Euro dives on Draghi, stocks rally

Forex

The euro fell and stocks rallied after ECB chief Mario Draghi talked up the prospect of interest rate cuts and more QE.

The euro shipped 50 pips in short order and euro area bond yields dropped as Mario Draghi gave the strongest signal yet the European Central Bank is about to launch a fresh round of easing measures.

Speaking at the annual central banker bean feast in Sintra, Draghi said: ‘Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,’ and added that the asset purchase programme ‘still has considerable headroom’ and that in the absence of inflation returning to target, additional stimulus will be required.

Draghi has really opened the door to more cuts and a new round of quantitative easing. He’s in full dove mode now, the towel has been thrown in. Building on the last ECB meeting, at which some members discussed reopening QE, this looks like a clear signal that the central bank is preparing markets to expect monetary policy to become more accommodative this year.

This is entirely in line with our long-held view that the ECB would ultimately be forced to do more to stimulate the ailing Eurozone economy. Inflation expectations are being crushed – Euro 5y5y inflation swaps lately sunk to record lows- below 1.2% for the first time. Economic indicators continue to show a deep and persistent slowdown.

The euro dived lower and the breakout now looks lost. EURUSD was trading at 1.1240, already under pressure having slipped the 1.13 handle, before it dropped sharply to trade on the 1.11 handle at 1.1190. The Fed meeting is unlikely to help the euro with dovishness well and truly baked in – in fact the Fed has a low bar for a hawkish surprise that could put more pressure on the euro.

German bund yields are lower again, with the 10-year sinking towards -0.3%.

This Draghi put lifted stocks – the Euro Stoxx 50 rallied over 30 points quickly to trade at 3409, having been languishing around 3370. The DAX shot up more than 150 points. All else equal, which it seldom is, more easing from the ECB should be a boost for equity sentiment.”

Equities flat ahead of big week for central banks

Equities
Indices
Morning Note

Shares open flat as markets look ahead to the FOMC meeting later in the week, whilst Lufthansa shares tumble on a profits warning.

European equities look pretty flat on the open after a decent run last week for global equity markets. The S&P 500 closed a shade lower on Friday. Asian shares a bit wobbly overnight. Gains may be hard to sustain with the Fed in focus and no clear signs of progress on trade.  Investors may take a bit of risk off the table in the next couple of days.

US commerce secretary Wilbur Ross has poured cold water on any hopes that we might get a trade deal from the G20 meeting and said the US is ready to increase tariffs on China if necessary. 

FOMC meeting

All eyes are of course on the Fed meeting this week. It’s hard to recall a time we headed into an FOMC meeting with so much at stake and with so much uncertainty about what might be agreed. This means the potential volatility around the event is likely to be substantially higher than at most recent FOMC meetings. Traders may start to show some nervousness ahead of the Fed meeting if they think it won’t be accommodative as hoped. 

We’ve also got the BoE and BoJ expected to stand pat. We could though see some hawks on the MPC vote for a rate hike to signal their intent, as it appears waiting for Brexit clarity could take a while longer than policymakers had anticipated. Three members of the rate-setting Monetary Policy Committee have in the last week or so said that rates will likely need to rise at a faster clip over the next two years than the market is currently pricing. This week could be when they signal their intent.

EURUSD is looking softer ahead of the Fed meeting with the apparent failure of the double-bottom breakout from the descending wedge. Last trading on 1.12, a breach on the downside of this handle opens up a return to the 1.110 level immediately. Sterling remains softer too ahead of the Bank of England meeting with the dollar broadly firmer. GBPUSD has last holding support at 1.2580 where we long-term rising trend support coming in.  

Oil 

A fair old whipsaw last week as geopolitical tensions in the Middle East temporarily lifted prices. But on the whole the bleak demand outlook is weighing on prices and we have seen Brent retreat to the comfort of $62-$62.50. WTI is a shade below the $53 level.  Yet to see a sustained downside break again but it may be coming, albeit rising geopolitical tensions may offer support.

Speculative long positions have been heavily reduced – CFTC data showing a trimming in net long positions of around 50k contracts from 400k reported in the COT on Jun 7th to 351k reported on Friday. That’s down from a high of around 547k at the end of April. The reduction in net long positions reflects worries about a supply glut as demand weakens and US production ramps. 

