Stocks firm, earnings unmask weakness, OPEC+ decision eyed

Morning Note

European markets moved up again this morning after stocks rallied on Wall Street and futures indicate further gains for US equity markets despite big bank earnings underlining the problems on Main Street. Sentiment recovered somewhat after Moderna’s vaccine candidate showed ‘promising’ results from phase 1 trials. It is too early to call a significant breakthrough, but it’s certainly encouraging.

Cyclical components led the way for the Dow with top performers the likes of Caterpillar and Boeing, as well as energy names Exxon and Chevron up over 3% as the index rose over 500pts, or 2.1%, its best day in over two weeks. Apple shares regained some ground to $388 ahead of an EU court ruling today on whether the company should repay €13bn in unpaid taxes.

Asian markets were mixed, with China and Hong Kong lower as US-China tensions rose, but shares in Japan and Australia were higher. European shares advanced around 0.75% in early trade, with the FTSE reclaiming 6,200 and the DAX near 12,800.

However, Tuesday’s reversal off the June peak may still be important – lots of things need to go right to extend the rally and you must believe this reporting season will not be full of good news, albeit EPS estimates – such as they are – may be relatively easy to beat.

My sense is what while the stock market does not reflect the real economy, this does not mean we are about to see a major drawdown again like we saw in March. The vast amount of liquidity that has been injected into the financial system by central banks and the fiscal splurge will keep stocks supported – the cash needs to find a home somewhere and bonds offer nothing. It will likely take a significant escalation in cases – a major second wave in the winter perhaps – to see us look again at the lows.

For the time being major indices are still chopping around the Jun-Jul ranges, albeit the S&P 500 and DAX are near their tops. Failure to breakout for a second time will raise the risk of a bigger near-term pullback, at least back to the 50% retracement of June’s top-to-bottom move in the second week of that month.

Trading revenues, loan loss provisions surge at US banks

US bank earning highlighted the divergence between the stock market and the real economy. JPMorgan and Citigroup posted strong trading revenues from their investment bank divisions but had to significantly increase loan loss provisions at their consumer banks. Wells Fargo – which does have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn.

This begs the question of when the credit losses from bad corporate and personal debt starts to catch up with the broader market. Moreover, investors need to ask whether the exceptional trading revenues are all that sustainable. Shares in Citigroup and Wells Fargo fell around 4%, whilst JPMorgan edged out a small gain. Goldman Sachs, BNY Mellon and US Bancorp report today along with Dow component UnitedHealth.

UK retail earnings

In the UK, retail earnings continue to look exceptionally bleak. Burberry reported a drop in sales of 45% in the first quarter, with demand down 20% in June. Asia is doing OK, but the loss of tourist euros in Europe left EMEIA revenues down 75% as rich tourists stayed clear of stores because of lockdown. Sales in the Americas were down 70% but there is a slight pickup being seen. Encouragingly, mainland China grew mid-teens in Q1 but grew ahead of the January pre COVID level of 30% in June, Burberry said. Shares opened down 5%.

Dixons Carphone reported a sharp fall in adjusted profit to £166m from £339m a year before, with a statutory loss of £140m reflecting the cost of closing Carphone stores. Electricals is solid and online sales are performing well, with the +22% rise in this sector including +166% in April. Whilst Dixons appears to have done well in mitigating the Covid damage by a good online presence, the Mobile division, which was already impaired, continues to drag.

Looking ahead, Dixons says total positive cashflow from Mobile will be lower than the previous guidance of about £200m, in the range of £125m-£175m. Shares fell 6% in early trade.

White House ends Hong Kong special status, US to impose sanctions

US-China tensions are not getting any better – Donald Trump signed a law that will allow the US to impose sanctions on Chinese officials in retaliation for the Hong Kong security law. The White House has also ended the territory’s special trade status – it is now in the eyes of the US and much of the west, no different to rest of China. This is a sad reflection of where things have gone in the 20+ years since the handover.  Britain’s decision to strip Huawei from its telecoms networks reflects a simple realpolitik choice and underscores the years of globalisation are over as east and west cleave in two.

The Bank of Japan left policy on hold but lowered its growth outlook. The forecast range by BoJ board members ranged from -4.5% to -5.7%, worse than the April range of -3% and –5%. It signals the pace of recovery in Japan and elsewhere is slower than anticipated.

Federal Reserve Governor Lael Brainard talked up more stimulus and suggested stricter forward guidance would be effective – even indicating that the central bank could look at yield curve control – setting targets for short- and medium-term yields in order to underpin their forward guidance.

EUR, GBP push higher ahead of US data; BOC decision on tap

In FX, we are seeing the dollar offered. EURUSD has pushed up to 1.1430, moving clear of the early Jun peak, suggesting a possible extension of this rally through to the March high at 1.15. GBPUSD pushed off yesterday’s lows at 1.2480 to reclaim the 1.26 handle, calling for a move back to the 1.2670 resistance struck on the 9-13 July.

