Stocks steady after Q2 boom, gold breaks higher, economic data uncertain

Morning Note

The S&P rallied 1.5% to finish the quarter up 20%, its best quarter since 1998 and keeping its YTD losses at –4%. The Dow Jones industrial average closed up 200pts as it continued its bounce off the 50-day simple moving average to notch its best quarter since 1987. Things were a little more mixed in Europe but again we saw the major bourses finish their best quarter in years.

Stocks rallied so sharply in Q2 for a number of reasons – chiefly stimulus, both fiscal and monetary, as well as the reopening of economies and better virus rates in most countries, though this trend has somewhat come undone in the US in the last couple of weeks. The aggressive pullback in February and March also left stocks rather oversold on a short-term basis, when considering the stimulus and relative yields to government bonds.

Meanwhile hopes of a vaccine are central if we are to see 2021 look more like 2019 than this year. For gains to be sustained in Q3 stocks require the continued support of stimulus, which remains on tap, as well as a better outlook on the virus spread and for the hard economic data to show a strong bounce from Q2, both of which could be more tricky.

Boeing declined by more than 5% as Norwegian Air cancelled an order for almost one hundred jets and competitor Airbus announced it would cut its workforce by 15,000, whilst Tesla shot 7% higher to a new record that takes its market capitalisation to $200bn for the first time. Shares in Facebook, which has come under fire lately by showboating big brands who are pulling advertising temporarily, rallied 3%.

Protests in Hong Kong signal geopolitical stress – Western powers have expressed dismay at China’s decision to pass the new national security law. The first arrests under the new law have been made – only a few hours after its imposition. The potential for this to create further unrest in Hong Kong and stoke US-China tensions will need to be monitored.

European equities traded cautiously on the first day of July and the third quarter after a mixed bag from Asia as Tokyo fell and Chinese bourses rallied. Australia was also higher as Hong Kong was shut for a holiday. The major indices remain in a broad zone between the 38.2% and 61.8% retracement of the drawdown in the second week of June.

Despite the sharp rise in cases in the US, which Dr Fauci says is out of control, Americans’ confidence is returning. The Conference Board’s index jumped by 12.2 points to 98.1, the best one-month rise in nine years. Chinese data was a little better than expected as the Caixin manufacturing PMI hit 51.2, but the Japanese Tankan survey disappointed at –34. Data points will remain mixed and noisy as we exit the crisis.

PMIs, which are diffusion indices, are particularly challenged by the speed and magnitude of the economic contraction. I would prefer to look at the hard data as it comes out over the third quarter. Economically things have rarely been this uncertain – we could be running way hotter than we think, but equally the long-term consequences could be deeper and longer-lasting than the V-shaped recovery camp would have it.

Looking ahead to today’s session, the ADP nonfarm employment report will provide a taster for Thursday’s BLS nonfarms report, while we will also be looking to the FOMC meeting minutes later for clues as to what else the Fed might be up to – there is unlikely to be anything other than ‘do whatever it takes’ mode on offer.

Gold prices rallied to fresh 8-year highs near $1790 on a technical breakout from the bullish flag formation. Real US rates remain at 7-year lows, while benchmark 3yr, 5yr and 7yr Treasury yields notched record low closes. As expressed in recent notes, gold looks to be a long-term winner from the pandemic as social and economic uncertainty favours the safe haven, whilst the vast increase in M1 and M2 money means there is a high chance – though not a certainty – of an inflation surge. Fading momentum on the CCI with a bearish divergence to the price action suggests a near-term pullback may be required – perhaps at the $1800 round number resistance – before the next significant leg higher can be made.

The rally on Wall Street upset the emerging downtrend and reasserted the range trade for the time being, with the S&P 500 finishing at 3100 in the 50% area of the June pullback.

In FX, cable bounced sharply off the 1.2250 support on the second look but remains constrained by the upper end of the channel.

