Bank of England lays ground for negative rates

Morning Note

The Bank of England is laying the groundwork for a descent into negative interest rates. This should worry us all. In a letter to banks today, deputy governor Sam Woods asked firms to detail their “current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these”.

The letter notes that “the financial sector … would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms”, and explains that “the MPC may see fit to choose various options based on the situation at the time”.

It comes after details from the last policy meeting showed that the BoE is actively considering negative rates, whilst Andrew Bailey has been at pains to stress that this does not necessarily mean they will take that route.

Indeed there is clearly a debate within the MPC going on right now that we are seeing play out in public. Last month deputy governor Dave Ramsden issued a note of caution only a day after Silvana Tenreyro pointedly backed negative rates.

It looks as though there are some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit they are being considered actively.

The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act.

Sterling doesn’t mind too much, with GBPUSD making its highest in almost 5 weeks before paring gains a little. Bank shares also didn’t take fright, with Natwest and Lloyds higher at the open.

Money markets have already priced in negative rates next year – today’s update does not materially alter the perception that the Bank is thinking seriously about negative rates but is in no rush to wheel them out. US bond and money markets are closed today for the Columbus Day holiday.

The idea that negative rates boost lending doesn’t wash – banks are not worried about the marginal impact on net interest margins as they are about whether the principal is repaid or not. And this in the current economic downturn and threat of rising unemployment, this will weigh on banks’ willingness to lend.

Indeed, I refer you again to the San Francisco Fed study from last month that shows the ECB made a big mistake by going negative.

This noted “banks expand lending only temporarily under negative rates” and “as negative rates persist, they drag on bank profitability even more”. It concluded that while lending initially increases under negative rates. “…gains are more than reversed as negative rates persist”. And under extended periods of negative rates, the evidence shows that “both bank profitability and bank lending activity decline”.

Negative rates are meant to increase loan growth, not depress it.

Chart showing how negative interest rates will affect UK monetary policy.

 

 

 

 

 

 

 

Equities were mildly higher in European trade early on Monday. The FTSE 100 enjoyed a solid week and managed to close on Friday above the 6,000 level that has proved so tricky to hold onto.

The FTSE weakened a little in early trade back to this round number support, with energy and consumer cyclicals dragging.

The S&P 500 rose Friday and closed at its best level since the start of September when it made the all-time high. Stimulus hopes remain in the forefront but the market, as a result, remains on the hook to rumours and headlines.

Donald Trump upped his offer to $1.8tn but Nancy Pelosi said it wasn’t enough. A stimulus package is coming sooner or later, although as stressed last week, there is a risk that a disputed election result delays this until 2021.

On the slate this week: IMF and World Bank meetings kick off today, whilst we have three days until the UK’s self-imposed Brexit deadline.

Nevertheless, even if there no breakthrough comprehensive trade deal agreed this week, the two sides are pledged to continue talking right up to the last moment.

Emmanuel Macron, who faces elections in the not-too-distant future, may seek too many concessions over fishing rights, which may scupper a deal. However, with the coronavirus causing havoc with the economy, neither side has a particularly strong hand and both sides need a deal.

Wall Street banks kick off earnings season across pond – read our preview here.

Election Watch

Biden leads by 9.8pts nationally and by 4.5pts in the battlegrounds. The Democrats lead by 4.9pts in the battleground states four years ago – Trump has been over this ground before and won against the odds – don’t write him off just yet. Trump has pulled ads in Ohio and Iowa leaving him off air in those states for a third week in a row. According to our friends over at BlondeMoney are the two most winnable swing states for Trump.

They say: “Either Trump is supremely confident he’s got these in the bag, despite polling neck-and-neck with Biden. Or he realises that he’s got to double down and go for the tougher states, and hope to sweep up those that are easier to win in the process. If he doesn’t get Florida or Wisconsin, Ohio or Iowa barely matter.”

My sense is that there is do-or-die attitude in the White House and he needs to shore up support elsewhere, such as Florida as his campaign finances, rather like his business empire, are not all they appear to be.

The dollar appeared to roll over last week. On DXY we had a MACD bearish crossover and 14-day RSI trendline break that indicated (as we flagged) that there could be downside.

What’s harder to say is whether this is yet more of a chop sideways for the dollar or renewal of the downtrend.

The close under the 50-day SMA could be taken as bearish signal and we may yet see the 91 handle tested again. The near-term support at the mid-Sep swing low sits around 92.70.

 

The Dollar index on the morning of12.10.2020

TalkTalk bid, IMB up on smoking, S&P 500 breaks range

Morning Note

The yo-yo week on Wall Street continues with stocks bouncing after Donald Trump tweeted support for a range of fiscal stimulus measures, having earlier set the market down by calling off talks on a comprehensive package until after the election. Whether it’s now or after November, what’s been made clear to investors is that fiscal stimulus is on its way.

