UK growth cools, British Land resumes dividend

UK growth unexpectedly cooled  in August, signalling a slower pace of recovery into the back-end of the year. GDP rose by 2.1% in August, which was below the 4.6% expected, despite the eat out to help out scheme boosting the hospitality sector significantly. The food and beverage service activities industry grew almost 70% over July thanks to the easing of lockdown restrictions and the government support scheme. 

 

Nevertheless, the outlook is not particularly encouraging. August 2020 GDP was now 21.7% higher than its April 2020 low, but the UK economy is still 9.2% below pre-pandemic levels. Sticking plasters like eat out to help out act only as a mild salve. Moreover, as the government considers more restrictions on people’s liberties to combat the virus, it is clear the path of recovery to pre-pandemic levels of activity will be slow and difficult. The pace of recovery has peaked, and things may get worse as we head into the winter before they improve again. The UK Chancellor Rishi Sunak will announce the next phase of the job support programme later today, which is set to include support for workers in industries forced to close under local lockdowns, such as bars and pubs. Sterling was unfazed by the loss of momentum in the economy with GBPUSD nudging up to 1.2970, yesterday’s high and close to the top of the range at 1.30.

 

Markets of course rather decoupled from the realities of the economy thanks to vast amounts of central bank stimulus and liquidity. The FTSE 100 rose above 6,000 for the first time in three weeks but this level continues to act as a very difficult barrier for bulls to clear. The S&P 500 closed up 0.8% at the highs of the day at 3,446. The Dow added 0.43% for its third positive session of the week and the Nasdaq added 0.5%. House speaker Nancy Pelosi said Democrats would reject any standalone stimulus packages. But we know stimulus of some sort is coming either before or after the election – the problem emerges if there is a contested election. 

 

Dallas Fed president Robert Kaplan underscored his more hawkish credentials, saying there is no need for additional QE on top of the Fed’s $120bn-a-month programme. A Fed paper this week suggested it could increase asset purchases by $3.5tn to boost the economy. Kaplan said that “the bond-buying needs to curtail, the Fed balance sheet growth needs to curtail”. The Fed’s position however remains that it will continue to purchase assets at least at the current clip.  

 

Election Watch 

 

With 25 days to go to the US election, Joe Biden leads Donald Trump by 9.7pts at a national level but his lead in the top battlegrounds has come down to 4.6pts. Trump trailed Hilary Clinton by 5.1pts in the key battleground states at this stage in 2016, but we should note there are fewer undecided voters this time. Latest betting odds imply 65% chance of a Biden win. 

 

Equities 

 

The pandemic has wrought damage on the commercial property sector as businesses have found it difficult to meet rent payments on time and the value of assets has been written down. Land Securities advised today that of £110m rent due Sep 29th, just 62% was paid within 5 working days, vs 95% for the same period a year before. Businesses renting office space (82% on time) were timelier than retailers (33% on time). For the earlier part of the year, the company has received 84% of rent due on 25 March (up from 75% at 2 July) and 81% of rent due on 24 June. Nevertheless, shares rose 3.5% in early trade as these numbers are perhaps not as bad as feared. 

 

British Land gave a very robust update though, noting all retail assets and 86% of stores are open. Footfall is 21% ahead of benchmark, retailer sales 90% of the same period last year. Collection rates for June have improved to 74%; 98% offices, 57% retail. Meanwhile 69% of September rents have been collected (91% offices, 50% retail). Management was also keen to talk up balance sheet strength – £1bn in undrawn facilities and cash, with no need to refinance until 2024. So robust in fact it’s resuming dividend payments – another little boost for the bedraggled income investor. Divis will be paid at 80% of underlying EPS. Those income investors cheered as shares rose 5%. 

 

London Stock Exchange confirmed plans to offload Borsa Italiana to Euronext. The €4.325bn is perhaps a little behind what had been touted, but it’s a necessary step to clear the decks for their Refinitiv acquisitions.  

 

Charts 

 

Gold still within the falling channel but making higher lows and now pushing up to the top of the channel – 50-day SMA above but the horizontal resistance at $1.920 needs to be cleared first.