Data today is focused on the US industrial production report, seen +4.3% month on month, and the Empire State manufacturing index, forecast at +10 vs -0.2 last month. The Bank of Canada is expected to leave interest rates on hold at 0.25% today, so we’ll be looking to get an update on how the central bank views the path of economic recovery.  Fed’s Beige Book later this evening will offer an anecdotal view of the US economy which may tell us much more than any backward-looking data can.

Oil remains uncertain ahead of OPEC+ decision

Oil continues to chop sideways ahead of the OPEC+ decision on extending cuts. WTI (Aug) keeps bouncing in and off the area around $40 and price action seems to reflect the uncertainty on OPEC and its allies will decide. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd. Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance.

However, an unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower. OPEC yesterday said it expects a bullish recovery in demand in the second half, revising its 2020 oil demand drop to 8.9m bpd, vs the 9m forecast in June. The cartel cited better data in developed nations offsetting worse-than-expected performance in emerging markets. EIA inventories are seen showing a draw of 1.3m barrels after last week produced an unexpected gain of 5.7m barrels.

JD.com raises $3.9 billion in 2020’s second-biggest IPO so far

IPO

JD.com, the second-largest online retailer in China, has raised $3.9 billion during its secondary listing on the Hong Kong Stock Exchange.

The company is pricing its IPO at HK$226 per share, HK$10 below the top end of its indicated range. JD.com already trades on the Nasdaq.

Shares will start trading in Hong Kong on Thursday 18th – the same day as the company holds its massive annual Anniversary Sale (known as 6.18). Last year JD.com reported sales of almost $30 billion – this week’s event will be a key test of demand as China continues to recover from lockdown and battles a fresh outbreak of Covid-19 cases.

The JD.com IPO follows a public offering by NetEase which raised $2.7 billion. Together the two tech giants have raised $6.6 billion – almost double what the rest of the Hong Kong IPOs have raised all year.

NetEase shares ended their first day of trading up 5.7%, closing HK$7 higher than its offer price of HK$123.

Hong Kong IPOs get a boost on US-China tensions

Increasing tensions between Washington and Beijing have helped stoke the Hong Kong IPO market recently. The US House of Representatives is considering a bill that would mandate US-listed Chinese companies to undergo financial audits, which could result in a number of companies being delisted.

This has prompted many companies whose shares are already traded in the US to seek a secondary listing in Hong Kong as a precaution.

NetEase acknowledged the impact that rising tensions could have in its IPO filings. Baidu founder and chairman, Robin Li, also acknowledged recently that his company could consider a secondary listing in Hong Kong if the US government tightens regulations surrounding Chinese firms.

More IPOs on the way

This could be the start of a reawakening for the IPO market in Hong Kong. China Bohai Bank Co is looking to raise over $2 billion, while both Smoore International Holdings and SK Biopharmaceuticals are expected to raise around $800 million.

Upcoming Hong Kong IPOs

  • JD.com
  • China Bohai Bank
  • SK Biopharmaceuticals
  • Hygeia Healthcare Holdings
  • Kangji Medical Holdings
  • Smore International Holdings
  • Zhenro Services Group

Equities pause after strong gains, FTSE reshuffle confirmed, ECB meeting ahead

Morning Note

Corporate PR is not something that worries traders regularly. Sometimes bad press is bad for the stock – look at Facebook and Cambridge Analytica. Sometimes the optics are just a bit galling for some of us. Take HSBC, which saw fit to promote overtly anti-Brexit propaganda with its ‘We Are Not an Island’ ad campaign.

Now, along with Standard Chartered, it is backing controversial national security in Hong Kong that will destroy freedom in the territory supposedly enshrined by the 1984 Sino-British joint declaration. It’s in tough spot of course – most of its revenues come from Greater China. It needs Beijing on side, but equally it should probably take a moment to put its political views in context next time. Shares are down a third YTD and have halved in the last two years.

Stimulus supports global stock markets – more PEPP from the ECB today?

Meanwhile stimulus everywhere is supporting equity market gains. Germany has agreed a €130bn stimulus package to reinvigorate its economy, while Australia has unveiled its fourth, A$680m programme, aimed at boosting the construction sector. The European Central Bank (ECB) will today likely stretch its pandemic asset purchase programme by another €500bn.

Stocks roared higher on Wednesday, with all the major indices marking another day of progress, but the rally has paused and stocks are off slight ahead of the ECB meeting and US jobless numbers today. The FTSE 100 closed above 6380 as bulls drive it back to the Marc 6th close at 6462. The DAX moved aggressively off its 200-day moving average and has support at 12,400 despite a slight pullback today.

The S&P 500 rose 1.4% to clear 3100 and moved close to the 78.6% retracement level. It now trades with a forward PE of 22.60. The Dow rallied another 500 points, or 2%, before running into resistance on the 200-day moving average around 23,365 on the futures after the cash close. The Nasdaq is only a few points from its all-time high.

Although we are seeing a mild pullback at the European open this morning, the dislocation between markets and the real economy is frankly unsustainable. On that front we have the weekly US jobs number today – we’re looking at continuing claims as the more important number as a gauge of how swiftly the US economy is getting going again. Continuing claims are seen at 20m, down from 21m last week. Hiring should be exceeding firing now, but it will be a long slog back to where things were. Riots and curfews in big metropolitan areas don’t help.

