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FTSE makes new post-pandemic high, Bitcoin up on ETF hopes
GPs will be paid more to do what they used to do before the pandemic, like see patients face to face. This is what dislocation and the ‘new normal’ looks like: same service, costs more. That’s one of the reasons why inflation is not going to be as transitory as central bankers have been telling us.
Markets are not that concerned by this, so it seems. The FTSE 100 has broken out to a new post-pandemic high, stretching its recent range by a few more points on the upside to hit a high of 7,242 this morning. This marks a roughly 400pt reversal from the Sep 20th intraday low. It’s been a very tight range of that size since April but there are encouraging signs the FTSE can yet end the year at its pre-pandemic level of 7,700.
Why the rally? Key is energy – BP and Shell among the top performers of the last month and have a big index weighting. That’s BP and Shell, which are both up more than 20% in the last month as oil and natural gas prices have soared. WTI is back above $82 this morning. Next is the two big reopening stories – IAG and Rolls Royce, they are the best performers of the last month among the blue chips. Reopening of travel has been a major factor and we see more good news today with the move to lateral flow tests for international arrivals. Then third we have the big banks – HSBC, Lloyds, StanChart and NatWest have all rallied over 10% in the last month as rates have risen and the macro environment has held up pretty well. Bets the Bank of England is far closer to raising rates have helped, but global bond yields have also been moving higher. The FTSE is exposed to the winds of the global economy and trade, which despite it all are holding up well, and UK shares remain heavily discounted to peers. The FTSE 250, a better gauge of the UK economy, has ticked higher in the last few sessions but is down by around 5% from its Sep high.
Wall Street closed firmly higher yesterday amid a rush of positive earnings reports from the big banks. Walgreens and UnitedHealth also delivered positive results that indicate the large corporations are still able to deliver earnings growth and higher profits despite the rising costs. Supply chain problems will become more obvious when some more consumer discretionary names report, but so far the storm is being weathered. Meanwhile lower rates lifted the big tech boats. The 1.7% rally for the S&P 500 was its best day since March.
On the data front, US initial jobless claims fell below 300,000 for the first time since the pandemic, but inflation is not going away. US PPI was a tad cooler than expected but still running hot at 8.6% year-on-year, however core PPI ticked up to 6.8% from 6.7%. The headline 8.6% was the largest advance since 12-month data were first calculated in November 2010. Today – US retail sales, Empire State mfg index.
Bitcoin eyes $60,000 as traders bet the SEC is poised to allow the first exchange-traded fund based on BTC futures. The SEC is reviewing around 40 Bitcoin-linked ETFs and a report from Bloomberg suggests the regulator will approve some of these. Bitcoin spiked on the report, which indicated that Invesco and ProShares could be among the providers cleared to start trading on Bitcoin ETFs. With the kick on to the $60k level it may be a matter of time before we see a fresh all-time high.
Gold – pulling back to the 23.6% retracement as it pares gains in the face of the $1,800 test.
GBPUSD: Nudging up to the trend line again at yesterday’s 3-week high.
European stocks pull back while dollar feels weak
European equities edged lower on opening this morning as investors respond to the flurry of earnings season reports from across the week.
A range of European-listed large caps are reporting today. Renault, Air France-KLM, BNP Paribas and IAG are some of the headliners today. It’s also a fairly busy day for US earnings too, with the likes of Proctor & Gamble, Chevron and ExxonMobil sharing their latest quarterly financials.
It will be interesting to see how Chevron and ExxonMobil perform. Oil prices have strengthened across 2021, despite recent dips due to OPEC+ wrangling, so this may have fed into resurgent revenues for the oil supermajors.
In terms of European earnings, BNP Paribas has shared headline profits of €2.9bn – a 26% annual rise – this quarter. Renault has also shared some insights already, noting €345bn in first half profits for 2021. It’s a major reversal for the French automaker, which posted a €7.3bn loss during the same period in 2020 after the Covid-19 caused mass factory shutdowns.
