UK growth cools, British Land resumes dividend

Morning Note

UK growth unexpectedly cooled  in August, signalling a slower pace of recovery into the back-end of the year. GDP rose by 2.1% in August, which was below the 4.6% expected, despite the eat out to help out scheme boosting the hospitality sector significantly. The food and beverage service activities industry grew almost 70% over July thanks to the easing of lockdown restrictions and the government support scheme. 

 

Nevertheless, the outlook is not particularly encouraging. August 2020 GDP was now 21.7% higher than its April 2020 low, but the UK economy is still 9.2% below pre-pandemic levels. Sticking plasters like eat out to help out act only as a mild salve. Moreover, as the government considers more restrictions on people’s liberties to combat the virus, it is clear the path of recovery to pre-pandemic levels of activity will be slow and difficult. The pace of recovery has peaked, and things may get worse as we head into the winter before they improve again. The UK Chancellor Rishi Sunak will announce the next phase of the job support programme later today, which is set to include support for workers in industries forced to close under local lockdowns, such as bars and pubs. Sterling was unfazed by the loss of momentum in the economy with GBPUSD nudging up to 1.2970, yesterday’s high and close to the top of the range at 1.30.

 

Markets of course rather decoupled from the realities of the economy thanks to vast amounts of central bank stimulus and liquidity. The FTSE 100 rose above 6,000 for the first time in three weeks but this level continues to act as a very difficult barrier for bulls to clear. The S&P 500 closed up 0.8% at the highs of the day at 3,446. The Dow added 0.43% for its third positive session of the week and the Nasdaq added 0.5%. House speaker Nancy Pelosi said Democrats would reject any standalone stimulus packages. But we know stimulus of some sort is coming either before or after the election – the problem emerges if there is a contested election. 

 

Dallas Fed president Robert Kaplan underscored his more hawkish credentials, saying there is no need for additional QE on top of the Fed’s $120bn-a-month programme. A Fed paper this week suggested it could increase asset purchases by $3.5tn to boost the economy. Kaplan said that “the bond-buying needs to curtail, the Fed balance sheet growth needs to curtail”. The Fed’s position however remains that it will continue to purchase assets at least at the current clip.  

 

Election Watch 

 

With 25 days to go to the US election, Joe Biden leads Donald Trump by 9.7pts at a national level but his lead in the top battlegrounds has come down to 4.6pts. Trump trailed Hilary Clinton by 5.1pts in the key battleground states at this stage in 2016, but we should note there are fewer undecided voters this time. Latest betting odds imply 65% chance of a Biden win. 

 

Equities 

 

The pandemic has wrought damage on the commercial property sector as businesses have found it difficult to meet rent payments on time and the value of assets has been written down. Land Securities advised today that of £110m rent due Sep 29th, just 62% was paid within 5 working days, vs 95% for the same period a year before. Businesses renting office space (82% on time) were timelier than retailers (33% on time). For the earlier part of the year, the company has received 84% of rent due on 25 March (up from 75% at 2 July) and 81% of rent due on 24 June. Nevertheless, shares rose 3.5% in early trade as these numbers are perhaps not as bad as feared. 

 

British Land gave a very robust update though, noting all retail assets and 86% of stores are open. Footfall is 21% ahead of benchmark, retailer sales 90% of the same period last year. Collection rates for June have improved to 74%; 98% offices, 57% retail. Meanwhile 69% of September rents have been collected (91% offices, 50% retail). Management was also keen to talk up balance sheet strength – £1bn in undrawn facilities and cash, with no need to refinance until 2024. So robust in fact it’s resuming dividend payments – another little boost for the bedraggled income investor. Divis will be paid at 80% of underlying EPS. Those income investors cheered as shares rose 5%. 

 

London Stock Exchange confirmed plans to offload Borsa Italiana to Euronext. The €4.325bn is perhaps a little behind what had been touted, but it’s a necessary step to clear the decks for their Refinitiv acquisitions.  

 

Charts 

 

Gold still within the falling channel but making higher lows and now pushing up to the top of the channel – 50-day SMA above but the horizontal resistance at $1.920 needs to be cleared first.

Euro Stoxx 50 – still within the long-term range but after moving above 21-day SMA now is looking to clear a cluster of moving averages including the 50-day SMA and 200-day EMA.

Trump returns, big tech faces antitrust concerns

Morning Note

Don’t be afraid: President Trump returned to the White House, but it might not be for much longer. Whilst Trump almost revelled in his victory over the virus, telling Americans not to fear it, Joe Biden’s lead in the polls is rising. Trump has work to do in the battlegrounds to swing back in his favour.

