Euro wobbles ahead of German court ruling, risk appetite improves

Morning Note

Attention this morning was on the German constitutional court and its ruling on the ECB’s long-standing bond buying programme. This could limit the amount of bonds the Bundesbank can buy, potentially creating a rift with the ECB and other member states. The real concern is whether it could affect the €750bn Pandemic Emergency Purchase Programme (PEPP), which has much looser rules than other QE programmes.

 

It’s high stakes – if the court blocks the Bundesbank from participating in QE it would be curtains for the ECB and creates significant Eurozone breakup risks. The good news is that the judges probably realise this. High stakes but the risk of serious ructions appears low.  The European Court of Justice has already ruled in favour of the ECB’s bond buying, so it’s hoped the German court will not rock the boat at this critical moment.

 

EURUSD was lower, breaking down at the 1.09 support having failed to sustain the move above 1.10 last week, which could open move back to around 1.0810. The euro seems to be displaying some degree of stress this morning ahead of the German court ruling. 

 

European markets rose after Asian equities made some gains. Markets in Japan, South Korea and China were shut for a holiday, but Hong Kong and Sydney rose. Wall Street closed a little higher after bulls pushed the S&P 500 into positive territory only in the final hour of trading yesterday. There is a little more risk appetite as oil prices climb. 

 

The Reserve Bank of Australia left rates on hold at the record low 0.25% and seems to be well dug in here. The RBA won’t go negative and won’t hike until the Covid-19 crisis is well in the rear view mirror. This is a pattern being repeated by most major central banks. 

 

Oil continues to make steady gains with front month WTI to $22 on hopes lockdowns are being lifted. The idea that we will be moving around anything like as much as before is fanciful, at least in the near term. New Zealand is going to be shut to foreigners – except perhaps their pan-Tasman pals – for a long time to come, the prime minister says. Ryanair has reported passenger numbers in April fell 99.6% and sees minimal traffic in May and June. Carnival is getting cruises going again – tentatively – in August. New car registrations in the UK collapsed in April, falling 97% to just 4,000 vehicles.

API data later today could show a very small build in inventories, but as always we prefer to look at tomorrow’s EIA figures. A small build would give more hope to oil bulls that the glut is not as bad as feared, however I would caution that we are simply seeing inventories naturally build more slowly as we approach tank tops.

Chart: EURUSD wobbles

FTSE 100 completes 400pt round trip this week

Morning Note

Stocks turned broadly weaker yesterday as investors reacted to some stinky data from Europe and the US. Overnight Asian data has also had the whiff of soft cheese that’s been left out too long. Stocks are softer once more, though most of Europe is on holiday so the focus is on London until New York opens.

The S&P 500 eased back almost 1% to relinquish the 61.8% retracement at 2934 but closing at 2912 it finished well off the lows. Both the Dow and the S&P 500 recorded their best months since 1987 as equity markets rebounded on central bank largesse, government bailouts and the outperformance of US tech over just about anything else. The tech-heavy Nasdaq was up 19% for the month and is nearly flat for the year. It’s shame we don’t really have any tech firms left, as nothing else is growing.

The FTSE 100 endured a terrible session, finishing 3.5% weaker as Shell tumbled, just holding onto 5900 and the 38.2% retracement of the drawdown. At Friday’s open the index shipped another 2% to break under 5800 and move back to where it opened on Monday at 5,752, completing a 400-pt round trip this week. This will be a level bulls will seek to defend. RBS shares rallied 3%, whilst Lloyds fell 4%. RBS said profits fell 59% to £288m as it set aside £800 for loan losses. But revenues were down just 1.6% at £3.2bn – Lloyds reported an 11% decline in revenues. Something doesn’t look right.

South Korean exports declined 24.3%, the worst slump in 11 years. Japanese factory activity fell to its lowest since 2009. The AIG Australian PMI dropped by 17.9 points to 35.8 in April, its largest month-to-month fall in the 28 years since it began. New Zealand consumer confidence fell 21 points in April to 84.8, where it troughed in 2008. Today’s main event will be the US ISM manufacturing PMI, which is seen declining to 36.7 from 49.1 a month ago.

Donald Trump is threatening new tariffs on China in retaliation for the coronavirus – trade tensions back on the agenda won’t be terribly positive for risk appetite but for now remains something on the margins. But the US and Europe will demand China steps up – if we talk about what permanent changes are taking place or what trends have accelerated sharply, then deglobalisation has to be at the forefront.