Effectively the market has decided that OPEC will choose to extend its production curbs when it meets later this month/early July. To do anything else would be to risk a collapse in prices. Saudi oil minister Al-Falih is optimistic about extending cuts. His confidence is now being discounted by the market however.

Equities

Deutsche Bank – If no one wants to marry you because you’ve got too much baggage, the answer is to get rid of the baggage. Deutsche plans to set up a bad bank (that’ll make two then) to offload some of the least profitable elements of business. This is Sewing’s big play – we await to see whether it’s enough to really convince shareholders that we’ve hit the bottom. Profitability targets still look rather distant.

Airlines – Lufthansa’s profits warning has taken the wind out of the airlines today. The margin on its preferred metric is seen between 5.5% and 6.5%, down from the previous guidance for adjusted EBIT margin of 6.5 to 8%.

At the end of April we noted that Lufthansa’s Q1 loss wasa red flag for the airline sector. Over-capacity in the European short haul market, intense competition and the resulting pressure on fares can be blamed for the decline in profitability, whilst rising fuel costs are an added headache. The sector always does a good job at competing away margins in the good times. No signs that anyone is prepared to reduce capacity therefore we would anticipate the wave of consolidation in European short haul is not over.

Babcock/Serco – Babcock confirms speculation it’s been approached by Serco. Not an immediately obvious move but the two are a pretty good fit and we had anticipated some consolidation in the sector given the problems for outsourcers. Serco has been doing well against a tough backdrop for outsourcers, meeting new higher performance targets, whilst Babcock has been suffering.  Babcock has been downgrading its forecasts for a while and has been on a persistently downward spiral. Last month Babcock reported profits down 47% last year and warned of a tough outlook for the coming one. 

Mexico fix green light for risk, oil rebounds, Thomas Cook carve-up

Indices
Morning Note

It’s a sea of green as stocks rebound on Trump’s Mexican fix. Investors are relieved at Mexico and the US coming to an agreement to avoid the latter slapping the former with tariffs, and this sent equity futures north. SPX closed Friday +1% for the day to cap a remarkable turnaround after a very rocky period. Futures show further gains Monday – looking now for a retest of 2900 –remarkable considering we were sub 2800 just a few sessions ago. Wall Street had its best week since Nov as weaker data cemented the market’s belief the Fed will cut rates – 4 cuts now more likely than 1 in 2019, according to the market. This looks overly optimistic. Futures indicate European shares are positive thanks to the Mexican deal with the FTSE 100 eyeing a return to 7400 and the DAX looking to return to 12,200. 

Tariff reprieve for Mexico

Late Friday the US ‘indefinitely suspended’ tariffs on Mexico after striking a deal. Whilst this is positive for risk assets, one should be cautious that this may only embolden Mr Trump to use tariffs as policy tool for the pursuit of non-economic interests. As previously suggested, the EU could be next – maybe to get the 2% defence spending target.  

Meanwhile as we raised on Friday, the US Treasury Sec Steve Mnuchin criticised China for purposefully letting its currency slide. The thesis is basically ‘no intervention is now intervention’. This has been talked about extensively before. Offshore USD/CNH was last around 6.950 – a little below Friday’s highs – expect the 7 handle to face stiff resistance but the jawboning is pushing it in that direction and suggests the PBOC won’t defend 7 at all costs like we might have assumed in the past. The onshore version sank to its weakest in six months today. 

Data overnight positive – Japan GDP Q1 revised higher, from 2.1% to 2.2%; while Chinese exports climbed in May, an unexpectedly strong performance. 

Dollar steady, oil rebounds

The US dollar was solid on Monday but could come under pressure. EURUSD holding at 1.13 and GBPUSD holding 1.27 but thus far failing to show any further momentum higher.  

Oil was firmer as the recovery in risk sentiment boosted crude. Saudi comments about extending OPEC cuts seem to be helping but largely this is baked in already – it’s the demand side that matters the most right now. Brent was last trading around $63.50. We await to see whether this is just another bear flag or the start of a meaningful recovery. Speculative net long positions fell again to 400k from 439k, indicating traders are continuing to unwind their bullish bets oncrude. E

Ferguson 

Good numbers from Ferguson but cloudy outlook means shares fell about 5%. Ongoing revenue growth of 6.2%, including 8.4% in the USA. Gross margins lightly ahead of last year, rising 20bps to 29.5%. Ongoing trading profit of $359m was $8m ahead of last year. FY guidance unchanged.  