ECB economic projections to detail the Covid-19 hit in Europe

The ECB meeting today will also help guide our view of how bad things are in Europe as we focus on the new staff projections. The ECB has detailed three scenarios for GDP in 2020 relating to the damage wrought by the pandemic: mild -5%, medium –8% and severe –12%.

Christine Lagarde said last week that the “economic contraction likely between medium and severe scenarios”, adding: “It is very hard to forecast how badly the economy has been affected.” Indeed there is actually no way of really know how badly Q2 went. We have various sources estimating pretty seismic falls; INSEE says French GDP will contract by 20% in the second quarter. Estimates for Germany suggest a roughly 10% decline.

The inflation projections will also be closely watched after HICP inflation in May slipped to its weakest in 4 years and outright deflation was recorded in 12 of the 19 members of the euro. Markets will also be keen to see what the ECB Governing Council makes of this development three years after Draghi declared the war on deflation won. Aside from the economy and inflation, the market is happily expecting an increase to PEPP of €500bn.

FTSE quarterly rebalancing confirmed

The FTSE quarterly rebalancing has been confirmed with Avast, GVC Holdings, Homeserve and Kingfisher entering the FTSE 100, and Carnival, Centrica, EasyJet and Meggitt dropping into the FTSE 250. EasyJet and Carnival have really taken a beating since the pandemic hit and longer term their business models are a problem if people don’t go on cruises, or if you enforce social distancing on planes.

Centrica has had a rough old time of things as its UK customer base has shrunk drastically, whilst earlier this year the company booked a number of one-off impairment charges relating to its oil & gas assets and nuclear power plant stake – a process it has since put on hold. Its main appeal of course was a steady income from a traditionally iron-cast dividend, which it has suspended.

Entering the FTSE 250

888 Holdings

AO World

BB Healthcare Trust

Calisen

Carnival

Centrica

Civitas Social Housing

EasyJet

JLEN Environmental Assets Group

Liontrust Asset Management

Meggitt

Oxford Biomedica

Scottish American Investment

Exiting the FTSE 250

Avast (promoted)

Bakkavor Group

Elementis

Forterra

GVC Holdings (promoted)

Homeserve (promoted)

Hyve Group

JPMorgan Indian Inv Trust

Kingfisher (promoted)

Marstons

Mccarthy & Stone

Senior

Stagecoach Group

In FX, the dollar has regained a little ground against major peers. GBPUSD failed to make the move stick above 1.26 to take out the Apr double top level and is now looking to test support around the 1.25 round number and the 23.6% retracement at 1.2510. EURUSD has eased off the 3-month highs struck yesterday but looks well supported for the time being at 1.12 – the ECB meeting today will deliver the usual volatility so watch out.

Oil has pulled back amid uncertainty over the OPEC+ meeting. Price dropped sharply yesterday before paring losses as it looked like the meeting would not take place today because of a dispute over compliance. Now we understand Russia and Saudi Arabia have agreed between themselves to extend the deepest level of cuts by another month, meaning the tapering from 9.7m bpd to 7.7m bpd will take place in August.

But they want non-compliant countries to play ball this time and over-comply going forward to make up for it. Whilst I think OPEC and Russia can just about keep the cuts on track, there are clear signs that this deal is a huge ask for many within OPEC and may unravel over the summer if prices hold up. Russian energy minister Novak was on the wires this morning saying oversupply was down to 7m bpd in May and could move to deficit of 3-5m bpd in July.

Chart: Dow runs into 200-day simple moving average

Candlestick chart of Dow Jones Industrial Average Index

Stocks nudge up, GBP breaks higher

Morning Note

Stock markets continued to strengthen as economies re-open but have yet to retest last Thursday’s highs. The unrest in the US is not likely to have a material impact on equity markets in the near term, largely because of the large-cap weighting, but we should caution that it has the potential to delay the economic recovery in the US.

People who would have been going back to work, spending in restaurants and bars, reopening their stores, will not in this febrile environment. President Trump is doubling down on using force to combat the unrest.

There was news on Remdesivir from Gilead – shares fell as the company reported indications that the drug has some positive impact, but it’s a long way from a slam dunk Covid-beater. Shares fell more than 3%.

So far, the situation with Hong Kong and simmering US-China tensions are being shrugged off. News that China was reducing soy imports from the US temporarily dented risk appetite yesterday. Today China’s foreign ministry said there was no information on any soy bean halt. Could be a load of rumours, but we should be very attuned to further developments on this front.

On the whole investors continue to see the glass half full even though the real extent of the economic damage is yet to be really felt. Furlough schemes and government bailouts may insulate people and companies from the shock, but these only delay the pain.

The FTSE 100 had a look at 6200 again this morning having moved added 90pts to 6,166 on Monday. Thursday’s peak at 6,234 remains the bull’s target for the cash market. The DAX moved to 11,900 with bulls eyeing the 200-day moving average at 12,100.

