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Stocks steady as pubs prepare to reopen
European stocks were steady near the flatline on a quiet Friday session with the US market closed for the Independence Day holiday. Stocks rallied in the prior session after a bumper US jobs report showed 4.8m jobs were created in June.
Despite this, as detailed yesterday, the unemployment rate remains very high at more than 11%, the more up-to-date weekly initial and continuing claims numbers are not improving quickly enough, and the recent spike in cases means several states are re-imposing lockdown restrictions, which will hamper jobs growth in July.
Risk assets gained more support as the Chinese services PMI rose to a 10-year high at 58.4 – the usual caveats about diffusion indices apply, as to the usual caveats about any data out of China, but it’s solidly encouraging for markets. Australian retail sales bounced back almost 17%. The number of cases in the US continue to surge – more than 55k in a single day the latest total, with the governor of Texas now mandating the wearing of facemasks.
Major indices continue to track around the middle of the June range, though thanks to a decent run this week are now moving towards the upper end of the range having tapped the lower end last week. The S&P 500 cleared the 61.8% retracement yesterday but closed well off its highs, while the Dow is struggling to hold the 50% level.
In Europe the FTSE 100 is holding above the 50% level, while the DAX is facing resistance today at the 78.6% level. After a strong week and with the US shut, it might be a quiet session today. Scratch that – with pubs about to reopen and with every trader planning their weekend engagements, it will be a very quiet one in London.
UK government eases quarantine rules for travellers
Anyone arriving in England from a number of countries including Spain, France, Germany and Italy won’t need to self-isolate from July 10th, whilst the government is also easing international travel restrictions. A full list of countries that people can arrive from without self-quarantining will be published today.
Relaxing the draconian quarantine rules and allowing more ‘non-essential’ travel should come as a shot in the arm for many beaten up travel & leisure stocks, but there’s a long way to go to restore confidence and get people travelling as much as they did last year. It will take years to get air passenger numbers back to 2019 levels.
Pub and restaurant stocks have taken a beating during the pandemic, but investors may be able to raise a glass come Saturday as the various inns and hostelries reopen because share prices have recovered remarkably well. Marston’s has risen threefold from its March low, while JD Wetherspoon and Mitchells & Butlers have both more than doubled in that time. Mine’s a quadruple whisky.
Oil (WTI-Aug) drifted higher to the top of the Jun 8th peak around $40.70 where it’s pulled back to the $40 round number. The move higher has been steadily losing momentum and failure at the $40.70 area suggests perhaps the progression of the double top into a head and shoulders reversal pattern.
GBPUSD hits resistance, EURUSD bullish flag nears completion
In FX, the pound’s bounce ran out of steam and the euro has come back to its anchor. GBPUSD rallied strongly out of the channel but hit resistance at 1.2520 and has consolidated in a very narrow range around 1.2470. As markets opened in Europe the pair slipped this range and started a move lower – it could retrace towards the round number support at 1.24.
Meanwhile EURUSD has come back to 1.1230, the anchor point for the whole of June. This is the 23.6% retracement of the 2014-2016 top-to-bottom rout. As the bullish flag pattern nears completion, we should expect a breakout soon – the swing highs around 1.14-1.15 offering the main resistance.
Risk assets rally on bumper US NFP jobs report
US stock futures jumped, and European equity indices pushed to highs of the day after a stand-out jobs report. Today’s US jobs figures show the economy is bouncing back, but there is a still a long way to go to replace all the millions of jobs lost due to the pandemic. Permanent destruction of demand and productivity will take years to claw back.
US employers added 4.8m jobs in June, which smashed the consensus expectations of around 3m. The unemployment rate declined more than expected to 11.1%. Revisions to Apr and May left employment 90k better than previously thought. Labour force participation improved to 61.5%. Wages are up 5% year-on-year.
US nonfarm payrolls – a closer look
But, a couple of things we should say about this to take the shine off the report. First, weekly continuing jobless claims were a little worse than expected at 19.3m – this was a little better than last week but the number ought to be improving at a faster rate. Second, the total gains in employment over the last two months total 7.5m – but this is still dwarfed by the –20.8m recorded in April.
Three, the BLS notes that employment in leisure and hospitality increased by 2.1 million, accounting for about two-fifths of the gain in total nonfarm employment. Meanwhile, employment in retail rose by 740,000, so about 2.8m of the 4.8m was in sectors that are highly exposed to fresh lockdowns and the slowing of reopening, which has been the result of the recent spike in cases. So we cannot expect the same contribution from these sectors over the summer if states are in a stop-start reopening scenario.
Four, while the number of unemployed classed as being on temporary layoff decreased by 4.8m in June to 10.6m, following a decline of 2.7m in May, the number of permanent job losers continued to rise, increasing by 588,000 to 2.9m in June.
