Stocks bounce after sell-off, stagflation worries persist

Morning Note

In a word, stagflation. That’s how I’d sum up what this market angst is all about. Or at least, the spectre of stagflation. Simply put, growth is already decelerating and downside risks to the growth outlook are darkening due to rising cases, Delta and other emerging variants, as well as worries about potentially lower vaccine efficacy. At the same time, inflation is shooting higher. Supply side constraints (supply chain tightness, availability of labour/parts) are a problem central bankers cannot solve. 

 

As I detailed on August 12th 2020, the Fed was always going to struggle to get a grip on inflation as it let the economy run hot – AIT was developed before the vaccines had their effect and the Fed has been slow to respond. (US inflation hot, stocks keep higher as bonds slip). “The Fed should and could be relaxed about headline inflation running above 2% for a time, instead prioritising the employment level, but it also means inflation expectations can start to become unanchored as they did in the 1970s […] In a nutshell, if inflation expectations lose their anchors, then we are faced with a stagflationary environment like nothing we have seen for 50 years. High inflation, low growth for years to come is the unwanted child of a global pandemic meeting massive government intervention. And, expounding further on Aug 13th“The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle.” 

 

Are we going to see another Volcker? I doubt it very much, I doubt central bankers have the bottle or mandate even (full employment, remember) to engineer a recession to get everything back on an even keel.

 

Stocks slumped at the start of the week and bonds rallied, sending the US 10yr benchmark to its lowest since February at 1.17%. The S&P 500 declined 1.6%, whilst the Dow Jones industrial average was more than 2% lower for the session, though both closed off the lows of the day. It was the worst single day for the Dow since October, as the major cyclical plays – energy and financials – led the losers. The S&P 500 briefly traded below its 50-day SMA but managed to close above this level, and managed to just hold onto our horizontal support drawn across the May-Jun peaks. The Vix spiked to 25. 

 

As previously noted here, the whole story of the bull run since the vaccine news/Biden win in Nov is littered with ~5% type pullbacks to that 50-day line, before the uptrend is resumed. Could it be different now? Perhaps, but it would be betting against form to suggest so. We’re only about 3% off the recent all-time high and this pullback may not be over until at least that becomes a ~6% drop to about the 4150 area. Cyclicals have been selling off for a while now and the market was being propped up by an ever-narrower base of mega cap tech/growth. 

 

Chart showing S&P 500 price action.

European indices endured a brutal session, with all the major bourses registering declines of more than 2% for the day. The FTSE 100 tumbled through its 100-day moving average, hitting a three-month low. In early trade, stock markets in Europe staged a fightback, but I’d flag the risk that this a) a deceased feline and in any event b) is a market in a summer funk that can cut you up in both directions. UBS boosted sentiment with a net profit of $2bn for the quarter, up 63%. EasyJet shares rose as it signalled it would fly 60% of Q4 2019 capacity in the final quarter.

The FTSE rolled over after failing to sustain the 78.6% retracement above 7,200. Starting to look a tad oversold and we should anticipate a retest of 7,000 but further weakness cannot be ruled out a bears can look to a possible retreat to the 61.8%/23.6% at 6,650, close to the 200-day SMA.

FTSE 100 performance

It’s another story of moving averages in FX, with cable dropping below its 200-day line. It’s not traded under the 100-day and 200-day SMAs since Jun 2020. Not a heap of support below and a swift move back to 1.350 cannot be ruled out.

GBPUSD price movements displayed on chart.

Finally, Bitcoin futures: as I said yesterday the price action was dreadful and shouting out for another leg lower, duly delivered as risk took a beating yesterday (great hedge…). Price action now under $30k and eyeing the Jun low.

Bitcoin futures price action.

Stocks firm ahead of jobs report, waiting on OPEC

Morning Note

European stocks rallied again in early trade after yet another record high for Wall Street as investors look ahead to today’s big jobs report from the US. The FTSE 100 rose above 7,150 for its best since Jun 18th and close to the post-pandemic peak set a few days before at 7,189.63. The DAX was up 0.4% in early trade to 15,666. Travel & leisure, basic resources and tech lead the way higher on the Euro Stoxx 600 this morning, whilst banks and retail are down. Earlier saw the S&P 500 notch a 6th straight record close, finishing above 4,300 for the first time at 4,319.94 with all sectors in the green, led by a 1.6% pop for energy stocks on higher oil prices.

