Stocks are on the back foot as the market pares expectations for how deep the Fed will cut rates. Expectations for a 50bps cut are diminished and the market is now looking to the ECB this week to see how dovish they go. SPX closed 0.62% lower on Friday. Softer earnings are not helping, albeit the market here is not really trading yet on company reports. Asia has been softer overnight. Futures indicate European markets are off to a flat start. 

Oil gains

Oil – tensions between the UK and Iran don’t really seem to be moving oil prices much. Friday’s gain was modest given the reports of a seizure by Iran of a British vessel. Brent is firmer above $63, while WTI was holding $56. There is not the same impact from one-off events like this – the oil market is not as susceptible to shocks that it once was. That said, if we had a real crisis that blocked the Strait of Hormuz, we’d definitely see higher prices. Speculative net long positions have increased sharply in the last week. 

Gold looks to be firm on the $1425 level, look for a push to $1450. Bitcoin is holding at $10,600 or thereabouts. Support around $10k, resistance around the $11,500 mark.

What to watch this week

Boris coronation – a new regime will be installed this week at Number 10. Watch for a harder tone on Brexit and the very clear message that Oct 31^st is a hard date. As previously argued, the reality of parliamentary arithmetic may see this soften in due course. Pound traders will be watching the new PM like hawks over the coming days.

Sterling will remain vulnerable to the prospect of a no-deal exit on Oct 31^st. There is more downside from here without breaching the 2017 lows. GBPUSD was last just below 1.25 – look for 1.24 again and maybe then we can see 1.2360, which brings 1.21 back into focus. Of course should Hunt surprise then we would expect a big snapback in GBP to the upside.

ECB – likely to be very dovish indeed. Mario Draghi only has three meets left before he shuffles off. Given the about turn by the Fed, the ECB has a blank cheque to lower rates and restart QE. We would expect the ECB – if it does not get a jump on the market this week by lowering rates and/or announcing a restart to QE – to give a very clear signal that it will do so soon. The best thing for the ECB and for Draghi is to make sure Lagarde is just left selling his policy for the first few months.

Meanwhile we have plenty of political risk rearing its head again in Europe. Italy’s government is said to be on the brink of collapse. Spain reported close to deal but risks remain.  

Earnings season

It’s a massive week for US earnings. So far the proportion of sales beats is lower than usual, according to GS. Considering that the bar has been set very low, this ought to concern. By the end of this week we should have a much clearer picture of the state of US businesses and the health of the world’s largest economy. Plenty of big bellwether stocks reporting this week, including Boeing, Caterpillar, Coca-Cola, Ford, Harley Davidson, Visa and Starbucks. We also have the bulk of the tech giants with Amazon, Alphabet and Facebook on tap. Watch also Twitter, Snap and Tesla. 

US GDP – Estimates for US Q2 growth were revised up after better-than-expected retail sales figures last week. The question is whether there is enough strength in the quarterly growth numbers to make the market rethink just how much the Fed will cut rates. The first reading of the Q2 GDP estimate is due on Friday. 

Equities 

Metro Bank has confirmed it is looking to sell a c£500m loan portfolio back to Cerberus. The move would clearly deliver a welcome capital injection at an important moment for the bank. Coupled with the recent equity raising this should allow the bank to move back into a surer position and look at growth plans again, which have been on hold since the loan fiasco. Half year results are due Wednesday. Pressure on Vernon Hill to depart is mounting. 

Centrica – said to be ready to slash the dividend. As we noted in May: Centrica and boss Iain Conn are in a jam. The company is facing a cocktail of headwinds and it is increasingly clear it will not be able to defend the dividend for much longer. 

Management stuck to its full year guidance but did not seem to be all that confident it can achieve it. The share price reflects despair in the strategy. Iain Conn will face more pressure. 

Again, from our May note: Unless the July update comes with a convincing strategic update I wouldn’t think he’ll be sticking around for much longer. 

FY adjusted operating cash flow was guided in the £1.8-£2.0bn range, which is of course below the £2.1-£2.3bn range for 2018-20. From the tone of the May update it did not sound like they were terribly confident of achieving even this lower target. The first four months has been challenging but this was largely expected. It’s rather foggy outlook that worries.

Even with the aggressive cost cutting going, there are doubts about how long you can keep doing that. And even then, it’s all weighed to the second half – £58m of £250m of the expected annualised efficiencies delivered so far this year. Divestments, including the sale of Clockwork, should bring in another £500m or so. It all rather looks like Centrica is scrambling around looking for cash to protect the divi and buy some time for Iain Conn.

So based on the reports, it looks like the big strategic move is to cut the divi and sell Spirit. That may buy Conn more time, but for how much longer?