EZ economic activity picks up, UK retail sales soar

Morning Note

European markets are tentatively higher in early trade on Friday, solidifying gains from Thursday’s upbeat session as global stocks made gains. DAX traded not far off recent intra-day all-time high at 15,440, but 15,500 continues to act as headwind for bulls and early gains were largely pared after one hour of trading, whilst the FTSE 100 dropped more than half of one per cent in early trade to drop under the key 7,000 level. Tech shares led a rebound on Wall Street as stocks in the US snapped a three-day losing streak. The S&P 500 rallied over 1% to 4,159, with the Nasdaq up 1.8% to 13,535. NDX rallied almost 2% as the big tech names that have the biggest impact on the index put in a strong day with Apple and Netflix both up 2%, with other FAANGs rising 1% and Tesla +4% and ARKK rose 3.5%. Futures indicate the major US indices will open higher later.

On the FTSE, tech and energy are leaders, whilst healthcare and industrials (yesterday’s gainers) are lower as the market continues to really chop around these 6,850-7,150 ranges. Until we see a breach in either way, this is our stomping ground for the time being. The big rejection of the 6800 handle on May 13th indicates little appetite for the lower end, but many factors are at work here. Not least, as discussed yesterday, the exposure of basic resources and energy stocks to the growth in emerging markets that could be affected by covid.

Chart showing FTSE 100 price movements.

UK retail sales beat expectations as all that pent-up demand was unleashed in April as non-essential shops were allowed to reopen on the 12th of the month. Sales rose 9.2% from March, versus forecasts of +4.5%. GBPUSD was bid up to 1.42 ahead of the release before peeling back to the 1.4180 area.

PMI numbers show progress in Europe, with the composite index for the Eurozone at 56.9 vs 55.1 expected, helping to keep EURUSD close to a 3-month high, however it keeps hitting a brick wall at 1.2240 and has retreated a touch from here this morning to sit at the 78.6% retracement of the Jan-Mar drop. With a potential topping patter at this area we could look to a retreat to 1.2170 area should the dollar catch any yield-related bid. Upside breach of 1.2240/5 area, the Feb swing high, calls for return to the Jan highs. Of course it all depends on markets’ analysis of the relative pace of change in expectations for the ECB and Fed tapering actions.

EURUSD currency pairing performance on May 21st.

Gold remains steady around the 50% retracement of the Aug-Mar decline. Treasury yields are steady, with 10s around the 1.64% level – so far not seeing much direction from the bond market but I’d expect this to shift up a gear soon.

Chart displaying gold price as of May 21st 2021.

WTI is testing nearly one-month lows at the $62 handle following the last couple of sessions’ weakness. Fears about tapering maybe, fears about demand in Asia rolling over and fears about Iranian crude coming back on the market certainly. Potential triple top could herald breakdown to the $60.60 area after downside breakout of the longer term trend line. But if bears can’t get it here then look for rebound to the $64 area.

WTI price movements.

ECB preview: Keep it simple

The European Central Bank (ECB) convenes today for its latest policy meeting. After last month’s word puke from Lagarde (“Financing conditions are defined by a holistic and multifaceted set of indicators, spanning the entire transmission chain of monetary policy from risk-free interest rates and sovereign yields to corporate bond yields and bank credit conditions.”), we have spent several weeks trying to accurately assess where the ECB is really at in terms of responding to the changing economic outlook with regards the recovery from the pandemic, rising bond yields and higher inflation expectations. There is greater clarity now – it looks like the ECB is happy to let inflation run higher and only let bond yields move up if due to better growth: it’s now all about real yields. At the last meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point. The question about tapering PEPP should wait until June, and ending the programme may need to be discussed in September, but for now the ECB should be looking to keep it simple.

This ought to be a quiet one for the ECB, but the propensity for miscommunication is strong. Since the March 11th meeting, the selloff in sovereign debt and rally in yields cooled, before picking up some steam again. While German 10-year bunds are north of where they were at the time of the March meeting and close to the February highs, real rates remain at historic lows. This is what matters to the ECB more than nominal rates. Moreover, the economic data has not materially changed since the last meeting and there signs the largest economies are adapting to lockdown restrictions better than before and are more resilient. The latest Zew survey about the German economy shows investor sentiment at its highest in over a year. The head of the French central bank recently noted that economic activity is declining less than feared in April. Vaccinations, slow to start, are picking up pace and the EU should be on course to catch up the UK and US before too long.