All eyes today turn to the US jobs report, the monthly nonfarm payrolls. Initial jobless claims declined to 364,000 last week, data yesterday showed, the lowest level since the pandemic started, but there are still more than 11m Americans receiving pandemic-related benefits. Today’s NFP is expected to print around 700k, but as ever the range of estimates is quite wide. That would imply an improvement from May’s 559,000, while the unemployment rate is expected to decline to 5.6% from 5.8%. Whilst we know the Fed has signalled it’s not ignorant to inflation risks, we also know that the labour market is a key factor in determining the likely timing and pace of tightening when it does happen. Since the Fed’s last meeting, which the market took as a sign of more hawkishness (from a very dovish base), the equation for markets has changed slightly. US 10-year yields trade around 1.46% ahead of the report, whilst US equity index futures are mildly higher.

OPEC failed to agree on an increase in production yesterday, as the UAE emerged as a dissenter against plans to gradually raise production by an additional 400k bpd each month through to December until the baseline for its own output is raised. The agreement in principle would also have led to the production deal being extended through to the end of 2022. The failure of OPEC members to agree to the deal means the planned OPEC+ meeting has been pushed back to today and could go on into the weekend. If OPEC cannot agree a deal, it could mean there is no agreement to gradually raise output, leaving production at current levels and forcing prices higher in what’s already seen as a very tight market.

WTI (continuous) remains well supported above $74.20 after spiking on yesterday’s news before paring gains a touch. The market seems to still expect a deal to be struck – failure could see another leg up.

Chart indicating movement of oil spot contracts.

Elsewhere, the bid for the dollar we have seen all week continues, with GBPUSD trading at the lowest since mid-April at 1,3750, which yet take it back to the double bottom at 1.3660.

GBPUSD performance indicated on a chart.

EURUSD also dropping to weakest since early April, bear flag playing out still, possible extension to the March low at 1.170. But in both cases the dollar is starting to look a little stretched.

Performance of the EURUSD currency pair.

Bitcoin futures around $33k, still trades under 200-day SMA.

Performance of Bitcoin contracts.

All looks calm ahead of the Fed meeting

Morning Note

Cooler rates and broadly positive risk sentiment helped send the Nasdaq composite to a record high on Monday, whilst the tech sector lifted the broader market as the S&P 500 also notched a fresh all-time closing high. Mega tech names led the gains for the index, whilst financials were the biggest drag. European stock markets are broadly higher in early trade. Growth/tech have come back, whilst the reopening/reflation trade has cooled somewhat.

Ahead of the Federal Reserve meeting this week there is no sign of a tantrum. Stocks are happy to catch the tailwinds higher despite being caught between a super-hot inflation reading last week and the Fed’s policy meeting. Rates have been steady coming into the meeting with the benchmark 10yr yield hovering a little below 1.5% and have been edging lower since the end of March – allowing growth stocks to catch some bid in recent weeks. The calm shows markets are broadly in tune with what the Fed’s views so far, but this can shift if the Fed acts too early or delays too long. Indeed, today’s Bank of America fund manager survey shows 72% think inflation is transitory, which pretty much tells you all you need to know about market positioning. The bottom line: “investors bullishly positioned for permanent growth, transitory inflation & a peaceful Fed taper via longs in commodities, cyclicals & financials,” the FMS report says. On the Fed and policy, 63% expect the Fed to signal a taper Aug/Sept; US infrastructure spending now seen a bit lower at $1.7tn and expectations for a steeper yield curve are at their lowest since Aug 2020.

The Fed’s two-day meeting begins today with markets paying close attention to the language from the FOMC’s statement and what the latest economic projections will tell us. Inflation and growth forecasts for the near-term will likely be revised substantially higher, but this is not going to materially alter the Fed’s position. It’s probably too early to hint at a taper – they can point to the labour market still being some way off where they want it to be and a lack of upwards pressures on inflation expectations. The transitory message will be clear. Chair Powell will seek to tamp down expectations for a taper but as the minutes from the last meeting revealed, he’s allowing it to be known that some policymakers are thinking about thinking about tapering asset purchases. But he will stress that the economy is not there yet: it’s under consideration but more progress is required. The first real signal will be left to Jackson Hole in August, or possibly the September meeting, in preparation to begin tapering in Dec/early 2022.

