeping its target rate at zero.

The move in US yields seemed to be a result of the ECB move to increase QE by a further €600bn. I’m not sure we can draw any immediate conclusions from this sharp move in US rates, but it will be very interesting to watch how the Fed responds to this development. Does it seek to influence the yield curve – yield curve control like the Bank of Japan, or does it let bond markets function?

If investors are dumping longer-dated bonds, and driving up yields, it may be that the inflation trade is on – given the tsunami of issuance and central bank intervention, it is logical enough to expect a bout of inflation coming round the bend, even if the immediate pressures from the pandemic are deflationary. Or it may just be a signal that the bond market thinks the worst of the crisis is over and we can chill out a bit – the move up in yields and drop in the Vix under 25, combined with the rally in equities should all be telling us that things are hunky dory.

When you look at the economic data, however, it’s hard to be to very optimistic. One to watch.

US nonfarm payrolls report on tap

The US nonfarm payrolls print is the last big risk event of the week, and seen at –8m, albeit Wednesday’s ADP number was just –2.76m vs –9m expected. Last month showed a massive –20m drop, but it only really told us what we already knew after several weeks of dreadful weekly initial claims numbers. Yesterday, US initial jobless claims fell to 1.9m but the continuing claims number rose 650k from last week to 21.5, ahead of expectations.

The fact that this number is rising is a worry that either businesses are not rehiring very fast, or worse, workers laid off simply don’t want to go back to work because they earn more now being unemployed thanks to the expanded benefit package. One report indicated about 40% of US workers are better off not working.

WTI oil, Brent oil near highs as OPEC again suggests moving meeting

Oil was near the highs with WTI (Aug) above $38 and Brent (Aug) above $40.50 as OPEC brings its off-again, on-again meeting forward from June 9th to June 6th (tomorrow) – at least that is the current understanding.

At various stages this week it’s been taking place yesterday, next week and not at all. Russia and Saudi Arabia want to get this extension over the line before the start of the new trading week. The meeting taking place on a Saturday does raise the prospect of a gap open on Sunday night.

Dollar unwind continues, euro higher on ECB stimulus

In FX, the dollar continues to get hit in an unwind of the pandemic trade that pushed it aggressively higher. EURUSD has advanced with the ECB stimulus which is going to give the politicians a better chance of agreeing to fiscal stimulus as per the EC’s budget proposals.

EURUSD broke above 1.1350 to trade around 1.1370 – eyes on the 1.1450 target still. GBPUSD is up around 1.2640, near to breaching the 200-day moving average, despite worries about Brexit talks going nowhere and the British parliament rejecting any extension of the transition period. The break by the pound above the twin peaks of the April highs opens up the path back to 1.28 and then 1.31, but the 200-day line offers a big test first.

Candlestick price chart for the pound sterling to US dollar FX pair

Stocks weaker as US continuing claims rise, ECB goes big

Equities
Forex

European shares held losses and Wall Street opened lower as the June rally in stocks paused for a wee breather, with tensions around Hong Kong resurfacing and US jobs data indicating a lacklustre recovery in the labour force.

The ECB seems to have passed the test today but we are still unsure on OPEC’s moves and the ensuing effects on oil prices, which could affect other risk assets. Meanwhile US jobs numbers were disappointing.

US initial jobless claims fell to 1.9m but the key continuing claims number rose 650k from last week to 21.5m, which was ahead of expectations. It’s a worry that we are not seeing this number coming down as it suggests employers are not calling their staff back as quickly as had been hoped.

Tomorrow is nonfarm payrolls day, of course, with expectations for the headline print to come in at –8m jobs but we note the ADP number yesterday was just –2.76m vs –9m expected.

Meanwhile risk sentiment looked to be a little weaker as scuffles were reported in Hong Kong as protestors try to mark the Tiananmen Square anniversary. The situation in Hong Kong and related US-China tensions remain a significant, under-appreciated tail risk for equity markets.