The timing becomes less important – doubts would resurface if there is a contested election result that leaves Washington lawmakers unable to come to a deal. However, Joe Biden’s lead in the polls would suggest this is becoming less likely, albeit my inclination is that Trump will do a lot better than the polls indicate.

Europe opens higher, can Wall Street gain for a second day?

The S&P 500 rose to its highest level since the start of September, finishing up 1.74% at 3,419, with the Sep 4th closing high at 3,426 offering the daily resistance. All 11 sectors rose. The Dow climbed 530 points, or 1.9%, to notch its best day since July. The Nasdaq added 1.9%.

The question is whether market can put two straight days of gains together, something it’s not managed in a week. The range-bound nature of the market right now and the general uncertainty around stimulus and the election – not to mention the Q3 earnings season about to kick off – may make it tough to cement gains.

Nevertheless, futures point to further gains when the cash equities open later. European markets opened higher in early trade on Thursday.

FOMC minutes

Fed minutes showed that officials are divided over the application of the central bank’s new policy framework. Policymakers ‘discussed a range of issues associated with providing greater clarity about the likely path of the federal funds rate in the years ahead’.

Meanwhile a report from Fed economist Michael Kiley called for the central bank to juice bond holdings by another $3.5tn to support the economy. The market probably liked this idea, too. Participants agreed on the uncertainty facing the economy, albeit there are the likes of Bullard who think it’s all going to be fine by the end of the year.

Weekly unemployment claims data later today will be watched as closely as ever.

German exports rose more than expected in August, climbing by 2.4% vs expectations for 1.7%. However, this was down from the 4.7% recorded in July. Exports to the US were down 21%, whilst China imported only 1.1% less goods than last year.

Toscafund offer boosts TalkTalk shares

TalkTalk shares shot higher after it received an offer Toscafund Asset Management for 97p a share. TALK rallied over 16% to exactly 97p. Executive chairman Charles Dunstone needs to approve the takeover for it pass. With no discount and no premium in the price this morning, the market seems to think he is.

There were signs of something afoot in the summer – Dunstone purchased 1m additional shares at the end of June at 86p after Tosca raised its stake to 29%.

TalkTalk had somewhat gone off my radar of late so I must revert to a two-year old note from 2018: “Increasingly TalkTalk looks like it’s ripe for takeover. It provides a good entry point into the UK broadband market and with growing subscriber numbers, there is plenty to recommend it.

Indeed, with a strong subscriber base, improving margins and shares still at multi-year lows, for anyone looking for an entry point into the UK broadband market then it’s probably your best bet.”  Recently it’s enjoyed decent cash growth on better fibre rates and cost control.

Imperial Brands rises alongside smoking demand

Smoking kills: Imperial Brands is seeing increased demand for its products as a result of the pandemic. And it’s good old fashioned cigarettes and tobacco we’re talking here – ‘next generation products’ like vaping are down 30%. Another unwanted side effect of governments’ inept, disruptive and failing approach to dealing with the coronavirus.

It’s been about fighting Covid at all costs and the UK government for one has systematically failed to consider the wider public health implications of their response. For example, Matt Hancock recently admitted that cancer patients would only be treated if the virus was ‘under control’.

Management today noted: “We have experienced some COVID-related changes in consumer behaviour with increased overall demand against our expectations, as consumers appear to have allocated more of their spend to tobacco, as well as some demand shifts between different markets and channels. This has resulted in better than expected volumes, driven by improved volume trends in several key European markets and in the US.”

Group revenues are slightly ahead of the half-year guidance, but additional manufacturing costs as a result of Covid have been incurred. Constant currency earnings per share are down about 6%, in line with expectations.

EasyJet on track for first-ever annual loss

Meanwhile, EasyJet reports today it’s on course for its first-ever annual loss as a result of the pandemic restrictions on air travel that have crippled the industry. Management expects to report a group headline loss before tax in the range of £815m to £845m after flying 50% fewer passengers than last year.

The airline flew 38% of planned capacity in Q4, in line with the September update in which it said capacity would be slightly less than 40%. These sorts of losses were anticipated and, overall, I think investors only really care about liquidity and headroom to get out the other side of this. On that front easyJet had a cash position of £2.3bn as of the end of September and it’s lowering costs aggressively to reduce the cash burn wherever it can – Q4 cash burn was less than Q3, which is a positive. Capacity of Q1 2021 will be at 25%.

With winter coming it’s usually a lean time for airlines and it’s going to be a long period of uncertainty as we await to see whether next summer is strong enough to prevent further cash being required. But easyJet looks ok for now.

Plans for a testing system for arrivals into the UK to reduce the quarantine period would be a boost, but there many factors that will weigh on demand, from unemployment to fears about the virus itself.

Banks set to kick off US Q3 earnings season

Equities

The S&P 500 rose 8.5% to 3,363 over the third quarter, having hit an all-time of 3580 at the start of September, with an intraday peak at 3588. The market faced ongoing headwinds from the pandemic, but risk sentiment remained well supported through the quarter by fiscal and monetary policy.

