HSBC and BP shares rally, European equities struggle after capitulation

Morning Note

HSBC dividend hopes rekindled: Shares rallied 6% on upbeat noises from management that it intends to start paying dividends again despite profits falling by a third as lower interest rates bit.

In its Q3 statement today the bank said the board will consider whether to pay a “conservative” dividend for 2020.

It will depend on regulators – we noted yesterday that shares in UK banks were slow to respond to reports the Bank of England is talking to commercial banks about restarting divis. The prospect of dividends coming back will interest income investors again and with returns cut all over the place, anything that offers yield will be snapped up.

The bank reported profit before tax was down 36% to $3.1bn, mainly from lower revenue, which declined 11% to $11.9bn. Asia was the sole source of positive income as it reported profit before tax of $3.2bn in the third quarter, despite interest rate headwinds.

It underlines the fact HSBC’s exposure and reliance on Greater China has been a positive this year in the wake of the pandemic and the economic recovery in that region being swifter than in Europe/US.

Cuts to interest rates by central banks left net interest margin at 1.20%, which was down 36 basis points from Q3 2019. Expected credit losses and other credit impairment charges were down $100m to $785m thanks to a steadier outlook for the economy.

Loan losses for the full year are seen around the lower end of the $8bn-$13bn range. Whilst banks are now setting aside less for bad loans than they did at the height of the pandemic in the spring, it’s unclear whether fiscal support is only kicking this particular can down the road.

Management warned specifically about ongoing US-China trade tensions and the uncertainty over the UK withdrawal from the EU. They also warned that the low-interest rate environment continues to put pressure on net interest income and will exert further headwinds through the fourth quarter before they are seen stabilising in 2021.

Are things starting to stabilise at BP? Shares rallied 2% as the company swung back to a profit in the third quarter. Underlying replacement cost profit for the quarter rose to $86m, compared with a loss of $6.7 billion for the second quarter of 2020 and down 96% from $2.3 billion profit for the third quarter of 2019.

BP said the result benefitted from the absence of significant exploration write-offs and recovering oil and gas prices and demand. This was partly offset by a significantly lower oil trading result, the company said. The dividend was maintained at 5.25 cents.

Fundamentally it’s just really tough to make money with oil prices at these levels – BP’s breakeven is at $42 and Brent today trades at $41 with a negative outlook as demand remains depressed and global inventories build. Whilst oil prices have certainly stabilised since the worst period of volatility in the spring, they have stabilised at materially lower levels than the industry would like.

Weaker oil prices combined with the catalyst of the pandemic is accelerating the green drive away from reliance on hydrocarbons. The commitment to renewables will require further investment and this may require further divestments.

Management says they have agreed or completed transactions for almost half the $25bn target by 2025. Net debt at quarter-end was $40.4 billion, down $0.5 billion, with the company saying it is on course to reach its $35bn target. Gearing at 33% was above last year and higher than where Bernard Looney would really like it to be.

Stocks in Europe struggled this morning after US markets were down heavily in the previous session and there was a weak handover from Asian equities. Yesterday’s capitulation across equity markets may require a bit more of a washout before the bulls are happy to come in again – they may even decide to wait for the US election to be over first, although after an hour of trading on Tuesday we have seen the bourses steadily come back to the flatline.

Stimulus seems like a bust before the election after Pelosi and Mnuchin failed to reach agreement on a call on Monday and Mitch McConnell adjourned the Senate until Nov 9th.

Pre-election volatility would be expected but this is occurring just as we are seeing the average number of new daily cases of coronavirus in the US hitting a record high, with former FDA boss Dr Scott Gottlieb warning of an exponential spread of the virus. Strict lockdowns across Europe and the problem of getting fiscal support where it needs threatens to create a double-dip recession.

Election jitters, no progress on a stimulus package and surging case numbers culminated in an equity market capitulation yesterday.

The S&P 500 declined almost 2% and under the 50-day simple moving average at 3,408, though it rallied off the lows at 3,364 in the last hour to finish at 3,400. Among the volume leaders, Snap declined 4.4%, Apple was flat ahead of Thursday’s earnings and American Airlines dropped over 6% as travel stocks were among the worst performers. Cruise liners sank by 8-9%.

The situation in Europe was no better, though the FTSE 100 failed to put in a new low. The DAX capitulated with a decline of 3.7% sparked by SAP’s pessimistic outlook and the German market is trading at levels not seen since June.

Earnings today to watch out for 

27Oct   Microsoft Corp.   Q1 2021 Earnings  
27Oct   Pfizer Inc.   Q3 2020 Earnings  
27Oct   Merck Co.   Q3 2020 Earnings  
27Oct   Eli Lilly and Co.   Q3 2020 Earnings  
27Oct   3M Co.   Q3 2020 Earnings  
27Oct   AMD (Advanced Micro Devices) Inc.   Q3 2020 Earnings  
27Oct   Caterpillar Inc.   Q3 2020 Earnings  

Election Watch

Biden lead cut to 7.8pts nationally but holds at 4.1pts in battlegrounds. Trump trailed Clinton by 2.8pts in the key swing states at this stage in 2016.

