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

What will happen to the US dollar if Trump wins re-election?

US Presidential Election

After years of threatening a devaluation, in the face of China’s own currency manipulation, President Trump recently indicated that he is now in favour of a strong dollar. Given the President’s inconsistency on the issue, and the current turbulent economic environment, what exactly would a second term entail for the most important currency in the world?

How a second Trump term could impact USD

The crucial distinction here is one of means versus ends. In the mind of President Trump, the currency is just a tool to deliver a buoyant stock market and booming economy, whatever he might tweet.

The Trump administration will do whatever it takes to catalyse the recovery, whether appreciation or depreciation is the required remedy. In our view, the latter will prove to fit the bill, and so the US dollar’s value will fall if the Trump train continues to roll through November.

Whilst the dollar has been relatively stable in its value over the course of Trump’s first three years in office, the gargantuan nature of the economic task at hand means that this trend simply cannot continue.

When he began his first term, the economy looked to be in a relatively healthy state. Discounting the remote possibility of a miraculous economic recovery, his second term will debut in very different circumstances.

Massive relief spending set to continue

Looking at the demand side, one could be forgiven for assuming that a dollar appreciation was imminent. The US economy comfortably outperformed the G7 and G20 averages in the first quarter of 2020, shrinking by just 1.3% compared to 2% and 3.4% respectively.

This is likely the result of mammoth congressional stimulus packages, which have allowed the US to lead the world nominally in terms of relief spending and come second in terms of percentage of GDP.

A second Trump term would almost certainly see further waves of relief, likely in the form of his $1 trillion infrastructure plan. This particular avenue of execution benefits from relatively healthy levels of bipartisan support, meaning that such spending can be expected no matter who controls the Congress come 2021.

US stocks likely to continue outperforming, pressuring USD

And in terms of the stock markets, the US has also consistently outperformed global averages throughout the President’s first term, including in the post-Covid era.

This is exemplified by the fact that the S&P 500 index has risen by over 50% since 2016, whilst the FTSE has fallen by around 9% in this same period. Given all of the above, the US is likely to continue attracting investors the world over, delivering inflationary demand-side pressures that would support USD.

However, the aforementioned upward pressure caused by a healthy economy will be insignificant when compared with the deflationary pressure instigated on the supply-side.

Federal Reserve stimulus measures will help Trump get weaker dollar

Since February, the Federal Reserve has increased its balance sheet by almost $3 trillion, moving from $4.2 trillion to $7 trillion. This rapid increase is expected to continue, with Trump calling the policy ‘something that’s really great for our country’.

In addition, the possibility of extreme measures in the form of yield curve control is rising, with several current Fed governors commenting that the policy should be on the table if necessary.

All of this is indicative of our central point: the authorities are prepared to do whatever it takes to prop up the stock market and the real economy and will stop at nothing to achieve this end.

Expanded balance sheet, flat interest rates, yield curve control to cause dollar depreciation

Trump has repeatedly held up rising stock prices as a beacon of success in his first term and will continue to do so if he wins a second. With quasi-control over the Fed, afforded to him by his position at the bully pulpit, the President will get what he desires, no matter the cost.

In this particular instance, the cost will be an expanding Fed balance sheet, rock-bottom interest rates and, if it comes to it, yield curve control measures. The sheer enormity of the response on the supply-side will be more than enough to drown out any inflationary pressures on the demand-side – depreciation inbound.

Overall, Pres Trump doesn’t really care about the value of the dollar outside of its utility as an economic tool or a stick with which to hit China. The real motivation behind the President’s actions in a second term will mirror those of the first: growth in the stock market and the real economy, in that order of importance.

In his pursuit of these goals, no policy instrument is off limits, whether it be a trusty expansion of the Fed’s balance sheet, or an as yet untested tool like yield curve control.

Whilst the Fed is technically a quasi-independent body, such independence is illusory, particularly in the context of Trump’s propensity for the use of public pressure. Whilst some demand-side inflationary effects will be initiated by a better-than-average recovery, such effects will be lost in the vastness of the supply-side avalanche that is to come.

If he achieves a second term, Pres Trump will leave office in 2024 having achieved two things that he initially desired: a stock market on the rise and a depreciated dollar.

US Election 2020: What happens to the US dollar with a Democrat clean sweep?

US Presidential Election

There are various permutations of results from this year’s US elections, but polling data increasingly indicates a strong chance of a Democrat clean sweep of the House, Senate and White House.

Obviously, the question for forex traders is what this may mean for the USD.

Traditionally the US dollar performs well in election years. The dollar index (DXY) has only fallen in two of the last 12 elections, with the drop in 2012 only marginal.