Stocks rise on NFP, cable lower on cancelled Brexit talks
Risk assets rose on the report as it was overall bullish. US futures jumped, with the S&P 500 heading above 3150, taking it some or 150 points, or around 5%, above last week’s lows. The Dow is up 1000 points from last week’s lows. European indices rose the risk rally higher too.
Elsewhere, we saw limited reaction in the dollar, but GBPUSD shot lower shortly after the release on a separate report saying that a meeting between the UK and EU chief negotiators that had been scheduled for Friday had been cancelled.
Gold slipped lower, making a fresh low under $1760 and a possible breakout of the bearish flag signalled this morning, potentially calling for a retreat to around the $1750-$1747 area.
Tesla rally continues on forecast-beating deliveries, Wedbush price hike
Meanwhile Tesla shares just keep on going and are set to gap up $100 after the company said it delivered 90,650 vehicles in the second quarter, well ahead of both what the company had guided and the Street expectation for 83k vehicles. The company has successfully ramped production at its Fremont site and the Shanghai plant also came back online after being forced to shutter in the first quarter due to Covid. China sales are picking up with Tesla selling almost 12,000 Model 3s in May.
The stock also got a lift after Wedbush Securities increased its price target on the stock to $1,250 from $1,000, whilst the bull scenario got a PT of $2,000. Chinese rival Nio delivered 3,740 vehicles during June and beat forecasts with second-quarter deliveries of 10,331 vehicles.
The FTSE 100 was well poised for a move and duly broke out of the descending trend line from the June peak, fresh horizontal resistance seen around 6260.
Stocks go up, cases go up, US jobs harder to call
European equities followed the US and Asia higher on hopes for a vaccine and a strong US jobs report, whilst shrugging off soaring numbers of new cases in the world’s largest economy.
US cases of Covid-19 continue to surge, rising more than 50,000 in a single day for the first time. Florida’s new case count rose 4.3%, vs the previous 7-day average of 5.7%, so indications perhaps that the rate of new cases may be coming down there. But California, Texas and Arizona recorded their largest one-day rise in cases.
Meanwhile, Tokyo also reported its highest number of cases in two months. Whilst the rise in cases is slowing the reopening of many states, some may argue that the US is simply heading for herd immunity a lot faster than anywhere else; in the long run this may help, not hinder, the country’s ability to get back to normal social and economic functioning.
Investors largely are shrugging off higher cases though as Pfizer reported positive results from a vaccine trial. But we have been here before – it’s too early to get too excited – but a working vaccine is the holy grail as it would allow real normality to return to the economy.
The S&P 500 rallied 0.5% to move to the 61.8% retracement, whilst the Nasdaq Composite set a new record high. The Dow finished a little lower. Shares in Asia took the cue to rally, whilst European bourses have opened with strength on Thursday morning. Lots of noise around but equity markets are not showing any real trend – major indices are still sitting around the middle of the June ranges.
Nonfarm payrolls tough to call
The ADP jobs report showed private employers in the US created 2.4m jobs in June, while the figure for May was completely revised to show a gain of 3m gained versus a previous estimate of 2.76m lost. Nonfarm payrolls today are again especially hard to call given the crisis. For May the consensus was for 8m jobs to be lost, but instead 2.5m were added.
For June the consensus is for 3m+ to be created. But the exceptionally wide range of forecasts suggests no true consensus – as I’ve mentioned a few times here the data is particularly difficult and noisy right now. Even if we get 5.5m created over the last two months, it still leaves 15m or so from the 20.5m lost in April unemployed, so recovery to the status quo ante remains a long way off.
Fed minutes indicated policymakers are keen to offer more detailed forward guidance about the path of interest rates but seemed less ready to go for yield curve control – a policy it last pursued during the second world war and one that the Bank of Japan is currently practising with limited success in achieving its goals.
Which leads us on nicely to the theme of Japanification, which is a thread which we like to explore from time to time. It can be summed up long-term economic malaise, deflation and a reliance on ever-larger monetary easing and low bond yields to prop up growth. Usually it’s Europe that seems to be tarred with this particular brush, but lately there are murmurings that the UK is heading down the same path.
For the first time, 30-year gilt yields fell below their Japanese counterparts this week. This is anomalous for a couple of reasons. First, the fact that gilt yields across the curve are at or near record lows highlights that investors haven’t blinked at the super-high issuance by the government to fund its response to the pandemic – the Bank of England’s asset purchase programme is doing its job. Two, the yield on Japan’s long bonds went up because the Bank of Japan said it would increase purchases of debt up to 10 years in maturity but keep buying of longer-dated maturities unchanged. This pushed up the yield curve, a fine example of yield curve control in action.
