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

Banks lead European stocks higher

Morning Note

Asian shares soared overnight on Monday, lending a positive start to the European session as equities rode a broad risk rally. The very strong US nonfarm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus.

Hong Kong rose 4%, Tokyo 2%, while shares on mainland China were up around 5% on, among other things, some bullish commentary in state press. Shanghai shares jumped 5.7%, the best one-day gain in five years.

It looks like local investors are chasing the market and the spill-over has lifted the boats across Asia. China’s rally sparked a broad risk-on move. Escalation of US-China tensions don’t seem to be a major worry.

Bank stocks surge as Europe opens higher

European shares took the baton and opened roughly 2% higher in early trade on Monday led by a surge in bank stocks. HSBC rallied 6% apparently on the China trade read across, but elsewhere we saw broad gains as investors looked to new leadership at Lloyds and Commerzbank, whilst hopes of a fiscal lift in Europe may be a factor. Broadly it looks like the Chinese rally has lifted cyclicals like banks and autos.

Eco data was better but not as good as hoped – German factory orders jumped 10.4% in May, although the rebound was less impressive than the 15% expected. Orders remain almost a third below where they were a year before. Bank of France Governor Francois Villeroy de Galhau said on Sunday the country’s economy was bouncing back quicker than expected.

Meanwhile, Andrew Bailey, the governor of the Bank of England, has written to UK banks warning of the operational challenges of negative rates (new computer systems, lower net interest margin). This could be taken either way; either it’s an explicit message to get ready, or it’s way of saying to them not to worry because we know it’s a massive pain. The letter said negative rates remain “one of the potential tools under active review” should the Bank think more stimulus is required.

The rally left the DAX close to the top of the June range, trading above 12,800. The FTSE is close to the 61.8% retrace of the pullback in the second week of June. US futures point towards strong gains when Wall Street reopens after the three-day weekend, with the S&P 500 moving clear of the 78.6% retracement. June peaks are starting to come into view and will be a key test for whether this rally has further to run or whether it’s time for a pullback.

Bets of further stimulus boost stocks

Whilst markets face a wall of worry, investors are confident of getting a leg up from further stimulus. Britain’s chancellor Rishi Sunak will set out a mini-Budget this week focused on jobs. A meeting of Eurozone finance ministers on Thursday will set the tone for the key July 17th-18th summit. Whilst the various countries disagree over the composition of grants and bailouts, on conditionality and over how the funds are divided up, Germany’s Angela Merkel is bound to make sure that a deal is done: the squabbling needs to stop.

Meanwhile the US Congress is set to work on a second stimulus bill this month. At the same time, Covid-19 cases continue to soar – markets are getting used to the numbers – but the pace of recovery in the US will flatten if rising cases means states re-impose lockdown restrictions. As noted last week, the headline number in the jobs report masked some ills, so we will again be very much focused on the weekly initial and continuing claims numbers this week.

Dollar softens, oil edges higher, Buffett bets on natural gas rebound

Elsewhere, the broad risk rally sent the dollar lower, with DXY at 96.80. Sterling pushed a little with GBPUSD back about 1.25, looking to break last week’s peak a little short of 1.2530. EURUSD was a whisker short of 1.13, entering the resistance formed by the July 2nd peak. Clearing this opens up the path to the Jun 23rd swing high at 1.1350. Market positioning remains quite aggressively short, with net speculative positions on the euro the most bearish in three years.

Crude oil was a little higher, with WTI (Aug) just about nudging the $41. Gold is steady at $1776, with the latest CFTC figures showing speculative net longs at the highest in two years. Finally, Warren Buffett is making a $10bn bet on natural gas prices rebounding – the veteran investor thinks the market, which hit a 25-year low last month, has bottomed, making assets cheap and is on course for a rebound.