A pullback in September erased the August rally but was largely seen as a necessary correction after an over-exuberant period of speculation and ‘hot’ money into a narrow range of stocks.

Q3 earnings come at important crossroads: Expectations for when any stimulus package will be agreed – and how big it should be – continue to drive a lot of the near-term price action, though the market has largely held its 3200-3400 range.

Elevated volatility is also expected around the Nov 3rd election. But next week we turn to earnings and the more mundane assessment of whether companies are actually making any money.

Banks kick off Q3 earnings season

Financials are in focus first: Citigroup and JPMorgan kick off the season formally on October 13th with Bank of America, Goldman Sachs and Wells Fargo on the 14th. Morgan Stanley reports on Oct 15th, In Q2, the big banks reported broadly similar trends with big increases in loan loss provisions offset by some stunning trading earnings.

Wall Street beasts – JPM, Goldman Sachs, Citi, Morgan Stanley and Bank of America – posted near-record trading revenues in the second quarter with revenues for the five combined topping $33bn, the best in a decade. At the time, we argued that investors need to ask whether the exceptional trading revenues are all that sustainable, and whether there needs to be a much larger increase for bad debt provisions.

Meanwhile, whilst the broad economic outlook has not deteriorated over the quarter, it has become clear that the recovery will be slower than it first appeared. Moreover, during Q3 the Fed announced a shift to average inflation targeting that implies interest rates will be on the floor for many years to come, so there is little prospect of any relief for compressed net interest margins.

Meanwhile there is growing evidence of a real problem in the commercial mortgage-backed securities (CMBS) market as new appraisals are seeing large swatches of real estate being marked down, particularly in the hotels and retail sectors.

At the same time, the energy sector has gone through a significant restructuring as we have seen North American oil and gas chapter 11 filings gathering pace through the summer as energy prices remained low. There is a tonne of debt maturing next year but how much will be repaid?

Key questions for the banks

  • Did the jump in trading revenues in Q2 carry through in Q3? Jamie Dimon thought it would halve.
  • On a related note, did the options frenzy in August help any bank more than others – Morgan Stanley?
  • Have provisions for bad loans increased materially over the quarter?
  • How bad are credit card, home and business loans?
  • And how bad is the commercial property sector, especially hotels and retail as evidence from the CMBS market starts to look very rocky?
  • How are bad debts in oil & gas looking?
  • How are job cuts helping Citigroup lower costs; how will its entry into China make a difference to the outlook?
  • How does Wells Fargo manage without an investment arm to lean on? So far it’s been a bit of a mess.
  • Was Warren Buffett right to cut his stake in Wells Fargo and some other US banks? Buffett pulled out airlines first then banks.
  • What do banks think of never-ending ZIRP and does the Fed’s shift affect forecasts at all?
  • How is Morgan Stanley’s wealth management division cushioning any drop in trading revenues?
  • What progress on Citigroup’s risk management system troubles?

Q2 earnings recap

JPMorgan beat on the top and bottom line. Revenues topped $33.8bn vs the $30.5bn expected, whilst earnings per share hit $1.38 vs $1.01 expected. The range of estimates was vast, so the consensus numbers were always going to be a little out.

The bank earned $4.7bn of net income in the second quarter despite building $8.9 billion of credit reserves thanks to its highest-ever quarterly revenue. Loan loss provisions were $10.5bn, which was more than expected and the quarter included almost $9bn in reserve builds largely due to Covid-19.

The consumer bank reported a net loss of $176 million, compared with net income of $4.2 billion in the prior year, predominantly driven by reserve builds. Net revenue was $12.2 billion, down 9%. Credit card sales were 23% lower, with average loans down 7%, while deposits rose 20% as consumers deleveraged.

The provision for credit losses in the consumer bank was $5.8 billion, up $4.7 billion from the prior year driven by reserve builds, chiefly in credit cards.

Trading revenues were phenomenal, rising 80% with fixed income revenues doubling. Return on equity (ROE) rose to 7% from 4% in Q1 but was still well down on the 16% a year before. ROTE rose to 9% from 5% in the prior quarter but was down from 20% a year before.

Citigroup EPS beat at $0.50 vs the $0.28 expected. Trading revenues in fixed income rose 68%, and made up the majority of the $6.9bn in Markets and Securities Services revenues, which rose 48%. Equity trading revenue dipped 3% to $770 million. Consumer banking revenues fell 10% to $7.34 billion, while net credit losses, jumped 12% year over year to $2.2 billion. Net income was down 73% year-on-year.

Since then the bank has offloaded its retail options market making business, leaving Morgan Stanley (reporting Oct 15th) as the major player left in this market. We await to see what kind of impact the explosion in options trading witnessed over the summer had on both. ROE stood at just 2.4% and ROTE at 2.9%.

Wells Fargo – which does not have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn. WFG reported a $2.4 billion loss for the quarter as revenues fell 17.6% year-on-year.

CEO Charlie Scharf was not mincing his words: “We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.”

