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

Week Ahead

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

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

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

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

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

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

FOMC and ECB meeting minutes

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

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

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

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

Reserve Bank of Australia interest rate decision

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

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

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

Economic data to watch

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

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

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

Key Events this Week

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

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

Stocks weaker post-Fed, Bank of England, OPEC+ meetings ahead

Morning Note

Wall Street fell and Asian equities followed the weak handover even as the Fed stayed very much on script with a dovish lower-for-longer message, whilst also presenting a more upbeat take on the economy in the near term.

The Fed put some meat on the new average inflation targeting skeleton that was sketched out by Jay Powell at Jackson Hole, saying it will aim to achieve inflation ‘moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%’. But the rub is that it doesn’t see this inflation coming through until 2023 at the soonest.

There were no explicit easing measures to get there sooner, so the FOMC has only really filled in some blanks as to what we already knew, and seems content for now to wait for Congress to sort the fiscal side out before it does anything more. The lack of any real determination to get inflation up sooner seemed to disappoint for risk.

Equities lower after FOMC, dollar catches bid

Equities peaked after the statement and then progressed lower during the presser with Powell right into the close, with the S&P 500 finishing down half of one percent at 3,385, led by a decline in tech, which is about a quarter of the index, whilst energy – now a tiny c2% weighting of the index – rallied 4% as oil climbed.

The 21-day SMA offered resistance and now we are looking again to the 50-day line at 3,335, with futures pointing lower. Meanwhile the Nasdaq finished –1.25% lower with Tesla, Apple, Amazon et al falling, and is likewise trapped between its 21-day and 50-day lines, with big trend line support close. European equity markets took the cue and fell over 1% at the open as the FTSE 100 again tested the 6,000 level.

USD caught a bid as well, with the dollar index lifting from a post-statement low of 92.85 to clear 93.50 overnight, before coming off a touch to 93.30 in early European trade. GBPUSD retreated to 1.2950 having earlier hit the 1.30 level. Gold came off its highs at $1970 to test the $1940 support area.

The Fed sees unemployment at a lower level and a larger economy by the end of the year than it did in June. Real GDP forecast for 2020 was revised down to –3.7% from –6.5% in June. Unemployment is seen at 7.6% compared with the 9.3% anticipated in June. Inflation is seen picking up more than it was in June albeit the rise in breakevens has levelled off at about 1.7%.

The key takeaway from the economic projections is that both core and headline PCE inflation are not seen returning to 2% until 2023 – the Fed even had to add a year to the forecast horizon just to get this in. Given it didn’t manage to get to 2% with unemployment under 4%, there is a lack of credibility around this, even though I for one believe inflation will come through.

The Fed is in the dark and there is no more it can really do without spiralling into the abyss of negative rates. The Fed is in the dark not just because it has no control over inflation, but also because the political situation remains very unclear with regards to fiscal stimulus and the presidential election in November.

So, there is a lot of uncertainty and all the Fed can really do is continue to stress its willingness to do whatever it takes and its willingness to overlook overshoots on inflation should they emerge. I’m in the camp that does expect inflation to feed through due to the massive increase in the money supply combined with supply chain disruption and the fiscal largesse.

The Fed’s policy shift also raises the prospect of inflation expectations becoming unanchored. However, we cannot ignore the fact that the pandemic has had a chilling effect on confidence and spending may be slow to reappear, pushing down on inflation for a while longer.

US data softens, focus switches to jobless claims and Bank of England

US retail sales lost momentum last month, with sales rising just 0.6% versus the 1.1% expected, signalling the effect of the expiration of $600 stimulus cheques that made many at the lower end of the income scale better off out of work than in.

US jobless claims later today will be closely watched for signs of any improvement after last week’s disappointment. Last week’s print of 884,000, which was flat on the previous week, signalled a slow down the recovery in the labour market and worried economists.

The Bank of England delivers its monetary policy statement at midday – will it surprise by going ‘big and fast’ with more QE – as governor Andrew Bailey suggested is the best approach for central banks in times of crisis last month?

There is also speculation that the Old Lady of Threadneedle St will turn to negative interest rates to stimulate the economy. Speaking to MPs recently, Bailey refused to rule out negative rates – a policy that has systematically failed to deliver the required inflation in the Eurozone – saying that it remains in the box of tools.

I’d expect the Bank to tee-up an increase in QE in November and not further rate cuts, but it may choose to fire first and ask questions later.

Snowflake surges on IPO

Snowflake (SNOW) shares made an astonishing stock market debut. After pricing the IPO at $120, the stock flew to almost $280 in the first few hours of trading before settling at $253. The price to sales multiple of about 360 is simply astounding – a lot of future growth was priced into the stock on its first day.  It’s the biggest software IPO ever and demand was exceptionally high, and the multiples being paid even loftier.