Elsewhere, whilst equity markets are volatile, bonds haven’t moved much with US 10-year Treasury yields at 0.80% and 10-year TIPS at –0.91%. With little movement there, gold is finding itself hugging its 21-day SMA and stuck between its 50-day and 100-day moving averages.

FX markets remain relatively calm. GBPUSD was steady at 1.30 as Brexit talks continue in London and EURUSD was holding around 1.18 ahead of the ECB meeting this Thursday. US durable goods orders on tap today expected at +0.5%, with core reading seen at +0.3%.

Gold movement on 27.10.2020

Stocks slip despite vaccine positives, banks up, SAP weighs on DAX

Morning Note

With the US election just around the corner, equity markets may continue to track sideways as they await the outcome and remain on the hook for headlines around stimulus and the spread of the virus.

We can expect volatility but no clear trend until the election is out of the way. A Democrat clean sweep would unleash a massive deluge of stimulus, but tax reforms could see a wave of selling before Christmas in anticipation of beating a hike to capital gains tax.

Asian shares were flat to lower overnight. US futures down 1%.

The S&P rallied 0.34% on Friday to end the week at 3,465. European shares opened lower erasing Friday’s bump after another tough week.

SAP results weighed heavily on the DAX, which was down –2.5% in early trade, whilst the FTSE 100 was -0.5%.

WTI (DEC) slumped to $38.50 after Libya said it could raise output to 1m barrels a day within four weeks. Supply-side concerns are heaped on top of rising demand-side concerns as the winter approaches.

Not a huge amount of news flow this morning but it’s set to be a very busy week with earnings season continuing over on Wall Street as 183 S&P 500 companies report including Big Tech. Apple, Amazon, Microsoft, Alphabet, and Facebook are among the biggest names delivering their quarterly updates.

Meanwhile, central banks are in action aplenty with the Bank of Japan, Bank of Canada, and European Central Bank all holding policy meetings.

AstraZeneca shares rose by one percent after the firm is reportedly seeing a strong immune response from its coronavirus vaccine in older people. It comes as the FDA allows AstraZeneca to restart trials in the US, meaning clinical trials have now fully resumed globally.

Additionally, a spokesman said the latest results build the body of evidence for the safety and immunogenicity – the ability to produce an immune response – of the vaccine candidate.

Meanwhile, separate reports suggested that a large London hospital will start receiving vaccine stocks in November – though health secretary Matt Hancock was swiftly on the wires to say that he does not expect health workers to be receiving the Astra Oxford vaccine this year. AZN +1% in early trade.

SAP shares in Germany fell 20% in early trade before paring losses to trade -16% after it cut its 2020 sales outlook citing weak demand for cloud services – potential knock-on for MSFT, AMZN.

With broad-based selling taking place at the European open, reports that UK regulators will allow banks to start paying dividends again next year failed to deliver any bid on the open.

However, shares in Lloyds, Barclays and HSBC bounced and turned positive as investors finally woke up the prospect of dividends resuming – momentum can build with divis seriously on the table again. HSBC reports this week – all eyes on whether it feels confident to start payments to shareholders again. Dividends at last year’s levels would equate to roughly 12% yield.

Ant Financial is on track to become the world’s biggest-ever IPO with shares set to price tomorrow – although Jack Ma said over the weekend the company has already determined the price.

Ant will list simultaneously in Hong Kong and Shanghai in the coming weeks. It’s expected to raise $30bn, which would surpass Saudi Aramco’s $29.4bn record set last year, will likely use the ‘greenshoe’ option worth another $5bn to meet demand, which is reaching mania-like levels among local retail investors, according to several reports. Institutional demand is also seen as being very strong.

Brexit talks will continue after talks between Frost and Barnier in London were extended through to Wednesday this week, whilst sources indicate that there are plans to carry on the party in Brussels from Thursday. GBPUSD started the session weaker as the dollar caught some bid overnight. Cable dipped to 1.30 and a test of the 50-day SMA. The dollar index has recovered 93 near the top of the Wed-Fri range.

The euro was trading steady to a little weaker after Italian bond yields fell in the wake of Friday’s upgrade from S&P. Italy’s debt was raised from BBB negative to BBB stable. The move has narrowed the bund-BTPs spread and comes ahead of the ECB meeting and Christine ‘we’re not here to narrow spreads’ Lagarde presser afterward on Thursday.

I looked at this in more detail in the week ahead, it’s clear that with virus restrictions being reimposed and the risk of a double-dip recession rising, it’s clear that the assumptions for growth contained in the ECB’s September report look out of step with reality. Given the murky outlook and dreadful inflation backdrop, it seems all but certain the ECB will increase its bond-buying programme by another €500bn by December and may use this week’s meeting to hint as such.

Election Watch

The last week of campaigning, but voting is already gathering pace. Biden leads by 8pts nationally, but by just 3.8pts in the battlegrounds.

He was closer to Clinton at this point – but comparisons with 2016 may not be relevant when so many people have already voted. Trump is showing tremendous energy, embarking on a frenzy of campaign events, while Sleepy Joe is just trying not to lose.