Wall Street climbs on stimulus hopes

Wall Street rallied as we saw decent bid come through for risk that left the dollar lower and benchmark Treasury yields higher amid hopes that policymakers in Washington are close to doing a deal on stimulus. House Democrat leader Nancy Pelosi and Treasury Secretary Steven Mnuchin spoke yesterday but failed to reach agreement on a fresh stimulus package.

Negotiations are due to resume today and whilst the mood seems to be better, getting agreement so close to the election will be tough but not impossible.

The S&P 500 rose 1.8% to close at the high of the day above the  3,400 level but the intra-day high at 3,428 from Sep 16th remains the top of the channel that bulls will look to take out – failure here may call for a retreat towards the middle of the range again.

Stimulus hopes will drive sentiment, but election risk is also a factor. Vix futures for Oct at $30.86 compared with November’s $32.23.

European markets turned lower in early trade on Tuesday as bulls failed to follow through on the relief rally on Monday – still very much range bound.

As noted last week the key is the 3300 level on the Stoxx 50 and 6,000 on the FTSE 100 to signal the market has broken the range. The S&P 500 is closer to doing it.

Benchmark yields rose firmly with 10-year Treasuries breaking out of the recent dull range towards 0.80%, settling at 0.77% near 4-month highs. The 30-year yield also hit its highest since Jun 9th.

With polling and odds improving for a Democrat clean sweep, the market is starting to price in more aggressive stimulus, greater issuance and bigger deficits. Fed chair Jay Powell speaks later today about the US economic outlook at the National Association of Business Economics annual meeting.

Cable eyes Brexit latest Brexit headlines

Brexit talks rumble on – are we closer to a deal? Deadlines are fast approaching and on the whole it seems more likely than not that we at least see a skinny deal or sorts.

EC vice president Maros Sefcovic has been on the wires this morning underlining that ‘full and timely’ implementation of the withdrawal agreement is not up for debate. The British Parliament and government say otherwise.

Meanwhile the European Parliament is not budging on its demands over the EU budget – whilst the recovery fund was announced to much fanfare, it needs to be delivered for Europe’s economy to recover more quickly than it is.

Democrats to target tech giants

Big tech stocks need monitoring after reports that a Democrat-led House panel will call for an effective breakup of giants like Apple, Amazon and Alphabet. It comes after a long anti-trust investigation by the panel led by Democratic Representative David Cicilline.

If approved and legislation is enacted, it would be the most significant reform in this area since Teddy Roosevelt. Certainly, the concentration of capital in a handful of big tech stocks is worrisome for lots of reason. Even if approved, getting from draft to legislation will not be easy. However, if there were a Democrat clean sweep, it could open the door to some aggressive reforms.

As I noted over a year ago, given that the FAANGs have been at the front of the market expansion in recent years, any breakup or threat of it may act as a drag on broader market sentiment. Calls have been growing louder and louder for the authorities to at least look at antitrust issues for the tech giants.

Political pressure is building – lawmakers sniff votes in tackling big tech. The shift really happened two years ago with the Facebook scandals, which really broke the illusion that Silicon Valley is in it for the little guy.

AUDUSD sinks on dovish RBA meeting

The Reserve Bank of Australia left interest rates on hold, refraining from a cut below 0.25% but maintaining a decidedly dovish bias that still indicates a further cut may occur this year.

The RBA said it will keep monetary policy easy “as long as is required” and will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3% target band. It kept its options open and stressed that it will continue to consider additional monetary easing.

After a decent run since the Sep 25th low AUDUSD was smacked down from its 50-day SMA at 0.7210 to trade around 0.7150. Currently contained by its 50- and 100-day SMAs.

The dollar index broke the horizontal support and the 21-day SMA, with the price action testing the trendline off the September lows. After the RSI trend breach and the MACD bearish crossover flagged yesterday was confirmed. 50-day SMA around 93.25 is the next main support.

The softer dollar gave some support to GBPUSD as it tests the top of the range and big round number and Fibonacci resistance at 1.30 this morning. Markets are also pushing back expectations for negative rates in the UK, which may be feeding through to a stronger pound.

Brexit risks remain but the odds of a deal seem to be better than evens, at least a ‘skinny’ deal that keeps dollar-parity wolves from the door.

The weaker dollar, higher inflation outlook is pushing up gold prices, which have broken above $1,900 but faces immediate resistance at the 21-day SMA on $1,916. Yesterday’s potential MACD bullish crossover has been confirmed.