It seems to be a story of the scarcity value of growth. It also shows just how much wild, free-flowing money there is in the market right now chasing whatever’s seen as hot and whatever offers the most growth.

We’re almost into the territory of describing these tech stocks as Veblen goods, where demand rises with the price. The IPO market is getting very frothy. We can blame/thank the Fed for this situation with ultra-low rates assured for a very long time and massive liquidity needing to find a home at whatever price that is. It’s like 1999 all over again.

London sees biggest listing in years as The Hut Group IPOs

Even London is getting in on the action with The Hut Group getting its IPO off with a swagger and a close at more than £6 after listing at £5. As noted when the listing was announced at the end of August, the valuation it deserves depends very much on your point of view.

In 2019 THG achieved year-on-year revenue growth of 24.5% to reach £1.1 billion with adjusted EBITDA of £111.3 million. The float aimed to raise £920m at £4.5bn market cap, which at c40x last year’s EBITDA and x4 sales doesn’t seem like too much to pay for this kind of growth….or does it?! The answer rests surely on whether it deserves a techy or a retail multiple.

Management forecast overall revenue growth of 20-25% over the medium term, with its tech platform Ingenuity (the capital-light growth lever) forecast to grow at 40% primarily as a result of increasing mix of e-commerce revenues as global brand owners accelerate their adoption of D2C strategies.

But revenues from Ingenuity remain relatively small – £61m in the first half of 2020, which was flat on last year and less than 10% of total group revenues. As a percentage of group revenues, the contribution from Ingenuity is going down. Again it’s the promise of growth that is appealing to investors right now.

Oil softens after FOMC statement

Elsewhere, oil was a little softer overnight as risk sentiment came off the boil after the Fed, but this came after a couple of very solid days. WTI for Oct breached $40 on the upside before paring gains but the $39.50 area has held for the time being and offered a springboard in early European trade.

EIA data showed inventories fell 4.4m barrels, contrasting with forecasts for a build. Gasoline stocks were drawn down at twice the rate expected. However, we remain concerned about the demand pick-up through the rest of the year – as all the main agencies have recently revised their demand forecasts lower.

We note also a report suggesting that OPEC is not about to panic by further cutting production – however that would depend on prices; WTI at $30 again might induce action. OPEC+ members are holding an online meeting today to assess compliance and whether additional cuts may be necessary – I would think for now they will stand pat, with the focus chiefly on compliance with current targets, which currently stands at 101%, according to sources reported yesterday.

But if prices come a lot more pressure there would likely be an OPEC+ response.

Markets steady before Fed meeting, Hut Group pops as IPO market shines

Morning Note

It’s Fed day: risk sentiment remains broadly positive but the big-ticket event is the Fed policy meeting. US stocks rose Tuesday as the two-day Fed policy meeting kicked off.

Whilst there is relative calm in markets again after the tech-led sell-off produced a correction in the Nasdaq and a 7% decline in the S&P 500, the expectation on the Fed to be very dovish may lead to volatility should the market think the FOMC isn’t offering enough detail on the future path of monetary policy.

The S&P 500 added 0.52% and managed to close above the psychologically significant 3,400 level after running into resistance at the 38.2% retracement of the early September pullback, with the 21-day SMA sitting around 3,426, which may offer a further test for bulls. The Nasdaq added 1.2% as Tesla shares rose a further 7%, extending the rally from Monday’s 12% gain.

Overnight, Tokyo was flat as Yoshihide Suga was elected as Japan’s new prime minister, replacing Shinzo Abe. European equity markets were slightly higher in early trade, though the FTSE 100 dropped.

FOMC preview: what to look for from today’s Fed announcements

There are several things to look out for from the Federal Reserve today, not least some firming up of the details around the new average inflation targeting regime.  After Jackson Hole, there were some unanswered questions for the FOMC.

There was not much in the way of detail of how the Fed plans to deliver the new AIT framework, for instance. And Powell’s speech lacked in any real specifics on the nature of forward guidance that the FOMC is clearly leaning towards – this will be an important lever of the AIT approach, so it needs to be clarified at this meeting.

Should forward guidance be based on a time horizon or specific economic data? Yield curve control has been shelved as an idea by the FOMC but remains an option should it desire. Today’s statement and press conference with Powell will be of great importance to iron out how AIT will be delivered.

Powell stressed that if ‘excessive inflationary pressures’ were to build, or inflation expectations were to rise above levels consistent with its mandate, the Fed ‘would not hesitate to act’. This gives it a degree of latitude down the line should there be a major inflation overshoot, which as noted on several occasions, is a very real possibly if expectations become unanchored.

So far, after rising sharply post the March trough in financial markets, US 10-year breakevens have levelled off, whilst benchmark bond yields have barely budged.