Bank of England lays ground for negative rates

Morning Note

The Bank of England is laying the groundwork for a descent into negative interest rates. This should worry us all. In a letter to banks today, deputy governor Sam Woods asked firms to detail their “current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these”.

The letter notes that “the financial sector … would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms”, and explains that “the MPC may see fit to choose various options based on the situation at the time”.

It comes after details from the last policy meeting showed that the BoE is actively considering negative rates, whilst Andrew Bailey has been at pains to stress that this does not necessarily mean they will take that route.

Indeed there is clearly a debate within the MPC going on right now that we are seeing play out in public. Last month deputy governor Dave Ramsden issued a note of caution only a day after Silvana Tenreyro pointedly backed negative rates.

It looks as though there are some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit they are being considered actively.

The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act.

Sterling doesn’t mind too much, with GBPUSD making its highest in almost 5 weeks before paring gains a little. Bank shares also didn’t take fright, with Natwest and Lloyds higher at the open.

Money markets have already priced in negative rates next year – today’s update does not materially alter the perception that the Bank is thinking seriously about negative rates but is in no rush to wheel them out. US bond and money markets are closed today for the Columbus Day holiday.

The idea that negative rates boost lending doesn’t wash – banks are not worried about the marginal impact on net interest margins as they are about whether the principal is repaid or not. And this in the current economic downturn and threat of rising unemployment, this will weigh on banks’ willingness to lend.

Indeed, I refer you again to the San Francisco Fed study from last month that shows the ECB made a big mistake by going negative.

This noted “banks expand lending only temporarily under negative rates” and “as negative rates persist, they drag on bank profitability even more”. It concluded that while lending initially increases under negative rates. “…gains are more than reversed as negative rates persist”. And under extended periods of negative rates, the evidence shows that “both bank profitability and bank lending activity decline”.

Negative rates are meant to increase loan growth, not depress it.

Chart showing how negative interest rates will affect UK monetary policy.

 

 

 

 

 

 

 

Equities were mildly higher in European trade early on Monday. The FTSE 100 enjoyed a solid week and managed to close on Friday above the 6,000 level that has proved so tricky to hold onto.

The FTSE weakened a little in early trade back to this round number support, with energy and consumer cyclicals dragging.

The S&P 500 rose Friday and closed at its best level since the start of September when it made the all-time high. Stimulus hopes remain in the forefront but the market, as a result, remains on the hook to rumours and headlines.

Donald Trump upped his offer to $1.8tn but Nancy Pelosi said it wasn’t enough. A stimulus package is coming sooner or later, although as stressed last week, there is a risk that a disputed election result delays this until 2021.

On the slate this week: IMF and World Bank meetings kick off today, whilst we have three days until the UK’s self-imposed Brexit deadline.

Nevertheless, even if there no breakthrough comprehensive trade deal agreed this week, the two sides are pledged to continue talking right up to the last moment.

Emmanuel Macron, who faces elections in the not-too-distant future, may seek too many concessions over fishing rights, which may scupper a deal. However, with the coronavirus causing havoc with the economy, neither side has a particularly strong hand and both sides need a deal.

Wall Street banks kick off earnings season across pond – read our preview here.

Election Watch

Biden leads by 9.8pts nationally and by 4.5pts in the battlegrounds. The Democrats lead by 4.9pts in the battleground states four years ago – Trump has been over this ground before and won against the odds – don’t write him off just yet. Trump has pulled ads in Ohio and Iowa leaving him off air in those states for a third week in a row. According to our friends over at BlondeMoney are the two most winnable swing states for Trump.

They say: “Either Trump is supremely confident he’s got these in the bag, despite polling neck-and-neck with Biden. Or he realises that he’s got to double down and go for the tougher states, and hope to sweep up those that are easier to win in the process. If he doesn’t get Florida or Wisconsin, Ohio or Iowa barely matter.”

My sense is that there is do-or-die attitude in the White House and he needs to shore up support elsewhere, such as Florida as his campaign finances, rather like his business empire, are not all they appear to be.

The dollar appeared to roll over last week. On DXY we had a MACD bearish crossover and 14-day RSI trendline break that indicated (as we flagged) that there could be downside.

What’s harder to say is whether this is yet more of a chop sideways for the dollar or renewal of the downtrend.

The close under the 50-day SMA could be taken as bearish signal and we may yet see the 91 handle tested again. The near-term support at the mid-Sep swing low sits around 92.70.

 

The Dollar index on the morning of12.10.2020

TalkTalk bid, IMB up on smoking, S&P 500 breaks range

Morning Note

The yo-yo week on Wall Street continues with stocks bouncing after Donald Trump tweeted support for a range of fiscal stimulus measures, having earlier set the market down by calling off talks on a comprehensive package until after the election. Whether it’s now or after November, what’s been made clear to investors is that fiscal stimulus is on its way.

The timing becomes less important – doubts would resurface if there is a contested election result that leaves Washington lawmakers unable to come to a deal. However, Joe Biden’s lead in the polls would suggest this is becoming less likely, albeit my inclination is that Trump will do a lot better than the polls indicate.

Europe opens higher, can Wall Street gain for a second day?

