Refineries earnings signal demand outlook

Commodities

Oil outlooks continue to fluctuate but a few upcoming announcements may give some clarity.

Prices are holding around $38 per barrel for WTI while Brent crude is roughly $40 p/b.

Refineries are looking to announce their earnings this week, which may give indicators towards Q4 oil demand, specifically on gasoline, diesel and jet fuels.

Valero Energy reported an uptick in demand during Q3, up from Q2, but still way below 2019 volumes.

Q4 forecasts suggest 2.5mpd demand, which is 500,000 lower than Q4 2019’s numbers.

Inventories are thusly high while demand is low.

Majors ExxonMobil and Chevron will be reporting their quarterly earnings this week on October 20th. It will be interesting to see how the supermajors have coped. Exxon alone announced a first-quarter loss of $610m in May 2020. Its performance will be indicative of the industry as a whole.

40 North American oil & gas producers have declared bankruptcy this year. This may point towards a) further closures industry-wide or b) closer collaboration and mergers.

For instance, Conoco Phillips announced last week it was acquiring Concho Resources. Will this be an ongoing trend?

In Natural Gas, markets anticipate bullish natural gas prices in the short and mid. There are several factors at play here including:

  • an unexpected jump in US LNG exports in the coming weekend
  • Potential production drops
  • A major temperature shift towards colder temperatures.

Resilience in natural gas prices is likely to emerge as we head into winter. Colder temperatures point towards stimulated demand for gas for heating and so on. Therefore, the coming months may prove beneficial for commodities traders – if a little cold.

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.

Fed minutes waltz away with risk appetite

Morning Note

FOMC minutes are casting a shadow over markets and underline that any recovery is not going to be a straight line of advances. The Fed layered on the risks and caution thick, but didn’t come up with any sweeteners for the market in the shape of more easing.

The US dollar roared back, gold tanked, and stocks are wobbling after minutes from the Federal Reserve’s July meeting left investors a little disappointed. Members clearly backed away from yield curve control and seemed to be in less of a hurry to push for clearer forward guidance.

‘With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,” the minutes said. This use of the phrase ‘at some point’ indicated members are not in a rush to tie rate hikes to specific economic goals. The Fed also noted that most members judged yield curve control ‘would likely provide only modest benefits in the current environment’.

The FOMC meets again in mid-September and will be reviewing the recent economic progress. For now it seems the Fed doesn’t feel the need to go quickly on more explicit forward guidance as the economy is still ‘in’ the pandemic – as long as cases rage we know what the Fed will do. The question comes on the exit – how quickly does the economy need to recover into the autumn for the Fed to feel the need to tie tightening to specific economic goals – the purpose of which would be to keep markets on an even keel.

Equities trip on FOMC minutes

The S&P 500 flirted with 3,400 in the early part of Wednesday’s session but shot 50pts lower after the minutes were released, ending down 0.44% to 3,374.85. The Dow and Nasdaq both tripped up as well. Asian markets fell overnight. European equity indices are taking their cue from this weak handover and dropped over 1% in early trade, before stocks pulled off the lows after China’s ministry of commerce said this morning that US-China trade talks would resume in the coming days. Vix futures are still pointing to increased volatility as we head towards the US election in November.

Apple hits $2tn market cap

Apple advanced to a new record high and became the world’s first $2tn company as it rose above $467 but closed flat at $462.83. There is a lot going on here – some of which is driven by Apple’s business and some of which is due to external factors. Apple has created a brand with immense power, and investors have really bought into the pivot towards Services to generate more sustainable revenues than being a pure play hardware manufacturer.

The upcoming rollout of 5G iPhones is a prime factor, as is its very strong balance sheet. I also think we could throw in the upcoming stock split as a factor as despite the fact it ought not to matter to the share price, it will undoubtedly make it easier for retail investors – a growing crop of US day traders – to buy the shares. Cf Tesla. And it’s a Covid-winner – the thirst for high quality growth has been well documented.

Dollar up, Brexit headline risks could weigh on sterling

The dollar caught a strong bid after the minutes. EURUSD fell from 1.1940 to 1.1840 where it has found support and is pushing off this level to pare some of the losses this morning. Cable also shipped two big figures in the last day and is now under 1.31 with near-term horizontal support at 1.3050. Brexit headline risks remain as trade talks continue this week – update coming tomorrow but we could get wire reports to knock the stuffing out of sterling. Overall if this is a cyclical dollar bear market then we would see this as a temporary blip.