Fiscal stimulus in focus ahead of Fed statement

The Fed is also likely to lean heavily on the need for Congress to come up with fresh stimulus – it cannot do all the lifting here. Whilst a fifth package remains elusive, Nancy Pelosi has signalled that Democrats could delay the October recess in order to get a deal done, with the White House saying the $1.5tn package floated by the ‘Problem Solvers Caucus’ was worthy of discussion.

The Fed has not quite exhausted all its ammunition, but it’s very much in a position where it needs to wait for the fiscal support. Several Fed officials have been talking up the need for fiscal support.

There will also be updated economic projections to watch out for along with the tone the Fed strikes on the economic outlook  – we know the Fed has taken a pretty cautious view of the economy and the loss of momentum in initial jobless claims may be a concern.

Looking ahead to today’s session, US retail sales will also be closely watched and may well show a sharp slowdown after Americans’ $600 stimulus cheques stopped. UK inflation figures earlier this morning showed a sharp drop in CPI inflation to 0.5% in August from 1.1% in July, as the Eat Out to Help Out scheme and the VAT cut on the hospitality industry bit into prices.

Hut Group IPO

Elsewhere, Hut Group shares got off to a lively start on their stock market debut, rising to 650p in what is the biggest IPO in London this year and for several years. As noted when the filing was lodged, after a considerable ramp in tech valuations this year – eg, Ocado +100% in the last 12 months – this IPO looked like a well-timed move, at least on the part of the founder who is due a bumper £700m pay-out should all go well, whilst still remaining very much in control of the business.

The question is whether this 10% margin business deserves a tech rating. A standard listing makes it ineligible for inclusion on the FTSE index although its mooted market cap would be enough just to make the FTSE 100. Any standard listing raises eyebrows as it means no index inclusion and lower governance standards. Arcane incentive schemes and a founder share model are also suspect.

Founder Matt Moulding is also selling £54m of stock despite previously indicating he would retain all his shares. Heavy demand indicates what a tech multiple, zero per cent interest rates and a premium on growth can do for your stock.

Indeed, the IPO market continues to show considerable strength, which does not indicate significant signs of stress in capital markets. Snowflake, a cloud software business backed by Warren Buffett, got its IPO off cleanly at a price of $120, valuing the company at $33bn.

Apple unveiled new products, but investors were underwhelmed by products like the new iPad Air and new watches, with the shares flat on the day and ticking lower by 0.67% in after-hours trading. All investors really care about is the 5G iPhone launch, when it comes.

Oil climbs on back of large inventory draw

Crude oil prices rose after a surprisingly large draw on inventories and have now bounced over 8% from last week’s lows. API figures showed stocks fell 9.5m barrels in the week ending September 11th, much more than the narrow 1.27m barrel draw expected.

EIA figures today are expected to show a build of 2m barrels, which seems rather unlikely in light of the API report. Oil prices firmed despite OPEC and IEA reports this week indicating a slower recovery in demand in 2020 than previously forecast.

Nevertheless, prices look vulnerable to a further pullback as the near-term uptrend runs out of steam and the longer-term downtrend re-asserts itself.

Stocks open higher ahead of busy central bank week

Morning Note

It looks like a second wave, but not as we know it. Even if cases are starting to rise in Britain and elsewhere, deaths are not picking up in the same way as before – younger, less vulnerable people are getting the virus this time it seems.

The World Health Organization (WHO) recorded a record one-day rise in cases globally. France recorded a record number of new infections – some 10k over the weekend. There is not the appetite for blanket shutdowns of the economy again – this is good, but the ongoing fear factor will keep a lid on animal spirits.

And governments could be spooked into heavy-handed responses, even if they don’t want to kneecap the economy.

AstraZeneca resumes vaccine trial

Fear can be vanquished with a vaccine, so it’s good news that AstraZeneca and Oxford University are resuming trial of their vaccine candidate, after it was paused a week ago. News on a vaccine – good or bad- is set to emerge in October, it seems.

Pfizer says there is a good chance it will deliver data from its late stage trials of its candidate vaccine, developed with German drug maker BioNTech. If approved, it could be available to Americans by the end of the year. The question is whether this may be needed – Sweden seems to be showing the way towards herd immunity.

With vaccines and herd immunity, unemployment becomes a much bigger problem. The end of the furlough scheme raises the prospect of employment rates reaching a cliff-edge. Unemployment could spiral and redundancies are taking place at twice the rate of the last recession. US initial jobless claims last week indicated the recovery is slow, even if job openings are more encouraging.

BoE to signal more stimulus this week?

This could make this week’s Bank of England meeting interesting. It has enough ammo in the quantitative easing quiver to last until the end of the year, but with only two more scheduled before 2020 is over, the Bank will need to lay the ground for more stimulus. Governor Andrew Bailey said central banks should go “big and fast” with QE and other stimulus at times of crisis.