The S&P 500 opened about a third of one percent lower but held 3100 even as the Vix declined to take a 25 handle. After the ECB meeting the DAX tested lows of the day at 12,321 before recovering to the 12,400 support.

The ECB surprised with a slightly bigger expansion of its Pandemic Emergency Purchase Programme (PEPP) than was expected, perhaps as it saw this as a good opportunity to front load the scheme rather trying to top up later down the line as limits approach. This does provide it ample room for the rest of the year without the market chatter resurfacing about whether and when it needs to do more.

The ECB took three steps: the PEPP envelope is being widened by an additional €600bn to €1.35bn, the scheme will last at least until June 2021 and it will reinvest proceeds at least until the end of 2022. This is emergency QE forever – or at least we are in a situation where the ECB has no option but to be on a war footing just to keep the show on the road. What price peace?

Staff projections were interesting – inflation is now seen at just 0.3% in 2020 vs 1.1% expected in March before magically picking up over the next two years. May showed outright deflation in 12 of the 19 countries using the euro and the weakest HICP inflation in four years. Growth is seen –8.7% under the ECB’s baseline scenario.

Christine Lagarde said she expects a rebound in Q3 and the staff projections indicate growth bouncing back to 5.2% in 2021. But she cautioned that weaker demand will exert a longer-lasting pressure on inflation. Inflation for 2022 is seen at just 1.3%, down from 1.5%, despite this massive amount of stimulus.

This is already well short of the 2% target and of course the ECB is very good at missing its target when the stimulus as ever has decreasing marginal effects. What’s clear is that we are at the limits of monetary policy efficacy.

More interesting perhaps for the future of the EZ – Finland has just said it cannot accept the EC’s recovery package as it stands – it will be a long slog getting this budget and bailout fund approved by all members.

German bund yields reversed their earlier fall to trade flat, whilst the euro pared some of its gains after spiking through the important Fibonacci level at 1.1230, with EURUSD last at 1.1350. GBPUSD was off its lows having bounced off the 1.2510 support to move back to 1.2540.

Equities pause after strong gains, FTSE reshuffle confirmed, ECB meeting ahead

Morning Note

Corporate PR is not something that worries traders regularly. Sometimes bad press is bad for the stock – look at Facebook and Cambridge Analytica. Sometimes the optics are just a bit galling for some of us. Take HSBC, which saw fit to promote overtly anti-Brexit propaganda with its ‘We Are Not an Island’ ad campaign.

Now, along with Standard Chartered, it is backing controversial national security in Hong Kong that will destroy freedom in the territory supposedly enshrined by the 1984 Sino-British joint declaration. It’s in tough spot of course – most of its revenues come from Greater China. It needs Beijing on side, but equally it should probably take a moment to put its political views in context next time. Shares are down a third YTD and have halved in the last two years.

Stimulus supports global stock markets – more PEPP from the ECB today?

Meanwhile stimulus everywhere is supporting equity market gains. Germany has agreed a €130bn stimulus package to reinvigorate its economy, while Australia has unveiled its fourth, A$680m programme, aimed at boosting the construction sector. The European Central Bank (ECB) will today likely stretch its pandemic asset purchase programme by another €500bn.

Stocks roared higher on Wednesday, with all the major indices marking another day of progress, but the rally has paused and stocks are off slight ahead of the ECB meeting and US jobless numbers today. The FTSE 100 closed above 6380 as bulls drive it back to the Marc 6th close at 6462. The DAX moved aggressively off its 200-day moving average and has support at 12,400 despite a slight pullback today.

The S&P 500 rose 1.4% to clear 3100 and moved close to the 78.6% retracement level. It now trades with a forward PE of 22.60. The Dow rallied another 500 points, or 2%, before running into resistance on the 200-day moving average around 23,365 on the futures after the cash close. The Nasdaq is only a few points from its all-time high.