So we look rather to the risk that a hawkishness creeps in. The ECB will need to be careful about getting itself tied in knots about when and how it will exit PEPP just yet, and whether a PEPP taper coincides with raising traditional asset purchases, and just what the reaction function is given it’s spent several weeks trying to clarify this since the last meeting. Now is not the time for such debates, however markets will look towards hawks becoming louder as inflation starts to pick up. Hawks are going to get more vocal if inflation starts runs higher over the next few months – the mandate is clear on this one. Lagarde will need to not sound overly confident about the recovery (why should she anyway?), or else risk letting markets latch on a timeframe for winding down PEPP.

And we should note that chatter about when is the right time to exit emergency mode is coming just as the ECB is looking at a potential change to the inflation mandate. Not content with a more symmetric target a la the Fed, it also wants to introduce inequality and climate change mandates…This only makes guessing the future path of monetary policy and the ECB’s reaction function even more muddy, which in turn may lead to some form of spike in yields and widening of spreads, which exactly what the ECB is seeking to avoid. Another reason to keep it simple tomorrow.

Tighter financial conditions ahead?

The ECB will also have to wrestle with the expectation of tightening financial conditions in the Euro area later this year. Banks and Eurozone banks expect to tighten access to credit in the second quarter, having already tightened in the first quarter. “This reflects banks’ uncertainty regarding the severity of the economic impact of the third wave of the pandemic and the progress in the vaccination campaign,” the ECB said, adding that loan demand is also faltering as companies postpone investments.

The ECB’s job is to make sure it doesn’t get dragged into a conversation about tapering PEPP and keep the markets happy until June when it will have much more data at its disposal and news on vaccinations will hopefully be much better. For this meeting, keep it simple is the order of the day.

EURUSD: Rejection of the 100-day SMA sets up today’s retest of the 1.20 round number support. Ultimately the ECB may not be the main driver of the pair right now and more exposed to broader risk sentiment and Treasury yields impacting the USD momentum.

Everyone’s suddenly talking about inflation, online retailers hit by sales tax report

Morning Note
  • Online retailers fall on sales tax report
  • Inflation in focus as yields climb
  • EURUSD outside candle

Shares in online retailers Asos, Boohoo Group and Ocado fell on reports the UK government is mulling a tax raid on companies that have profited from the pandemic. This may raise a question about opportunistic tax policy (the government is meant to be pro-business), however most people feel online retailers are not paying their fair share and the burden is falling too much on struggling high street stores. It’s never made sense that bricks-and-mortar businesses pay more in tax than the very rivals who are stripping away their market share. A possible tax hike aimed squarely at online sales presents a near-term overhang for these stocks, but they remain structurally well positioned to capture more sales as consumer habits continue to shift online. Boohoo and Asos both fell over 3% in early trade, whilst Ocado was down less at –1%. The news comes as Boohoo buys Dorothy Perkins, Wallis and Burton for £25.2m from Arcadia, following Asos snapping up Topshop etc last week. Boohoo’s purchase exposes the brand to a much broader consumer base but the online sales tax raid has somewhat overshadowed the move.

European stock markets were broadly higher at the open, extending a good run last week, whilst US futures are pointing higher today after hitting fresh record highs on Friday. The risk-on mood seems to be driven by a combination of falling case numbers in developed countries, whilst efforts by Congressional Democrats to pass Joe Biden’s $1.9tn stimulus without Republican support has delivered a fresh shot of confidence into equity markets. Vaccine setbacks – the AstraZeneca version is not so effective against the South African strain – are being largely shrugged off as cases fall. The risk-on mood is evident with Asian shares broadly higher, Brent crude taking a $60 handle and US 10-year yields are at a one-year high close to 1.2%.

Indeed, as long-end yields rise and curves steepen, inflation is shaping up to be the real test of market strength this year. Inflation is the big unknown as we don’t really know how central banks will respond – in fact I’m not sure if they know since none of the current crop of central bankers have the experience of needing to tame an inflation tiger. They are programmed to cut and ease, and tapering bond purchases has been as much as can be countenanced. The Fed did raises rates in the Trump period as the economy took off, but it was not due to rising inflation, simply to put the brakes on growth, prevent overheating and find some ammo for the next downturn.

