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Bank of England lays ground for negative rates
The Bank of England is laying the groundwork for a descent into negative interest rates. This should worry us all. In a letter to banks today, deputy governor Sam Woods asked firms to detail their “current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these”.
The letter notes that “the financial sector … would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms”, and explains that “the MPC may see fit to choose various options based on the situation at the time”.
It comes after details from the last policy meeting showed that the BoE is actively considering negative rates, whilst Andrew Bailey has been at pains to stress that this does not necessarily mean they will take that route.
Indeed there is clearly a debate within the MPC going on right now that we are seeing play out in public. Last month deputy governor Dave Ramsden issued a note of caution only a day after Silvana Tenreyro pointedly backed negative rates.
It looks as though there are some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit they are being considered actively.
The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act.
Sterling doesn’t mind too much, with GBPUSD making its highest in almost 5 weeks before paring gains a little. Bank shares also didn’t take fright, with Natwest and Lloyds higher at the open.
Money markets have already priced in negative rates next year – today’s update does not materially alter the perception that the Bank is thinking seriously about negative rates but is in no rush to wheel them out. US bond and money markets are closed today for the Columbus Day holiday.
The idea that negative rates boost lending doesn’t wash – banks are not worried about the marginal impact on net interest margins as they are about whether the principal is repaid or not. And this in the current economic downturn and threat of rising unemployment, this will weigh on banks’ willingness to lend.
Indeed, I refer you again to the San Francisco Fed study from last month that shows the ECB made a big mistake by going negative.
This noted “banks expand lending only temporarily under negative rates” and “as negative rates persist, they drag on bank profitability even more”. It concluded that while lending initially increases under negative rates. “…gains are more than reversed as negative rates persist”. And under extended periods of negative rates, the evidence shows that “both bank profitability and bank lending activity decline”.
Negative rates are meant to increase loan growth, not depress it.
Equities were mildly higher in European trade early on Monday. The FTSE 100 enjoyed a solid week and managed to close on Friday above the 6,000 level that has proved so tricky to hold onto.
The FTSE weakened a little in early trade back to this round number support, with energy and consumer cyclicals dragging.
The S&P 500 rose Friday and closed at its best level since the start of September when it made the all-time high. Stimulus hopes remain in the forefront but the market, as a result, remains on the hook to rumours and headlines.
Donald Trump upped his offer to $1.8tn but Nancy Pelosi said it wasn’t enough. A stimulus package is coming sooner or later, although as stressed last week, there is a risk that a disputed election result delays this until 2021.
On the slate this week: IMF and World Bank meetings kick off today, whilst we have three days until the UK’s self-imposed Brexit deadline.
Nevertheless, even if there no breakthrough comprehensive trade deal agreed this week, the two sides are pledged to continue talking right up to the last moment.
Emmanuel Macron, who faces elections in the not-too-distant future, may seek too many concessions over fishing rights, which may scupper a deal. However, with the coronavirus causing havoc with the economy, neither side has a particularly strong hand and both sides need a deal.
Wall Street banks kick off earnings season across pond – read our preview here.
Biden leads by 9.8pts nationally and by 4.5pts in the battlegrounds. The Democrats lead by 4.9pts in the battleground states four years ago – Trump has been over this ground before and won against the odds – don’t write him off just yet. Trump has pulled ads in Ohio and Iowa leaving him off air in those states for a third week in a row. According to our friends over at BlondeMoney are the two most winnable swing states for Trump.
They say: “Either Trump is supremely confident he’s got these in the bag, despite polling neck-and-neck with Biden. Or he realises that he’s got to double down and go for the tougher states, and hope to sweep up those that are easier to win in the process. If he doesn’t get Florida or Wisconsin, Ohio or Iowa barely matter.”
My sense is that there is do-or-die attitude in the White House and he needs to shore up support elsewhere, such as Florida as his campaign finances, rather like his business empire, are not all they appear to be.
The dollar appeared to roll over last week. On DXY we had a MACD bearish crossover and 14-day RSI trendline break that indicated (as we flagged) that there could be downside.
What’s harder to say is whether this is yet more of a chop sideways for the dollar or renewal of the downtrend.
The close under the 50-day SMA could be taken as bearish signal and we may yet see the 91 handle tested again. The near-term support at the mid-Sep swing low sits around 92.70.
Equity markets hungover ahead of Presidential debate + Brexit breakthrough?
There is the whiff of a hangover for investors this morning as European shares stumbled after an exuberant rally in the previous session that left the major bourses around 2-3% higher to start the week. We haven’t made it back to the key mid-Sep levels and bulls may be looking at downside risks in the shape of the slowing economic recovery and pre-election jitters.
Nancy Pelosi and Steve Mnuchin may be able to cut one last stimulus deal before the election, but it still looks like the odds of it passing the House and Senate are less than evens.
First presidential debate in focus
It’s all going to kick off later tonight, as the first US presidential debate takes place in Cleveland. The fun starts at 9pm US eastern time and will last one and a half hours. Trump won in Ohio, a typical battleground rust belt state, by eight points last time around but it is leaning towards Biden in 2020, according to the polls.
But we know polls only tell a portion of the story – it’s in the battlegrounds where it counts.
JPM did an investor survey of potential election outcomes – 79% said the worst-case scenario is a Democrat president and Senate, whilst 49% said the best case would be a Republican president and Senate.
We know which way Wall Street is leaning, but there is not a clear sense that the result will materially impact the course of equity markets. As discussed last week, whilst a Democrat clean sweep – the Blue-nami – would mean higher taxes and regulation, other factors may play into the bulls’ favour, notably the chance of a comprehensive fiscal package.
More importantly, the global recovery from the pandemic, the Fed and earnings will be key drivers for equities after the election. The only thing the market wants is to get the election out of the way – the real danger to near-term valuations would be a long period of legal disputes post-election, which may mean price action continues to chop sideways within the range set in the second half of September.
Vix futures are starting to look interesting again with the spread from Oct to Nov widening to $2 with the near month trading at $31 and November at $33, with December at $31.
Sterling up on hopes of breakthrough in Brexit talks
Brexit breakthrough? Hopes of a deal are on the up, amid reports that the EU is prepared to ditch its requirement to reach a broad agreement before drafting a text. This means they can start on the joint legal text whilst there are still a few outstanding issues that need to be resolved.