Broad rally for equities as UK goes for lockdown-lite, Tesla fails to spark, precious metals under pressure

Morning Note

European markets rose 1% in early trade on Wednesday, extending mild gains from the previous sessions following the steep selling on Monday. Yesterday, the S&P 500 rose 1%, and the Nasdaq climbed 1.7%, whilst markets across Europe were a little more mixed with London and Frankfurt higher but Paris lower.

Today sees solid bid across sectors and bourses with a slate of manufacturing and services PMIs in focus. The FTSE 100 recovered the 5,900 level, with even IAG and easyJet getting in on the action, rising 6% each. Safe-haven play Fresnillo was off by a similar margin as silver and gold prices come under a good deal of pressure again today.

There is no clear evidence for the airlines to rally except that perhaps there was an overreaction earlier in the week.

PMIs underline the fragility of the recovery

I will issue the usual caveat about extrapolating too much from these diffusion indices, but they do highlight an interesting trend. The manufacturing sector can sustain a recovery as firms can work out how to function in the new environment, but it’s harder for many service sector businesses to operate at all, which drags on the number.

Service sector companies are also much more exposed to the caprice of lockdowns. Both German and French services PMIs came in under 50, indicating contraction (survey respondents think things are worse than the month before), while both countries’ manufacturing PMIs pointed to expansion.

The UK is heading for a second lockdown-lite

This will dent the recovery and hit some sectors especially hard, but perhaps more importantly this is spurring the chancellor into action. With the furlough scheme slated to end in October, there is a risk of a jobs calamity even without further lockdown restrictions, which are a possibility.

Rishi Sunak is reported to be working on new plans to support jobs, which may ease worries among investors that the UK economy could fall off a cliff for a second time just as the Brexit process reaches its finale.

Individual stocks are putting some very big moves daily which only indicates the kind of dislocation in market pricing, uncertainty about the path of the pandemic and the fact that no one really knows where a lot of these securities ought to be trading.

Whether it’s value or growth, tech or travel, the unevenness of both the recovery and government policy means it’s hard to know what a fair value is. Trying to extrapolate a narrative to fit all of this is often a fool’s errand.

Tesla stock tumbles after Battery Day reveals fall flat

A case in point: Tesla shares fell over 5% and extended their decline by a further 7% in after-hours trading, despite Elon Musk outlining the company’s plans to halve the cost of battery manufacturing and market an electric car at $25,000. The new battery tech would deliver 16% more range and x6 more power, but the company said production in volume is three years away.

There is some debate about whether Tesla’s Battery Day announcements amount to incremental or revolutionary changes to battery technology, but two things are clear: Tesla has not suddenly acquired warp speed capability, but clearly the company has a roadmap to cheaper, longer life battery technology that it will make itself and will allow it to lead the EV field for a while longer.

Panasonic and other suppliers were hit with Tesla planning to make its own battery. Nevertheless, given all the anticipation around a potential game-changer in battery technology, investors were a little underwhelmed by the news. Tesla’s Frankfurt-listed shares declined 7% at the open, before paring losses a touch.

Nike climbs as online sales surge, Ant Group takes another IPO step

Nike shares shot higher after-market following an 82% rise in online sales, with the company expecting to benefit from a permanent shift to direct online sales. EPS of $0.95 beat the $0.47 expected, on revenues of $10.6bn vs the $9bn expected. Nike continues to benefit from its strong brand presence that is akin to Apple in the smartphone space, as well as large investments in its web and mobile platforms. Shares in Adidas and Puma rose about 4% on the read-across.

Ant Group took a step closer to its mega-IPO after it submitted documents for registrations of the Shanghai side of the listing. The company plans to list both on Shanghai’s STAR Market and in Hong Kong, with valuation estimates in the region of $250bn-$300bn.

Cable softens, BoE Baily fails to quell negative rate fears

In FX, GBPUSD traded under 1.27 in early European trade after the downside breach of the 200-day EMA presented bears with an obvious momentum play. Yesterday’s move under the 1.2760 level has opened up the path to further losses and today the pair is trading through the 100-day line and testing the 38.,2% retracement at 1.2690.

Whilst Andrew Bailey attempted some push back on negative rates, saying they are not imminent, the takeaway from his comments was that this unorthodox and dangerous tool is very much being actively considered by the bank’s Monetary Policy Committee.

Chart: GBPUSD downside exposed

The USD continues to find bid, which is weighing on gold. DXY extended its push out of the channel, forcing gold to trade under $1,900 and test the 50% retracement around $1875, corresponding with the horizontal support of the descending triangle formed by the August lows. Silver has a bearish bias after breaching the August low.

