UK enters worst recession, European stocks steady after Wall St slips on stimulus doubts

Morning Note

What did I miss? Stimulus measures keep being debated, vaccine hopes are at first raised then more sensibly assessed, and stocks in the US keep going up; the S&P 500 has risen about 5%, whilst European markets are flat over the period. I seem to recall in July a lot of chatter about European equities outperforming, but there has been little to show from that trade so far. Gold has smashed a new all-time high and profits been taken, an easy win for most, whilst oil prices have barely moved.

UK economy posts worst decline since records began

So, what has changed? Britain’s economy is on the ropes, but we knew this already. UK GDP fell by 20.4% in the second quarter, which was largely in line with expectations. Economic activity is bouncing back – the economy grew 8.7% in June but remains well below the levels seen in February. Having been out and about over the last three weeks, I can safely say there will be more recovery recorded in July and August.

But getting back to 2019 levels of activity is going to take a very long time as we see permanent impairment in certain sectors of the economy, as well as behavioural and social changes. Cable recovered off the 1.3020 horizontal support formed by the low on Monday on the update to continue to trade its August range. With the dollar turning around and seemingly finding its near-term support, GBPUSD may struggled to hold its 1.30 level.

Gridlocked US stimulus talks weigh on stocks

The Democrats and Republicans can’t agree anything. Stocks on Wall Street slipped after gridlock in Washington left investors wary of pinning their hopes on a bipartisan stimulus package, but the S&P 500 was at one point just a few points from its all-time high at one point and could still take it out this week. Senate majority leader Mitch McConnell naturally blamed the Democrats for this but revealed the two sides had not spoken since Friday.

The Dow and S&P 500 both snapped a 7-day winning streak, whist European markets rose a touch on Wednesday’s open after a strong run-up on Tuesday. The FTSE 100 continues to trade the narrow range of the June pullback without any signs of breaking out.

Gold tumbles on profit-taking

The lack of fresh stimulus left gold bulls wary and profits were taken but we have seen a big bounce off some important technical support this morning.  Spot dropped under $1900 but found support on the old resistance at $1865 and the 200-period SMA on the 4hr charts may offer some technical support. More important is the trend support offered by the line drawn from the lows made since the March trough.

Gold’s rally has been all about stimulus and inflation and so doubts about whether there will be more stimulus saw investors recast inflation expectations a little and the technical exhaustion of the move needed to be factored in. US real rates rose, with 10yr TIPS back to –0.99%, having struck a low of –1.08% last week. Benchmark 10yr yields rose to 0.66% but whilst real rates are so deeply negative gold will have support.

Chart: Gold recovers $1,927 after finding support at $1,865

Biden picks Harriss as running mate

Joe Biden named Kamala Harris his running mate for the race to the White House. Two points about this really stand out. The duo needs to get the vote out, and Harris should energise many who may not otherwise vote, but they cannot risk losing the centre in the rust belt where the issue is the economy.

But the problem for Trump is that accusations that Biden’s VP pick was too zealous a prosecutor when acting as California attorney general make it difficult for Republicans to say the Democrats won’t be tough on crime. Her appointment will somewhat blunt Republican attacks on law & order.

The key question for investors is who wins in November and whilst details like VP picks are important, they are just a small part of the story. Trump still wins in my opinion whatever the polls are saying.

Kiwi weakens after RBNZ extends QE, opens door to negative interest rates

New Zealand is in full panic mode, locking down Auckland amid a mystery outbreak of Covid. The RBNZ duly announced it would expand the Large Scale Asset Purchase programme to $100bn, which just nudged the kiwi lower. But the real focus is on negative rates – a full four mentions of the committee looking at a negative OCR were in the release. Lower and negative rates is increasingly the path of least resistance for the RBNZ, which makes the NZD open to further downside risk.

Oil prices were up a touch, with WTI (Sep) taking a $42 handle this morning ahead of the inventory figures from the US Energy Information Administration, which are expected to show a draw of 2.9m barrels. API data yesterday showed stockpiles fell 4.4m barrels last week.

Elsewhere in FX land, watch the double top on the EURUSD pair with the rejection of 1.19 looking more convincing we look for neckline support around the 1.17 level to hold for bulls to make a fresh drive higher. However, the pullback in US Treasuries and uptick in yields may offer support for the dollar to push back hard.