Euro Stoxx 50 – still within the long-term range but after moving above 21-day SMA now is looking to clear a cluster of moving averages including the 50-day SMA and 200-day EMA.

Week Ahead: AAPL & TSLA split, Dow reshuffle, NFP in focus

What’s next for Apple and Tesla once their stock splits go into effect? How will the new-look Dow react to the latest market updates? And can the US nonfarm payrolls continue the trend of strong growth?

Apple and Tesla splits

This week Apple and Tesla will both start trading at their new prices after completing their recent splits. AAPL will drop by a quarter; TSLA by a fifth. Both stocks have seen huge appreciation since the splits were announced, with Apple jumping above $500 per share last week and Tesla continuing to climb after recently blasting through $2,000.

Stocks often pull back after a split as holders sell some of their additional shares to lock in some profit from recent appreciation, but this could be temporary. Apple will soon unveil its latest iPhone range, including the much-anticipated 5G models. Tesla’s upcoming Battery Day event, scheduled for September 22^nd, could see the company announce new innovations that improve the range and performance of its cars.

You can find out more about the stock splits and how they affect any open trades here.

New look Dow Jones Industrial Average

Following the Apple stock split, the Dow Jones Industrial Average will be a different beast from this week onwards. The Dow is a price-weighted index, unlike the S&P 500 which is based on market capitalisation, so a 75% drop in Apple’s share price has forced several changes.

First of all Apple will no longer have the largest weighting in the index, and will drop from first place to around 17^th. This means that volatility in the stock have a smaller impact upon the Dow than previously. United Health will become the biggest stock in the index, and consequently will have more clout.

Additionally, several stocks have been dropped from the index to make way for new ones in order to keep its composition roughly a quarter tech stocks. You can read more about the changes here.

Zoom Video Communications earnings

Since the start of the pandemic Zoom has become an essential tool for businesses across the globe. It’s also seen a sharp increase in personal usage, with consumers using it to do everything from hold date nights to streaming weddings and even funerals. Customer numbers surged 354% year-on-year during the company’s first-quarter, with revenue up 169%.

As a result investors have jumped on the stock, sending ZM rocketing 330% so far this year.

This time around analysts are looking for sales of almost $500 million and EPS of $0.45 per share – which would equate to year-on-year growth of 462.5%.

Reserve Bank of Australia to trim the OCR?

The Reserve Bank of Australia meets this week. Last month policymakers unleashed more QE and acknowledged that there would be an economic hit from the decision to implement a full lockdown in Victoria – the second-largest state by population and output – but left rates on hold.

ASX Cash rate futures show that a slim majority of market participants are expecting the RBA to slash rates to 0% this time around. However, governor Philip Lowe has previously floated the idea of a rate cut to 0.1% should further adjustments be necessary, so even if policymakers do see the need for more easing they may not go all the way to zero.

US Nonfarm Payrolls

Friday’s US nonfarm payrolls data will of course be the main focus of the week. Jobs growth once again outpaced forecasts last month, although the rate of recovery eased to 1.763 million as a resurging number of coronavirus cases slowed hiring.

Recent jobless claims data has continued to show falling numbers of initial and continuous claims: the number of first-time applicants for jobless insurance dropped below 1 million in the week ending August 8^th, for the first time since the pandemic started. The four-week average for claims has fallen consistently for several weeks, as have the number of continuous claims.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

Dow reshuffle: Exxon, Pfizer, Raytheon out; Amgen, Salesforce.com, Honeywell in

Major changes to the Dow Jones Industrial Average have been announced in the wake of Apple’s 4-for-1 stock split.

Exxon Mobil, Raytheon and Pfizer are to be dropped – all stocks dropped on Tuesday after the announcement late on Monday. As of August 31^st, they will be replaced by Honeywell, Salesforce.com and Amgen. All three rose sharply on anticipated rebalancing into these stocks by passive and tracker funds.

It leaves United Health the largest stock on the Dow, with the Apple stock split reducing its weighting as the Dow is a price-weighted index. Many may question why the likes of Amazon, Facebook or Alphabet have not been included instead, but the thinking around index composition for the Dow has never been entirely clear.