Whilst the crisis is disinflationary at present, the vast increase in the supply of money, which unlike the post-2008 QE is not going to end up sloshing around the banks but be put to work directly in the economy, means it may be too soon to call Britain the next Japan, whatever the chart vigilantes tell us.
Gold eases back from multi-year high, crude oil soft on rising gasoline stocks
Gold pulled back off its recent multi-year high in a sharp corrective move but has found support around $1765. Yesterday I said fading momentum on the CCI with a bearish divergence to the price action suggested a near-term pullback may be required – this came a little swifter than expected and we may see further weakness as a bearish flag formation may call for another leg lower to $1750.
Crude oil stocks declined by 7.2m barrels vs an expected drop of about 1m, driven by lower imports due to an expected drop from Saudi Arabia. Price action was weaker on the news though as gasoline stocks rose 1.2m barrels vs an expected decline of 1.6m. WTI (Aug) initially eased back but has recovered a little to sit on $40. Again, as mentioned previously, the estimates on WTI stocks right now are also way off the mark.
In FX, GBPUSD broke out as the dollar was offered across the board. The double tap on 1.2250 produced a strong bounce that carried forward to see the downtrend broken as it broke out of the channel resistance and cleared the 50-day simple moving average. Bulls will need to see the last swing high around 1.2540 cleared to reassert an uptrend. Brexit headline risk remains a big hurdle to getting real momentum behind a rally for cable, but if there is a breakthrough the upside could run very quickly. EURUSD pushed up on dollar weakness with bulls needing to take out the Jun 29th high at 1.12877.
Stocks steady after Q2 boom, gold breaks higher, economic data uncertain
The S&P rallied 1.5% to finish the quarter up 20%, its best quarter since 1998 and keeping its YTD losses at –4%. The Dow Jones industrial average closed up 200pts as it continued its bounce off the 50-day simple moving average to notch its best quarter since 1987. Things were a little more mixed in Europe but again we saw the major bourses finish their best quarter in years.
Stocks rallied so sharply in Q2 for a number of reasons – chiefly stimulus, both fiscal and monetary, as well as the reopening of economies and better virus rates in most countries, though this trend has somewhat come undone in the US in the last couple of weeks. The aggressive pullback in February and March also left stocks rather oversold on a short-term basis, when considering the stimulus and relative yields to government bonds.
Meanwhile hopes of a vaccine are central if we are to see 2021 look more like 2019 than this year. For gains to be sustained in Q3 stocks require the continued support of stimulus, which remains on tap, as well as a better outlook on the virus spread and for the hard economic data to show a strong bounce from Q2, both of which could be more tricky.
Boeing declined by more than 5% as Norwegian Air cancelled an order for almost one hundred jets and competitor Airbus announced it would cut its workforce by 15,000, whilst Tesla shot 7% higher to a new record that takes its market capitalisation to $200bn for the first time. Shares in Facebook, which has come under fire lately by showboating big brands who are pulling advertising temporarily, rallied 3%.
Protests in Hong Kong signal geopolitical stress – Western powers have expressed dismay at China’s decision to pass the new national security law. The first arrests under the new law have been made – only a few hours after its imposition. The potential for this to create further unrest in Hong Kong and stoke US-China tensions will need to be monitored.
European equities traded cautiously on the first day of July and the third quarter after a mixed bag from Asia as Tokyo fell and Chinese bourses rallied. Australia was also higher as Hong Kong was shut for a holiday. The major indices remain in a broad zone between the 38.2% and 61.8% retracement of the drawdown in the second week of June.
Despite the sharp rise in cases in the US, which Dr Fauci says is out of control, Americans’ confidence is returning. The Conference Board’s index jumped by 12.2 points to 98.1, the best one-month rise in nine years. Chinese data was a little better than expected as the Caixin manufacturing PMI hit 51.2, but the Japanese Tankan survey disappointed at –34. Data points will remain mixed and noisy as we exit the crisis.
PMIs, which are diffusion indices, are particularly challenged by the speed and magnitude of the economic contraction. I would prefer to look at the hard data as it comes out over the third quarter. Economically things have rarely been this uncertain – we could be running way hotter than we think, but equally the long-term consequences could be deeper and longer-lasting than the V-shaped recovery camp would have it.
Looking ahead to today’s session, the ADP nonfarm employment report will provide a taster for Thursday’s BLS nonfarms report, while we will also be looking to the FOMC meeting minutes later for clues as to what else the Fed might be up to – there is unlikely to be anything other than ‘do whatever it takes’ mode on offer.