Yesterday crypto stocks jumped as Bitcoin recovered the $40k handle following a tweet by Elon Musk. MicroStrategy rallied almost 16%, whilst Coinbase added more than 6%. Meme stocks aren’t going away – AMC jumped 15% and Wish added almost 13%. A survey shows hedge funds expect to hold 7% of their assets in cryptos in the next 5 years.

This morning Ashtead slipped a little even as it reported a doubling in profits in the fourth quarter of the year. Operating profits +95% to £264m was a good performance and reflects the recovery in construction in the US as the economy reopened. Shares have risen by 45% this year as it has demonstrated both resilience to the downturn and a positive uptick in activity as economies reopen for business. As chief executive Brendan Horgan puts it: “Our business can perform in both good times and more challenging ones.”

No lift for sterling out of its current moribund range as UK labour market data out this morning showed the number of employees on company payrolls rose by 197k last month, though this remains about 550k below where it was before the pandemic hit. A positive report on the whole. GBPUSD maintains its slightly weaker bias as it slides down the channel looking for a meaningful shift in gear.

Tobacco stocks fall, Netflix earnings on tap, Cable touches 1.40

Week Ahead

A soft start to Tuesday’s session after stocks in Europe closed lower yesterday as the early promise of the green boards fizzled. Stocks on Wall Street were lower, with the Dow Jones closing more than 100 points below Friday’s record high and the S&P 500 down 0.5% from its all-time high also set at the end of last week. These are not strong directional moves but there is not a lot of dry powder on the side lines in investors pretty well all-in on stocks. The macro story seems well understood for now vis-à-vis vaccines, the pandemic, the Fed, stimulus – really the question mark is over whether earnings can keep up with expectations to support current valuations. In the current setup it’s hard to see room for multiple expansion – compression is way more likely as rates rise (although this trade has taken a breather for now) – so we need the ‘E’ bit of the PE bit to hold up or we will see losses. Given the reopening this year, a large global savings glut and all the fiscal and monetary largesse, earnings should be strong. But expectations are already pretty high. Where there does seem room for manoeuvre is in the rotation out of growth and into value and back again.  

 

Netflix earnings today will provide a vital guide to this. The Street expects about 6m net subscriber adds and the market should look beyond the guidance for Q2 since it’s skewed by comps. Content remains king – Netflix needs to continue to produce the goods to remain the number one – primus inter pares – streaming app among households (the last to be ditched if cloth needs to be cut). Long term it remains a structural winner and the accelerated gains from the pandemic should be now be discounted. Focus should be on churn rates, password sharing crackdown, the content pipeline and competition.

 

Shares in GameStop rose 6% after news the CEO George Sherman would step down by the end of July. This is all playing into the hope and expectation that Ryan Cohen will lead a resurgence in the firm’s fortunes on a wave of ecommerce growth. There have already been several big board moves and this is the latest sign that the activist investor is making his presence felt. Meanwhile famed Redditor Roaring Kitty – aka Keith Gill (‘I’m not a cat’) has doubled his stake GME by exercising 500 $12 call options and purchasing an additional 50,000 shares. 

 

Following moves in stocks like Altria and Philip Morris in the US yesterday, shares in British American Tobacco and Imperial Brands tumbled after reports the Biden administration is looking to cap nicotine levels in cigarettes. Officials are also looking at whether they will pursue a ban on menthol cigarettes, and whether this ought to be pursued together or separately, according to the Wall Street Journal. I remember a similar report back in 2017 on a proposal from the FDA to lower nicotine levels sending tobacco stocks plunging. Would it really make as big a difference as the share price moves suggest? Lower nicotine cigarettes may be less addictive – so the rationale is that this would make it easier for smokers to quit or switch to other ‘safer’ products and therefore be a ‘good thing’. However, consumers may be tended to perceive lower nicotine cigarettes as safer, which could make them easier to sell, which would be the precise opposite of what the administration intends. A ban on menthol cigarettes is a much more straightforward policy. Both BATS and IMB fell 5-6% in early trade on the developments.

 

Despite resuming its dividend, AB Foods shares slipped as it offered a very cautious outlook on slower reopening of Primark sites, higher costs at the food business and FX headwinds. Following an ‘exceptional’ performance in the first half of the year, management expect Grocery, Sugar, Agriculture and Ingredients businesses to be softer in the second half. At Primark, ABF expects to be trading from 68% of its retail selling space, (or 79% if stores with restricted trading are included) by the end of April. Reopening dates for France, Ireland and the remaining stores in Germany are yet to be confirmed. 

