US Election, Recession, Brexit: What’s in store for markets in 2020 H2?

The first half of 2020 has been a wild ride. We’ve seen unprecedented moves in markets, historic stimulus efforts by both central banks and governments, and record-breaking data that grabbed headlines across the globe.

H1 has already brought plenty of drama, but what should we expect from the next two quarters? Join us for a recap of some of the biggest events in market history and a look at the risks and opportunities that lie ahead.

Coronavirus pandemic prompts worst quarter in decades for stocks

At the start of 2020 the main themes of the year looked to be the US Presidential Election, the trade war with China, and Brexit.

It seems like years ago that markets began to get jittery on fears that the handful of novel coronavirus cases in Wuhan, China, could become something ‘as bad as SARS’. It quickly became apparent that we were dealing with something much worse, and the market was quick to realise the full, brutal, reality of a global pandemic.

The panic reached its zenith towards the end of March. As the sell-off ran out of momentum global stock markets were left -21.3% lower. The S&P 500 had its worst quarter since 2008; the Dow dropped the most since 1987 and set a new record for the biggest single-day gain (2,117 points) and single-day loss (2,997 points). European stocks had their worst quarter since 2002, with a -23% drop in Q1.

Oil turns negative for first time in history after Saudi Arabia sparks price war

Things became even more chaotic in the oil markets when, after OPEC and its allies failed to agree a pandemic response, Saudi Arabia opened the floodgates and slashed prices of its crude oil exports. Oil prices endured the biggest single-day collapse since the Gulf War – over -24%.

It was further strain for a market now seriously considering the risk that shuttered economies across the globe would hit demand so hard that global storage would hit capacity. The May contract for West Texas Intermediate went negative – a first for oil futures – changing hands for almost -$40 ahead of expiry.

Meanwhile US 10-year treasury yields hit record lows of 0.318%, and gold climbed to its highest levels in seven years, pushing even higher in Q2.

Economies locked down, central banks crank up stimulus

Nations across the globe ordered their citizens to remain at home, taking the unprecedented step to voluntarily put huge swathes of their economies on ice for weeks. Even when lockdown measures were eased, the new normal of social distancing, face masks, and plastic screens left many businesses operating at a fraction of their normal capacity.

The world’s central banks were quick to step in during the height of market volatility and continued to do so as the forecasts for the economic impact of the pandemic grew even more grim. The Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia, and the Reserve Bank of New Zealand all dropped rates to close to zero. Along with the European Central Bank, they unleashed enormous quantitative easing programmes, as well as other lending measures to help support businesses.

Unprecedented stimulus as unemployment spikes

Governments stepped in to pay the wages of furloughed employees as unemployment spiked – the US nonfarm payrolls report for April showed a jaw-dropping 20.5 million Americans had become unemployed in a single month. In the space of just six weeks America had erased all the job gains made since the financial crisis. The bill for US stimulus measures is currently $2 trillion, and is set to go higher when further measures are approved.

While most of the data may be improving, we’re still yet to see just how bad the GDP figures for Q2 are going to be. These, which will be released in the coming weeks, will show just how big a pit we have to dig ourselves out of.

H2: Recovery, US election, trade wars, Brexit

Markets may have recovered much of the coronavirus sell-off – US and European stocks posted their best quarter in decades in Q2 – but the world is still walking a fine line between reopening its economies and fending off the pandemic. Second wave fears abound. In the US in particular, economic data is largely pointing to a sharp rebound in activity, but at the same time Covid-19 case numbers are consistently smashing daily records.

These key competing bullish and bearish factors threaten to keep markets walking a tightrope in the quarters to come. Because of this, progress in the race to find a vaccine is closely watched. Risk is still highly sensitive to news of positive drug trials. The sooner we get a vaccine, the sooner life can return to normal, even if the world economy still has a long way to go before it returns to pre-crisis levels.

US Presidential Election: Trump lags in polls, Biden threatens to reverse tax cuts

The biggest talking point on the market in the coming months, aside from coronavirus, will undoubtedly be the US Presidential Election. The stakes are incredibly high, especially for the US stock market, and Democrat nominee Joe Biden intends to reverse the bulk of the sweeping tax cuts implemented by president Donald Trump.

Trump is currently lagging in the polls, with voters unimpressed by his response to the pandemic and also to the protests against police brutality that swept the nation. The president has long taken credit for the performance of the stock market and the economy, so for the latter to be facing a deep recession robs him of one of his key topics on the campaign trail.

Joe Biden may currently have a significant lead, but there is a long time to go until the polls, and anything could happen yet.

China trade war in focus, Hong Kong law adds fresh complications

The trade war with China would be a focus for the market anyway, but will come under increasing scrutiny in the run-up to the election. Thanks to Covid-19, anti-China sentiment is running high in the United States. This means Biden will also have to talk tough on China, which could mean that the damaging trade war is set to continue regardless of who wins the White House this time around.

Tensions have already risen on the back of China’s passing of a new Hong Kong security law, and coronavirus makes it virtually impossible that the terms of the Phase One trade agreement hashed out by Washington and Beijing will be carried out. Trump may be forced to stick with the deal, because abandoning it would leave him unable to flaunt his ability to make China toe the line during the presidential race. This would be positive for risk – markets were already rattled by fears that the president’s response to the Hong Kong law would include abandoning the deal.

How, when, and if: Unwinding stimulus

Even if we get a vaccine before the end of the year and global economies do rebound sharply, the vast levels of government and central bank stimulus will need to be addressed. Governments are running wartime levels of debt.

