Stocks rally into quarter end

Morning Note

It’s month and quarter end. Scores on the doors are FTSE 100 up 1.6% for the quarter, 0.5% for September, which is not bad going considering the kind of volatility we have seen. Less positive for the US indices with the S&P 500 down 3.6% in September, just holding onto its quarterly gain of 1.4%. The Nasdaq 100 is down 5% this month. The DAX is down for both the month and the quarter. Hang Seng –15% almost for the quarter after all the tumult for tech stocks and Evergrande. Three-quarters of the way into 2021 and the S&P 500 is up 16%, the FTSE 100 up 10% and the DAX up 12%. The FTSE All World Index – a measure of global stocks – is lower for September, flat for the quarter, but still up 26% over the last 12 months. Flattish performance this quarter reflects stagnating growth rates globally and a rocky month we have just seen. September lived up to its promise for volatility, October is set to bring more with inflation, central bank tightening and slowing growth combining to create a less positive backdrop for equity markets. Investors should also be keeping a close eye on Washington – whilst a default is unthinkable – the merry dance keeps bond markets guessing.

This morning European stock markets opened firmly in the green after a broadly positive session in Asia, though shares in Tokyo and Hong Kong fell. The selloff on Wall Street on Tuesday failed to gather steam, with the broad market managing a mild gain yesterday, though the Nasdaq notched a mild decline as the pressure from higher bond yields and inflation concerns persisted.

Boohoo shares tumbled 10% as the company warned that rising costs were hitting margins. Management warned on supply chain and wage costs, whilst a higher number of customer returns and ongoing business investment were also a factor in the lower margin guidance. Boohoo might be at the sharp end of rising input inflation but it’s a marker for the rest of the market. We might expect to see other companies performing a similar degree of expectation management, albeit there is always the chance some will be sandbagging.

The FTSE 100 broke clear of the recent range to notch its best since Sep 7th, clearing a high above 7,150 and taking back into the area traded in the second half of August. Weakness in sterling might be a factor in its favour.

Dollar on the rampage: Sterling continues its run lower despite UK growth being revised higher than earlier estimates. GDP rose by 5.5% in the second quarter, above the initial indication for growth of 4.8%. It means the economy is about 3.3% below where it was before the pandemic. Meanwhile, house prices chalked up a 5th straight month of double-digit rises. Cable is still in the doldrums however after two large down days, with the 1.340 round number support tested this morning. Fears that the Bank of England will be raising rates just as growth is stagnating is hurting sentiment towards the pound a touch, whilst the dollar is going gangbusters. DXY has broken above 94 with an exceptionally strong move yesterday and EURUSD has a 1.15 handle again for the first time since July last year. USD is just moving a little lower in early trade after yesterday’s rampage.

Briefly:

• China’s manufacturing sector entered contraction for the first time since the pandemic

• Oxford Nanopore Technologies shares open at 545p on debut, above the IPO price of 425p, extend gains to trade +40% higher around 588p.

• Look ahead to German inflation later in the session, plus more from Powell and a raft of Fed speakers. Chicago PMI and weekly unemployment claims also on the tape alongside the final US Q2 GDP reading.

Stocks grind higher, Vectura goes up in smoke

Morning Note

All a tad quiet this morning. European stock markets were tentatively higher in early trade Friday after another record session on Wall Street saw the three major indices rally, though small caps declined. The FTSE 100 led the way as it sprang back from yesterday’s ex-divis, up 0.3% to 7,220, whilst the DAX moved close to 16,000. Asian stock markets moved in the opposite direction as concerns about the pace of the delta variant in the region left many of the major indices lower again. There is not a whole lot going on today and risk remains fairly muted as US 10yr yields hover around 1.34% and FX markets look reasonably calm. Gold made further gains to $1,760 in the wake of yesterday’s strong producer price inflation print in the US.

