Stocks open weaker, gold reclaims $2k, M&S streamlines quicker

Morning Note

Stocks yawned a bit, but Wall Street rose to within a whisker of the all-time high in another sub-1% daily move. Crowding into the tech trade showed no signs of letting up as the Nasdaq jumped 1% to a fresh record peak even as the White House announced new curbs on Huawei to restrict access to chips.

Asian shares drifted a bit as the US pressure on Huawei again highlighted the risks to manufacturing and trade, while European stocks were weaker at the open after ticking up a bit on Monday.

Stocks calm, but trouble could be brewing

August remains calm but there may be trouble ahead. Market indicators are sounding a couple of alarm bells – not necessarily to retest lows of March but for a short and sharp pullback. The US stock market is only at all-time highs because of the Fed and huge fiscal stimulus; it does not reflect reality – so what you say, it never has. But forward earnings multiples of ~25x for the S&P 500 are less likely to survive for long than 20x. Put-call ratios are moving in a direction that often correlates to a reversal.

Moreover, Vix futures point to greater anticipated market volatility into the autumn as the US presidential race inevitably tightens. Uncertainty over the result will create angst and volatility. The market is way too confident that Biden will win, although if Trump pulls it off the market could rip higher.

A fresh stimulus package would be a major tailwind for stocks, but it’s going to be hard to get it done with the election looming. The market will have to pay attention to the real economy again. A sharp rise in US mortgage delinquencies to a 9-year high at 8.2% even as house prices and homebuilder confidence rise on record low interest rates should be a cause for concern. Consumer-driven businesses, about 70% of the US economy, will be in for a shock as stimulus cheques have ended.

European shares have underperformed since the March low but would be swept up by any US-led selling. Rising coronavirus cases on the continent is a worry for reopening and could nip the nascent recovery in the bud.

M&S announces fresh job cuts

There is more carnage on the British high street as Mark & Spencer announced 7,000 job cuts in the coming months as it speeds up its ‘streamlining’ process, by which it means slashing jobs, costs and the store footprint and catching up with the modern world of retail. Covid-19 has accelerated a lot of consumer trends and as observed before, it may be the catalyst required to make M&S finally wake up. Food sales rose well, while clothing & home was down severely but is improving.

It’s very hard to gauge exactly how well M&S is doing against the unique backdrop of the pandemic, but we can say that investors should welcome accelerated change given the starting point pre-pandemic. M&S has promised renaissance before and failed, but this time it could be different.

M&S food sales ought to be higher though – Kantar figures this morning show we’re spending a lot more on groceries and all the supermarkets are gaining. However, food price inflation of 2.9% again raises the stagflation alarm bells and underpins the sense that inflation, at least on a range of basic commodities, will rise.

Warren Buffett bets on gold

Gold got a lift from Warren Buffett’s bet on the metal and a weaker dollar this morning has sent prices racing back to $2,000 after clearing the 23.6% retracement resistance around $1980. Gold has further to go longer term but there is yet still a risk of a second corrective move lower within the bull market.

Equity markets eye European Covid count, US postal ballots become electoral flash point

Morning Note

Dog days on animal farm: it’s a very quiet start to the session with European indices trading either side of the flatline in the first hour as traders eye the rise in coronavirus cases across the continent. Basic resources, healthcare and tech were higher, offsetting broad weakness in the rest of the market with travel stocks leading the losses.

Europe’s rising Covid-19 cases cause investor alarm

As noted in the week ahead, the number of new Covid-19 cases across Europe is the number one thing to watch in the coming days as it has the potential to send nascent economic recovery into reverse. Germany has extended travel warnings to nearly all of Spain, which while making it easier to grab a sun lounger is taking the shine off travel and leisure stocks again this morning. IAG and TUI both fell another 3-4%, with EasyJet down more than 2%.

A sharp rise in cases in Spain, France and Germany will make traders nervous about new lockdowns and ensure that local equity markets remain volatile. Nevertheless, basic resources stocks registered strong gains in early trade to offset much of the losses elsewhere.

US stocks tried many times but failed last week to notch a record intraday high, falling shy of the Feb 19th peak at 3,393.52 several times. The problem is that this is not a simple bull market, with the split between growth and value plain to see. All stock sectors are equal, but some are more equal than others.