We’re looking at an even longer slog back to normalised monetary policy – something that banks like the Bank of England and the European Central Bank were struggling to reach even before Covid. There will be huge quantitative easing programmes to unwind and interest rates to lift away from zero, or potentially even out of negative territory.

Markets have been able to recover thanks to a steady cocktail of government and central bank stimulus. The years since the financial crisis have proven that it is incredibly difficult to wean markets and the economy off stimulus. There could be some tough decisions ahead, especially as governments begin to consider how they plan to repair their finances in the years to come.

Brexit deadline approaches, impasse remains

There is also Brexit to consider. While the coronavirus forced officials to move their negotiations online, little else seems to have happened so far. Both sides are refusing to budge and both sides are claiming that the other is being unreasonable. The UK does not want an extension to the transition period, and the two sides are running out of time to agree a trade deal.

We’ve seen before that both Downing Street and Brussels like to wait until the last possible moment to soften their stance. However, the risks here are higher because before there was always the prospect of another extension.

The last time negotiations were extended the battle in Westminster shocked the UK to its constitutional core. The Conservative landslide victory of 2019 gave Boris Johnson a much stronger hand this time around – the UK will leave in December, regardless of the situation.

Stay on top of the biggest events in H2

Whatever happens in the coming months, we’ll be here to bring you the latest news and analysis of the top developments and market events via the blog and XRay.

Stocks, shopping and borrowing all rise

Stocks are firmer on Friday though major indices continue to show indecision as they rotate around the 50-60% retracement of the recent pullback through the second week of June. Economic data remains challenging and in the US at least there are fears about rising case numbers.

US jobless claims were disappointingly high, missing expectations for both initial and continuing claims. Following the surprisingly good nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m.

The slowing in the rate of change is a concern – hiring is not really outpacing firing at a fast-enough pace to be confident of a decent recovery. You would prefer to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.

US Covid-19 cases climb, UK retail sales jump in May

Worries about the spread of the disease persist, though second wave fears are not exerting too much pressure as investors start to get used to rising case numbers – remember it’s not cases that count, it’s the lockdown and people’s fear of going out that hurts the economy and corporate earnings. California and Florida both registered their biggest one-day rise in cases. As previously stated, I don’t believe there is the will to enforce blanket lockdowns again.

UK retail sales rose 12% in May, bouncing back from the 18% decline in April as we rushed to DIY stores but are still 13% down on February levels before the pandemic struck these shores.  Australia also posted a strong bounce in retail sales of more than 16%.

Will US quadruple witching boost volatility for range bound stocks?

Stocks were broadly weaker yesterday in Europe and the US. Shares across Europe have opened higher on Friday and remain set to end the week up. As per yesterday’s note, the major indices remain in consolidation mode around the middle of the range from the Jun 8/9th peaks to the Jun 15th lows. The S&P 500 finished at 3115, on the 61.8% retracement of the move.

Trading around the 6240 level this morning the FTSE 100 is similarly placed but also flirting with the 50% retracement of the Jan-Mar drawdown. Remember it’s quadruple witching in US when options and futures on indices and equities expire, so there can be a lot more volume and volatility.

UK public debt is now higher than GDP, official data this morning shows. That’s not happened since the 1960s as the nation recovered from the second world war and highlights the damage being wrought on the public finances by the pandemic response. Picking up from the Bank of England yesterday, which increased QE by £100bn, the amount of issuance may require additional asset purchases from the central bank.

Sterling bears eye 1.22 in the wake of BoE decision

Sterling broke to almost three-week lows yesterday, with GBPUSD testing the 1.24 round number support in the wake of the BoE decision. This morning the 50-day simple moving average at 1.2430 is acting as support but having already broken down through the key support levels the path to 1.22 is open again. The euro was also making fresh lows for June, with the 1.12 round number holding for the time being after a breach of the 1.1230 area at the 23.6% of the 2014-2017 top-to-bottom move.

OPEC compliance promises lift oil

Oil is higher, with WTI (Aug) progressing back towards the top of the recent consolidation range close to the $40 level, which may act as an important psychological level. Iraq and Kazakhstan have set out how they will not only comply with OPEC cuts but also compensate for overproduction in May. Other ‘underperforming participants’ have until Jun 22nd to outline how they will compensate for overproduction following Thursday’s Joint Ministerial Monitoring Committee (JMMC). OPEC conformity stood at 87% in May and the JMMC did not recommend extending the maximum level of cuts into August.

Hopes that non-compliant nations will make up for cuts helped raise sentiment around crude and sent Brent into backwardation for the first time since the beginning of March, with August now trading a few cents above September and October contracts.

Stocks come off highs but optimism reigns, OPEC agrees cut

German and Chinese data is taking the gloss a little off Friday’s US jobs report, but the overriding sense in stock markets remains one of remarkable optimism. Speaking of which, pubs in England could reopen by Jun 22nd.

Stock markets surged last week and completed Friday by breaking through more important levels after a very strong jobs report from the US. The nonfarm payrolls report showed the US economy added 2.5m jobs in May, after more than 20m were lost the previous.

This was taken as a reason to buy stocks as it handsomely beat forecasts of 8m jobs being lost. The S&P 500 is now down just 1% for the year and trades with a forward price-to-earnings ratio of more than 23.

The report was of course hailed as a signal of American greatness – the biggest comeback in history, according to Donald Trump – and the White House even suggested it meant less support may be needed for the economy: ‘There’s no reason to have a major spending bill. The sense of urgent crisis is very greatly dissipated by the report,’ said the president’s economic advisor Stephen Moore.

Cue the Federal Reserve this week which needs to keep up the ‘whatever it takes’ mantra – does it see concern in the recent rise in Treasury yields that it needs to lean on, or will it take their recovery as a sign of optimism?

