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Stocks pull back as California shuts up shop again, pound retreats
A rolling back of the reopening process in California and rising US-China tensions left Wall St and Asian markets weaker, with stocks in Europe following their lead as surprisingly good Chinese trade data was not enough to calm markets.
European equity indices fell back in early trade on Tuesday after stocks on Wall Street suffered a stunning reversal late in yesterday’s session. At one point the S&P 500 touched its highest since level since the end of February at 3,235 before sellers sold hard into that level and we saw a very sharp pullback to 3,155 at stumps.
After threatening to break free from the Jun-Jul trading range, the fact the S&P was unable to make good on its promise could signal fresh concerns about the pandemic but also investor caution as we head into earnings season – the fact is the market should not be up for the year. Although it’s hard to get a real feel for valuations because so many companies scrapped earnings guidance, the S&P 500 is trading on a forward PE multiple that is way too optimistic, you would feel. Earnings season gets underway properly today with JPMorgan and Wells Fargo.
The Nasdaq also slipped 2% as tech stocks rolled over, with profit-taking a possible explanation after a) a very strong run for the market has left prices very high and, b) signs of a pullback for the broader market indicated now might be a good time to take stock. Tesla rode a $200 range in a wild day of trading that saw the stock open at $1,659, rally to $1,795 and close down 3% at $1,497.
Stocks retreat as California rolls back reopening, US-China tensions rise
California’s economy is larger than that of the UK or France, so when Governor Gavin Newsom rolled back the reopening of the state on Monday, investors took notice. The closure of bars, barbers and cinemas among other business venues followed moves in economically important states like Texas, Florida and elsewhere, indicating the rate of change in the recovery is not going to improve.
Whilst the market had developed a degree of immunity to case numbers rising, it is susceptible to signs that the economic recovery will be a lot slower than the rally for stocks in the last three months suggests.
Overnight Chinese trade data surprised to the upside with exports up 0.5% in June and imports rising 2.7%, beating expectations for a decline and signalling that domestic demand is holding up well. Singapore’s economy plunged into a recession with a 41.2% drop in GDP, while Japan’s industrial production figures were revised lower.
Tensions between the US and China took another sour turn as the White House rejected China’s claims to islands in the South China Sea, which aligns the US with a UN ruling in 2016. It had previously declined to take sides – the move indicates Washington’s displeasure and willingness to go up against China on multiple fronts now.
UK economy undershoots forecasts with tepid recovery
The UK is already seeing what a non-V recovery looks like. GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply.
UK retail sales rose 10.9% in June on a like for like basis excluding temporarily closed stores, whilst overall sales rose a more modest 3.4% and non-food sales in stores were down a whopping 46.8% for the quarter. Suffice to say that headlines of rebounds mask many ills.
Sterling extended a selloff after the GDP numbers disappointed. The reversal in risk appetite late yesterday saw GBPUSD break down through the channel support and this move has continued to build momentum overnight and into the European morning session. The rejection of the 1.2667 region seems to have made the near-term top for the rally. The 38.2% retrace line at 1.250 may offer support before the old 50% retracement level at 1.2464.
WTI (Aug) was a little softer under $40 as market participants eye the OPEC+ JMMC meeting on Wednesday. This will decide whether to roll back some of the 9.6m barrels or so in production cuts by the cartel and allies. The risk is that if OPEC acts too earnestly to raise production again the market could swiftly tip back into oversupply should the economic recovery globally fail to build the momentum required.
Another factor to consider is whether giving the green light to up production is taken by some members as an excuse to open the taps again and result in more production than agreed – compliance remains the ever-present risk for any OPEC deal.
Stocks head for best quarter in years, Powell testimony weighs on yields
The UK’s economy shrank a little more than expected in the first quarter – the 2.2% plunge was the joint worst since 1979. Of course, it will be dwarfed by the Q2 drop, with April already printing 20% lower. Meanwhile China’s PMI data showed a slight improvement and Japan’s industrial production plunged over 8%.
Does any of this tell us much as investors and traders? In normal times, yes of course, as it might make a difference of a few points on the margins, but in the time of coronavirus there is an awful lot of noise around the data which makes it a lot more challenging, as well as of course all the stimulus, which muffles the notes that the data is trying to sound. Boris Johnson will launch an FDR-like New Deal infrastructure package today to distract us from the harsh reality of rising unemployment and ongoing restrictions on our liberties.
Powell’s economic outlook weighs on US yields
US Treasury yields declined as Federal Reserve chair Jay Powell said the outlook for the economy is ‘extraordinarily uncertain’. In prepared remarks for today’s Congressional hearing alongside Treasury Secretary Steve Mnuchin, Mr Powell said output and employment remain ‘far below their pre-pandemic levels’, adding: ‘The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus.’
He also noted that ‘a full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities’. San Francisco Federal Reserve President Mary Daly said it’s too early to tell and is just ‘watching the data’. Aren’t we all.