Ferguson remains a play on the US economy, particularly new housing starts. Shares in the company are still subdued following the selloff last autumn and are yet to recover the kind of level we saw in September.  

Fears about the economic outlook in the US are a factor, but the expectations the Fed will cut rates should act as a support. US mortgage rates have come down as yields have retreated to 2-year lows. US new housing starts have picked up in the last two months and confidence has returned to the sector, some of which should be reflected in the Q3 numbers. New home sales dipped in April, but this was from an 11-year high as the market recovered from the disaster in the final quarter of 2018. 

Thomas Cook

 Thomas Cook confirmed that it is in discussions with Fosun following receipt of a preliminary approach. It follows reports over the weekend that 18% shareholder Fosun is ready to pounce for the tour operator business excluding the airline, which it cannot own due to EU aviation rules. As noted on May 16th, when we suggested an approach was in the offing, as once the airline is sold a major obstacle to the Chinese group making a bid will have been removed.

Management says it has received multiple bids, including for the whole, and parts, of the airline business. Triton may make life more difficult for Fosun but whatever the outcome, it seems the writing is on the wall after some bad losses and a ratcheting up in debt levels. First half losses jumped to almost £1.5bn – its biggest ever – as it took a £1.1bn write-down on My Travel. Underlying EBIT losses increased by £65 million to £245 million, which was down mainly to margin pressure in package holidays. Net debt has risen to £1.25bn

Sadly, it rather looks like Thomas Cook will be carved up in some fashion or other. This may not be a bad thing – clearly managing this large, complex holiday business proved daunting. But selling off the various bits of the business is likely to be even more complex.”

May’s last day, Nonfarm payrolls due

Morning Note

May’s last day, Mexico trade standoff, US jobs, Yuan looks to 7

And so, the time has come for Theresa May to shuffle off. Except she won’t quite as she will remain on as a caretaker PM. Boris Johnson is frontrunner. If he gets in – and we’ve detailed why we think he will – it could be a troublesome one for the pound. Votes start next week and we should be down to the final two before June is over.

Trade v Fed 

US equities continue to march higher as the Fed story is all that matters – investors are still guzzling that Kool-Aid. The Dow added 180 points, leaving it up over 1100 points from the low hit this week.  SPX rose 0.61% to 2,843. Looking first for 2870 and then 2889 for bulls. Support around 2817 and 2800. 

European equities were softer as the ECB was not dovish as expected. Mixed bag in Asia overnight – Nikkei and ASX higher, Kospi down, India flat, China weaker.  

Futures show European markets on the front foot, bouncing back modestly from Thursday’s dip. 

EURUSD failed to break out any further after the ECB meeting. After pushing up to 1.13 it’s found well-trodden turf at 1.1260 for comfort. At send time sterling was steady at 1.27 against the dollar. 

Oil has bounced after looking a bit oversold. Brent testing resistance around $62.50, the 50% retracement of the Dec-thru-Apr rally. 

Some progress on the Mexican-American talks over tariffs. VP Pence said he was ‘encouraged’ by the discussions as Mexico offered to deploy 6,000 members of its new National Guard police force, but has reiterated that the 5% tariffs are still slated for Monday. 

Fed jawboning continues but with a slightly different tone. NY Fed John Williams was more hawkish – or at least one feels more representative of the Fed’s unwillingness to flip-flop into a rate cut. His base case is for the US to grow above trend at 2.25%-2.5%. His baseline is a ‘very good one’. Not language suggestive of a cut, albeit he acknowledged risks to the downside. 

Yuan risk 

USDCNH rallied, with the yuan weakening amid concerns the PBOC is not worried about devaluation. Bloomberg reports PBOC governor Yi Gang said he wasn’t worried about the seven level being breached. Given the tensions over trade, devaluation in the CNH would risk escalation as it would be perceived with suspicion in Washington. USDCNH was last at 6.941, threatening to break out above last October’s highs around 6.97. Gang is right that no one level is particularly more important than the next, but the 7 handle on USDCNH holds a very real psychological hold over the market. If that goes we would expect Trump to counter-attack.

