Risk appetite resurfaces, HSBC shares soar

Morning Note

Risk appetite has returned after last week’s turbulence. European bourses rose 1-2% in early trade on Monday after Wall Street’s rally on Friday lifted the boats. The S&P 500 was still down for the week, but with the broad market -10% from its all-time highs at the low, those looking for a correction after the hot summer rally may have found it already.

The market tested 3200, which is where it reached at the peak in June before the pullback and where it closed 2019. Bonds have not taken part in the drawdown – US 10-year Treasuries have barely budged this month and remain stuck around 0.66%. This might imply that the September sell-off is more about a repricing of risk assets based on valuations and profit-taking after the summer run-up, rather than deeper fears about a prolonged stagnation in the economy.

Volatility likely on US presidential debate, NFP this week

Nevertheless, with the first US presidential debate and the last jobs report before the election coming this week, there is ample scope for markets to remain volatile. Until we clear the highs from a fortnight ago – 3400 on SPX, around 3300 on Stoxx 50 and 6,000 on the FTSE, the downside bias remains.

Rising numbers of coronavirus cases imply a softer recovery, depressed consumer sentiment and the need for more fiscal support to generate upside. Markets don’t seem to be moving too much on vaccine news and rumours – there may be a realisation that a vaccine is not a silver bullet that will repair all the damage done in 2020, even if it makes 2021 look brighter.

Ping An adds to HSBC stake

HSBC shares rallied 10% after Ping An Asset Management increased its stake in the bank. HSBC’s largest shareholder only marginally bolstered its holding to 8% from 7.95%, but the vote of confidence translated into a very substantial rally for the shares both in Hong Kong and London.

HSBC had lately sunk to a 25-year low after being named in reports relating to money laundering, so maybe this was some simple averaging-in by Ping An. Shares are only back to where they were a fortnight ago – when stocks have been beaten down as much as HSBC they are often ripe for larger percentage swings as investors try to figure out what is the real value.

If you think Britain’s banks are fundamentally sound, shares are priced compellingly. Lloyds at 25p trades at 0.35 of book value.

BoE Tenreyro defends negative rates

Bank of England rate setter Silvana Tenreyro defended negative rates in an article over the weekend, in what we could construe as a careful piece of choreography to communicate the bank’s shift towards a state of outright financial repression.

She said there were ‘encouraging’ signs that there are no longer the same obstacles to cutting rates to below zero. But she’s been positive on negative rates for several months so we should probably not read too much into her comments.

Andrew Bailey remains the most important voice of the MPC and whilst he did not seek to quell speculation last week that the Bank is considering how to use negative rates, he did stress that it’s not in a hurry to pull them out the toolbox.

Brexit talks in focus for GBP

Brexit talks resume this week and despite all the noise, both sides want a deal. Whilst the UK threw a spanner in the works with the internal market bill, the real substance of the trade deal is what matters. On that front the EU and UK are about 90% there. The problem is the remaining elements and without these sorted there is no deal.

Nevertheless there is hope that they will enter the ‘tunnel’: the period of closed, detailed talks that would lead to a deal. If there is white smoke this week then sterling will rally strongly, but I would expect this to drag on for a while longer, for deadlines to be missed and for GBP crosses to remain exposed to negative headline risk.

The euro retained its downside bias after more jawboning from the ECB.  Ignazio Visco, Italy’s central bank governor, said the euro’s recent strengthening is “worrying us because it generates further downward pressures on prices at a time when inflation is already low”. A slate of ECB speakers this week are likely to lean hard on governments to deliver fiscal support.

Chart: GBPUSD tests near-term resistance at 1.28

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




Civitas Social Housing


JLEN Environmental Assets Group

Liontrust Asset Management


Oxford Biomedica

Scottish American Investment

Exiting the FTSE 250

Avast (promoted)

Bakkavor Group



GVC Holdings (promoted)

Homeserve (promoted)

Hyve Group

JPMorgan Indian Inv Trust

Kingfisher (promoted)


Mccarthy & Stone


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

HSBC & BP absorb the damage, oil plunges again

Morning Note

The S&P 500 rallied to close at its highest since March 10th as investors pin their hopes on states reopening in the coming days and weeks, but we’ve had a less impressive session overnight in Asia. European shares are a bit mixed today on a huge day for corporate earnings which are by and large showing up the huge damage being done to heavyweight stocks from Covid-19 and the collapse in oil prices. The FTSE 100 opened mildly lower but is holding the 5800 level. US futures have weakened along with oil, which is coming under intense selling pressure again.