Week Ahead: BoE, BoJ meetings; data to crush quick Covid recovery hopes

Week Ahead

Last week the Federal Open Market Committee effectively killed hopes that the global economy could rebound quickly from the Covid-19 pandemic. Much of the data due this week is expected to deteriorate further. Any bright spots could be overshadowed by growing fears we may be facing a second wave of infections.

The Bank of England and Bank of Japan both hold policy meetings this week. Expect more signals that stimulus is here to stay for a long time.

Make sure you’re prepared for the coming week – read our full breakdown of the key events and data that markets will be watching.

China industrial production to accelerate, retail sales decline to slow

China is still the bellwether for the global recovery, with markets watching the data closely to see how quickly an economy can rebound from lockdown. Industrial production returned to growth on an annualised basis in April after three months of contraction. Forecasts for May suggest growth accelerated to 5%.

Retail sales are expected to continue to contract, although the rate of decline has moderated sharply since the -20.5% drops recorded in January and February. April saw a drop of -7.5% and the decline is expected to have slowed to -2% in May.

Bank of Japan to set out timeline for low rates

Last week the US FOMC stated that interest rates would remain near zero until 2022. This could prompt a similar move by the Bank of Japan, which will look to curb yen strength on the flight to safety caused by the FOMC’s gloomy economic predictions. The BOJ may therefore decide to give its own timeframe for keeping rates at their current, or lower, levels.

Fading hopes of V-shaped recovery to drag ZEW sentiment lower

German and Eurozone economic sentiment has climbed since April, but forecasts suggest the latest readings could see investor confidence pull back again. Assessment of the current conditions is in dire territory anyway, but the overall numbers were pulled up by improving expectations for a swift recovery – something that is becoming increasingly unlikely.

UK, Canada inflation – price growth to remain under pressure

Lockdowns and collapsing oil prices have exerted heavy pressure on consumer prices. Inflation data this week from the UK and Canada is expected to show further weakness. The UK’s core inflation rate was just 0.1% in April. Forecasts for Canada’s data expect a drop of -0.2% on the month, after the -0.7% recorded in May.

Retails sales decline to worsen for UK, Canada – US looking brighter?

Retail sales figures for the UK and Canada this week are expected to post more huge drops, with consumers still restrained by lockdown measures and business closures. Those businesses that are able to reopen have seen trade affected by the strict social distancing measures.

The UK, Canada, and the US all saw retail sales drop by the most on record in April. In the case of the UK and Canada things are expected to have gotten even worse in May.

However, in the case of the US data, recent figures from Mastercard suggest that the decline in retail sales may have softened notably in May. Sales fell -16.4% in April, but Mastercard says it saw a much smaller decline in transaction volumes last month.

New Zealand growth data: calm before the storm

New Zealand prime minister Jacinda Ardern was able to declare last week that Covid-19 had been eradicated in the country and that things could go back to normal.

However, the economic hit caused by the government’s actions to combat the virus will be severe. The OECD predicts a -8.9% drop in GDP this year, with the economy not returning to pre-Covid levels until the end of 2021.

This week’s GDP data is for the first quarter, and a drop of just -0.4% is expected. But as we already know, it’s the second quarter reading that really matters.

Australia jobless rate to keep climbing

Data this week is expected to show another 200,000 jobs were lost last month, on top of the nearly 600,000 in April. The unemployment rate jumped a whole percentage point to 6.2% in April, although this was well below market expectations of a surge to 8.3%.

The jobless rate is predicted to climb to 6.9%, although the true rate is likely much higher, considering how many Australians are currently relying on the government to pay their wages.

Bank of England to expand QE

The Bank of England is expected to expand its quantitative easing programme this week, with estimates for the increase ranging from £70 billion to £200 billion.

Negative rates are sure to get a mention, but policymakers are approaching the issue cautiously. While governor Andrew Bailey has recently softened his opposition to such a tool, he has only gone as far as saying that it would be “foolish” to rule them out. BoE chief economist Andy Haldane said at the end of May that, while the MPC was exploring the idea of negative rates, it was very much in the review phase and a decision on the matter was not close.