Stocks surge as Russia claims to have a Covid-19 vaccine

Equities

Stocks have leapt higher today after Russia claimed that it had registered the world’s first vaccine for the new coronavirus.

The Dow has climbed over 350 points higher and the S&P 500 has risen to within touching distance of the all-time high set in February. European stocks have held on to this morning’s gains.

Conversely, safe-haven precious metals are getting hammered, with gold now down over -4% at $1,940.00 and silver crashing -7% to $27.00.

Putin announces registration of world’s first coronavirus vaccine

President Putin claims that the virus works ‘quite effectively, it forms a stable immunity and, I repeat, has passed all the necessary checks’. He also said that one of his daughters has been given the vaccine.

The vaccine has undergone clinical trials, which have been completed in under two months. Phase three trials are expected to start on Wednesday and will involve countries including the United Arab Emirates, the Philippines, and Saudi Arabia.

The vaccine will be called ‘Sputnik V’ in overseas markets. The Russian Direct Investment Firm, Russia’s sovereign wealth fund, is backing the production of the vaccine and claims that over 20 countries have filed preliminary applications for a total of over 1 billion doses so far.

Doubts over Russian vaccine claims

While Putin has hailed the Russian breakthrough and stocks have moved sharply higher, the news has been met with scepticism elsewhere.

A spokesman for the World Health Organisation cautiously said that the body was in contact with Russia about the “possible pre-qualification process for a Covid-19 candidate vaccine which requires rigorous review”.

And former US Food and Drug Administration commissioner and Pfizer board member Dr Scott Gottlieb told CNBC today that, compared to the US efforts, Russia’s vaccine development is ‘certainly not ahead’.

‘They’ve cleared the equivalent, really, of a Phase 1 clinical trial in terms of putting it in 100 to maybe as many as 300 patients so it needs to be evaluated in a large-scale clinical trial,’ Gottlieb said.

Regardless of any cautious noises, markets are powering higher, with investors perhaps repricing their expectations for how far out a working vaccine is.

Week Ahead: UK GDP in focus, will labour data help ease recovery doubts?

Week Ahead

There’s plenty of growth and labour market data in the docket this week to further improve the picture of the global economy, while sentiment data could provide some clarity on the outlook. The RBNZ will announce its latest policy decisions, and oil markets could see heightened volatility on reports from the International Energy Agency and OPEC.

UK Q2 GDP, smaller decline but longer recovery?

The first estimate of the UK’s Q2 GDP is due on Wednesday. Analysts have forecast a -20.4% drop on the quarter. Last week the Bank of England stated that it believes the Q2 drop will be “less severe” than initially predicted, although the timeframe for the recovery has been extended.

A second reading of Eurozone GDP is also due this week – the economy fell by a record -12.1% between April and June according to preliminary estimates and no changes are expected this time around.

Labour market data key as questions over recovery pace grow

Jobs data remains one of the key metrics used to measure the economic recovery from Covid-19 and the figures are coming under threat from fresh lockdowns in major cities and regions in the world’s largest economies.

The UK’s unemployment rate currently stands at 3.9% but some analysts are expecting the data for June to reveal a jump to 6%. The Bank of England’s latest forecasts predict the jobless rate will hit 7.5% by the end of the year. We’ll get figures for unemployment benefit claims for July as well.

Australia also releases monthly employment change and unemployment rate figures, while the weekly US jobless claims data remains a key focus.

Have fresh lockdowns hit consumer, business sentiment?

Consumer and business sentiment data this week includes Australia’s NAB Business Confidence and Westpac Consumer Confidence, the ZEW Economic Sentiment indexes for the Eurozone and Germany, and the latest US University of Michigan Consumer Sentiment index. Sentiment may have taken a knock from the new restrictions put in place to help control the spread of the virus.

Also of note this week are Chinese and US inflation rates and retail sales.

RBNZ interest rate decision

Recent economic data suggests the Reserve Bank of New Zealand may not need to make any further policy adjustments at this moment, although a rise in hedge funds betting against the Kiwi indicates the smart money is expecting more stimulus in the near future.

Q2 employment data showed a much smaller-than-expected drop in employment and, thanks to an upwards revision to the Q1 data, the jobless rate unexpectedly held steady at 4%.