Bank of America reported earnings of $3.5 billion, with EPS of $0.37 ahead of the $0.27 expected on revenues of $22bn. Its bond trading revenue rose 50% to $3.2 billion, whilst equities trading revenue climbed 7% to $1.2 billion. But the bank increased reserves for credit losses by $4 billion and suffered an 11% decline in interest income.

Return on equity (ROE) fell to 5.44% from 5.91% in the prior quarter and was down significantly from last year’s Q2 11.62%. Return on tangible equity (ROTE) slipped to 7.63% from 8.32% in Q1 2020 and from 16.24% in Q2 2019.

Morgan Stanley was probably the winner from Q2 as it reported net revenues of $13.4 billion for the second quarter compared with $10.2 billion a year ago. Net income hit $3.2 billion, or $1.96 per diluted share, compared with net income of $2.2 billion, or $1.23, for the same period a year ago.

Wealth Management delivered a pre-tax income of $1.1 billion with a pre-tax margin of 24.4%. Investment banking rose 39%, with Sales and Trading revenues up 68%. MS managed to increase its ROE to 15.7%, and the ROTE to 17.8% from respectively 11.2% and 12.8% in Q2 2019.

Goldman Sachs reported net revenues of $13.30 billion and net earnings of $2.42 billion for the second quarter. EPS of $6.26 destroyed estimates for $3.78. Bond trading revenue rose by almost 150% to $4.24 billion, whilst equities trading revenue was up 46% to $2.94 billion. ROE came in at 11.1% and ROTE at 11.8%.

Expectations

(source: Markets.com)

Bank Forecast Revenues (no of estimates)

 

Forecast EPS (no of estimates)

 

BOA $20.8bn (8) $0.5 (23)
GS $9.1bn (15) $5 (21)
WFG $17.9bn (17) $0.4 (24)
JPM $28bn (19) $2.1 (23)
MS $10.4bn (15) $1.2 (20)
C $18.5bn (17) $2 (21)

 

Shares

None have really managed to match the recovery in the broad market but valuations are compelling.

Goldman trading either side of 200-day EMA

Wells Fargo can’t catch any bid

Bank of America bound by 50-day SMA

Citigroup still nursing losses after reversal in September

JPM breakouts consistently fail to hold above 200-day EMA

Tesco profits slump, stocks swinging on mixed stimulus messages

Morning Note

Stocks fell after Donald Trump nixed hopes of a stimulus deal, or so it seemed. The S&P 500 declined 1.4% on the day having earlier traded higher.

But Trump also called for support for airlines and then sent a tweet addressing the House Democrat leader Nancy Pelosi: “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?”

In short, Republicans, including the President, don’t want to pay for a tonne of social programmes which Democrats have made part of the stimulus bill. But they do want to support the economy. Stimulus is clearly coming some way, somehow, just probably not before the election.  Or it could, who knows.

Markets remain clearly on the hook to the headlines but the fundamentals haven’t changed much. The election is taking on more significance the closer it gets and markets just want it out of the way to move forward.

Biden’s lead in the polls is compelling and tonight’s vice presidential debate probably won’t change much with so few voters undecided. Nevertheless, Trump is back and cannot be written off just yet.

Indeed whilst the S&P 500 fell, it didn’t even look at 3,300 and remains in the middle of the September range. Earlier it briefly broke the Sep 16th intra-day high, hitting 3,431.  European markets are similarly short of much direction right now – in fact they’ve been clamped in a tight range since June and were flat in early trade on Wednesday.

Tesco shares up on earnings

Tesco profits fell as costs and sales rose. Operating profit before nasties was down 15% despite group sales rising almost 7%. Retail free cash flow decreased by £91m year-on-year to £554m. Tesco Bank is becoming a headache and needs to be offloaded – sales here slipped a third and it slumped to an operating loss of £155m due to provisions for bad debt and lower income.

Management noted that a ‘marked deterioration in macro-economic indicators, particularly UK unemployment and GDP, drove an increase in the provision for potential bad debts’. Shifting the financial division on to some other party seems like one of the first things for Ken Murphy. Having already offloaded the mortgage book, Tesco has one foot out the door already.

Booker continues to do well with Retail sales up 22%; offsetting Catering sales falling 12%. And whilst we often compare Tesco to a super tanker that can take a long time to turn around, Tesco’s scale has been important in retooling for the pandemic age.

Online delivery capacity more than doubled to reach 1.5m slots a week, which compares favourably with Ocado and the problems it has in building capacity. Whilst increases costs, being provisioned to handle more online orders is essential and makes Tesco look well placed – shares rose over 2%.

Democrat report hammers big tech

As flagged in yesterday’s note, a Democrat-led Congressional committee has issued a damning report on big tech. Following more than a year of reports and investigations, the 449-page report said Amazon, Apple, Alphabet and Facebook enjoy ‘monopoly power’ and called on them to restructure their businesses and possibly even be broken up.