US data mixed, stimulus talks going nowhere fast

Last week, US retail sales were soft, although ex-autos the number was better than expected. Unemployment claims fell below 1m for the first time. However a stimulus bill has not been discussed by Congress and with the end of the $600-a-week stimulus cheques, there may be a tougher time ahead for consumers and companies dependent on them – 70% of the US economy is consumer driven, so the loss of this additional income will be hard felt.

Unless a stimulus package is agreed, stock markets may need to take corrective action. Even if bears don’t take control, a pullback from the all-time high to consolidate gains before bulls mount a fresh drive higher should also be considered.

Asia moves higher despite cancelled US-China trade talks

Asian markets were broadly higher on Monday but shares in Tokyo fell 0.8% as figures showed Japan’s economy shrank by the most on record in the second quarter, declining 7.8%. This works out at -27.8% annualised, which makes it the sharpest downturn since 1980 when such records began. It’s also the third straight quarter of contraction. We also note that Tesla’s new registrations in China fell to 11,623 units in July, down from 15,529, which may indicate a slower rate of recovery in the world’s second largest economy.

US-China trade talks slated for Saturday did not happen with sources blaming scheduling conflicts and a desire to give China time to increase its purchase of US exports. Meanwhile, in Washington developments around the November election are starting to heat up. Speaker Nancy Pelosi has called on the House of Representatives from recess to vote on a bill to ‘protect’ the US Postal Service, accusing President Trump of a “campaign to sabotage the election”.

Election officials are worried about delays that could mean ballots are not counted – a huge amount of extra demand this year because of Covid-19. Donald Trump doesn’t trust mail-in voting and has previously said he would block additional funding for the USPS. In short, Covid-19 has created a vast amount of extra demand for postal ballots and the White House recognises these are more likely to be Democrat votes.

Meanwhile the Democrat convention gets underway on Monday and lasts until Thursday, marking the end of the phoney war and start of the campaign proper. Watch for a speech from Kamala Harris, the VP candidate, on Wednesday, with Joe Biden to speak on Thursday.

GBP/USD in focus as Brexit talks resume

Brexit talks resume this week and the European Commission fired the opening salvo in the exchange, with executive vice president Valdis Dombrovskis warning that the City will have to wait beyond the end of the year for equivalence. Talks between the UK and EU resume on Tuesday. Last week David Frost, the UK lead negotiator, said that a deal ‘can’ be reached in September, and that the UK was not interested in threatening the EU’s single market.

However he also reiterated that Britain would never compromise on the jurisdiction of the courts nor on fishing rights. There is significant headline risk for GBP this week as August rolls on. Nevertheless, hope springs eternal as far as sterling is concerned. GBPUSD was trading above 1.31 with the dollar offered across the board and the dollar index taking a 92 handle.

Stocks slide on US-China tensions, weak US jobs report

Morning Note

European exceptionalism? Led by a rebound in France and Germany,  business activity in the Eurozone picked up sharply in July, whilst the dogged British shopper has lifted UK retail sales back to pre-Covid levels. At the same time, US jobless claims unexpectedly rose amid a surge in cases which is being replicated in many other large economies, but not so much in Europe. Could Europe and the UK be handling the reopening phase of the pandemic better, and does this suggest economic outperformance? The obvious answer is that it’s not that simple – more on this below.

Stocks and other risk assets slid sharply as rising US-China tensions and a concerning US jobs report conspired to take the shine off the equity market gloss, with a decline in US big tech names weighing heavily on the broader market. The DAX fell 2% in early European trade and the FTSE 100 fell back under the 6,100 level after Chinese shares led Asian markets lower in a brutal session.

The S&P 500 declined over 1% yesterday fell as big tech shares slid. When big tech falls so does the whole market. The S&P big five – Amazon, Apple, Alphabet, Facebook and Microsoft – which now make up almost a quarter of the index by market capitalization – were all down more than 3%, with Apple off 4.5% after a note from Goldman Sachs called the rally in the stock ‘unsustainable’. Intel share plunged 10% after it warned on delays to the next generation of microchips which is having a clear read across to European technology sector this morning.

US-China tensions are a concern as the latter retaliated for the closure of its consulate in Houston by telling its American friends in Chengdu to shut their consulate. I would reiterate that this kind of tit-for-tat is not new; a trade war has been raging for years – what’s new is the coronavirus and a presidential election in a few months.