Kroger earnings

Kroger is expected to report earnings growth of 23.6% year-on-year when it releases quarterly earnings on June 18th. EPS is predicted at $0.89, while net sales are expected to have increased 7.7% year-on-year to $40.12 billion.

Kroger stock has weathered the Covid-19 pandemic well, having swiftly rebounded from the March sell-off, and is now trading up around 12% for the year. Our Analyst Recommendations tool shows it has a consensus “Buy” rating. Hedge funds bought 20 million shares in the last quarter.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
09.30 UTC 17-June FXTrademark Course – Moving the Odds
11.00 UTC 17-June Introduction to Currency Trading: Is it For Me?
11.30 UTC 18-June Trading with the Killswitch Approach
10.00 UTC 19-June Supply & Demand – Approach to Trading

 

Key Events this Week

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

02.00 UTC 15/06/2020 China Industrial Production / Retail Sales
01.30 UTC 16/06/2020 RBA Monetary Policy Meeting Minutes
03.00 UTC 16/06/2020 Bank of Japan Rate Decision
09.00 UTC 16/06/2020 German/EZ ZEW Economic Sentiment
12.30 UTC 16/06/2020 US Retail Sales
06.00 UTC 17/06/2020 UK Inflation Rate
12.30 UTC 17/06/2020 Canada Inflation Rate
14.30 UTC 17/06/2020 US EIA Crude Oil Inventories
12.45 UTC 17/06/2020 New Zealand Quarterly GDP
01.30 UTC 18/06/2020 Australia Employment Change / Unemployment Rate
Pre-Market 18/06/2020 Kroger (Q1) – Pre-Market
11.00 UTC 18/06/2020 Bank of England Rate Decision
12.30 UTC 18/06/2020 US Weekly Jobless Claims
14.30 UTC 18/06/2020 US EIA Natural Gas Storage
06.00 UTC 19/06/2020 UK Retail Sales
12.30 UTC 19/06/2020 Canada Retail Sales

Gold breaks out, European equities rally

Morning Note

Equities and oil are higher as investors cautiously welcome signs lockdowns are ending but markets remain in this tug-of-war pattern where we simply don’t know whether the damage will be a lot worse than feared or the recovery will be much swifter. Indices remain in broad ranges are still seeking direction.

On Sunday, Robert Chote of the UK budget watchdog warned a V-shaped recovery was unlikely. Fed chair Jerome Powell cautioned recovery in the US would likely be slow, and it could take a vaccine to see activity rebound to 2019 levels. This week in a testimony to Congress he will likely stress the ‘whatever it takes’ mantra and push for more on the fiscal side.

Absent buying equities and negative rates, the Fed has had its six. What’s going to be interesting is whether the policy response of different governments leads to different speed recoveries. This is most dangerous moment for people and the economy – the logic of lockdown made sense to prevent health system overload, but we are not anywhere near that now. We need to get moving a lot quicker than we are.

The Atlanta Fed forecasts GDP will contract 42.8% in the second quarter. Overnight data showed Japan has entered a recession already. The Bank of England’s assumptions for a V-shape recovery look rather naïve.

Gold has emerged as a clear winner from the economic turmoil created by the pandemic. Prices were slotted into a consolidation pattern since mid-April and a tentative upside breach was attempted on Friday, but the daily close was below the $1747 level that marked the multi-year high struck last month. There has been more energy about gold bulls today and prices have driven up to above $1760, the highest since Oct 2012. The peak in that month of $1795 is the next target for bulls.

As noted in Friday’s commodities note, although gold was sold off in February and the first half of March, this was prompted by a scramble for cash at all costs due in part to a dollar liquidity squeeze that has since eased considerably. Gold has made substantial gains in tandem with risk assets since the March lows.

Whilst sentiment and relative dollar values exert short-term pressure, the combination of negative real yields and the prospect of an inflation glut due to massively increased money supply is sending prices higher. Whilst the Covid-19 outbreak is at first a deflationary shock to the economy, the aftermath of this crisis could be profoundly inflationary.

Gold remains the best hedge against inflation which may be about to return, even if deflationary pressures are more pronounced right now.