This has positive overtones, but the two sides still appear no closer on these critical last steps. European Commission Vice President Maros Sefcovic said yesterday: “The UK’s positions are far apart from what the EU can accept.”
Sterling drove to a two-week high, with GBPUSD rising to 1.29 before paring gains to sit around 1.2850 this morning.
Bank of England deputy governor warns over negative rates
But it the rally was less about Brexit than it was about comments from Dave Ramsden, the deputy governor of the Bank of England, who sounded a strong sound of caution over negative interest rates. The MPC seems to be airing its dirty laundry in public – the comments came only a day after Silvana Tenreyro pointedly backed negative rates.
Anyways it looks there is some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit they are being considered actively.
The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act.
The dollar peeled off its recent two-month highs in the 94.60 region which is offering the near-term resistance. The pullback called for last week has been slow to emerge with a couple of retests of this level but near-term weakness is certainly becoming more evident.
Elsewhere, oil markets remain trapped in a tight range but could be heading for a pullback as global inventories start to build. API numbers later today, EIA numbers on tap Wednesday. Watch the Chinese numbers too as global inventories swing to builds.
Surging cases numbers cripple demand, whether rational or not. Contango spreads indicate softer demand and inventory builds ahead. The price action alone on WTI is a not a pretty picture for bulls.
Coming up, there is a slew of Fed speakers later today with Clarida, Quarles, Harker and Williams on the slate. Richard Clarida is probably the most important, with the Fed governor due to speak on Future Considerations for Treasury Market Resilience. Meanwhile, the Treasury market is completely dead as yields remain trapped in their tight ranges.
Chart: The S&P 500 is still trapped by the moving averages
The market rallied 1.6% on Monday and ran slap into the 50-day SMA, shy of the 21-day SMA. We have to see whether this marks the swing high and calls for another pullback.
Risk appetite resurfaces, HSBC shares soar
Risk appetite has returned after last week’s turbulence. European bourses rose 1-2% in early trade on Monday after Wall Street’s rally on Friday lifted the boats. The S&P 500 was still down for the week, but with the broad market -10% from its all-time highs at the low, those looking for a correction after the hot summer rally may have found it already.
The market tested 3200, which is where it reached at the peak in June before the pullback and where it closed 2019. Bonds have not taken part in the drawdown – US 10-year Treasuries have barely budged this month and remain stuck around 0.66%. This might imply that the September sell-off is more about a repricing of risk assets based on valuations and profit-taking after the summer run-up, rather than deeper fears about a prolonged stagnation in the economy.
Volatility likely on US presidential debate, NFP this week
Nevertheless, with the first US presidential debate and the last jobs report before the election coming this week, there is ample scope for markets to remain volatile. Until we clear the highs from a fortnight ago – 3400 on SPX, around 3300 on Stoxx 50 and 6,000 on the FTSE, the downside bias remains.
Rising numbers of coronavirus cases imply a softer recovery, depressed consumer sentiment and the need for more fiscal support to generate upside. Markets don’t seem to be moving too much on vaccine news and rumours – there may be a realisation that a vaccine is not a silver bullet that will repair all the damage done in 2020, even if it makes 2021 look brighter.
Ping An adds to HSBC stake
HSBC shares rallied 10% after Ping An Asset Management increased its stake in the bank. HSBC’s largest shareholder only marginally bolstered its holding to 8% from 7.95%, but the vote of confidence translated into a very substantial rally for the shares both in Hong Kong and London.
HSBC had lately sunk to a 25-year low after being named in reports relating to money laundering, so maybe this was some simple averaging-in by Ping An. Shares are only back to where they were a fortnight ago – when stocks have been beaten down as much as HSBC they are often ripe for larger percentage swings as investors try to figure out what is the real value.
If you think Britain’s banks are fundamentally sound, shares are priced compellingly. Lloyds at 25p trades at 0.35 of book value.
BoE Tenreyro defends negative rates
Bank of England rate setter Silvana Tenreyro defended negative rates in an article over the weekend, in what we could construe as a careful piece of choreography to communicate the bank’s shift towards a state of outright financial repression.
She said there were ‘encouraging’ signs that there are no longer the same obstacles to cutting rates to below zero. But she’s been positive on negative rates for several months so we should probably not read too much into her comments.
Andrew Bailey remains the most important voice of the MPC and whilst he did not seek to quell speculation last week that the Bank is considering how to use negative rates, he did stress that it’s not in a hurry to pull them out the toolbox.
Brexit talks in focus for GBP
Brexit talks resume this week and despite all the noise, both sides want a deal. Whilst the UK threw a spanner in the works with the internal market bill, the real substance of the trade deal is what matters. On that front the EU and UK are about 90% there. The problem is the remaining elements and without these sorted there is no deal.
Nevertheless there is hope that they will enter the ‘tunnel’: the period of closed, detailed talks that would lead to a deal. If there is white smoke this week then sterling will rally strongly, but I would expect this to drag on for a while longer, for deadlines to be missed and for GBP crosses to remain exposed to negative headline risk.
The euro retained its downside bias after more jawboning from the ECB. Ignazio Visco, Italy’s central bank governor, said the euro’s recent strengthening is “worrying us because it generates further downward pressures on prices at a time when inflation is already low”. A slate of ECB speakers this week are likely to lean hard on governments to deliver fiscal support.
Chart: GBPUSD tests near-term resistance at 1.28
Stocks attempt rally after selloff, sterling down on Bailey remarks, Kingfisher enjoys DIY boom
Stock markets firmed in early European trade but remain battered and bruised by yesterday’s sell-off as fears of a second wave of cases and new lockdown measures dealt a blow to risk sentiment. Selling pressure has been building for some time and the dam broke yesterday.
A recovery in the final hour of trade lifted the market off the lows so it wasn’t full capitulation, but there could yet be more downside as the S&P 500 approaches correction territory.
SPX, Dow tumble, tech strength stems Nasdaq losses
The S&P 500 declined by 1.2% and the Dow dropped 1.8% but tech stocks fared better with the Nasdaq flat for the day. Shares in Apple rose 3% and Microsoft was up 1% as some of the Covid winners showed more resilience to fears over second waves of the pandemic and fresh lockdown measures, which seemed to be the trigger.