The S&P 500 rose to its highest level since the start of September, finishing up 1.74% at 3,419, with the Sep 4th closing high at 3,426 offering the daily resistance. All 11 sectors rose. The Dow climbed 530 points, or 1.9%, to notch its best day since July. The Nasdaq added 1.9%.

The question is whether market can put two straight days of gains together, something it’s not managed in a week. The range-bound nature of the market right now and the general uncertainty around stimulus and the election – not to mention the Q3 earnings season about to kick off – may make it tough to cement gains.

Nevertheless, futures point to further gains when the cash equities open later. European markets opened higher in early trade on Thursday.

FOMC minutes

Fed minutes showed that officials are divided over the application of the central bank’s new policy framework. Policymakers ‘discussed a range of issues associated with providing greater clarity about the likely path of the federal funds rate in the years ahead’.

Meanwhile a report from Fed economist Michael Kiley called for the central bank to juice bond holdings by another $3.5tn to support the economy. The market probably liked this idea, too. Participants agreed on the uncertainty facing the economy, albeit there are the likes of Bullard who think it’s all going to be fine by the end of the year.

Weekly unemployment claims data later today will be watched as closely as ever.

German exports rose more than expected in August, climbing by 2.4% vs expectations for 1.7%. However, this was down from the 4.7% recorded in July. Exports to the US were down 21%, whilst China imported only 1.1% less goods than last year.

Toscafund offer boosts TalkTalk shares

TalkTalk shares shot higher after it received an offer Toscafund Asset Management for 97p a share. TALK rallied over 16% to exactly 97p. Executive chairman Charles Dunstone needs to approve the takeover for it pass. With no discount and no premium in the price this morning, the market seems to think he is.

There were signs of something afoot in the summer – Dunstone purchased 1m additional shares at the end of June at 86p after Tosca raised its stake to 29%.

TalkTalk had somewhat gone off my radar of late so I must revert to a two-year old note from 2018: “Increasingly TalkTalk looks like it’s ripe for takeover. It provides a good entry point into the UK broadband market and with growing subscriber numbers, there is plenty to recommend it.

Indeed, with a strong subscriber base, improving margins and shares still at multi-year lows, for anyone looking for an entry point into the UK broadband market then it’s probably your best bet.”  Recently it’s enjoyed decent cash growth on better fibre rates and cost control.

Imperial Brands rises alongside smoking demand

Smoking kills: Imperial Brands is seeing increased demand for its products as a result of the pandemic. And it’s good old fashioned cigarettes and tobacco we’re talking here – ‘next generation products’ like vaping are down 30%. Another unwanted side effect of governments’ inept, disruptive and failing approach to dealing with the coronavirus.

It’s been about fighting Covid at all costs and the UK government for one has systematically failed to consider the wider public health implications of their response. For example, Matt Hancock recently admitted that cancer patients would only be treated if the virus was ‘under control’.

Management today noted: “We have experienced some COVID-related changes in consumer behaviour with increased overall demand against our expectations, as consumers appear to have allocated more of their spend to tobacco, as well as some demand shifts between different markets and channels. This has resulted in better than expected volumes, driven by improved volume trends in several key European markets and in the US.”

Group revenues are slightly ahead of the half-year guidance, but additional manufacturing costs as a result of Covid have been incurred. Constant currency earnings per share are down about 6%, in line with expectations.

EasyJet on track for first-ever annual loss

Meanwhile, EasyJet reports today it’s on course for its first-ever annual loss as a result of the pandemic restrictions on air travel that have crippled the industry. Management expects to report a group headline loss before tax in the range of £815m to £845m after flying 50% fewer passengers than last year.

The airline flew 38% of planned capacity in Q4, in line with the September update in which it said capacity would be slightly less than 40%. These sorts of losses were anticipated and, overall, I think investors only really care about liquidity and headroom to get out the other side of this. On that front easyJet had a cash position of £2.3bn as of the end of September and it’s lowering costs aggressively to reduce the cash burn wherever it can – Q4 cash burn was less than Q3, which is a positive. Capacity of Q1 2021 will be at 25%.

With winter coming it’s usually a lean time for airlines and it’s going to be a long period of uncertainty as we await to see whether next summer is strong enough to prevent further cash being required. But easyJet looks ok for now.

Plans for a testing system for arrivals into the UK to reduce the quarantine period would be a boost, but there many factors that will weigh on demand, from unemployment to fears about the virus itself.

Tesco profits slump, stocks swinging on mixed stimulus messages

Morning Note

Stocks fell after Donald Trump nixed hopes of a stimulus deal, or so it seemed. The S&P 500 declined 1.4% on the day having earlier traded higher.

But Trump also called for support for airlines and then sent a tweet addressing the House Democrat leader Nancy Pelosi: “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?”

In short, Republicans, including the President, don’t want to pay for a tonne of social programmes which Democrats have made part of the stimulus bill. But they do want to support the economy. Stimulus is clearly coming some way, somehow, just probably not before the election.  Or it could, who knows.

Markets remain clearly on the hook to the headlines but the fundamentals haven’t changed much. The election is taking on more significance the closer it gets and markets just want it out of the way to move forward.