Gold prices rallied to fresh 8-year highs near $1790 on a technical breakout from the bullish flag formation. Real US rates remain at 7-year lows, while benchmark 3yr, 5yr and 7yr Treasury yields notched record low closes. As expressed in recent notes, gold looks to be a long-term winner from the pandemic as social and economic uncertainty favours the safe haven, whilst the vast increase in M1 and M2 money means there is a high chance – though not a certainty – of an inflation surge. Fading momentum on the CCI with a bearish divergence to the price action suggests a near-term pullback may be required – perhaps at the $1800 round number resistance – before the next significant leg higher can be made.
The rally on Wall Street upset the emerging downtrend and reasserted the range trade for the time being, with the S&P 500 finishing at 3100 in the 50% area of the June pullback.
In FX, cable bounced sharply off the 1.2250 support on the second look but remains constrained by the upper end of the channel.
What is short selling a stock?
Short selling, or shorting, is a strategy used by traders in an attempt to profit from falls in the price of a stock. While you can short other assets types, such as FX, commodities, or indices, stocks are the most commonly shorted instrument.
How short selling works
Traditionally, a trader interested in shorting a stock in a company needs to borrow them from someone who already holds them, like a broker. They then sell these shares at the going market price.
If their prediction is correct, and the shares in question do appreciate in value, they are able to repurchase the same quantity of shares that they borrowed for a lower price than they received when they first sold them. They can return the shares to the broker and keep the difference between the original sale price and the repurchase price – minus fees – as profit.
For example, imagine a trader interested in short selling Goldman Sachs borrowed 100 shares on June 5th, 2020, and sold them for $22,200 ($222.00 per share). They then waited until June 26th and bought 100 shares in Goldman Sachs for $19,000 ($190.00 per share). Without fees, they would have made a profit of $3,200.
Thanks to contracts for difference (CFDs), you don’t actually need to borrow or sell a stock in order to short it. You can simply short the CFDs, which are derivatives that track the price of the underlying stock, instead.
Why trade stocks short?
Shorting a stock gives you even more flexibility in how you trade the markets. There are many opportunities that you can take advantage of, as not every business has promising fundamentals or operates in a strong sector.
Wirecard is a perfect example. Although it was considered one of Germany’s leading tech companies, many, including journalists at the Financial Times, raised alarm bells. Wirecard was accused of misreporting its financials, giving the market a false impression of its business.
In June 2020 short sellers were vindicated, when, after having delayed reporting its results as many times as the regulators would permit, Wirecard was forced to admit that nearly €2 billion in cash that was missing from its balance sheet probably did not exist.
The share price collapsed. In the two days following the company’s bid for insolvency, the share price fell almost 100%, and short sellers made a total of $1.2 billion in the week ending June 26th.
Short selling isn’t always a sign traders believe that a business is poorly run or hiding potentially criminal activities. Sometimes they just believe that the market has made an error in how it is valuing the company, and that eventually the price will correct lower to reflect its fair valuation. Or they could be expecting that a wider market downturn will impact the stock in question more than others.
What is a short squeeze?
Short positions lose money when the asset in question rises in price. If something happens to drive an stock significantly higher, short traders may be forced to close their positions to prevent further losses. In order to close a short position, a trader needs to buy the stock that they are shorting. This increases the demand for the stock and pushes the price higher still. More and more short sellers are forced to close their positions because of rising prices, which in turn pushes prices higher and forces out more short sellers.
This is known as a short squeeze.
Using risk management when short selling
Just like with a long position, you can use risk management to lock in profits or limit losses when trading short.
Risk management on a short position works the opposite way around to a long position. So where a stop loss order on a long position would be placed below the entry level of the trade, on a short position your stop loss would be placed above it.
Similarly, your take profit level would be at a lower price than your entry price.
Stocks head for best quarter in years, Powell testimony weighs on yields
The UK’s economy shrank a little more than expected in the first quarter – the 2.2% plunge was the joint worst since 1979. Of course, it will be dwarfed by the Q2 drop, with April already printing 20% lower. Meanwhile China’s PMI data showed a slight improvement and Japan’s industrial production plunged over 8%.
Does any of this tell us much as investors and traders? In normal times, yes of course, as it might make a difference of a few points on the margins, but in the time of coronavirus there is an awful lot of noise around the data which makes it a lot more challenging, as well as of course all the stimulus, which muffles the notes that the data is trying to sound. Boris Johnson will launch an FDR-like New Deal infrastructure package today to distract us from the harsh reality of rising unemployment and ongoing restrictions on our liberties.
Powell’s economic outlook weighs on US yields
US Treasury yields declined as Federal Reserve chair Jay Powell said the outlook for the economy is ‘extraordinarily uncertain’. In prepared remarks for today’s Congressional hearing alongside Treasury Secretary Steve Mnuchin, Mr Powell said output and employment remain ‘far below their pre-pandemic levels’, adding: ‘The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.’