If there an explosion in unemployment, this line will be tested. I’d expect the Bank to sound more dovish this week, although it is unlikely to alter policy so far in advance of the November Budget, in which the government show its fiscal hand.

Of course, there is still time for Rishi Sunak, the Chancellor, to extend furlough, as many are urging him to do. UK 2-year gilt yields hit fresh record lows this morning with the market seemingly convinced the BoE will give a very strong signal it is preparing to deliver additional stimulus – most likely in the form of increased asset purchases rather than a descent into a vortex of negative rates.

The problem of furlough schemes and extending them is of course one of productivity and the opportunity cost of maintaining people in a kind of output stasis. Zombie workers and zombie companies are a growing problem. Indeed, new research shows the number of zombie companies in the US is near the 2000 record.

European stocks build on decent week

European markets opened higher on Monday, with the FTSE 100 solidifying above 6,000 and the DAX ticked up to 13,300. This comes after a decent week for European markets that contrasted with Wall Street weakness.

The Nasdaq finished last week down –4%, with the S&P 500 dropping –2.5% over the five days. The Nasdaq broke under its 50-day simple moving average, whilst the S&P 500 traded through it at the lows but held it at the close.

European markets fared better as they were much less exposed to the sell-off in tech – some rotation taking place as investors look to ‘reopening’ stocks over the Covid-19 winners, but it was far from anything significant.

Indeed, in dollar terms, the moves in the FTSE 100 for example were far less impressive. Investors in the US may also be paying attention to the presidential race – Biden’s tax plans would knock earnings, although it’s far tighter race than the national polls indicate. US futures are higher and have cleared the Friday peak struck during the London morning session.

Abenomics safe as Suga elected new leader?

Suga-high for Japanese equities? In Japan, Yoshihide Suga, the former chief cabinet secretary, looks set to replace Shinzo Abe as prime minister after being elected to the lead the country’s ruling Liberal Democrat Party. Suga has pledged to maintain Abenomics and seems to be causing few ripples in the market.

He will only have a year to make an impact though before the next elections are scheduled – he could choose to call a snap election to shore up his support, but the coronavirus might get in the way.

The Nikkei 225 edged up 0.65%, while the yen was steady against the dollar at 106.

M&A activity is rising and there are deals aplenty – TikTok seems to be heading the way of Oracle, whose chairman is a Trump support, whilst SoftBank is offloading Cambridge-based Arm to Nvidia.

Meanwhile Gilead, whose remdesivir antiviral is treating Covid-19 patients, is buying Immunomedics for $21bn. With vast sums of private equity to be deployed, there may be a slew of deals and takeovers as we head into the autumn.

Brexit and Federal Reserve to weigh on cable, gold rangebound

In FX, ongoing talks between the UK and EU look set to be the chief driver for GBP crosses. However, a Federal Reserve meeting this week will impact the USD side of cable. There is not a new to say about the Brexit talks after last week – we await to see whether the discussions can get any further.

Usual headline risks to cable, but GBPUSD could get squeezed higher absent of any negative news. GBPUSD traded at 1.2840 in early trade having made a firm near-term base at the 200-day EMA at 1.2750. Downtrend still in force until the 1.30 handle is recovered.

Elsewhere, gold is still trading in a very narrow range around the $1940 level. US breakevens have come down a bit, US 10s are hunkered in around 0.66% and real rates (10-year TIPS) have just come down a touch.

Remember it’s Fed week. The Federal Reserve convenes on September 15th and 16th for the first time since Jerome Powell signalled that the central bank would be prepared to tolerate higher inflation as a trade-off for a swifter economic recovery and jobs growth.

Unemployment has fallen since the pandemic peak but is not improving quickly enough. The Fed is not expected to announce any fresh policy change but will reinforce Powell’s message from Jackson Hole on the policy shift.

Indeed the main focus for the Fed right now is actually not monetary policy but fiscal as members await any move in Washington to deliver a fresh stimulus package.

Week Ahead: Central banks galore but fiscal response is the key

Week Ahead

It’s a veritable cornucopia of central bank delights this week with the Federal Reserve, Bank of England and Bank of Japan all in action, following the ECB and Bank of Canada last week. The Bank of Japan decision may well be overshadowed by Japanese politics as the ruling Liberal Democratic Party (LDP) elects a new leader days before the national diet elects a new prime minister.

Meanwhile we continue to keep our eyes on the high frequency economic data, with jobless claims and retail sales numbers on tap as well.

FOMC

The Federal Reserve convenes on September 15th and 16th for the first time since Jerome Powell signalled that the central bank would be prepared to tolerate higher inflation as a trade-off for a swifter economic recovery and jobs growth. Unemployment has fallen since the pandemic peak but is not improving quickly enough.

The Fed is not expected to announce any fresh policy change but will reinforce Powell’s message from Jackson Hole on the policy shift. Indeed the main focus for the Fed right now is actually not monetary policy but fiscal as members await any move in Washington to deliver a fresh stimulus package. 