According to Morgan Stanley, the key is not who wins but whether you get gridlock in Washington or not. The bank sees USD strength from a Democrat ‘blue wave’, that is a clean sweep of the House, Senate and White House. But they also see USD strength from a Republican full house, as unlikely as that seems now based on the polls. The US dollar would be more likely to soften if Donald Trump wins but the House and/or Senate are controlled by the Democrats.

Pandemic changes everything

Historical patterns may not prove much use, however, due in large part to the massive amount of fiscal and monetary easing that has been carried out not just by the US but also its G10 counterparts. This has created an unusual backdrop to the election and means the waters FX traders are swimming in are murkier than usual.

According to researchers at Sweden’s SEB, the dollar rose in the 100 trading days after nine of the past 10 elections from 1980 to 2016. Democrat wins produced a 4% rally on average, whilst a Republican victory saw a gain of 2%.

So, can we expect the dollar to rally after the election no matter what the outcome? It’s clearly a lot more complicated, not least because of the unique macro-economic backdrop created by the pandemic.

Indeed, foreign exchange analysis from investment banks UBS and Crédit Agricole suggests precisely the opposite. One argument is that Trump’s policies of fiscal stimulus and protectionism have supported the dollar, so a Democrat clean sweep could pull these legs from under the USD.

However, there are not many signs of the Democrats taking a more lenient approach to China, in fact both sides seem to be vying to be seen as tougher than the other on China. Therefore, trade disputes and battles of intellectual property rights will, in all likelihood, persist.

On the fiscal side, it’s hard to see much difference – both camps back massive stimulus to support the economy post-pandemic, whilst the Federal Reserve is very clearly prepared to keep rates at zero for as long as necessary. The usual rules of the game in terms of how the dollar responds to fiscal and monetary policy inputs have to a certain extent been thrown out by the pandemic.

Donald Trump has been a little wayward in his messaging around the dollar’s strength – it’s normal for presidents to underscore the idea that a strong dollar equals a strong USA. The ‘strong dollar policy’ has been in place for at least 20 years and initially Trump was seen moving away from this stance.

Whilst he has been more resolutely in the strong dollar camp lately, there is always the risk that post-pandemic the president again calls for a weaker dollar to make the country more competitive.

Euro matters

Relative economic performance and relative expectations of interest rate differentials will be what matters. Will the euro rebound with a fiscal stimulus package? Will the pound stabilise after Brexit?

The euro matters most when we look at this other side of the dollar equation as EUR has an outsized weighting in DXY – more than 50%. So, when we look at USD, or DXY, strength we are also to a large extent looking at EUR too.

The European Central Bank (ECB) has like the Fed responded to the pandemic with a massive increase in its QE programme. Efforts on the fiscal side have been slower, but in spite of concerns among some member states about the nature of stimulus funding, there seemed to be a broad agreement on the need for support.

Crucially right now the more ‘dovish’ policymakers are the more it supports the currency – the worry is that not enough support risks growth, but also creates pressure in bond markets, leading to a widening of spreads between bunds and peripheral yields. The ECB seems to be in ‘whatever it takes’ mode, though we note German resistance to participating in asset purchase programmes. The risk really lies on the fiscal side.

Failure to agree to the fiscal measures being discussed as part of the EU budget talks would be negative for the currency. Whilst an agreement is the base case, it may not deliver fully on its promise and may be a watered-down version to the €750bn rescue fund put forward by the European Commission.

Morning Note: Aussie rallies on election win, equities slow

Equities
Forex
Indices
Morning Note

It was a tentative start to the trading week as markets digest the last few day’s ructions, ongoing news flow around US-China trade and mounting concerns about what is going on between the US and Iran. 

The main European bourses have opened in the red although the FTSE 100 put up something of a fight to just about hold in the green. Can probably thank the weaker pound for this. Italian stocks are being hammered this morning.

US S&P 500 e-mini futures are green now having seen the broad market turn south on Friday. Stocks fell in the last couple of hours of trading last week on reports US-China trade talks were on hold. The market remains at the mercy of commentary and news flashes around these talks and it is wise to try and put some ear muffs on at times. 

Australian banking stocks were the main winners as the win for the Liberal-National coalition removed the risk of certain regulatory moves.  

Forex – Aussie wins

AUDUSD – ScoMo’s miracle victory has lifted the Australian dollar a touch, but bulls shouldn’t get too excited yet. AUDUSD firmed up on the first session of trading since the result of the election became known. Having fallen close to decade lows on the 0.68 handle, the pair has firmed on the 0.6920 level. Resistance seen at 0.69440, the 23% retracement of the down move from the April highs. Whilst the election may deliver some short-term relief for Aussie bulls, it’s the RBA that really matters. The market is betting on a rate cut this summer and seems likely, the question is whether this is the first in a cycle of cuts or is one-and-done.  Nevertheless, having taken a look at decade lows, bulls will be hopeful that we have seen a reversal in the long-term down trend.