He also noted that ‘a full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities’. San Francisco Federal Reserve President Mary Daly said it’s too early to tell and is just ‘watching the data’. Aren’t we all.
A strong quarter for stocks, but risks of a sharp pullback abound
Stocks rallied on Monday despite a wobbly start, as US pending home sales jumped the most on record in May, whilst Boeing surged 14%, heaping dozens of points on the Dow as it restarted test flights on the 737 MAX aircraft yesterday.
But as I keep stressing, this is a very rangebound market. The S&P 500 rose 1.5% but is caught between the 38.2% and 50% retracement of the pullback in the second week of June. The Dow added more than 2% but couldn’t even achieve the 38.2% line. Whilst indices are still trading this range, there is a downside bias evident lately and emerging down trend channels as we’ve made a couple of lower highs and lower lows. If this trend strengthens it could gain enough momentum to retest of the June lows.
Indeed, during cash equity trading hours the last 5 sessions has produced a lower low and lower high on the S&P 500. Valuations still look too high and based on a far-too-optimistic view of an earnings rebound in 2021 and does not account for permanent productivity and demand destruction. Of course stimulus is making a big difference here, but risk assets are exposed if we see the pandemic get worse from here. World Health Organisation boss Tedros said the worst is yet to come. Cases across states like Arizona, Texas and Florida continue to surge and look to be completely out of control. A short, sharp pullback is a very real possibility.
Nevertheless, it’s been a solid month and an exceptionally strong quarter. US equities have enjoyed their best quarter in 20 years, whilst stocks in Europe have fared pretty well too as investors participated in the rebound off the March lows. It’s mirrored elsewhere in risk assets – copper is up a fifth, but is slightly weaker for the year. For instance, the S&P 500 is up 18% QTD, but down 5% YTD. The FTSE 100 is up almost 10% QTD, but down over 17% YTD.
On the open on Tuesday, European stocks were mixed and lacking direction as they traded either side of the flatline. The FTSE 100 was trading around the 50% retracement of the June pullback and took a little hit as Shell downgraded its oil outlook and warned it will need to take up to write down the value of its assets by as much as $22bn. This follows a similar move by BP, which moved lower apparently on the Shell read-across.
Chart: Dow tests 50-day SMA support, downtrend starts to gain momentum.
Elsewhere, gold was supported around $1770 but slightly below the recent 8-year high as the flag pattern starts to near completion following the leg up on Friday. Needless to say, we can look to US real rates and 10yr Treasury Inflation Protected Securities (TIPS) dipping to –0.7%, a new seven-year low. Across the curve real rates are more negative than they have been a decent while.
Crude oil recovered the $39 handle but has failed to ascend all the way to $40 and has peeled back this morning. The near-term rising trend is offering support but the double top still exerts its influence and may well result in a further pullback to $35.
In FX, the dollar continues to find bid and the dollar index is making a nice little move off its lows still in a strong uptrend channel but is just running into horizontal resistance around the 97.65 area – breakout could see 98 handle again in short order. The downtrend dominates for cable as the pair continued south down the channel to test 1.2250. Whilst this held, the failure to recover 1.23150 on the swing higher may call for a further decline to the 1.22 round number support, and thence our old friend 1.2160 may come into play.
Chart: Downward trend dominates for cable
Coronavirus outbreaks leave stocks stuck in their ranges
Virus outbreaks in the US continue to weigh on the mood, as it suggests the run-up in stocks on hopes of a V-shaped economic recovery may be overly optimistic. Several states, mainly in the south, have been forced to re-impose lockdown restrictions after being the first to reopen. Dr Fauci described it as a ‘serious problem’. The dangers of reopening too quickly seem all too apparent, but investors are also keeping an eye on outbreaks in Tokyo, Australia and China.
European equities were a touch softer but trading near the flatline on Monday morning, with a general lack of direction about today’s trade. Major indices tracking around the middle of their June ranges after Asian equities fell. US equities were lower Friday and finished down for the week but, as the month ends, stocks have enjoyed a very strong quarter.
The FTSE 100 is up over 8% quarter-to-date, while the S&P 500 has rallied over 16% in Q2 and the DAX has surged 21%. Valuations remain the concern as we head into earnings season with the S&P 500 still trading at more than 22x on a forward basis.
Coming up this week – Powell testimony, US nonfarm payrolls
Of course stocks haven’t only rallied because of reopening economies – enormous liquidity thanks to the coordinated action of central banks has been key. Central bankers have been striking similar notes in terms of the response to the crisis and Jerome Powell, the Federal Reserve chairman, will testify in Congress again this week. The Fed’s rather downbeat assessment of the economic recovery helped to stop the rally in its tracks and since then indices have been trading ranges.