Despite the heavy selling, bulls put in a strong finish – the Dow was down over 900 points at the low before ending –500pts. At its lows the S&P 500 plunged by as much as 2.7%. Nevertheless, the broad market is now already –6% for the month of September, has notched four straight daily declines for the first time since March, and is over 8% off its all-time high.
The FTSE 100 fell over 3%, breaching the 21-day simple moving average line. Despite the pressure the bulls just held the 5,800 round number and closed above the Sep 4th low of 5,799. The Stoxx 50 breached the July lows and is now close to its Jun bottom having sunk under its 200-day SMA. The move follows a clear period of congestion that was calling for a breakout, having been caught in an ever-narrower range.
The DAX fell almost 4.5% with heavy selling into the closing bell seen as bears tried but failed to crack the 12,500 round number as the 78.6% retracement of the Feb-Mar rout held. There were modest gains in early trade on Tuesday but the rally looks a little wobbly.
Fading hope for another round of stimulus in the US is another weight, with the death of Ruth Bader Ginsburg over the weekend seen as a decisive blow against a bipartisan deal being achieved before the election, since it materially magnifies the polarisation in Washington. A deal will need to wait until after November 3rd.
In addition, a heavy ramp up in August with far too much hot money chasing too few shares, increasingly stretched valuations, the lack of a vaccine on the horizon and the rising risk of volatility around the US Presidential Election – and uncertainty over whether we will get a clean result – seems to have caught up with the markets.
UK government set to introduce new Covid curbs, Kingfisher gets DIY boost in Q2
The UK government is set to introduce fresh measures to ‘control’ the virus – curfews and working from home if possible. What a difference a month makes – only a few weeks ago we were being implored to get out and about to help out. It’s almost like they don’t know what they are doing.
While pub shares fell on curfew news, several earnings reports today highlight the uneven nature of the recovery so far, and the uncertain path ahead.
Tui – uncertainty over the course of lockdowns and quarantine rules is leaving holidaymakers unsure about booking in the coming months. The winter 20/21 programme has been further reduced by 20% since the Q3 update, to around 40% adjusted capacity, reflecting ‘the current uncertainty relating to travel restrictions’. TUI says it is currently 30% sold for the adjusted winter capacity.
Compared to the normal levels of prior year, bookings are currently down 59%, in line with adjusted capacity. Consumers are much happier to assume things will be ‘back to normal’ by summer 2021. Tui says bookings are up 84% but at 80% adjusted capacity, however we should caution that much of this will be pushback demand from this summer as consumers changed travel dates to next year.
Cost-cutting has helped TUI weather the storm – that and some whopping bailouts from the German government, but it and the entire travel industry needs governments across Europe to give far greater clarity over restrictions and quarantines. Shares rose a touch but the rest of the travel sector was weaker with Carnival off another –4% and IAG down –3% after a drubbing yesterday.
Kingfisher enjoyed a strong recovery in Q2 as DIYers tackled their jobs lists. This recovery has continued into Q3 to date, management say, with growth across all banners and categories. Q3 20/21 group LFL sales to Sep 19th are up 16.6%.
DIYers are driving the recovery – sales at B&Q rose 28% in Q2 on a like-for-like basis. Trade less so – Screwfix LFL sales were up just 2.4%, though they are +9.9% in Q3 so far – as the construction industry struggles to get going again. Overall UK & Ireland sales rose 2.4% in the first half despite lockdown as people rediscovered their homes and their desire for improving them. French bounced back strongly, with Q2 sales +27% vs the –41.5% decline in Q1.
First half sales were –5.9% lower. Overall H1 sales were a tad lighter but cost reductions meant adjusted pre-tax profit rose 23% to £415m, with retail margins +140bps to 9%. Shares rose 6% in early trade and have more than doubled off the March low.
Dollar climbs on Fed jawboning, BoE’s Bailey to speak today
In FX, the rollover in risk sentiment and some interesting Fed jawboning played into the dollar bulls, with DXY sustaining a breach of the channel on the upside and clearing its 50–day SMA, which had been a key point of resistance last week. Gold retreated under $1,900 at one point with the stronger dollar weighing.
The Fed’s Bullard said the US has done enough on the fiscal front, whilst Dallas Fed president Kaplan stressed that the Fed should not keep its hands tied by committing to ZIRP forever even if the economy bounces back. Powell stressed that the Fed will use all its tools to do whatever it takes.
More Powell today plus Bank of England governor Andrew Bailey, who said in remarks this morning that the recovery in Q3 has been ahead of expectations but stressed that the hard yards are ahead.
All the market wants to know is whether negative rates are coming or not – he said the Bank has looked ‘very hard’ at the scope to cut rates further, including negative rates. So this was not the attempt to distance the MPC from the negative rate comments in last week’s release to give the central bank more flexibility. As the MPC indicated last week, Bailey wants to leave negative rates on the table.
GBPUSD was under fresh pressure under 1.28 and could be set up for a bear flag continuation with a possible dive back to 1.22. If this holds, bulls need to clear 1.30 to be encouraged. The key test is the 200-day EMA around 1.2760 which was tested last week and held, encouraging a rally back to 1.30. Cable shed this support in the early European session as Bailey got on the airwaves – one to watch today with the 100-day the last line of defence.
BoE quick take: negative rates on the table hit cable
Sterling dropped sharply along with gilt yields, with GBPUSD down one big figure to take a 1.28 handle and 2-year gilt yields dropping to -0.1% after the Bank of England delivered a dovish statement which included overt references to introducing negative rates.
It looks like Bailey is prepared to go big and fast if there is an unemployment crisis once the furlough scheme ends. For the time being he is keeping his powder dry.
Whilst the MPC kept rates on hold at 0.1% and the stock of asset purchases at £745bn, it looks like it is on the cusp of delivery further accommodation. The Bank ‘stands ready’ to do more, it said, adding that will not tighten monetary policy until there is ‘clear evidence’ of achieving its 2% inflation target in a sustainable way.
But it was the mention of negative rates that seems to led to sterling being offered.