Chart: Dollar continues breakout

 

Chart: Gold tests 50% retracement

Chart: Silver breaks August lows

Risk gains as Powell signals lower for longer on rates

Equities

Fed chair Jay Powell announced a new monetary policy framework based on average inflation targeting (AIT), as had been anticipated. I read this as admission by the Fed that the monetary and fiscal response to the pandemic will ultimately prove inflationary (M1 increase, deglobalisation etc), but that the Fed does not want to pull the handbrake on a long and slow recovery by being constrained with a mandate to keep inflation level. It’s also increasingly politically tuned into recent events in prioritising jobs over price stability.

Essentially the Fed is taking a step back from price stability, it is not going to worry about inflation overshooting; the focus is on employment not stable money. It’s about supporting the economy not prices – this is an important shift, albeit one that we have largely assumed unofficially to be the case for some time. The Fed today made it clear it won’t take the punch bowl away as quickly as it would have done in the past.

Fed AIT framework leaves unanswered questions

But the Fed is keeping its hands relatively free by not sticking to any specific formula relating to AIT – this poses some unanswered questions for the FOMC. There was not much in the way of detail of how the Fed plans to  deliver the new framework. For instance, if inflation runs at 1% for 5 years, does that mean it allows it to run at 3% for the next 5?

Powell’s speech lacked in 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 the next meeting in September.

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. The September 16th meeting 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.

Dollar offered, stocks and gold bid

Markets are trying to make sense of the changes. The dollar index sold off initially to 92.40 but pared losses and came back to 93 as US yields started to pick up with 10s back above 0.719% having dipped to 64bps. EURUSD spiked to 1.190 but quickly retreated to 1.180. GBPUSD surged to 1.3280 before coming back in to the round number support.

Stocks rose with Wall Street hitting fresh record highs at the open as AIT is fundamentally supportive of risk assets, entailing as it does lower interest rates for longer. The S&P 500 approached 3,500 for the first time, meaning it’s up 100 points for the week. Gold drove sharply higher to $1976 but retraced as quickly as it rallied to $1940 as yields climbed. The key for the market is what will AIT do to inflation expectations.

Earlier data showed just what a big task the Fed has in getting unemployment back to pre-pandemic levels (3.5%). It’s clear the US still has a very troubled jobs market – initial claims still above 1m, continuing claims only came down a small amount to 14.54m from 14.76m a week before. Q2 contraction in the US was a little less than previously estimated, with the annualised figure coming in at –31.7% vs –32.9% on the first reading.

European shares stutter after Wall Street’s all time high

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Morning Note

US stocks closed at record highs but European stocks remain a lot more subdued, with the FTSE 100 struggling at the open today after suffering a sharp reversal in the latter part of the session yesterday. Bulls did try to wrestle control from bears in the first hour of trading, but it looks like it will be another volatile day and a lot will depend on how Wall Street performs in the first hour or two of the NY session. House speaker Nancy Pelosi said the Democrats could be willing to agree to a scaled-down stimulus package, which has helped soothe risk muscles. Asian shares were mixed and US futures are flat.

 

Whilst the S&P 500 notched record intra-day and closing highs, the FTSE 100 is tracking close to the lower end of the June range and is –20% YTD. Sterling’s strength has not helped but European equity markets just haven’t matched expectations. The DAX has done better but remains some way off its highs. While we focus on the broad market in the US, the fact is it has been driven largely by a rather narrow group of stocks and the rest of the market has not enjoyed the same bounce. Tech is up 50% for the last 12 months, whilst Energy is down 30 per cent.

 

The question is whether this is early cycle or the death throes of the last bull market. Either you read this as a sign that the market could go a lot higher as we enter a cyclical bull market with lots of cash sitting on the side lines still to pour into value, or you worry that this is a Fed-fuelled tech bubble with forward earnings multiples looking enormously stretched at around 25x on a forward basis. I would be concerned that volatility will increase as we head into the autumn with the election looming and there is at least a chance of a technical pullback for the S&P 500. And how much more stimulus can you throw at this? The Fed has killed the bond market and lifted the boats – but how much more can it do? If the market tests the Fed again, what is left in the tank?

 

For the FTSE 100, the near-term downtrend is starting to approach important support levels.

 

USD can’t catch bid

In FX trading, the US dollar was offered yesterday and was the chief driver of the market, sending the euro to its highest versus the greenback in more than two years. The break above 1.19 for EURUSD leaves bulls in control after two previous attempts failed. EURUSD eased back from these highs today but remains supported above 1.19 with bulls eyeing a recapture of the May 2018 swing high at 1.20.  