Looking at indices, we can see drops on the key European bourses. The FTSE 100 was down 73 points at the start of Friday at 7,005.2. Germany’s DAX is about 117 points lower, at 15,492, and the French CAC40 dropped 28 points at 6,605.
Conversely, the NASDAQ was at 14,778, showing a small 15.8 jump. The Dow Jones was up 153 points too at 35,083. The S&P 500 continues the positive trend for US indices, up by 18.51 to reach 4,419.
Asian markets were performing lower, especially Hong Kong’s Hang Seng, which had dropped nearly 1.56% at 24,905 at the time of writing. Shares in Asia are possibly on course for their worst month since May 2020 as trading volatility steps up.
Turning to the dollar, the Dollar Index, which weighs the greenback against six other major currencies, looks like it’s on track for more dismal performance following a dovish Fed outlook. It is currently rated at 91.88, after reaching a low of 91.85 – the lowest level seen since June 29th.
The Fed committed to boosting its monthly Treasury securities purchases by $80bn at its meeting on Wednesday July 28th. An accommodative approach to the economy, despite hot inflation and disappointing Q2 GDP performance, appears to be Chairman Jerome Powell and the Fed’s direction.
US GDP grew at 6.5% in the quarter ending June, falling way below the Dow Jones estimated 8.4%. A combination of higher consumer prices, high commodities prices, and falling manufacturing and services output contributed to the worse-than-expected second quarter growth rate.
WTI oil contracts started this morning at $73.48. Brent has dipped just below $75 at $74.99 but could be on course to crack that threshold by the end of the day. At week’s end, oil should have gained around 2%, with higher demand in the US and tighter supplies cited as supports.
Bitcoin had cleared $40,000 earlier in the week, but as of today had fallen back to $39,677 at its lowest. The world’s most popular cryptocurrency has had a bit of a torrid July and looks like it’s struggling to establish a breakout.
FTSE hits post-pandemic high, Bitcoin leaps on Musk tweet
European stock markets rose in early trade Monday, with the DAX in Frankfurt hitting a new all-time high and the FTSE 100 making a fresh post-pandemic high above 7180 as the broadly positive mood in equity markets continued to override concerns about inflation. Travel shares like IAG and EasyJet fell as it appears all but certain England’s full reopening will be delayed by another 4 weeks. Markets are now caught between last week’s big inflation reading and this week’s Fed meeting. Despite the big inflation reading from the US, inflation expectations are not really rising which should allow the Fed to keep its dovish stance. Treasury yields have held under 1.5%, indicating investors are buying the transitory story for now. Nevertheless, I’d expect these to take offer at some point and for 10s to retest 2% in the coming months.
Wednesday’s statement from the Federal Reserve is not expected to feature any fireworks, but it is an important meeting as it will offer clues about the reaction function of the central bank to rising inflation. We know the Fed is happy to let inflation run a little hot over the summer as it pins everything on its employment mandate. So, labour market data is arguably more important than inflation numbers right now. On that front the last NFP jobs report was something of a Goldilocks number – not too hot to worry about an early taper of the Fed’s $120bn-a-month bond buying programme, but not so cool as to fret about the recovery. The truth is the Fed is looking at both and this meeting comes at a time of great uncertainty over whether inflation will indeed prove to be as transitory as policymakers believe.
Minutes from the FOMC meeting in April had the Fed floating a trial balloon, as these indicated some policymakers are thinking about thinking about tapering asset purchases. “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said. Members of the FOMC also stressed the importance of “clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases”. The question remains: when does the Fed think it’s hit the landing area for the economy, and does inflation take off in the meantime? This week’s meeting is not expected to deliver any surprises – the jobs numbers are positive right now, but the labour market is some way off the Fed’s goal, whilst the inflation story is fairly-well understood for now. Anything to suggest the Fed could tighten earlier would lead to volatility.