What do hedge funds, analysts and insiders say about these new Dow components?

Amgen (AMGN)

Honeywell (HON)

Salesforce.com (CRM)

Apple and Tesla announce stock splits – here’s what you need to know

Apple and Tesla have both announced that they will split their stocks at the end of this month. Apple shareholders will be granted three additional shares for each one they hold, while Tesla shareholders will receive another four shares for each one they hold. 

The price of each share will be divided by the size of the split to reflect the increased supply: AAPL will start trading at 0.25 times the pre-split price, while Tesla stock will trade at 0.2 times the pre-split price. 

But why are Apple and Tesla splitting their stocks, and how will this affect your trades? 

Why are Apple and Tesla splitting their stocks? 

Apple was the first to announce its stock split earlier this month, followed a few days later by Tesla. Both shares have rallied hard since the announcements although a split shouldn’t theoretically affect their value. 

Stock splits usually happen for two reasons: to increase liquidity and to make the stock more attractive to retail investors. 

Liquidity 

An asset’s liquidity refers to how easily it can be bought and sold without impacting its price. Putting more shares into circulation often increases its trading volume, which can narrow the spread between bid and ask prices. This could make it easier for buyers and sellers to get a fair price for the shares they want or have. 

Appeal 

Apple stock currently trades for around $430 per share, while Tesla has surged towards $2,000 recently. The high valuation could be putting investors off. Shares are often bought and sold in standardised blocks – a “board lot” of 100 shares would cost an investor $43,000. If the stock were split today, 100 shares would cost $10,750. 

However, modern ways of trading shares (such as leveraged products like Contracts for Difference) have made it more affordable to trade even expensive stocks, so the benefit isn’t as obvious as it used to be 

Regardless of the why the decision was made, investors have taken it as a sign of confidence in the stock – Apple and Tesla wouldn’t want to lower their share price if the companies felt that there wasn’t the potential for further appreciation. 

How will the stock splits affect my trades? 

On August 31st Apple stock will start trading at a quarter of the pre-split price, and Tesla will begin trading at a fifth of the pre-split price. 

Any existing positions on AAPL CFDs will be closed at the original opening price and new positions opened at the new split-adjusted price but for four times more units. The same will happen with positions on TSLA CFDs, but with five times more units. 

See below for an example – note that the prices given are based upon the market value as of August 20th and are for indicative purposes only. 

• Before the split you have 100 units of Apple CFDs, each valued at $462 for a total value of $46,200. 
• When the stock is split your position for 100 units will be closed at the original opening price (so P&L will display as zero) and a new position will be opened that is four times larger. In this instance your holdings would now be for 400 units of Apple CFDs.
• The price of each unit will be worth a quarter of the pre-split price, meaning in this example each unit is valued at $115.50 for a total for $46,200 – exactly as before. 

If you didn’t already have a position in Apple and wanted to trade it, or want to expand an existing position, you would be able to buy the same quantity of units for a lower price, or more units for the same cost as before. 

In effect, the size of your AAPL and TSLA positions will be multiplied by the same quantity as the stock prices are divided by, meaning the value of your holdings will not change. 

How the Apple split will impact the Dow 

Anyone trading the Dow will also need to pay attention to the Apple stock split. 

The Dow Jones Industrial Average is a price-weighted index, so when Apple’s stock price drops thanks to the split the company will no longer be the index’s biggest constituent (that will be UnitedHealth). 

Moves in Apple stock will therefore have less of an influence on the Dow than they currently do. 

Will other companies copy Apple and Tesla? 

Investors are now looking to other tech giants to see whether they decide to follow suit. Amazon and Alphabet will be of particular interest – Amazon’s stock price is over $3,100, while Alphabet is trading near $1,500 at the time of writing. 

A lower stock price for Apple would make the stock more attractive, and Amazon and Alphabet may want to ensure they aren’t pricing potential investors out of the market. However, as the huge cost of an individual share in either of them proves, neither Amazon nor Alphabet has felt the need to resist high prices in the past. 