US stocks climbed by around a third of one per cent despite the civil unrest dragging on and drawing some attention. The S&P 500 finished at 3,055, above its 200-day moving average and making a high at 3,062 in the process, just short of last week’s peak at 3,068. The Dow is trading around the 25,500 level with the 200-day SMA in sight at 26,360.

It’s a very light day for data but overnight the RBA left rates on hold at 0.25% and signalled a more optimistic view of growth. ‘It is possible that the depth of the downturn will be less than earlier expected,’ Governor Philip Lowe said. AUDUSD is stronger, moving back to 0.68 and its best level since January.

News this week will be crucial – US services ISM on Wednesday and the nonfarm payrolls on Friday – for getting more of a handle on how much damage has been done and how quickly businesses are recovering.

Crude oil continues to hold the break on hopes that OPEC+ will agree to further extending the deepest production cuts. OPEC is set to meet June 4th now, with market participants expecting the cartel and Russia to rollover the May-Jun level of cuts for another 1-3 months.

Having brought the meeting forward it looks like OPEC+ will extend the most aggressive cuts of 9.7m bpd through to the end of the summer, though an extension for the rest of 2020 looks off the table. As noted yesterday, with compliance at just 75% last month, all else being equal, OPEC will need more time to rebalance the market as it wishes.

In FX, sterling has made a nice move higher, with GBPUSD breaking north above $1.25, after there was talk of a Brexit compromise ahead of the next round of talks this week. According to reports, the UK is making the first move to compromise – let’s see if the EU can be flexible enough to get a deal done. GBPUSD pushed through the 23.6% retracement around 1.251, potentially opening up a move back to the Apr double top above 1.26.

Removing a no-deal risk at this time would be a significant boost to the pound right now and may well take cable back above 1.30.

GBPUSD technical analysis chart for June 2nd 2020

Stocks rally, dollar offered, OPEC meeting may be brought forward

Morning Note

European markets nudged up on Monday as the cash opens followed the futures higher and bulls try to recover last week’s highs. Stocks across Europe finished Friday sharply weaker on US-China fears that eased a bit after the cash markets closed, but still the major indices rose last week.

On Monday, the FTSE 100 rose over 1% at the open to 6,176, with bulls eyeing Thursday’s peak at 6,234. The DAX also faded later on in the session to rest on the 61.8% retracement – although Frankfurt is shut for Whit Monday, futures are trading higher. US futures are in the green. The Hang Seng led Asia higher and shot up by more than 3%.

US stocks edged higher on Friday as Donald Trump’s press conference on China was not as bad as feared, albeit the US is to end preferential status for Hong Kong for trade and travel and is ending ties with the WHO. This rally completed a very solid month for Wall Street as both the Dow and S&P 500 finished 4% higher, while the Nasdaq was up almost 7%.

Market nerves were calmed as Trump held something back and did not reignite the trade war, but we should nevertheless stress that US-China tensions are expected to deteriorate over the coming months as Trump doubles down ahead of the presidential election.  China has responded this morning with comments from the foreign ministry this morning offering the usual non-descript warnings of ‘countermeasures’ and advice to the US to just butt out.

Looking at the economic damage from Covid, today’s focus is the US ISM manufacturing PMI, which is seen rebounding to 43.5 from 41.5. Overnight data showed South Korean exports tumbled 23.7% in May, which was worse than expected but an improvement on April’s 25% decline.

Manufacturing activity in the country declined at the second fastest clip since 2009, marginally improving from April. Japan’s factory activity contracted at the sharpest pace since 2009, the final PMI showed. China’s manufacturing PMI showed a tiny amount of expansion but the damage to global trade from the pandemic left new export orders still in contraction.

Remember, PMIs only ask if survey participants think things are better or worse than the previous month, so they give a pretty imperfect snapshot of economic activity in times of crisis. A reading over 50 only tells us things are better than last month – not a high bar to clear. The real hard economic data we want to see will look at the period after lockdown restrictions end.

In FX, the dollar is offered at the start of the trading week with momentum continuing against the greenback. The dollar index is lower, taking a 97 handle and breaking down through the 61.8% retracement of the Covid-inspired rally.

GBPUSD hit 1.24, clearing the 50% retracement at 1.23750. EURUSD advanced as high as 1.1150 running into resistance at this level, the March 27th swing high. The ECB meeting this week is the chief focus for the euro, with most anticipating the central bank to push its PEPP envelope wider by another €500bn whilst the going is good – see our ECB Preview: Welcome to Japan?

Brexit risks come to the fore again this week as talks resume on Tuesday. The language last week from the UK’s chief negotiator David Frost was not optimistic, saying the EU mandate is not likely to produce a deal. Michel Barnier hit back, telling The Times that the UK has taken ‘three steps back’. The next few days will be crucial to break the deadlock and we will be paying close attention to whether the two sides think that progress has been made this time around.

OPEC may bring its June meeting forward to this Thursday at the request of Algeria, which holds the rotating presidency. Algeria says this is to facilitate crude sales for Saudi Arabia, Iraq and Kuwait. Russia, the key lynchpin of OPEC+, is reported to have no objections.