Delivery Hero – a beneficiary of an increase in orders due to the pandemic – has been named the replacement for the disastrous, scandal ridden Wirecard on the DAX. The food delivery company will join the German blue-chip index on Monday. Delivery Hero is on course to deliver one billion orders this year, thanks in large part to the lockdowns.

Another sub-1m print for US jobless figures?

US initial jobless claims today are expected to come in under 1m again, with continuing claims at 15m. Last week’s report showed jobless claims fell under 1m for the first time since the pandemic, but unemployment levels remain exceptionally high and the concern is that temporary layoffs become permanent. The rate of change is not going to improve – the easy wins are behind us and the hard slog lies in front.

EIA crude oil inventories showed a draw of 1.6m barrels last week, while gasoline stocks declined by 3.3m barrels. WTI crude prices nudged up to $43.20 before pulling back as risk assets came under pressure from the Fed minutes. Copper prices broke above $3 for the first time in over two years but failed to sustain the move after the minutes and pared gains.

Tomorrow morning watch for Eurozone PMIs (ignore) and UK retail sales. Sales rebounded 13.9% in June after May’s 12.3% jump, which almost took total sales back to where they were before the pandemic. We know however that these masks huge shifts in how people spend their money. We also know that when furlough schemes end and we get a real increase in unemployment, people will be tightening their belts.

Ex-divis hit FTSE, US stocks near record high, trade comes back in focus

Morning Note

US stocks rallied to close near its all-time highs yesterday amid what some are saying are signs of greater confidence in the economic recovery in the US. Or perhaps it’s just even speedier decoupling between Wall St and Main St. Nevertheless, bond yields pushed higher amid a faster-than-expected rise in US inflation, whilst the market is starting to focus again on trade and tariffs.

The fact that the broad stock market is at all-time highs is a testament to unbelievable amounts of monetary and fiscal stimulus – the patient is hooked, and only more drugs will do. The disconnect between the stock market and the real economy is too stark, too unjust and too indicative of a system that continues to favour capital over labour that, sooner or later, a change is gonna come.

Europe soft despite strong close on Wall Street, TUI posts earnings wipe-out

Never mind all that for now though, stonks keep going up. The S&P 500 rose 1.4% to end at 3,380, just six points under its record closing high at 3,386.15, with the record intraday peak at 3,393.52. Asian stocks broadly followed through, with shares in Tokyo up almost 2%.

European stocks failed to take the cue and were a little soft on the open, with the FTSE 100 the laggard at -1%, though 22.3pts are due to BP, Shell, Diageo, AstraZeneca, GSK and Legal & General among others going ex-dividend.

For a taste of the real economy, we can look at TUI, which said group revenues in the June quarter were down 98% to €75m. It’s a total wipe-out of earnings, but it’s not a surprise – the business was at a virtual standstill for most of the period and was only able to resume some limited operations from mid-May. Just 15% of hotels reopened in the quarter, whilst all three cruise lines remain suspended.

TUI posted an EBIT loss of €1.1bn for the quarter, taking total losses over the last nine months to €2bn, with €1.3bn due to the pandemic forcing the business to be suspended. Summer bookings are down over 80% but it has got another €1.2bn lifeline from the German government. Shares fell over 6% in early trade.

Trade in focus as US-China weekend talks approach

US-China tensions are rearing their head again. Officials meet this Saturday to review progress of the phase one deal. White House economic adviser Larry Kudlow the deal was ‘fine right now’. Sticking with trade, the US is maintaining 15% tariffs on Airbus aircraft and 25% tariffs on an array of European goods, including food and wine, despite moves by the EU to end the trade dispute.

Crucially it did not follow through with a threat to hike tariffs, however it still leaves the risk of further escalation when the EU is likely to win WTO approval to strike back with its own tariffs.