US jobless claims data beats expectations – but Wall Street struggles

Global stock markets are struggling around or below opening levels today despite an improvement in US jobless data.

The Dow has crept higher, while the Nasdaq has eked out a new intraday high before trimming gains. The S&P 500, which is now under 2% away from February’s all-time high, is trading marginally lower.

Jobless claims drop, but the overall picture remains bleak

Markets are little cheered by the latest labour market data, with investors instead awaiting any news of progress as lawmakers continue to argue over a new stimulus bill. The proximity of tomorrow’s nonfarm payrolls report is also keeping markets soft.

This is despite initial weekly jobless claims printing at 1.186 million – well below the 1.415 million expected by analysts and also the lowest reading since the pandemic sent claims jumping by nearly 7 million at the end of March.

Continuing claims – which counts those claiming benefits for two or more consecutive weeks – have dropped from 16.95 million to 16.10 million, again below forecasts.

While this points to improving labour market conditions, the bigger picture remains bleak. This is the 20^th straight week that the US has registered more than a million new weekly claims. 31 million Americans remain unemployed.

The figures have further complicated the outlook for the labour market, which had been showing signs of weakening again. Yesterday’s ADP private payrolls report showed jobs growth of just 167,000 compared to expectations of over 1 million.

Nonfarm payrolls in focus – is the jobs recovery under threat?

The latest numbers will put tomorrow’s nonfarm payrolls report under even greater scrutiny, as markets look for more clarity over the direction of the labour market.

Economists expect payrolls grew by 1.6 million, which represents a sharp slowdown in jobs gains after payrolls jumped 2.7 million in May and 4.8 million in June. However, payrolls returned to growth more quickly than expected.

President Donald Trump has promised “big jobs numbers are coming on Friday”.

Equities hold ranges, gold jumps as US real yields sink

Equity markets are still looking for direction as they flit about the middle of recent ranges. Fear of a second wave of cases is denting the mood today, as the so-called R-number in Germany jumps to 2.88, US cases hit the highest level since early May, and Apple closes more stores in the US.

White House trade adviser Peter Navarro said the US is preparing for a second wave in the autumn – it’s debatable whether the current spike in cases in some states is still part of the first wave. Equity markets remain sensitive to headline risk around virus numbers, stimulus and economic data, but we are still awaiting signs of whether the strong uptrend reasserts itself or whether we see a more serious pullback.

Looking at the pullback over the second week of June, the major indices are still hovering either side of the 50% retracement of the move. Momentum may start to build to the downside should cases rise, and restrictions are re-imposed. For now, the indices are simply bouncing around these ranges. The question is whether markets finally catch up with the real economy – the disconnect between Wall Street and Main Street is a worry for those who think the market has rallied too far, too fast.

Economic data will continue to show a rebound, glossing over the fact that the numbers on the whole still indicate a severe recession. However, to make the bull case – the Fed and central bank peers are on hand and the old maxim still stands: don’t fight the Fed. Meanwhile there are record amounts of cash sitting on the side lines and bond yields on the floor – and will be for a long while – making equities (FTSE 100 dividend yield at 4% for example), more appealing.

The FTSE 100 opened down 1% and tested the 50% line at 6,223, whilst the DAX pulled away from its 50% level around 12,250 ahead of the open to fall through 12,200 before paring the losses. Asian markets were softer, whilst US futures indicated a lower open after falling on Friday – ex-tech.

Oil (WTI – Aug) ran out of gas as it tried to clear the Jun peak at $40.66 but remains reasonably well supported around the $39-40 level. We look at a potential double top formation that could suggest a pullback to the neckline support at $35. Imposing fresh restrictions on movement may affect sentiment ahead of any impact on demand itself, but OPEC+ cuts are starting to feed through to the market and we could be in a state of undersupply before long.

The risk-off tone helped lift gold to break free of the $1745 resistance, before pulling back to test this level again. The rally fizzled before the top of the recent range and recent multi-year highs were achieved at $1764. Whilst benchmark yields have not moved aggressively lower, with US 10s at 0.7%, real yields as indicated by the Treasury Inflation Protected Securities (TIPS) are weaker. 10yr TIPS moved sharply lower over the last two US sessions, from –0.52% to –0.6%, marking a new low for the year and taking these ‘real yields’ the lowest they’ve been since 2013.