This may suggest an energy and enthusiasm to get a deal on maintaining deeper cuts for longer. July is currently set to see a gradual tapering of cuts down from 9.7m bpd in May and June, but there has been a lot of chatter that Saudi Arabia is trying to bring Russia around to backing an extension to make the deeper cuts last longer – perhaps for the rest of 2020.

Whilst OPEC production hit 20-year lows last month, compliance with the agreed cuts stood at around 75% as Iraq and Nigeria failed to meet targets. Crude prices rebounded sharply in May and are cautiously holding gains ahead of the OPEC+ talks. WTI for August was up at $35.73, although front month contracts have pulled back on Monday.

Stocks off a little at month end, US-China tensions rise

Morning Note

What did they do just when everything looked so dark?
Man, they said “We’d better accentuate the positive
Eliminate the negative
And latch on to the affirmative”

Stocks are ending May on a slightly downbeat note, but investors have definitely been accentuating the positive this week and for the whole of May.

Thank goodness, Covid-19 is getting bumped off the headlines; trouble is it’s not for good news. At last though we are seeing some caution displayed in the markets over China’s decision to impose national security legislation on Hong Kong and the ensuing ramp up in US-China tensions.

US stock markets close in the red, Trump to give press conference on China

US stocks were positive for most of Thursday before sharply reversing in the last hour and closing in the red, after the White House announced that Donald Trump would hold a press conference on China on Friday. ‘We are not happy with China. We are not happy with what’s happened’, he said. The UK, which signed a joint statement condemning China for its actions with Australia, Canada and the US, is opening the door to citizenship for 300,000 Hong Kong residents.

Given how stretched valuations have become, worries about US-China tensions don’t seem fairly priced in. As previously noted, investors need to be prepared for things to get worse from here, particularly given the back drop of a looming election for a second term, the worst recession in memory and 100,000 deaths from Covid – blamed on China – and the trade war, which is still rumbling on.

The pressure on Donald Trump at home is high. The press conference today will likely see Trump increase the war of words with China but he could go further an announce further sanctions on individuals associated with law, or revoke Hong Kong’s special status with the US on trade.

The S&P 500 was up most of the session but closed 6 points lower at the death, whilst the Dow fell 0.6% to 25,400, crumbling 300 points in the last 45 minutes of trading on the news of the White House presser.

Overnight, shares in Hong Kong fell again. European equities followed suit on Friday, declining by around 1% after a decent run in the previous session. The FTSE 100 faded off the 6200 handle reclaimed on Thursday. Hong Kong and China focused HSBC was down another 2.5%. But the FTSE was still headed for a roughly 200-point gain this week. European equities are still firmly higher this week as investors rotated somewhat away from the Covid/tech/quality play and back into cyclicals as economies reopen without undue rises in cases.

The Nasdaq, which has notably outperformed on a year to date basis, has markedly underperformed benchmarks this week. Remember it’s the last day of the month of May – it’s been a solid week and month for equities so investors may seek to take a little risk off the table going into the weekend and into June. The Hong Kong/US/China situation is all the excuse needed.

Data continues to show the dire economic impact of Covid-19

The economic data still stinks. 1 in 4 Americans have lost their jobs since Covid hit. US initial jobless claims rose another 2m to top 40m. But it’s slowing, with the weekly count down again for the 8th straight week. Moreover, continuing claims fell 3.9m to 21.1m, which indicates the labour force is returning – hiring is beating firing again, but it will be a long slow process to recover the 40.8m jobs lost, far longer than it took to lose them. A portion will be lost forever.

The US economy slowed more than previously thought, with the second GDP print for Q1 at -5%, vs 4.8% on the initial print. The Atlanta Fed GDPNow model forecasts Q2 GDP down 40.8%.

French GDP in the first quarter was down just 5.3% vs the 5.8% initially printed. Retail sales and industrial production in Japan both declined by more than 9%. Retail sales in Germany dropped 5.3% in April, not as bad as the -12% forecast – spendthrifts! Meanwhile those frugal French consumers spent even less than forecast, with spending down more than 20% vs a 15% declined expected. France is though reopening its culturally vital bars, restaurants and cafes from next week, so that should get consumers parting with a few more sous.

Dollar offered despite risk-off trade in equities

Despite the risk-off to trade in equities the dollar was offered into the month end. The euro extended its rally after breaking the 200-day moving average yesterday, with EURUSD pushing up to 2-month highs at 1.11. The March peak at 1.1150 is the next target. Sterling was also firmer against the buck, with GBPUSD recovering the 1.23 handle, trying to hold the 50-day line as support.

Shares in Twitter declined by more than 4% as Donald Trump signed an executive order that paves the way for legislation to tighten rules for social media platforms around third party content liability. It’s probably all a lot of hot air and distraction as he pursues a personal vendetta following the fact check warning on a couple of his tweets. Nevertheless, we have consistently warned that social media companies will need to face up to more and more scrutiny and tighter regulation around content distribution and the use of personal data.