Biden’s lead in the polls is compelling and tonight’s vice presidential debate probably won’t change much with so few voters undecided. Nevertheless, Trump is back and cannot be written off just yet.

Indeed whilst the S&P 500 fell, it didn’t even look at 3,300 and remains in the middle of the September range. Earlier it briefly broke the Sep 16th intra-day high, hitting 3,431.  European markets are similarly short of much direction right now – in fact they’ve been clamped in a tight range since June and were flat in early trade on Wednesday.

Tesco shares up on earnings

Tesco profits fell as costs and sales rose. Operating profit before nasties was down 15% despite group sales rising almost 7%. Retail free cash flow decreased by £91m year-on-year to £554m. Tesco Bank is becoming a headache and needs to be offloaded – sales here slipped a third and it slumped to an operating loss of £155m due to provisions for bad debt and lower income.

Management noted that a ‘marked deterioration in macro-economic indicators, particularly UK unemployment and GDP, drove an increase in the provision for potential bad debts’. Shifting the financial division on to some other party seems like one of the first things for Ken Murphy. Having already offloaded the mortgage book, Tesco has one foot out the door already.

Booker continues to do well with Retail sales up 22%; offsetting Catering sales falling 12%. And whilst we often compare Tesco to a super tanker that can take a long time to turn around, Tesco’s scale has been important in retooling for the pandemic age.

Online delivery capacity more than doubled to reach 1.5m slots a week, which compares favourably with Ocado and the problems it has in building capacity. Whilst increases costs, being provisioned to handle more online orders is essential and makes Tesco look well placed – shares rose over 2%.

Democrat report hammers big tech

As flagged in yesterday’s note, a Democrat-led Congressional committee has issued a damning report on big tech. Following more than a year of reports and investigations, the 449-page report said Amazon, Apple, Alphabet and Facebook enjoy ‘monopoly power’ and called on them to restructure their businesses and possibly even be broken up.

It’s just a report at this stage but a Democrat clean sweep in November’s elections could see elements become legislation. Share in the four companies fell by around 2-3% yesterday.

FOMC meeting minutes later will be parsed for any further details on what policy makers believe could trigger any tightening. The September meeting minutes ought to provide more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained by this.

EIA data in focus for oil

EIA inventories out later today coming the API report yesterday showed build in crude stocks of 951k barrels in the week ending Oct 2nd. As previously argued, we need to closely watch global inventories flipping from draws to builds which would signal demand failing to re-emerge at the levels anticipated.

EIA is forecast to record a draw of 1.2m barrels. WTI is trading at $40 but faces resistance.

Chart: E-mini futures take elevator down on Trump tweets but climb stairs back up

Trump returns, big tech faces antitrust concerns

Morning Note

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

Wall Street climbs on stimulus hopes

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

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

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

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

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

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

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

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

Cable eyes Brexit latest Brexit headlines

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

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

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

Democrats to target tech giants

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

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

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

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

AUDUSD sinks on dovish RBA meeting

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

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

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

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

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

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

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

Unhealthy market fixations, Cineworld’s time to die?

Morning Note

There has been a lot of column inches written, and much ink spilled, over Donald Trump testing positive for the coronavirus. There were, I fear, a few too many quick to sound the alarm and say this would see stocks ‘tumble’, etc.

True, US stock markets fell on Friday, with the S&P 500 down 1%. But this was 25pts above the lows of the day and likely just as much about a tepid September jobs report from the US as anything else; the broad market finished the week up by 1.5% in the end. Hopes of stimulus persist and Nancy Pelosi said on Sunday that lawmakers are making progress.

Traders should still be on alert for updates on Trump’s status, but unless things go very bad it should just be a lot of noise. The President could be discharged from hospital today.

European markets rose in early trade but pared gains as PMIs crossed to show lacklustre recovery in the Eurozone. US stock futures indicated a bounce when Wall Street opens later. One market that has seemingly been brought back from the brink is the bond market, which looked to all intents and purposes like it had been completely killed by the Fed.

Treasury yields moved higher on hopes of stimulus with the US 10-year showing some vital signs at last and nudging up to 0.7%.

US labour market recovery slows

The US labour market is not in good health, with the economy creating 661k jobs in September vs the 800k expected. This was also a marked decline from the 1.371m created in August. The unemployment rate declined for a fifth straight month to 7.9%, but it remains at historically high levels.

The US economy has recovered about half the jobs lost at the peak of the pandemic. The problem remains the same as we have been saying for months now – the reopening rebound was the easy part. The hard slog lies ahead, and it could take years to fully recover all the lost jobs. The UK seems to be in a similar position.

Cineworld stock tumbles as chain shuts UK and US theatres

Time to die? Cineworld is closing all its cinemas in the UK and US amid a collapse in demand due to the pandemic. Shares plunged 50% on the news this morning. The delay to the next James Bond film was the straw that broke the camel’s back, but Cineworld was a little bloated before the pandemic struck.