Real yields are currently negative all the way out to 30 years.

In FX, GBPUSD started the week lower but has pulled away off the bottom a little. The momentum however remains to the downside after the failure to recover 1.2450. Bulls will need to clear the last swing high at this level to end the downtrend, though this morning the 1.24 round number is the first hurdle and is offering resistance.

CFTC data shows speculative positioning remains net short on GBP. Meanwhile net long positioning on the euro has jumped to over 117k contracts, from a steady 70-80k through May. Nevertheless, the current trend remains south though the 1.12 round number is acting support – the question is having seen the 1.1230 long-term Fib level broken, do we now and perhaps test the late March high at 1.1150.

Europe firms as Brent follows WTI’s lead lower

European markets are cautiously higher after yesterday’s decline, but the daily momentum indicators are fading. The reality of economic collapse is being seen in oil markets, but – juiced by central bank support and of course being much more forward-looking than, for instance the June oil contract – equity markets are displaying greater optimism. I’d say oil markets are telling us how bad things are right now, while equity markets tell us how good or bad investors hope/fear things will be next year.

Now it’s the turn for Brent. Turmoil in global oil markets dragged Brent futures under $16, leaving the front month trading at its weakest since 1999. The collapse in WTI at the start of the week has spooked the market and now we see similar concerns about floating storage starting to fill up as physical storage constraints worrying WTI. The roll this Friday could be gappy, although Brent is cash settled, not physically, so in theory it ought not to be as troubled and negative prices are unlikely. That said, if global storage is running out – and that is what the Brent trade is starting to suggest – then there will be no bid and prices could hit zero.

WTI remains under pressure with the June contract suffering a ‘flash crash’ yesterday as it slumped as low as $6.50 before recovering above $10. The June contract, whilst not immediately facing the same liquidity problems as the May contract did on Monday, is going to be under pressure all the way to expiry with nowhere left in the US to take physical delivery. It too could turn negative if paper traders are left holding the baby close to expiry. July is trading around $18.40, August is above $21. Edward Morse, head of commodities at Citigroup, says oil could bounce back to $50 by the end of the year.

Meanwhile the damage is being felt in oil ETFs which are needing to shift their holdings further out in future months. The United States Oil Fund (USO) is ditching its June holdings as it tries to shore its balance sheet, and this will be having an impact on the front month trading. It will also be sharpening the super contango. It becomes a vicious circle as long as no one wants to take delivery. Yesterday saw more than 2m June contracts traded, the CME Group said, the busiest single day for the month ever.

The pain in oil markets is unsettling risk appetite more broadly, with the S&P 500 down 3% and the Dow shedding over 600 points yesterday. It was the worst day for the three main indices since April 1^st. Charts and momentum suggesting the rally has lost steam and 50-day SMAs (blue line) almost seem to be frightening the market and forcing it to back off. The question is whether sentiment sours from here and we retest the lows or it’s just a pause in the rally. Earnings are not telling us an awful lot as uncertainty reigns. The key is the emergence from lockdown and restart of economies. And of course, finding a vaccine.

Dow Cash, 1-Day Chart, Marketsx – 08.32 UTC+1, April 22nd, 2020

Whilst European markets are higher today after yesterday’s drop, the momentum is fading and the DAX has broken under trend support. Again the 50-day SMA is major barrier.

DAX Cash, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

A major boost for Netflix as it added almost 16m new subscribers in the first quarter, well ahead of expectations. The company has been boosted by lockdown measures and should see more net subscriber adds in Q2 but notes in the circumstances it’s all ‘guess work’. But this might be as good as it gets this year – Netflix won’t get a better opportunity to gain new members than now. I’d also be concerned that after such a big runup in the stock to all-time highs, the upside is pretty well discounted now and viewing figures will start to decline as lockdowns end. A stronger dollar is hitting foreign earnings and spending on content is delayed by production shutdowns. EPS was a slight miss but Netflix profits are always a little lumpy due to inconsistent spending on content.