Oil first fell but since recovered after EIA figures showed a build in crude oil inventories. Crude stocks rose 7.9m barrels, though inventories at Cushing, Oklahoma, declined by 3.4m. WTI (Aug) was hovering around $33 at send time, just about slap in the middle of its consolidation range.

Equity indices clear big hurdles even as Hong Kong tensions simmer

Morning Note

Tensions between the US and China are worsening, with the two sides clashing at the UN over Hong Kong. China rejected a US proposal for the Security Council to meet over the issue, whilst US secretary of state Mike Pompeo declared that Hong Kong is no longer autonomous from Beijing. China’s ‘parliament’ this morning approved the controversial national security legislation for the territory.

We also note reports this morning that China escorted a US navy ship out of its waters. Meanwhile Taiwan is to buy Harpoon anti-ship missiles from the US, which is likely to further rile Beijing. Tensions are showing signs they could boil over – we cannot play down the importance of an embattled US president facing a national crisis at home in an election year – one he can blame on his chief geopolitical adversary. Expect more sabre rattling.

Shares in Hong Kong and Taiwan fell, whilst Japanese equities rose by more than 2% in a mixed session overnight in Asia. The FTSE 100 rallied towards 6200 on the open, but shares in Standard Chartered and HSBC fell, signalling investor concern about what’s going on in Hong Kong.

Nevertheless, equity markets continue to strengthen and move out of recent ranges and clear important technical resistance. Confidence in equity markets is strong thanks more stimulus and signs economies are reopening quicker.  A resurgence in cases in South Korea is a worry.

Yesterday, US stocks surged with the S&P 500 closing above 3,000 for its best finish since March 2nd, whilst the Dow added over 500 points to clear 25k at stumps. The S&P 500 cleared the 200-day moving average and is now trading with a forward PE multiple of about 24x – making it look decidedly pricey.

European followed Wall Street higher with broad-based gains. The DAX yesterday closed above the 61.8% retracement around 11,581 and extended gains through the 11,700 level. The FTSE 100 thrust towards 6200 this morning, hitting its highest intra-day level since March 10th. The 50% retracement around 6250 is the next target before bulls can seek to clear the gap to the March 6th close at 6,462.

EasyJet is planning to reduce its fleet by 51 and cut up to 30% of staff. This is the big fear playing out – temporary furlough becomes permanent firing once businesses figure out that demand has vanished. Whilst airlines will feel this more than just about any other sector, this trend will be seen in a wide range of industries, albeit to a lesser extent.

Shares in EZJ rose 8% – cost cuts are welcome of course for investors, but also the indication of running at 30% of capacity over the summer is better than had been feared. Efforts by the likes of Greece and Spain to salvage the summer season will help a lot. IAG and Ryanair shares rose 2-3%.

Twitter shares fell and were down more in after-hours trading after Donald Trump threatened to shut down social media sites that stifle conservative voices. Having been sanctioned by Twitter with fact-check warnings, the president is very unhappy. It hurts his ego and it blunts his most effective tool.

The White House said the president will sign an executive order on social media today. Facebook shares were also lower yesterday and extended losses in after-hours trade. Will Trump try to silence Twitter and Facebook? No, but he can put more of a regulatory squeeze on them and raise their costs.

Europe’s bailout proposals were greeted with optimism, but the frugal four countries of Austria, Denmark, Sweden and the Netherlands did not seem terribly impressed at plans that will raise their budget contributions. They will need to be brought round. Estonia has also said it won’t vote for the proposals. Work to be done – getting all countries on board with a complex budget takes a long time in the best of circumstances, let alone amid a dreadful recession.

The euro has largely held gains after rising on the EU’s budget plans. EURUSD firmed above 1.10 but is struggling to clear the 200-day moving average around 1.1010. Bulls need to see a confirmed push above this to unlock the path back to 1.1150, the March swing high. Failure calls for retest of recent swing lows at 1.0880.

Sterling was steady with GBPUSD around 1.2270 after yesterday giving up the 1.23 handle and testing support at 1.220 following Britain’s chief Brexit negotiator gave a pretty downbeat assessment of trade talks to MPs.

Today’s data focuses on the US weekly unemployment claims, which are forecast at +2.1m. As we enter the summer and states reopen, the hiring will gradually overtake the firing but we are not yet there. Durable goods orders – an important leading indicator of activity – are seen at –19% month-on-month with the core reading seen at –14.8%. A second print of the US Q1 GDP is seen steady at –4.8%.

Oil dived and took a look at last week’s lows as API figures showed a surprise build in crude inventories in the US. Stocks rose by 8.7m in the week ending May 22nd, vs expectations for a draw of 2.5m barrels. The build in stocks means the EIA data today will be more closely monitored than usual, given that expected drawing down of inventories has underpinned the resurgence in crude pricing. WTI (Aug) slipped back to $31.60, just a little short of the May 22nd swing low.

Hong Kong dents optimism but stocks remain on track

Morning Note

US shares surged on Tuesday, with the Dow rising more than 2%, briefly trading above the 25k level again before closing a little short. The S&P 500 rose over 1%, traded above 3,000 for the first time since March 5th hitting a high at 3,021 before it too closed below this psychologically important level. The broad index traded above the important 200-day moving average but failed to close above this indicator.