Bank of England

The Bank of England also meets this week, amid mounting speculation that the Old Lady of Threadneedle St will turn to negative interest rates to stimulate the economy.

Speaking to MPs recently, governor Andrew Bailey refused to rule out negative rates – a policy that has systematically failed to deliver the required inflation in the Eurozone. “It’s in the box of tools,” he said. “We’re not planning it at the moment, we’ve got no plans to use it imminently, but it is in the box.”

Meanwhile, again it is the fiscal response that seems to matter more right now – central banks have already shot most of their ammunition. Andy Haldane, the BoE’s chief economist, warned last week that the UK’s furlough scheme should not be extended – but will the chancellor cave to demands to prolong it in order to protect jobs? As the furlough scheme approaches its end in October, the government may be forced to extend in order to avoid a cliff-edge in job losses. 

Japanese yen in focus

There is a fair chance Japanese equity markets and the yen will see heightened volatility this week with two big risk events. On Monday, the ruling Liberal Democratic Party (LDP) elects a new leader days before the national diet elects a new prime minister.

Following the resignation of Shinzo Abe on health grounds, chief cabinet secretary Yoshihide Suga is the favourite to replace him. Whilst he is the continuity candidate and has pledged to carry on with Abenomics, there is a risk that he may call an election, which could introduce political risk to the JPY and Nikkei 225. The Bank of Japan statement the day after the Diet vote is not anticipated to rock the boat.  

Earnings

On the FTSE, keep an eye out for Ocado Q3 earnings on Tuesday, with investors keen to get a read on how the Marks & Spencer partnership has started. Investors will also want to know the perennial question – where is the cash? Ocado’s share price has rocketed this year on the boom in online retail. Its +80% rally in 2020 puts it behind only Fresnillo in terms of YTD gains.

However, it’s yet to really deliver any returns to investors by way of free profit.

Meanwhile retail bellwether Next (-16% YTD) is a cash cow that even with a collapse in the high street consistently manages to deliver free cash flow. Its half year results follow on Thursday. In July the company reported that while full price sales in the second quarter were down -28% against last year, this was far better than expected and an improvement on the best-case scenario given in the April trading statement. Management guided full year profit before tax at £195m.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

17.00 UTC 14-⁠Sep Blonde Markets
From 15.30 UTC 15⁠⁠-⁠⁠Sep Weekly Gold, Silver, and Oil Forecasts
13.00 UTC 16⁠⁠-⁠⁠⁠⁠⁠Sep Indices Insights
14.45 UTC 17⁠-⁠⁠⁠⁠⁠Sep Master the Markets
17.00 UTC 17-⁠⁠⁠⁠⁠Sep Election2020 Weekly

Key Events this Week

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

09.00 UTC 14-Sep Eurozone Industrial Production
01.30 UTC 15-Sep RBA Monetary Policy Meeting Minutes
02.00 UTC 15-Sep China Industrial Production & Retail Sales
06.00 UTC 15-Sep UK Unemployment Rate, Claimant Count Change
09.00 UTC 15-Sep Germany, Eurozone ZEW Economic Sentiment
After-Market 15-Sep Adobe – Q3 2020
After-Market 15-Sep FedEx
06.00 UTC 16-Sep UK Consumer Price Index
12.30 UTC 16-Sep US Retail Sales
14.30 UTC 16-Sep US EIA Crude Oil Inventories
18.00 UTC 16-Sep FOMC Interest Rate Decision, Economic Projections
18.30 UTC 16-Sep FOMC Press Conference
22.45 UTC 16-Sep New Zealand Quarterly GDP
01.30 UTC 17-Sep Australia Employment Change, Jobless Rate
04.00 UTC 17-Sep Bank of Japan Rate Decision & Statement
11.00 UTC 17-Sep Bank of England Interest Rate Decision
12.30 UTC 17-Sep US Weekly Jobless Claims
14.30 UTC 17-Sep US EIA Natural Gas Storage
23.30 UTC 17-Sep Japan Inflation Rate
06.00 UTC 18-Sep UK Retail Sales
12.30 UTC 18-Sep Canada Retail Sales
14.00 UTC 18-Sep US Preliminary University of Michigan Sentiment Index

Fed minutes waltz away with risk appetite

Morning Note

FOMC minutes are casting a shadow over markets and underline that any recovery is not going to be a straight line of advances. The Fed layered on the risks and caution thick, but didn’t come up with any sweeteners for the market in the shape of more easing.

The US dollar roared back, gold tanked, and stocks are wobbling after minutes from the Federal Reserve’s July meeting left investors a little disappointed. Members clearly backed away from yield curve control and seemed to be in less of a hurry to push for clearer forward guidance.