Bank of England wheels for fresh charge

Morning Note

Central banks need to be marshalled like cavalry and stimulus like charges. If your stimulus doesn’t rout the enemy immediately, you can easily get bogged down in a melee in which you lose your advantage. The Federal Reserve keeps wheeling around and managing to rally troops for fresh charges – the corporate bond buying announcement this week was a fine example.

But increasingly the cavalry is wearying and the more this drags on the less impact the Fed’s repeated charges will have against the twin enemies of deflation and unemployment. Investors are clinging on to central bank stimulus like the Gordon Highlanders gripped the stirrups of the Scots Greys, as they rode down the French columns at Waterloo.

BoE preview: more QE on the way

The Bank of England will mount a fresh charge at the enemy formations today. Coordination is the name of the game: it needs to keep on top of the huge amount of issuance – borrowing – by the UK government. Wartime levels of debt means the BoE must expand the envelope to hoover it up or risk yields starting to rise and spreads widening.

So, the BoE is expected to increase QE by at least £100bn, but I think it may well opt for £200bn, or even more, given that even £100bn would only last it until the end of the summer and the real long-term economic problems are going to emerge later in the autumn. Interest rates will stay at 0.1% and expectations firmly anchored for the near future with forward guidance repeating that the Bank will do whatever it takes.

In order to achieve this, the government and central bank will need to coordinate throwing more money at the problem. Indications suggest furlough has been costly but only delayed a lot of the pain – a looming unemployment crisis will require further central bank support, which means more QE is likely.  And don’t talk about negative interest rates – Andrew Bailey mentioned it once, but I think he got away with it. Once you go negative, it’s very hard to get back to normal.

Whilst fresh forecasts are not due until August, the Bank will likely set a more defensive tone in terms of its expectations for the recovery. As noted here on May 7th (BoE: for illustrative purposes only) the Bank’s assumptions on economic recovery seem rather optimistic.

Sterling was steady ahead of the decision. GBPUSD held around the middle of its trading range, sitting on the 38.2% retracement of the bottom-to-top rally from the May low to the Jun high. Monday’s test of the 1.2450 (50% level) remains the support whilst the upside seems well guarded by the 200-day moving average just above 1.2690 that sparked the run lower since Tuesday.

Stocks on the back foot on fears of second Covid-19 wave

Wall Street stocks fell yesterday, except for tech, whilst European markets are on the back foot this morning as investors parse new cases in the US and China. The bulls lost energy as new hospitalisations in Texas due to Covid-19 rose 11% in the space of 24hrs. Several other US states are seeing rising cases that are a worry, albeit the kind of mass lockdown seen earlier this year appears an unlikely course of action. The economic damage is too high, and we are generally better equipped to handle it.

Worries about China are also important – markets had largely not bet on a second lockdown in the world’s second largest economy.

Overall, the market swings now suggest investors are reacting to various headlines about recovery, stimulus and new cases without much clear direction as to what it all means as a bigger picture. The major indices are right in the middle of recent trading ranges, sitting around the 50-60% retracements of the move from the multi-month highs at the start of last week to the swing lows this week.

Elsewhere, the US pulled out of talks with Europe over a global digital services tax, which raises the risk of individual countries taking their own steps, in turn sparking a fresh wave of US-EU tensions. An escalation of dormant trade wars is not out of the question if EU nations and the UK decide to tax US tech giants aggressively.

This comes of course after the EU launched an anti-trust probe into Amazon. In Europe, Germany passed additional fiscal stimulus to combat the pandemic costs. This morning Angela Merkel called on the EU to agree to the Covid fund before the summer break.

Crude steady on EIA inventories data

Crude prices were steady as they hold within the consolidation pattern printed since the start of June. WTI for August was holding around the $38 marker after the EIA inventories rose 1.2m barrels, vs expectations for a draw.

This matched the API data (+3.9m) and suggests there are more supply-side pressures at present, but OPEC data indicated demand not falling as much as previously expected in the second half of the year. Meanwhile it seems Iraq is working its way towards complying with OPEC+ cuts.

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