 

The real action yesterday was in FX as the dollar continued to unwind its recent gains. Sterling rallied for a sixth day on the bounce, its strongest daily move since January, and is holding onto gains this morning, with GBPUSD touching 1.40 in early trade. The move is very extended and susceptible to a pullback before the next leg back to the recent highs at 1.42. The weaker dollar extended to the EURUSD pair, which is flirting with the 100-day simple moving average at 1.2050. A sustained breach to the upside calls for a return to the 1.22 handle. 

 

On the sterling story, there are clear signs the UK is getting back to business. Normality, no; but activity is picking up. Hiring is up 17%, unemployment is down from last quarter. Retail footfall and consumer spending is picking up rapidly. Of course, all this data is massively skewed by interventions – furlough masks the true employment situation, arbitrary reopening dates skew spending to the first few days and weeks as the pent-up demand is let out. Nevertheless, these are encouraging signs. 

 

Oil is drifting higher as markets look to dwindling global inventories and the expected uplift in demand as US driving season comes into view. The success of the vaccination programme in the US is a big plus for the world’s largest consumer. Refinery runs are picking up and stockpiles globally are at their 5-year average. It’s looking like the glut developed last year is over. Reports yesterday pointed to OPEC+ downgrading the April 28th scheduled ministerial meeting to just a JMMC monitoring meeting. Given OPEC+ has already agreed production levels through to July this would make sense as the market remains fairly calm and well supported for now. 

 

As flagged in yesterday’s note, gold pulled back a touch, hit by rising Treasury yields. The 50-day SMA at $1,750 may offer an area to rest should the move in yields gather steam. The softer dollar is a support but yields matter more for gold.

Gold pulled back a touch, hit by rising Treasury yields.

Cable hits 6-week low

Forex

Looks to be a pretty soggy morning for risk as sterling slipped to its weakest since the start of February, whilst the dollar is bid, shares slipped, oil fell and bond yields retreated ahead of the Congressional testimony of Fed chair Jay Powell and Treasury Secretary Janet Yellen. We kind of know where the Fed is at in terms of yields, inflation and accommodation. We will want to hear a lot more about what Yellen says on additional stimulus, with Biden’s mooted $3tn plan in the offing. FTSE 100 trades around 6,700 by 10am, down -0.3%, with the DAX -0.5% for the session. US futures still lower, Vix nudging up. US 10s are lower at 1.644% and copper is weaker by more than 1% and WTI futures dropped over 3% back under $60.

GBPUSD sank to a 6-week low as the 50-day simple moving average went at 1.382 and then the round number broke to see the cross test 1.3770. Looking at the 78.6% retracement around 1.3750 for support. I’d still be confident the pound will be retest 1.40 and break above that when it does.

GBPUSD has sunk to a 6-week low.

The dollar is finding bid across the board this morning, with EURUSD dropping 30pips or so in the last 3 hours to under 1.19, with a potential retest of yesterday’s lows around the 1.1875 area. Key 200-day SMA coming in around 1.1850.

EURUSD dropping 30pips or so in the last 3 hours to under 1.19.

WTI futures looking to the downside today as risk is offered and markets fret over the rise in cases in Europe and a shorter holiday summer season. As flagged in today’s morning call briefing the potential bearish wedge has already broken down, looking to the 50day SMA around $58.80.

WTI futures looking to the downside today.

Yields weigh on stocks, inflation again, oil recovers from sharp selloff

Morning Note

Economy vs markets: The Fed gave a bullish outlook on the economic recovery this week, but left its dovish course of monetary policy unchanged. Perfect conditions for a market rally, some might say. After stocks in the US closed at record highs on Wednesday following the statement, the reckoning came on Thursday. Yields popped, nobbling tech stocks: the US 10-year Treasury yield rose to 1.75%, the Nasdaq fell 3%. The downbeat mood rippled across other markets and left all the major indices lower, Asian markets fell and Europe has opened in the red. The FTSE 100 is weaker as heavyweights BP and Shell fell in the wake of yesterday’s oil price plunge and HSBC declined 2%.