ECB fallout 

Markets are still digesting the impact of the ECB’s forward guidance change yesterday. The pressure to launch a new round of QE will only build. I see the market testing the ECB on this and driving it towards opening its toolkit again. EURUSD gains seen capped, whilst the relative quality of the dollar versus a world of ugly sisters should underpin the buck.

Jobs! 

Nonfarm payrolls are the headline risk event. The ADP print earlier in the week could herald a bad-un, but we’re still looking for something in the region of 180k, in line with the long-term trend. We should recall that the 27k print for the ADP number came after a whopper the month before of 271k – look for the 3-month average. Jobs growth remains solid, but this month’s print could be a tad light. Look for 100k maybe. The super tight labour market may well see hirings start to decline a touch anyway. Unemployment is seen at 3.6%. 

It’s far too easy to read way too much into a single jobs number. Remember the 20k print for Feb was followed by prints of 196k and 263k in the following two months – and had preceded by Jan and Feb printing above 300k. 

The wage data is probably more important as far as Fed expectations as it matters for inflation. Average hourly earnings are forecast to increase 0.3%. Traders likely to remain cautious ahead of the nonfarm payrolls. 

Equities 

Ferrexpo – welcome bit of good news after auditor strife and corporate governance concerns – sees material improvement in earnings – group EBITDA in 1H 2019 is expected to increase materially compared with 1H 2018. Improvement driven by higher pricing, production and sales volumes, while cost inflation lower than expected due to a fall in oil prices and the European gas price, which has partially offset by an appreciation of the Ukrainian Hryvnia versus the US dollar. 

Banks – the FCA is coming down very hard on overdraft fee charging, but stops short of ending free banking. 

Beyond Meat – last night Beyond Meat reported much better than expected Q1 results. The stock market darling shows no signs of falling out of love – shares popped 25% at one stage in after-hours trading and were last up 18% – close to 5 times above its $25 IPO price at $117.49. Losses rose to $6.6m but revenues tripled to more than $40m. Massive growth opportunity but the multiples are crazy and competitors are coming – you’re entering a space that is really ripe for the FMCG giants to take over. 

European stocks rebound, euro about to give it up

Equities
Forex
Indices
Morning Note

Stocks were lower across the board yesterday as the weight of the US-China trade dispute pushed everything down. From pretty much assuming the US and China would strike a deal, the market is repricing for a prolonged fight.

SPX closed lower by 19 points, or 0.69%, at 2,783, resting close on the 100-day moving average. This was a little off its lows of the day and a shade above the all-important 200-day moving average at 2776. The Dow shipped over 200 points and was briefly below 25k. 

The FTSE is also flirting with the 200-day line having closed 83 points lower at 7185. The pattern looks decidedly bearishy and flaggy right now. Support on the 38% retracement of the bottom-to-top rally from the 2018 low thru Apr high sits at 7150, which we saw tested and rejected yesterday. This was also an area of support that produced a bounce through the third week of May. 

We are seeing a small rebound in Europe on the open but there’s still lots of nervousness out there and the downward pressure is rather powerful and looks hard to resist. Any gains look hard won and easy to give up at the moment.

Forex

Dollar is still bid, pressuring everything else, with the dollar index on the 98 handle as it hoovers up haven demand. The euros is on the brink of capitulation on the 1.11 handle, with the pair last at 1.11343, ready to test those key May lows again, which marked a 2-year trough for the single currency. A breakdown through 1.11 on the downside brings 1.08 back into the picture.

GBPUSD doing very little still, trapped around the 1.2640 region. Whilst we are yet to retest Thursday’s low at 1.2610, we are making progressively lower highs and lower closes – the pound is still under a lot of pressure and this doesn’t look like having much chance of lifting until we know who the next PM will be. Brexit uncertainty remains.

That renewed dollar strength seems to be weighing on gold, which was last back at 1277. Rising trend support appears around the 1270 mark but for now the metal looks caught in a range. 