Bank of England puts negative rates on the table
The bit that did the damage was included right at the bottom (underlines my own):
‘The Committee had discussed its policy toolkit, and the effectiveness of negative policy rates in particular, in the August Monetary Policy Report, in light of the decline in global equilibrium interest rates over a number of years. Subsequently, the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates. The Bank of England and the Prudential Regulation Authority will begin structured engagement on the operational considerations in 2020 Q4.
It also set the stage for more QE, with the MPC noting that the Bank ‘stood ready to increase the pace of purchases to ensure the effective transmission of monetary policy’. With the current QE ammo due to run out by the end of the year, the Bank looks likely to expand the asset purchase programme by around £100bn in November.
We can now also start to worry about negative rates being implemented – a lot will depend on the unemployment rate as we head towards Dec with the furlough scheme ending.
On the economy, the Bank thinks the UK economy in Q3 will be 7% below Q4 2019 levels, which is not as bad as previously forecast. Inflation is forecast to remain below 1% until next year.
Chart: Cable breaches near-term trend but tries to find support at 1.29.
Looking to see whether this move reasserts the longer-term downtrend – lots depends on the Brexit chatter taking place in the background.
Stocks weaker post-Fed, Bank of England, OPEC+ meetings ahead
Wall Street fell and Asian equities followed the weak handover even as the Fed stayed very much on script with a dovish lower-for-longer message, whilst also presenting a more upbeat take on the economy in the near term.
The Fed put some meat on the new average inflation targeting skeleton that was sketched out by Jay Powell at Jackson Hole, saying it will aim to achieve inflation ‘moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%’. But the rub is that it doesn’t see this inflation coming through until 2023 at the soonest.
There were no explicit easing measures to get there sooner, so the FOMC has only really filled in some blanks as to what we already knew, and seems content for now to wait for Congress to sort the fiscal side out before it does anything more. The lack of any real determination to get inflation up sooner seemed to disappoint for risk.
Equities lower after FOMC, dollar catches bid
Equities peaked after the statement and then progressed lower during the presser with Powell right into the close, with the S&P 500 finishing down half of one percent at 3,385, led by a decline in tech, which is about a quarter of the index, whilst energy – now a tiny c2% weighting of the index – rallied 4% as oil climbed.
The 21-day SMA offered resistance and now we are looking again to the 50-day line at 3,335, with futures pointing lower. Meanwhile the Nasdaq finished –1.25% lower with Tesla, Apple, Amazon et al falling, and is likewise trapped between its 21-day and 50-day lines, with big trend line support close. European equity markets took the cue and fell over 1% at the open as the FTSE 100 again tested the 6,000 level.
USD caught a bid as well, with the dollar index lifting from a post-statement low of 92.85 to clear 93.50 overnight, before coming off a touch to 93.30 in early European trade. GBPUSD retreated to 1.2950 having earlier hit the 1.30 level. Gold came off its highs at $1970 to test the $1940 support area.
The Fed sees unemployment at a lower level and a larger economy by the end of the year than it did in June. Real GDP forecast for 2020 was revised down to –3.7% from –6.5% in June. Unemployment is seen at 7.6% compared with the 9.3% anticipated in June. Inflation is seen picking up more than it was in June albeit the rise in breakevens has levelled off at about 1.7%.
The key takeaway from the economic projections is that both core and headline PCE inflation are not seen returning to 2% until 2023 – the Fed even had to add a year to the forecast horizon just to get this in. Given it didn’t manage to get to 2% with unemployment under 4%, there is a lack of credibility around this, even though I for one believe inflation will come through.
The Fed is in the dark and there is no more it can really do without spiralling into the abyss of negative rates. The Fed is in the dark not just because it has no control over inflation, but also because the political situation remains very unclear with regards to fiscal stimulus and the presidential election in November.
So, there is a lot of uncertainty and all the Fed can really do is continue to stress its willingness to do whatever it takes and its willingness to overlook overshoots on inflation should they emerge. I’m in the camp that does expect inflation to feed through due to the massive increase in the money supply combined with supply chain disruption and the fiscal largesse.
The Fed’s policy shift also raises the prospect of inflation expectations becoming unanchored. However, we cannot ignore the fact that the pandemic has had a chilling effect on confidence and spending may be slow to reappear, pushing down on inflation for a while longer.
US data softens, focus switches to jobless claims and Bank of England
US retail sales lost momentum last month, with sales rising just 0.6% versus the 1.1% expected, signalling the effect of the expiration of $600 stimulus cheques that made many at the lower end of the income scale better off out of work than in.
US jobless claims later today will be closely watched for signs of any improvement after last week’s disappointment. Last week’s print of 884,000, which was flat on the previous week, signalled a slow down the recovery in the labour market and worried economists.
The Bank of England delivers its monetary policy statement at midday – will it surprise by going ‘big and fast’ with more QE – as governor Andrew Bailey suggested is the best approach for central banks in times of crisis last month?
There is also speculation that the Old Lady of Threadneedle St will turn to negative interest rates to stimulate the economy. Speaking to MPs recently, Bailey refused to rule out negative rates – a policy that has systematically failed to deliver the required inflation in the Eurozone – saying that it remains in the box of tools.
I’d expect the Bank to tee-up an increase in QE in November and not further rate cuts, but it may choose to fire first and ask questions later.
Snowflake surges on IPO
Snowflake (SNOW) shares made an astonishing stock market debut. After pricing the IPO at $120, the stock flew to almost $280 in the first few hours of trading before settling at $253. The price to sales multiple of about 360 is simply astounding – a lot of future growth was priced into the stock on its first day. It’s the biggest software IPO ever and demand was exceptionally high, and the multiples being paid even loftier.
It seems to be a story of the scarcity value of growth. It also shows just how much wild, free-flowing money there is in the market right now chasing whatever’s seen as hot and whatever offers the most growth.
We’re almost into the territory of describing these tech stocks as Veblen goods, where demand rises with the price. The IPO market is getting very frothy. We can blame/thank the Fed for this situation with ultra-low rates assured for a very long time and massive liquidity needing to find a home at whatever price that is. It’s like 1999 all over again.
London sees biggest listing in years as The Hut Group IPOs
Even London is getting in on the action with The Hut Group getting its IPO off with a swagger and a close at more than £6 after listing at £5. As noted when the listing was announced at the end of August, the valuation it deserves depends very much on your point of view.