Business inflation expectations have also risen from 1.2% to 1.4%, meaning the outlook for both areas the RBNZ is mandated to consider has improved.

IEA & OPEC oil market reports

As well as the weekly US EIA crude oil inventories data, commodity traders will also want to watch for the latest oil market reports from the International Energy Agency and OPEC.

Recent oil inventories data from the US has been bullish, showing a huge draw over the past two weeks. Traders will want to see that the IEA and OPEC expect a continued recovery in demand.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
17.00 UTC 10-⁠Aug Blonde Markets
From 15.30 UTC 11⁠-⁠Aug Weekly Gold, Silver, and Oil Forecasts
17.00 UTC 13-⁠Aug Election2020 Weekly
12.00 UTC 14⁠-⁠Aug Marketsx Platform Walkthrough

Key Events this Week

Watch out for the biggest events on the economic calendar this week:

01.30 GMT 10-Aug China Inflation Rate
After-Market 10-Aug Occidental Petroleum
01.30 GMT 11-Aug Australia NAB Business Confidence
06.00 GMT 11-Aug UK Claimant / Employment Change & Unemployment Rate
09.00 GMT 11-Aug Eurozone / Germany ZEW Economic Sentiment
02.00 GMT 12-Aug RBNZ Interest Rate Decision
06.00 GMT 12-Aug UK Preliminary Q2 GDP
09.00 GMT 12-Aug Eurozone Industrial Production
Pre-Market 12-Aug Tencent Holdings – Q2 2020
12.30 GMT 12-Aug US Inflation Rate
14.30 GMT 12-Aug US EIA Crude Oil Inventories
12-Aug OPEC Monthly Oil Market Report
After-Market 12-Aug Cisco Inc – Q4 2020
01.30 GMT 13-Aug Australia Employment Change / Unemployment Rate
06.00 GMT 13-Aug Germany Finalised Inflation
08.00 GMT 13-Aug International Energy Agency Oil Market Report
12.30 GMT 13-Aug Initial Jobless Claims
14.30 GMT 13-Aug US EIA Natural Gas Storage
02.00 GMT 14-Aug China Industrial Production and Retail Sales
09.00 GMT 14-Aug Eurozone Q2 GDP 2nd Estimate
12.30 GMT 14-Aug US Retail Sales
14.00 GMT 14-Aug University of Michigan Sentiment Index

What will happen to the US dollar if Trump wins re-election?

US Presidential Election

After years of threatening a devaluation, in the face of China’s own currency manipulation, President Trump recently indicated that he is now in favour of a strong dollar. Given the President’s inconsistency on the issue, and the current turbulent economic environment, what exactly would a second term entail for the most important currency in the world?

How a second Trump term could impact USD

The crucial distinction here is one of means versus ends. In the mind of President Trump, the currency is just a tool to deliver a buoyant stock market and booming economy, whatever he might tweet.

The Trump administration will do whatever it takes to catalyse the recovery, whether appreciation or depreciation is the required remedy. In our view, the latter will prove to fit the bill, and so the US dollar’s value will fall if the Trump train continues to roll through November.

Whilst the dollar has been relatively stable in its value over the course of Trump’s first three years in office, the gargantuan nature of the economic task at hand means that this trend simply cannot continue.

When he began his first term, the economy looked to be in a relatively healthy state. Discounting the remote possibility of a miraculous economic recovery, his second term will debut in very different circumstances.

Massive relief spending set to continue

Looking at the demand side, one could be forgiven for assuming that a dollar appreciation was imminent. The US economy comfortably outperformed the G7 and G20 averages in the first quarter of 2020, shrinking by just 1.3% compared to 2% and 3.4% respectively.

This is likely the result of mammoth congressional stimulus packages, which have allowed the US to lead the world nominally in terms of relief spending and come second in terms of percentage of GDP.

A second Trump term would almost certainly see further waves of relief, likely in the form of his $1 trillion infrastructure plan. This particular avenue of execution benefits from relatively healthy levels of bipartisan support, meaning that such spending can be expected no matter who controls the Congress come 2021.

US stocks likely to continue outperforming, pressuring USD

And in terms of the stock markets, the US has also consistently outperformed global averages throughout the President’s first term, including in the post-Covid era.