 

Up in smoke: Vectura’s board recommended the Philip Morris offer of 165p, a 10p-per-share premium to the Carlyle bid, but in the statement they seemed to make a point of stressing they did so on advice from their bankers and they were heavy on the idea of ‘fiduciary duties’. They argue that “wider stakeholders could benefit from PMI’s significant financial resources and its intentions to increase research and development investment and to operate Vectura as an autonomous business unit that will form the backbone of its inhaled therapeutics business”, but clearly there will be much hand wringing over the fact this business has been taken over by Big Tobacco and many investors will worry about the ESG implications of the transaction. But probably not enough to vote down the deal. The government could yet step in.

 

Shares in Airbnb fell in after-hours trading despite a 300% pop in revenues. Despite the strong figures for the second quarter, the company warned about the impact of the delta variant. Meanwhile Disney reported a blowout quarter, with parks returning to profitability for the first time since the pandemic struck. Earnings came in at $0.80 per share vs the $0.55 expected as subscriber figures for Disney+ also beat forecasts at 116m. 

 

On Tuesday we spoke about the demand problem for oil, specifically that too much hope was being placed on the recovery in H2. Right on cue, the International Energy Agency (IEA) sharply downgraded its demand outlook for the rest of 2021 due to the worsening progress of the pandemic. It warned that new restrictions in consuming countries, particularly in Asia, will reduce mobility and oil use. Nevertheless, it says the ongoing OPEC+ restraint will keep the market in balance for now, though a surplus may be seen in 2022 if members and other producers ramp up.  

 

According to the IEA, oil demand is set to rise by 5.3m bpd 2021 and by an additional 3.2m bpd in 2022. OPEC thinks demand should rise 6m bpd in 2021, with 5bpd of that figure due to arrive in H2. It seems OPEC may need to revise its figures for the rest of the year, though it seems the IEA believes the market should remain in equilibrium with existing production cuts.  This pretty much reflects the sentiment in the oil market right now, with prices retreating ~10% since the early July peak, as traders have taken a dimmer view of the demand story. 

 

Transitory? After the consumer price inflation held at a 13-year high, US producer price inflation rose to 6.2% vs 5.6% expected, with the core month-on-month reading up to 1% against +0.5% forecast. That left those clinging to the CPI-data-showed-inflation-has-peaked narrative a little uneasy. Also please note that a major port in China – the world’s third busiest – is now closed because of a solitary coronavirus case, which will mean ongoing supply chain disruptions, further pressuring PPI and thus CPI higher. 

 

Chart: Cable starting to look wobbly at 1.38 as it flirts with the 200-day SMA following a bearish MACD crossover on the daily chart.

GBPUSD Chart 13.08.2021

Bank of England maintains dovish stance, raises inflation forecasts

The Bank of England today confirmed it would continue with its economy-boosting measures but said higher inflation is on the way.

Bank of England statement

Staying the course

Today, the Bank of England Monetary Policy Committee (MPC) voted to keep the historic low-interest rate in place. There will be no move from the current 0.1% base rate. Additionally, members voted 7-1 to keep the £895bn quantitative easing programme in place.

Policymakers struck a cautiously optimistic tone at today’s Bank of England press conference. However, Governor Bailey and council members did signal policy will be subject to modest tightening from here on out.

The BoE also raised its inflation forecasts. Economists were expecting this, given CPI has passed targets for two consecutive months.

In its monetary policy report, the Bank of England said: “Overall, Bank staff now expect inflation to rise materially further in the near term, temporarily reaching 4% in 2021 Q4 and 2022 Q1, 1½ percentage points higher than in the May projection.”

The report also outlined that the recent acceleration in CPI inflation is mainly due to volatility in energy and the prices of other goods. In the medium term, the Bank said it expects inflation to peter out and fall back to around its current 2% target.

Looking to GDP, the BoE forecasts 5% growth in Q2 2021 after a 1.6% contraction in the first quarter. This is slightly above what the Bank predicted in its May report. Even so, this would leave UK GDP some 4% lower than pre-pandemic levels.

GDP growth is forecast at 3% for Q3, in response to thousands of workers needing to isolate after Delta variant COVID-19 cases surged across the UK in recent weeks. However, COVID cases and hospitalisations have broadly fallen in the last month, giving some hope that the “pingdemic” is just a bump on the road to recovery.