HSBC joined the growing rank of banks setting aside huge amounts of capital to absorb the expected economic hit from the Covid-19 outbreak. Today’s Q1 update showed a 48% decline in reported profits before tax to $3.2bn as it hiked loan loss provisions to $3bn. It comes after a $3.9bn loss in Q4 2019 due to writing down assets in its investment and commercial banking arms in Europe by $7.3bn. Shares slipped nearly 2% in early trade in London.

There are two main challenges for HSBC. First its pivot to Asia and reliance on earnings out east, at a time when emerging market growth could become very challenged due to Covid-19 and a stronger USD. Second, it’s embarking on a major restructuring designed to slash costs that will inevitably be delayed. Management note today they will be slower to reduce risk weighted assets (RWAs).

Having been made to scrap dividends and buybacks by UK regulators, there was chatter HSBC would think about moving its headquarters out of London and back to Hong Kong. Investors residing in the ex-colony were not impressed, with some launching a legal challenge. HSBC took the strange step of apologising to them today for the loss of income. But while regulators over here may be exceedingly cautious and willing to bash the banks at times, it’s nothing on what awaits if you get within reach of Beijing. Reassessment of the West’s relationship with China after Covid-19 suggests it will be prudent to stick to London.

Elsewhere European banks are in full reporting mode this week. Santander profits were down 82% after setting aside €1.6bn in provisions for losses. UBS profits rose 40% and it seems to less exposed to loan loss provisions than many peers.

BP meanwhile faces a single problem – a collapsing oil market as demand falls and prices plunge. Management reported underlying replacement cost profit for the first quarter of $0.8 billion, compared with $2.4 billion for the same period a year earlier. This, they said, reflected lower prices, demand destruction in the downstream particularly in March, a lower estimated result from Rosneft and a lower contribution from oil trading.

As a result, net debt ballooned by $6bn to $51.4bn leaving gearing at 36.2%. But it’s maintained its dividend – for now. The $10bn acquisition of BHP’s shale assets was not such a smart move. As mentioned before, if BP wants to go green and be ‘carbon neutral’ by 2050, it’s going to require higher oil prices to do it. Oil will pay for the shift away from oil. BP shares slipped 2% in early trade.

Finally, highlighting the extent of the damage in US shale, Weir Group reports today that Q1 Oil & Gas orders were down 34%, and expects capex in North America to be down 50% in 2020.

Oil slumps again

On oil, the front-month (June) WTI contract is coming in for the expected bashing. Prices plunged Monday and have extended losses in Asia after USO said it was dumping its June contracts, about 20% of its holdings. It was inevitable that the front month would again hit the skids as we approach tank tops in the US and producers are too slow to turn off the taps. Increasingly there are also signs floating storage is running out for Brent. There is nothing to stop front month WTI approaching zero again with nowhere to stash the oil. The market will remain in steep contango as traders try to find shelter in future months but this only heaps more and more pressure on the front months.


Having cleared the 50-day simple moving average decisively with yesterday’s close, the S&P 500 is now facing the key resistance around 2885.

WTI has slumped again and continues to make new lows this morning – path to zero is open again.

Cautious tone for equities, oil rallies

Morning Note

HSBC is said to be mulling a move back to Hong Kong because the Bank of England asked it to not pay a dividend. Certainly, bank boards won’t be happy – their members count on those divis for paying for their second and third homes. Nor too will many savers, many of which are in Hong Kong. But any notion that the authorities will be interested in doing anything to ‘support savers’ is fanciful. That idea died with the last financial crisis with central banks unleashing QE and permanently ultra-low rates.

This crisis has turned accommodative monetary policy up to 11 – regulators, governments and central banks are not interested in savers. The hunt for yield goes on – income investors shunned the British bank stocks yesterday, which seems odd given that it was well reported the day before that the BoE was forcing them to ditch dividends and buybacks. HSBC’s threat is likely a reminder to the UK authorities that this time around the banks are here to fix the problem and should not be a target for politicians like they were last time.

Markets in Europe got off to cautious start, trading mildly higher and trimming a chunk of early gains, with the usual tug-of-war as investors try to figure out just how far the virus spreads and just how bad the economic damage will be. There is not a huge amount of conviction out there, following a tough session on Tuesday that saw European and US equities down ~4%. It looks like the month-end rebalancing juiced equities into the last days of March.

Today the focus is on the US weekly unemployment claims count for an indication of the extent of economic damage. Last week this surged to 3.3m and could be even higher this time around. Talk of 5m+ is not overly pessimistic but the consensus is 3.7m.