The GDP second print for Q1 is later – with the market already betting big on a rate cut this year it’s hard to see how a downward revision will really shift things. The first reading showed 3.2% and is expected to be revised down to 3.1%.

Watches of Switzerland

Meanwhile the latest IPO is in London – Watches of Switzerland has priced at the top of its range, at 270p. Shares will start trading today on the open. As we’ve seen this year IPOs can be a rough ride for shareholders and management. Hopefully for the management and buyers it won’t turn out to be another turkey like Aston Martin – one feels the omens are better for this one.

Markets react to European elections

Equities
Forex
Indices
Morning Note

European equity markets are on the front foot again, building on yesterday’s gains, as investors breathe a collective sigh of relief following the European parliamentary elections.

European bourses have firmed as it looked like the political centre ground is holding in the EU despite pressure from right and left, whilst we have some upbeat spin on trade to contend with as we hear about a possible US-Japan trade deal. London and Wall Street will be playing catch up today. Futures in the US point to gains today. 

Euro elections: the centre holds, barely

European elections returned gains for a number of right-wing, Eurosceptic parties as expected, but not enough to really shake the ground from under the centrists. The main blocs have held on to remain just about in control, although for the first time they have lost their combined majority.  

The gains for the right continue to point to a problem for Brussels. But there were also big gains for the Greens. The political landscape is shifting, but it wasn’t a Brexit-like earthquake.

The strength of the League in Italy and National Rally in France is noteworthy and will exert domestic pressure more than at a European level. Expect further confrontation between Rome and Brussels. Indeed, on that note, Italian bond yields spiked, with the 10yr BTP above 2.7% again, amid reports the EU is mulling a $4bn fine for Italy for failure to control debt. For France it simply highlights that Macron’s reformist agenda is under a lot of pressure.

The euro though has been pretty well unmoved although London and New York were shut yesterday and we might see traders coming back in today. EURUSD was steady at 1.1180.

Brexit looms over pound

Ain’t no party like a Brexit Party: In the UK the centre has given way completely, and the pressure on the pound remains firm. The Brexit Party won the day, although the overtly Remain parties did very well with the LibDems and Greens enjoying a strong bump in support. European elections are entirely meaningless of course in terms of the Westminster arithmetic, but the impact on the ruling Tory party is key. 

For markets, we should expect the result to impact the leadership race and already a number of leading candidates have upped the no-deal rhetoric. One can only argue that this will, on the margins at least, push candidates more towards the fringes and see the party go more to the right. Given the Tory membership’s pro-Brexit feelings there is an ever-increasing risk of a no-deal exit at this stage. A lot is priced in but a no-deal would see further downside for the pound.

GBPUSD has found support again around 1.2670 and while there is still a lot of pressure, Thursday’s reversal on the 78% Fib retracement on 1.2610 looks to have placed something of a floor under the pound for the time being.  

Bitcoin 

Cryptos have rallied hard again on strong volumes, taking another leg higher over the weekend. Bitcoin is testing the $9k round number resistance, before a tilt at the 38% retracement around $9640 and then the April 2018 high on $10k. Once this market builds up a head of steam, it’s hard to stop. As previously argued, this is a big momentum play and the more buzz the more traders will pile in behind the rising wave. Standing in front of a steamroller springs to mind, if you are a natural bear. Better to wait and let it fizzle out, which it will eventually. The more it rallies, the bigger the blow-up when it comes. However, we should expect some pullbacks and retracements along the way, so watch for those whenever the rally looks overextended – 14-day RSI approaching 90 has been a pretty good indicator in the past. 

Morning Note: Powell pulls rate cut rug from equities, Europe to open lower

Equities
Forex
Indices
Morning Note

Is the US economy running hot or not? The economy is growing at +3%, but inflation isn’t there. PMIs are softening, but the labour market is as tight as it can be. The yield curve has started to steepen again – the big recession indicator has dimmed. 

For the Fed, the glass is half full, still. That means it sees no need to cut rates this year – markets have been pricing in a 65% chance of a cut before 2019 is out. Now they need to rethink this. As I’ve been saying for some time, the market was mis-pricing where the Fed sits on the economy and inflation and was overly dovish.