 

GBPUSD was a little softer this morning after shooting clear of the 1.32 level yesterday to hit its best level since the election last December. The move clears important technical resistance of the long-term downtrend and opens a path back to 1.35, last year’s peak, with the golden cross (50-day SMA rising through the 200-day SMA) considered a bullish confirmation of the rally. Near term the higher-than-anticipated CPI inflation reading this morning has not been able to lift the pound, although it ought to help quell immediate speculation the Bank of England will resort to negative rates. 

 

Meanwhile the pound remains exposed to significant headline risks this week. Brexit talks have not gotten off to the best start as the EU rejected British proposals for truckers’ access to the continent. I would anticipate that the longer this drags the more we see pressure come back on GBP. FOMC minutes tonight will be watched for any signs the Fed feels the need to lean even harder on rates. For now the dollar can’t seem to catch a bid with the dollar index now barely holding the 92 handle and the last line of defence before a return to the 80s sitting at 91.60 (the 78.6% retrace of the two-year uptrend) now firmly in view. 

Oil prices slip ahead of OPEC+ meeting

Crude prices were a little lower this morning ahead of an OPEC+ meeting to review after touching a 5-month high yesterday on improving risk sentiment as US equities rose, whilst the softer dollar is offering ongoing support to commodity markets. 

 

OPEC and allies are likely to stick with 7.7m bpd supply cut – what we don’t know is whether the demand side really picks up into the back end of the year. On that front a lot will depend on the containment and control of the virus in Europe – rising cases raises real risk that hamstrung governments simply revert to a wide lockdown and restrict movement again. Airlines and travel stocks will face a tough time. 

 

Gold was softer after breaking back above $2k in yesterday’s volatile session. Near-term support appears to rest on the 23.6% retracement around $1980. Whilst bulls are still just about in control, their momentum is not what it was and we would prefer to see the next swing clear $2015 for the bullish trend to be fully reasserted. A further corrective move lower should still be considered a real possibility.

Stocks open weaker, gold reclaims $2k, M&S streamlines quicker

Morning Note

Stocks yawned a bit, but Wall Street rose to within a whisker of the all-time high in another sub-1% daily move. Crowding into the tech trade showed no signs of letting up as the Nasdaq jumped 1% to a fresh record peak even as the White House announced new curbs on Huawei to restrict access to chips.

Asian shares drifted a bit as the US pressure on Huawei again highlighted the risks to manufacturing and trade, while European stocks were weaker at the open after ticking up a bit on Monday.

Stocks calm, but trouble could be brewing

August remains calm but there may be trouble ahead. Market indicators are sounding a couple of alarm bells – not necessarily to retest lows of March but for a short and sharp pullback. The US stock market is only at all-time highs because of the Fed and huge fiscal stimulus; it does not reflect reality – so what you say, it never has. But forward earnings multiples of ~25x for the S&P 500 are less likely to survive for long than 20x. Put-call ratios are moving in a direction that often correlates to a reversal.

Moreover, Vix futures point to greater anticipated market volatility into the autumn as the US presidential race inevitably tightens. Uncertainty over the result will create angst and volatility. The market is way too confident that Biden will win, although if Trump pulls it off the market could rip higher.

A fresh stimulus package would be a major tailwind for stocks, but it’s going to be hard to get it done with the election looming. The market will have to pay attention to the real economy again. A sharp rise in US mortgage delinquencies to a 9-year high at 8.2% even as house prices and homebuilder confidence rise on record low interest rates should be a cause for concern. Consumer-driven businesses, about 70% of the US economy, will be in for a shock as stimulus cheques have ended.

European shares have underperformed since the March low but would be swept up by any US-led selling. Rising coronavirus cases on the continent is a worry for reopening and could nip the nascent recovery in the bud.

M&S announces fresh job cuts

There is more carnage on the British high street as Mark & Spencer announced 7,000 job cuts in the coming months as it speeds up its ‘streamlining’ process, by which it means slashing jobs, costs and the store footprint and catching up with the modern world of retail. Covid-19 has accelerated a lot of consumer trends and as observed before, it may be the catalyst required to make M&S finally wake up. Food sales rose well, while clothing & home was down severely but is improving.

It’s very hard to gauge exactly how well M&S is doing against the unique backdrop of the pandemic, but we can say that investors should welcome accelerated change given the starting point pre-pandemic. M&S has promised renaissance before and failed, but this time it could be different.