In the cash market, the FTSE had yesterday eased back close to Friday’s low, hitting 5414, a little shy of the Mar 27th bottom at 5407. Yesterday’s high at 5,671, struck on the open, is the first target. We’ve had only three down days in 10, stabilisation is still the order of the day.

In FX, GBPUSD remains within the range of the 50% and 61.8% levels (see chart). We can mark out a pennant, usually a continuation pattern, on the 4hr chart.


GBP/USD, 4-Hour Chart, Marketsx – 08.13 UTC+1, April 2nd, 2020

The selling in oil has lost momentum resulting in a bounce well flagged yesterday by the MACD crossover on the daily chart after a series of failures to breach $20 on the downside. Near-term resistance offered at the 200-hour moving average. There is a lot of noise out there about whether Russia is ramping production or not, what Trump is up to etc. Talk of a truce in the price/supply war is lifting sentiment but you cannot help but sense a dead cat bounce. Trump always claims he close to a deal.

From what we can glean from the chatter, Russia is not raising output but the Saudis are not backing off and have increased output to record levels. If there is a truce then oil can rally a bit but the pressure seems weighted to the downside and any supply deal will not be able to offset the collapse in demand. US oil inventories surged by 13.8m barrels in the week to March 27th, the biggest one-week rise since 2016. Globally inventories are going to full to the brim within weeks.


Crude Oil Futures, 1-Hour Chart, Marketsx – 08.37 UTC+1, April 2nd, 2020


HSBC jaws fears, BHP, Greggs, Bitcoin’s ramp


After US markets were closed yesterday, the week begins in earnest today. US futures are steady with the SPX and DOW unmoved around 2,775 and 25,880. European markets are opening on the flat. Looking ahead to this morning’s FTSE session, HSBC figures will likely weigh after the shares dipped in Hong Kong following a disappointing set of annual results. HSBC missed on both the top and bottom line as profits came in more than $1bn short and revenues were also c$1bn short despite rising 5% year-on-year. Pre-tax profits came in at $19.9bn versus $21.3bn expected as the market came off in the final quarter. Nevertheless profits jumped 16% from 2017 levels and the bank is still producing cash.

Big numbers to consider –   

  • Jaws were negative at -1.2% and this is a worry if you are looking at how the shares might perform over the medium term. 
  • CET1 ratio down to 14% from 14.5% a year before, against the trend we have seen but still a healthy number. 
  • Return on average tangible equity rose to 8.6% from 6.8%, which is encouraging but doubts remain around the 10% target.

Clearly HSBC’s focus on China and Asia is a double-edged sword. There are still huge returns and opportunity in these markets, but the bank’s exposure to this region means the recent slowdown in China in particular, as well as fears about what the trade landscape will look like going forward, can bite.

BHP – H1 missed forecasts, with revenues flat at $21.59bn and EBITDA -3%, but management sees a stronger H2. Supply disruptions hit BHP hard in the first half, with management having warned in Jan of a $600m hit to earnings as a result of problems at copper and iron ore sites. Improved iron ore prices because of the Vale disaster suggest a better second half of the year is coming. Risks remain from a slowdown in China.

Greggs – on a roll, of course.

The vegan sausage roll is proving to be a marketing masterstroke. Total sales were up 14.1% in the first seven weeks of the year, with LFL sales up 9.6%. Management has called the performance ‘exceptionally strong’ and this means full year underlying profits will be ahead of expectations. There is such a thing now as Veganuary and Greggs tapped into this trend with precision. More importantly the core offering remains strong and the focus on delivering value is still there, meaning consumers are continuing to head to Greggs. This could be even more important should food prices rise after Brexit.

In currencies, the dollar has firmed, with DXY back to 96.70 having sunk to 96.50. A recovery above 87 again depends on the twin factors of the FOMC minutes and a slew of EZ PMI data later this week. EURUSD has eased back off the 1.13 handle having failed the test around 1.1340. Support on the round number 1.13 level and then at 1.1290 before the lows at 1.1240.

Sterling was unmoved by the political drama for once, and remains supported at 1.29 for the time being. All quiet on the Brexit front for now as the Independent Group take the headlines away from the government’s floundering – a welcome distraction for some but this won’t last. The pound still looks overly sanguine on the risks ahead. On tap this morning is the UK wage data at 09:30.

Bitcoin ramped yesterday and is showing signs of recovery. Futures were last changing hands at 3,887.50, marking a 9% recovery in the last week, but there does seem to have been a rejection of anything close to $4,000. This is a notable resistance area now, therefore a break on the upside would be meaningful.”


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