Net debt of over $8bn – thanks mainly to two large leveraged acquisitions in recent years – and a market cap of $540m by the close on Friday left Cineworld in a difficult position to refinance if punters were not coming through the doors; without the Bond franchise to draw people in there was little option – closing its theatres at least gives it a chance to preserve cash and wait for things to improve. Refinancing by some sort of rights issue seems inevitable.

However, I fear there have been permanent behavioural shifts in consumers that will mean the market is forever smaller. It is hard to gauge right now what permanent damage is done to cinemas, but the closure of Cineworld, however temporary, is a plain indicator that it could be significant and lasting.

The advance of over-the-top streaming services, especially Netflix with its vast Hollywood budgets and ability to make feature films, has been a critical blow to the industry and Covid has vastly compounded the problem by keeping viewers away. In its interim results last month, the company warned that a worsening of the pandemic could leave it unable to survive; today’s announcement confirms that it is on the brink.

Demand uncertainty hits Tesla

Tesla shares fell 7% on Friday after the company failed to quell longer-term demand concerns despite delivering a record number of cars in the third quarter. The company delivered 139,300 vehicles, compared with expectations of 137,000 vehicles.

It looks to be a bit of an unusually bad reaction to very impressive numbers. As the Shanghai factory ramps production Tesla should be able to steadily increase volumes despite the pandemic, albeit Elon Musk’s target of 500k this year looks out of reach for now.

Monetary policy in focus this week

It’s going to be a busy week for central bank jawboning – the Fed’s Powell, Kaplan (the hawk), Harker, Williams, Kashkari, Barkin and Evans are all due on the wires in the coming days. Also watch for the FOMC minutes from the September meeting for more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained.

The ECB latest meeting minutes are also due on Thursday and similarly there is a slew of speakers slated for the week, including Lagarde, Lane, Guindos and Mersch.

Meanwhile the Reserve Bank of Australia could cut rates to 0% when it meets this week. Futures markets have indicated odds of a rate cut at about 50%. However we could well see the RBA cut from 0.25% to 0.1%, or it could delay until November 3rd.

Deputy governor Guy Debelle recently outlined policy tools the RBA is considering to help it meet its twin mandates on employment and inflation, including foreign exchange intervention and negative interest rates.

Chart: Gold continues to slide down the channel – watch the 21-day SMA at the top and 100-day offering support underneath as potential pivots

Stocks up, Rolls-Royce down on rights issue

Morning Note

Stock market bulls got the signal they needed from US Treasury secretary Steven Mnuchin, who said the White House was serious about doing a deal with House Democrats on a stimulus package. Nevertheless, no agreement was reached after talks between Mnuchin and Nancy Pelosi.

The Democrats pulled a vote on their $2.2tn package; the White House has come up with a $1.5tn counteroffer. Stimulus is coming, the question really is only when – a deal before the election still looks difficult. Meanwhile end of month and end of quarter flows likely had a positive impact after a soft September.

Stocks end September lower

The S&P 500 rallied and closed above its 50-day moving average, perhaps offering bulls a signal of strength. The next major level is 3,400 and then the Sep 16th intra-day high at 3,428. The close at 3,363 left the broad market down 3.9% in September, its first down month since March. The Dow Jones fell 2.3% last month, while the Nasdaq was more than 5% weaker for September.

European markets did not fall as much, but they also didn’t rally as much in August. In fact, European equities have been stuck in a range for months now and are failing to really spark into life. Cyclically weighted indices leave investors searching elsewhere for growth (US tech mainly) amid a slow recovery from the pandemic. The FTSE 100 is still struggling to hold the 5,900 level.

European stocks remain in their broad ranges – nothing to get excited about yet and the implications of US election angst and rising case numbers is likely to prevent any material breakout. A vaccine could help, but it’s also no silver bullet to depressed demand and structural inefficiencies in the economy that have been years in the making.

Shares in Tokyo didn’t trade after an outage that last all day on what ought to have been a busy day for equity books. The Tankan survey showed business sentiment improved, but not by as much as expected. Chinese markets were closed for a holiday.

Palantir starts trading after direct-listing

Palantir got its direct-listing IPO with the odd hiccup as insiders struggled to access the transactional platform provided by Morgan Stanley. Nevertheless, the stock opened at $10 and reached as high as $11.42 before closing at $9.50.

It’s been a very solid year for IPOs despite the huge volatility in the spring. A dearth of growth and hunger for any kind of yield as actually made this a surprisingly good time for tech companies in particular to go public. The Renaissance IPO ETF, which tracks the newest and largest listings, is up almost 70% YTD.

Rights issue plans send Rolls Royce skidding

Rolls Royce shares sunk over 6% after the company finally outlined a rights issue that has been required for some time. The company has over £3bn in debt due next year so had to come up with something given the ongoing hit to cashflows. RR will raise £2bn by way of a 10-for-3 rights issue priced at a 41% discount to 130p closing prices yesterday.

Given the strategic importance to the UK, the government is also on hand with support in the shape of a further £1bn from UK Export Finance. Shares were trading at a 16-year low after the news and are down 82% this year – the rights issue comes after a sustained period of weakness with investors betting that management needed to shore up the balance sheet.

The pandemic has created a perfect storm for airlines and this has left Rolls Royce’s aerospace business in the mire.