In FX, GBPUSD broke down through near-term horizontal support and out of its range yesterday and with the bearish bias persisting the next level comes in around 1.2160, the Apr 6^th and late March swing lows. Near-term though the 1hr MACD is positive after a potentially bullish crossover late yesterday.

GBP/USD, 1-Day Chart, Marketsx – 08.35 UTC+1, April 22nd, 2020

 

Oil leads global market tumble on ‘Black Monday’

The collapse of OPEC+ talks over the weekend tipped markets into chaos on Monday. Traders, already on edge due to the unfolding coronavirus epidemic, were sent fleeing to safety after Saudi Arabia slashed its crude oil prices.

Crude and Brent tumbled over 30%, their worst daily performance since the Gulf War, hitting lows below $27.50 and $31.50 respectively. The Kingdom cut prices for April crude by 30% and stated that it intends to raise its output above 10 million barrels per day. Talks at the weekend saw OPEC and its allies fail to agree new terms for an oil production cut; OPEC+ couldn’t even agree to extend the current level of cuts, let alone deepen the cuts to battle the hit to demand from the coronavirus outbreak.

Saudi Arabia is well-positioned to weather weak prices and Russia claims it can withstand the pressure for up to a decade. US shale oil producers, who have flooded the global market with oil to take advantage of supported prices and are heavily debt-laden, could be in dire trouble.

Equities tank

Global equity markets have been sent tumbling. The collapse in the oil markets, combined with news that the Italian government has imposed travel bans on 16 million people, sent investors running from stocks.

US futures went limit down after triggering circuit breakers during the Asian session. After a 5% drop the Dow was indicated to open down over 1,300 points, but based upon the ETF market – which is not suspended – the Dow was looking at a drop of 1,500. Asian stocks took a hammering, with the Hang Seng and the Nikkei both closing over 1,100 points lower.

European equities sank as well, with the DAX, and Euro Stoxx 50, all off around 7%. The FTSE 100, also down 7% to test 6,000, was trading at levels not seen since the immediate aftermath of the Brexit referendum.

Stocks most at risk

While stocks across the board tanked, several industries were hit harder than others.

Oil majors slumped. BP (LSE) tumbled 20%, ExxonMobil dropped 17%, Chevron tumbled 16%, and Occidental cratered 38% – all in pre-market trading on the NYSE – while Royal Dutch Shell fell 14%.

Airlines were hit hard as well after the price slump left them sitting on big losses after hedging oil at higher prices. American Airlines, Delta Airlines, Southwest Airlines and United Airlines were all down 5-6% in the pre-market.

Coronavirus fears weighed on tech stocks. The FAANGS all recorded losses in the range of 6-7%, but cruise ship operators were hit harder. The US government warned American citizens not to go on cruises. Carnival – the company that owns many of the ships currently stranded due to on-board quarantines – dropped 10%, Norwegian Cruise Lines tumbled 11%, and Royal Caribbean Cruises slumped 12% – all before the markets opened.

New record lows for US bonds

The flight to safety drove the yield on US government debt down to record lows. Yields move inversely to prices. The yield on the US 10-year treasury bond fell to 0.32% while the yield on the 30-year treasury note fell towards 0.7%, breaching 1% for the first time in a year.

Gold traded around $1,673 after hitting $1,700 over the weekend.

Cryptos join in with global market chaos

The cryptocurrency market is no stranger to volatility. The world’s largest cryptocurrencies were down around 10-15%, with Bitcoin falling below $8,000.

Closing on all-time highs, FOMC preview

Equity markets buoyant after Tuesday’s rally ahead of the key Federal Reserve meeting.

You can just about smell the all-time highs. The S&P 500 rallied 28 points to 2,917.75, just a shade under 1% below its April record high. The Dow added 350+ points to 26,465.54. 

And yet the latest BAML data shows fund managers are at their most bearish since the global financial crisis a decade ago. Equity allocations have experienced their second worst drop on record – we’ve seen a huge move into cash. And yet and yet, we’re close to all-time highs again for US equity markets at least. This is what you may call an unloved rally. 