This is exemplified by the fact that the S&P 500 index has risen by over 50% since 2016, whilst the FTSE has fallen by around 9% in this same period. Given all of the above, the US is likely to continue attracting investors the world over, delivering inflationary demand-side pressures that would support USD.

However, the aforementioned upward pressure caused by a healthy economy will be insignificant when compared with the deflationary pressure instigated on the supply-side.

Federal Reserve stimulus measures will help Trump get weaker dollar

Since February, the Federal Reserve has increased its balance sheet by almost $3 trillion, moving from $4.2 trillion to $7 trillion. This rapid increase is expected to continue, with Trump calling the policy ‘something that’s really great for our country’.

In addition, the possibility of extreme measures in the form of yield curve control is rising, with several current Fed governors commenting that the policy should be on the table if necessary.

All of this is indicative of our central point: the authorities are prepared to do whatever it takes to prop up the stock market and the real economy and will stop at nothing to achieve this end.

Expanded balance sheet, flat interest rates, yield curve control to cause dollar depreciation

Trump has repeatedly held up rising stock prices as a beacon of success in his first term and will continue to do so if he wins a second. With quasi-control over the Fed, afforded to him by his position at the bully pulpit, the President will get what he desires, no matter the cost.

In this particular instance, the cost will be an expanding Fed balance sheet, rock-bottom interest rates and, if it comes to it, yield curve control measures. The sheer enormity of the response on the supply-side will be more than enough to drown out any inflationary pressures on the demand-side – depreciation inbound.

Overall, Pres Trump doesn’t really care about the value of the dollar outside of its utility as an economic tool or a stick with which to hit China. The real motivation behind the President’s actions in a second term will mirror those of the first: growth in the stock market and the real economy, in that order of importance.

In his pursuit of these goals, no policy instrument is off limits, whether it be a trusty expansion of the Fed’s balance sheet, or an as yet untested tool like yield curve control.

Whilst the Fed is technically a quasi-independent body, such independence is illusory, particularly in the context of Trump’s propensity for the use of public pressure. Whilst some demand-side inflationary effects will be initiated by a better-than-average recovery, such effects will be lost in the vastness of the supply-side avalanche that is to come.

If he achieves a second term, Pres Trump will leave office in 2024 having achieved two things that he initially desired: a stock market on the rise and a depreciated dollar.

Week Ahead: Tesla earnings and vaccine hopes to drive sentiment

Week Ahead

Coming up this week – can Tesla do enough to justify its massive valuation with its second quarter earnings release? 

Tesla Q2 earnings

Tesla (TSLA) has enjoyed a stunning rally in 2020, rising 270% year to date. In the last 12 months, the stock has risen more than 500% in what can only be described as one of the most amazing turnarounds in corporate history. Over this period the S&P 500 has gained around 7%. Valuations are out the window and the stock is trading on tech multiples – some would say for good reason, but short interest in the stock – the percentage of shares out on loan to traders betting the stock will fall – remains relatively high at 7.5% 

Tesla stock has soared in the last year 

But it’s back to basics this week as Tesla reports its Q2 2020 financial results. The company is likely to report a fourth straight quarterly profit on July 22nd, which would clear the way for it to enter the S&P 500, and may explain the recent rally as funds have decided they will need to own some of it. 

The stock pushed to all-time highs close to $1,800 after the company said it delivered 90,650 vehicles in the second quarter, well ahead of both what the company had guided and the Street expectation for 83,000 vehicles. The company has successfully ramped production at its Fremont site and the Shanghai plant also came back online after being forced to shutter in the first quarter due to Covid. China sales are picking up with Tesla selling almost 12,000 Model 3s in May. The stock also got a lift after Wedbush Securities increased its price target on the stock to $1,250 from $1,000, whilst the bull scenario got a PT of $2,000. 

Analysts remain divided on Tesla 

…but hedge funds have been increasing their holdings 

Other earnings this week to watch come from Microsoft, Coca-Cola and Unilever. 

AstraZeneca and Oxford University vaccine results

Hopes for a vaccine continue to underpin equity market sentiment despite signs of a slower recovery than the V-shaped rebound everyone had hoped for. Much hope is being pinned on a candidate vaccine being developed by AstraZeneca and Oxford University – results from phase one clinical trials are due on Monday and could set the tone for the rest of week in equity markets. 