It’s just a report at this stage but a Democrat clean sweep in November’s elections could see elements become legislation. Share in the four companies fell by around 2-3% yesterday.

FOMC meeting minutes later will be parsed for any further details on what policy makers believe could trigger any tightening. The September meeting minutes ought to provide more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained by this.

EIA data in focus for oil

EIA inventories out later today coming the API report yesterday showed build in crude stocks of 951k barrels in the week ending Oct 2nd. As previously argued, we need to closely watch global inventories flipping from draws to builds which would signal demand failing to re-emerge at the levels anticipated.

EIA is forecast to record a draw of 1.2m barrels. WTI is trading at $40 but faces resistance.

Chart: E-mini futures take elevator down on Trump tweets but climb stairs back up

Trump returns, big tech faces antitrust concerns

Morning Note

Don’t be afraid: President Trump returned to the White House, but it might not be for much longer. Whilst Trump almost revelled in his victory over the virus, telling Americans not to fear it, Joe Biden’s lead in the polls is rising. Trump has work to do in the battlegrounds to swing back in his favour.

Wall Street climbs on stimulus hopes

Wall Street rallied as we saw decent bid come through for risk that left the dollar lower and benchmark Treasury yields higher amid hopes that policymakers in Washington are close to doing a deal on stimulus. House Democrat leader Nancy Pelosi and Treasury Secretary Steven Mnuchin spoke yesterday but failed to reach agreement on a fresh stimulus package.

Negotiations are due to resume today and whilst the mood seems to be better, getting agreement so close to the election will be tough but not impossible.

The S&P 500 rose 1.8% to close at the high of the day above the  3,400 level but the intra-day high at 3,428 from Sep 16th remains the top of the channel that bulls will look to take out – failure here may call for a retreat towards the middle of the range again.

Stimulus hopes will drive sentiment, but election risk is also a factor. Vix futures for Oct at $30.86 compared with November’s $32.23.

European markets turned lower in early trade on Tuesday as bulls failed to follow through on the relief rally on Monday – still very much range bound.

As noted last week the key is the 3300 level on the Stoxx 50 and 6,000 on the FTSE 100 to signal the market has broken the range. The S&P 500 is closer to doing it.

Benchmark yields rose firmly with 10-year Treasuries breaking out of the recent dull range towards 0.80%, settling at 0.77% near 4-month highs. The 30-year yield also hit its highest since Jun 9th.

With polling and odds improving for a Democrat clean sweep, the market is starting to price in more aggressive stimulus, greater issuance and bigger deficits. Fed chair Jay Powell speaks later today about the US economic outlook at the National Association of Business Economics annual meeting.

Cable eyes Brexit latest Brexit headlines

Brexit talks rumble on – are we closer to a deal? Deadlines are fast approaching and on the whole it seems more likely than not that we at least see a skinny deal or sorts.

EC vice president Maros Sefcovic has been on the wires this morning underlining that ‘full and timely’ implementation of the withdrawal agreement is not up for debate. The British Parliament and government say otherwise.

Meanwhile the European Parliament is not budging on its demands over the EU budget – whilst the recovery fund was announced to much fanfare, it needs to be delivered for Europe’s economy to recover more quickly than it is.

Democrats to target tech giants

Big tech stocks need monitoring after reports that a Democrat-led House panel will call for an effective breakup of giants like Apple, Amazon and Alphabet. It comes after a long anti-trust investigation by the panel led by Democratic Representative David Cicilline.

If approved and legislation is enacted, it would be the most significant reform in this area since Teddy Roosevelt. Certainly, the concentration of capital in a handful of big tech stocks is worrisome for lots of reason. Even if approved, getting from draft to legislation will not be easy. However, if there were a Democrat clean sweep, it could open the door to some aggressive reforms.

As I noted over a year ago, given that the FAANGs have been at the front of the market expansion in recent years, any breakup or threat of it may act as a drag on broader market sentiment. Calls have been growing louder and louder for the authorities to at least look at antitrust issues for the tech giants.

Political pressure is building – lawmakers sniff votes in tackling big tech. The shift really happened two years ago with the Facebook scandals, which really broke the illusion that Silicon Valley is in it for the little guy.

AUDUSD sinks on dovish RBA meeting

The Reserve Bank of Australia left interest rates on hold, refraining from a cut below 0.25% but maintaining a decidedly dovish bias that still indicates a further cut may occur this year.

The RBA said it will keep monetary policy easy “as long as is required” and will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3% target band. It kept its options open and stressed that it will continue to consider additional monetary easing.

After a decent run since the Sep 25th low AUDUSD was smacked down from its 50-day SMA at 0.7210 to trade around 0.7150. Currently contained by its 50- and 100-day SMAs.

The dollar index broke the horizontal support and the 21-day SMA, with the price action testing the trendline off the September lows. After the RSI trend breach and the MACD bearish crossover flagged yesterday was confirmed. 50-day SMA around 93.25 is the next main support.