Things have changed since then. Not least, the Fed will no longer act preemptively to cool the economy based on models of unemployment, wage growth and the Philips Curve. Instead, average inflation targeting explicitly calls for the Fed to stand pat even as inflation exceeds its 2% target. It will wait until the economy and jobs market are swinging again before hiking. Except, if inflation starts to shoot higher – and I think we have a perfect cocktail of demand and supply side forces to create inflation this year – then the Fed may need to act. Not just the Fed – the Bank of England last week said spare capacity in the economy will be eliminated this year.  I’ve consistently stressed that while the pandemic was initially deflationary, it would lead to inflation at the kind of levels that worry policymakers.

On inflation you have several forces at work. Supply side or ‘cost push’ – commodities are rising in price, supply chains are becoming more expensive and the recent manufacturing PMIs point to rising input prices. In fact, as detailed here last week, the last IHS Markit US manufacturing PMI reported that cost pressures worsened amid raw material shortages, and firms passed this on as selling prices rose at the fastest pace since July 2008. The ISM PMI noted inflationary pressures, too, as the Prices Index surged to 10-year high last month. On the demand side, higher costs are easily passed on as the fiscal and monetary stimulus has injected vast amounts of new money into the system and liquidity remains ample. US five-year breakeven inflation rates are at their highest in 8 years, whilst the 5s30s curve is at its steepest since 2015. 2s10s is at 1.10%, the steepest in almost 4 years.

All this matters in the end since if the US 10-year (risk-free) rate hits say 1.75%, it starts to lower the appeal of equities at current valuations. Tina – there is no alternative – starts to look less appealing. Bank of America says that while more than 60% of S&P 500 companies currently yield more than the 10-year does, should it hit 1.75% this percentage drops to 44%. Corporate debt markets are also at risk of a shakedown should Treasury rates move up.

In FX, the US dollar suffered a big reversal on Friday and backs my belief that the recent move higher was a bull trap. Sterling recovered $1.37 and a fresh stab at the 33-month high at 1.3760 looks to be in sight. This level held several times in late January and will a breach could see momentum follow through strongly to 1.40. Note on Friday’s outside candle on EURUSD, a possible bullish engulfing reversal as the trend support has been recovered.

Possible bullish engulfing reversal as the trend support has been recovered on EURUSD.

Cable hits YTD high, OPEC decision coming


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.


Ex-divis hit FTSE, US stocks near record high, trade comes back in focus

Morning Note

US stocks rallied to close near its all-time highs yesterday amid what some are saying are signs of greater confidence in the economic recovery in the US. Or perhaps it’s just even speedier decoupling between Wall St and Main St. Nevertheless, bond yields pushed higher amid a faster-than-expected rise in US inflation, whilst the market is starting to focus again on trade and tariffs.

The fact that the broad stock market is at all-time highs is a testament to unbelievable amounts of monetary and fiscal stimulus – the patient is hooked, and only more drugs will do. The disconnect between the stock market and the real economy is too stark, too unjust and too indicative of a system that continues to favour capital over labour that, sooner or later, a change is gonna come.

Europe soft despite strong close on Wall Street, TUI posts earnings wipe-out

Never mind all that for now though, stonks keep going up. The S&P 500 rose 1.4% to end at 3,380, just six points under its record closing high at 3,386.15, with the record intraday peak at 3,393.52. Asian stocks broadly followed through, with shares in Tokyo up almost 2%.

European stocks failed to take the cue and were a little soft on the open, with the FTSE 100 the laggard at -1%, though 22.3pts are due to BP, Shell, Diageo, AstraZeneca, GSK and Legal & General among others going ex-dividend.

For a taste of the real economy, we can look at TUI, which said group revenues in the June quarter were down 98% to €75m. It’s a total wipe-out of earnings, but it’s not a surprise – the business was at a virtual standstill for most of the period and was only able to resume some limited operations from mid-May. Just 15% of hotels reopened in the quarter, whilst all three cruise lines remain suspended.

TUI posted an EBIT loss of €1.1bn for the quarter, taking total losses over the last nine months to €2bn, with €1.3bn due to the pandemic forcing the business to be suspended. Summer bookings are down over 80% but it has got another €1.2bn lifeline from the German government. Shares fell over 6% in early trade.