In 2019 THG achieved year-on-year revenue growth of 24.5% to reach £1.1 billion with adjusted EBITDA of £111.3 million. The float aimed to raise £920m at £4.5bn market cap, which at c40x last year’s EBITDA and x4 sales doesn’t seem like too much to pay for this kind of growth….or does it?! The answer rests surely on whether it deserves a techy or a retail multiple.
Management forecast overall revenue growth of 20-25% over the medium term, with its tech platform Ingenuity (the capital-light growth lever) forecast to grow at 40% primarily as a result of increasing mix of e-commerce revenues as global brand owners accelerate their adoption of D2C strategies.
But revenues from Ingenuity remain relatively small – £61m in the first half of 2020, which was flat on last year and less than 10% of total group revenues. As a percentage of group revenues, the contribution from Ingenuity is going down. Again it’s the promise of growth that is appealing to investors right now.
Oil softens after FOMC statement
Elsewhere, oil was a little softer overnight as risk sentiment came off the boil after the Fed, but this came after a couple of very solid days. WTI for Oct breached $40 on the upside before paring gains but the $39.50 area has held for the time being and offered a springboard in early European trade.
EIA data showed inventories fell 4.4m barrels, contrasting with forecasts for a build. Gasoline stocks were drawn down at twice the rate expected. However, we remain concerned about the demand pick-up through the rest of the year – as all the main agencies have recently revised their demand forecasts lower.
We note also a report suggesting that OPEC is not about to panic by further cutting production – however that would depend on prices; WTI at $30 again might induce action. OPEC+ members are holding an online meeting today to assess compliance and whether additional cuts may be necessary – I would think for now they will stand pat, with the focus chiefly on compliance with current targets, which currently stands at 101%, according to sources reported yesterday.
But if prices come a lot more pressure there would likely be an OPEC+ response.
Stocks open higher ahead of busy central bank week
It looks like a second wave, but not as we know it. Even if cases are starting to rise in Britain and elsewhere, deaths are not picking up in the same way as before – younger, less vulnerable people are getting the virus this time it seems.
The World Health Organization (WHO) recorded a record one-day rise in cases globally. France recorded a record number of new infections – some 10k over the weekend. There is not the appetite for blanket shutdowns of the economy again – this is good, but the ongoing fear factor will keep a lid on animal spirits.
And governments could be spooked into heavy-handed responses, even if they don’t want to kneecap the economy.
AstraZeneca resumes vaccine trial
Fear can be vanquished with a vaccine, so it’s good news that AstraZeneca and Oxford University are resuming trial of their vaccine candidate, after it was paused a week ago. News on a vaccine – good or bad- is set to emerge in October, it seems.
Pfizer says there is a good chance it will deliver data from its late stage trials of its candidate vaccine, developed with German drug maker BioNTech. If approved, it could be available to Americans by the end of the year. The question is whether this may be needed – Sweden seems to be showing the way towards herd immunity.
With vaccines and herd immunity, unemployment becomes a much bigger problem. The end of the furlough scheme raises the prospect of employment rates reaching a cliff-edge. Unemployment could spiral and redundancies are taking place at twice the rate of the last recession. US initial jobless claims last week indicated the recovery is slow, even if job openings are more encouraging.
BoE to signal more stimulus this week?
This could make this week’s Bank of England meeting interesting. It has enough ammo in the quantitative easing quiver to last until the end of the year, but with only two more scheduled before 2020 is over, the Bank will need to lay the ground for more stimulus. Governor Andrew Bailey said central banks should go “big and fast” with QE and other stimulus at times of crisis.
If there an explosion in unemployment, this line will be tested. I’d expect the Bank to sound more dovish this week, although it is unlikely to alter policy so far in advance of the November Budget, in which the government show its fiscal hand.
Of course, there is still time for Rishi Sunak, the Chancellor, to extend furlough, as many are urging him to do. UK 2-year gilt yields hit fresh record lows this morning with the market seemingly convinced the BoE will give a very strong signal it is preparing to deliver additional stimulus – most likely in the form of increased asset purchases rather than a descent into a vortex of negative rates.
The problem of furlough schemes and extending them is of course one of productivity and the opportunity cost of maintaining people in a kind of output stasis. Zombie workers and zombie companies are a growing problem. Indeed, new research shows the number of zombie companies in the US is near the 2000 record.
European stocks build on decent week
European markets opened higher on Monday, with the FTSE 100 solidifying above 6,000 and the DAX ticked up to 13,300. This comes after a decent week for European markets that contrasted with Wall Street weakness.
The Nasdaq finished last week down –4%, with the S&P 500 dropping –2.5% over the five days. The Nasdaq broke under its 50-day simple moving average, whilst the S&P 500 traded through it at the lows but held it at the close.
European markets fared better as they were much less exposed to the sell-off in tech – some rotation taking place as investors look to ‘reopening’ stocks over the Covid-19 winners, but it was far from anything significant.
Indeed, in dollar terms, the moves in the FTSE 100 for example were far less impressive. Investors in the US may also be paying attention to the presidential race – Biden’s tax plans would knock earnings, although it’s far tighter race than the national polls indicate. US futures are higher and have cleared the Friday peak struck during the London morning session.
Abenomics safe as Suga elected new leader?
Suga-high for Japanese equities? In Japan, Yoshihide Suga, the former chief cabinet secretary, looks set to replace Shinzo Abe as prime minister after being elected to the lead the country’s ruling Liberal Democrat Party. Suga has pledged to maintain Abenomics and seems to be causing few ripples in the market.
He will only have a year to make an impact though before the next elections are scheduled – he could choose to call a snap election to shore up his support, but the coronavirus might get in the way.
The Nikkei 225 edged up 0.65%, while the yen was steady against the dollar at 106.
Meanwhile Gilead, whose remdesivir antiviral is treating Covid-19 patients, is buying Immunomedics for $21bn. With vast sums of private equity to be deployed, there may be a slew of deals and takeovers as we head into the autumn.
Brexit and Federal Reserve to weigh on cable, gold rangebound
In FX, ongoing talks between the UK and EU look set to be the chief driver for GBP crosses. However, a Federal Reserve meeting this week will impact the USD side of cable. There is not a new to say about the Brexit talks after last week – we await to see whether the discussions can get any further.