Apple shares declined in extended trading after it reported a slowdown in revenue growth and declined to offer guidance for the June quarter. It will however continue to buy back stock and increased its share repurchase programme by $50bn. Revenues from iPhones declined 7% to $29bn, but Services revenues rose 16% to $13.3bn. Overall revenue growth was down to +0.5% vs 9% in the previous quarter.

Amazon shares also dipped after hours as it warned massive costs incurred because of Covid-19 could lead it to a first quarterly loss in 5 years. Amazon always spends big when required and is prepared to make the investment at the expense of short-term earnings per share metrics.

Despite these results, both Apple and Amazon are in the camp where you think they will be thriving under the new world order. More smartphone time – yes, more home delivery – yes, more cloud servers required – yes.

Crude oil continues to find bid with front month WTI running to $20 before dropping back to $19. Crude prices are stabilising as OPEC+ cuts begin to take effect this month, potentially easing the supply-demand imbalance. Markets are also more confident about US states reopening for business, which will fuel demand for crude products like gasoline. Texas oil regulators don’t seem prepared to mandate production cuts, with chairman Wayne Christian against plans for 1m bpd reduction.

In FX, yesterday saw a pretty aggressive 4pm fix as we approached the month end. GBPUSD made a big-figure move and rallied through 1.25 and beyond 1.26 but turned back as it approached the Apr 14th swing high at 1.2650 and the 200-day SMA. It looked an easy fade but the euro also spiked but has held its gains, with EURUSD trading at 1.0960, having briefly dipped to 1.0830 after the ECB decision.

Charts

GBPUSD fades after hitting near-term resistance

EURUSD – clears 50-day SMA, looking to scale Apr 14th high

Fed and ECB previews

Forex

First up, the Federal Reserve kicks off its two-day meeting today (Apr 28th) and whilst there is always scope for a surprise, we would not anticipate any change to the policy outlook, chiefly because the Fed is no longer waiting for scheduled policy meetings but is operating in ‘real-time’.  

 

There is virtually zero chance the Fed will remove any accommodation until the threat of Covid-19 has passed. But if anyone thinks the FOMC will go negative they are in for a shock – there is no appetite to cut rates any lower and go below the zero lower bound. Europe and Japan are hardly shining examples of that policy working. Jay Powel has already ruled it out, though that in itself is not a reason it won’t happen.

 

The Fed has already thrown the kitchen sink at the market and the economy, announcing unlimited bond buying  – QE4ever – and expansion of corporate debt buying to include junk. There is not a huge amount left for the Fed could realistically do, save buying stocks outright and taking rates negative, neither or which are palatable or likely in the near term, partly because the efforts so far have calmed market stress and prevented further dislocation.  

 

Markets will be looking for any signal from Jay Powell about how the Fed views the rebound – is he still confident of a bounce back in the second half? Formal projections are not due until June. 

 

It’s a fairly similar story for the European Central Bank (ECB). We think they will not commit to any further policy moves right now but will likely signal they are ready to do so by June. The Pandemic Emergency Purchase Programme (PEPP) QE lift has been initiated with an overall envelope of €750bn, and it appears likely to be expanded by an additional €500bn in the next month or three. 

 

Two key things will be the focus. First the communication needs to be crystal clear – we don’t want a repeat of the spreads widening fiasco from Christine Lagarde. Since then the ECB has been absolutely on-point. The ECB must be continue to show to the market that it stands four-square behind the functioning of markets, the single currency and supporting the EZ economy. And on this, I would anticipate a lot of the focus in the press conference to be on the European Council efforts on a bailout package. Watch the BTPs-Bund spreads for how the market views the ECB performance. 

 

EURUSD – as noted on Monday, speculators are dialling up their net long bets on the euro. The Commitment of Traders (COT) from the US Commodity Futures Trading Commission showed euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017. Traders turned long at the end of March and have been adding to positions since then. We saw a shift like this in speculative EUR positioning in 2017 it preceded a 15% rally in EURUSD.

Upbeat start for European equities

Morning Note

No Monday morning blues for equities after the Bank of Japan announced more stimulus and we’ve some good news from Italy at last and even Deutsche Bank has reported a profit.

The BOJ laid down the gauntlet to the Federal Reserve and European Central Bank, who both meet later this week, by raising its package of support. The BOJ will now buy unlimited government bonds (JGBs), catching up with market expectations, and is increasing how much corporate and commercial paper it buys.

The moved gave an upbeat tone to trading in Asia. Tokyo rose 2.7% whilst Hong Kong rose 2%. European shares followed suit with the FTSE 100 opening above 5800 and the DAX reclaiming 10,500. Indices remain in consolidation phase and risk rolling over as momentum fades, but the news today is quite positive. US futures are positive after closing higher on Friday but falling over the course of the week.