Trade in focus as US-China weekend talks approach

US-China tensions are rearing their head again. Officials meet this Saturday to review progress of the phase one deal. White House economic adviser Larry Kudlow the deal was ‘fine right now’. Sticking with trade, the US is maintaining 15% tariffs on Airbus aircraft and 25% tariffs on an array of European goods, including food and wine, despite moves by the EU to end the trade dispute.

Crucially it did not follow through with a threat to hike tariffs, however it still leaves the risk of further escalation when the EU is likely to win WTO approval to strike back with its own tariffs.

Strong US CPI raises stagflation fears

Yesterday, despite the optimism in the market, there was – for me at least – some potential signs of bad news for the real economy (not the stock market, remember) with US inflation picking up faster than expected. You can read this as the economy doing better than fared as consumers return, but you can equally take a glass half empty view and see this as a major worry that prices of essentials are going to rise whilst economic growth stagnates – which can be a cocktail for a period of stagflation.

Given the enormous amount of money being pumped into the system, there is a better than evens chance we get an inflation surge even if the pandemic was initially very disinflationary. Unlike in the wake of the financial crisis, the cash is not being gobbled up in the banking system as increased capital buffers etc, but is going into the (real) economy. Moreover, it’s being done in tandem with a massive fiscal loosening.

Short-lived pullback for USD?

Year-over-year, headline inflation rose from 0.6% to 1%, whilst core CPI was up 1.6% in July vs the 1.2% expected. Food prices rose 4.6%, whilst the cost of a suit is down a lot. 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.

Investor optimism is keeping the dollar in check. The dollar index moved back to the 93 mark, whilst the euro broke above 1.18 against the greenback for a fresh assault on 1.19, twice rejected lately. Sterling is making more steady progress but is well supported for now above 1.30, however the dollar’s pullback may be short-lived. Gold held onto gains to trade above $1930 after testing the near-term trend support around $1865 yesterday.

US EIA data, OPEC report boost oil

Oil prices held gains after bullish inventory data and OPEC’s latest monthly report. WTI (Sep) moved beyond $42 after the latest EIA report showed a draw of 4.5m barrels last week. Meanwhile, as noted yesterday, OPEC’s new report indicated the cartel will continue with production cuts for longer.

In its monthly report, OPEC lowered its 2020 world oil demand forecast, forecasting a drop of 9.06m bpd compared to a drop of 8.95m bpd in the previous monthly report. But the report also sought to calm fears that OPEC+ will be too quick to ramp up production again. Specifically, OPEC said its H2 2020 outlook points to the need for continued efforts to support market rebalancing. Compliance was down but broadly the message seems to be that OPEC is not about to walk away from the market.

Euro, gold break higher as dollar snaps bullish trend

Morning Note

The euro rose to 18-month highs after EU leaders agreed their stimulus package and a broad risk rally saw the bulk of dollar crosses achieve long-awaited technical breakouts. EURUSD has broken out above 1.15, the key March swing high resistance, with the next target in sight for bulls at 1.1570, the January 2019 peak. Three consecutive daily gains show strong momentum with the bulls. The pair needs to hold onto this 1.15 to move up into the 1.1760 area around the long-term 38.2% Fibonacci retrace.

Elsewhere in FX markets, sterling rose to its best level in a month against the dollar, as the greenback came under pressure across the board. GBPUSD has cleared 1.27 but the rally lost near-term momentum around 1.2770, short of the Jun highs at 1.2810. The Aussie has also cleared some big levels and AUDUSD is looking to take out its Apr 2019 highs at 0.72 before it can consider the Nov 2018 peak at 0.74.

I don’t like to call the dollar top anything like as easily as many, but the dollar is set up to retrace some more of the last two years’ gains. The dollar index has broken down at two-year trend support which may call for further downside pressure to build, particularly now the EU has apparently got its house in order and the US needs to keep up. This morning we have seen USD push back a little – GBPUSD needs to hold yesterday’s low 1.2650 needs to hold for sterling bulls.