Usual headline risks to cable, but GBPUSD could get squeezed higher absent of any negative news. GBPUSD traded at 1.2840 in early trade having made a firm near-term base at the 200-day EMA at 1.2750. Downtrend still in force until the 1.30 handle is recovered.
Elsewhere, gold is still trading in a very narrow range around the $1940 level. US breakevens have come down a bit, US 10s are hunkered in around 0.66% and real rates (10-year TIPS) have just come down a touch.
Remember it’s Fed week. The Federal Reserve convenes on September 15th and 16th for the first time since Jerome Powell signalled that the central bank would be prepared to tolerate higher inflation as a trade-off for a swifter economic recovery and jobs growth.
Unemployment has fallen since the pandemic peak but is not improving quickly enough. The Fed is not expected to announce any fresh policy change but will reinforce Powell’s message from Jackson Hole on the policy shift.
Indeed the main focus for the Fed right now is actually not monetary policy but fiscal as members await any move in Washington to deliver a fresh stimulus package.
Volgende week: Veel nieuws van centrale banken, maar de sleutel ligt bij de fiscale reactie
Het is spitsuur deze week wat betreft de centrale banken; de Federal Reserve, Bank of England en Bank of Japan komen in actie, na de ECB en Bank of Canada afgelopen week. Het besluit van de Bank of Japan wordt wellicht overschaduwd door de Japanse politiek, nu de Liberale Democratische Partij (LDP) een nieuwe leider kiest, vlak voordat een nieuwe premier wordt gekozen.
Intussen houden we onze ogen ook gericht op de wekelijks terugkerende economische data, zoals de uitkeringsaanvragen en retailcijfers.
De Federal Reserve vergadert op 15 en 16 september voor de eerste keer sinds Jerome Powell aangaf dat de centrale bank bereid is hogere inflatie te tolereren in ruil voor sneller economisch herstel en banengroei. De werkloosheid is gedaald na de piek van de pandemie, maar het herstel gaat te traag.
De Fed zal naar verwachting geen nieuwe beleidsverandering aankondigen, maar de boodschap van Powell versterken. De belangrijkste focus van de Fed ligt inderdaad niet bij het monetaire beleid maar bij het fiscale, nu leden wachten op beweging uit Washington met betrekking tot een nieuw stimuleringspakket.
Bank of England
De Bank of England vergadert ook deze week, te midden van groeiende speculatie dat de “Old Lady of Threadneedle Street” zal overgaan tot negatieve rente om de economie te stimuleren.
In gesprek met parlementariërs weigerde gouverneur Andrew Bailey negatieve rente uit te sluiten – een beleid dat systematisch faalde met betrekking tot de vereiste inflatie in de eurozone. “Het zit in de gereedschapskist,” zei hij. “We hebben het nu niet in de planning staan, we zijn niet van plan het op korte termijn in te zetten, maar het zit in de kist.”
Intussen is het de fiscale reactie die er op dit moment meer toe lijkt te doen – centrale banken hebben hun munitie al grotendeels verschoten. Andy Haldane, hoofdeconoom van de BoE, waarschuwde vorige week dat de verlofregeling in het VK niet verlengd moet worden – maar het is afwachten of de minister van Financiën toegeeft aan verzoeken tot verlenging om banen te beschermen. De verlofregeling loopt in oktober af en de regering zal zich misschien gedwongen zien hem te verlengen, om te voorkomen dat banen in een afgrond verdwijnen.
Focus op de Japanse yen
Met twee aankomende risico-events, is er een goede kans dat de Japanse aandelenmarkt en de yen deze week verhoogde volatiliteit laten zien. Maandag kiest de regerende Liberale Democratische Partij (LDP) een nieuwe leider, enkele dagen voordat een nieuwe premier wordt gekozen door het parlement.
Shinzo Abe trad onlangs af om gezondheidsredenen, en kabinetssecretaris Yoshihide Suga is zijn gedoodverfde opvolger. Hoewel hij kan zorgen voor continuïteit en heeft beloofd de Abenomics voort te zetten, bestaat het risico dat hij verkiezingen uitschrijft, met politiek risico voor de JPY en Nikkei 225. De verklaring van de Bank of Japan, de dag na de stemming in het parlement, zal waarschijnlijk weinig deining veroorzaken.
Wat de FTSE betreft, zijn de derdekwartaalresultaten van Ocado dinsdag interessant. Investeerders zullen graag willen weten hoe de samenwerking met Marks & Spencer heeft uitgepakt. Investeerders zullen ook het antwoord willen op de altijd blijvende vraag – waar is het geld? Het aandeel Ocado schoot dit jaar omhoog als gevolg van de stijging van online aankopen. Met een stijging van meer dan +80% in 2020 laat het bedrijf alleen Fresnillo achter zich als het gaat om de YTD-koers.
Die groei heeft zich echter nog niet vertaald in rendement voor investeerders door middel van winstuitkering.
Retailer Next (-16% YTD) is intussen een melkkoe die zelfs met de leegloop van de winkelstraten consistent een vrije cashflow laat zien. Deze halfjaarresultaten volgen donderdag. Hoewel het bedrijf in juli een verkoopdaling van -28% in het tweede kwartaal ten opzichte van vorig jaar rapporteerde, was dit veel beter dan verwacht en een overtrof dit het best-case scenario waar in april van uitgegaan werd. Het management schatte de winst vóór belasting op 195 miljoen pond.