Meanwhile Bitcoin shot higher this weekend to trade close to $40k after Elon Musk indicated Tesla could accept the crypto asset for purchases. “When there’s confirmation of reasonable (~50%) clean energy usage by miners with positive future trend, Tesla will resume allowing Bitcoin transactions,” the ‘Technoking’ of Tesla tweeted. Tesla’s decision last month to stop accepting Bitcoin led to considerable volatility in the asset, whilst it was the company’s big investment announced in February that helped propel it to an all-time high near $65k. This latest tweet only confirms what a crazy relationship Musk has with Bitcoin and his incredible influence on prices.
Oil prices made fresh highs as the outlook for demand improves and supplies remain on the tight side. WTI broke out clear of $71, its highest in almost 3 years. It comes after the International Energy Agency (IEA) called on OPEC and its allies to increase production. “OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” it said last week.
Markets look for direction from ECB, US CPI inflation
European stock markets were again lacking direction ahead of today’s closely awaited ECB meeting and a hotly anticipated inflation reading from the US. The FTSE 100 trades a little higher, the DAX a little lower. Wall Street closed lower with the major indices holding to well-worn ranges. The S&P 500 down 0.4% to 4,219.55 but remains just a few points below its all-time high of 4,238.04 set on May 7th.
Meme stocks attracted the most interest as Clean Energy Fuels – the fourth most talked about stock on the /Wallstreetbets thread yesterday – rallied 31%. AMC fell 10% and Clover Health dropped 23% after a monster rally in the previous session. Today’s most-discussed stocks include WISH, CLF, WKHS, AMC and TLRY.
US inflation reading key risk event
If there is a worry about inflation – today’s US CPI print will tell us a lot – then the bond market is not showing it. US 10yr yields fell under 1.49% to the lowest level in 3 months. This is not just a Fed thing – the yield on longer dated paper such as the 30yr is also well off its 2021 highs. Today’s inflation reading still poses a risk to the market. The annual rate is forecast to climb to 4.7% in May, from 4.2% in April, whilst the core reading is seen at 3.4%, with the month-on-month at +0.4%. With the Federal Reserve anchoring its policy goals to employment, another hot reading won’t be too much to worry about. Nevertheless, the print will still lead to some volatility at 13:30 (BST) in index futures, numerous FX crosses and gold. An above forecast inflation reading would reignite market taper fears, albeit this is likely to be short-lived and one to fade as the Fed still has control of this, at least to the extent that the market believes it does.
ECB set to hold steady for now
The European Central Bank (ECB) convenes today amid a much rosier economic outlook than at the start of the year. But with the central bank having communicated its plans to front-load asset purchases, there is not expected to be any material change in policy or communication. It will be hard to avoid taper talk so how the ECB responds to questions around tapering will be of central importance to the market’s expectations and the euro. At the March meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but that 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. Today it’s likely the ECB will support continuing running PEPP at around €80bn a month before starting to taper in September.
Yields have been pressing higher but have retreated from the May peaks. The increased pace of asset purchases that was agreed in March came as a response to rising yields at the time. But the economic outlook – chiefly driven by a strong vaccine rollout that was slow to start but is now firing on all cylinders – has improved greatly since then. The ECB has been taking the line that inflation is temporary and rising bond yields reflect better fundamentals, so I don’t think it will be unduly concerned by a higher rate environment now due to the better economic picture. This will make talk of a taper very difficult to ignore. The language around the speed of asset purchases may change somewhat, and this could drive EZ yields + EUR higher. It will be very interesting to see what the ECB says about the state of financing conditions, and it is sure to continue to tie PEPP purchases to maintaining these as ‘favourable’.
The big risk for EUR crosses around this meeting is: does the ECB silence taper talk with enough vigour to keep yields in check, or does it allow the market to think the more hawkish voices are winning the argument about when the central bank eventually exits emergency mode? With the ECB seen in a holding pattern, there is quite a low bar for a hawkish surprise.