Economies continue to reopen a little quicker than we’d feared. US airlines are reporting a uptick in passenger levels vs where they were last month, but were down about 80% from the same Memorial holiday weekend a year before. Globally, it seems as though countries are able to ease lockdown restrictions without sparking immediate secondary waves of infections – albeit the risk of such emerging down the line should not be ignored.

The higher the S&P 500 rises without earnings picking up the pricier it gets. PE multiples already look stretched and further gains for the index would come despite declining earnings, stretching these valuations still further. What happens when banks really lay bare all the non-performing loans they are going to need to write off?

US stock markets test key 200-day SMA

In the last two major recessions (see below chart), the 200-day simple moving average has been the ceiling for the market. A breakout here would be important for recovering market highs – failure could suggest it will contain price action for a while. I hate to say it but this time could be different – central bank largesse was not a factor like it is today. This only concentrates the power of the largest capitalised companies.

What’s going on in the real economy is not reflected by markets. Even as we reopen, the economic uncertainty and long-term health fears will support household deleveraging, boost savings rates and knock consumer spending.

Today the Fed will release its Beige Book providing anecdotal evidence of business activity across the US – there will be some very grim stories to tell and will underline how it will take a long time to get businesses and people moving at the same rate they were before the crisis.

Tensions in Hong Kong weigh on global equities – will the US sanction China?

The rally in global equities seen at the start of the week ran out of steam a little in Asia overnight though as tensions in Hong Kong hove into view once more. Riot police fired pepper pellets at groups gathering to protest a bill that would ban people from insulting the Chinese national anthem. This comes as tensions were stoked by China’s planned introduction of sweeping national security powers in Hong Kong.

There is a strong chance that the anti-Beijing feeling grows and leads to the kind of unrest we saw over several months last year. The US is said to be considering sanctions against China; Beijing said yesterday it was increasing its readiness for military combat. Whilst the eyes of the world are on Hong Kong, China is already engaged in a military standoff on its border with India.

Asia soft, European stocks firm

Asian shares fell broadly, although Tokyo held up as Japan said it will carry out another $1.1 trillion stimulus package on top of a $1.1tn programme already launched last month. The Hang Seng dipped by almost 1%. But European shares rose with the FTSE 100 recapturing 6100 and making a sally towards 6200 and to close the early March gap.

Yesterday the DAX made the move back towards its Mach 6th close at 11,541 to fill the gap but failed to complete the move on the close. This morning the DAX moved strongly through this level after a pause at the open, moving back to 11,600.

Euro, pound come off highs, retreat from key technical levels

In FX, both the euro and pound failed to really make any real breach despite a strong gain yesterday and have come off their highs. EURUSD moved back towards the middle of the recent range, having fallen short of a move back to 1.10 and was last trading around 1.0960.  GBPUSD has retreated under 1.23 having fallen short of the 50% retracement of the move lower over the last month around 1.2375.

After Germany and France proposed a €500bn bailout fund based on mutual debt issuance (what some have dubbed Europe’s Hamiltonian moment), EC President Ursula von der Leyen will present her plans, which will build on the Franco-German proposal and call for a €1 trillion plan. If the budget talks are successful it should lower the risk premium on EU sovereign debt, lowering bond yields and offering succour to the euro as well as to European equity markets. It would also mark a major step towards EU fiscal policy coordination and possible fiscal union. The frugal four remain a hindrance but Merkel’s weight is behind this.

We’re also looking at the appearance before MPs today by Michael Gove and UK Brexit negotiator David Frost.

Gold falls to test $1700, WTI crude oil edges down to $34

Gold was weaker, testing $1700 again as US yields rallied on economic reopening, but 10yr Treasury yields peeled back off the highs at 0.7% due perhaps to the US-China tension.

WTI (Aug) has retreated further from the $35 level and is testing support around $34. The pattern suggests a pause for thought as we try to figure out the mess of supply and demand. The pattern is one of consolidation with a bullish flag forming, with better demand forming the basis for the move alongside supply impairment that was evidenced by a new report from the IEA saying Covid-19 will cause investment in the energy sector to decline by $400bn this year. That is the kind of capex carnage that will remove a lot of supply and force rebalance quickly.

Chart: The 200-day line has been a ceiling in past recessions

Global stocks risk off as Beijing considers new Hong Kong security law

Equities

Shares in Hong Kong plunged overnight on fears a tougher stance from Beijing’s towards the territory will spark fresh pro-democracy protests, potentially leading to the kind of wide scale unrest witnessed last year.

The Hang Seng slid over 5%, notching its worst daily decline in 5 years, as China’s National People’s Congress (NPC) moved to impose controversial national security legislation in Hong Kong, bypassing local lawmakers.

Markets unsettled as China plans new Hong Kong security law

China’s Communist Party wants to impose a national security law that would ban “treason, secession, sedition and subversion”.