Elsewhere in FX, sterling remains under the cost. GBPUSD is struggling below 1.28 and is showing few signs of being able to mount much of a rally. The ongoing political uncertainty and the open war in the Tory party will act as drags on risk sentiment. GBPUSD was last at 1.2730 and with support seen at 1.2710, the Jan 10/11 lows. 

And coming up this week we have a potentially volatile period for GBP given the European Parliament elections take place on Thursday through to Sunday. We should also be on guard for any EUR spasms if there is a surge in populist parties threatening to shake things up in Brussels. We’ve heard all this before, but nevertheless markets remain highly sensitive to news flashes – only last week the euro was moving on a series of comments made by Italy’s ruling populist parties.  

Oil higher

We have some can kicking but it rather looks like OPEC is leaning to an extension and could adjust the volumes. Compliance was at 160% in April, which gives ample scope to raise output or reduce the production curb commitments. Brent remains bid above $73 on this as well as the mounting tensions between the US and Iran

Morning Note: European markets lower, oil gains, pound under pressure

Equities
Forex
Indices
Morning Note

European markets opened lower, with the major equity indices pulling back after Wednesday’s kneejerk move higher amid a very noisy, confusing picture for investors regards trade, growth and interest rates.

The FTSE 100 lost 20 points to retreat to 7275, losing the 7300 handle achieved yesterday. Auto stocks are weaker this morning – perhaps a dose of reality in the cold light of the morning after yesterday’s gains. 

Markets recovered ground yesterday, switching from red to green sharply as reports suggested the US will delay auto tariffs by six months. This, combined with some more jawboning from Mnuchin on trade talks, tended to ease the worries about the US-China trade spat. 

But the US president add pressure elsewhere – issuing an executive order banning US firms from working with Huawei. Lots and lots and lots of noise from all sides – making this a tough market to be in.

SPX bounced off support around the 2817 level, which was a big area of resistance in the not-too-distant past, to close at 2,850. 

Bonds bid

The 10-year Treasury remains below 2.4%, with bonds finding bid as the US retail sales and industrial production numbers missed yesterday. 3m-10yr inversion again flashes the recession amber lights – expect to hear more of this talk even though the US seems a long way from recession right now (3.2% print GDP, consumer spending and retail sales at multi-year highs, unemployment at 50-year lows…I could go on).

Oil rallies

Oil – Brent has rallied above $72. Bullishness seems to be down to mounting geopolitical risks in the Middle East. Specifically, oil is higher because the market is worried that the US and Iran are at risk of a flare-up. Oil rose despite a surprise build in US inventories, which were up 5.4m barrels in the last week according to yesterday’s EIA data. We also saw a build in inventories in Cushing.  

Meanwhile the IEA revised its demand growth outlook lower by 90k barrels a day to 1.3m. Whilst this was bearish, the group also highlighted the significant supply side uncertainty – Iran, Venezuela, Libya etc. As we noted in a recent strategy note on oil, the IEA says the supply picture is ‘confusing’. 

Sterling under pressure

FX – Unemployment data from Australia overnight came in weaker and leads us to assume the RBA will cut over the summer (or winter). Although employment rose, jobs growth seems likely to slacken. The RBA has made it perfectly clear that should inflation or unemployment not improve it will be cutting soon. This may well create further downside on the Aussie, which is of course under pressure from the whole China-trade-growth story.

AUDUSD is seriously threatening the 0.69 level on the downside. There is a lot of pressure there and it could go, which would open up move to 2016 lows at 0.68. We’re at multi-year lows here so there is a lot of support to contend with. Whether AUDUSD gets squeezed lower still though will depend on whether the RBA signals it’s one (maybe two) and done, or if it’s embarking on a longer-term easing cycle. 

GBPUSD remains below the 1.2860 level having breached this important support yesterday. Brexit worries abound – it’s either no deal or no Brexit by the looks of things. Next up we could see it slip to the mid-Feb lows around 1.2780. Below that we start to consider a return to the 2019 lows around 1.24 as a possibility. The rebels are putting their pieces in place to oust May if (when) her Brexit bill fails against for the umpteenth time.  Meanwhile as we noted yesterday’s note, amid a broad downturn in risk appetite the pound is exposed. EURGBP is advancing past the 0.87 marker and was last at 0.874, pushing up to 0.88 and the Feb highs.”

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