NFP boosts stocks, but recovery will still take a long time

I would like to make three points on this jobs report.

One, an unemployment rate of 13.3% is still very, very bad – 18m jobs lost over two months and a continuing weekly claims count on the rise.

Two, this was the easy bit as furloughed workers came back to their jobs as soon as they could – this seemed to happen a little quicker than had been expected but was, in itself, not the surprise. The tough part is not the immediate snap back in activity once restrictions lift, but recovery to 2019 levels of employment and productivity, which will take much, much longer.

Three, the data itself is flawed. There have been classification errors, so the real rate of unemployment may be much higher, whilst the response rate to the survey was a lot lower than usual.

Treasury yields and stocks surged – the S&P 500 went above 3200 before closing at 3193, whilst 10-year yields drove to 0.94%. Gold pulled back to its weakest level in a month.

China trade data, German industry output weigh on European stock markets

European stock markets opened lower on Monday, pulling back marginally from Friday’s peaks as Chinese trade data and German industrial production numbers weighed. China’s exports fell 3.3% year-on-year in May, whilst imports declined 16.7%.

German industrial plunged 18% last month, the biggest-ever decline.  But there is little sign risk appetite has really slackened. The FTSE 100 looks well supported now above 6400, having closed the all-important March 6th-9th gap. The DAX looks well supported at 12,700.

Crude oil gaps higher after OPEC meeting

Crude prices gapped higher at the open after OPEC+ agreed to extend the deepest level of production cuts by another month and Saudi Arabia followed this by hiking its July official selling prices by around $6, more than had been expected.

A deal among OPEC and allies, confirmed on Saturday, had already been all but announced last week. WTI (Aug) pushed up above $40 but gains have been capped with this agreement being all but fully priced.

The question will be whether there is appetite among members to extend cuts again. Those countries that have not complied with quotas in May and June will need to make up the difference in July, August and September.

Higher oil prices will encourage US shale producers to reopen taps, whilst it is unclear how well demand is coming back despite lockdown restrictions being lifted around the world.

Adelanto semanal: Altas expectativas en torno a las reuniones de la FOMC

Como viene siendo habitual, podemos esperar un aluvión de aciagos datos económicos a lo largo de la semana que viene. Prestaremos atención a las cifras por si esconden claves acerca de la duración de la recuperación económica y también para comprobar si los pronósticos del colapso previsto en el 2T son tan funestos como parecen.

Los mercados de materias primas estarán muy pendientes de la reunión de la OPEP, aunque las últimas noticias apuntan a que lo que ocurra podría decepcionar a los operadores. La FOMC podría recuperar sus pronósticos económicos, así como arrojar algo más de luz sobre las perspectivas de las políticas con un viraje hacia una orientación prospectiva de la política monetaria.

¿Qué nos dicen los datos del sentimiento sobre la recuperación tras la Covid? 

Operadores, economistas, empresarios y legisladores de todo el mundo siguen sin saber con certeza cómo será la recuperación tras el fin del confinamiento. La mayoría aún alberga la esperanza de que se produzca un abrupto repunte, pero no parece que vaya a ser el caso.

Entre tanta incertidumbre, el sentimiento de empresas y consumidores se erige como un indicador útil de la valoración de la gente de a pie sobre el futuro. Como cabría esperar, hasta ahora las encuestas han sido profundamente pesimistas.

Sin embargo, actualmente asistimos a la reapertura de numerosas economías, así como a la relajación de las medidas de confinamiento y, en muchos países, las personas están volviendo a algo parecido a la vida normal. ¿Estos hechos se han traducido en una perspectiva más halagüeña o este primer paso simplemente ha puesto de manifiesto cuánto nos queda hasta alcanzar la recuperación?

¿Ampliará la OPEP los históricos recortes de producción? 

La semana pasada, la decisión de la OPEP de no posponer su reunión más allá del 9 de junio no sentó bien a los mercados petrolíferos. A principios de la semana, algunos informes apuntaban a que el cártel pretendía ampliar sus históricos recortes de producción durante varios meses o incluso hasta finales de año.

Estas esperanzas impulsaron el precio del petróleo, pero el crudo y el Brent quedaron a la deriva a finales de semana a medida que las perspectivas se ensombrecían. Finalmente, parece más probable que Arabia Saudí y Rusia acuerden ampliar los recortes históricos durante un único mes, en lugar de empezar a reducirlos a partir de julio. Sin embargo, las tensiones en torno a la falta de cumplimiento entre algunos de los miembros del cártel avivan las dudas acerca de la posibilidad de que no se alcance ningún acuerdo.

Datos de inflación de EE. UU.: ¿deflación sostenida a la vista? 

Esta semana se publicarán los datos de la inflación estadounidense. Los titulares de los últimos días han recogido noticias impactantes: en abril se produjo la mayor caída en el crecimiento de precios desde 2008, y la inflación subyacente registró el mayor descenso desde 1957, año en el que se empezó a registrar este parámetro.

Los legisladores no van a preocuparse demasiado por un solo mes de caídas de precio bruscas; la principal fuente de inquietud es que estamos en el umbral de un prolongado periodo de deflación. Los tipos de interés ya están al mínimo, pero otra lectura inferior a cero del crecimiento de los precios podría hacer que los mercados se pregunten cuánto tiempo dejará pasar la FOMC antes de llevar los tipos a terreno negativo.

Reunión de la FOMC: los mercados buscan pronósticos económicos y orientación prospectiva de la política monetaria 

El jueves, el Comité federal de mercado abierto anunció sus últimas decisiones en materia de políticas.