Strong US CPI raises stagflation fears

Yesterday, despite the optimism in the market, there was – for me at least – some potential signs of bad news for the real economy (not the stock market, remember) with US inflation picking up faster than expected. You can read this as the economy doing better than fared as consumers return, but you can equally take a glass half empty view and see this as a major worry that prices of essentials are going to rise whilst economic growth stagnates – which can be a cocktail for a period of stagflation.

Given the enormous amount of money being pumped into the system, there is a better than evens chance we get an inflation surge even if the pandemic was initially very disinflationary. Unlike in the wake of the financial crisis, the cash is not being gobbled up in the banking system as increased capital buffers etc, but is going into the (real) economy. Moreover, it’s being done in tandem with a massive fiscal loosening.

Short-lived pullback for USD?

Year-over-year, headline inflation rose from 0.6% to 1%, whilst core CPI was up 1.6% in July vs the 1.2% expected. Food prices rose 4.6%, whilst the cost of a suit is down a lot. The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle.

Investor optimism is keeping the dollar in check. The dollar index moved back to the 93 mark, whilst the euro broke above 1.18 against the greenback for a fresh assault on 1.19, twice rejected lately. Sterling is making more steady progress but is well supported for now above 1.30, however the dollar’s pullback may be short-lived. Gold held onto gains to trade above $1930 after testing the near-term trend support around $1865 yesterday.

US EIA data, OPEC report boost oil

Oil prices held gains after bullish inventory data and OPEC’s latest monthly report. WTI (Sep) moved beyond $42 after the latest EIA report showed a draw of 4.5m barrels last week. Meanwhile, as noted yesterday, OPEC’s new report indicated the cartel will continue with production cuts for longer.

In its monthly report, OPEC lowered its 2020 world oil demand forecast, forecasting a drop of 9.06m bpd compared to a drop of 8.95m bpd in the previous monthly report. But the report also sought to calm fears that OPEC+ will be too quick to ramp up production again. Specifically, OPEC said its H2 2020 outlook points to the need for continued efforts to support market rebalancing. Compliance was down but broadly the message seems to be that OPEC is not about to walk away from the market.

Coronavirus outbreaks leave stocks stuck in their ranges

Morning Note

Virus outbreaks in the US continue to weigh on the mood, as it suggests the run-up in stocks on hopes of a V-shaped economic recovery may be overly optimistic. Several states, mainly in the south, have been forced to re-impose lockdown restrictions after being the first to reopen. Dr Fauci described it as a ‘serious problem’. The dangers of reopening too quickly seem all too apparent, but investors are also keeping an eye on outbreaks in Tokyo, Australia and China.

European equities were a touch softer but trading near the flatline on Monday morning, with a general lack of direction about today’s trade. Major indices tracking around the middle of their June ranges after Asian equities fell. US equities were lower Friday and finished down for the week but, as the month ends, stocks have enjoyed a very strong quarter.

The FTSE 100 is up over 8% quarter-to-date, while the S&P 500 has rallied over 16% in Q2 and the DAX has surged 21%. Valuations remain the concern as we head into earnings season with the S&P 500 still trading at more than 22x on a forward basis.

Coming up this week – Powell testimony, US nonfarm payrolls

Of course stocks haven’t only rallied because of reopening economies – enormous liquidity thanks to the coordinated action of central banks has been key. Central bankers have been striking similar notes in terms of the response to the crisis and Jerome Powell, the Federal Reserve chairman, will testify in Congress again this week. The Fed’s rather downbeat assessment of the economic recovery helped to stop the rally in its tracks and since then indices have been trading ranges.

The US jobs report – on Thursday this week due to the July 4th holiday – will provide an important view on the pace of recovery, but we should note that the weekly unemployment claims numbers are proving a more sensitive and up-to-date barometer, not least since there are problems with the data gathering for the monthly nonfarms report.

Facebook shares tumble on ad boycott, but how long can brands stay away?

Facebook shares tumbled more than 8% on Friday as a growing number of companies join a boycott of the platform over hate speech. We saw how a boycott of Facebook by users failed to move the needle on earnings, but this time it’s different – it’s the big brands that pay the big bucks and the loss of Unilever, Starbucks, Coca-Cola, Levi’s and Diageo among others will create a headwind to revenue growth in the coming quarter.

I would think Facebook can and will do a lot more and will be able to take steps to assuage brands’ concerns, allowing the stock to recover. Moreover, will brands be able to avoid Facebook for very long? Virtue signalling is one thing, but they also need to shift product.