Italian and German yield spreads came in after S&P didn’t downgrade Italian debt. This is good news for the ECB, which may well increase its pandemic asset purchase programme by €500bn this week.

On the Covid-19 front, Italy is also making progress and will relax lockdown measures from May 4th. Spain has reported its lowest daily death toll in a month. Boris Johnson is back to work.

Meanwhile Deutsche Bank reported exceeded expectations on profits and revenues in the first quarter but warned on loan defaults as a result of Covid-19. Investors shrugged off the warning and shares rose 7%, sending European banking stocks higher by around 3%. It’s a very big week for earnings releases – HSBC, BP, Shell, Amazon, Alphabet, Facebook and the rest.

Oil has taken a turn lower as fears of approaching ‘tank tops’ imminently. The June WTI contract is starting to show stress, gapping lower at the open last night and trending lower to approach $14. Brent is –5% or so at $23.50. Goldman Sachs estimates global storage capacity will be reached in just three weeks, which would require a shut-in of 20% of global output. That would chime with what we’ve been tracking and suggests OPEC+ cuts of 9.7m are – as anticipated – not nearly enough. It will make the Brent front-month contract liable to volatility, though perhaps not quite what we have seen in WTI. Baker Hughes says oil rigs in the US were down 60 in the week to Apr 24th to 378, the fewest active since 2016 and well under half the number this time a year ago.

In FX, speculators are dialling up their net long bets on the euro. The Commitment of Traders (COT) from the US Commodity Futures Trading Commission shows euro net longs rose to 87.2k contracts in the week to Apr 21st, the most since May 2017. Traders turned long at the end of March and have been adding to positions since. The last time a move like this occurred in EUR positioning in 2017 it preceded a 15% rally in EURUSD.

Meanwhile, speculators net short bets on the USD are now at the highest in two years as traders call the top in the dollar. Traders habitually call the top in the dollar and get it wrong. Various actions taken by the Fed to improve liquidity and an easing in the market panic we saw in March has helped, but the dollar remains the preferred safe harbour in times of market stress.

EURUSD – the last time specs turned this long was in May 2017.

DAX – rangebound, approaching top Bollinger band.

Stocks head lower after Gilead, EU disappointments

Morning Note

US stocks faded and European equity markets are broadly weaker following on reports Gilead’s Remdesivir drug isn’t what it was cracked up to be. It had been indications of early positive results for treating Covid-19 patients with the drug that sent markets up at the tail end of last week. We should note these are all leaked reports and the data is sketchy at best. What it shows is how the market is prepared to read into positive vaccine or anti-viral news with extreme optimism, setting the bar high for disappointment.

Data on the economy isn’t offering any disappointment – the bar is already so low that nothing can really be really upsetting. US initial jobless claims rose by more than 4m again, taking total unemployment claims to 26m from Covid-19. UK retail sales fell by a record 5.1% in March, but a drop of this magnitude was widely anticipated. Consumer confidence didn’t decline, but held steady at an 11-year low at -34.

Stimulus is being worked out. The US House of Representatives on Thursday approved the $484bn package for small businesses and hospitals.  More will be needed, you feel. Today’s data of note is the US durable goods orders, which are seen falling 12%, with the important core reading down 6%.

In Europe, Angela Merkel made sure Germany’s economic weight will stand behind a €1tn package for the Eurozone to prevent weaker economies from recovering a lot more slowly than richer ones. This will be defining moment for the EU – if it cannot pull together now, what is the point of it? Of course, there are still strong differences between nations on the actual size and nature of the fund. Critically, we don’t know whether cash will be dispensed as loans or grants. There was a definite sense from Thursday’s meeting of the EU kicking the can down the road. The problem for the EU and the euro is that we’re heading towards a world debt monetization and it cannot take part. German and Italian spreads widened.  Support needs to be agred – Lufthansa today says it will run out cash in weeks.

The euro continues to come under pressure on the disappointment and yesterday’s PMI horror show. Support at the early Apr lows around 1.07750 was tested as I suggested in yesterday’s note, which could open up a move back to 1.0640 without much support in the way.

Heading into the final day of trading for the week, the UK was outperforming – the Dow down 3% this week, while the FTSE was about 0.7% higher. The FTSE 100 shed about 100 points though in early trade Friday to give up its 5800 handle and head for a weekly loss.