M&S food sales ought to be higher though – Kantar figures this morning show we’re spending a lot more on groceries and all the supermarkets are gaining. However, food price inflation of 2.9% again raises the stagflation alarm bells and underpins the sense that inflation, at least on a range of basic commodities, will rise.

Warren Buffett bets on gold

Gold got a lift from Warren Buffett’s bet on the metal and a weaker dollar this morning has sent prices racing back to $2,000 after clearing the 23.6% retracement resistance around $1980. Gold has further to go longer term but there is yet still a risk of a second corrective move lower within the bull market.

France quarantine knocks travel & leisure stocks

Morning Note

European markets turned south on Friday led by a decline in travel and leisure stocks after the UK added France to its 14-day quarantine list. Yesterday, US stocks dipped after a run at the all-time highs failed again – the S&P 500 finished the day down 0.2%, but the Nasdaq eked out a small gain.

Asian markets ticked up amid a mixed bag of data and economic indicators and European stocks slipped in early trade after falling across the board on Thursday. After a decent start to the week it looks like equity markets are finishing off rather meekly.

Travel & leisure weaken as UK adds France to quarantine list

With France being added to the quarantine list for the UK, travel & leisure is under pressure.  Shares in IAG, Ryanair, Tui and EasyJet were all sharply lower as the move will force a large swathe of cancellations right at the peak of the summer holiday season for one of the largest markets for UK tourists. Half a million Brits are thought to be in France right now. Related stocks were also hit.

WH Smith – purveyor of overpriced sweets and free Evian – slipped down the board as a result. Apart from the immediate damage this will do at the height of the school holidays and peak summer season, the quarantine decision also underlines the inherent risk you take in booking a holiday abroad right now, which will do nothing for consumer confidence.

US jobless claims under 1m

US jobless claims fell under 1m for the first time since the pandemic devastated the labour force, but unemployment levels remain exceptionally high and there remains the fear that too many temporary layoffs will become permanent. Initial unemployment claims dropped to 963k from almost 1.2m a week before, whilst continuing claims fell to 15.5m from more than 16m the previous week.

Unemployment fell but remains above 10% and the twofold worry remains – after the initial resurgence upon reopening, the sustainable pace of recovery is too slow, and that some portion of the labour force is lost forever. The situation in the UK looks even more stark as the life support machine of furlough gets switched off.

Later today comes the US retail sales report for July, which are expected to drop back sharply to +2% from +7.5% the prior month, with core +1.3% from +7.3%. A smaller increase in retail sales is expected as pent-up demand drove the unusually high demand in May and June following the collapse in March and April. Going forward, the destruction in the labour market will force consumers to tighten purse strings – unless there is free money ad infinitum.

On that front, progress is slow to non-existent – Congress has broken up for the summer recess with no fresh stimulus deal in the offing. The improvement in the jobless numbers and apparent improvement in some of the other high frequency data may make it even less likely that US politicians can agree to a package, particularly with the election starting to dominate thinking.

China posts surprise retail drop, Eurozone GDP to confirm sharp Q2 slump

Chinese retail sales slipped in July, declining 1.1% after a 1.8% drop in June, whilst industrial production rose a solid 4.8%, although this was also short of expectations. The disappointing retail sales number hit the luxury sector this morning but also underscores the weakness in the demand side of the recovery. Eurozone GDP figures later today are expected to confirm a sharp contraction in the second quarter as lockdown measures were in full force. This data is now pretty historic and won’t do anything for markets.

Gold is holding around $1950 but the bearish flag on the chart looks like there could be a further corrective move in the long-term uptrend. As US rates seem to be inclined to roll higher there is a risk of a further downswing. The yield on US 10yr Treasuries are above 0.7% and TIPS creep higher.  Longer term you would feel that gold continues to be a strong winner from the pandemic.

Ex-divis hit FTSE, US stocks near record high, trade comes back in focus

Morning Note

US stocks rallied to close near its all-time highs yesterday amid what some are saying are signs of greater confidence in the economic recovery in the US. Or perhaps it’s just even speedier decoupling between Wall St and Main St. Nevertheless, bond yields pushed higher amid a faster-than-expected rise in US inflation, whilst the market is starting to focus again on trade and tariffs.

The fact that the broad stock market is at all-time highs is a testament to unbelievable amounts of monetary and fiscal stimulus – the patient is hooked, and only more drugs will do. The disconnect between the stock market and the real economy is too stark, too unjust and too indicative of a system that continues to favour capital over labour that, sooner or later, a change is gonna come.