Crude oil was steady with WTI (Aug) around $38 after rallying off the medium-term support around $37.50. OPEC+ compliance in June is expected to be higher than in May, mainly because Saudi Arabia, Oman, Kuwait and the UAE are cutting above their quotas. In FX, cable continues to track its channel lower with a new low put in at 1.2315, with the previous support in the 1.2390 region now acting as resistance.

Equities in retreat as Covid-19 cases advance, oil drops

Morning Note

Equity markets have come under pressure again as a spike in new Covid cases across the US has investors worried, whilst the IMF drastically cut its growth forecasts for the year. Major equity indices have retreated towards the lower end of the range traded in June but have yet to make fresh lows for the month – when they do it will get very interesting and could call for another leg lower.

Stocks in Europe were down 3% on Wednesday, whilst Wall Street dropped 2.6%. European markets opened lower again Thursday, with a risk-off trade seeing all sectors in the red and telcos, healthcare and utilities declining the least.

Investors are pulling their heads in a little as the surge in cases raises concerns about how quickly the US economy can emerge from the ashes. There are also clusters in Germany of course but the focus is on the divergence between the European and US experience.  The FTSE 100 retreated close to 6,000 round number but found support around the 23.6% retracement at 6,066.

The S&P 500 closed at 3,050, on the 38.2% retracement. With softness on the open in Europe and futures indicating a lower open, we may see SPX test its 23.6% level on the 3,000 round number. A retest of the June lows looks increasingly likely.

IMF cuts global outlook, US-EU trade tensions simmer

Meanwhile the IMF lowered its 2020 outlook, warning the global economy would shrink a lot more this year than it had forecast in April. Global output is forecast at –4.9%, vs –3% in April. The UK and EU will decline 10%, whilst the US economy will shrink 8%. Tellingly, the IMF also lowered its 2021 bounce-back forecast – growth globally is expected to rally 5.4%, vs the 5.8% forecast in April.

In other words, the decline will be deeper and the recovery slower; that is, no V-shaped recovery. We can also add US-EU trade tensions into the mix hitting stock market sentiment, as the White House has threatened fresh tariffs. I’d also suggest that the closer we get to the election and the more polls show Biden leading Trump, the greater the risk of a Democrat clean sweep, which will need to be priced into equity markets.

Improved virus response, central bank stimulus lowers risk to equities

Although we see clear headline risk around spikes in Covid cases for equity markets, any second wave is not going to result in the same level of lockdown restrictions endured in the first wave: it’s just too costly economically and because we have learned a lot in how to cope with this virus, both in terms of treatment and prevention. This means any further pullback we see, whilst potentially quite sharp, is unlikely to see a retest of the lows in March.

Meanwhile central bank stimulus is still strong. The Fed has shifted materially – it now has a $7tn balance sheet, setting a floor under the bond market that pushes up equities. The risk to equities comes later in the year when we get a real insight into both the pace of economic recovery and, by extension, corporate earnings – does the S&P 500 still justify x23 forward PE, or should it start to trade at more like x19? The current forward PE of around x23 suggests hope of a bounce back in earnings next year that may not come to fruition.

US weekly jobless claims in focus

On the pace of economic recovery, today’s weekly jobless claims report will be of great significance. Last week’s underwhelmed. Following the surprisingly strong 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 was the main concern – hiring not really outpacing firing at a fast-enough pace to be confident of a decent recovery. I would like to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.

Gold eases back as dollar recovers

Gold eased back off 8-year highs as the US dollar gained on the risk-off trade, but at $1765 in early European trade had bounced off lows around $1753 struck overnight. Short-term we see a stronger dollar exerting some pressure on gold prices; longer term the focus is on US real rates, which have just risen a touch off the lows. 10yr Treasury Inflation Protected Securities (TIPS) eased away from 7-year lows at –0.66 to –0.64, providing another little headwind to gold prices in the near term. 