Inflation has picked up since the last meeting, which could see the forecast for 2021 and 2022 revised upwards from the March level. EZ inflation rose to 2% in May from 1.6% in April, the first time it’s been on target in over two years. With growth in Q1 a little light, the rebound in the summer should mean GDP projections remain broadly unchanged.
ECB speakers have been offering a few titbits since the last meeting. Of particular importance to the speed at which the ECB will exit emergency mode, Christine Lagarde stressed that inflationary pressures will be temporary – sticking to the global central banker script. At the April meeting she said tapering talk was premature. But she remains caught between the hawks and doves. Kazaks and Lane made it clear policymakers will look at the asset purchase programme again in June, which could involve scaling back the programme if the economic situation is better. There were dovish comments from Panetta in late May, noting that it was too early to taper bond purchases. Banque de France Governor, Villeroy de Galhau, stressed that the ECB is going to be at least as slow to tighten as the Federal Reserve.
Finally, London’s IPO market is showing signs of fatigue. Broker Marex has pulled its planned listing, while fuel cell company Elcogen and miner Tungsten have both delayed planned floats. Whilst there may be more to the Marex decision than simply ‘challenging IPO market conditions’, it does rather seem there is some amount of investor fatigue after a deluge of new issuance in the first quarter. Wise to pause. In the case of Marex, it may be wise to steer clear.
Markets stay calm, Bitcoin suffers
All rather calm: European markets opened a shade higher today after a mixed session on Monday saw little real direction from the major bourses. The FTSE 100 ended up 8pts, or +0.12%, at 7,077, but remains well within the range of the last 2 months. This morning it’s risen about 20pts to take a look at 7,100 again. US stocks were also mixed – the S&P 500 declined a touch as it struggled to make a new all-time high, whilst the Nasdaq rallied more than 0.4%. Meme stocks roared on Monday – GME rallied over 12% and the AMC advanced 14%. Earnings estimates for US stocks keep going up. Whilst we cannot expect any multiple expansion this year – as previously noted – even at the recent records the market probably wasn’t truly reflective of the kind of earnings growth we can expect this year. The Vix keeps coming down. MSCI’s All-Country World Index rose 0.1% on Monday, its sixth record close in 7 days.
The truth is markets seem to be bobbing along pretty happily until there is the next big short-term risk scare – a well-understood, or at least fairly static, macro picture for the time being keeping things on an even keel. Inflation remains the big unknown but for now, bond yields are steady – US Treasury yields continue to look pretty calm around 1.55% – but the path for bond yields seems only higher this year. The question is one of timing and markets seem happy to wait until they get a clearer signal.
Look out Thursday for the double header of the European Central Bank (and a possible taper clanger to come), and the US CPI inflation print, which is expected to be something in the region of +3.4%, which is another big reading after the +4.2% hit last month. The core month-on-month reading is seen at +0.4%, down from the 40-year high of +0.9% last time around. Today we look to the German sentiment indicators at 10am (BST), plus the US trade balance figs and JOLTS job openings for event risk, though again it has to be said it’s a pretty light day for data.
Bitcoin struggles once more, with prices sliding under $33k again this morning and dipping beneath the post May crash stabilisation lows. I’ve expounded on this too many times to add anything new, but suffice to say it’s not a currency – no one is spending it; it’s just monstrous speculation. Donald Trump’s fears about Bitcoin threatening the dollar are unfounded. In almost every single use case – except in the world of criminals, terrorists and non-fungible token collectors – you have to convert it back into fiat to use it (even to buy your Tesla), so I fail to see it as anything but a kind of pointless digital gold. Read our latest update for more on investing in cryptocurrencies.