The weekly US jobs report was very disappointing and indicated that the progress made as lockdown ended has not just stalled but gone into reverse as various states rolled back their reopening. Against expectations for a flat reading of 1.3m, initial claims in the week to July 18th actually rose 100k from the week before to 1.4m. Continuing claims were better than expected at 16.2m vs the 17m anticipated. It looks like the surge in coronavirus cases across the ‘Sun Belt’ and other areas of the country, which caused many states to pause or roll back reopening of the economy, resulted in an increase in layoffs. The question we will continue to ask is how much is temporary and how much is permanent?

Futures indicate the S&P 500 to open lower and down marginally for the week, which has been quite a volatile one. Monday’s aggressive rally at the close was countered by a sharp reversal in the last hour of trade on Tuesday before the uptrend resumed to take the broad market to its best level since February. What we are seeing is a slow grind and lots of indecision, which could be the hallmark of the next 6 months with a largely sideways but volatile market.

Watching the data remains a tough ask – PMIs will show rebounding sentiment, but these are full of flaws and may not be entirely relied upon. Harder data like the unemployment claims report is not as sensitive to mood swings and will continue to indicate a long hard slog before we get back to pre-Covid levels.

Nevertheless, we are seeing some better data here in Europe. Germany’s manufacturing PMI rebounded into positive territory for the first time in 19 months, whilst France’s services PMI accelerated at a healthy clip. Combined, the Eurozone composite PMI moved up to 54.8 from 48.5 in June and was ahead of the 51.1 expected. I would issue the usual caveats about the nature of these diffusion indices, which only ask survey participants if things were better, worse or the same as the previous month. But at least they are positive – things are clearly looking up, albeit from a very low base level during lockdown. Can it last is the big question, and with backlogs of work declining and costs rising the picture for employment is not good. On the face of the headline numbers are encouraging, but these mask some real trouble ahead and a long, hard slog to get back to pre-Covid activity levels.

And today’s UK retail sales print is encouraging in some ways. Sales rebounded 13.9% in June, which easily beat expectations and came after May’s 12.3% jump. Taken together, the increases in the volume of retail sales in May and June have brought total sales back to a level similar to as before the pandemic. Ex-fuel, total retail sales are better than they were a year before. But on-food and fuel sales, while up sharply, are still not back to where they were before the lockdown took hold. High streets are being stripped bare, but at least you can now stick a four-storey block of flats without any planning permission where the grocer used to have his shop.

Gold continued to push up as US real rates edged even lower with the rally only encountering resistance close at the $1,900 round number and a retest of this level looks likely. US 10yr TIPS  declined again to –0.90% as benchmark 10yr Treasury yields slipped under 0.6%. The record at $1,921 is well within sight and the bulls are not about to let go of this opportunity to set an all-time high.

In FX, the euro continues to make ground against a faltering dollar as DXY slips to its weakest in almost two years. EURUSD has notched 5 straight positive sessions and momentum to the upside appears strong. The pair has broken free from the Jan 2019 resistance around 1.1570 and is trying to make 1.16 stick. Decent German PMI data helped sentiment towards the euro this morning, with the composite reading up to 55.5, ahead of expectation. However, the broad risk off tone to the market on Friday is underpinning some bid for the dollar which could see the rally falter, at least in the near-term.

GBPUSD held gains above 1.27 and moved clear of the 200-day SMA in a bid to clear out the descending trend resistance, even as the tone from the Brexit negotiators yesterday did not bode well for the chances of securing a deal.  If cable can make this move stick it opens the path back to 1.30 despite the Brexit worries, chiefly as the long dollar trade unwinds.

Chief negotiator for the EU, Michel Barnier, said a deal was unlikely by the end of the year. We should also remember that the pound faces multiple downside risks in terms running large twin deficits, a protracted economic recession from Covid that is forecast to be greater in magnitude than Europe and the RoW, and talk of negative rates still holding water. However, we can also look are record low and negative gilt yields as a sign that the UK is not seen in any real danger of exploding debt loads. Britain still has some friendly strangers to count on, or perhaps just a sign that central bank intervention is working well.

Stocks firm, earnings unmask weakness, OPEC+ decision eyed

Morning Note

European markets moved up again this morning after stocks rallied on Wall Street and futures indicate further gains for US equity markets despite big bank earnings underlining the problems on Main Street. Sentiment recovered somewhat after Moderna’s vaccine candidate showed ‘promising’ results from phase 1 trials. It is too early to call a significant breakthrough, but it’s certainly encouraging.