Also watch for a reaction in AstraZeneca shares, which have rallied strongly this year to make it the largest stock on the FTSE 100 

Economic data to watch

As ever on Thursday we are anticipating an important update from the US which will help show the pace of reopening and economic recovery in the shape of weekly initial and continuing unemployment claims. 

On Friday we have UK retail sales for June, which are expected to show improvement after rebounding a healthy 12% in May following the –18% decline in April at the height of the lockdown.  

Friday also sees the release of the latest flash PMIs for the Eurozone, which a month ago showed a decent rebound. PMIs, which are diffusion indices, are particularly challenged by the speed and magnitude of the economic contraction. So, whilst they may make a V-shape, it does not mean the recovery is V-shaped. PMIs only ask if survey participants think things are better or worse than the previous month, so they give a pretty imperfect snapshot of economic activity in times of crisis. A reading over 50 only tells us things are better than the prior month, which right now is not a high bar to clear.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
17.00 UTC 20-Jul Blonde Markets
From 15.30 UTC 21-Jul Weekly Gold, Silver, and Oil Forecasts
14.45 UTC 23-Jul Master the Markets with Andrew Barnett
17.00 UTC 23-Jul Introduction to Currency Trading – Is it For Me?

Top Earnings Reports this Week

Here are some of the biggest earnings reports scheduled for this week:

After-Market 20-Jul IBM – Q2
07.00 GMT 21-Jul UBS – Q2
Pre-Market 21-Jul Coca-Cola Co – Q2
Pre-Market 21-Jul Philip Morris – Q2
Pre-Market 22-Jul Biogen – Q2
After-Market 22-Jul Tesla – Q2
After-Market 22-Jul Microsoft – Q2
After-Market 22-Jul Gilead Sciences – Q2
07.00 GMT 23-Jul Unilever – Q2
Pre-Market 23-Jul AT&T – Q2
Pre-Market 23-Jul Twitter – Q2
After-Market 23-Jul Intel – Q2
23-Jul Southwest Airlines – Q2
Pre-Market 24-Jul Verizon – Q2
Pre-Market 24-Jul American Express – Q2

Key Events this Week

Watch out for the biggest events on the economic calendar this week:

01.30 GMT 21-Jul RBA Monetary Policy Meeting Minutes
02.30 GMT 21-Jul RBA Governor Lowe Speech
12.30 GMT 21-Jul Canada Retail Sales
00.30 GMT 22-Jul Japan Flash Manufacturing PMI
01.30 GMT 22-Jul Australia Retail Sales
12.30 GMT 22-Jul Canada CPI
14.30 GMT 22-Jul US EIA Crude Oil Inventories
06.00 GMT 23-Jul German GfK Consumer Climate
12.30 GMT 23-Jul US Weekly Jobless Claims
14.30 GMT 23-Jul US EIA Natural Gas Storage
06.00 GMT 24-Jul UK Retail Sales
07.15-08.00 GMT 24-Jul Flash Eurozone Services, Manufacturing PMIs
08.30 GMT 24-Jul Flash UK Services, Manufacturing PMIs
13.45 GMT 24-Jul US Flash Manufacturing PMI

Dutch PM Rutte ‘not optimistic’ ahead of EU summit, Netflix misses

Morning Note

European stocks were choppy and likely set for a volatile finish to the week as EU leaders gather in Brussels for a key summit, with market participants squarely focused on whether the EU can agree to a broad recovery fund as part of the talks over the bloc’s budget for 2021-27.

Whilst the EU seems to be edging closer to a deal and Merkel and Macron should ultimately get the consensus they need for something like a €500bn-€750bn package of support, there is a risk the market has put too much on this particular meeting and is left disappointed if there is no final decision taken this weekend.

We may get an agreement in principle on the fund that will be made up of a mix of grants and loans, with details on the total money value and attached reform requirements to be finessed. Even that might be a stretch though – Merkel warned this week that it could take until the end of the summer to achieve a deal and today said talks would be tough.

Dutch PM Rutte said this morning he’s ‘not optimistic’ ahead of the talks. Indeed, I would not expect much more than a political declaration affirming member states commitment to achieving some kind of a deal.