No obstante, esta vez los mercados esperarán que la FOMC proporcione alguna indicación. La reunión de abril, y sus correspondientes actas, no esbozaron ningún plan concreto acerca de cómo podría evolucionar la política monetaria en el futuro en respuestas al deterioro de las condiciones económicas. Los miembros del comité sopesaron establecer objetivos de desempleo e inflación, así como una fecha límite antes de la cual no se incrementarían los tipos.

El Resumen de proyecciones económicas probablemente vuelva esta semana después de que, en marzo, se dejara de publicar dado el elevado nivel de incertidumbre con respecto a las perspectivas económicas. Este hecho, junto con una orientación prospectiva de la política monetaria implícita, ofrecerá a los mercados una visión más precisa de la política de la Fed en el futuro.

El crecimiento y los datos de producción británicos condicionarán las expectativas del 2T 

El aluvión de datos de Reino Unido relativos a abril nos dará una idea del temido rendimiento del 2T. Ya se ha asumido que este trimestre será nefasto, pero los datos mensuales del PIB y de la producción industrial confirmarán si hasta los peores escenarios han sido tan terribles.

Se prevé que el PIB medio para el trimestre finalizado en abril se situé en el -12 %, con una caída del 2 % en abril. En términos mensuales, se prevé que el crecimiento se desplome un 24 %, mientras que la caída interanual se situará en torno al 29 %. La producción manufacturera probablemente haya descendido casi un 30 %. Nos encontramos inmersos en lo que se supone que es la peor parte, pero todavía nos preguntamos cuán fatídico será el balance de daños en la economía.

¿Todo despejado para la oferta en la nube de Adobe? 

Con el fin de la temporada de ganancias, la agenda corporativa está completamente vacía, aunque Adobe podría suponer una interesante novedad.

El software de la empresa está basado en la nube, para gran alivio de la mayoría de los negocios que dependen de él, pero cuyos empleados se encuentran confinados en sus hogares, lejos de sus equipos de trabajo. El hecho de que sus productos se comercialicen mediante un modelo de suscripción podría ayudar a mantener una relativa estabilidad en los ingresos; no obstante, como la mayoría de las empresas, es probable que Adobe informe de una merma en su actividad durante el trimestre.

Lo más destacado en XRay esta semana

Descubra toda la programación de formación y los análisis del mercado financiero.

07.15 UTC Daily European Morning Call
17.00 UTC 08-June Blonde Markets
From 15.30 UTC 09-June Gold, Silver, and Oil Weekly Forecasts
17.00 UTC 10-June FOMC Preview with chief market analyst Neil Wilson
14.45 UTC 11-June Master the Markets with Andrew Barnett

Acontecimientos económicos clave

No se pierda las principales citas del calendario económico de esta semana:

06.00 UTC 08-Jun German Industrial Production
08.30 UTC 08-Jun Eurozone Sentix Investor Confidence
01.30 UTC 09-Jun AU NAB Business Confidence
09.00 UTC 09-Jun Eurozone Final Employment Change / Revised GDP (Q/Q)
00.30 UTC 10-Jun Westpac Consumer Sentiment
01.30 UTC 10-Jun China CPI
12.30 UTC 10-Jun US CPI
14.30 UTC 10-Jun US EIA Crude Oil Inventories
18.00 UTC 10-Jun FOMC Rate Decision
18.30 UTC 10-Jun FOMC Press Conference
Pre-Market 10-Jun Dollarama – Q1 2021
12.30 UTC 11-Jun US Unemployment Claims
14.30 UTC 11-Jun US EIA Natural Gas Storage
After-Market 11-Jun Adobe – Q2 2020
06.00 UTC 12-Jun UK GDP (M/M), Manufacturing/Industrial Production (M/M), Construction Output (M/M)
14.00 UTC 12-Jun Preliminary University of Michigan Sentiment Index

Equities head for strong finish, all eyes on the bond market, NFP jobs report

No V? The lack of a V-shaped recovery may not be worrying stock markets too much, but it is a source concern for consumers who lost confidence over the course of May. Perhaps this was due to the glacial pace of easing of lockdown restrictions and annoyance at the government; or perhaps it was economic – worries about job losses and a big drop in house prices finally sinking in and offsetting the novelty of being furloughed.

Whatever the cause, GfK’s UK consumer confidence index slipped to –36 in the second half of May, down from –34 in the first half and near the –39 printed in July 2008. Meanwhile, Japanese household spending fell even further in April, declining more than 11%. This was the fastest drop in spending since 2001 and built on a 6% drop in March.

Stock markets fell yesterday, pausing what’s been a robust risk-on rally in June, whilst bond yields snapped out of their funk. European stock markets suffered a broad decline. The Nasdaq hit a record intra-day high but ended down 0.7% on the day. The Dow eked a small gain, but the broad S&P 500 index declined 0.34%, though held the 3100 handle after dropping as low as 3090.

European stock markets rebound, eyes on bonds after ECB QE hike

Today, European stock markets rallied back to their highs of the week in the first half hour of trading, with the FTSE rising above 6400 and the DAX at 12,700. Both set to complete a very strong week of gains, with a German stimulus package and ECB bond buying helping to lift sentiment. The DAX’s breach of the 61.8% retracement was a very good bullish signal –  since then, in the last week it has cleared the 200-day line and advanced through the 78.6% level, up close to 10% since last Friday’s close. The FTSE is over 5% higher this week.