Cyclical components led the way for the Dow with top performers the likes of Caterpillar and Boeing, as well as energy names Exxon and Chevron up over 3% as the index rose over 500pts, or 2.1%, its best day in over two weeks. Apple shares regained some ground to $388 ahead of an EU court ruling today on whether the company should repay €13bn in unpaid taxes.

Asian markets were mixed, with China and Hong Kong lower as US-China tensions rose, but shares in Japan and Australia were higher. European shares advanced around 0.75% in early trade, with the FTSE reclaiming 6,200 and the DAX near 12,800.

However, Tuesday’s reversal off the June peak may still be important – lots of things need to go right to extend the rally and you must believe this reporting season will not be full of good news, albeit EPS estimates – such as they are – may be relatively easy to beat.

My sense is what while the stock market does not reflect the real economy, this does not mean we are about to see a major drawdown again like we saw in March. The vast amount of liquidity that has been injected into the financial system by central banks and the fiscal splurge will keep stocks supported – the cash needs to find a home somewhere and bonds offer nothing. It will likely take a significant escalation in cases – a major second wave in the winter perhaps – to see us look again at the lows.

For the time being major indices are still chopping around the Jun-Jul ranges, albeit the S&P 500 and DAX are near their tops. Failure to breakout for a second time will raise the risk of a bigger near-term pullback, at least back to the 50% retracement of June’s top-to-bottom move in the second week of that month.

Trading revenues, loan loss provisions surge at US banks

US bank earning highlighted the divergence between the stock market and the real economy. JPMorgan and Citigroup posted strong trading revenues from their investment bank divisions but had to significantly increase loan loss provisions at their consumer banks. Wells Fargo – which does have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn.

This begs the question of when the credit losses from bad corporate and personal debt starts to catch up with the broader market. Moreover, investors need to ask whether the exceptional trading revenues are all that sustainable. Shares in Citigroup and Wells Fargo fell around 4%, whilst JPMorgan edged out a small gain. Goldman Sachs, BNY Mellon and US Bancorp report today along with Dow component UnitedHealth.

UK retail earnings

In the UK, retail earnings continue to look exceptionally bleak. Burberry reported a drop in sales of 45% in the first quarter, with demand down 20% in June. Asia is doing OK, but the loss of tourist euros in Europe left EMEIA revenues down 75% as rich tourists stayed clear of stores because of lockdown. Sales in the Americas were down 70% but there is a slight pickup being seen. Encouragingly, mainland China grew mid-teens in Q1 but grew ahead of the January pre COVID level of 30% in June, Burberry said. Shares opened down 5%.

Dixons Carphone reported a sharp fall in adjusted profit to £166m from £339m a year before, with a statutory loss of £140m reflecting the cost of closing Carphone stores. Electricals is solid and online sales are performing well, with the +22% rise in this sector including +166% in April. Whilst Dixons appears to have done well in mitigating the Covid damage by a good online presence, the Mobile division, which was already impaired, continues to drag.

Looking ahead, Dixons says total positive cashflow from Mobile will be lower than the previous guidance of about £200m, in the range of £125m-£175m. Shares fell 6% in early trade.

White House ends Hong Kong special status, US to impose sanctions

US-China tensions are not getting any better – Donald Trump signed a law that will allow the US to impose sanctions on Chinese officials in retaliation for the Hong Kong security law. The White House has also ended the territory’s special trade status – it is now in the eyes of the US and much of the west, no different to rest of China. This is a sad reflection of where things have gone in the 20+ years since the handover.  Britain’s decision to strip Huawei from its telecoms networks reflects a simple realpolitik choice and underscores the years of globalisation are over as east and west cleave in two.

The Bank of Japan left policy on hold but lowered its growth outlook. The forecast range by BoJ board members ranged from -4.5% to -5.7%, worse than the April range of -3% and –5%. It signals the pace of recovery in Japan and elsewhere is slower than anticipated.

Federal Reserve Governor Lael Brainard talked up more stimulus and suggested stricter forward guidance would be effective – even indicating that the central bank could look at yield curve control – setting targets for short- and medium-term yields in order to underpin their forward guidance.

EUR, GBP push higher ahead of US data; BOC decision on tap

In FX, we are seeing the dollar offered. EURUSD has pushed up to 1.1430, moving clear of the early Jun peak, suggesting a possible extension of this rally through to the March high at 1.15. GBPUSD pushed off yesterday’s lows at 1.2480 to reclaim the 1.26 handle, calling for a move back to the 1.2670 resistance struck on the 9-13 July.