Hoogtepunten op XRay deze week
Bekijk de volledige agenda van financiële marktanalyses en trainingen.
|17.00 UTC||14-Sep||Blonde Markets|
|From 15.30 UTC||15-Sep||Weekly Gold, Silver, and Oil Forecasts|
|13.00 UTC||16-Sep||Indices Insights|
|14.45 UTC||17-Sep||Master the Markets|
|17.00 UTC||17-Sep||Election2020 Weekly|
Belangrijke economische agendapunten
Kijk uit naar de belangrijkste economische agendapunten deze week. Een volledige ￼kalender met economische en corporate events￼ is beschikbaar op het platform.
|09.00 UTC||14-Sep||Eurozone Industrial Production|
|01.30 UTC||15-Sep||RBA Monetary Policy Meeting Minutes|
|02.00 UTC||15-Sep||China Industrial Production & Retail Sales|
|06.00 UTC||15-Sep||UK Unemployment Rate, Claimant Count Change|
|09.00 UTC||15-Sep||Germany, Eurozone ZEW Economic Sentiment|
|After-Market||15-Sep||Adobe – Q3 2020|
|06.00 UTC||16-Sep||UK Consumer Price Index|
|12.30 UTC||16-Sep||US Retail Sales|
|14.30 UTC||16-Sep||US EIA Crude Oil Inventories|
|18.00 UTC||16-Sep||FOMC Interest Rate Decision, Economic Projections|
|18.30 UTC||16-Sep||FOMC Press Conference|
|22.45 UTC||16-Sep||New Zealand Quarterly GDP|
|01.30 UTC||17-Sep||Australia Employment Change, Jobless Rate|
|04.00 UTC||17-Sep||Bank of Japan Rate Decision & Statement|
|11.00 UTC||17-Sep||Bank of England Interest Rate Decision|
|12.30 UTC||17-Sep||US Weekly Jobless Claims|
|14.30 UTC||17-Sep||US EIA Natural Gas Storage|
|23.30 UTC||17-Sep||Japan Inflation Rate|
|06.00 UTC||18-Sep||UK Retail Sales|
|12.30 UTC||18-Sep||Canada Retail Sales|
|14.00 UTC||18-Sep||US Preliminary University of Michigan Sentiment Index|
Volgende week: Non-farm payroll VS, rentebesluiten RBA en BoE – met onze briefing voor volgende week weet u wat u te wachten staat
Het cijferseizoen komt ten einde, maar de cijfers van Q3 van Walt Disney zullen deze week nauw in de gaten worden gehouden. Op economisch gebied houden zowel de RBA als de BoE monetaire beleidsvergaderingen, en het rapport van de Amerikaanse non-farm payroll op vrijdag dreigt de markten tot in het weekeinde volatiel te houden.
Aandacht op PMI’s van Markit, Caixin, ISM
Een groot aantal PMI’s zal deze week meer informatie geven over de staat van de wereldwijde economie. De PMI’s voor de productie- en dienstensector staan op de agenda voor de eurozone, het VK en de VS. De aandachtig gevolgde China Caixin productie-PMI is maandag als eerste aan de beurt. De diensten-PMI volgt woensdag als de markten in Azië zijn geopend.
Ook op de planning deze week staan de ISM-indices voor productie en dienstverlening in de Verenigde Staten. De dienstenindex zal naar verwachting een stap terug doen, nadat deze in juli met bijna 12 punten was gestegen. Verwacht wordt dat er nog altijd sprake van een stevige groei zal zijn.
Vergadering Reserve Bank of Australia – leidt deflatie tot een snelle reactie?
De Reserve Bank of vergadert tegen een achtergrond van toenemende besmettingen met het coronavirus, zowel landelijk als in de rest van de wereld.
Nieuwe lockdowns vormen een bedreiging voor het heropenen van economieën wereldwijd. Uit recente CPI-gegevens bleek dat de prijzen voor het eerst sinds 1997 in het tweede kwartaal op jaarbasis zijn gedaald, waarbij in dit kwartaal tevens sprake was van de grootste daling ooit gemeten.
De markten verwachten dat de beleidsmakers meer zullen doen om inflatie te stimuleren. Nu de rentetarieven effectief al nul zijn en niemand deze nog verder wil verlagen, zal de aandacht zijn gericht op of de RBA andere vormen van stimuli nu of op de korte termijn nodig acht.
Cijfers Walt Disney
Investeerders zullen letten op drie factoren bij de cijfers van het derde kwartaal van Walt Disney, die na het sluiten van de markt op 4 augustus gepresenteerd zullen worden. Het grootste deel van de omzet van het bedrijf komt uit de attractieparken. Sommigen hiervan zijn inmiddels weer open, maar anderen zijn ondanks eerdere beloftes nog altijd gesloten wegens de toenemende besmettingen.
Uitstel en vertraging van de productie en release van grote films zal impact hebben op zowel de bottom line als de vooruitzichten van het bedrijf.
Disney+ kan een lichtpuntje zijn. De lockdowns hebben tot een grote toename van het aantal abonnees geleid bij rivaal Netflix, en beleggers zullen hopen dat ook Disney hiervan profiteert.
Rentebesluit Bank of England, inflatierapport
Het Monetary Policy Committee van de Bank of England zal donderdag de nieuwe monetaire beleidsbeslissingen aankondigen.
Hoofdeconoom Andy Haldane zei onlangs tegen het Treasury Select Committee dat hij gelooft dat de Britse economie is hersteld van „ongeveer de helft” van de enorme klappen in maart en april, maar waarschuwde dat de werkloosheid kan toenemen tot niveaus die sinds de jaren 80 niet meer zijn voorgekomen.
Haldane noemde enkele beleidslijnen die de Bank of England toe zou kunnen passen als beleidsmakers dit nodig achten. Negatieve rente zou tot veel discussie leiden, maar het MPC zou ook het opkoopprogramma (QE) en kredietversoepelingen verder kunnen uitbreiden.
Er wordt niet verwacht dat de rentetarieven of QE aangepast zullen worden. Ook zal de BoE op donderdag de meest recente inflatiecijfers bekend maken.
Non-farm payroll: leiden nieuwe lockdowns tot trager herstel van de arbeidsmarkt?
Het Amerikaanse non-farm payroll-rapport wordt vrijdag gepubliceerd. De laatste twee maanden was er sprake van een enorme rebound na het verlies van 20 miljoen banen in april; in mei en juni werden kwamen er respectievelijk 2,7 en 4,8 miljoen banen bij. Economen verwachten dat er in juli weer 2,2 miljoen banen bijgekomen zullen zijn.
Er is nog een lange weg te gaan tot de werkgelegenheid in de VS weer terug is op het niveau van pre-COVID. Het toenemende aantal besmettingen en nieuwe beperkingen voor bedrijven in veel Amerikaanse staten kunnen de groei van de werkgelegenheid verder vertragen.