MicroStrategy doubles down
Even as Bitcoin struggles diamond eyes MicroStrategy boss Michael Saylor is buying yet more of the stuff. MSTR shares fell 3% as it announced another $400m bond offering, which it said it MicroStrategy intends to “acquire additional bitcoins”. I don’t think there is much overall market impact from falling Bitcoin prices, but there is exposure for a certain kind of momentum/growth type names. MSTR has just booked a $285m loss due to fluctuations in Bitcoin prices. As noted in our note of May 19th, you now have a publicly listed stock with a market cap of almost $5bn (now $4.58bn) which is seemingly entirely dependent on the price of Bitcoin remaining above $24k.
Elsewhere, sterling remains pressured under $1.42 with yesterday’s move to this key level rejected. GBPUSD trades around 1.4150. Currently caught between the 100-hour and 200-hour MAs as the near-term triangle formation plays out. Gold hovers around the $1,900 area but the bearish MACD crossover last week suggests it will fail.
Sterling advances to $1.42, shares in Frankfurt hit new record
Shares in Frankfurt rose to a record high in early trade as European stock markets started Tuesday in upbeat fashion after an indecisive session on Monday left the major indices only slightly lower. The DAX rallied almost 1% to 15,540 at the high just after the open. The FTSE 100 is also firmer near 7,100 after last week’s big rejection of the 6800 handle left a path clear to retest the post-pandemic highs. Yesterday saw Wall Street down but only a little and the major indices were well off the lows. Meme stocks had a good day as AMC rallied 7%, whilst GameStop finished up by almost 13% on the day. Airbnb and Doordash were among the big fallers, decaling over 6% and 5% respectively. The S&P 500 closed down 0.25% at 4,163, whilst the Nasdaq was a tad weaker and the Russell 2000 rose marginally. UBS has increased its ear-end S&P 500 forecast to 4,400 citing exceptionally strong earnings growth this year that will more than compensate for valuation headwinds.
Vodafone charged to the bottom of the FSTE 100, declining more than 6% and knocking 9pts off the index, as it said capital expenditure would rise. Full year results show group revenue declined 2.6% to €43.8bn, a little better than consensus, whilst adjusted ebitda fell 1.2% to €14.4bn. Covid’s impact on roaming was a big factor in lower revenues, but a €500m reduction in European operating costs helped offset in terms of earnings. But the higher capex guidance, as Vodafone invests in new tech and services like 5G, is why investors are taking some skin out of the game today.
In the wake of last week’s inflation scare, Fed officials have duly been wheeled out to shore up risk sentiment. Arch hawk Kaplan of the Dallas Fed (non-voting this year) reiterated his belief that rates could rise next year, but we know he’s an outlier with no say this year. Vice-chair Clarida stressed patience as the economy reopens. Minutes from the last FOMC meeting due on Wednesday will be parsed for any kind of dissent beyond Kaplan. At his press conference for the April meeting, chair Powell was adamant that it’s way too early to discuss tapering: “We’ve said we would talk well in advance and it is not yet time to do so.” Minutes will show the Fed is still on course – the question is what the data does to the market over the coming weeks and months and whether it really believes the Fed won’t blink.
Sterling trades at its best level against the US dollar since late February, with the cable pair mounting a push back to 1.42 in early trade this morning after a solid employment report from the UK. The 3-month calls for a look again at the post-pandemic peak at 1.4250 struck on Feb 24th, but rejection of this area again may signal a double top and slow grind back to the 1.38 region. The British labour market looks in decent shape for now; the true test comes with the end of the furlough scheme. The unemployment rate declined to 4.8% in the January-March quarter from 5.1% in the preceding three-month period. The employment rate also rose but remains below its pre-pandemic level. Payrolled employees increased in April for a 5th straight month but was down 772k since February 2020.
