Equity markets continue September slide

Morning Note

Stock markets in Europe turned lower Thursday after tough day on Wall Street left the S&P 500 close to correction territory. Six months on and with some big gains locked in, investors are starting to fret over the recovery ahead, with the Fed warning that the US economic recovery would suffer if there is no further stimulus and the UK set for a longer winter of discontent.

On Thursday morning, European equities traded lower but pared early losses after the first hour of trading. Asia was notably weaker. German business confidence improved a fraction. Donald Trump said he could overrule the FDA’s plans to introduce tougher standards for authorising a coronavirus vaccine.

The S&P 500 closed near its lows of the day, falling over 2.3% to 3,236 on broad market weakness as both tech/growth declined alongside cyclicals. The index is close to correction territory again – from its intra-day high at 3,588 the 10% corrective move sits at 3,229, Monday’s low point. On a closing basis, it’s 3,222.

What’s remarkable is that through all this selling, Treasuries are unmoved – 10s continue to print around the 0.67% region – why are bonds just not moving through all this equity market selling?

Risk sentiment deteriorating?

Whilst we can look at the rampant speculation and excessive valuations in big tech stocks unwinding over the course of September, we are seeing broader declines in other sectors that indicates deteriorating risk sentiment as we head into the autumn.

There may be several reasons behind this – less certainty over a vaccine emerging soon, second wave fears, the realisation that consumer confidence and spending in the economy will slump unless governments continue to inject stimulus and the usual volatility before the US election.

Trump continues to tease with comments around not committing to a smooth transition of power – of course there is no risk that he would somehow carry out a coup, but equally I fear there is almost no chance the election result will be confirmed on the night. Gore/Bush 2000 seems likely to be repeated but things are far nastier, far more polarised now than then.

More broadly perhaps we can put the sell-off in equities down to fading momentum in the economic recovery – PMIs are showing weakness, whilst other measures of economic activity indicate a levelling-off after the bounce back over the summer – at the same as there is no fresh stimulus emerging either on the fiscal or the monetary side.

Fed officials warn over US economic recovery, call for government support

Whilst central banks continue to stress that they will do whatever it takes, few additional concrete steps have been taken lately.  Washington appears gridlocked over fiscal support.

Fed speakers issued a series of warnings about the path of recovery in the US. Jay Powell warned Americans would burn through savings and find it harder to sell their homes. Boston Fed president Rosengren warned of a ‘credit crunch’ by the end of the year with community and regional banks likely to come under pressure from more bad loans as businesses are forced to close.

Cleveland Fed president Mester also called for more fiscal stimulus to support the fragile recovery. Goldman Sachs lowered its quarter-on-quarter GDP growth estimate for Q4 to 3% from 6%, implying the economy contracting 2.5% in the quarter. Powell and Treasury Sec Mnuchin speak later today. Also watch the weekly jobless claims numbers, with initial claims seen at 845k.

UK chancellor abandons Autumn Budget

In the UK, chancellor Rishi Sunak is abandoning his planned Budget for a short-term round of targeted measures, which he will announce later today.  This is likely to featured more targeted support for sectors like hospitality and travel. It’s clear on both sides of the pond that unless there is more fiscal support, the economic recovery will go into neutral and stall.

Only three weeks ago the government implored us to get back to the office to support city centres – what’s strange is that they did this without realising that cases would rise. Their risk tolerance for the spread is extremely low, which indicates a government operating on the fly.

Strong dollar pressures pound and precious metals lower

Dollar strength is weighing on its major peers as well as gold and silver, although the greenback’s advance just paused for a while this morning. Sterling has retreated to its weakest level for two months and is current sitting on the 38.2% retracement with the 100-day line turning into near-term resistance.

The pound remains exposed to several strong headwinds, including the risk of a no-deal Brexit, negative rates and a deeper and longer-lasting economic collapse than peers. Meanwhile gold fell below $1850 and has retreated 10% from the recent all-time high but found support at the 100-day DMA. Silver has broken the trend line after some very nasty price action over the last few days, but it too has found support around its 100-day line.

Chart: Cable holds 1.2690 for now, 100-day line becomes resistance

Chart: Dollar index advances with three white soldiers candle formation and possible gap close to 96?

Chart: Silver test 100-day line

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

Morning Note

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

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

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

PMIs underline the fragility of the recovery

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

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

The UK is heading for a second lockdown-lite

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

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

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

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

Tesla stock tumbles after Battery Day reveals fall flat

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

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

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

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

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

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

Cable softens, BoE Baily fails to quell negative rate fears

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

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

Chart: GBPUSD downside exposed

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

Chart: Dollar continues breakout

 

Chart: Gold tests 50% retracement

Chart: Silver breaks August lows

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