Gold has broken out to notch fresh nine-year highs at $1,865, bringing the $1,900 firmly into view as well as the all-time high around $1,921 becoming a real target. US 10yr Treasury yields drifted under 0.6% but are just about holding onto this level for now. Real rates continue to stretch out deeper into negative territory, with 10yr TIPS sliding to –0.87% and the whole curve falling. The way interest rates are looking combined with the macro backdrop and the threat of an inflation surge caused by the amount of aggressive monetary and fiscal stimulus, means gold may end the year at $2,000. Unless the inflation comes through though this may mark a medium-term top with real interest rates at the bottom of their multi-year range and without much room to extend further into negative territory. Two big, interconnected questions for gold bulls now – can 10yr TIPS break out to the downside and take out –1%, and does inflation come through in 2021 or even 2022 when the cycle picks up?

Oil broke out to finally close the gap to the March 6th level. WTI (Aug) rose above $42 but pared gains on an unexpectedly large build in US crude stockpiles. Crude inventories rose by 7.5m barrels last week, according to the American Petroleum Institute. The Energy Information Administration is forecast to report a draw of 2.1m barrels when it releases its weekly report later today. If the EIA confirms the API numbers it would be the biggest build in inventories since late May. There is a risk that there is a greater and faster build-up in inventories as states have rolled back some lockdown restrictions and demand may not have picked up as quickly as anticipated. Jobless claims figures indicate far fewer trips made for work.

US stocks finished up on Tuesday but only just and closed near the lows of the day. The Nasdaq fell 0.8% but the S&P 500 rose 0.17% and remains up for 2020. European stocks were a tad weaker this morning, but the DAX has cleared its Jun range. The FTSE 100 continues to chop around the middle of its range and may face some pressure from a strengthening pound.

Whilst the EU has worked out its stimulus, the US is trying to fashion its latest package. Senate Republican leader Mitch McConnell said he expects another round of direct payments to feature in the next package, with the $600 weekly top-up cheques coming to an end this month, an abrupt drop in earnings for many households.

Tesla shares fell over 4% yesterday as the stock continues its wild ride that has seen it rally over 270% this year. The company is likely to report a fourth straight quarterly profit later today after the closing bell on Wall Street, 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. Estimates range from an earnings per share (EPS) loss of $2.50 on revenues of $2.77bn to a $1.5 profit on $6.2bn in sales.

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. JMP Securities analyst Joseph Osha, one of the stock’s biggest bulls, downgraded this week to market perform from outperform.

Stocks firm, earnings unmask weakness, OPEC+ decision eyed

Morning Note

European markets moved up again this morning after stocks rallied on Wall Street and futures indicate further gains for US equity markets despite big bank earnings underlining the problems on Main Street. Sentiment recovered somewhat after Moderna’s vaccine candidate showed ‘promising’ results from phase 1 trials. It is too early to call a significant breakthrough, but it’s certainly encouraging.

Cyclical components led the way for the Dow with top performers the likes of Caterpillar and Boeing, as well as energy names Exxon and Chevron up over 3% as the index rose over 500pts, or 2.1%, its best day in over two weeks. Apple shares regained some ground to $388 ahead of an EU court ruling today on whether the company should repay €13bn in unpaid taxes.

Asian markets were mixed, with China and Hong Kong lower as US-China tensions rose, but shares in Japan and Australia were higher. European shares advanced around 0.75% in early trade, with the FTSE reclaiming 6,200 and the DAX near 12,800.

However, Tuesday’s reversal off the June peak may still be important – lots of things need to go right to extend the rally and you must believe this reporting season will not be full of good news, albeit EPS estimates – such as they are – may be relatively easy to beat.

My sense is what while the stock market does not reflect the real economy, this does not mean we are about to see a major drawdown again like we saw in March. The vast amount of liquidity that has been injected into the financial system by central banks and the fiscal splurge will keep stocks supported – the cash needs to find a home somewhere and bonds offer nothing. It will likely take a significant escalation in cases – a major second wave in the winter perhaps – to see us look again at the lows.

For the time being major indices are still chopping around the Jun-Jul ranges, albeit the S&P 500 and DAX are near their tops. Failure to breakout for a second time will raise the risk of a bigger near-term pullback, at least back to the 50% retracement of June’s top-to-bottom move in the second week of that month.

Trading revenues, loan loss provisions surge at US banks

US bank earning highlighted the divergence between the stock market and the real economy. JPMorgan and Citigroup posted strong trading revenues from their investment bank divisions but had to significantly increase loan loss provisions at their consumer banks. Wells Fargo – which does have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn.