Europe soft despite strong close on Wall Street, TUI posts earnings wipe-out

Never mind all that for now though, stonks keep going up. The S&P 500 rose 1.4% to end at 3,380, just six points under its record closing high at 3,386.15, with the record intraday peak at 3,393.52. Asian stocks broadly followed through, with shares in Tokyo up almost 2%.

European stocks failed to take the cue and were a little soft on the open, with the FTSE 100 the laggard at -1%, though 22.3pts are due to BP, Shell, Diageo, AstraZeneca, GSK and Legal & General among others going ex-dividend.

For a taste of the real economy, we can look at TUI, which said group revenues in the June quarter were down 98% to €75m. It’s a total wipe-out of earnings, but it’s not a surprise – the business was at a virtual standstill for most of the period and was only able to resume some limited operations from mid-May. Just 15% of hotels reopened in the quarter, whilst all three cruise lines remain suspended.

TUI posted an EBIT loss of €1.1bn for the quarter, taking total losses over the last nine months to €2bn, with €1.3bn due to the pandemic forcing the business to be suspended. Summer bookings are down over 80% but it has got another €1.2bn lifeline from the German government. Shares fell over 6% in early trade.

Trade in focus as US-China weekend talks approach

US-China tensions are rearing their head again. Officials meet this Saturday to review progress of the phase one deal. White House economic adviser Larry Kudlow the deal was ‘fine right now’. Sticking with trade, the US is maintaining 15% tariffs on Airbus aircraft and 25% tariffs on an array of European goods, including food and wine, despite moves by the EU to end the trade dispute.

Crucially it did not follow through with a threat to hike tariffs, however it still leaves the risk of further escalation when the EU is likely to win WTO approval to strike back with its own tariffs.

Strong US CPI raises stagflation fears

Yesterday, despite the optimism in the market, there was – for me at least – some potential signs of bad news for the real economy (not the stock market, remember) with US inflation picking up faster than expected. You can read this as the economy doing better than fared as consumers return, but you can equally take a glass half empty view and see this as a major worry that prices of essentials are going to rise whilst economic growth stagnates – which can be a cocktail for a period of stagflation.

Given the enormous amount of money being pumped into the system, there is a better than evens chance we get an inflation surge even if the pandemic was initially very disinflationary. Unlike in the wake of the financial crisis, the cash is not being gobbled up in the banking system as increased capital buffers etc, but is going into the (real) economy. Moreover, it’s being done in tandem with a massive fiscal loosening.

Short-lived pullback for USD?

Year-over-year, headline inflation rose from 0.6% to 1%, whilst core CPI was up 1.6% in July vs the 1.2% expected. Food prices rose 4.6%, whilst the cost of a suit is down a lot. The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle.

Investor optimism is keeping the dollar in check. The dollar index moved back to the 93 mark, whilst the euro broke above 1.18 against the greenback for a fresh assault on 1.19, twice rejected lately. Sterling is making more steady progress but is well supported for now above 1.30, however the dollar’s pullback may be short-lived. Gold held onto gains to trade above $1930 after testing the near-term trend support around $1865 yesterday.

US EIA data, OPEC report boost oil

Oil prices held gains after bullish inventory data and OPEC’s latest monthly report. WTI (Sep) moved beyond $42 after the latest EIA report showed a draw of 4.5m barrels last week. Meanwhile, as noted yesterday, OPEC’s new report indicated the cartel will continue with production cuts for longer.

In its monthly report, OPEC lowered its 2020 world oil demand forecast, forecasting a drop of 9.06m bpd compared to a drop of 8.95m bpd in the previous monthly report. But the report also sought to calm fears that OPEC+ will be too quick to ramp up production again. Specifically, OPEC said its H2 2020 outlook points to the need for continued efforts to support market rebalancing. Compliance was down but broadly the message seems to be that OPEC is not about to walk away from the market.

Watch our exclusive XRay Talk on gold and oil with commodities guru Phil Carr

Commodities

Gold has today surged to a new record high above $1,945.00.

Last week head of trading at The Gold and Silver Club Phil Carr joined Markets.com chief market analyst Neil Wilson to discuss the current state of the commodity markets and what’s on the horizon for gold and oil in the second half of the year.

You can watch the full video below.

We’ll be hosting more talks with leading industry figures on a range of topics over the coming months. Make sure you’re signed up to Marketsx to get your invite to our next exclusive conversation and to ask your trading questions.

Stocks firm, gold chased higher, Tesla earnings beat

Morning Note

European stocks were firmer after US stocks rallied yesterday to finish at the best level in months, whilst Asia was mixed. The S&P 500 closed at 3,276, its best finish since February as decent corporate earnings supported the bulls who continue to shrug off the rising Covid cases as well as mounting US-China tensions. The broad index also managed to close at the high of the previous session, having previously closed 20 pts short of this level. 