Eyes on the bond market again: after being somewhat subdued by central bank actions for many weeks US 10yr yields broke out to 0.85% even as stocks slipped up, whilst 2s couldn’t move beyond 0.2%. I think you have to look deeper into what the central banks are doing here as well as the amount of issuance. The Fed is reducing the pace of asset purchases, but investors think it will need to keep a lid on the front end of the curve for a long time by keeping its target rate at zero.

The move in US yields seemed to be a result of the ECB move to increase QE by a further €600bn. I’m not sure we can draw any immediate conclusions from this sharp move in US rates, but it will be very interesting to watch how the Fed responds to this development. Does it seek to influence the yield curve – yield curve control like the Bank of Japan, or does it let bond markets function?

If investors are dumping longer-dated bonds, and driving up yields, it may be that the inflation trade is on – given the tsunami of issuance and central bank intervention, it is logical enough to expect a bout of inflation coming round the bend, even if the immediate pressures from the pandemic are deflationary. Or it may just be a signal that the bond market thinks the worst of the crisis is over and we can chill out a bit – the move up in yields and drop in the Vix under 25, combined with the rally in equities should all be telling us that things are hunky dory.

When you look at the economic data, however, it’s hard to be to very optimistic. One to watch.

US nonfarm payrolls report on tap

The US nonfarm payrolls print is the last big risk event of the week, and seen at –8m, albeit Wednesday’s ADP number was just –2.76m vs –9m expected. Last month showed a massive –20m drop, but it only really told us what we already knew after several weeks of dreadful weekly initial claims numbers. Yesterday, US initial jobless claims fell to 1.9m but the continuing claims number rose 650k from last week to 21.5, ahead of expectations.

The fact that this number is rising is a worry that either businesses are not rehiring very fast, or worse, workers laid off simply don’t want to go back to work because they earn more now being unemployed thanks to the expanded benefit package. One report indicated about 40% of US workers are better off not working.

WTI oil, Brent oil near highs as OPEC again suggests moving meeting

Oil was near the highs with WTI (Aug) above $38 and Brent (Aug) above $40.50 as OPEC brings its off-again, on-again meeting forward from June 9th to June 6th (tomorrow) – at least that is the current understanding.

At various stages this week it’s been taking place yesterday, next week and not at all. Russia and Saudi Arabia want to get this extension over the line before the start of the new trading week. The meeting taking place on a Saturday does raise the prospect of a gap open on Sunday night.

Dollar unwind continues, euro higher on ECB stimulus

In FX, the dollar continues to get hit in an unwind of the pandemic trade that pushed it aggressively higher. EURUSD has advanced with the ECB stimulus which is going to give the politicians a better chance of agreeing to fiscal stimulus as per the EC’s budget proposals.

EURUSD broke above 1.1350 to trade around 1.1370 – eyes on the 1.1450 target still. GBPUSD is up around 1.2640, near to breaching the 200-day moving average, despite worries about Brexit talks going nowhere and the British parliament rejecting any extension of the transition period. The break by the pound above the twin peaks of the April highs opens up the path back to 1.28 and then 1.31, but the 200-day line offers a big test first.

Candlestick price chart for the pound sterling to US dollar FX pair

Equities pause after strong gains, FTSE reshuffle confirmed, ECB meeting ahead

Corporate PR is not something that worries traders regularly. Sometimes bad press is bad for the stock – look at Facebook and Cambridge Analytica. Sometimes the optics are just a bit galling for some of us. Take HSBC, which saw fit to promote overtly anti-Brexit propaganda with its ‘We Are Not an Island’ ad campaign.

Now, along with Standard Chartered, it is backing controversial national security in Hong Kong that will destroy freedom in the territory supposedly enshrined by the 1984 Sino-British joint declaration. It’s in tough spot of course – most of its revenues come from Greater China. It needs Beijing on side, but equally it should probably take a moment to put its political views in context next time. Shares are down a third YTD and have halved in the last two years.

Stimulus supports global stock markets – more PEPP from the ECB today?

Meanwhile stimulus everywhere is supporting equity market gains. Germany has agreed a €130bn stimulus package to reinvigorate its economy, while Australia has unveiled its fourth, A$680m programme, aimed at boosting the construction sector. The European Central Bank (ECB) will today likely stretch its pandemic asset purchase programme by another €500bn.

Stocks roared higher on Wednesday, with all the major indices marking another day of progress, but the rally has paused and stocks are off slight ahead of the ECB meeting and US jobless numbers today. The FTSE 100 closed above 6380 as bulls drive it back to the Marc 6th close at 6462. The DAX moved aggressively off its 200-day moving average and has support at 12,400 despite a slight pullback today.

The S&P 500 rose 1.4% to clear 3100 and moved close to the 78.6% retracement level. It now trades with a forward PE of 22.60. The Dow rallied another 500 points, or 2%, before running into resistance on the 200-day moving average around 23,365 on the futures after the cash close. The Nasdaq is only a few points from its all-time high.

Although we are seeing a mild pullback at the European open this morning, the dislocation between markets and the real economy is frankly unsustainable. On that front we have the weekly US jobs number today – we’re looking at continuing claims as the more important number as a gauge of how swiftly the US economy is getting going again. Continuing claims are seen at 20m, down from 21m last week. Hiring should be exceeding firing now, but it will be a long slog back to where things were. Riots and curfews in big metropolitan areas don’t help.

ECB economic projections to detail the Covid-19 hit in Europe

The ECB meeting today will also help guide our view of how bad things are in Europe as we focus on the new staff projections. The ECB has detailed three scenarios for GDP in 2020 relating to the damage wrought by the pandemic: mild -5%, medium –8% and severe –12%.