The dollar remains on the back foot more generally. DXY has flipped under 90 and is now at its weakest since dollar since the Feb 25th drop, whilst EURUSD has hit 1.22 again. US 10-year yields are a tad firmer at 1.65%, pushing real rates lower with the 10yr TIPS to –0.90%. The combination of weaker USD and lower real rates helped gold continue to advance beyond $1,870 where it is looking at the 50% retracement of the move down since August, as flagged in yesterday’s note.
WTI crude oil futures jumped to $67, breaking clear of the recent range to look again at testing their strongest since before the pandemic, struck on March 8th at $68. Brent hit $70 for the first time since March 5th. This has to be a risk-on move off the back of signs that Europe and the US are moving forward with reopening despite concerns about variants. News that vaccines seem to be effective against the current variants has traders optimistic that reopening plans will largely go ahead as planned. Breakout of the horizontal resistance could see return to $75 WTI. The opening up of travel is encouraging, whilst US airports are seeing more passengers passing through terminals than at any stage since before the pandemic. Whilst worries exist about the situation in India, this is largely a known quantity and the ‘trade’ is to look for a rebound in demand this year. By the mid-summer this may be over as demand might not pick up as expected.
European equities rise as China eases
Police in Hong Kong are investigating an alleged toilet paper heist, amid a shortage due to the coronavirus outbreak. Things are bad when loo roll becomes currency.
It’s a dull old session out there today: European shares were a little indecisive at the start of play following a mixed bag overnight in Asia, but are leaning higher with stimulus from China helping to lift the mood. Basic resources stocks were among the biggest gains on the FTSE as the blue chip index moved to try to reclaim the 7500 level, last some way short at 7445.
Shares in Hong Kong and Shanghai advanced as China cut a key medium-term interest rate, while Tokyo shares slipped on growth concerns. Markets are betting this will be only a part of a wider stimulus programme to offset the economic damage wrought by the Covid-19 coronavirus – the PBOC has already been injecting liquidity and there will no doubt be more to come. China reported another 2k cases by Sunday night, taking the total to more than 70k.
US stocks finished higher for the second straight week. Markets in the US will be closed today for Washington’s birthday but have rolled into the holiday in fine fettle. Industrial productions were weak, down 0.3% in January, largely down to Boeing. Ex-aircraft production, factory output rose 0.3%. Retail sales showed the US consumer started the year in decent shape, with headline sales +0.3% month on month.
There are growing fears about the economic impact. Japan’s economy shrank at the quickest pace in six years in the last quarter of 2019 – down 6.3% as the consumption tax hike hobbled the economy far worse than thought.
Most think to hit to tourism and exports resulting from the outbreak will mean the economy contracts again in the March quarter, pushing Japan into recession. Meanwhile Singapore has slashed its growth outlook for 2020.
Oil is higher above $52, having closed last week well. Look like a base has been formed at $50, looking to cement gains north of last week’s highs at $52.2.
In FX, there are tentative signs of stabilisation and basing for EURUSD. Speculators have not been this net short since Jun 2019, with net shorts at nearly 86k, contracts so the short-euro trade is very crowded. As ever this CFTC data is a week old so I wouldn’t be surprised if the next set of data showed deeper net shorts towards 100k corresponding to the dove under 1.0880. The inverted hammer on Friday suggests near term reversal but until 1.09 is reclaimed the bears remain in control.
Sterling is giving a gallic shrug to some French fighting talk vis-à-vis Brexit trade talks. GBPUSD is steady at 1.3040, with support at 1.30 and near-term resistance seen at the 50-day moving average at 1.3070.
M&S out of FTSE 100 for the first time
It’s bad news for Marks & Spencer as the retailer is dropped from the FTSE 100.
It is the first time the troubled food and fashion company has not been a FTSE 100 member since the index was launched in 1984.
The relegation is the latest in a long line of miserable milestones marking the decline of the once-great British retailer.
M&S has had a tough year, with shares down 40% since the start of the year. Based on the closing price of stock on Tuesday, its market value fell below the threshold for inclusion in the index. The announcement was made on Wednesday and the move will be implemented on September 23rd.
