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European equities rise as China eases
Police in Hong Kong are investigating an alleged toilet paper heist, amid a shortage due to the coronavirus outbreak. Things are bad when loo roll becomes currency.
It’s a dull old session out there today: European shares were a little indecisive at the start of play following a mixed bag overnight in Asia, but are leaning higher with stimulus from China helping to lift the mood. Basic resources stocks were among the biggest gains on the FTSE as the blue chip index moved to try to reclaim the 7500 level, last some way short at 7445.
Shares in Hong Kong and Shanghai advanced as China cut a key medium-term interest rate, while Tokyo shares slipped on growth concerns. Markets are betting this will be only a part of a wider stimulus programme to offset the economic damage wrought by the Covid-19 coronavirus – the PBOC has already been injecting liquidity and there will no doubt be more to come. China reported another 2k cases by Sunday night, taking the total to more than 70k.
US stocks finished higher for the second straight week. Markets in the US will be closed today for Washington’s birthday but have rolled into the holiday in fine fettle. Industrial productions were weak, down 0.3% in January, largely down to Boeing. Ex-aircraft production, factory output rose 0.3%. Retail sales showed the US consumer started the year in decent shape, with headline sales +0.3% month on month.
There are growing fears about the economic impact. Japan’s economy shrank at the quickest pace in six years in the last quarter of 2019 – down 6.3% as the consumption tax hike hobbled the economy far worse than thought.
Most think to hit to tourism and exports resulting from the outbreak will mean the economy contracts again in the March quarter, pushing Japan into recession. Meanwhile Singapore has slashed its growth outlook for 2020.
Oil is higher above $52, having closed last week well. Look like a base has been formed at $50, looking to cement gains north of last week’s highs at $52.2.
In FX, there are tentative signs of stabilisation and basing for EURUSD. Speculators have not been this net short since Jun 2019, with net shorts at nearly 86k, contracts so the short-euro trade is very crowded. As ever this CFTC data is a week old so I wouldn’t be surprised if the next set of data showed deeper net shorts towards 100k corresponding to the dove under 1.0880. The inverted hammer on Friday suggests near term reversal but until 1.09 is reclaimed the bears remain in control.
Sterling is giving a gallic shrug to some French fighting talk vis-à-vis Brexit trade talks. GBPUSD is steady at 1.3040, with support at 1.30 and near-term resistance seen at the 50-day moving average at 1.3070.
M&S out of FTSE 100 for the first time
It’s bad news for Marks & Spencer as the retailer is dropped from the FTSE 100.
It is the first time the troubled food and fashion company has not been a FTSE 100 member since the index was launched in 1984.
The relegation is the latest in a long line of miserable milestones marking the decline of the once-great British retailer.
M&S has had a tough year, with shares down 40% since the start of the year. Based on the closing price of stock on Tuesday, its market value fell below the threshold for inclusion in the index. The announcement was made on Wednesday and the move will be implemented on September 23rd.
This won’t have come has a surprise for traders, as relegation has been on the cards for more than a year as the share price has steadily declined on poor sales, slow uptake of online shopping and recently struggling food business.
The retailer has been one of the losers in the High Street slowdown, but has compounded these issues by dropping the ball with womenswear, with complaints of poor value and enormous competition from fast fashion brands and online retailers.
Its food offering used to be a highlight for the company, but that too has struggled in recent years. Investors hoped that a partnership with Ocado may help the retailer turn things around, but some argue M&S overpaid and is unlikely to realise a return on the deal.
M&S wasn’t the only company relegated or promoted in the FTSE Quarterly review.
FTSE 100 Movers
Micro Focus and Direct Line will also be dropping out of the FTSE 100, and entering the FTSE 250. They will be replaced by precious metals mining company Polymetal, drug-maker Hikma and aerospace and defence group Meggitt.
All three companies have already made appearances in the FTSE 100.