Christine Lagarde said last week that the “economic contraction likely between medium and severe scenarios”, adding: “It is very hard to forecast how badly the economy has been affected.” Indeed there is actually no way of really know how badly Q2 went. We have various sources estimating pretty seismic falls; INSEE says French GDP will contract by 20% in the second quarter. Estimates for Germany suggest a roughly 10% decline.

The inflation projections will also be closely watched after HICP inflation in May slipped to its weakest in 4 years and outright deflation was recorded in 12 of the 19 members of the euro. Markets will also be keen to see what the ECB Governing Council makes of this development three years after Draghi declared the war on deflation won. Aside from the economy and inflation, the market is happily expecting an increase to PEPP of €500bn.

FTSE quarterly rebalancing confirmed

The FTSE quarterly rebalancing has been confirmed with Avast, GVC Holdings, Homeserve and Kingfisher entering the FTSE 100, and Carnival, Centrica, EasyJet and Meggitt dropping into the FTSE 250. EasyJet and Carnival have really taken a beating since the pandemic hit and longer term their business models are a problem if people don’t go on cruises, or if you enforce social distancing on planes.

Centrica has had a rough old time of things as its UK customer base has shrunk drastically, whilst earlier this year the company booked a number of one-off impairment charges relating to its oil & gas assets and nuclear power plant stake – a process it has since put on hold. Its main appeal of course was a steady income from a traditionally iron-cast dividend, which it has suspended.

Entering the FTSE 250

888 Holdings

AO World

BB Healthcare Trust

Calisen

Carnival

Centrica

Civitas Social Housing

EasyJet

JLEN Environmental Assets Group

Liontrust Asset Management

Meggitt

Oxford Biomedica

Scottish American Investment

Exiting the FTSE 250

Avast (promoted)

Bakkavor Group

Elementis

Forterra

GVC Holdings (promoted)

Homeserve (promoted)

Hyve Group

JPMorgan Indian Inv Trust

Kingfisher (promoted)

Marstons

Mccarthy & Stone

Senior

Stagecoach Group

In FX, the dollar has regained a little ground against major peers. GBPUSD failed to make the move stick above 1.26 to take out the Apr double top level and is now looking to test support around the 1.25 round number and the 23.6% retracement at 1.2510. EURUSD has eased off the 3-month highs struck yesterday but looks well supported for the time being at 1.12 – the ECB meeting today will deliver the usual volatility so watch out.

Oil has pulled back amid uncertainty over the OPEC+ meeting. Price dropped sharply yesterday before paring losses as it looked like the meeting would not take place today because of a dispute over compliance. Now we understand Russia and Saudi Arabia have agreed between themselves to extend the deepest level of cuts by another month, meaning the tapering from 9.7m bpd to 7.7m bpd will take place in August.

But they want non-compliant countries to play ball this time and over-comply going forward to make up for it. Whilst I think OPEC and Russia can just about keep the cuts on track, there are clear signs that this deal is a huge ask for many within OPEC and may unravel over the summer if prices hold up. Russian energy minister Novak was on the wires this morning saying oversupply was down to 7m bpd in May and could move to deficit of 3-5m bpd in July.

Chart: Dow runs into 200-day simple moving average

Candlestick chart of Dow Jones Industrial Average Index

OPEC meeting preview: record production cut to be extended?

Crude oil and Brent oil have continued to push higher this week on hopes that the upcoming OPEC meeting will see the cartel and its allies agree to extend production cuts.

Officials from major oil producers were originally scheduled to hold their next (online) meeting on June 9th, but current OPEC president Algeria has proposed moving the meeting forward to June 4th – this Thursday.

Oil traders have taken this as a sign that the cartel and its allies, a grouping known as OPEC+, are eager to act as quickly as possible to keep oil markets stable.

Crude oil firms ahead of OPEC meeting

Crude oil has gained over $0.80, or 2.3%, while Brent oil is $0.90, or 2.4%, higher today.

Candlestick chart of crude oil prices and Brent oil prices comparison

OPEC’s current output cut is for nearly 10 million barrels per day. It’s the highest level of production cuts in the cartel’s history and equates to around 10% of global demand.

The cut was agreed in the wake of the collapse in oil prices during March. Saudi Arabia, frustrated that OPEC ally Russia was refusing to commit to further cuts to help counteract the shock to demand caused by the coronavirus pandemic, abandoned existing curbs and slashed prices on its own oil exports.

The Kingdom and Russia soon returned to the negotiating table and agreed to the 9.7 million barrels per day cut in May and June, with the production cut reducing to 7.7 million barrels per day from July until December.

But OPEC officials are now in talks to continue with the elevated level of cuts, potentially until the start of September. While some reports suggest that the cuts could remain in place until the end of the year, such a proposal would likely meet with strong resistance from Russia.

Are crude oil and Brent oil heading higher after OPEC meeting?

While oil has edged higher this week on tentative hopes for an agreement on extending the cut, OPEC meetings always carry a risk of disappointment. Markets are showing restraint ahead of the gathering, which is still yet to be confirmed for this week.

While it seems that OPEC producers want to keep the current level of cuts in place, Russian participation remains a key sticking point. It seems the Russians are onboard with something, but there is a risk the final agreement falls short of market expectations.

Get more insight ahead of the cartel gathering with our exclusive OPEC meeting special on XRay  – set a reminder now.

Oil prices spike on surprise draw

WTI futures and Brent futures spiked to highs of the day after a surprise draw on US oil stocks. EIA figures showed a 745k barrel drawdown vs an expected build of more than 4m barrels. Stocks at the key Cushing, Oklahoma hub feel by 3m barrels, the first such draw since February. Gasoline inventories fell 3.5m barrels vs 2.2m expected. Distillates continued to build at 3.5m. Refinery inputs averaged 12.4m bpd, which was 0.6m bpd less than the previous week’s average.