Dollar retreats but Brexit headline risks threaten GBP

As called for, the dollar finally rolled over from the resistance at 94.60 to test the support at 93.70. The 21-day comes in around 93.50. Dollar softness left cable making weekly highs at 1.2950, but the 3-week range of 1.27-1.30 remains.

Brexit talks continue and EU ‘sources’ are out this morning saying the two sides have failed to close differences on state aid. Expect the usual headline risk for GBP crosses as the ninth round of negotiations wrap up on Friday. US weekly jobless claims today will be watched closely ahead of the NFP numbers tomorrow.

Oil prices rose after the EIA reported US crude inventories fell by 2m barrels, against expectations for a rise of 1.9m. Nevertheless, stocks at Cushing, Oklahoma rose 1.8m barrels and gasoline inventories also climbed.

As stated earlier this week, the outlook for crude is murky as production comes back on stream and demand recovery wanes. We need to also pay close attention to global stocks flipping to builds from draws over the next three months. WTI closed lower in September for the first time since April.

Chart: Dollar softens, looking at potential RSI trend line being broken and potential MACD crossover if 93.70 fails to hold

US Presidential debate farce, Compass points way to more lockdown worries

Morning Note

Staying up for the first Presidential debate would hardly have been worth it. Unedifying is the best word to describe. Biden held his own and the president missed his chance, mainly by talking over his rival at any opportunity; he did not allow Biden enough rope to hang himself.

Race featured prominently, but Trump only played to his base. This was the disruptive, abrasive Twitter Trump. We await to see whether the spectacle has had any impact on the up to one in ten voters yet to make up their minds. As grandpa Wilson would have said, I hae ma doots.

And as I keep saying, what matters in the US Presidential Election will be turnout in key battleground states and for this Trump needs it to be as rancorous as possible to energise his base. There is talk Biden won’t want to do more debates – that would be a mistake and make him look worse than he does after a relatively successful outing for the Democrat nominee, given the low expectations.

Equities down – will rebalancing give Wall Street a lift?

Stock markets fell yesterday, with European bourses down but off the lows. The FTSE 100 ended under 5,900. The S&P 500 butted its head against the 50-day moving average and came off to finish at 3,335.

US futures indicated further losses for Wall Street after the debate concluded. Asian markets were mixed. European stocks were mixed at the open but turned green after a weak start and the FTSE 100 rose above 5,900 with a weaker pound helping.

Month- and quarter-end rebalancing flows may make for volatility today. With US stock markets enduring a tough month there could be some reallocation back into equities that lifts Wall Street later.

Treasury yields ticked lower with bonds finding some bid, with the 10-year benchmark yield to 0.64%, its weakest since the start of September. I think last night gave the market a taste of the kind of election jitters to expect – the only thing the market wants is to get this election out of the way and draw a line under the whole charade.

Having kicked on from the 100-day line, gold firmed as TIPS moved more into negative territory but failed to clear $1,900.

Dollar slips lower, ADP in focus ahead of Friday’s NFP

The response in FX to the debate was a bit ‘meh’, but the dollar continued to ease back off the highs struck late last week and early this week, with DXY moving under 94, with bears eyeing the support at 93.70.

Later today is the ADP nonfarm report, which comes two days before the final NFP report ahead of the election. GBPUSD declined in early trade to test the 1.28 round number but the pair remains very much in its range of 1.27-30 that has bounded the price action for the last 3 weeks.

Britain’s economy contracted the most on record in the second quarter, albeit the 19.8% drop in GDP was less than the previously estimated 20.4%. Whilst this is backwards looking, just how optimistic can we be about the near future?

Compass Group uncertain about the future

Rising cases here threaten to mean further restrictions on our liberty that will act to further depress economic activity and consumer sentiment. Meanwhile unemployment will undoubtedly rise, harming the consumer sector even further.

Compass Group’s pre-close update contained some worrying signals for investors about this very problem, with management warning that the pace at which revenues and margins will recover remains unclear, especially given the possible increase in lockdown measures in the Northern Hemisphere through the winter months.

Group revenues fell about 19%, with Europe –25%, North America –19% and the Rest of World –9%. Sports and Leisure businesses in Europe and North America remain closed, but there has good recovery in Education and Healthcare.  Shares fell 4%.

Lockdowns and expected disruption to arrangements mean airline shareholders need to keep a close eye on forward booking trends. Flight searchers are down anything from 60-80% from a year before, according to Kayak. The chart below shows demand for the UK over the course of the year. The figures for the rest of Europe are comparable.

Talk of negative interest rates has been doing the rounds a lot on Threadneedle Street of late. But the Bank of England would be well advised to consider a Federal Reserve study that says the European Central Bank (ECB) made a big error when it opted for negative rates.

As repeatedly stressed in these columns, negative rates represent a monetary policy black hole from which it is very hard to escape and it harms banks, eroding their profits and capital ratios over time.

The study from the San Francisco Fed notes that “banks expand lending only temporarily under negative rates” and “as negative rates persist, they drag on bank profitability even more”.