Equities finished Friday on a more solid footing but were still lower for the week. On Monday, European equities charged out of the gate. Basic resources, oil & gas and autos led the way. The FTSE 100 rose over 2% reclaimed 5900 and was just about flat with where it opened last Monday. The DAX rallied 2% in early trade after declining 4% last week.

Global indices are still in their recent ranges, albeit moving back towards the top end. Today’s early bounce only wipes out last week’s losses. At 5940 the FTSE 100 is about 50% back to the Apr 30th peak.

Regulators across Italy, France, Spain and others have decided to end the ban on short selling, which was introduced in March to stem some of the bloodletting. This move signals greater confidence among regulators that the bottom is in for equities.

WTI oil (Jun) jumped $1.70 to above $31 and Brent futures also traded higher amid signs the market is rebalancing a little faster than had been expected. Easing of lockdown measures has been positive, whilst supply has come off due to shut-ins. OPEC has been talking up making deeper cuts for longer. The worry is that this rally simply prompts producers to carry on pumping.

WTI for August was only a little higher than the June contract as the contango spread tightens. Maybe things are not so bad as we thought in oil, but the issue of storage capacity remains as long as supply exceeds demand.

In FX, GBPUSD crashed through key support on Friday and closed at the lows of the day. The pair opened lower today but has pared losses. The tenor of Brexit talks is not supportive for sterling right now, after talks last week ended with no progress. Time is running out fast and we become less sure that either side has the political will and capital to expend on this when dealing with the economic catastrophe of the pandemic.

Chatter around the Bank of England looking at negative rates is another weight on sterling right now. It’s a huge moment as we deal with a massive increase in government debt, run huge twin deficits and exit the EU whilst in the midst of the worst global recession since the 1930s. What then happens to the pound if rates go negative?

After losing the 1.2160 support GBPUSD has now opened up a potential retreat to 1.18. Next Fib support at 1.2034.

Midday wrap: Europe higher as risk appetite returns, DAX near ATHs

Equities
Forex
Indices

European markets enjoyed solid gains Thursday as risk appetite returned. But the rally hardly betrays a wanton desire for equities because a) we’re already at or near record highs and b) the selloff had not been especially deep despite US-Iran conflict fears seeing havens enjoy firm bid. Even a shaky ceasefire is enough right now to support the bulls. Stronger-than-expected German industrial production figures (+1.1% vs -1.7% prev and 0.8% est) are helping sentiment, particularly in Frankfurt.

The DAX has led the charge with a 1.25% push higher to 13,485, having earlier touched a high of 13,522. With investors apparently keen to load up on risk with US-Iran tensions easing and a US-China trade deal baked in, we may well see the drive to January 2018’s all-time high just shy of 13,600. Geopolitical risks remain of course with the situation in the Middle East still fluid, but you get the sense the bulls are keen to push this over the line. 

The FTSE 100 added 0.5% to break 7600 with resistance seen at 7675, the high posted Dec 27th.  A softer pound is compensating for the weaker oil price.

Elsewhere US markets are firmer again with the Dow shaping up for a triple-digit gain on the open.

Oil has held just short of $60 with no further losses while gold is also holding the line around $1545. 

In FX, the pound took a drubbing as the market decided Bank of England governor Mark Carney’s comments were more dovish than before. GBPUSD slipped the 1.31 handle to test support on the 50-day moving average around 1.3010. I don’t see much in what he said as particularly more dovish than in the past. Commentary around the likelihood of the UK agreeing a trade deal with the EU before the end of 2020 is also weighing on the pound today. 

Meanwhile, as flagged in the morning note, the bullish engulfing daily candle for USDJPY is resulting in further gains today with the pair moving to 109.50 and momentum in favour of USD across the board. Having cleared the 200-day and other MAs bulls are looking to break the trend line drawn from the falling highs since the swing high of Oct 2018. Big 61% Fib level to cross at 109.60 where we have seen rallies hit a wall several times lately. This level will offer a decent amount of resistance as a result. 