WTI (Aug) rallied above $27.80 before paring gains to trade roughly in the middle of today’s range around $27.30. Front month (Jun) oil was up at $26.30. The draw on inventories, particularly at Cushing, will spur hopes demand is coming back as economies reopen and that we are not approaching ‘tank tops’ as swiftly as feared. However there are still risks that at least for the Jun and Jul contracts we see high levels of volatility as we approach expiry.

OPEC updates demand forecast, sources suggest further production cuts

Earlier, OPEC said crude oil demand in 2020 would fall even further than previously thought. In 2020, world oil demand growth is forecast to drop by 9.07m bpd, an adjustment lower of more than 2m bpd from the prior report.

In its monthly report it said the contraction is concentrated in the second quarter and mostly in OECD Americas and Europe, with transportation and industrial fuels affected the most.  As such, OECD oil demand is now revised lower by 1.20m bpd while non-OECD oil demand growth was adjusted down by 1.03m bpd.

Demand contraction in 2020 can be mitigated with sooner than expected easing of government COVID-19 related measures, and faster response of economic growth to the implemented extraordinary stimulus packages,” OPEC said.

In terms of supply, a raft of announcements from OPEC members has pointed to greater cuts than previously estimated. In addition, sources have talked about extending the 9.7m bpd cuts beyond June. I think this mainly reflects huge demand destruction and nowhere to put the crude more than increased willingness to ‘take one for the team’. Meanwhile the cartel believes the collapse in prices will further affect non-OPEC supply. Non-OPEC oil supply in 2020 is revised down further by almost 2m bpd from the previous projection, and is now forecast to decline by 3.5m bpd.

The main revisions of the month are based on production shut-ins or curtailment plans announced by oil companies – including the majors – particularly in North America. Globally, excluding the OPEC++ 9.7m bpd cut, around 3.6m bpd of production cuts have been announced, so far, in response to the lack of demand, low oil prices, excess supply and limited storage capacity. And yet in April, OPEC crude oil production increased by 1.8m bpd from March.

European markets cautiously higher, oil weak despite OPEC deal

After rallying into the Easter weekend, European markets were bit lacklustre on Tuesday but still trading marginally higher thanks to some decent numbers out of China and the continued hope that governments are getting a grip of the crisis. US shares closed softer on Monday, with the S&P 500 down 1%, but this was after the best weekly rally for Wall Street since 1974.

Asian shares rallied overnight after better-than-expected Chinese trade data. Exports fell 6.6% in March, against –14% expected. Imports slipped 0.9% vs –9.5% forecast. With the usual caveats around Chinese government data, these numbers are much better than feared and underpinned broad strength in Asian trade. The Nikkei 225 closed 3% higher, finishing at a one-month high, while shares across China were also up around the 1% mark for the day. US futures are trading higher.

Lockdowns are being extended: The bitterer the pill, the stronger the medicine. At least that is what many governments are hoping for as they extend lockdowns and seek a path out of the mess. France will only gradually begin reopening the country from May 11th, while India’s lockdown is being extended through to May 3rd. The UK seems set to extend the lockdown by another 3 weeks to May 7th. The hope is that the more pain now, the quicker you can reopen the economy. We’ll need it – France’s finance minister Le Maire says GDP will decline 8% in 2020.

Meanwhile in the US, Donald Trump is as belligerent as ever, saying he is working on plans to reopen the economy, despite being the global epicentre of the outbreak and deaths exceeding 22,000. Several state governors are taking steps on their own to do this. The risk lies, as everyone knows, in reopening too soon and needing to close down again. But if the US economy does get moving sooner than elsewhere, we could see stocks outperform too.

Earnings season kicks off today in the US with the big banks. JPMorgan and Wells Fargo get the show on the road. Bank of America, Goldman Sachs and Morgan Stanley report on Wednesday. Investors seem to be expecting heightened volatility around this quarter’s earnings releases, reflecting the deep uncertainty about how bad the numbers will be. Heightened volatility will undoubtedly support trading top line, but we will need to see what effect government support has had on things like impairment charges. And as ever, the real focus will be on the earnings outlook for Q2.

Despite the historic OPEC++ deal to cut output by 9.7m bpd over the next two months and commit to ongoing curbs for two years, WTI has slipped lower since reopening on Monday and is forming a support zone around $22.30/40. Brent is struggling to hold $32.

There is still a lot uncertainty over whether the reduction in output will be enough. Saudi energy minister Abdulaziz Bin Salman said it will be more than the 9.7m headline cut, indicating as much as 19.5m bpd will come out of the market initially. But the commitment still lacks what some think could be a demand crash worth 30m bpd. Whilst there is bound to be a rebalancing in oil markets due to supply coming off, either by design or by default, most think OPEC and allies haven’t done enough to prop up prices in the near term, albeit they do seem to have shown a willingness to prevent a complete collapse as inventory builds threatened to overwhelm the market.

Output in North America is already collapsing. The EIA sees output down 366k bpd in April to 8.71m bpd and a further drop in May to 8.53m bpd. It wasn’t’ long ago US output was around 13m bpd. In Canada the number of active rigs has declined to just 35 from as many as 240 in February. Bank of America says the deal by OPEC will stem the decline in the US – just 1.8m bpd being lost vs a 3.5m without the deal. It predicts demand for 2020 will be down 9.2m bpd, vs a prior estimate of 4.4m. Texas oil regulators could decide today to mandate 20% production cuts.