FTSE 250 Movers
Perhaps unsurprisingly, there is more movement in the FTSE 250 review. Amigo Holdings, Funding Circle Holdings and Intu Properties have been demoted from the FTSE 250, alongside Metro Bank. Metro Bank’s shares fell 90 per cent over the last year after an accounting error revealed at the start of the year showed some of its assets were classed as riskier than they should have been.
Fund Manager Neil Woodford suffered another blow as his Woodford Patient Capital Trust was dropped from the index; shares had fallen 40 per cent since the start of the year due to investor fears of illiquid assets. Earlier this year, the Trust froze assets to prevent investors withdrawing funds.
Fashion retailer Ted Baker was also a casualty. The company was hit by a huge scandal in March this year, causing its founder to resign as Chief Executive, as well as facing two profit warnings.
On the flip side, Trainline, which only floated earlier this year, was promoted to the FTSE 250. Other promotions to the index were Airtel Africa, Finablr, Foresight Solar Fund, Sirius Real Estate and Watches of Switzerland Group.
Euro dives on Draghi, stocks rally
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.”
Trump’s London calling, US-China trade war worsens, oil smoked
Global stocks were down by around 6% in May – can we get a better June? The runes are not looking great.
Futures indicate European shares are lower today as trade tensions continue to mount and investors exhibit greater fear about the global economy and the risk of recession. Asian markets were generally lower after a big selloff on Wall Street on Friday that saw the S&P 500 decline 37 points, or 1.32%, to finish at 2,752.06, below its 200-day moving average. FTSE 100 held the 7150 level, but this is likely to get taken out today.
Trade fears are heating up
The trade war is not cooling down; in fact, it looks like the rhetoric is heating up and further escalation seems likely. China is raising tariffs on $60bn of US goods in retaliation for tariffs, coming up with its own blacklist of foreign companies, has accused the US of resorting to ‘intimidation and coercion’, and begun an investigation into FedEx. And the Chinese defence minister says if the US wants a fight, they will ‘fight to the end’. No end in sight, and the chances of a G20 détente are slim.
US stock futures were lower along with oil amid growing fears about this trade setup. Nothing like progress has been seen re Mexico, and now the market is dealing with reports that the US has been eyeing slapping tariffs on some Australian imports, As we noted last week, the escalation last week with the attack on Mexico – especially as it represented a weaponization of trade to pursue non-economic policies – represents a major turning point and could bring others into the fray. Again, the EU could come under fire soon.
Data overnight has been mixed but still indicates slowdown. China’s Caixin PMI read 50.2, unchanged from a month before but a little ahead of expectations. Japan’s PMI has gone negative, moving to 49.8, signalling contraction. Japanese manufacturing output down for 5 months in a row, while new export orders fell for the 6th straight month. Japanese equities were down sharply overnight. UK PMI at 09:30, with the ISM numbers for the US due at 15:00.
Trump heads to the UK today – unfortunately he’s meeting a lame duck PM so we can’t expect much of importance. There will be lots of talk of a trade deal with the US post-Brexit. Harder Brexiteers in the Tory leadership race are likely to be emboldened. Expect the no-deal talk to increase.
Sterling is sure to be under plenty of pressure until the leadership race is clearer. GBPUSD remains anchored to 1.26 for now, having made fresh multi-month lows last week. However, Friday’s bullish hammer reversal may provide the basis for a short-term rally. Just a hint that the pound is oversold and could be ready for a wee bounce.
Oil smoked, gold higher
Oil has taken a beating as markets worry more about a slowdown in global demand than supply constraints. Brent has declined by 10% or so in just a couple of days and is holding on $61, while WTI is clinging to $53. Speculators are liquidating long positions wholesale, with Friday’s COT report showing net longs down by 40k contracts. Net long positioning has fallen by about a fifth (100k contracts or more) since the late April high at 547.4k.
Stockpiles are at their highest in two years. Speculative long positions continue to be cut. Supply uncertainty is losing out to demand uncertainty. Simply put, with OPEC and co curbing output, there is ample excess capacity in the market should it be needed. 14-day RSI and 20-day CCI suggest oversold and ready for a bounce, but this is like trying to catch a falling knife.