Although we are seeing a mild pullback at the European open this morning, the dislocation between markets and the real economy is frankly unsustainable. On that front we have the weekly US jobs number today – we’re looking at continuing claims as the more important number as a gauge of how swiftly the US economy is getting going again. Continuing claims are seen at 20m, down from 21m last week. Hiring should be exceeding firing now, but it will be a long slog back to where things were. Riots and curfews in big metropolitan areas don’t help.

ECB economic projections to detail the Covid-19 hit in Europe

The ECB meeting today will also help guide our view of how bad things are in Europe as we focus on the new staff projections. The ECB has detailed three scenarios for GDP in 2020 relating to the damage wrought by the pandemic: mild -5%, medium –8% and severe –12%.

Christine Lagarde said last week that the “economic contraction likely between medium and severe scenarios”, adding: “It is very hard to forecast how badly the economy has been affected.” Indeed there is actually no way of really know how badly Q2 went. We have various sources estimating pretty seismic falls; INSEE says French GDP will contract by 20% in the second quarter. Estimates for Germany suggest a roughly 10% decline.

The inflation projections will also be closely watched after HICP inflation in May slipped to its weakest in 4 years and outright deflation was recorded in 12 of the 19 members of the euro. Markets will also be keen to see what the ECB Governing Council makes of this development three years after Draghi declared the war on deflation won. Aside from the economy and inflation, the market is happily expecting an increase to PEPP of €500bn.

FTSE quarterly rebalancing confirmed

The FTSE quarterly rebalancing has been confirmed with Avast, GVC Holdings, Homeserve and Kingfisher entering the FTSE 100, and Carnival, Centrica, EasyJet and Meggitt dropping into the FTSE 250. EasyJet and Carnival have really taken a beating since the pandemic hit and longer term their business models are a problem if people don’t go on cruises, or if you enforce social distancing on planes.

Centrica has had a rough old time of things as its UK customer base has shrunk drastically, whilst earlier this year the company booked a number of one-off impairment charges relating to its oil & gas assets and nuclear power plant stake – a process it has since put on hold. Its main appeal of course was a steady income from a traditionally iron-cast dividend, which it has suspended.

Entering the FTSE 250

888 Holdings

AO World

BB Healthcare Trust

Calisen

Carnival

Centrica

Civitas Social Housing

EasyJet

JLEN Environmental Assets Group

Liontrust Asset Management

Meggitt

Oxford Biomedica

Scottish American Investment

Exiting the FTSE 250

Avast (promoted)

Bakkavor Group

Elementis

Forterra

GVC Holdings (promoted)

Homeserve (promoted)

Hyve Group

JPMorgan Indian Inv Trust

Kingfisher (promoted)

Marstons

Mccarthy & Stone

Senior

Stagecoach Group

In FX, the dollar has regained a little ground against major peers. GBPUSD failed to make the move stick above 1.26 to take out the Apr double top level and is now looking to test support around the 1.25 round number and the 23.6% retracement at 1.2510. EURUSD has eased off the 3-month highs struck yesterday but looks well supported for the time being at 1.12 – the ECB meeting today will deliver the usual volatility so watch out.

Oil has pulled back amid uncertainty over the OPEC+ meeting. Price dropped sharply yesterday before paring losses as it looked like the meeting would not take place today because of a dispute over compliance. Now we understand Russia and Saudi Arabia have agreed between themselves to extend the deepest level of cuts by another month, meaning the tapering from 9.7m bpd to 7.7m bpd will take place in August.

But they want non-compliant countries to play ball this time and over-comply going forward to make up for it. Whilst I think OPEC and Russia can just about keep the cuts on track, there are clear signs that this deal is a huge ask for many within OPEC and may unravel over the summer if prices hold up. Russian energy minister Novak was on the wires this morning saying oversupply was down to 7m bpd in May and could move to deficit of 3-5m bpd in July.

Chart: Dow runs into 200-day simple moving average

Candlestick chart of Dow Jones Industrial Average Index

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