This begs the question of when the credit losses from bad corporate and personal debt starts to catch up with the broader market. Moreover, investors need to ask whether the exceptional trading revenues are all that sustainable. Shares in Citigroup and Wells Fargo fell around 4%, whilst JPMorgan edged out a small gain. Goldman Sachs, BNY Mellon and US Bancorp report today along with Dow component UnitedHealth.

UK retail earnings

In the UK, retail earnings continue to look exceptionally bleak. Burberry reported a drop in sales of 45% in the first quarter, with demand down 20% in June. Asia is doing OK, but the loss of tourist euros in Europe left EMEIA revenues down 75% as rich tourists stayed clear of stores because of lockdown. Sales in the Americas were down 70% but there is a slight pickup being seen. Encouragingly, mainland China grew mid-teens in Q1 but grew ahead of the January pre COVID level of 30% in June, Burberry said. Shares opened down 5%.

Dixons Carphone reported a sharp fall in adjusted profit to £166m from £339m a year before, with a statutory loss of £140m reflecting the cost of closing Carphone stores. Electricals is solid and online sales are performing well, with the +22% rise in this sector including +166% in April. Whilst Dixons appears to have done well in mitigating the Covid damage by a good online presence, the Mobile division, which was already impaired, continues to drag.

Looking ahead, Dixons says total positive cashflow from Mobile will be lower than the previous guidance of about £200m, in the range of £125m-£175m. Shares fell 6% in early trade.

White House ends Hong Kong special status, US to impose sanctions

US-China tensions are not getting any better – Donald Trump signed a law that will allow the US to impose sanctions on Chinese officials in retaliation for the Hong Kong security law. The White House has also ended the territory’s special trade status – it is now in the eyes of the US and much of the west, no different to rest of China. This is a sad reflection of where things have gone in the 20+ years since the handover.  Britain’s decision to strip Huawei from its telecoms networks reflects a simple realpolitik choice and underscores the years of globalisation are over as east and west cleave in two.

The Bank of Japan left policy on hold but lowered its growth outlook. The forecast range by BoJ board members ranged from -4.5% to -5.7%, worse than the April range of -3% and –5%. It signals the pace of recovery in Japan and elsewhere is slower than anticipated.

Federal Reserve Governor Lael Brainard talked up more stimulus and suggested stricter forward guidance would be effective – even indicating that the central bank could look at yield curve control – setting targets for short- and medium-term yields in order to underpin their forward guidance.

EUR, GBP push higher ahead of US data; BOC decision on tap

In FX, we are seeing the dollar offered. EURUSD has pushed up to 1.1430, moving clear of the early Jun peak, suggesting a possible extension of this rally through to the March high at 1.15. GBPUSD pushed off yesterday’s lows at 1.2480 to reclaim the 1.26 handle, calling for a move back to the 1.2670 resistance struck on the 9-13 July.

Data today is focused on the US industrial production report, seen +4.3% month on month, and the Empire State manufacturing index, forecast at +10 vs -0.2 last month. The Bank of Canada is expected to leave interest rates on hold at 0.25% today, so we’ll be looking to get an update on how the central bank views the path of economic recovery.  Fed’s Beige Book later this evening will offer an anecdotal view of the US economy which may tell us much more than any backward-looking data can.

Oil remains uncertain ahead of OPEC+ decision

Oil continues to chop sideways ahead of the OPEC+ decision on extending cuts. WTI (Aug) keeps bouncing in and off the area around $40 and price action seems to reflect the uncertainty on OPEC and its allies will decide. 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. 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.

However, an unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower. OPEC yesterday said it expects a bullish recovery in demand in the second half, revising its 2020 oil demand drop to 8.9m bpd, vs the 9m forecast in June. The cartel cited better data in developed nations offsetting worse-than-expected performance in emerging markets. EIA inventories are seen showing a draw of 1.3m barrels after last week produced an unexpected gain of 5.7m barrels.

Equities feel the hangover

Morning Note

Equity markets look a tad bleary-eyed and hungover this morning after a bit of binge. Call it exuberance, but the strong rally in China stoked by the state-run press left markets with only way to travel on Monday and now the price has to be paid. Meanwhile we continue to monitor the rising cases in the US and an emerging spat between the UK and China over Hong Kong and Huawei which simply evinces the fact that Covid is reshaping the world.