It looks like a classic case of rates go up, growth stocks fall. Cyclicals didn’t really benefit though – it is not a simple case of moving from one part of the stock market to another. Nevertheless, I think this is part of the natural churn we are going to see in stock markets as they respond on a daily basis to rises in bond yields. This is not about absolute levels – not yet at least – but about the pace of these moves in bond markets which will take out bulls and bears alike with the gyrations. These shakeouts will create new entry points. As I said after the FOMC meeting, the Fed and its chair Jay Powell are letting the dogs of inflation off the leash and this creates all kinds of tensions in markets. Yields and inflation expectations are going to rise – the Fed is explicitly telling them to do so. It couldn’t really be any clearer: the Fed wants inflation and yields to rise. It’s technically behind the curve, but wilfully, gleefully. It’s behind the curve in the way a driver of car steers his car round the bend looking firmly at the road ahead and knowing there are chicanes coming.

If the Fed wants to run the economy hot, the latest Philly Fed index suggests it’s already there. The index for current manufacturing activity in the region jumped from a reading of 23.1 in February to 51.8 for March its highest point in nearly 50 years. The current new orders index also increased to a 50-year high, rising 28 points to 50.9 in March. And inflation again reared its head as firms reported price pressures from purchased inputs. The prices paid index rose from 54.4 to 75.9, its highest reading since March 1980. These kinds of readings are going to become normal over the next few months and see pressure on yields – the big question is at what point the Fed breaks and concedes that this is not just a transitory blip. I don’t think it will buckle and this ought to exert much greater pressure on yields, potentially leading to some kind of ‘tantrum’ and creating further volatility in stocks, particularly growth and tech.

The Bank of England was unchanged. The MPC didn’t provide any push back on yields but this just chimes with what the governor, Andrew Bailey, has been saying. It also didn’t want to play up to market expectations for a hike next year. Overall, I call this a holding statement until we get more info on the recovery.

The Bank of Japan has widened its yield curve target, increasing the size of the band within which it allows longer-dated yields to move. JGB yields moved higher in response. The BoJ also said it would no longer commit to buying ETFs at an annual pace of 6tn yen, instead saying it would only purchase these assets when necessary. Both moves are attempts to give the central bank more flexibility and make its stimulus more sustainable in the wake of the pandemic as it tries to stimulate inflation. February core CPI inflation fell 0.4% year-on-year, signalling a decline in the rate annual declines in consumer prices for the second straight month, as rising fuel costs offset the drop in household spending.

Oil prices are higher after they tumbled yesterday in a brutal sell-off for complacent bulls. Demand fears maybe, rising inventories maybe; certainly, some lack of momentum after Brent hit $70 was a factor. I don’t think it is going to mark a reversal for bulls, more of a shakeout as the summer looks set to see strong demand again. Nevertheless, we had noted that the nearest months flipping to contango was a signal there was some fears that the market right now is not as tight as it might be. WTI dropped to touch its 50-day moving average and is firmer this morning. (good example of MACD divergence signalling a problem).

Gold remember still trades with the bullish MACD crossover in oversold territory on the daily chart supporting the bulls. On the hourly chart we see a firm bounce off the 200-hour simple moving average plus MACD crossover and trend supporting the thesis. Bulls require to take out the swing high at $1,756 with the big resistance at $1,760 before a return to $1,795/$1,800.

Cable: Hourly chart giving off some good signals for bulls after bouncing off the 200-hour SMA and MACD bullish crossover in play – looking for a retest of 1.40 perhaps, however the 38.2% retracement around 1.3950 is offering resistance.

NFP review: numbers disappoint but stimulus drives sentiment

Indices
  • Stock futures hold gains, yield curve steepens
  • Second straight disappointing payrolls number
  • Move to fast-track Biden stimulus package drives sentiment

Stocks are set for fresh record high opens on Wall Street and a 5th straight day of gains – something we haven’t seen since August. A soft jobs report has done little to upset the underlying risk-on sentiment that stems from the milking stool of equity market strength: vaccines, stimulus and earnings growth.

Although in line with expectations, really it was another disappointing number from the US jobs market. Nonfarm payrolls rose +49,000 in January, following the -227,000 decline in December, which was revised down from the initial -140,000 print last month. So things look worse in the labour market than maybe we thought but futures are looking right through this with Joe Biden’s $1.9tn stimulus package coming over the hill. The dollar is offered and the yield on US 10-year Treasury notes has leapt with spreads widening along the curve.  2s10s spread at 1.06%, highest for four years, with 5s30s at 150bps,  the widest since 2015.

The decision to move on stimulus without Republican support really changes the game. As I said yesterday, Biden wants to act fast and does not want to spend his first 100 days in office horse trading with the GOP over relief plans. The price of this could be any hopes of bipartisanship in future and we may need to wait until 2022 for the big green/infrastructure package as a result, and it may prove harder to deliver. For now thought dumping an extra 10% of GDP in stimulus is being lapped up by the market.