Data today is focused on the US industrial production report, seen +4.3% month on month, and the Empire State manufacturing index, forecast at +10 vs -0.2 last month. The Bank of Canada is expected to leave interest rates on hold at 0.25% today, so we’ll be looking to get an update on how the central bank views the path of economic recovery.  Fed’s Beige Book later this evening will offer an anecdotal view of the US economy which may tell us much more than any backward-looking data can.

Oil remains uncertain ahead of OPEC+ decision

Oil continues to chop sideways ahead of the OPEC+ decision on extending cuts. WTI (Aug) keeps bouncing in and off the area around $40 and price action seems to reflect the uncertainty on OPEC and its allies will decide. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd. Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance.

However, an unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower. OPEC yesterday said it expects a bullish recovery in demand in the second half, revising its 2020 oil demand drop to 8.9m bpd, vs the 9m forecast in June. The cartel cited better data in developed nations offsetting worse-than-expected performance in emerging markets. EIA inventories are seen showing a draw of 1.3m barrels after last week produced an unexpected gain of 5.7m barrels.

Stocks pull back as California shuts up shop again, pound retreats

Morning Note

A rolling back of the reopening process in California and rising US-China tensions left Wall St and Asian markets weaker, with stocks in Europe following their lead as surprisingly good Chinese trade data was not enough to calm markets.

European equity indices fell back in early trade on Tuesday after stocks on Wall Street suffered a stunning reversal late in yesterday’s session. At one point the S&P 500 touched its highest since level since the end of February at 3,235 before sellers sold hard into that level and we saw a very sharp pullback to 3,155 at stumps.

After threatening to break free from the Jun-Jul trading range, the fact the S&P was unable to make good on its promise could signal fresh concerns about the pandemic but also investor caution as we head into earnings season – the fact is the market should not be up for the year. Although it’s hard to get a real feel for valuations because so many companies scrapped earnings guidance, the S&P 500 is trading on a forward PE multiple that is way too optimistic, you would feel. Earnings season gets underway properly today with JPMorgan and Wells Fargo.

The Nasdaq also slipped 2% as tech stocks rolled over, with profit-taking a possible explanation after a) a very strong run for the market has left prices very high and, b) signs of a pullback for the broader market indicated now might be a good time to take stock. Tesla rode a $200 range in a wild day of trading that saw the stock open at $1,659, rally to $1,795 and close down 3% at $1,497.

Stocks retreat as California rolls back reopening, US-China tensions rise

California’s economy is larger than that of the UK or France, so when Governor Gavin Newsom rolled back the reopening of the state on Monday, investors took notice. The closure of bars, barbers and cinemas among other business venues followed moves in economically important states like Texas, Florida and elsewhere, indicating the rate of change in the recovery is not going to improve.

Whilst the market had developed a degree of immunity to case numbers rising, it is susceptible to signs that the economic recovery will be a lot slower than the rally for stocks in the last three months suggests.

Overnight Chinese trade data surprised to the upside with exports up 0.5% in June and imports rising 2.7%, beating expectations for a decline and signalling that domestic demand is holding up well. Singapore’s economy plunged into a recession with a 41.2% drop in GDP, while Japan’s industrial production figures were revised lower.

Tensions between the US and China took another sour turn as the White House rejected China’s claims to islands in the South China Sea, which aligns the US with a UN ruling in 2016. It had previously declined to take sides – the move indicates Washington’s displeasure and willingness to go up against China on multiple fronts now.

UK economy undershoots forecasts with tepid recovery

The UK is already seeing what a non-V recovery looks like. GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply.

UK retail sales rose 10.9% in June on a like for like basis excluding temporarily closed stores, whilst overall sales rose a more modest 3.4% and non-food sales in stores were down a whopping 46.8% for the quarter. Suffice to say that headlines of rebounds mask many ills.

Sterling extended a selloff after the GDP numbers disappointed. The reversal in risk appetite late yesterday saw GBPUSD break down through the channel support and this move has continued to build momentum overnight and into the European morning session. The rejection of the 1.2667 region seems to have made the near-term top for the rally. The 38.2% retrace line at 1.250 may offer support before the old 50% retracement level at 1.2464.

WTI (Aug) was a little softer under $40 as market participants eye the OPEC+ JMMC meeting on Wednesday. This will decide whether to roll back some of the 9.6m barrels or so in production cuts by the cartel and allies. The risk is that if OPEC acts too earnestly to raise production again the market could swiftly tip back into oversupply should the economic recovery globally fail to build the momentum required.