The softer dollar gave some support to GBPUSD as it tests the top of the range and big round number and Fibonacci resistance at 1.30 this morning. Markets are also pushing back expectations for negative rates in the UK, which may be feeding through to a stronger pound.

Brexit risks remain but the odds of a deal seem to be better than evens, at least a ‘skinny’ deal that keeps dollar-parity wolves from the door.

The weaker dollar, higher inflation outlook is pushing up gold prices, which have broken above $1,900 but faces immediate resistance at the 21-day SMA on $1,916. Yesterday’s potential MACD bullish crossover has been confirmed.

Cineworld shares collapse: who is next?

Equities

Cineworld shares collapsed on Monday after the company closed its UK and US theatres after the latest James Bond picture was delayed. Shares dived around 44% to trade at 22p.

Lumbered with over $8bn in debt and with a $1.6bn loss in the first half, things were looking dicey for Cineworld well before today’s update. Short interest in the stock was exceptionally high as hedge funds circled a vulnerable member of the herd.

Short-list

Looking at Shorttracker.co.uk we can see the following stocks are the top targets by short sellers.

Company % short Funds short
CINEWORLD GROUP 8.50% 8
PREMIER OIL PLC 8.10% 2
TULLOW OIL PLC 7.90% 5
METRO BANK PLC 7.80% 5
PEARSON PLC 7.80% 7
PETROFAC LTD 7.80% 5
CARILLION PLC 7.20% 6
HAMMERSON PLC 7.20% 6
SAINSBURY (J) PLC 6.50% 4
TUI AG 6.10% 8
INTL CONSOLIDATED AIRLINE-DI 5.90% 7
BABCOCK INTL GROUP PLC 5.80% 4
PETROPAVLOVSK PLC 5.60% 2
WEIR GROUP PLC/THE 5.40% 5
BLUE PRISM GROUP PLC 4.70% 5
IQE PLC 4.70% 3
VODAFONE GROUP PLC 4.40% 4
FUTURE PLC 4.20% 4
DOMINO’S PIZZA GROUP PLC 4.00% 6
WOOD GROUP (JOHN) PLC 4.00% 6
CAPITA PLC 3.80% 5
MICRO FOCUS INTERNATIONAL 3.80% 3
N. Brown Group 3.80% 3
WM MORRISON SUPERMARKETS 3.70% 3
ASHMORE GROUP PLC 3.50% 4

The Z-list

It’s not always the best indicator but the Altman Z-Score is always worth looking at. Here’s the lowest scoring stocks on the FTSE 350. (source: Reuters)

Name RIC Altman Z-Score
FTSE 350 Index .FTLC
Vodafone Group PLC VOD.L -0.43
London Stock Exchange Group PLC LSE.L 0.03
IntegraFin Holdings plc IHPI.L 0.08
TP ICAP PLC TCAPI.L 0.16
Ninety One PLC N91.L 0.23
Rolls-Royce Holdings PLC RR.L 0.62
Premier Foods PLC PFD.L 0.62
Aston Martin Lagonda Global Holdings PLC AML.L 0.65
ContourGlobal PLC GLO.L 0.70
Intermediate Capital Group PLC ICP.L 0.73
Airtel Africa PLC AAF.L 0.77
Severn Trent PLC SVT.L 0.77
Capita PLC CPI.L 0.84
United Utilities Group PLC UU.L 0.85
IWG Plc IWG.L 0.85
SSE PLC SSE.L 1.05
Energean PLC ENOG.L 1.06
Cineworld Group PLC CINE.L 1.08
Pennon Group PLC PNN.L 1.09
National Grid PLC NG.L 1.11
Petropavlovsk PLC POG.L 1.11
FirstGroup PLC FGP.L 1.13
Diversified Gas & Oil PLC DGOC.L 1.15
Mitchells & Butlers PLC MAB.L 1.18
Talktalk Telecom Group PLC TALK.L 1.18
TUI AG TUIT.L 1.19
British Land Company PLC BLND.L 1.21
BT Group PLC BT.L 1.23
National Express Group PLC NEX.L 1.24
Signature Aviation PLC SIGSI.L 1.25

 

Traders can make up their own minds about which companies may require additional capital raising using the Reuters equity analysis tool in the platform.

Unhealthy market fixations, Cineworld’s time to die?

Morning Note

There has been a lot of column inches written, and much ink spilled, over Donald Trump testing positive for the coronavirus. There were, I fear, a few too many quick to sound the alarm and say this would see stocks ‘tumble’, etc.

True, US stock markets fell on Friday, with the S&P 500 down 1%. But this was 25pts above the lows of the day and likely just as much about a tepid September jobs report from the US as anything else; the broad market finished the week up by 1.5% in the end. Hopes of stimulus persist and Nancy Pelosi said on Sunday that lawmakers are making progress.

Traders should still be on alert for updates on Trump’s status, but unless things go very bad it should just be a lot of noise. The President could be discharged from hospital today.