Oil slides on rising stockpiles

Crude oil declined with the broader risk-off trade. Rising US stockpiles – which hit a record high for the straight week – have also started to spook traders. Crude inventories climbed 1.44m barrels in the week to June 19th, to 540.7 million barrels. Gasoline stocks were down 1.7m barrels, giving encouraging signals about driving demand. US crude oil refinery inputs rose 239,000 bpd to 13.8m bpd. Total US production rose 500,000 bpd to 11m bpd due to the return of Gulf of Mexico output following Tropical Storm Cristobal. 

WTI (Aug) retreated off the $40 level to trade just above $37 – as suggested whilst the fundamentals have started to build in favour of stronger pricing, the market will not be immune to a technical pullback on overbought conditions and/or a decline in sentiment among traders due to rising US cases. The emerging double top is less nascent than it was and increasingly calls for the $35 neckline to be touched. A breach here calls for $31.50, the swing lows touched in the second half of May.

In FX, we can see a downwards channel for GBPUSD. The cross has pulled back to 1.24 as the dollar found bid, before paring losses a little this morning. Bulls need to clear the swing high at 1.2540 to break the downtrend, but trend resistance appears around 1.25 first. Bears can eye a pullback to under the Jun 21st low around 1.2334, with the channel suggesting we may see a 1.22 handle should the bulls fail to break 1.25 next.

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.

BoE: for illustrative purposes only

Morning Note

The Bank of England left rates at 0.1% and, to the surprise of some, did not increase the size of its asset purchase programme. Sterling bounced back a bit after a week of losses following the decision. GBPUSD tested support at 1.23 overnight but spiked north of 1.2380 on the Bank of England’s announcement.

The assessment of the economy from the Bank is grim. The BoE said indicators of UK demand have generally stabilised at “very low levels” with a reduction in the level of household consumption of around 30%.  “Consumer confidence has declined markedly, and housing market activity has practically ceased,” the MPC statement noted. Company sales are seen –45% in Q2, with business investment –50%.

In a ‘plausible illustrative economic scenario’, the BoE forecasts a fall in UK-weighted world growth from 2% in 2019 to -13% in 2020, before bouncing back 14% in 2021 and 4% in 2022. Andrew Bailey, the new governor, said there will be some long-term damage to the capacity of the economy, but in the illustrative scenario, these are judged to be relatively small. The Bank seems to be in the –V-shaped reovery camp.

Two things stand out, Firstly, more QE is coming, even if it’s not today. Two members of the MPC voted to increase the stock of asset purchases by £100bn at this meeting.

Secondly, the Bank’s assumptions on economic recovery seem rather optimistic – let’s hope the plausible scenario is right. I have a nasty feeling it won’t be as there will be deep and lasting changes to the way people shop, work, travel and simply move around. The deep central bank and government support, especially furlough schemes, will make a huge difference, but things won’t be the same. IAG today says the level of demand in 2019 won’t recover properly until 2023.

After a decent start to the trading session yesterday the S&P 500 failed to break above 2890 again and bears took hold later to drive the index down 20pts. Europe was dragged lower into the close with the DAX finishing down 1%. European markets rallied a bit at the open on Thursday but the move lacks much conviction – the US will be the driver today and there futures indicate a bounce.

US 10-year bond yields rose to their highest in three weeks, pressuring gold, which has relinquished the $1700 handle to test the $1682 support area. US real yields rose to –0.38% from –0.44% as 10yr Treasuries drove to 0.7%.

Oil is in a holding pattern after the EIA said crude inventories rose less than expected. Crude oil stocks rose 4.6m barrels in the week to May 1st, whilst gasoline inventories fell on a pick-up in driving as states reopen. Domestic oil output in the US fell 200k bpd to 11.9m bpd. Inventories at Cushing, Oklahoma rose a little over 2m barrels, the smallest increase since late March. Having rallied to $26, WTI retreated but has found near-term support at $23 and is bound by resistance at $24.50. The Brent futures curve indicates a narrowing in contango spreads that indicates markets are less fearful of oversupply in the physical market.

European stocks mixed, oil rally runs out of gas

Morning Note

Germany’s top court laid down a challenge to the European Union: who is the final arbiter in European law? Apparently, they don’t think it is the ECJ. German judges think the ECB needs to show buying bonds under QE was proportionate – by what yardstick? They have 3 months to comply or the Bundesbank won’t be allowed to play.