The plan was detailed at the NPC on Friday, triggering fears that Beijing will end freedoms for people in Hong Kong not enjoyed elsewhere in China. As well as big losses for the Hang Seng, European and US stock market futures fell deep into the red ahead of the European open.

Carrie Lam, the pro-Beijing chief executive of Hong Kong, says the territory will fully cooperate with China.

Beijing’s Hong Kong plans send stocks tumbling – but why now?

Under terms of the handover from the British in 1997, Hong Kong is required to pass national security laws but has so far not done so.

Hong Kong’s first chief executive Tung Chee-hwa tried and failed to pass national security laws in 2003, sparking protests that ultimately ended in his resignation.

Lately Chinese officials have become worried it lose its grip on Hong Kong with new elections due in September.

Last November pro-democracy candidates won handily in district council elections, raising fears in Beijing that this would be replicated in Legco elections this autumn.

This followed several months of unrest and civil disobedience against a planned extradition bill – later abandoned – which caused Hong Kong’s economy to tank and local stocks to tumble.

How Hong Kong-Beijing tensions could impact global stock markets

This is a significant flash point that will stir local protests and anger the US.

Unrest last year caused Hong Kong to fall into recession for the first time in ten years, with GDP contracting 3.2% in the July-September quarter as tourists steered clear of the territory.

The unrest also caused business sentiment to sour – a repeat would be an unwelcome development for the likes of Asia-focused banks HSBC and Standard Chartered.

Investors will need to add renewed Hong Kong-Beijing tensions into their mix of geopolitical risks, and it is the way it fits into the broader US-China rivalry that is more of a worry for investors.

Equities face new geopolitical risks as China-US relations sour further

At a time of already strained relations between China and the West, this decision will only isolate Beijing even more.

US President Donald Trump he would “address that issue very strongly” if Beijing passed the law. The White House has already started to stiffen its resolve against China for what it sees as the country’s failure to contain the Covid-19 outbreak.

Republican and Democratic Senators plan to introduce legislation to impose sanctions on Chinese officials if the law is passed.

Meanwhile US-China trade tensions remain on the table and with the US presidential election this November coming at a time of immense economic dislocation, the relationship between Washington and Beijing looks set to only get worse.

Hong Kong turmoil risk roils markets

Morning Note

Shares in Hong Kong plunged on fears Beijing’s tough stance will spark fresh pro-democracy protests, potentially leading to the kind of widescale unrest we saw last year.

The Hang Seng slid over 5% as China imposes controversial national security legislation that bypasses local lawmakers. The move was taken as China’s National People’s Congress convenes. Carrie Lam, the Hong Kong chief executive, says the territory will fully cooperate with China.

This is a potentially significant flash point that will stir local protests and will anger the US. At a time of already strained relations between China and the West, this decision will only isolate Beijing even more. Investors will need to add renewed Hong Kong-Beijing tensions into their mix of geopolitical risks, whilst the way it fits into the broader US-China rivalry will be closely watched.

The risk-off tone fed into European trading with the FTSE 100 off almost 2% at 5900 in early trade on Friday.  Asia-focussed banks HSBC and Standard Chartered were among the laggards. UK retail sales plunged 18.1% in April, led by a 50% decline in clothing sales. Online shopping rose to a record 30.7% of all retail – good for the nimbler retailers with good online operations, not so encouraging for the rest.

US stocks closed lower on Thursday, with the S&P 500 down 0.78% to 2,948. Having nudged to the top of their respective ranges, indices are retreating to more comfortable levels for investors given the state of the economic damage and uncertainty over earnings. Futures indicate Wall Street will open lower.

US initial jobless claims came in at 2.4m as expected and was the lowest reading since March. It takes the total jobs lost since the crisis began to almost 39m. Now we need to look at the continuing claims rather than the initial claims counts. It certainly raises hopes the jobs market has bottomed – the bulk of jobs to be lost have already been lost.

As various US states reopen and business gets going again, we ought to see hiring exceed firing. The key will be how swiftly the hiring replaces lost jobs – it’s hard to see the 39m being replaced as quickly as they were lost. Temporary layoffs will become permanent as businesses slowly reopen and find demand down and cash flow a problem.

Data compiled by software company Envestnet Yodlee shows Americans used their stimulus cheques to buy stocks. Middle income earners – those on $35,000 to $70,000 a year – were the main drivers. This chimes with the view that the bounce off the March lows was driven by incremental retail buyers, not a return of positive institutional flow.

The US manufacturing PMI also showed some mild improvement as did the European and UK numbers, but as mentioned yesterday, this was off a very low base and numbers still indicate sharp contraction.

In FX, the dollar is bid as risk-off sentiment rules. EURUSD broke 1.10 yesterday but retreated as it looked to test the 200-day resistance a little above the round number. Cable moved back under 1.22 at 1.2180.

Having rallied Thursday to $35, crude oil (WTI Aug) slipped sharply overnight, breaking the trendline, as China’s NPC decided to scrap its GDP target for 2020. It suggested Beijing is not about to really stimulate infrastructure investment like it has in the past. Markets, in particularly commodities, were looking for more.

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