A strong quarter for stocks, but risks of a sharp pullback abound
Stocks rallied on Monday despite a wobbly start, as US pending home sales jumped the most on record in May, whilst Boeing surged 14%, heaping dozens of points on the Dow as it restarted test flights on the 737 MAX aircraft yesterday.
But as I keep stressing, this is a very rangebound market. The S&P 500 rose 1.5% but is caught between the 38.2% and 50% retracement of the pullback in the second week of June. The Dow added more than 2% but couldn’t even achieve the 38.2% line. Whilst indices are still trading this range, there is a downside bias evident lately and emerging down trend channels as we’ve made a couple of lower highs and lower lows. If this trend strengthens it could gain enough momentum to retest of the June lows.
Indeed, during cash equity trading hours the last 5 sessions has produced a lower low and lower high on the S&P 500. Valuations still look too high and based on a far-too-optimistic view of an earnings rebound in 2021 and does not account for permanent productivity and demand destruction. Of course stimulus is making a big difference here, but risk assets are exposed if we see the pandemic get worse from here. World Health Organisation boss Tedros said the worst is yet to come. Cases across states like Arizona, Texas and Florida continue to surge and look to be completely out of control. A short, sharp pullback is a very real possibility.
Nevertheless, it’s been a solid month and an exceptionally strong quarter. US equities have enjoyed their best quarter in 20 years, whilst stocks in Europe have fared pretty well too as investors participated in the rebound off the March lows. It’s mirrored elsewhere in risk assets – copper is up a fifth, but is slightly weaker for the year. For instance, the S&P 500 is up 18% QTD, but down 5% YTD. The FTSE 100 is up almost 10% QTD, but down over 17% YTD.
On the open on Tuesday, European stocks were mixed and lacking direction as they traded either side of the flatline. The FTSE 100 was trading around the 50% retracement of the June pullback and took a little hit as Shell downgraded its oil outlook and warned it will need to take up to write down the value of its assets by as much as $22bn. This follows a similar move by BP, which moved lower apparently on the Shell read-across.
Chart: Dow tests 50-day SMA support, downtrend starts to gain momentum.
Elsewhere, gold was supported around $1770 but slightly below the recent 8-year high as the flag pattern starts to near completion following the leg up on Friday. Needless to say, we can look to US real rates and 10yr Treasury Inflation Protected Securities (TIPS) dipping to –0.7%, a new seven-year low. Across the curve real rates are more negative than they have been a decent while.
Crude oil recovered the $39 handle but has failed to ascend all the way to $40 and has peeled back this morning. The near-term rising trend is offering support but the double top still exerts its influence and may well result in a further pullback to $35.
In FX, the dollar continues to find bid and the dollar index is making a nice little move off its lows still in a strong uptrend channel but is just running into horizontal resistance around the 97.65 area – breakout could see 98 handle again in short order. The downtrend dominates for cable as the pair continued south down the channel to test 1.2250. Whilst this held, the failure to recover 1.23150 on the swing higher may call for a further decline to the 1.22 round number support, and thence our old friend 1.2160 may come into play.
Chart: Downward trend dominates for cable
Week Ahead: UK and Eurozone GDP, NZ Budget, Marriott earnings
Economic data at the moment tends to fall into one of two categories: 1) How bad did things get in Q1, and, 2) How quickly are they likely to get better? Everyone knows the Q2 data is where the real pain lies, but markets want an idea of where things stood before the effects of COVID-19 lockdowns really began to bite.
To this end flash Q1 GDP figures from the UK, Germany, and the Eurozone this week will act as a primer ahead of data for the current quarter. The US has already reported its advanced GDP estimate for Q1, showing that the economy contracted 4.8% during the first three months of the year, compared to expectations of 4%.
The UK economy is expected to shrink 4.4% on the previous quarter, the German economy by 2.8%, and the Eurozone by 3.8%. If the US data is any indication, these forecasts may not be bleak enough.
The key question, though, is whether this weakness is the predicted impact of COVID-19 arriving earlier than expected, or a sign that the impact is worse than the already dire expectations.
The US will post inflation and retail sales data, and the University of Michigan will publish its preliminary reading of its latest sentiment index. Australian releases this week include the wage price index and employment change and unemployment rate figures.
China industry, retail sales and New Zealand Budget
On the other end of the scale, Chinese industrial production and retail sales figures for April will give markets a vague idea of what an economy on the other side of lockdown looks like. It’s not an entirely accurate bellwether – China returned to work around the same time that Europe battened down the hatches.
The shuttering of businesses across the West will damage manufacturing demand in Asia. Industrial production is expected to drop 4.2%, compared to a 1.1% drop in March. Retail sales had cratered nearly 16% in February. The unemployment rate is expected to tick higher to 6.3% from 5.9%.
Also on the post–COVID front, the New Zealand government will hand down its latest Budget release this week. Finance Minister Grant Robertson has already laid out his strategy in a prebudget speech (delivered via video link, of course): respond, recovery, rebuild.