‘With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,” the minutes said. This use of the phrase ‘at some point’ indicated members are not in a rush to tie rate hikes to specific economic goals. The Fed also noted that most members judged yield curve control ‘would likely provide only modest benefits in the current environment’.

The FOMC meets again in mid-September and will be reviewing the recent economic progress. For now it seems the Fed doesn’t feel the need to go quickly on more explicit forward guidance as the economy is still ‘in’ the pandemic – as long as cases rage we know what the Fed will do. The question comes on the exit – how quickly does the economy need to recover into the autumn for the Fed to feel the need to tie tightening to specific economic goals – the purpose of which would be to keep markets on an even keel.

Equities trip on FOMC minutes

The S&P 500 flirted with 3,400 in the early part of Wednesday’s session but shot 50pts lower after the minutes were released, ending down 0.44% to 3,374.85. The Dow and Nasdaq both tripped up as well. Asian markets fell overnight. European equity indices are taking their cue from this weak handover and dropped over 1% in early trade, before stocks pulled off the lows after China’s ministry of commerce said this morning that US-China trade talks would resume in the coming days. Vix futures are still pointing to increased volatility as we head towards the US election in November.

Apple hits $2tn market cap

Apple advanced to a new record high and became the world’s first $2tn company as it rose above $467 but closed flat at $462.83. There is a lot going on here – some of which is driven by Apple’s business and some of which is due to external factors. Apple has created a brand with immense power, and investors have really bought into the pivot towards Services to generate more sustainable revenues than being a pure play hardware manufacturer.

The upcoming rollout of 5G iPhones is a prime factor, as is its very strong balance sheet. I also think we could throw in the upcoming stock split as a factor as despite the fact it ought not to matter to the share price, it will undoubtedly make it easier for retail investors – a growing crop of US day traders – to buy the shares. Cf Tesla. And it’s a Covid-winner – the thirst for high quality growth has been well documented.

Dollar up, Brexit headline risks could weigh on sterling

The dollar caught a strong bid after the minutes. EURUSD fell from 1.1940 to 1.1840 where it has found support and is pushing off this level to pare some of the losses this morning. Cable also shipped two big figures in the last day and is now under 1.31 with near-term horizontal support at 1.3050. Brexit headline risks remain as trade talks continue this week – update coming tomorrow but we could get wire reports to knock the stuffing out of sterling. Overall if this is a cyclical dollar bear market then we would see this as a temporary blip.

Delivery Hero – a beneficiary of an increase in orders due to the pandemic – has been named the replacement for the disastrous, scandal ridden Wirecard on the DAX. The food delivery company will join the German blue-chip index on Monday. Delivery Hero is on course to deliver one billion orders this year, thanks in large part to the lockdowns.

Another sub-1m print for US jobless figures?

US initial jobless claims today are expected to come in under 1m again, with continuing claims at 15m. Last week’s report showed jobless claims fell under 1m for the first time since the pandemic, but unemployment levels remain exceptionally high and the concern is that temporary layoffs become permanent. The rate of change is not going to improve – the easy wins are behind us and the hard slog lies in front.

EIA crude oil inventories showed a draw of 1.6m barrels last week, while gasoline stocks declined by 3.3m barrels. WTI crude prices nudged up to $43.20 before pulling back as risk assets came under pressure from the Fed minutes. Copper prices broke above $3 for the first time in over two years but failed to sustain the move after the minutes and pared gains.

Tomorrow morning watch for Eurozone PMIs (ignore) and UK retail sales. Sales rebounded 13.9% in June after May’s 12.3% jump, which almost took total sales back to where they were before the pandemic. We know however that these masks huge shifts in how people spend their money. We also know that when furlough schemes end and we get a real increase in unemployment, people will be tightening their belts.

US EIA Oil Inventories Preview: Crude edges higher on surprise API draw

Commodities

Crude and Brent oil continue to trade sideways today, with crude adding $0.38 and Brent up $0.40 to reclaim around half of yesterday’s losses.

While crude oil has managed to rise above previous long-term resistance at $41, a new ceiling at $42 has quickly been established, and WTI continues to trade within a narrow range. It is the same story for Brent – a break above $44 early last week couldn’t be sustained.

API data surprises with large crude draw

Today’s gains have been prompted by the latest American Petroleum Institute’s crude oil inventories data, which has surprised with a sizeable 6.829 million barrel draw. Analysts had expected to see a mild increase of 357,000 barrels.

While this points to better-than-expected demand, it’s worth noting that last week’s figures revealed a shock build of 7.544 million barrels against expectations of a draw.

Stimulus talk, FOMC meeting limit upside for oil

Also capping gains are delays to the next US stimulus bill. Republicans and Democrats are still debating the measures – Democrats claim they don’t go far enough, but President Trump also has criticisms of the bill.