 

There are some concerns with US-China tensions after the closure of the consulate in Houston, with China retaliating by closing the US consulate in Chengdu. But this kind of tit-for-tat is nothing new – we have been dealing with a trade war for years and I think the market is fully expecting friction to increase, particularly as the US presidential election looms and domestic strife makes it all too convenient for the White House to bash China. UK-China tensions are something a little fresher and have led to Chinese authorities taking the English Premier League off air.  

 

Tesla posted its first full year of GAAP profitability, meaning it can now be considered for inclusion in the S&P 500. Excluding special items, EPS came in at $2.18 on revenues of $6bn. Whilst the beat on deliveries reported earlier by the company indicated a strong quarter, this was better than most had forecast. Whilst the stock is still exceedingly rich based on the fundamentals, it’s one with such a backing that it just doesn’t seem to matter. In some ways it’s a talisman for the whole stock market – old fashioned ideas like valuation and discounted free cash flow models simply don’t matter when you have such an incredible amount of liquidity. It’s also a bet on the future of the automotive industry – which carmaker is going to be around in 50 years? 

 

Microsoft shares fell after hours following its quarterly earnings revealed a slowing in cloud growth, with revenues from the Azure business down from 59% to 47%, although overall the company beat on both the top and bottom lines. XBox revenues soared as gamers found ways to pass the time in lockdown. Likewise Americans stocking up on ice cream and other goodies lifted Unilever sales but emerging markets -without the help of an Ocado to bring consumers lockdown treats – were tougher.

 

On the data front, Germany’s Gfk consumer confidence survey was better than expected, printing –0.3 vs the –4.6 expected. South Korea’s economy is in recession after the worst slump 57 years.  

 

Today the focus is on the US weekly unemployment numbers, with initial jobless claims forecast to hold steady at 1.3m. Initial jobless claims last week of 1.3m were almost unchanged from the prior week. As noted after the release of the numbers last Thursday, the improving trend in initial jobless claims has all but halted, which may reflect the spike in coronavirus cases that has coincided with renewed lockdown measures in a number of economically important states such as Texas and California. There are also big worries that temporary layoffs are turning into permanent firings. 

 

Continuing claims fell to 17.3m vs the 18m in the prior week, which was a tad better than the 17.6m expected. The total number of people claiming benefits in all programmes for the week ending June 27th fell to 32m a decrease of 430k from the previous week.  

On the Covid front, US deaths exceeded 1,000 for the second day, whilst California – the most populous and economically important state – saw more than 12k cases on Wednesday, its largest single-day rise. 

 

In FX, the dollar remains on the backfoot with major peers cementing gains. EURUSD has cleared the January 2019 peak at 1.1570 and looking for a further extension towards the next big Fibonacci level at 1.1760 and the September 2018 swing highs at 1.18. The outlook for the euro is more bullish – on a technical note the clearance of 1.15 is a big hurdle out of the way, whilst the agreement on the EU pandemic fund is fundamentally vital to pushing the euro higher. Longer term is could have very far-reaching repercussions for bond investors, too. GBPUSD was trading above 1.27 and the 200-day moving average and testing the descending trend line that forced the pullback on Tuesday – clearance of these two hurdles opens up a path to 1.30 albeit the fundamental bullish thesis on sterling is far cloudier. 

 

Oil nudged up despite the rise in US crude inventories. WTI (Aug) pressed up above $42 after the EIA reported a crude oil inventory build of 4.9m barrels in the week to July 17th, vs the 2m barrel draw expected, albeit the API print had already flagged a likely increase in stockpiles. Stocks at the Cushing, Oklahoma, hub rose 1.375m vs last week’s build of almost 1m. 

 

Gold continues to march higher as real rates hit all-time lows with 10yr TIPS finishing at –0.88%. Gold pressed up to $1,876 this morning to mark a new 9-year peak. The momentum that is chasing this trade should easily enable bulls to find the $1921 all-time high last achieved in 2011 – you get the feeling there is a lot of appetite to take out this level, but expect some considerable resistance and another pullback to $1800 may be required first. After clearing the all-time high there is a chance of a move to $2k, but we should question whether the support from declining real rates will continue to act as a driver of gold prices without a significant inflationary follow-through. Nevertheless, it’s clear that the combination of a very uncertain macro backdrop, fresh geopolitical risk, the threat of inflation stemming from the massive injection of both monetary and fiscal stimulus make gold a clear-cut Covid winner. 

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