Particularly interesting is that Robertson says this will be a chance to not just rebuild the economy, but rebuild it better. Will other finance ministers around the globe be looking to reshape their economies over the coming months and years, or simply get the train back on the rails? The notion could drastically change what markets should expect from the coming years.
Earning season: Marriott, Cisco, Tencent
Marriott earnings are due before the market opens on the 11th. The hotel giant recently raised $920 million in new cash through its credit card partners. Revenue per available room was down 60% during March.
The stock has a “Hold” consensus with a 19% upside (based on the May 6th closing price) according to our Analyst Recommendations tool. Hedge funds has sold shares in the previous quarter, while insiders have snapped up the stock. The latest research on the stock from Thompson Reuters is available to download in the Marketsx platform.
Marketsx stock sentiment tools: Marriott International Inc (MAR – NASDAQ)
Cisco reports after the market close on May 13th. While analysts rate the stock a “Buy”, hedge funds dumped 83 million shares in the last quarter, with company insiders selling over 9 million in the last three months. The latest research on the stock from Thompson Reuters is available to download in the Marketsx platform.
Marketsx stock sentiment tools: Cisco Systems Inc (CSCO – NASDAQ)
Heads-Up on Earnings
The following companies are set to publish their quarterly earnings reports this week:
|Pre-Market||11-May||Marriott – Q1 2020|
|11-May||Bridgestone Corp – Q1 2020|
|05.00 UTC||12-May||Allianz – Q1 2020|
|12-May||Vodafone Group – Q4 2020|
|Pre-Market||13-May||Tencent Holdings – Q1 2020|
|After-Market||13-May||Cisco – Q3 2020|
|13-May||Sony Corp – FY 2019/20|
|14-May||Wirecard – Q1 2020|
|14-May||Astellas Pharma – Q4 2019|
Highlights on XRay this Week
|07.15 UTC||Daily||European Morning Call|
|09.00 UTC||Daily||Earnings Season Daily Special|
|15.30 UTC||12-May||Weekly Gold Forecast|
|12.50 UTC||13-May||Indices Insights|
|18.00 UTC||14-May||BlondeMoney Gamma Special|
Key Economic Events
Watch out for the biggest events on the economic calendar this week:
|23.50 UTC||10-May||Bank of Japan Summary of Opinions|
|01.30 UTC||12-May||China CPI|
|07.00 UTC||12-May||UK Preliminary Quarterly GDP|
|12.30 UTC||12-May||US CPI|
|01.30 UTC||13-May||Australia Wage Price Index (Q/Q)|
|03.00 UTC||13-May||RBNZ Interest Rate Decision|
|14.30 UTC||13-May||US EIA Crude Oil Inventories|
|01.30 UTC||14-May||Australia Employment Change / Unemployment Rate|
|02.00 UTC||14-May||New Zealand Annual Budget Release|
|12.30 UTC||14-May||US Jobless Claims|
|14.30 UTC||14-May||US EIA Natural Gas Storage|
|02.00 UTC||15-May||China Industrial Production / Retail Sales|
|06.00 UTC||15-May||Germany Preliminary GDP (Q1)|
|09.00 UTC||15-May||Eurozone Preliminary GDP and Employment Change (Q1)|
|12.30 UTC||15-May||US Retail Sales|
|14.00 UTC||15-May||Preliminary University of Michigan Sentiment Index|
UK GDP could wake sluggish pound, but the outlook is far from rosy
The UK’s first-quarter GDP print could be a good one, but will everything be as it appears?
Analysts at EY ITEM Club expect an uptick in growth during the months in what should have been the final quarter before the UK began its transition out of the European Union. A frantic few months, several baffling votes, and two extensions later, and the government now has until October to figure it out.
It’s longer than we need, Theresa May boldly claimed, seemingly having forgotten how the last few months have unfolded. Since then the political front has fallen eerily quiet, but the same cannot be said for businesses.
Brexit preparations to inflate growth figures?
If the UK economy did indeed pick up pace at the start of 2019, it could be because companies were busy stockpiling ahead of – what seemed at the time – an almost unavoidable no-deal Brexit.
PMIs for the quarter have made unpleasant reading; March saw the key services index collapse into contraction territory with a 48.9 reading. Construction, meanwhile, recorded the first consecutive output decline since August 2016.
Manufacturing, on the other hand, hit a 13-month high of 55.1 during March. The key phrase from survey-conductors Markit, though, was “The impact of Brexit preparations remained a prominent feature at manufacturers in March. Efforts to build safety stocks led to survey-record increases in inventories of both purchases and finished products”.
It’s even possible that consumers have been stockpiling, and that this will increase growth as well.
How will sluggish pound respond to growth data?
Brexit and the associated political drama have worked to effectively anaesthetise sterling from economic data. Even key data like services PMIs have been met with a muted response of late; until the outcome of the Brexit negotiations is known, the economic calendar for the UK is somewhat moot.
Growth data could be different.