Oil gains could accelerate on this afternoon’s US crude oil inventories data from the Energy Information Administration. Analysts predict a build, but after the API’s figures we could see the data confirm a large, unexpected draw instead.

Market focus on tonight’s announcement from the Federal Open Market Committee could keep a lid on price action. Traders are expecting the FOMC to reaffirm its commitment to stimulus – the Federal Reserve has already announced that its lending programmes will continue until the end of the year, beyond the original September end date.

However, if policymakers don’t sound as dovish as markets expect this could fuel a rebound for the dollar, which this week hit two-year lows. Dollar strength would put downside pressure on crude and Brent even if the latest inventories data is positive.

Here’s what to expect from this week’s FOMC meeting

Forex

The Federal Open Market Committee announces its latest monetary policy decisions and guidance on Wednesday. Blonde Money CEO Helen Thomas takes a look at what the Fed might hope to achieve with its latest meeting.

Catch the latest political and macroeconomic insight from Helen each week on XRay.

Week Ahead: FOMC minutes and NFP dominate the calendar

Week Ahead

While Chinese PMIs will be in focus at the start of the week, the US economic calendar will dominate over the next few days, with the latest ISM Manufacturing PMI, FOMC meeting minutes, and the June nonfarm payrolls report all on the way.

China PMIs 

It’s time for the latest China PMIs – as these are the first of the month’s global PMI data they are the first chance markets have to see how things are shaping up. 

China’s recovery may be in jeopardy now thanks to new Covid-19 outbreaks, but the latest PMIs will nonetheless serve as something of a blueprint for how other nations might fare, as they too look past battling the virus and begin focussing more on getting their economies up and running again. 

Germany, Eurozone inflation 

Consumer prices shrank -0.1% across the Eurozone during May, although this is hardly a shock. Inflation data this week could show further declines, which is to be expected given the huge collapse in demand, surging unemployment, and the stimulus being pumped out by the European Central Bank. Last week Fitch predicted that core Eurozone inflation will decelerate throughout the next 18 months and end 2021 below 0.5%. 

A sustained period of deflation will be bad for the economy, but in the short term these readings are expected and so the market impact of CPI data has been somewhat lessened of late. 

Germany retail sales 

Consumer activity has rebounded sharply in the US and UK since restrictions were eased – can Germany follow suit? US retail sales jumped 17.7% in May, beating market expectations of an 8% rise, while UK sales were up 12% against the 5.7% forecast. 

German retail sales dropped -5.3% in April, but this was far better than the -12% fall expected by analysts, with a surge in online sales helping soften the rate of collapse. Sales are expected to have climbed 2.5% in May as physical retailers began to reopen, but as with the US and UK data we could see a much bigger reading. 

US ISM manufacturing 

US manufacturing is struggling to recover from the shock of the pandemic. May’s ISM PMI ticked higher after the lowest reading in more than a decade in April, but missed market expectations by half a point. A sharper rebound is forecast for June, but the manufacturing PMI released by IHS Markit last week disappointed expectations by remaining in contraction territory, even as the Eurozone and UK readings returned to growth. 

FOMC meeting minutes 

The FOMC dealt markets a blow as a result of its last meeting, releasing worse-than-expected economic projections that did much to kill the idea that the US would enjoy a V-shaped recovery. Policymakers noted that interest rates would stay near zero until at least 2022 and that the rate of asset purchases would increase over the coming months. 

Minutes of the meeting will give more details, with markets particularly interested in any mentions of yield curve control (YCC), which is likely to be the next policy tool deployed by the Fed to keep a lid on rates. The time of this move is still uncertain, but the minutes may provide some clues. 

US nonfarm payrolls report 

It’s the US Independence Day bank holiday on Friday, due to July 4th falling on Saturday this year. This means the June nonfarm payrolls report is due out on Thursday. 

Last month’s data stunned with a 2.5 million increase in employment against forecasts of an -8 million drop, indicating that the US economy may be recovering faster than previously thought. 

Recently weekly jobless claims figures have disappointed, however – although the numbers have continued to fall, the decline in new claims has been softer than expected. Is this pointing to a more permanent scarring of the labour market, and if so do we need to reign in expectations that the NFP can continue to deliver such strong numbers? You can get instant reaction to the data and analysis of the market response with our free NFP Live webinar – register free today. 