This won’t have come has a surprise for traders, as relegation has been on the cards for more than a year as the share price has steadily declined on poor sales, slow uptake of online shopping and recently struggling food business.
The retailer has been one of the losers in the High Street slowdown, but has compounded these issues by dropping the ball with womenswear, with complaints of poor value and enormous competition from fast fashion brands and online retailers.
Its food offering used to be a highlight for the company, but that too has struggled in recent years. Investors hoped that a partnership with Ocado may help the retailer turn things around, but some argue M&S overpaid and is unlikely to realise a return on the deal.
M&S wasn’t the only company relegated or promoted in the FTSE Quarterly review.
FTSE 100 Movers
Micro Focus and Direct Line will also be dropping out of the FTSE 100, and entering the FTSE 250. They will be replaced by precious metals mining company Polymetal, drug-maker Hikma and aerospace and defence group Meggitt.
All three companies have already made appearances in the FTSE 100.
FTSE 250 Movers
Perhaps unsurprisingly, there is more movement in the FTSE 250 review. Amigo Holdings, Funding Circle Holdings and Intu Properties have been demoted from the FTSE 250, alongside Metro Bank. Metro Bank’s shares fell 90 per cent over the last year after an accounting error revealed at the start of the year showed some of its assets were classed as riskier than they should have been.
Fund Manager Neil Woodford suffered another blow as his Woodford Patient Capital Trust was dropped from the index; shares had fallen 40 per cent since the start of the year due to investor fears of illiquid assets. Earlier this year, the Trust froze assets to prevent investors withdrawing funds.
Fashion retailer Ted Baker was also a casualty. The company was hit by a huge scandal in March this year, causing its founder to resign as Chief Executive, as well as facing two profit warnings.
On the flip side, Trainline, which only floated earlier this year, was promoted to the FTSE 250. Other promotions to the index were Airtel Africa, Finablr, Foresight Solar Fund, Sirius Real Estate and Watches of Switzerland Group.
Euro dives on Draghi, stocks rally
The euro fell and stocks rallied after ECB chief Mario Draghi talked up the prospect of interest rate cuts and more QE.
The euro shipped 50 pips in short order and euro area bond yields dropped as Mario Draghi gave the strongest signal yet the European Central Bank is about to launch a fresh round of easing measures.
Speaking at the annual central banker bean feast in Sintra, Draghi said: ‘Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,’ and added that the asset purchase programme ‘still has considerable headroom’ and that in the absence of inflation returning to target, additional stimulus will be required.
Draghi has really opened the door to more cuts and a new round of quantitative easing. He’s in full dove mode now, the towel has been thrown in. Building on the last ECB meeting, at which some members discussed reopening QE, this looks like a clear signal that the central bank is preparing markets to expect monetary policy to become more accommodative this year.
This is entirely in line with our long-held view that the ECB would ultimately be forced to do more to stimulate the ailing Eurozone economy. Inflation expectations are being crushed – Euro 5y5y inflation swaps lately sunk to record lows- below 1.2% for the first time. Economic indicators continue to show a deep and persistent slowdown.
The euro dived lower and the breakout now looks lost. EURUSD was trading at 1.1240, already under pressure having slipped the 1.13 handle, before it dropped sharply to trade on the 1.11 handle at 1.1190. The Fed meeting is unlikely to help the euro with dovishness well and truly baked in – in fact the Fed has a low bar for a hawkish surprise that could put more pressure on the euro.
German bund yields are lower again, with the 10-year sinking towards -0.3%.
This Draghi put lifted stocks – the Euro Stoxx 50 rallied over 30 points quickly to trade at 3409, having been languishing around 3370. The DAX shot up more than 150 points. All else equal, which it seldom is, more easing from the ECB should be a boost for equity sentiment.”
