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

Morning Note

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

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

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

PMIs underline the fragility of the recovery

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

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

The UK is heading for a second lockdown-lite

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

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

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

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

Tesla stock tumbles after Battery Day reveals fall flat

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

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

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

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

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

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

Cable softens, BoE Baily fails to quell negative rate fears

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

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

Chart: GBPUSD downside exposed

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

Chart: Dollar continues breakout

 

Chart: Gold tests 50% retracement

Chart: Silver breaks August lows

Stocks softer as UK mulls second lockdown

Morning Note

Boris Johnson says a national lockdown would be disastrous, but his scientific advisers are proposing a two-week lock-up in October. A new risk-averse religion with devotees kneeling to the great NHS deity has been born.

The question is whether the government decides to ‘follow the science’ or not. Cases are certainly up, but the number of tests being carried out daily is exponentially higher than it was in March and April. The worry, of course, is that there is a lag of a couple of weeks and the rise in cases we have seen translates into a spike in hospital admissions in a fortnight.

British shoppers are a robust lot. UK retail sales rose 0.8% and are now 4% ahead of February’s pre-pandemic levels. When you can’t do things like go on holiday you can buy stuff, like DIY materials.

Home improvement spending drove sales of household goods to rise by 9.9%. We will see just how this translates into companies when Kingfisher reports half-year results next week.

Consumer spending is a big driver of the economy, but unfortunately a V-shaped recovery in retail sales is only part of the picture and we are yet to see what happens as the furlough scheme ends and real permanent unemployment rises.

Equity markets fell, with chatter about a vaccine more conservative and hopes of any delivery in volume really focused on next year and not by the end of October, despite what Donald Trump says. What we might have by the end of October is some really compelling results from clinical trials, which might be enough for markets.

Donald Trump is pressing House Republicans to up their offer for another round of stimulus.

European stocks were broadly lower on Friday, with the FTSE 100 again looking around the 6,000 level. The S&P 500 down almost one per cent and again testing its 50-day line. The Nasdaq dropped over 1% to close under its 50-day moving average.

Snowflake fell, with the stock declining 10% after the frenzied first day of trade led to some profit-taking. Tesla was down 4% ahead, but remains up this week ahead of the Battery Day event next Tuesday.

Jobless claims in the US improved slightly, the picture remains troubled and one of a slower recovery. Initial claims fell marginally to 860,000, but this is still very high. Unemployment remains high at 8.6%, albeit this was a drop from 9.3% the previous week.

The total number of people claiming benefits in all programs for the week ending August 29 was 29,768,326, an increase of 98,456 from the previous week.

Bank of England edges towards further easing, ponders negative rates

Yesterday, the Bank of England kept rates on hold at 0.1% and the stock of asset purchases at £745bn, but it looks like on the cusp of delivering further accommodation. The Bank ‘stands ready’ to do more, it said, adding that will not tighten monetary policy until there is ‘clear evidence’ of achieving its 2% inflation target in a sustainable way.

With the current QE ammo due to run out by the end of the year, the Bank looks likely to expand the asset purchase programme by around £100bn in November. There were also overt references to the Bank actively considering negative rates, which hit sterling and sank gilt yields and saw money markets pricing in negative rates this year.

Cable recovered some ground after the BoE-inspired drop as the dollar reversed course, with GBPUSD rising back to its 50-day SMA at 1.30. DXY hit resistance at the 50-day and the longer-term downtrend reasserted itself, although for now the dollar remains in a non-trending sideways pattern. We await to see whether this is the bottom or a pause (bear flag) before the next leg lower.

Oil prices climbed again after the OPEC+ meeting revealed Saudi Arabia’s determination to keep the alliance together and conforming with the production cuts. WTI (Oct) rose above $41, the highest in two weeks.

There were words of warning for traders from Prince Abdulaziz bin Salman, the Saudi energy minister, who said anyone gambling on the market would be ‘ouching like hell’, in reference to a question over whether OPEC+ would taper cuts in December.

OPEC+ won’t say whether it will take further action to boost prices, but as mentioned yesterday, this will depend on the price, which largely will be a factor of sentiment based around demand.

Stocks, shopping and borrowing all rise

Morning Note

Stocks are firmer on Friday though major indices continue to show indecision as they rotate around the 50-60% retracement of the recent pullback through the second week of June. Economic data remains challenging and in the US at least there are fears about rising case numbers.

US jobless claims were disappointingly high, missing expectations for both initial and continuing claims. Following the surprisingly good nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m.

The slowing in the rate of change is a concern – hiring is not really outpacing firing at a fast-enough pace to be confident of a decent recovery. You would prefer to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.

US Covid-19 cases climb, UK retail sales jump in May

Worries about the spread of the disease persist, though second wave fears are not exerting too much pressure as investors start to get used to rising case numbers – remember it’s not cases that count, it’s the lockdown and people’s fear of going out that hurts the economy and corporate earnings. California and Florida both registered their biggest one-day rise in cases. As previously stated, I don’t believe there is the will to enforce blanket lockdowns again.

UK retail sales rose 12% in May, bouncing back from the 18% decline in April as we rushed to DIY stores but are still 13% down on February levels before the pandemic struck these shores.  Australia also posted a strong bounce in retail sales of more than 16%.

Will US quadruple witching boost volatility for range bound stocks?

Stocks were broadly weaker yesterday in Europe and the US. Shares across Europe have opened higher on Friday and remain set to end the week up. As per yesterday’s note, the major indices remain in consolidation mode around the middle of the range from the Jun 8/9th peaks to the Jun 15th lows. The S&P 500 finished at 3115, on the 61.8% retracement of the move.

Trading around the 6240 level this morning the FTSE 100 is similarly placed but also flirting with the 50% retracement of the Jan-Mar drawdown. Remember it’s quadruple witching in US when options and futures on indices and equities expire, so there can be a lot more volume and volatility.

UK public debt is now higher than GDP, official data this morning shows. That’s not happened since the 1960s as the nation recovered from the second world war and highlights the damage being wrought on the public finances by the pandemic response. Picking up from the Bank of England yesterday, which increased QE by £100bn, the amount of issuance may require additional asset purchases from the central bank.

Sterling bears eye 1.22 in the wake of BoE decision

Sterling broke to almost three-week lows yesterday, with GBPUSD testing the 1.24 round number support in the wake of the BoE decision. This morning the 50-day simple moving average at 1.2430 is acting as support but having already broken down through the key support levels the path to 1.22 is open again. The euro was also making fresh lows for June, with the 1.12 round number holding for the time being after a breach of the 1.1230 area at the 23.6% of the 2014-2017 top-to-bottom move.

OPEC compliance promises lift oil

Oil is higher, with WTI (Aug) progressing back towards the top of the recent consolidation range close to the $40 level, which may act as an important psychological level. Iraq and Kazakhstan have set out how they will not only comply with OPEC cuts but also compensate for overproduction in May. Other ‘underperforming participants’ have until Jun 22nd to outline how they will compensate for overproduction following Thursday’s Joint Ministerial Monitoring Committee (JMMC). OPEC conformity stood at 87% in May and the JMMC did not recommend extending the maximum level of cuts into August.

Hopes that non-compliant nations will make up for cuts helped raise sentiment around crude and sent Brent into backwardation for the first time since the beginning of March, with August now trading a few cents above September and October contracts.

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