Gold meanwhile is picking up safe haven bid as this decline is not just about valuations but about big fears for the global economy. The easing off in the US dollar has also supported gold. Having broken $1300 gold was last around $1310, with next target $1324.
FTSE rebalancing etc
Finally, there’s a fair bit of chatter about the FTSE rebalancing – will Marks & Spencer survive in the 100? Will JD Sports be promoted? I wouldn’t get too worked up about it all, even if it’s good sport. EasyJet likely to go – shares have been hammered but the business is tightly run and it’s always been one of the smallest in the FTSE 100. MKS lucky to survive with only the rights issue saving it.
Kier – warning on profits – going from bad to worse after the rights issue flopped.
Astra – hails Lynparza pancreatic cancer drug trials success
William Hill – bid rumours are doing the rounds
Dignity – says it welcomes Treasury/FCA proposals
European stocks rebound, euro about to give it up
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.
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.
Market Commentary – More Brexit Deadlock
Brexit deadlock as Parliament plays the fool on April 1st
It reads like an April Fool’s story, but it’s unfortunately true; while a bunch of semi-naked climate change protesters demonstrated in the viewing gallery (allegedly even supergluing themselves to the windows), MPs voted against all four Brexit alternatives in another round of indicative votes.
It’s now just ten days to go until the UK is set to leave the European Union with no deal in place. The EU has been doing its best to act nonchalant, but chief negotiator Michel Barnier stated that a long extension was possible, given enough justification. A sign of jitters from Europe, or simply another attempt to make sure the EU doesn’t get the blame for the UK’s misfortune?
Not only are the odds of a no deal exit significant, but chances of a general election are also sizeable. Labour has already stated that it is on election footing, and it’s hard to see how the current government could negotiate anything after Brexit even if Theresa May’s Withdrawal Agreement miraculously scrapes a majority during a likely fourth vote.
Cable has slipped on the latest results but has already cut losses in half since the morning session began, rejecting the $1.3020 handle and climbing back towards $1.3050. Such a small move suggests markets are still yet to price in the high chance of a no deal; traders are holding out hope that the UK will somehow blunder its way into a longer Article 50 extension.
In this respect cable is somewhat akin to a cartoon character that has run off a cliff, yet continues to go straight until it eventually realises it has run out of ground. The gravity of the situation will hit at some point, leaving a big potential downside for GBP/USD unless the government can magic an almighty rabbit out of its incredibly empty hat.
Fourth day of gains for FTSE 100
The UK’s blue-chip index has risen for four consecutive sessions now, with oil companies pushing the index higher, helped by sterling weakness. Shell and BP are leading the index higher after yesterday’s Chinese manufacturing data pushed crude prices higher; unexpected growth in the Asian superpower has softened fears of a global slowdown. Shell is 0.6% higher, while BP has ticked up 0.5%.
Other strong movers include HSBC (0.8%), spirits-maker Diageo (0.8%) and Unilever (0.9%). On the other end of the scale is Rolls-Royce, which has dropped 2% after premature blade deterioration was found on two Boeing 787-10 jets equipped with the company’s Trent 1000 TEN engines; Singapore Airlines has grounded the planes.
Elsewhere global indices are softer after yesterday’s strong gains, with Asian stocks consolidating a seven-month high. European stocks are edging lower.
Cryptocurrency rally sends bitcoin rocketing above $5,000
The crypto market has raced higher this morning, with bitcoin on track for its biggest one-day gain in a year after breaching $5,000 – a level not seen since November 2018. The 25% gains were quickly trimmed, but BTC remains up 15% at around $4,765.00.
Other major cryptos are enjoying strong gains as well; litecoin is 13% higher, bitcoin cash up 10%, ethereum 9% higher, and ripple up 8%. Crypto fans are celebrating the beginning of the long-prophesied bull market, but such jubilance is premature. Technical indicators suggest caution, with the RSI for BTC trending around 90 – anything above 70 is considered overbought.
The rally added $17 billion to the value of the crypto market in under an hour, but traders are struggling to identify the cause of the uptrend.