US pre-mkts 

Cowen has come out with a bunch of price target upgrades 

Facebook raised PT to $245 from $240 

Alphabet raised PT to $1575 from $1525 

Twitter raised PT to $34 from $32 

Elsewhere AMD shares are up c2.5% pre-market after Mizuho raised the stock to buy. 

Benchmark has initiated Lyft with a sell rating , price target of $35, which is $10 below yesterday’s closing price. 

Boeing shares are up a touch pre-mkt despite Berenberg cutting to hold. After enjoying a thumping 5% jump yesterday, Tesla shares are a touch softer pre-market after being cut to neutral at Baird, a long-time bull which seems to think the recent rally has run its course. They said: “we would not short the stock and remain positively biased over the long run.” See yesterday’s Equity Strategy: US earnings Q4 preview: Two major stocks to watchfor more on Tesla.

European equities rally as euro, pound crack lower

Equities
Forex
IPO
Morning Note

European markets were on the front foot on Friday morning despite a weak cue from the US and Asia as currency weakness and expectations for yet lower interest rates fuelled risk appetite. Asian shares plumbed a three-week low but European bourses are trading up again. The FTSE 100 continued the good work from Thursday to hit 7400 and make a clear break out of the recent range. With the move north a decent case to make for the 7450 area, the 61.8% retracement of the August retreat.

The S&P 500 declined quarter a percent to 2977.62 against a back drop of political uncertainty in Washington. Markets won’t like these impeachment hearings but ultimately the risk of Mr Trump being ousted by Congress appears very slim indeed.

Another stinker of an IPO – Peloton shares priced at $29 but were down $2 at $27 on the first tick and ended 11.2% lower at $25.76. First day nerves maybe but this stock has fad written all over it. Think GoPro.

On the matter of dodgy prospectuses and dubious IPOs… S&P has downgraded WeWork debt another notch, and slapped a negative outlook on for good measure.

FX – the euro now looks to be on the precipice, on the verge of breaking having made fresh two-year lows on EURUSD. Whilst the 1.09 level may still hold, the banging on the Sep 3/12 lows at 1.09250 has produced a result with overnight tests at 1.09050. We’ve seen a slight bounce early doors in Europe but the door is ajar for bears. The Euro is under pressure as ECB chief economist Lane said there is room for more cuts and said the September measures were ‘not such a big package’. How much more can the ECB feasibly do?

Sterling is tracking lower against the broader moves in favour of USD. There is a chance as we approach crunch time on Brexit that GBPUSD pushes back to the lower end of the recent range, the multi-year lows around 1.19. Bulls have a fairly high bar to clear at 1.25. At time of publication, the pound had cracked below yesterday’s low at 1.23, opening up a return to 1.2280 and then 1.2230. The short-covering rally is over – time for political risk to dominate the price action.

Bank of England rate setter Saunders made pretty dovish comments, saying it’s quite plausible the next move is a cut. In making the case for a cut now it conforms to the belief in many in the market that the Bank is barking up the wrong tree with its slight tightening bias in its forward guidance. The comments from Saunders are clearly an added weight on the pound.

On Brexit – there’s a lot of noise of course and all the chatter is about MPs’ use of language and how could Boris possibly still take the UK out of the EU by October 31st without a deal. The fact is he can and he intends to. There is some serious risk that GBP declines from here into the middle of October on the uncertainty and heightened risk of no deal. This would then be the make or break moment – extension agreed and we easily pop back to 1.25, no deal and it’s down to 1.15 or even 1.10.

Data to watch today – PCE numbers at 13:30 (BST). If the core CPI numbers are anything to go by, the Fed’s preferred measure of inflation may point to greater price pressures than the Fed has really allowed for. Core durable goods also on tap, expected -1.1%. Plenty of central bank chatter too –de Guindos and Weidmann from the ECB follow Lane and then Quarles and Harker from the Fed. Should keep us busy this Friday.