The US jobs report – on Thursday this week due to the July 4th holiday – will provide an important view on the pace of recovery, but we should note that the weekly unemployment claims numbers are proving a more sensitive and up-to-date barometer, not least since there are problems with the data gathering for the monthly nonfarms report.
Facebook shares tumble on ad boycott, but how long can brands stay away?
Facebook shares tumbled more than 8% on Friday as a growing number of companies join a boycott of the platform over hate speech. We saw how a boycott of Facebook by users failed to move the needle on earnings, but this time it’s different – it’s the big brands that pay the big bucks and the loss of Unilever, Starbucks, Coca-Cola, Levi’s and Diageo among others will create a headwind to revenue growth in the coming quarter.
I would think Facebook can and will do a lot more and will be able to take steps to assuage brands’ concerns, allowing the stock to recover. Moreover, will brands be able to avoid Facebook for very long? Virtue signalling is one thing, but they also need to shift product.
Crude oil was steady with WTI (Aug) around $38 after rallying off the medium-term support around $37.50. OPEC+ compliance in June is expected to be higher than in May, mainly because Saudi Arabia, Oman, Kuwait and the UAE are cutting above their quotas. In FX, cable continues to track its channel lower with a new low put in at 1.2315, with the previous support in the 1.2390 region now acting as resistance.
Tesco dips on bank bad loan provisions, US banks flip on Fed stress tests and Volcker Rule change
Tesco shares slipped on the open despite surging sales online and in-store. Due to the economic situation and expected rise in unemployment, the company has increased provisions for bad debts at Tesco Bank, which will result in a loss of £175m-£200m for the 2020/21 financial year. In April management had flagged a likely loss at the bank this year versus £193m in operating profit last year. This will weigh on group profits for the year and while grocery sales are much better, profits may struggle to follow the kind of yoy progress.
At the core business, sales are of course exceptionally strong online (+48%) and roaring ahead in-store too. Total sales in the core UK & ROI business increased by 9.2%. Booker was up 6%, with the –32% decline in catering offset by a +24% increase in retail. The decision to match Aldi on prices means lower margins for core consumer division, whilst online operations are costly to maintain, particularly as the business has responded to such a surge in demand. But in big retail you have to keep running. Shares are down 11% YTD.
Fed tells US banks to suspend buybacks, cap dividends after stress test results
Talking of banks and bad loans, the Federal Reserve’s much-anticipated stress tests on US banks were published. The central bank warned that under certain scenarios some banks’ reserves would fall close to minimum capital thresholds, with lenders suffering up to $700bn in loan losses in the worst case. The Fed instructed the 33 largest banks to suspend share buybacks and cap dividend payments until the fourth quarter of this year, at the soonest.
However, all will need to resubmit plans later in the year. Shares in Goldman Sachs, JPMorgan Chase and Wells Fargo all fell in extended trade after hours, all three having rallied by around 3-4% in the normal session ahead of the results. So, all the banks have, in essence, ‘passed’, but we know that is only because of the massive injection of Fed liquidity provisions and monetary easing, as well as Congressional stimulus.
Earlier, financials (+2.26%) had led the way higher as the S&P 500 climbed more than 1% and the Dow added 300 points after Federal Deposit Insurance Commission officials in the US said they would ease the Volcker Rule, a post-financial crisis era regulation designed to rein in banks’ risk-taking. Some argue this kind of regulation, which has completely curtailed prop trading, has been a drag on bank profits as much as low interest rates.
The move would free up a lot of bank capital and make it easier for lenders to make large investments into venture capital. It would also end the need for banks to set aside capital for derivatives trades between different affiliates of the same firm. This idea has been floated in the past of course – but seems to have found new support since the crisis.
Stimulus is good, but it’s not sustainable; better to unleash animal spirits and let people get on with the business of taking risk and making money. We ought to be mindful of any implications of a Democrat White House and Congress on this change.
Oil rebounds off lows, natural gas tumbles to 25-year low
Energy stocks also rose (+1.96%) as oil prices rebounded off the lows. Crude oil (Aug) touched lows close to $37 as risk assets were offered earlier on during Thursday but recovered as stocks turned green later in the session. WTI has recovered to $39 but slipped a little this morning; bulls require the recovery to $40 first and then a push above $41.50 to reassert the uptrend. Natural gas prices plummeted to a 25-year low, amid a rise in stockpiles and declining demand.
The rally on Wall Street lifted the boats around the world. European stocks had begun shaky but turned positive for the day and have opened higher again on Friday morning. The rally in global equities continued into the Asian session overnight and has sent the major indices back towards the middle of the June range. Stocks rallied despite the growing signs that several large and economically important US states are going through significant rises in cases of Covid-19 and some are halting their reopening.