Another factor to consider is whether giving the green light to up production is taken by some members as an excuse to open the taps again and result in more production than agreed – compliance remains the ever-present risk for any OPEC deal.

Equity markets whipsaw on US-China trade uncertainty

Morning Note

It’s over, it’s not over: The White House looked to be as dysfunctional as ever as Peter Navarro, trade adviser to President Trump, said the US-China trade deal was over, prompting a sharp fall in risk assets in trading during the Asian session. He was forced to retract the statement, saying it was taken out of context, before Donald Trump himself quickly tweeted:

The reality is of course the US-China relations are exceptionally poor, but on paper at least, the trade deal lives. The market wouldn’t like fresh open conflict on trade between the two world’s largest economies, as it would make recovery from the pandemic even slower. Navarro may speak the truth, but it’s an inconvenient truth that the White House would prefer to avoid right now. Markets are happy to nod along as long as the Fed has their back.

Overnight, equity markets were whipsawed by the comments from Mr Navarro, but Asian stocks eventually rallied. US stocks edged higher on Monday but stayed well within the recent ranges; futures were all over the place overnight.

Europe opens higher, but second-wave risks cloud outlook

European stocks opened firmer having slipped yesterday, again though sticking to the near-term ranges. Whilst the FTSE is trading in the range and favouring the 61.8% level over the 38.2%, the market has made a series of success lower highs that may indicate bulls are not feeling very confident about recovering the post-pandemic highs any time soon. Rallies are still lacking conviction, but dips are still being bought.

Further increases in cases across big economies make the outlook uncertain. US cases continue to surge, while South Korea says it is in the midst of a second wave that arrived sooner than previously thought. Meanwhile England is set for reopening of pubs, restaurants and more on July 4th.

Pound hits resistance at 1.25, BoE governor Bailey due to speak later

In FX, the pound is higher having apparently found a near-term trough around the 1.2340 area. GBPUSD pushed up to 1.25 but hit resistance here and has retraced a little to the 1.2450 support area on the 50% retracement of the May-Jun rally. Andrew Bailey, the governor of the Bank of England, speaks today after giving some policy hints yesterday in an article in which he said the Old Lady was more likely to reduce its balance sheet before raising rates.

He also was widely reported to have said the Government could have run out of cash had it not been for the central bank, which is patently untrue, since governments which borrow and print their own currency cannot run out of money – what the Bank did was smooth out the functioning of bond and currency markets.  Indeed what Mr Bailey said was not that the government would run out of money – he knows it cannot; his comments were widely misreported and misinterpreted in the press.

Euro spikes on French PMI strength

The euro took off higher after French PMI data went over 50, signalling expansion. The PMIs are a bit of a wonky indicator right now given they are entirely sentiment-based and ask only a narrow question – whether things are better, worse or the same as the prior month.

Given the reopening of the economy in the last few weeks, it would be very strange indeed if the PMIs were not improving – it does mean the economy is out of the woods. EURUSD drove up to 1.13 but hit resistance here and turned back.

Gold eased a little off its highs above $1760 but looks well support around $1750. US benchmark real rates – 10yr Treasury Inflation Protected Securities (TIPS) – fell again, slipping to –0.63%, the lowest level in 7 years. Crude oil was firmer above $40 and managed to make a fresh post-negative-pricing high.

How will the US-China relationship define the Presidential election?

US Presidential Election

Trump knows that antagonising China is a dangerous game. But in the run up to the election, it’s also a political necessity.

Before the coronacrisis, there was already a perfect storm of economic and security disputes brewing between the US and China. Covid-19 compounded all the existing issues as well as adding a whole new dimension to the rift. Tension is escalating on all fronts.

Economic

Phase one of the trade deal is dead. The promises made by China – purchasing at least $200 billion in US exports over two years – looked unrealistic from the get-go. But the virus means meeting phase one’s targets will be downright impossible. Throw in that China is already buying more from competitors (its imports from Brazil are up 35% on May 2019) even in an economic downturn, and any revival of the Trade Deal before the Election look dead and buried.

Security

The tech war has entered a period of unprecedented turbulence. Trump continues to affirm that Huawei threatens national security, upping the ante in May when a new rule was issued barring Huawei and its suppliers from using American technology.