Trump’s London calling, US-China trade war worsens, oil smoked
Global stocks were down by around 6% in May – can we get a better June? The runes are not looking great.
Futures indicate European shares are lower today as trade tensions continue to mount and investors exhibit greater fear about the global economy and the risk of recession. Asian markets were generally lower after a big selloff on Wall Street on Friday that saw the S&P 500 decline 37 points, or 1.32%, to finish at 2,752.06, below its 200-day moving average. FTSE 100 held the 7150 level, but this is likely to get taken out today.
Trade fears are heating up
The trade war is not cooling down; in fact, it looks like the rhetoric is heating up and further escalation seems likely. China is raising tariffs on $60bn of US goods in retaliation for tariffs, coming up with its own blacklist of foreign companies, has accused the US of resorting to ‘intimidation and coercion’, and begun an investigation into FedEx. And the Chinese defence minister says if the US wants a fight, they will ‘fight to the end’. No end in sight, and the chances of a G20 détente are slim.
US stock futures were lower along with oil amid growing fears about this trade setup. Nothing like progress has been seen re Mexico, and now the market is dealing with reports that the US has been eyeing slapping tariffs on some Australian imports, As we noted last week, the escalation last week with the attack on Mexico – especially as it represented a weaponization of trade to pursue non-economic policies – represents a major turning point and could bring others into the fray. Again, the EU could come under fire soon.
Data overnight has been mixed but still indicates slowdown. China’s Caixin PMI read 50.2, unchanged from a month before but a little ahead of expectations. Japan’s PMI has gone negative, moving to 49.8, signalling contraction. Japanese manufacturing output down for 5 months in a row, while new export orders fell for the 6th straight month. Japanese equities were down sharply overnight. UK PMI at 09:30, with the ISM numbers for the US due at 15:00.
Trump heads to the UK today – unfortunately he’s meeting a lame duck PM so we can’t expect much of importance. There will be lots of talk of a trade deal with the US post-Brexit. Harder Brexiteers in the Tory leadership race are likely to be emboldened. Expect the no-deal talk to increase.
Sterling is sure to be under plenty of pressure until the leadership race is clearer. GBPUSD remains anchored to 1.26 for now, having made fresh multi-month lows last week. However, Friday’s bullish hammer reversal may provide the basis for a short-term rally. Just a hint that the pound is oversold and could be ready for a wee bounce.
Oil smoked, gold higher
Oil has taken a beating as markets worry more about a slowdown in global demand than supply constraints. Brent has declined by 10% or so in just a couple of days and is holding on $61, while WTI is clinging to $53. Speculators are liquidating long positions wholesale, with Friday’s COT report showing net longs down by 40k contracts. Net long positioning has fallen by about a fifth (100k contracts or more) since the late April high at 547.4k.
Stockpiles are at their highest in two years. Speculative long positions continue to be cut. Supply uncertainty is losing out to demand uncertainty. Simply put, with OPEC and co curbing output, there is ample excess capacity in the market should it be needed. 14-day RSI and 20-day CCI suggest oversold and ready for a bounce, but this is like trying to catch a falling knife.
Gold meanwhile is picking up safe haven bid as this decline is not just about valuations but about big fears for the global economy. The easing off in the US dollar has also supported gold. Having broken $1300 gold was last around $1310, with next target $1324.
FTSE rebalancing etc
Finally, there’s a fair bit of chatter about the FTSE rebalancing – will Marks & Spencer survive in the 100? Will JD Sports be promoted? I wouldn’t get too worked up about it all, even if it’s good sport. EasyJet likely to go – shares have been hammered but the business is tightly run and it’s always been one of the smallest in the FTSE 100. MKS lucky to survive with only the rights issue saving it.
Kier – warning on profits – going from bad to worse after the rights issue flopped.
Astra – hails Lynparza pancreatic cancer drug trials success
William Hill – bid rumours are doing the rounds
Dignity – says it welcomes Treasury/FCA proposals