Jay Powell last night made it clear the Fed thinks that the low inflation is down to ‘transitory’ factors. This word was key, and has given risk assets a bit of a fright. The Fed’s preferred gauge of core inflation has slipped from around 2% to 1.6% in recent months, but policymakers remain relaxed. If weaker inflation persists, however, the Fed may need to consider a cut.

The S&P 500 beat a hasty retreat on Powell’s comments – slipping 0.75% on the day to close at 2,923.73. Bonds were sold and yields climbed. Powell is not listening to Donald Trump and his 1% cut + QE idiocy.  

Why the market is surprised by the commentary from Powell is not really clear. The minutes from the last meeting showed sill that the bias remains mildly towards tightening – I.e. the way policymakers read the economy progressing suggests still another hike before a cut. The market is still not pricing in the chances of a rate hike this year. 

The word ‘transitory’ has done the damage – once again Powell has found a way to make what should have been a fairly innocuous presser quite interesting.  

European markets are seen lower on the open – taking their cue from Wall Street and its risk-off moves. The FTSE 100 is seen opening around 7357, while the DAX – coming back from the May Day holiday – is seen at 12,347 on the open.

The dollar managed to pare losses as Powell’s comments were digested. EURUSD gave up the 1.12 handle and remains below this in early morning trade.  

Having rallied as high as 1.31 at one brief moment ahead of the Fed statement, GBPUSD has retreated to 1.3050. Lots of strong horizontal support now around 1.3030/40.”

Mayday, mayday: SPX record high ahead of Fed, euro higher

Equities
Forex
Morning Note

The S&P 500 closed out at a new record high yesterday as the market shrugged off the Alphabet earnings miss and instead chose to focus on the positives – namely a dovish Fed, apparent progress on China trade talks and a humming US economy. Aside from Alphabet the earnings season so far has been a positive surprise.

Apple earnings after the bell were upbeat (see earlier note), whilst a softer dollar was a tailwind. Dow industrials enjoyed positive earnings from Merck, Pfizer and McDonalds. GE also delivered an earnings beat. The Nasdaq finished lower as the Alphabet earnings disappointment weighed. Apple should deliver a boost to the index today. 

The euro is trading at a one-week high against the dollar, whilst cable has also sought to raise its head above the 1.30 mark again. We should be careful about reading the rites on the dollar rally thought – month end rebalancing has been pinned on some of yesterday’s losses for USD.  

Nevertheless, there was some boost as EZ GDP data printed higher than expected and German CPI was also on the upside. German inflation rose to 2% year on year, after leaping 1% month on month in April. I would still caution that other macro data are pointing to ongoing weakness. Leading indicators don’t look so clever with PMI data indicating a slowdown in Q2.   

Euro at week highs

As far as EURUSD goes, Friday’s indecisive candle was an indicator of a short-term rally but the longer-term trend remains to the downside. Trend resistance is coming in around the 1.12650, with April highs horizontal resistance beyond at 1.1320. This suggests we could get a little more upside in the near term before the rally hits a roadblock. EUUSD was last holding above the 1.1210 level. Expect thinner liquidity today as it’s the May Day holiday on the continent with the major European bourses shut.  

FOMC on tap

Coming up later today of course is the FOMC decision. Don’t expect the Fed to tie its hands to anything conclusive right now – there are just too many moving parts and policymakers are split over where they think the economy is heading. I would expect that the Fed retains its slight hiking bias – discussions around the possibility of cuts may take place but the Fed should stick to its patient, data dependent mantra. Declining two-year yields and stable 10-yrs has produced a mild steepening in the yield curve, which may show greater market confidence in the economy and a sign that perhaps the much-talked-about recession is not about to hit.

Markets are still underestimating likelihood of a hike this year –  Currently the market indicates a 65% chance of a cut this year and zero chance of a hike. Whether that would be a mistake or not it not the point. Policymakers will have to acknowledge the impressive Q1 GDP print, as well as booming consumer spending. Softer inflation and earnings numbers mean there is no pressure to raise rates though. Of course, Trump will keep his foot on Powell’s throat and continue to jawbone in favour of cuts. The big question vis-a-vis this meeting and the market response is whether Powell chooses to sound dovish or hawkish in the press conference. Evens. Powell doesn’t have to do anything this time.”

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