It concludes: “While lending initially increases under negative rates, our analysis implies that gains are more than reversed as negative rates persist. Overall, our results suggest that caution is warranted when considering negative monetary policy rates to encourage additional bank lending. Under extended negative rate episodes, evidence shows that both bank profitability and bank lending activity decline. This calls into question one of the primary motivations for negative policy rates.”

Chart: Negative rates are meant to increase loan growth, not depress it

Elsewhere in commodities, oil was softer as the API weekly inventory data showed a small draw on crude stocks while there was a build in gasoline inventories. As noted yesterday, traders should be wary of global onshore inventories flipping from draws to builds

The American Petroleum Institute recorded a draw of 831k on oil inventories whilst gasoline inventories rose 1.6m vs expectations for a draw of 1.3m. Oil stocks at Cushing, Oklahoma rose by 1.61m. As data points to a slowdown in the velocity of people, demand for oil is already rolling over and stocks may well start to build without China hoovering up the excess.

EIA data on tap later today will provide further guidance for markets. WTI (Nov) retreated to a two-week low at $38.42 but recovered $39, which is forming the near-term support. September lows at $36 are in focus.

Equity markets hungover ahead of Presidential debate + Brexit breakthrough?

Morning Note

There is the whiff of a hangover for investors this morning as European shares stumbled after an exuberant rally in the previous session that left the major bourses around 2-3% higher to start the week. We haven’t made it back to the key mid-Sep levels and bulls may be looking at downside risks in the shape of the slowing economic recovery and pre-election jitters.

Nancy Pelosi and Steve Mnuchin may be able to cut one last stimulus deal before the election, but it still looks like the odds of it passing the House and Senate are less than evens.

The FTSE 100 and DAX both fell 1% and the failure by bulls to build any momentum from these one-day bounces is a sign of tepid sentiment.

First presidential debate in focus

It’s all going to kick off later tonight, as the first US presidential debate takes place in Cleveland. The fun starts at 9pm US eastern time and will last one and a half hours. Trump won in Ohio, a typical battleground rust belt state, by eight points last time around but it is leaning towards Biden in 2020, according to the polls.

But we know polls only tell a portion of the story – it’s in the battlegrounds where it counts.

JPM did an investor survey of potential election outcomes – 79% said the worst-case scenario is a Democrat president and Senate, whilst 49% said the best case would be a Republican president and Senate.

We know which way Wall Street is leaning, but there is not a clear sense that the result will materially impact the course of equity markets. As discussed last week, whilst a Democrat clean sweep – the Blue-nami – would mean higher taxes and regulation, other factors may play into the bulls’ favour, notably the chance of a comprehensive fiscal package.

More importantly, the global recovery from the pandemic, the Fed and earnings will be key drivers for equities after the election. The only thing the market wants is to get the election out of the way – the real danger to near-term valuations would be a long period of legal disputes post-election, which may mean price action continues to chop sideways within the range set in the second half of September.

Vix futures are starting to look interesting again with the spread from Oct to Nov widening to $2 with the near month trading at $31 and November at $33, with December at $31.

Sterling up on hopes of breakthrough in Brexit talks

Brexit breakthrough? Hopes of a deal are on the up, amid reports that the EU is prepared to ditch its requirement to reach a broad agreement before drafting a text. This means they can start on the joint legal text whilst there are still a few outstanding issues that need to be resolved.

This has positive overtones, but the two sides still appear no closer on these critical last steps.  European Commission Vice President Maros Sefcovic said yesterday: “The UK’s positions are far apart from what the EU can accept.”

Sterling drove to a two-week high, with GBPUSD rising to 1.29 before paring gains to sit around 1.2850 this morning.

Bank of England deputy governor warns over negative rates

But it the rally was less about Brexit than it was about comments from Dave Ramsden, the deputy governor of the Bank of England, who sounded a strong sound of caution over negative interest rates. The MPC seems to be airing its dirty laundry in public – the comments came only a day after Silvana Tenreyro pointedly backed negative rates.

Anyways it looks there is some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit they are being considered actively.

The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act.

The dollar peeled off its recent two-month highs in the 94.60 region which is offering the near-term resistance. The pullback called for last week has been slow to emerge with a couple of retests of this level but near-term weakness is certainly becoming more evident.

Elsewhere, oil markets remain trapped in a tight range but could be heading for a pullback as global inventories start to build. API numbers later today, EIA numbers on tap Wednesday. Watch the Chinese numbers too as global inventories swing to builds.

Surging cases numbers cripple demand, whether rational or not. Contango spreads indicate softer demand and inventory builds ahead. The price action alone on WTI is a not a pretty picture for bulls.

Coming up, there is a slew of Fed speakers later today with Clarida, Quarles, Harker and Williams on the slate. Richard Clarida is probably the most important, with the Fed governor due to speak on Future Considerations for Treasury Market Resilience. Meanwhile, the Treasury market is completely dead as yields remain trapped in their tight ranges.

Chart: The S&P 500 is still trapped by the moving averages

The market rallied 1.6% on Monday and ran slap into the 50-day SMA, shy of the 21-day SMA. We have to see whether this marks the swing high and calls for another pullback.

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