Foreign policy

The Trump administration is reportedly exploring several measures that could punish China for its handling of the virus, including suing the Chinese government for reparations and cancelling US debt obligations to the country. Meanwhile, China has ordered its state-owned enterprises to stop purchases of US farm products after the US threatened to withdraw its special status treatment for Hong Kong – itself a response to China’s new security law for the territory.

The President was aiming to run his campaign based around strong economic performance, and failing that, a successful response to the pandemic. As both these options become increasingly difficult to achieve, China must serve as the scapegoat on which Trump can pin his administration’s failings.

Usefully for Trump, the American people aren’t too fond of the Chinese right now either. A Pew Research Center poll from April suggests that Americans have increasingly negative views of the country with two-thirds now holding an unfavourable opinion towards China.

This sentiment is widespread across a range of groups in America, which is unusual in an ever more polarised electorate.

A Republican ad campaign has been launched proclaiming, “One nation deserves the blame: China”, while the America First Action SuperPAC says it’s spending around $10 million on ads in swing states condemning Biden over China.

It’s rare for two thirds of Americans to reach such a strong consensus so inevitably both the incumbent and his challenger are attempting to burnish their anti-China stripes.

Each also believes they can use China to score personal points against the other candidate.

  • Trump is quick to criticise “Beijing Biden” and his son’s alleged profiteering from Chinese business.
  • A recent Biden campaign ad reads, “Trump rolled over for the Chinese. He took their word for it.”, and goes on to cite some of Trump’s early remarks praising China’s pandemic response.

This fight isn’t without its risks however.

  • In May, Biden’s aforementioned ad sparked outcry from representatives of Asian American Organizations who accused the Democratic candidate of feeding the rise of anti-Asian racism in the US.
  • For Trump, a new economic cold war would imperil any incipient return to growth not to mention leave it isolated when big global discussions take place. Hence the recent decision by the US Commerce Department to allow American companies to collaborate with Huawei on 5G technology standards.

As we know though, Trump is no stranger to risky political moves. With winning the election his top priority and alternatives running out, the President will hold onto the anti-China card for dear life to avoid being trumped by Biden.

The battle of ‘who’s tougher on China’ shows no signs of relenting. Both candidates will be forced to push harder and harder to have the last word on an issue which has galvanised such a strong reaction among the American public.

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.

JD.com raises $3.9 billion in 2020’s second-biggest IPO so far

IPO

JD.com, the second-largest online retailer in China, has raised $3.9 billion during its secondary listing on the Hong Kong Stock Exchange.

The company is pricing its IPO at HK$226 per share, HK$10 below the top end of its indicated range. JD.com already trades on the Nasdaq.

Shares will start trading in Hong Kong on Thursday 18th – the same day as the company holds its massive annual Anniversary Sale (known as 6.18). Last year JD.com reported sales of almost $30 billion – this week’s event will be a key test of demand as China continues to recover from lockdown and battles a fresh outbreak of Covid-19 cases.

The JD.com IPO follows a public offering by NetEase which raised $2.7 billion. Together the two tech giants have raised $6.6 billion – almost double what the rest of the Hong Kong IPOs have raised all year.

NetEase shares ended their first day of trading up 5.7%, closing HK$7 higher than its offer price of HK$123.

Hong Kong IPOs get a boost on US-China tensions

Increasing tensions between Washington and Beijing have helped stoke the Hong Kong IPO market recently. The US House of Representatives is considering a bill that would mandate US-listed Chinese companies to undergo financial audits, which could result in a number of companies being delisted.

This has prompted many companies whose shares are already traded in the US to seek a secondary listing in Hong Kong as a precaution.

NetEase acknowledged the impact that rising tensions could have in its IPO filings. Baidu founder and chairman, Robin Li, also acknowledged recently that his company could consider a secondary listing in Hong Kong if the US government tightens regulations surrounding Chinese firms.

More IPOs on the way

This could be the start of a reawakening for the IPO market in Hong Kong. China Bohai Bank Co is looking to raise over $2 billion, while both Smoore International Holdings and SK Biopharmaceuticals are expected to raise around $800 million.

Upcoming Hong Kong IPOs

  • JD.com
  • China Bohai Bank
  • SK Biopharmaceuticals
  • Hygeia Healthcare Holdings
  • Kangji Medical Holdings
  • Smore International Holdings
  • Zhenro Services Group

Stocks off a little at month end, US-China tensions rise

Morning Note

What did they do just when everything looked so dark?
Man, they said “We’d better accentuate the positive
Eliminate the negative
And latch on to the affirmative”

Stocks are ending May on a slightly downbeat note, but investors have definitely been accentuating the positive this week and for the whole of May.