European markets rose in early trade but pared gains as PMIs crossed to show lacklustre recovery in the Eurozone. US stock futures indicated a bounce when Wall Street opens later. One market that has seemingly been brought back from the brink is the bond market, which looked to all intents and purposes like it had been completely killed by the Fed.

Treasury yields moved higher on hopes of stimulus with the US 10-year showing some vital signs at last and nudging up to 0.7%.

US labour market recovery slows

The US labour market is not in good health, with the economy creating 661k jobs in September vs the 800k expected. This was also a marked decline from the 1.371m created in August. The unemployment rate declined for a fifth straight month to 7.9%, but it remains at historically high levels.

The US economy has recovered about half the jobs lost at the peak of the pandemic. The problem remains the same as we have been saying for months now – the reopening rebound was the easy part. The hard slog lies ahead, and it could take years to fully recover all the lost jobs. The UK seems to be in a similar position.

Cineworld stock tumbles as chain shuts UK and US theatres

Time to die? Cineworld is closing all its cinemas in the UK and US amid a collapse in demand due to the pandemic. Shares plunged 50% on the news this morning. The delay to the next James Bond film was the straw that broke the camel’s back, but Cineworld was a little bloated before the pandemic struck.

Net debt of over $8bn – thanks mainly to two large leveraged acquisitions in recent years – and a market cap of $540m by the close on Friday left Cineworld in a difficult position to refinance if punters were not coming through the doors; without the Bond franchise to draw people in there was little option – closing its theatres at least gives it a chance to preserve cash and wait for things to improve. Refinancing by some sort of rights issue seems inevitable.

However, I fear there have been permanent behavioural shifts in consumers that will mean the market is forever smaller. It is hard to gauge right now what permanent damage is done to cinemas, but the closure of Cineworld, however temporary, is a plain indicator that it could be significant and lasting.

The advance of over-the-top streaming services, especially Netflix with its vast Hollywood budgets and ability to make feature films, has been a critical blow to the industry and Covid has vastly compounded the problem by keeping viewers away. In its interim results last month, the company warned that a worsening of the pandemic could leave it unable to survive; today’s announcement confirms that it is on the brink.

Demand uncertainty hits Tesla

Tesla shares fell 7% on Friday after the company failed to quell longer-term demand concerns despite delivering a record number of cars in the third quarter. The company delivered 139,300 vehicles, compared with expectations of 137,000 vehicles.

It looks to be a bit of an unusually bad reaction to very impressive numbers. As the Shanghai factory ramps production Tesla should be able to steadily increase volumes despite the pandemic, albeit Elon Musk’s target of 500k this year looks out of reach for now.

Monetary policy in focus this week

It’s going to be a busy week for central bank jawboning – the Fed’s Powell, Kaplan (the hawk), Harker, Williams, Kashkari, Barkin and Evans are all due on the wires in the coming days. Also watch for the FOMC minutes from the September meeting for more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained.

The ECB latest meeting minutes are also due on Thursday and similarly there is a slew of speakers slated for the week, including Lagarde, Lane, Guindos and Mersch.

Meanwhile the Reserve Bank of Australia could cut rates to 0% when it meets this week. Futures markets have indicated odds of a rate cut at about 50%. However we could well see the RBA cut from 0.25% to 0.1%, or it could delay until November 3rd.

Deputy governor Guy Debelle recently outlined policy tools the RBA is considering to help it meet its twin mandates on employment and inflation, including foreign exchange intervention and negative interest rates.

Chart: Gold continues to slide down the channel – watch the 21-day SMA at the top and 100-day offering support underneath as potential pivots

Stocks sink as Trump tests positive for Covid-19

US Presidential Election

President Trump and First Lady Melania have tested positive for Covid-19. How has the market reacted, and what does this mean for the US Presidential Election?

Stay on top of the polls and all the latest election news with our dedicated US Presidential Election site.

Europe’s best performing stocks in Q3

Equities

Although the coronavirus pandemic is still hanging over the stock market, Q3 saw attention turning to the recovery prospects after the damage dealt in the first half of the year.

Here are some of the best and worst performers in the quarter just ended.

M&A activity picks up

Covid-19 slammed the brakes on M&As during the first half, with the value of deals conducted dropping -64% on the year during Q2. Things have rebounded sharply in Q3, with deals down only -8.4%.

G4S registered the best performance of all Stoxx 600 shares in Q3, with the stock up 76% largely thanks to an approach from Canada’s GardaWorld.

A $9.2 billion deal to buy Ebay’s classifieds business help push the stock of Norway’s Adevinta up 65%.

Suez also got a boost from M&A after Veolia Environment offered take a 29.9% stake in the company in the first step towards a full takeover.

EU green plan boosts renewable stocks

ESG (environment, social, and governance) investing helped stocks with an environmental focus race ahead of the wider market in Q3.

Vestas jumped 53% and Siemens Gamesa leapt 46%. Both are in the field of wind power. Finnish refiner Neste upped its investment into renewables and saw its stock rise nearly 30%.