European stocks handed back some of Monday’s gains on the open on Tuesday after the strong start to the trading week pushed the FTSE 100 back above 6200. Energy and financials led the fall but all Stoxx 600 sectors dropped in the first hour of trade. Tokyo and Hong Kong fell, but shares in China continued to rally on very high volumes.

Nasdaq hits fresh record high, but is a correction incoming for Wall Street?

Wall Street also rallied after the bump up in China, with the Nasdaq hitting a fresh all-time high, but yesterday had a feel of a frothy move based on nothing but fumes. The put/call ratio for the S&P 500, which reflects market positioning and sentiment, has fallen to levels that have in the past indicated a correction is in the offing. Speculators have also lately aggressively cut their net long positioning on S&P 500 futures.

The upcoming earnings season will be crucial, and investors may see earnings estimates reduced given that many companies simply scrapped guidance, which could call for a rethink of valuations. Indices continue to track the ranges of June, so until we break out in either direction the pattern is one of a choppy but sideways market as investors try to figure out the balance on offer between reopening & stimulus vs cases & permanent economic damage from falling confidence and increased saving.

Recovery is happening, but is it fast enough: German industrial production rose 7.8% in May, but the figure was short of the 11% that was expected. Meanwhile, BMW Q2 sales in China rose from the same period a year ago, which might be down to the pent-up demand from the shutdown in the country in Q1, but nevertheless indicates a decent pace of recovery in the world’s second largest economy.

The UK’s Halifax mortgage survey showed prices fell for a fourth month in a row in June, but activity levels are rebounding, with enquiries up 100% from May. It’s too early to tell if this rebound can be sustained – a truism across the economic data prints we see right now.

Fed’s Bostic cautious over US recovery

Meanwhile we got another dose of salt from Raphael Bostic, the Atlanta Fed president, who warned of signs the US recovery is levelling off. Indeed, the headline nonfarm payrolls number last Thursday masks a lot of ills. Not least of which, permanent job losses are on the rise: while the number of unemployed classed as being on temporary layoff decreased by 4.8m in June to 10.6m, following a decline of 2.7m in May, the number of permanent job losers continued to rise, increasing by 588,000 to 2.9m in June.

Additionally, the data for the June report was collected largely before the spike in cases in several of the big economically important states like Texas and California. Dr Fauci said the US is still ‘knee-deep’ in the first wave.

RBA holds rates, notes increased uncertainty on rising Covid-19 cases

The Reserve Bank of Australia left interest rates on hold at the record low 0.25%, but noted households and businesses are worried about the state of the economy after the jump in cases in Victoria raised doubts about the country’s handling of the outbreak, which had been assumed to be as good as New Zealand.

“The downturn has been less severe than earlier expected,” RBA governor Philip Lowe said in a statement, but added that “uncertainty about the health situation and the future strength of the economy is making many households and businesses cautious, and this is affecting consumption and investment plans”. Scott Morrison’s government will deliver a statement on July 23rd outlining further support on the fiscal side.

Gold still bullish, EUR and GBP drift lower

Elsewhere, gold’s bullish bias remains intact as it consolidates around $1780 and may be preparing for a fresh run towards $1800 – first up it needs to clear the seven-year highs at $1789. WTI (Aug) is steady at $40 for now and in FX we see the majors still trading within recent ranges as the dollar recovers a little from Monday’s risk-on sell-off.

EURUSD failed to break the June swing high at 1.1345 yesterday and has pulled back towards the middle of the bullish pennant. GBPUSD has also drifted lower after several failed attempts in the last session to clear the 1.2520 resistance, finding some immediate support on the 200-period SMA on the 4-hr chart. Sterling has that RoRo feel.

FX update: Pound blown off course by Frosty Brexit talks, euro tests 200-day line


Sterling got a smack and the euro pulled back from its highs of the day as Britain’s chief Brexit negotiator confirmed what we already knew; that UK-EU talks are not going very well at all. Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic.

GBPUSD moved sharply off the 1.23 handle, turning lower to test 1.2250 before paring those losses. EURGBP pushed higher and looked towards the May 21st swing high at 0.90, a two-month peak. Undoubtedly sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the Covid-19 pandemic and back into the cut-and-thrust of negotiations.