The market does seem to be able to live with rising cases better than it did, partly because there is not the sense that anyone wants to lockdown the entire economy again. Longer-term we are looking at the data over the summer providing a much clearer view of how economies are doing, and we need to see what the next corporate earnings season tells us. If investors start to think EPS forecasts are not about to improve drastically then the S&P 500 cannot handle the kind of multiple it currently trades on.
Chart: FTSE 100 and S&P 500 move back to middle of their June ranges
In FX, the majors are holding ranges. GBPUSD continues to slide down the channel but bulls will be hoping to put in a new higher low close to 1.2390, yesterday’s bottom. We’re getting to the point where this channel either reverses course of makes fresh lows towards 1.22. At the open the pair slipped to test the near-term support (pink line), which may guide the path to the top of the channel. Failure here suggests a retest of yesterday’s lows.
Equities in retreat as Covid-19 cases advance, oil drops
Equity markets have come under pressure again as a spike in new Covid cases across the US has investors worried, whilst the IMF drastically cut its growth forecasts for the year. Major equity indices have retreated towards the lower end of the range traded in June but have yet to make fresh lows for the month – when they do it will get very interesting and could call for another leg lower.
Stocks in Europe were down 3% on Wednesday, whilst Wall Street dropped 2.6%. European markets opened lower again Thursday, with a risk-off trade seeing all sectors in the red and telcos, healthcare and utilities declining the least.
Investors are pulling their heads in a little as the surge in cases raises concerns about how quickly the US economy can emerge from the ashes. There are also clusters in Germany of course but the focus is on the divergence between the European and US experience. The FTSE 100 retreated close to 6,000 round number but found support around the 23.6% retracement at 6,066.
The S&P 500 closed at 3,050, on the 38.2% retracement. With softness on the open in Europe and futures indicating a lower open, we may see SPX test its 23.6% level on the 3,000 round number. A retest of the June lows looks increasingly likely.
IMF cuts global outlook, US-EU trade tensions simmer
Meanwhile the IMF lowered its 2020 outlook, warning the global economy would shrink a lot more this year than it had forecast in April. Global output is forecast at –4.9%, vs –3% in April. The UK and EU will decline 10%, whilst the US economy will shrink 8%. Tellingly, the IMF also lowered its 2021 bounce-back forecast – growth globally is expected to rally 5.4%, vs the 5.8% forecast in April.
In other words, the decline will be deeper and the recovery slower; that is, no V-shaped recovery. We can also add US-EU trade tensions into the mix hitting stock market sentiment, as the White House has threatened fresh tariffs. I’d also suggest that the closer we get to the election and the more polls show Biden leading Trump, the greater the risk of a Democrat clean sweep, which will need to be priced into equity markets.
Improved virus response, central bank stimulus lowers risk to equities
Although we see clear headline risk around spikes in Covid cases for equity markets, any second wave is not going to result in the same level of lockdown restrictions endured in the first wave: it’s just too costly economically and because we have learned a lot in how to cope with this virus, both in terms of treatment and prevention. This means any further pullback we see, whilst potentially quite sharp, is unlikely to see a retest of the lows in March.
Meanwhile central bank stimulus is still strong. The Fed has shifted materially – it now has a $7tn balance sheet, setting a floor under the bond market that pushes up equities. The risk to equities comes later in the year when we get a real insight into both the pace of economic recovery and, by extension, corporate earnings – does the S&P 500 still justify x23 forward PE, or should it start to trade at more like x19? The current forward PE of around x23 suggests hope of a bounce back in earnings next year that may not come to fruition.
US weekly jobless claims in focus
On the pace of economic recovery, today’s weekly jobless claims report will be of great significance. Last week’s underwhelmed. Following the surprisingly strong nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m. The slowing in the rate of change was the main concern – hiring not really outpacing firing at a fast-enough pace to be confident of a decent recovery. I would like to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.
Gold eases back as dollar recovers
Gold eased back off 8-year highs as the US dollar gained on the risk-off trade, but at $1765 in early European trade had bounced off lows around $1753 struck overnight. Short-term we see a stronger dollar exerting some pressure on gold prices; longer term the focus is on US real rates, which have just risen a touch off the lows. 10yr Treasury Inflation Protected Securities (TIPS) eased away from 7-year lows at –0.66 to –0.64, providing another little headwind to gold prices in the near term.
Oil slides on rising stockpiles
Crude oil declined with the broader risk-off trade. Rising US stockpiles – which hit a record high for the straight week – have also started to spook traders. Crude inventories climbed 1.44m barrels in the week to June 19th, to 540.7 million barrels. Gasoline stocks were down 1.7m barrels, giving encouraging signals about driving demand. US crude oil refinery inputs rose 239,000 bpd to 13.8m bpd. Total US production rose 500,000 bpd to 11m bpd due to the return of Gulf of Mexico output following Tropical Storm Cristobal.