This not an ordinary summit – what’s being talked about is mutual debt issuance for the first time. A deal would be a major breakthrough for the EU and show that the bloc has the ability to respond to an era-defining crisis with one voice.  Merkel is throwing all her political capital behind the European Recovery Fund, so there more than just EU solidarity riding on it.

The Frugal Four of Sweden, Austria, Denmark and the Netherlands remain the main barrier to achieving a deal as they are still to be convinced on why they should be sharing the burden of weaker states, but most countries will be out to fight their corner too. At least they are all back in a room and can talk through the night to trade horses and get something done – not so easy on Zoom, albeit it’s an absolute hangar of a room.

ECB’s Lagarde dismisses tapering chatter

Yesterday, the ECB left rates on hold as expected and Christine Lagarde appeared to push back against the tapering chatter by saying the ECB would use the full PEPP envelope of €1.35tn ‘barring surprises’. She also seemed confident member states would agree on the fiscal response to the crisis, which gave the euro a little nudge up at the time.

EURUSD is back under 1.14 this morning – a recovery fund deal would likely take it over 1.15 and set it up for further gains. Near term the support is around the 1.12 region.

Stocks on Wall Street finished lower on Thursday, led by a decline in tech. It’s probably too early to say this is part of a rotation out of growth into value – which could be a trade to consider if you assume that a vaccine is coming and things get back to normal – but there may be an element of profit-taking in big tech as investors take stock of events and consider the uncertainty over the pandemic, reopening rates, stimulus, earnings outlooks and stretched valuations in some corners of the market vs many stocks being in the bargain basement, among others.

Netflix subscribers and earnings growth miss

Netflix shares plunged 9% to $480 in after-hours trade as the company signalled weaker subscriber growth and profits missed expectations. Revenues were a tad better than forecast at $6.15bn, and as I expected, net subscriber additions in excess of 10m were ahead of estimates for about 7.5m, but earnings per share were a little soft at $1.59 vs $1.80 expected.

But guidance on future growth in subscribers was soft with the company only anticipating 2.5m net adds in September quarter. Maintaining Covid-era subscriber growth was always a tall order, if not impossible, but 2.5m would represent its weakest growth rate for a long time.

Although EPS was a miss, it was largely down to the timing of a California research and development tax credit charge. Netflix earnings have always been lumpy and net subscriber adds has always been a greater guide. The company expects 16% operating margin in 2020 and 19% for 2021, which CEO Reed Hastings said was ‘tamping down the expectations’.

Competition remains a headwind as new streaming services come online, but increasingly even social media is considered a rival. Netflix cited TikTok as a competitor – good news then that the US wants to ban the Chinese social media app.

There are of course questions about whether Netflix will manage to attract eyes in the way it did during lockdown – cinemas reopening, bars and restaurants luring people off the sofa etc, whilst the impact of Covid-related shutdowns on production is still being understood. Moreover coronavirus has simply pulled forward a lot of net adds from the coming quarters – expect slower growth but the company remains in a very good place.

US jobless claims mixed, homebuilder sentiment climbs

Economic data from the US was mixed. Initial jobless claims hit 1.3m, almost unchanged from the prior week. The improving trend has all but halted and may reflect the spike in coronavirus cases that has coincided with renewed lockdown measures in a number of economically important states such as Texas and Florida. California’s decision to roll back reopening signals worse could be ahead.

Continuing claims fell to 17.3m vs the 18m last week, which was a tad better than the 17.6m expected. The total number of people claiming benefits in all programmes for the week ending June 27th fell to 32m a decrease of 430k from the previous week. What’s clear is the rate of change is not moving in the right direction – getting back to pre-Covid levels will take a long time.

However, homebuilder sentiment rose 14 points to 72 in July, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). That’s where the index reached in March before the crisis hit and it slumped to 30 in April.

Oil and gold are both still in consolidation mode. WTI (August) cannot make a move beyond $41 stick, whilst gold is still crabbing sideways around the $1800 level and appears to set its new low and near-term support at $1796. US real rates (10yr TIPS) made new 7-year lows at –0.79%.

Blonde Money ECB and EU Summit Preview

Equities
Forex

What can we expect from this week’s European Central Bank monetary policy decision? Blonde Money CEO and founder Helen Thomas takes a look at what could be in store for markets on the back of the latest announcements, and why the ECB will be watching the upcoming EU Summit as intently as the markets will.