Hoogtepunten op XRay deze week
Bekijk de volledige agenda van financiële marktanalyses en trainingen.
|07.15 UTC||Daily||European Morning Call|
|12.00 UTC||03-Aug||Master the Markets with Andrew Barnett|
|From 15.30 UTC||04-Aug||Weekly Gold, Silver, and Oil Forecasts|
|17.00 UTC||06-Aug||Election2020 Weekly|
|12.00 UTC||07-Aug||Marketsx Platform Walkthrough|
Belangrijke cijfers deze week
We zetten enkele van de belangrijkste rapporten voor deze week op een rij:
|05.30 UTC||04-Aug||Bayer – Q2|
|04-Aug||Sony – Q1|
|Pre-Market (UK)||04-Aug||BP – Q2|
|After-Market||04-Aug||Walt Disney – Q3|
|05.00 UTC||05-Aug||Allianz – Q2|
|06.00 UTC||06-Aug||Glencore – Q2|
|06-Aug||Adidas – Q2|
|Pre-Market||06-Aug||Siemens – Q3|
|06-Aug||Uber – Q2|
Belangrijke economische agendapunten
Kijk uit naar de belangrijkste economische agendapunten deze week:
|01.45 UTC||03-Aug||China Caixin Manufacturing PMI|
|07.15 UTC – 08.00 UTC||03-Aug||Finalised Eurozone Manufacturing PMIs|
|08.30 UTC||03-Aug||Finalised UK Manufacturing PMI|
|14.00 UTC||03-Aug||US ISM Manufacturing PMI|
|04.30 UTC||04-Aug||RBA Interest Rate Decision|
|22.45 UTC||04-Aug||New Zealand Quarterly Employment Change / Jobless Rate|
|01.45 UTC||05-Aug||China Caixin Services PMI|
|07.15 UTC – 08.00 UTC||05-Aug||Finalised Eurozone Services PMIs|
|08.30 UTC||05-Aug||Finalised UK Services PMI|
|14.00 UTC||05-Aug||US ISM Nonmanufacturing PMI|
|14.30 UTC||05-Aug||US EIA Crude Oil Inventories|
|11.00 UTC||06-Aug||Bank of England Rate Decision, Monetary Policy Report|
|12.30 UTC||06-Aug||US Weekly Jobless Claims|
|14.30 UTC||06-Aug||US Natural Gas Storage|
|01.30 UTC||07-Aug||RBA Monetary Policy Statement|
|06.00 UTC||07-Aug||Germany Industrial Production / Trade Balance|
|12.30 UTC||07-Aug||US Nonfarm Payrolls, Average Earnings, Jobless Rate|
Banks lead European stocks higher
Asian shares soared overnight on Monday, lending a positive start to the European session as equities rode a broad risk rally. The very strong US nonfarm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus.
Hong Kong rose 4%, Tokyo 2%, while shares on mainland China were up around 5% on, among other things, some bullish commentary in state press. Shanghai shares jumped 5.7%, the best one-day gain in five years.
It looks like local investors are chasing the market and the spill-over has lifted the boats across Asia. China’s rally sparked a broad risk-on move. Escalation of US-China tensions don’t seem to be a major worry.
Bank stocks surge as Europe opens higher
European shares took the baton and opened roughly 2% higher in early trade on Monday led by a surge in bank stocks. HSBC rallied 6% apparently on the China trade read across, but elsewhere we saw broad gains as investors looked to new leadership at Lloyds and Commerzbank, whilst hopes of a fiscal lift in Europe may be a factor. Broadly it looks like the Chinese rally has lifted cyclicals like banks and autos.
Eco data was better but not as good as hoped – German factory orders jumped 10.4% in May, although the rebound was less impressive than the 15% expected. Orders remain almost a third below where they were a year before. Bank of France Governor Francois Villeroy de Galhau said on Sunday the country’s economy was bouncing back quicker than expected.
Meanwhile, Andrew Bailey, the governor of the Bank of England, has written to UK banks warning of the operational challenges of negative rates (new computer systems, lower net interest margin). This could be taken either way; either it’s an explicit message to get ready, or it’s way of saying to them not to worry because we know it’s a massive pain. The letter said negative rates remain “one of the potential tools under active review” should the Bank think more stimulus is required.
The rally left the DAX close to the top of the June range, trading above 12,800. The FTSE is close to the 61.8% retrace of the pullback in the second week of June. US futures point towards strong gains when Wall Street reopens after the three-day weekend, with the S&P 500 moving clear of the 78.6% retracement. June peaks are starting to come into view and will be a key test for whether this rally has further to run or whether it’s time for a pullback.
Bets of further stimulus boost stocks
Whilst markets face a wall of worry, investors are confident of getting a leg up from further stimulus. Britain’s chancellor Rishi Sunak will set out a mini-Budget this week focused on jobs. A meeting of Eurozone finance ministers on Thursday will set the tone for the key July 17th-18th summit. Whilst the various countries disagree over the composition of grants and bailouts, on conditionality and over how the funds are divided up, Germany’s Angela Merkel is bound to make sure that a deal is done: the squabbling needs to stop.
Meanwhile the US Congress is set to work on a second stimulus bill this month. At the same time, Covid-19 cases continue to soar – markets are getting used to the numbers – but the pace of recovery in the US will flatten if rising cases means states re-impose lockdown restrictions. As noted last week, the headline number in the jobs report masked some ills, so we will again be very much focused on the weekly initial and continuing claims numbers this week.
Dollar softens, oil edges higher, Buffett bets on natural gas rebound
Elsewhere, the broad risk rally sent the dollar lower, with DXY at 96.80. Sterling pushed a little with GBPUSD back about 1.25, looking to break last week’s peak a little short of 1.2530. EURUSD was a whisker short of 1.13, entering the resistance formed by the July 2nd peak. Clearing this opens up the path to the Jun 23rd swing high at 1.1350. Market positioning remains quite aggressively short, with net speculative positions on the euro the most bearish in three years.
Crude oil was a little higher, with WTI (Aug) just about nudging the $41. Gold is steady at $1776, with the latest CFTC figures showing speculative net longs at the highest in two years. Finally, Warren Buffett is making a $10bn bet on natural gas prices rebounding – the veteran investor thinks the market, which hit a 25-year low last month, has bottomed, making assets cheap and is on course for a rebound.