WTI (Aug) retreated off the $40 level to trade just above $37 – as suggested whilst the fundamentals have started to build in favour of stronger pricing, the market will not be immune to a technical pullback on overbought conditions and/or a decline in sentiment among traders due to rising US cases. The emerging double top is less nascent than it was and increasingly calls for the $35 neckline to be touched. A breach here calls for $31.50, the swing lows touched in the second half of May.
In FX, we can see a downwards channel for GBPUSD. The cross has pulled back to 1.24 as the dollar found bid, before paring losses a little this morning. Bulls need to clear the swing high at 1.2540 to break the downtrend, but trend resistance appears around 1.25 first. Bears can eye a pullback to under the Jun 21st low around 1.2334, with the channel suggesting we may see a 1.22 handle should the bulls fail to break 1.25 next.
Gold makes fresh highs, equities retreat to middle of ranges
Gold broke out to fresh multi-year highs above $1770 as real Treasury yields continued to plunge. US 10-year Treasury Inflation Protected Securities (TIPS) dipped to new 7-year lows at –0.66% and have declined by 14bps in the last 6 days. The front end of the curve has also declined more sharply in the last couple of sessions, with 2-year real rates at –0.81%. Indeed, all along the curve real rates have come down with the 30-year at –0.14%.
Gold has also found some bid on a softening dollar in recent days, with the dollar index down 1% in the last two sessions. Fears that global central banks are fuelling a latent inflation boom with aggressive increases in the money supply continue to act as the longer-term bull thesis for gold.
Gold climbs on falling bond yields, fears of long-term inflation bubble
As previously discussed, gold is a clear winner from the pandemic. Gold was initially sold off in February and the first half of March as a result of the scramble for cash and dollar funding squeeze. Since then gold has made substantial progress in tandem with risk assets since the March lows because of central bank action to keep a lid on bond yields. The combination of negative real yields and the prospect of an inflation surge due to massively increased money supply is sending prices higher.
Whilst the Covid-19 outbreak is at first a deflationary shock to the economy, the aftermath of this crisis could be profoundly inflationary. Gold remains the best hedge against inflation which may be about to return, even if deflationary pressures are more pronounced right now.
Covid-19 second wave fears keep stocks range bound
Stocks are a little shaky this morning after a strong bounce on Tuesday. European markets opened lower, with the FTSE 100 slotting back under 6,300 at the 61.8% retracement, which called for a further retreat to the 50% zone around 6220. The DAX is weaker this morning and broke down through support at 12,400, the 61.8% level.
The Dow is holding around 26,100 and the 50% level of the pullback in the second week of June, while the S&P 500 is finding support on the 61.8% level around 3,118. Equity markets continue to trade the ranges as investors search for direction on how quickly the economy will recover and whether second waves threats are real.
On the second wave, the US looks clearly to have suffered a new, and in the words of Dr Fauci, ‘disturbing surge’ in cases. Virus hotspots like Texas, Florida, California and Arizona are seeing cases soar. Such is the worry the EU may ban Americans from travelling to its member states. Tokyo has also reported a spike in cases, whilst Germany is locking down two districts in North Rhine-Westphalia and there has been an outbreak in Lower Saxony.
On stimulus, Treasury Sec Steve Mnuchin said the administration is looking at extending the tax deadline beyond July 15th and is seriously looking at additional fiscal support to build on the $2.2tn Cares Act.
Dollar retreats, RBNZ decision hits NZD
In FX, the dollar has been offered this week, allowing major peers to peel back off their lows. GBPUSD has regained 1.25, while EURUSD has recovered 1.13. The kiwi was offered today after the Reserve Bank of New Zealand left rates on hold but said monetary policy easing would need to continue. The RBNZ said it will continue with the Large Scale Asset Purchase programme of NZ$60b and keep rates at 0.25%. The central bank noted that the exchange rate ‘has placed further pressure on export earnings…[and] the balance of economic risks remains to the downside’.
Crude off multi-month highs, mixed on API data
WTI (Aug) pulled back having hit its best level since March, dropping beneath the $40.70 level that was the Jun 8th peak, but remained clinging to $40. Prices have slipped the near-term trend support. Again, I’m looking at a potential double top calling for a pull back to $35. However, the fundamentals are much more constructive, and indicate a stronger outlook for demand and supply than we had feared in May.
API data showed inventories rose 1.7m barrels last week, gasoline stocks declined by 3.9m barrels, while distillate inventories fell by 2.6m barrels. Crude stocks at the Cushing, Oklahoma, fell by 325,000 barrels for the week. EIA figures today are forecast to show a build of 1.2m barrels.
Chart: Gold up over 20% from its March low