Oil is in danger of entirely fading the gap back to $54.85, the pre-attack close, having made a fresh low yesterday at $55.40. There’s still a modicum of geopolitical risk premium in there though, but bearish fundamentals are reasserting themselves over the bullish geopolitics. WTI was at $56.10, ready to retest recent lows at $55.40. Bulls require a rally to $57.0 to mark a gear change. However we are now touching the rising trend support line drawn off the August low at $50, so could be finding some degree of support.

Gold is pretty range-bound now, but we are seeing it test the $1500 level which could call for retreat to near $1482, the bottom of the recent range and key support.

M&S out of FTSE 100 for the first time

Equities
Indices

It’s bad news for Marks & Spencer as the retailer is dropped from the FTSE 100.

It is the first time the troubled food and fashion company has not been a FTSE 100 member since the index was launched in 1984.

The relegation is the latest in a long line of miserable milestones marking the decline of the once-great British retailer.

M&S has had a tough year, with shares down 40% since the start of the year. Based on the closing price of stock on Tuesday, its market value fell below the threshold for inclusion in the index. The announcement was made on Wednesday and the move will be implemented on September 23rd.

This won’t have come has a surprise for traders, as relegation has been on the cards for more than a year as the share price has steadily declined on poor sales, slow uptake of online shopping and recently struggling food business.

The retailer has been one of the losers in the High Street slowdown, but has compounded these issues by dropping the ball with womenswear, with complaints of poor value and enormous competition from fast fashion brands and online retailers.

Its food offering used to be a highlight for the company, but that too has struggled in recent years. Investors hoped that a partnership with Ocado may help the retailer turn things around, but some argue M&S overpaid and is unlikely to realise a return on the deal.

M&S wasn’t the only company relegated or promoted in the FTSE Quarterly review.

FTSE 100 Movers

Micro Focus and Direct Line will also be dropping out of the FTSE 100, and entering the FTSE 250. They will be replaced by precious metals mining company Polymetal, drug-maker Hikma and aerospace and defence group Meggitt.

All three companies have already made appearances in the FTSE 100.

FTSE 250 Movers

Perhaps unsurprisingly, there is more movement in the FTSE 250 review. Amigo Holdings, Funding Circle Holdings and Intu Properties have been demoted from the FTSE 250, alongside Metro Bank. Metro Bank’s shares fell 90 per cent over the last year after an accounting error revealed at the start of the year showed some of its assets were classed as riskier than they should have been.

Fund Manager Neil Woodford suffered another blow as his Woodford Patient Capital Trust was dropped from the index; shares had fallen 40 per cent since the start of the year due to investor fears of illiquid assets. Earlier this year, the Trust froze assets to prevent investors withdrawing funds.

Fashion retailer Ted Baker was also a casualty. The company was hit by a huge scandal in March this year, causing its founder to resign as Chief Executive, as well as facing two profit warnings.

On the flip side, Trainline, which only floated earlier this year, was promoted to the FTSE 250. Other promotions to the index were Airtel Africa, Finablr, Foresight Solar Fund, Sirius Real Estate and Watches of Switzerland Group.

US, China jawbone on trade, but markets aren’t taking the bait

Indices

In a remarkable show of restraint, markets have remained in the red despite positive noises on the prospect of reopening trade negotiations between Washington and Beijing.

US and Chinese officials are trying to sound positive on the odds their nations can reach an agreement on trade. It’s just the latest in a cycle of: sound positive > negotiate terms > back away from a deal > raise tariffs.

But this time around it seems markets are becoming wary of the rhetoric. Today, major indices are mostly in the red. Even the cautious optimism of yesterday’s early rise was quickly wiped out later in the New York session as traders thought twice about bidding up the major indices.

It could partly be exhaustion. The past month has seen the Dow gain or lose over 800 points in a single session on more than one occasion. 1,000 point swings are unusual, but not rare for the Hang Seng these days. Gold has seen movements in the region of 2%, while volatility for oil has produced swings of 5% in both directions.

The mystery phone call

On Monday, China’s top negotiator tried to calm fears ignited by Friday’s new tariff announcements. Vice Premier Liu He stated,

“We believe the trade war escalation is bad for China, bad for the United States and bad for the interest of the people in the world. We are willing to use a calm attitude to solve problems by negotiations and cooperation.”