According to the MPC, the economy will return to its pre-pandemic levels in the last quarter of the year. The pandemic’s impact is expected to have substantially lessened by then. At this time, GDP growth will cool and return to levels more normally seen in mature economies.

Unwinding QE

Quantitative easing-related purchases will be scaled back once the base rate reaches 0.5%, according to today’s policy outlook. At this time, the Bank will stop investing in maturing UK government bonds, but only if economic conditions are good enough.

This rate is substantially lower than the 1.5% rate earmarked in 2018.

In its policy report, the MPC forecast that its main interest rate would reach 0.5% in the third quarter of 2024, after hitting 0.2% in the third quarter of 2022 and 0.4% for the same period in 2023.

This comes after the Bank of England was recently dubbed “addicted to QE” by a House of Lords committee – something which Governor Bailey strenuously denies.

In all, a fairly positive report for the UK then. Sterling was up around the $1.925 level against the dollar after the Bank’s plans were made public and continued to build momentum at writing.

European stocks mixed ahead of earnings & BoE statement

Morning Note

Investors showed mixed sentiment this morning on a day that promises much in the way of earnings and central bank announcements.

At the time of writing, the FTSE 100 had retreated by over seven points. The DAX and CAC were performing much better, adding 17.8 and 22.38 points respectively. From a pan-European perspective, the Stoxx 50 was trading 17.00 upwards.

Many UK investors are essentially waiting for today’s Bank of England statements. Governor Bailey is due to outline the central bank’s monetary policy at midday today. Inflation is expected to be the day’s running theme.

Inflation has so far overshot established target levels for two consecutive months. The Bank’s response will be critical today. So far, there are two schools of thought predicting what the BoE might do. On one side, economists broadly think Bailey will up inflation targets. Investors, on the other hand, believe that the Bank will stick to a dovish tack, leaving its interest and QE stance unchanged.

UK CPI was up 0.5% in June on a month-by-month basis. This was way ahead of estimates and the fastest CPI growth rate reported since May 2018.

It’s likely the Bank of England is still feeling cautiously optimistic. It has predicted that inflation will peak at 3% in 2021 before falling away next year. The BoE says it has yet to see any evidence that the current acceleration in CPI is anything but transitionary.

Despite the surge in Delta variant COVID-19 cases across the last month, UK infection rates have broadly trended down throughout July and August. That gives some hope that the country will be able to return to full normality quicker than other economies. Pretty much all restrictions have been removed.

Ahead of today’s BoE announcement, GBP/USD had recaptured the 1.390 level. At the time of writing, cable had reached 1.394 and was up 0.19% on the day. Its future course will be decided later when we get more info on the Bank of England’s QE bond-buying stance.

EUR/USD had stayed mostly flat at 1.1837.

In terms of earnings, European large caps reporting today include Siemens, Adidas, Merck, Bayer, Intesa Sanpaolo and WPP.

Looking to US markets, the Nasdaq was showing positive movements, trending up nearly 20 points. The Dow Jones and S&P 500, however, were down pre-market, with the Dow sliding 0.9%. The S&P 500’s downward trend was in the 0.5% region at the time of writing.

On Wall Street, large caps reporting include Square and Virgin Galactic. You can find a rundown of the companies sharing earnings today with our US earnings season calendar.

Asian stocks steady after gaining sports boost

Morning Note

Asian markets gained a reprieve this morning as Chinese money is pumped into equities.

Hong Kong’s Hang Seng Index rose 1.7% in Asian trading on Wednesday morning after being battered on Tuesday as China’s government announced yet another crackdown. This time, online gaming stocks are in the CCP’s sites, which state media has dubbed “spiritual opium”. Restrictions on this sector are expected.

However, some stocks that took the biggest hits yesterday have regained some footing as investors looked to bought during a wider sell-off. Tencent, which dropped 7% yesterday, had gained 6.3%, helping to reverse some of its losses. According to market observers, this was down to an influx of cash from mainland investors, rather than Hong Kong-based traders.

The company has committed to tighter controls to combat child online gaming addictions following the government’s rebuke. Still, not great for its owners who lost as much as $14bn in the recent drop.