Overall, it’s been a pretty indecisive week for indices with no significant developments in terms of the virus or economic data. It’s interesting that in terms of earnings releases, we are not seeing much other than a huge amount of uncertainty as companies scrap guidance. American Express is the main large cap reporting today. It’s already warned that Covid-19 would hit payments as lockdown measures force people to stay home. The momentum of the rally from the trough has faded this week and could see stocks roll over next week if there no more good news. It’s either a bullish flag pause, or a roll over to be signalled by a MACD bearish crossover. The question is do you think stocks should be down 10% or 20% from the all-time highs?

DAX: momentum fading

S&P 500: 50-day SMA proves the resistance with 2800. Watch the MACD.

Oil is proving to be more stable. Oklahoma’s energy regulator has said producers can close wells without losing their licences. Donald Trump started to look desperate, stoking tensions with Iran. You would not be surprised if it were a dastardly plan to boost oil prices. Treasury Secretary Mnuchin suggested the White House was looking at a bailout for the oil industry.

Today’s Baker Hughes rig count will be closely watched to see how much production is being shut in. Last week’s figures showed the sharpest decline in active rigs for 5 years, falling 66 to 438, around half the number drilling for oil the same time a year ago.

PMIs crash as social distancing looks set to last, European shares softer

Morning Note

Britain faces future of social distancing. The chief medical officer for England, Chris Witty, says some disruptive lockdown measures will remain in force for the rest of the year. Pubs and restaurants may not open until Christmas. If they can before, you only need to do the arithmetic and work out that a pub which could usually count on being chock full of a Friday night won’t do much business if everyone is forced to stand six feet apart. They will lose less money by staying shut. It’s increasingly looking like a total failure by the British government to implement the testing required to get the country moving. Lockdown measures cannot become normalised.

The economic damage from these lockdowns is still providing some remarkably ugly numbers, but I think equity markets have already discounted the worst. France’s services PMI slid to 10.4 in April, while the composite index slipped to 11.2 vs 26 forecast. Germany’s composite PMI was a little better, but services were also uber-weak at 15.9. This follows some hideous PMIs overnight as Japan’s services PMI sank to its weakest since 2007. It’s notable that the severe lockdown measures that we have across Europe are not in place in Japan. Australia’s services survey down to a record low 19.6, but Australian exports climbed 29% in March thanks to a bounce back in iron ore shipments to China after a sharp decline in Jan and Feb.

When an economy has been effectively shut down it’s no surprise the PMIs will reflect it. It’s like looking in the rear-view mirror at a horrible accident – better to focus on the road ahead. France’s finance minister Bruno Le Maire says the government wants all retail outlets to open by May 11th. However, this excludes bars and restaurants – what’s the point? Germany has just announced a new €10bn package of support and is already lifting some lockdown restrictions. Test, test, test.

Meanwhile, the European Central Bank is loosening its rules on asset purchases to enable it buy so-called ‘fallen angel’ bonds – paper issued by companies not rated investment grade. Credit ratings agencies are expected to downgrade a slew of corporates from investment to junk, so this merely lets the ECB to operate how it wants – it doesn’t want to narrow the pool of available bonds and only prop up the ones who need it the least.

After the stramash of the last few days, oil has regained some stability, but I would be cautious about reading too much into any gains until we see the supply shut-ins and OPEC cuts start to reduce the flow, and the demand picks up again. Brent futures for June touched a low under $16 yesterday but rallied through to $22 and are last trading around $21.50. WTI for June also rallied from yesterday’s lows at $6.50 but twice failed to recover $16 and were last trading under $15.

European markets tried to sketch out gains in early trade as oil prices recovered some ground but the PMIs started to weigh. Shell and BP – big FTSE weightings – led the way higher before the economic hit dragged on sentiment. The FTSE 100 put on a good show yesterday, rallying 2.3% and closing near the highs at 5,770. Wall Street rallied 2% yesterday as the Senate passed a relief bill and oil recovered its footing, but stocks finished off the highs and the S&P 500 failed to close above 2800. Futures indicate mild gains.

The DAX was also firmer by 1.6% yesterday but failed to recover the trend line and has turned weaker again this morning. Daily momentum indicators have turned across indices and suggest a period of weakness.

In FX, the dollar is a tad softer at the start of the session but the dollar index remains firmly above the 100 level at 100.480. GBPUSD is flirting with the trend resistance having backed away from this yesterday following the crossover on the 1hr MACD. Bias remains to the downside, support at 1.2250 may be looked at.

EURUSD also maintains a bearish bias and took fright at the PMI horror show to dip under 1.08. Support at the early Apr lows around 1.07750 may be tested, which could open up a move back to 1.0640.

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