Speaking to MPs, Frost said the EU’s current mandate handed to chief negotiator Michel Barnier is – in certain key areas –  not likely to produce an agreement, adding that the EU must change its stance in order to reach a deal with the UK. He said that the policy enshrined in the EU’s mandate is not one that can be agreed by the UK. Interesting to see sterling come back a touch as Mr Frost said it’s still the early stages of talks and the UK is still setting out its position – this seems rather optimistic given the timelines previously mentioned.

Whilst we knew that there had been precious little progress in the latest round of talks, the language indicates the two sides are very far apart still. We should however note that adopting this tone is part of the game – the UK’s position remains to take a hard line and, with Mr Cummings still in place, I would think this will remain the case. When questioned, Mr Frost said he reports to the PM, not to Mr Cummings. Of course, we all know where the real power lies.

As previously noted time is running out fast for the talks and we become less sure that either side has the political will and capital to expend on this when dealing with the economic catastrophe of the pandemic. The EU focus is on sorting out a rescue fund that all members can sign up to. Political capital is being spent on that more readily.

Chatter around the Bank of England looking at negative rates is another weight on sterling right now. Indeed it’s a crossroads moment as we deal with a massive increase in government debt, run huge twin deficits and exit the EU whilst in the midst of the worst global recession since the 1930s. There are a lot of downside risks for GBP.

Chart: Pound under pressure: EURGBP moves up to test near-term resistance, GBPUSD drops sharply

Meanwhile, EURUSD also pulled back from its highs, before recovering the 1.10 handle. The euro had earlier moved higher and European equities extended gains after the European Commission laid out plans for an additional €750bn stimulus fund. Ursula von der Leyen set out plans to distribute €500bn in grants – as per the Franco-German proposals – with an additional €250bn in loans on top. She said this would take the EU’s total recovery fund to €2.4 trillion.

A German government spokesman said Berlin was happy the EU had taken up elements of the plans set out last week by Angela Merkel and Emmanuel Macron. Macron urged the EU to move forward quickly. But a Dutch official said budget talks would ‘take time’, indicating a still rather frosty approach to the rescue fund from certain corners – it’s far from a done deal.

Chart: EURUSD analysis

The EC plans took the cross through the 200-day simple moving average around 1.1010 but there was not an immediate follow-through and the Brexit chatter knocked it back before it retook the 200-day line. Bulls need to see a confirmed push above this to unlock the path back to 1.1150, the March swing high. Failure calls for retest of recent swing lows at 1.0880.

FX strategy: euro, pound push up as dollar offered on risk appetite return


The euro and Sterling were on the front foot on Tuesday, with cable stretching its advance to near a 2-week peak. Whilst the dollar was offered on a broad return of risk appetite, the euro also seemed to get some lift from the ECB, which is giving signals it’s ready to do even more.

Bank of France Governor Francois Villeroy de Galhau, a key member of the ECB’s Governing Council, told a conference on Monday that there is room for the central bank to act ‘rapidly and powerfully’.

Speaking to CNBC subsequently on Tuesday he said there is a need to be flexible with the current round of coronavirus asset purchases, suggesting that the ECB shouldn’t need to bound to capital keys that dictate how many government bonds it can purchase based on the size of each country’s economy.

The German Constitutional Court ruling earlier this month expressly stated that the capital key was essential to avoid distorting markets, so this could fuel further disquiet among those hawks who have been set against the ECB’s bond buying.

Meanwhile, we await to see whether the EU states can agree a fiscal response, with Denmark, Austria, Sweden and the Netherlands countering the Franc-German proposal for a €500bn bailout fund to be financed by the European Commission issuing bonds. The so-called ‘Frugal Four’ want only a short-term emergency scheme financed by loans.

EURUSD chart analysis

Prices are in recovery mode following a rejection of the lows yesterday at 1.0870. EURUSD extended to 1.09730 – with this high formed we can look to recover the 1.1020, the May 1st peak which could open up a breakout from the two-month range.

GBPUSD chart analysis

Meanwhile GBPUSD pushed up to a 2-week high at 1.23 after the 1.2160 support area held and we saw a push through the 1.2250 channel. A break to the upside calls for a return to 1.25/1.26 and the Apr double top highs. Failure to sustain the move beyond 1.23 calls for retest of the 1.2160 support and thence the swing low at 1.2080 comes back into focus.


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