Thank goodness, Covid-19 is getting bumped off the headlines; trouble is it’s not for good news. At last though we are seeing some caution displayed in the markets over China’s decision to impose national security legislation on Hong Kong and the ensuing ramp up in US-China tensions.

US stock markets close in the red, Trump to give press conference on China

US stocks were positive for most of Thursday before sharply reversing in the last hour and closing in the red, after the White House announced that Donald Trump would hold a press conference on China on Friday. ‘We are not happy with China. We are not happy with what’s happened’, he said. The UK, which signed a joint statement condemning China for its actions with Australia, Canada and the US, is opening the door to citizenship for 300,000 Hong Kong residents.

Given how stretched valuations have become, worries about US-China tensions don’t seem fairly priced in. As previously noted, investors need to be prepared for things to get worse from here, particularly given the back drop of a looming election for a second term, the worst recession in memory and 100,000 deaths from Covid – blamed on China – and the trade war, which is still rumbling on.

The pressure on Donald Trump at home is high. The press conference today will likely see Trump increase the war of words with China but he could go further an announce further sanctions on individuals associated with law, or revoke Hong Kong’s special status with the US on trade.

The S&P 500 was up most of the session but closed 6 points lower at the death, whilst the Dow fell 0.6% to 25,400, crumbling 300 points in the last 45 minutes of trading on the news of the White House presser.

Overnight, shares in Hong Kong fell again. European equities followed suit on Friday, declining by around 1% after a decent run in the previous session. The FTSE 100 faded off the 6200 handle reclaimed on Thursday. Hong Kong and China focused HSBC was down another 2.5%. But the FTSE was still headed for a roughly 200-point gain this week. European equities are still firmly higher this week as investors rotated somewhat away from the Covid/tech/quality play and back into cyclicals as economies reopen without undue rises in cases.

The Nasdaq, which has notably outperformed on a year to date basis, has markedly underperformed benchmarks this week. Remember it’s the last day of the month of May – it’s been a solid week and month for equities so investors may seek to take a little risk off the table going into the weekend and into June. The Hong Kong/US/China situation is all the excuse needed.

Data continues to show the dire economic impact of Covid-19

The economic data still stinks. 1 in 4 Americans have lost their jobs since Covid hit. US initial jobless claims rose another 2m to top 40m. But it’s slowing, with the weekly count down again for the 8th straight week. Moreover, continuing claims fell 3.9m to 21.1m, which indicates the labour force is returning – hiring is beating firing again, but it will be a long slow process to recover the 40.8m jobs lost, far longer than it took to lose them. A portion will be lost forever.

The US economy slowed more than previously thought, with the second GDP print for Q1 at -5%, vs 4.8% on the initial print. The Atlanta Fed GDPNow model forecasts Q2 GDP down 40.8%.

French GDP in the first quarter was down just 5.3% vs the 5.8% initially printed. Retail sales and industrial production in Japan both declined by more than 9%. Retail sales in Germany dropped 5.3% in April, not as bad as the -12% forecast – spendthrifts! Meanwhile those frugal French consumers spent even less than forecast, with spending down more than 20% vs a 15% declined expected. France is though reopening its culturally vital bars, restaurants and cafes from next week, so that should get consumers parting with a few more sous.

Dollar offered despite risk-off trade in equities

Despite the risk-off to trade in equities the dollar was offered into the month end. The euro extended its rally after breaking the 200-day moving average yesterday, with EURUSD pushing up to 2-month highs at 1.11. The March peak at 1.1150 is the next target. Sterling was also firmer against the buck, with GBPUSD recovering the 1.23 handle, trying to hold the 50-day line as support.

Shares in Twitter declined by more than 4% as Donald Trump signed an executive order that paves the way for legislation to tighten rules for social media platforms around third party content liability. It’s probably all a lot of hot air and distraction as he pursues a personal vendetta following the fact check warning on a couple of his tweets. Nevertheless, we have consistently warned that social media companies will need to face up to more and more scrutiny and tighter regulation around content distribution and the use of personal data.

Oil first fell but since recovered after EIA figures showed a build in crude oil inventories. Crude stocks rose 7.9m barrels, though inventories at Cushing, Oklahoma, declined by 3.4m. WTI (Aug) was hovering around $33 at send time, just about slap in the middle of its consolidation range.

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