Unemployment fell to 6.3% from 6.7% but the decline in the participation rate is a concern. U6 unemployment fell to 11.1% from 11.7%. Average hourly earnings rose +5.4% year-on-year vs 5% expected. The two month net revision took the total down by -159k. The US still has some 9.8m fewer jobs than it had in February 2020 before the pandemic struck. Permanent job losses are a concern – the number of permanent job losers, at 3.5 million, changed little in January but is 2.2 million higher than in February.

S&P 500 not bothered: Biden is going for it on stimulus.

S&P 500 not bothered: Biden is going for it on stimulus.

Cable higher and hugging the trendline.

Cable higher and hugging the trendline.

Cable hits YTD high, OPEC decision coming

Forex

Sterling rose to its highest against the US dollar in 2020 with the greenback coming under more pressure this afternoon in a repeat of yesterday’s moves as the weaker dollar narrative shows no signs of running out of gas. GBPUSD advanced beyond 1.3490, its best since the Boris Bounce of Dec 2019 after the Conservatives won a strong majority and a run at 1.35 seems ‘on’ for bulls now.

That would see cable back to levels not seen since the soft Brexit narrative-driven 1.43 area of spring 2018. The moves are probably two-fold – one is clearly about dollar weakness with majors posting solid gains vs the buck. The other cause may be markets front-running a Brexit deal with indicators the UK and EU negotiators are heading towards the ‘big push’. Don’t worry lads, we’ll be eating sauerkraut in Berlin by Christmas…we know what overplaying Brexit headlines has been like but it feels like this time is different simply because we are running out of road.

EURUSD has risen to its strongest in over two and a half years, rising above 1.2170. As noted when we saw 1.20 breached, there is not a huge amount of resistance blocking a return to 1.25. USDJPY dipped under 103.70, its lowest since the Nov 6th low which preceded the massive Nov 9th rally. Dollar index making new lows as a result with pressure on all fronts taking it to some near-term support at 909.50. Little support through to 88.

Cable has hit a YTD high today.

Meanwhile, a word on OPEC – as of send time the meeting had begun with sources pointing to increase production slowly at a rate of 500k bpd from next year, either from Jan or Feb. WTI seems happy enough with $45 on the headlines but we await the final decision.

 

Pound at 6-week low, European stocks stabilise but risk sentiment fragile

Morning Note

Tech stocks bled heavily again for a third straight day as trading resumed on Wall Street following the Labor Day weekend. Tesla slumped a whopping 21% to notch its worst day ever. The other major tech giants also dropped heavily as the Nasdaq fell 4% and entered correction territory – down 10% from its recent peak.

Whilst this began as more of a technical correction within tech following the astonishing ramp in August than a broad risk-off move, it is nonetheless bleeding into the broader market and dragged down the majority of stocks. US benchmark yields have retreated and oil prices have rolled over.

SPX not far behind after Nasdaq enters correction territory

There was some rotation going on – Disney, Nike, McDonald’s, Ford and GM rose – but the S&P 500 still declined almost 3% and is not so far off correction territory itself. On the whole there is a sense that this selloff represents that sentiment has become too exuberant and needed to correct.

We may expect the US market now to chop in W-pattern over the coming months and follow the path taken by European equities since June with the loss of momentum in the economic recovery and US election risks likely to become more visible in equity markets.

Asian equities fell with the weak US handover. European stocks opened a little bit higher in early trade but risk sentiment appears very fragile. The FTSE 100 is enjoying the pound’s distress with heavyweight dollar-earners like BP, Shell, Unilever and British American Tobacco among the best risers.

In dollar terms the market is flat. The index got a confidence boost as Barclays raised their call on UK equities to ‘market-weight’ from ‘underweight’.

Increase in coronavirus cases weighs on recovery outlook

Nevertheless, investors are becoming worried again about rising Covid cases across many developed markets which threaten the trajectory of the recovery and may well weigh on demand in a number of sectors.

The evidence is evident in a couple of markets. Oil prices have rolled over with WTI dropping under $37 to hit its weakest since the middle of June. Another tell that this tech-led selloff is more than just a simple technical correction are bond yields.

US 10-year Treasury yields logged their biggest drop in a month, sliding from 0.72% Friday to 0.682%. Despite the move in yields gold prices remain resolutely stuck to the $1930 anchor having tested $1906 and the 50-day SMA yesterday.