Asian shares were encouraged by Wall Street’s gains. Japan closed 1.72% higher. Futures indicate European shares are treading water ahead of the FOMC decision later today. A touch of caution after an exuberant session yesterday. 

Oil rallied again – demand outlook matters a lot more than supply constraints. The world is awash with oil whatever OPEC does. Brent was close to its $62.50 comfort, the 50% Fib level that continues to anchor prices. WTI has regained $54. On both charts signs of either double-bottom reversal or bearish flag continuation patterns. 

The prospect of president Trump meeting his counterpart Xi Jinping at the G20 assembly later this month, combined with signs of renewed stimulus efforts by the ECB, has investors eyeing short-term gains. We need to wait and see what the Federal Reserve does. So hold on tight, let the flight begin. 

FOMC Preview 

Summary 

You got to know when to hold ‘em, know when to fold ‘em. Markets expect the Fed to cut 3 times this year, but the Fed needs to be careful about reacting too easily to markets. There is not the need to be as pessimistic about growth and inflation as bond markets suggest, despite some softness in recent labour market data. The Fed will seek to avoid sounding overly hawkish, but one feels there is a need to steer markets away from expecting the Fed to ride to the rescue of financial markets.  

Backdrop 

It’s hard to recall a time we headed into an FOMC meeting with so much at stake and with so much uncertainty about what might be agreed and what the guidance for the rest of the year will look like. This means the potential volatility around the event is likely to be substantially higher than at most recent FOMC meetings. 

Macroeconomic indicators suggest slowing growth whilst there have been no positive developments on trade. Inflation is tame but there is arguably enough to keep the Fed on the side lines for the rest of the year. And quite how much the data has softened since the last meeting to suddenly warrant a cut is beyond me. 

Moreover, last week’s retail sales data has gone against the downbeat, pro-cut grain. The Atlanta Fed GDPNow model predicts 2.1% GDP growth in Q2, up from the previous 1.4%. The model now anticipates second-quarter real personal consumption expenditures growth of 3.2% to 3.9%. 

Talk of demoting Jay Powell further clouds the picture as Trump heaps pressure on the  Fed chair to cut. Know when to walk away, know when to run. 

Market pricing 

Markets do not currently anticipate the Fed will cut rates this week, but they are pricing in a cut in July and a subsequent 1-2 25bps cuts.  

Pricing for a rate cut this week dropped sharply – from nearly 30% to around 21% – after the strong retail sales print on Friday. It’s since crept back up to 26%. For July, though, market pricing indicates an 87% chance of a cut, whilst there is a 95% chance for September. 

The blackout period ahead of the meeting has tied tongues that were in overdrive in the preceding days. 

Powell’s comments in Chicago at the start of June were the trigger for a relief rally in equities. He noted ‘recent developments involving trade negotiations and other matters’, adding that: ‘We do not know how or when these issues will be resolved’. 

This was the key remark: ‘We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion’. 

Critically he did not signal a cut, but only stuck to the Fed’s oft-stated stance. Markets have read much more into this, and could be left disappointed. The problem for Powell now is to gently steer markets back to the right course. 

Coming Up Today (GMT) 

GBP- CPI y/y (08:30) 

CAD- CPI m/m (12:30) 

EUR- ECB President Draghi Speaks (14:00) 

USD- FOMC Economic Projections (18:00) 

USD- FOMC Statement (18:00) 

USD- Federal Fund Rate (18:00) 

USD- FOMC Press Conference (18:30) 

BRL -Interest Rate Decision (21:00) 

NZD- GDP q/q (22:45) 

May’s last day, Nonfarm payrolls due

May’s last day, Mexico trade standoff, US jobs, Yuan looks to 7

And so, the time has come for Theresa May to shuffle off. Except she won’t quite as she will remain on as a caretaker PM. Boris Johnson is frontrunner. If he gets in – and we’ve detailed why we think he will – it could be a troublesome one for the pound. Votes start next week and we should be down to the final two before June is over.