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
From 15.30 UTC 30-Jun Weekly Gold, Silver, and Oil Forecasts
17.00 UTC 01-Jul Blonde Markets
19.00 UTC 01-Jul Introduction to Currency Trading: Is it For Me?
12.25 UTC 02-Jul

US Nonfarm Payrolls: Live Market Analysis

 

Key Events this Week

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

12.00 UTC 29-Jun German Preliminary Inflation
23.30 UTC 29-Jun Japan Unemployment / Industrial Production
After-Market 29-Jun Micron Technology – Q3 2020
01.00 UTC 30-Jun China Manufacturing, Non-Manufacturing PMIs
06.00 UTC 30-Jun UK Finalised Quarterly GDP
30-Jun easyJet – Q2 2020
09.00 UTC 30-Jun Eurozone Flash CPI
12.30 UTC 30-Jun Canada Monthly GDP
14.00 UTC 30-Jun US CB Consumer Confidence
After-Market 30-Jun FedEx Corp – Q4 2020
01.45 UTC 01-Jul Caixin Manufacturing PMI
06.00 UTC 01-Jul Germany Retail Sales
Pre-Market 01-Jul General Mills – Q4 2020
Pre-Market 01-Jul Constellation Brands – Q1 2021
12.15 UTC 01-Jul US ADP Nonfarm Payrolls Report
14.00 UTC 01-Jul ISM Manufacturing PMI
14.30 UTC 01-Jul US EIA Crude Oil Inventories
18.00 UTC 01-Jul FOMC Meeting Minutes
01.30 UTC 02-Jul Australia Trade Balance
12.30 UTC 02-Jul US Nonfarm Payrolls (Friday is US Bank Holiday)
01.30 UTC 03-Jul Australia Retail Sales
All Day 03-Jul US Bank Holiday – Markets Closed

Fed braces for long haul, second wave worries hit equities

Morning Note

Time to dig in for the fight. Usually, at least for the last decade, a dovish Federal Reserve would help boost risk sentiment. But we are in different times and however accommodative monetary policy remains, the market needs a lot more, like a patient hooked on painkillers. Whilst the Fed last night committed to keeping rates at zero all the way through 2022, stocks (excluding the Covid-immune tech sector) are selling off.

The Fed’s extremely downbeat assessment of the US economy and jobs market, combined with expectations for a slow recovery, left risk assets looking very exposed after a big run up last week. Stocks in Europe slipped up ahead of the meeting and have extended losses today with the major bourses down more than 2% again.

Asian shares fell and Wall Street closed in the red, although the Nasdaq managed to secure another record closing high above 10,000. US Treasury yields sank partly on the commitment on keeping rates down but also because investors see a slower recovery taking place and lasting damage to the economy. Gold rallied to $1740.

FOMC economic projections dash hopes of V-shaped recovery

Assessments for the economy are grim. The Fed forecast the US economy to contract by 6.5% this year and for the unemployment rate to be above 9% by the end of the year. This would be an improvement from the current rate of 13.3%, but it points towards a very slow recovery.

Indeed, unemployment is still seen at 6.5% through 2021. Faced with this, Jay Powell, the Fed chairman, said he is “not even thinking about thinking about raising rates”. And as many have warned, some of the damage will be permanent, meaning significant lost productivity. Powell said: “My assumption is there will be a significant chunk…millions…who don’t go back to their old jobs.” The V-shaped recovery theory died last night with the Fed.

Gloomy forecasts from the Fed chime with the OECD’s downbeat outlook. It said the UK economy will contract 11.5% this year even without a second wave. And second wave worries are another factor dragging down on stocks, particularly as we see rising numbers of Covid cases in several US states like Texas, Florida and California, where hospitalisations are at their highest since May 13th after rising for nine of the last ten days.

Really the market got too far ahead of itself and is reacting to the Fed’s gloomy outlook and fears of a second wave of infections. We will get more indications about the pace of hiring vs firing today with the US initial and continuing jobless claims number.

European equities slump on the back of FOMC meeting

Today’s market moves show the reopening trade unwinding in the wake of the Fed. Carnival and IAG led the losers on the FTSE 100 whilst only Polymetal, Fresnillo and Unilever were higher. European travel & leisure shares fell 5%, with automakers and banks down 4%.

The S&P 500 is likely to open weaker after sliding 0.5% yesterday to close under 3200 at 3190. Ocado shares fell 6% after announcing a £657m share placing and that it would raise a further £350m by way of a convertible bond. Whilst shares are lower, this is about raising cash to grow, possibly transformational growth. This is what Amazon would do.

Tesla led the tech sector and Nasdaq higher, as shares rose 9% yesterday to close above $1,025. The leg up came after Elon Musk said the company would ramp production of the Tesla Semi, its electric freight truck.

In FX, the dollar is finding bid as risk sentiment sours. GBPUSD has moved back to test 1.2650, having spiked as high as 1.28 yesterday. The pound is now very much a RoRo currency – risk-on, risk-off.

Copper prices fell having rallied for the last few sessions on fears of a slow economic recovery. Oil was holding losses as it hit around $38 for WTI after a surprise rise in US crude stocks combined with the hit to risk sentiment.  EIA figures showed crude oil inventories rose 5.7m barrels vs expectations for a 1.45m drawdown.

Sellers return: S&P 500 in retreat, next leg lower to 2975? 

Candlestick price chart of the S&P 500 index

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