There is also some negative headlines around work on a vaccine which may weigh on risk a touch, or at least provide algos with a sell signal. AstraZeneca shares fell after it was forced to pause clinical trials of its Covid-19 vaccine candidate after a participant in the study was taken ill.

Such are the problems with pinning hopes on a vaccine for a return to normal to be possible. The worry is that while we have all kind of assumed that one company will come up with vaccine later this year, it’s not going to be plain sailing.

Tesla tumbles after S&P 500 snub

Tesla shares got well and truly smoked after it was not added to the S&P 500, to some surprise. Tesla stock hadn’t traded below its 50 day average price since April 13 and closed the day at this level at $330 – this level needs to hold or we could see further declines for the stock.

The market was surprised by Tesla not being included in the index. At the time, we talked a lot about how possible inclusion in the S&P 500 was a big driver of the stock’s rally earlier in the year and therefore being snubbed will force some funds to rethink whether they need to hold such a high beta stock if it’s not part of the index.

Pound sinks on Brexit worries, strong dollar

In FX markets, sterling is finding the going very tough, sinking to a 6-week low with the dollar catching a bid and Brexit risks weighing. DXY has advanced to clear 93.50 and test the top of the descending wedge, while EURUSD dropped further under 1.18 ahead of the ECB meeting which might be a lot more dovish than the market thinks.

This is not a pure dollar move by any means – the pound was also at its weakest since the end of July against the euro, too. For cable this has meant the build-up of downside pressure has blown out the stops at 1.30 and GBPUSD is running south with not a lot of support until 1.28.

Brexit risks are a major factor – the UK government admitted it will break international law in order to fix the withdrawal agreement should there be no deal by October 15th. Talks continue today between the UK and the EU and there are clear headline risks as traders see a higher chance of no deal emerging.

However, we should caution that a deal will likely emerge at the last moment after considerable brinkmanship from both sides that makes it seem as though a deal is impossible. Nevertheless, with still 5 weeks to go before the deadline imposed by the British government, there may be a very rough ride ahead for the pound.

Chart: Stops are out as GBPUSD trades below 50-day SMA

Chart: Having pushed clear of the 21-day SMA the dollar tests top of the descending wedge, 50-day SMA above

FX Strategy: Cable drops after stalled Brexit talks get nowhere

Forex

Sterling fell back to session lows with a view to the week lows being tested after Brexit talks seem to have gone nowhere. The two sides are still too far apart. Specifically, the EU wants to agree on fisheries and state aid rules before making progress on anything else. EU demands for a level playing field are non-negotiable if there is to be more than a low-level agreement.

Michel Barnier was not upbeat and whilst reiterating that a deal is possible, he said an agreement seems ‘unlikely’ and is concerned about the state of play. David Frost, his British counterpart, said talks were useful but little progress had been made.

The next round of talks take place the week commencing September 7th. Whilst the market was not positioned for a breakthrough this week, it’s getting closer and closer to the crunch point – the longer we go without a deal the more pressure comes onto the pound.

The two sides are still a long way from agreement on key terms. We should note that Barnier as the EU mouthpiece will always be pessimistic right up to the moment a deal is done. Nevertheless, on certain fundamental principles it looks as though the chasm is too great to bridge.

Grappling with the competing concerns of sovereignty (UK) and integrity of the single market (EU) goes to the very heart of the talks. Both sides need to make philosophical compromises before the practical compromises can follow. This is where I start to become concerned about a big, comprehensive deal being done.

Meanwhile EURUSD has dropped under 1.18 after a weak round of PMIs raised fears about the pace of recovery in the Eurozone and traders are starting to show concern the recent ramp in EUR may be overdone. Net long positioning in EUR has become very stretched and the EURUSD is susceptible to a squeeze lower.

Chart: Weekly GBPUSD – trying to break descending trend line. A close under here opens path back to the roaring 20s. We’ve seen a lot more volatility in GBPUSD this week with larger daily moves than generally seen of late.

Chart: Daily GBPUSD – Competing forces at work. Last week’s MACD bearish crossover still points to lost momentum and near-term weakness despite the throwover this week. Golden cross acted as a bullish confirmation of the thrust higher this week. Bollinger starting to point to break out, with downside in favour following today’s Brexit briefing and generally risk-off tone to the end of the week favouring USD.

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