Trump later claimed that “China called last night”, and strengthened the message by telling reporters at the G7 summit that “This is a very positive development for the world”. He later claimed “I think we’re going to make a deal”.

Asian markets trimmed losses and US and European stocks edged higher. But traders weren’t convinced.

Trump’s claim that there had been a phone conversation between officials from the US and China kept markets on the back foot. China’s Commerce Ministry declined to comment when asked by Reuters for confirmation that a call had taken place. While US Treasury Secretary Steven Mnuchin said the two sides had been in contact, editor of China’s state newspaper the Global Times, Hu Xijin, claimed that negotiators haven’t talked recently.

After being burned before, markets need something more concrete

It’s not that hard for an official to say that a trade war is bad and they don’t want one. Without confirmation of the key phone call, that’s all markets have to go on.

The major indices today are largely in the red, with the DAX heading towards a 1% loss and US futures pointing to a lower open. Traders clearly aren’t falling for the jawboning – if Trump or Beijing wants to calm market fears they’re going to have to offer up something a lot more solid.

Stocks firmer, China slows, earnings in focus

Forex
Indices
Morning Note

Bad news = good news. Relatively lacklustre growth in China has the market baying for more stimulus. To be fair, despite the headline Q2 GDP number slipping to a 30-year low at 6.2%, there were some signs of encouragement. Industrial production rose 6.3% in June, an improvement on the 5% growth in May. Retail sales also beat forecasts so. Most of the recent softness seems trade-related, with exports having dipped 1.3%.

Asia has broadly ticked higher despite, or indeed because of, the softer China GDP numbers. Futures show European markets are higher after a fairly lacklustre weak. Indeed European equity markets moved lower last week just as the US was punching record highs. Time for Draghi and co to turn the taps on. 

Indices march higher

Wall Street continues to roar higher, with the S&P 500 closing up half a percent on the day at 3,013.77. Oil and gold fairly steady.

Bitcoin is weaker, slipping to support around $10k having given up the $11,600 level. FX steady – GBPUSD holding at 1.2570, with EURUSD at 1.1270. Volatility in FX has collapsed with central banks turning the liquidity taps back on.

Earnings season kicks off

Earnings season is coming with fairly low expectations. Two weeks prior to earnings season 82% of companies that had revised earnings estimates going into the reporting period had lowered them. Lowballing by Wall Street ahead of earnings season is normal, but the scale of the downward revisions is noteworthy. This happened ahead of the Q3 2018 earnings, just before we saw stocks slump into a bear market, albeit one that has proved very temporary.   

Recession – We’re likely to see an earnings recession. Q1 earnings declined 0.29%, therefore making this likely to become a full-blown earnings recession, that is, back-to-back year-on-year declines in EPS. In 2016, the last time this happened, we saw earnings decline for 4 straight quarters. S&P 500 companies are expected to report a roughly 3% decline in EPS this quarter. 

Trade concerns – whilst we had a degree of détente at the G20, existing tariffs are still in place and no meaningful progress has been seen. There’s a growing acceptance that the US and China are in this for the long-haul. The US election cycle means we are unlikely to see a reason for Trump to do any deal until 2020. Whilst for now the mood is upbeat, in the event of no deal, the lack of progress through the rest of the year would likely begin to drag on sentiment and affect equity markets. If corporates see additional tariffs being imposed their EPS forecasts would need to be revised substantially lower. The impact of the US-China trade war on earnings is yet to be fully felt but we could hear from a number of large-caps voicing concerns. The extent to which CFOs highlight worry about trade on EPS forecasts will be of particular importance. Of course we are likely to see a lot of kitchen sinking with companies blaming trade for all manner of ills.  

Banks start the ball rolling this week. Big question over interest rates – rate cuts may well be coming in the US and this will have implications for banks. Net interest margin would likely fall although the easier credit conditions would offset some of the negative effects. Citigroup unofficially kicks off the earnings season on Wall Street today. How much will banks be affected by Fed rate cuts? In investment banking, is there anything from the Deutsche carcass worth stripping? 