Get the latest macroeconomic and political insight from Helen every week on XRay.

US oil inventories preview: Crude rebounds after hitting lowest levels since July 1st

Commodities

Crude oil touched the lowest levels since the start of the month on Tuesday as investors fretted over the pace of reopening in the world’s major economies. Better-than-expected US crude oil inventories data from the American Petroleum Institute helped push oil higher on Wednesday, with WTI briefly spiking above $41.00 before pulling back to trade below the long-term resistance level.

Crude oil remains rangebound ahead of this week’s main events, with $41.00 providing resistance and support at $39.00.

Oil unsteady as California orders bars to close

Risk sentiment has been knocked across the board after Californian governor Gavin Newsom ordered bars across the state to close and indoor operations to halt in restaurants, cinemas and museums.

The measures have raised questions over how quickly the world’s major economies can afford to reopen. California’s shutdown was prompted by an increase in the average number of new Covid-19 cases to over 8,000 per day during the past week.

OPEC committee to review production cuts

The timing of the shuttering in California is particularly troublesome for the oil markets, given that OPEC’s Joint Ministerial Committee meets this week to review the level of production cuts. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd.

OPEC Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance. An unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower.

EIA data: Draw expected, but are the forecasts accurate?

Prices are also being kept contained ahead of the US Energy Information Administration’s weekly crude inventories report. The latest EIA data is expected to show a draw of 2.275 million barrels after last week’s surprise build of over 5.6 million barrels.

Oil rallied yesterday after the American Petroleum Institute predicted a weekly draw of 8.3 million barrels, smashing expectations for a 2.275 million barrel drop in storage volumes.

Stocks pull back as California shuts up shop again, pound retreats

Morning Note

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.

Equities rally ahead of Wall Street’s Q2 earnings season

Morning Note

A positive start to the week for global equities reflected a strong finish on Wall Street on Friday and an unwillingness to get bogged down by record global daily case numbers. A surge in the futures overnight translated into +1% gains for European cash equity markets as they opened, although the immediate move was to retreat off the highs made by the futures.

Whilst indices have chopped around the Jun-Jul ranges, there are divergences in the performance: the DAX is close to its June high, the FTSE 100 has only retraced 38.2%. Meanwhile futures show the S&P 500 is set to open at 3200, just 40 points from its post-March highs, whilst the Dow has only retraced 50%. These discrepancies reflect index composition as much as anything else – what to watch out for this week will be whether the S&P 500 or the DAX break free or move back towards the middle of their ranges.

The WHO said over 230k new cases were recorded in 24hrs, a record. The US recorded over 70k cases but increasingly investors are shrugging off these headlines as it’s felt the country won’t lockdown in the same way again. Nevertheless, the spike in Covid cases has slowed reopening in several states and this could translate into negative rate of change in some of the economic data which could be a problem for bulls.

It’s a big week for data, not least the start of the Q2 earnings season on Wall StreetThe high frequency economic data should continue to point to recovery however it will be the rate of change that matters more – is the recovery gaining momentum or are the easy wins behind us?

Tesla stock surged another 10% on Friday to rise above $1,500. The company is likely to report a fourth straight quarterly profit on July 22nd, which would clear the way for it to enter the S&P 500, and may explain the recent rally as funds have decided they will need to own some of it.

In commodities, gold continues to consolidate on the $1,800 level and with the bullish flag in play it could retrace further before the near-term pullback is complete, with the longer-term support on the trend line coming in around $1788. Speculative net long positioning rose, whilst inflows into gold funds continue to surge.

Crude oil continues to battle with the trend line as it tries to recover the bullish bias after last week’s sharp sell-off. Coming up this week is the U.S. Energy Information Administration (EIA) drilling report (Jul 13th) and OPEC monthly oil market report (July 14th). Speculative net positioning has barely changed in the last week, according to the CFTC COT report, with net longs at 535k vs 543k the prior week.

In FX, the dollar bounced a little of its lows in early trade with the dollar index making a bottom at 96.35 and pushing back up to 96.50. Sentiment for the dollar is a bit softer due to the risk-on trade, which is lifting major peers to drift higher. GBPUSD may have made a near-term top around 1.2670 but remains supported by the bullish channel.

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