Lockdowns create home improvement boom

The reality of being stuck at home for a long time, or needing to prepare a space for homeworking, has fuelled a DIY boom that made Kingfisher and Kesko two of the top 20 performing European stocks in Q3.

The UK’s Kingfisher hit a level not seen in over two years, while Finland’s Kesko came close to notching a new record high.

Gold miners flourish as safe-haven demand persists

Safe-haven demand, and a bet that vast central bank and government stimulus measures will eventually spark strong inflation, continued to support gold in Q3. Fresnillo was the best-performing gold miner, followed by Centamin and Polymetal.

Q3 disappointments

Healthcare stocks were some of the worst performers in Q3, despite having surged in the first half of the year. The impact of the pandemic upon elective procedures saw Ambu trim its outlook and deliver some of the sector’s worst returns. Meanwhile, Galapagos tumbled over -30% after its rheumatoid arthritis treatment failed to get approval from the US Food and Drug Administration.

Stocks up, Rolls-Royce down on rights issue

Morning Note

Stock market bulls got the signal they needed from US Treasury secretary Steven Mnuchin, who said the White House was serious about doing a deal with House Democrats on a stimulus package. Nevertheless, no agreement was reached after talks between Mnuchin and Nancy Pelosi.

The Democrats pulled a vote on their $2.2tn package; the White House has come up with a $1.5tn counteroffer. Stimulus is coming, the question really is only when – a deal before the election still looks difficult. Meanwhile end of month and end of quarter flows likely had a positive impact after a soft September.

Stocks end September lower

The S&P 500 rallied and closed above its 50-day moving average, perhaps offering bulls a signal of strength. The next major level is 3,400 and then the Sep 16th intra-day high at 3,428. The close at 3,363 left the broad market down 3.9% in September, its first down month since March. The Dow Jones fell 2.3% last month, while the Nasdaq was more than 5% weaker for September.

European markets did not fall as much, but they also didn’t rally as much in August. In fact, European equities have been stuck in a range for months now and are failing to really spark into life. Cyclically weighted indices leave investors searching elsewhere for growth (US tech mainly) amid a slow recovery from the pandemic. The FTSE 100 is still struggling to hold the 5,900 level.

European stocks remain in their broad ranges – nothing to get excited about yet and the implications of US election angst and rising case numbers is likely to prevent any material breakout. A vaccine could help, but it’s also no silver bullet to depressed demand and structural inefficiencies in the economy that have been years in the making.

Shares in Tokyo didn’t trade after an outage that last all day on what ought to have been a busy day for equity books. The Tankan survey showed business sentiment improved, but not by as much as expected. Chinese markets were closed for a holiday.

Palantir starts trading after direct-listing

Palantir got its direct-listing IPO with the odd hiccup as insiders struggled to access the transactional platform provided by Morgan Stanley. Nevertheless, the stock opened at $10 and reached as high as $11.42 before closing at $9.50.

It’s been a very solid year for IPOs despite the huge volatility in the spring. A dearth of growth and hunger for any kind of yield as actually made this a surprisingly good time for tech companies in particular to go public. The Renaissance IPO ETF, which tracks the newest and largest listings, is up almost 70% YTD.

Rights issue plans send Rolls Royce skidding

Rolls Royce shares sunk over 6% after the company finally outlined a rights issue that has been required for some time. The company has over £3bn in debt due next year so had to come up with something given the ongoing hit to cashflows. RR will raise £2bn by way of a 10-for-3 rights issue priced at a 41% discount to 130p closing prices yesterday.

Given the strategic importance to the UK, the government is also on hand with support in the shape of a further £1bn from UK Export Finance. Shares were trading at a 16-year low after the news and are down 82% this year – the rights issue comes after a sustained period of weakness with investors betting that management needed to shore up the balance sheet.

The pandemic has created a perfect storm for airlines and this has left Rolls Royce’s aerospace business in the mire.

Dollar retreats but Brexit headline risks threaten GBP

As called for, the dollar finally rolled over from the resistance at 94.60 to test the support at 93.70. The 21-day comes in around 93.50. Dollar softness left cable making weekly highs at 1.2950, but the 3-week range of 1.27-1.30 remains.

Brexit talks continue and EU ‘sources’ are out this morning saying the two sides have failed to close differences on state aid. Expect the usual headline risk for GBP crosses as the ninth round of negotiations wrap up on Friday. US weekly jobless claims today will be watched closely ahead of the NFP numbers tomorrow.

Oil prices rose after the EIA reported US crude inventories fell by 2m barrels, against expectations for a rise of 1.9m. Nevertheless, stocks at Cushing, Oklahoma rose 1.8m barrels and gasoline inventories also climbed.

As stated earlier this week, the outlook for crude is murky as production comes back on stream and demand recovery wanes. We need to also pay close attention to global stocks flipping to builds from draws over the next three months. WTI closed lower in September for the first time since April.

Chart: Dollar softens, looking at potential RSI trend line being broken and potential MACD crossover if 93.70 fails to hold

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