The biggest uncertainty for oil is how quickly does demand recover in the medium term? Indeed, this is the central question for risk assets in general.

In FX, the pound pushed up to its strongest in a month versus the US dollar. GBPUSD broke clear of the month range yesterday and continues to find near term support above 1.2530. Looking to hold the rally above the 61.8 retracement at 1.25150.The mid-March swing highs around 1.2650 offer near-term resistance to the bulls, as well as the 200-day moving average at 1.2657 . Daily MACD still positive. The UK and EU are trying to keep the Brexit show on the road and are due to set out how they plan to progress trade talks on Wednesday.

Chart: FTSE 100, 1hr, MACD signalling weakness, look for support around Thursday’s lows at 5,677.

Markets.com

UK 100 Cash, 1-Hour Chart, Marketsx – 08.50 UTC+1, April 14th, 2020

 

Oil leads global market tumble on ‘Black Monday’

The collapse of OPEC+ talks over the weekend tipped markets into chaos on Monday. Traders, already on edge due to the unfolding coronavirus epidemic, were sent fleeing to safety after Saudi Arabia slashed its crude oil prices.

Crude and Brent tumbled over 30%, their worst daily performance since the Gulf War, hitting lows below $27.50 and $31.50 respectively. The Kingdom cut prices for April crude by 30% and stated that it intends to raise its output above 10 million barrels per day. Talks at the weekend saw OPEC and its allies fail to agree new terms for an oil production cut; OPEC+ couldn’t even agree to extend the current level of cuts, let alone deepen the cuts to battle the hit to demand from the coronavirus outbreak.

Saudi Arabia is well-positioned to weather weak prices and Russia claims it can withstand the pressure for up to a decade. US shale oil producers, who have flooded the global market with oil to take advantage of supported prices and are heavily debt-laden, could be in dire trouble.

Equities tank

Global equity markets have been sent tumbling. The collapse in the oil markets, combined with news that the Italian government has imposed travel bans on 16 million people, sent investors running from stocks.

US futures went limit down after triggering circuit breakers during the Asian session. After a 5% drop the Dow was indicated to open down over 1,300 points, but based upon the ETF market – which is not suspended – the Dow was looking at a drop of 1,500. Asian stocks took a hammering, with the Hang Seng and the Nikkei both closing over 1,100 points lower.

European equities sank as well, with the DAX, and Euro Stoxx 50, all off around 7%. The FTSE 100, also down 7% to test 6,000, was trading at levels not seen since the immediate aftermath of the Brexit referendum.

Stocks most at risk

While stocks across the board tanked, several industries were hit harder than others.

Oil majors slumped. BP (LSE) tumbled 20%, ExxonMobil dropped 17%, Chevron tumbled 16%, and Occidental cratered 38% – all in pre-market trading on the NYSE – while Royal Dutch Shell fell 14%.

Airlines were hit hard as well after the price slump left them sitting on big losses after hedging oil at higher prices. American Airlines, Delta Airlines, Southwest Airlines and United Airlines were all down 5-6% in the pre-market.

Coronavirus fears weighed on tech stocks. The FAANGS all recorded losses in the range of 6-7%, but cruise ship operators were hit harder. The US government warned American citizens not to go on cruises. Carnival – the company that owns many of the ships currently stranded due to on-board quarantines – dropped 10%, Norwegian Cruise Lines tumbled 11%, and Royal Caribbean Cruises slumped 12% – all before the markets opened.

New record lows for US bonds

The flight to safety drove the yield on US government debt down to record lows. Yields move inversely to prices. The yield on the US 10-year treasury bond fell to 0.32% while the yield on the 30-year treasury note fell towards 0.7%, breaching 1% for the first time in a year.

Gold traded around $1,673 after hitting $1,700 over the weekend.

Cryptos join in with global market chaos

The cryptocurrency market is no stranger to volatility. The world’s largest cryptocurrencies were down around 10-15%, with Bitcoin falling below $8,000.

CySEC (Europa)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Programa de Indemnización (FSCS) de hasta 20.000 EUR
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Gestión de acciones
  • Quantranks

Markets.com está administrada por Safecap Investments Limited. Autorizada por la CySEC con número de licencia 092/08 y por la FSCA con número de licencia 43906.

FSC (RESTO DEL MUNDO)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Verificación electrónica
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Creador de estrategias

Markets.com, administrada por Tradetech Markets (Australia) Pty Ltd («TTMAU”) Regulada por la Comisión de Servicios Financieros («FSC») de las Islas Vírgenes Británicas con número de licencia SIBA/L/14/1067.

FCA (Reino Unido)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Programa de Indemnización para los Inversores (ICF) de hasta 85.000 GBP
    * en función e los criterios y la idoneidad
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Cotizaciones de spread
  • Creador de estrategias

Markets.com, administrada por TradeTech Alpha Limited (“TTA”) Regulada por la Autoridad de Conducta Financiera («FCA») con número de licencia 607305.

ASIC (Australia)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Verificación electrónica
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas

Markets.com, administrada por Tradetech Markets (Australia) Pty Ltd («TTMAU”) Tiene el número de Licencia de Servicios Financieros Australianos 424008 y está autorizada para prestar servicios financieros por la comisión del Mercado de Valores de Australia («ASIC”).

FSCA (Africa)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Creador de estrategias

Markets.com, administrada por TradeTech Markets (Sudáfrica) (Pty) Limited («TTMSA”) Autorizada por la Junta de Servicios Financieros de Sudáfrica («FSCA») con número de licencia 46860.

Al seleccionar uno de estos reguladores, se mostrará la información correspondiente en todo el sitio web. Para obtener más información, haga clic aquí.