Trade v Fed 

US equities continue to march higher as the Fed story is all that matters – investors are still guzzling that Kool-Aid. The Dow added 180 points, leaving it up over 1100 points from the low hit this week.  SPX rose 0.61% to 2,843. Looking first for 2870 and then 2889 for bulls. Support around 2817 and 2800. 

European equities were softer as the ECB was not dovish as expected. Mixed bag in Asia overnight – Nikkei and ASX higher, Kospi down, India flat, China weaker.  

Futures show European markets on the front foot, bouncing back modestly from Thursday’s dip. 

EURUSD failed to break out any further after the ECB meeting. After pushing up to 1.13 it’s found well-trodden turf at 1.1260 for comfort. At send time sterling was steady at 1.27 against the dollar. 

Oil has bounced after looking a bit oversold. Brent testing resistance around $62.50, the 50% retracement of the Dec-thru-Apr rally. 

Some progress on the Mexican-American talks over tariffs. VP Pence said he was ‘encouraged’ by the discussions as Mexico offered to deploy 6,000 members of its new National Guard police force, but has reiterated that the 5% tariffs are still slated for Monday. 

Fed jawboning continues but with a slightly different tone. NY Fed John Williams was more hawkish – or at least one feels more representative of the Fed’s unwillingness to flip-flop into a rate cut. His base case is for the US to grow above trend at 2.25%-2.5%. His baseline is a ‘very good one’. Not language suggestive of a cut, albeit he acknowledged risks to the downside. 

Yuan risk 

USDCNH rallied, with the yuan weakening amid concerns the PBOC is not worried about devaluation. Bloomberg reports PBOC governor Yi Gang said he wasn’t worried about the seven level being breached. Given the tensions over trade, devaluation in the CNH would risk escalation as it would be perceived with suspicion in Washington. USDCNH was last at 6.941, threatening to break out above last October’s highs around 6.97. Gang is right that no one level is particularly more important than the next, but the 7 handle on USDCNH holds a very real psychological hold over the market. If that goes we would expect Trump to counter-attack.

ECB fallout 

Markets are still digesting the impact of the ECB’s forward guidance change yesterday. The pressure to launch a new round of QE will only build. I see the market testing the ECB on this and driving it towards opening its toolkit again. EURUSD gains seen capped, whilst the relative quality of the dollar versus a world of ugly sisters should underpin the buck.

Jobs! 

Nonfarm payrolls are the headline risk event. The ADP print earlier in the week could herald a bad-un, but we’re still looking for something in the region of 180k, in line with the long-term trend. We should recall that the 27k print for the ADP number came after a whopper the month before of 271k – look for the 3-month average. Jobs growth remains solid, but this month’s print could be a tad light. Look for 100k maybe. The super tight labour market may well see hirings start to decline a touch anyway. Unemployment is seen at 3.6%. 

It’s far too easy to read way too much into a single jobs number. Remember the 20k print for Feb was followed by prints of 196k and 263k in the following two months – and had preceded by Jan and Feb printing above 300k. 

The wage data is probably more important as far as Fed expectations as it matters for inflation. Average hourly earnings are forecast to increase 0.3%. Traders likely to remain cautious ahead of the nonfarm payrolls. 

Equities 

Ferrexpo – welcome bit of good news after auditor strife and corporate governance concerns – sees material improvement in earnings – group EBITDA in 1H 2019 is expected to increase materially compared with 1H 2018. Improvement driven by higher pricing, production and sales volumes, while cost inflation lower than expected due to a fall in oil prices and the European gas price, which has partially offset by an appreciation of the Ukrainian Hryvnia versus the US dollar. 

Banks – the FCA is coming down very hard on overdraft fee charging, but stops short of ending free banking. 

Beyond Meat – last night Beyond Meat reported much better than expected Q1 results. The stock market darling shows no signs of falling out of love – shares popped 25% at one stage in after-hours trading and were last up 18% – close to 5 times above its $25 IPO price at $117.49. Losses rose to $6.6m but revenues tripled to more than $40m. Massive growth opportunity but the multiples are crazy and competitors are coming – you’re entering a space that is really ripe for the FMCG giants to take over.