The ECB is clearly not amused. In a very brief update, the central bank said it ‘takes note’ of the judgement by the German Federal Constitutional Court but remains ‘fully committed’ to its price stability mandate.

Finally, it added simple: “The Court of Justice of the European Union ruled in December 2018 that the ECB is acting within its price stability mandate.” Quite clearly the German court cannot overrule the ECJ – that’s the whole point, it’s why we wanted out. Italy’s PM Conte agrees, noting that ECB independence is at the heart of European treaties.

The euro has held onto losses to test the 1.0820 level this morning, as German factory orders declined 15.6%, more than the 10% expected. As I noted yesterday, anything that casts doubt on the ability of the ECB to provide the backstop to the bond market is a concern and is euro-negative.

It also seems this decision will likely kill of any hope of collective debt issuance to tackle the current crisis. And a challenge to the PEPP bond buying by the ECB from the same German actors looks likely. There is yet a tail risk that the Bundesbank is forced not to take part in ECB bond buying in three months’ time – this would cause chaos.

The S&P 500 rose yesterday but closed where it opened at 2868, some 30 points off the highs of the day. The lack of any real conviction has led to a mixed start to trading for European markets, where Monday’s rebound looks to be under threat.

Oil rallied strongly but pulled back from the highs as traders realised once again that storage is still a problem. Whilst clearly there are signs of supply and demand rebalancing because lockdown measures are being lifted, but it’s going to be a slow process and it’s hard to see it righting itself before the Jun WTI contract is up.

Crude oil inventories rose 8.4m barrels, according to data from the American Petroleum Institute (API) late on Tuesday. The more closely watched EIA inventory data is released at 15:30 London time and is forecast showing a similar kind of build around 8m barrels. Front month WTI bounced off resistance at $26 to pull back to under $24.50 in early European trade.

Today’s ADP payrolls print will be an amuse-bouche for the weekly jobless claims starter on Thursday followed by Friday’s nonfarm payrolls main course.

Euro wobbles ahead of German court ruling, risk appetite improves

Morning Note

Attention this morning was on the German constitutional court and its ruling on the ECB’s long-standing bond buying programme. This could limit the amount of bonds the Bundesbank can buy, potentially creating a rift with the ECB and other member states. The real concern is whether it could affect the €750bn Pandemic Emergency Purchase Programme (PEPP), which has much looser rules than other QE programmes.

 

It’s high stakes – if the court blocks the Bundesbank from participating in QE it would be curtains for the ECB and creates significant Eurozone breakup risks. The good news is that the judges probably realise this. High stakes but the risk of serious ructions appears low.  The European Court of Justice has already ruled in favour of the ECB’s bond buying, so it’s hoped the German court will not rock the boat at this critical moment.

 

EURUSD was lower, breaking down at the 1.09 support having failed to sustain the move above 1.10 last week, which could open move back to around 1.0810. The euro seems to be displaying some degree of stress this morning ahead of the German court ruling. 

 

European markets rose after Asian equities made some gains. Markets in Japan, South Korea and China were shut for a holiday, but Hong Kong and Sydney rose. Wall Street closed a little higher after bulls pushed the S&P 500 into positive territory only in the final hour of trading yesterday. There is a little more risk appetite as oil prices climb. 

 

The Reserve Bank of Australia left rates on hold at the record low 0.25% and seems to be well dug in here. The RBA won’t go negative and won’t hike until the Covid-19 crisis is well in the rear view mirror. This is a pattern being repeated by most major central banks. 

 

Oil continues to make steady gains with front month WTI to $22 on hopes lockdowns are being lifted. The idea that we will be moving around anything like as much as before is fanciful, at least in the near term. New Zealand is going to be shut to foreigners – except perhaps their pan-Tasman pals – for a long time to come, the prime minister says. Ryanair has reported passenger numbers in April fell 99.6% and sees minimal traffic in May and June. Carnival is getting cruises going again – tentatively – in August. New car registrations in the UK collapsed in April, falling 97% to just 4,000 vehicles.

API data later today could show a very small build in inventories, but as always we prefer to look at tomorrow’s EIA figures. A small build would give more hope to oil bulls that the glut is not as bad as feared, however I would caution that we are simply seeing inventories naturally build more slowly as we approach tank tops.

Chart: EURUSD wobbles

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