Equities 

Sports Direct – the soap opera continues – delays annual results due to House of Fraser uncertainty. The big question was what impact House of Fraser and various other acquisitions of dubious value would have on Sports Direct results. A material impact, one can only assume. HoF must be losing money hand over fist.  Looking to the earnings, top line growth is expected to rise but profits are seen weaker as the cost of acquisitions weighs. Since reporting an 27% decline in underlying profits in the first half we’ve not heard a peep from Sports Direct on performance. The delay in delivering the annual results does not sit well with investors, who must be nervous about what it means. It seems likely it’s been a tough ride in the core Sports Direct retail division, whilst acquisitions have added nothing but increased costs.

NFP beat dampens rate cut bets, but not by enough

Indices

This afternoon’s US non-farm payrolls report was even more closely watched than usual. It is common for traders to get twitchy ahead of arguably the most important monthly data release on the economic calendar, but this was different.

Markets are betting that the US Federal Reserve will cut interest rates when it meets again at the end of this month. Pricing suggests multiple 25 basis point cuts over the coming 12 months.

The Federal Open Market Committee hasn’t exactly been on the same page as the markets for some time, and the latest jobs numbers given strong ammunition with which to defend their hawkishness. Economists expected to see a 165,000 increase from today’s payrolls, after May’s dire reading of 75,000, but in fact the US economy added 224,000 jobs during June.

A slight tick higher in the participation rate saw the unemployment rate inch up to 3.7%, against expectations of no change at 3.6%.

Wage growth, key inflation predictor, slowed to 0.2% month-on-month, and 3.1% year-on-year. In both cases the readings were 10 basis points lower than analysts had expected.

Market reaction to non-farm payrolls

Stock futures tumbled, with the Dow quickly shedding 180 points and the S&P 500 dropping 0.8% following the announcement as markets cut bets on easier Fed policy. US ten-year treasury yields gained six basis points in the space of 10 minutes to trade back above 2%. EUR/USD fell 0.6%, breaking through three levels of support to hit 1.1222, while GBP/USD dropped 0.7% to test 1.2500.

The latest non-farm payrolls have highlighted the disconnect between market expectations for monetary policy and what the economy is signalling is needed. It’s true that growth is beginning to slow, and some data has revealed weakness in areas such as manufacturing, but so far the market is expecting a disproportionate response from US policymakers.

Markets expect three rate cuts between now and April 2020, although bets of four are not far behind. There are no expectations of interest rates remaining in the current 2.25-2.50% range – wise, considering the data and global macroeconomic conditions – while a handful of uber doves have gone as far as pricing in seven cuts by April 2020.

Those expectations are likely to cool in the wake of the latest NFP data, but the market is still convinced that the Fed is about to embark on a rapid cycle of loosening policy. It will take a lot more than one better-than-expected data print before we reach a realistic middleground.

Trading frenzy ahead on Russell rebalancing?

Equities

Expect a busy trading session thanks to the annual rebalancing of the FTSE Russell US indices. According to The Wall Street Journal, the first few seconds of trading on the day of the reconstitution last year saw around $100 billion in stock trades.

The US benchmarks have been updated to ensure the correct weighting, which means some stocks will be dropped and others added. These stocks can see a flurry of activity, with traders dumping the excluded stocks and snapping up the newest Russell constituents. However, fresh inclusions and exclusions are often easy to predict and telegraphed well in advance.

Fund managers will need to rebalance their portfolios – it is estimated that index funds tracking Russell benchmarks will need readjusting to the tune of $170 billion to keep themselves aligned with the reshuffled indices. $9 trillion is pegged to the US benchmarks in total.

The Russell recon has a bigger impact than other index reshuffles because it happens annually, compared to the quarterly rebalancing undertaken by other indices like the Dow, FTSE and DAX.

Rebalancing is a long process, and today marks the end. The conclusion of the Russell adjustments is often one of the highest volume trading days each year.

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