Sports stocks are the new hope on Chinese markets. The CCP has announced a massive $775bn sports infrastructure investment plan in the run-up to the 2022 Winter Olympics. It has plans afoot to boost the percentage of Chinese citizens actively participating in sport and physical activity to 38.5% by 2025.

That includes construction of over 2,000 sports parks, fitness centres, and public sports stadiums. A group of sports-related government-backed SMEs is expected to be “cultivated” too.

On the announcement of these plans, sportswear manufacturers Li Ning Co. was up as high as 12% in Asian trading, while Anta Sports Products rose 10%.

Asian markets were also given a bit of a boost by increased Chinese services activity, helping to counteract a slowdown in manufacturing. The latest Caixin services PMI reading came in at 54.9 this morning – up from June’s reading of 50.3.

Turning to European markets, the FTSE100 has started the day on the front foot, rising 26.55 points to 7,137. At 15,666, the German DAX is up 94.65 points, while France’s CAC is also showing positive movements by rising 28.85 points to 6,760.

We’re due services PMI readings today for the EU and UK.

Ahead of tomorrow’s bumper Bank of England announcements, GBP/USD is making its way towards July highs again thanks to the softer dollar. At the time of writing, cable had reached 1.34914 as bulls take control.

Falling UK COVID-19 cases and the success of the nation’s vaccination programme are acting as the pound’s chief support. The EU backing off from threats over perceived legal action threats on the Northern Ireland protocols has also helped. Both the UK and EU are still in negotiations trying to find a solution to the tricky Northern Ireland question.

Gold has reacted positively to the weaker dollar too, helping reverse a three-day downward trend. It’s now heading back towards $1,820, but buyers still remain cautious.

Bitcoin continues to struggle. The crypto looked like it was pulling above $42,000 at the weekend, but as of Wednesday morning, BTC had slumped to around $37,778.

Oil has crawled back above the $70 level after dropping to $69 on WTI contracts yesterday. Rising global Delta variant cases has put pressure on demand recovery, and subsequently prices. Brent is trading at around $72.72, with WTI at $70.65. It’s an uncertain time for crude markets at the moment, although majors like BP, Chevron and ExxonMobil have recorded strong Q2 earnings off the back of strong oil prices in 2021. The next couple of weeks will be crucial for prices.

European stocks to open higher on rebounding risk sentiment

Morning Note

Key European indices are set to open August positively as risk sentiment lightens after last week’s poor close for the markets.

The FTSE100 starts on the front foot, tracking over 70 points higher this morning. The DAX jumps up 112.27 points, while the CAC40 is up by 55.08.

It’s good to see the markets in a broadly confident mood this morning. Asian equities, which performed stolidly last week following a spate of new Chinese regulatory crackdowns, also begin August with strong positive movements. The Hong Kong Hang Seng, for instance, has taken big strides to reach 26,195 at the time of writing – up 270.

Elsewhere, a number of confident earnings reports from global large caps is helping power positive stock market sentiment.

HSBC, for example, reported at the start of Asian trading it had grown profits fourfold this quarter, reaching $5.1bn. Europe’s largest lender’s H1 profits are up 150% year-on-year, totalling $10.8bn. Total revenues, however, are down from $13.1bn in Q1 to $12.6bn. Even so, a very strong quarter for HSBC has been seen.

Rolls-Royce and Taylor-Wimpey are amongst the European firms reporting quarterly earnings today. On Wall Street, technology provider Arista Networks kicks off another busy earnings week later on, while Uber, scandal-rocked Activision Blizzard, GM, and Virgin Galactic all due to share quarterly figures later this week.

Check our US earnings season calendar for more information.

The USD continues its bearish form, with the Dollar Index dropping to the 92 level, after dipping below that. This is the greenback’s worse performance since May and hasn’t been helped by the Fed’s dovish stance on rate hikes.

The weaker dollar has been fairly good news GBP/USD, however. The pairing has climbed to fresh daily tops of 1.3925, helping reclaim territory that slide away on Friday. The pound has been supported by falling Delta variant COVID-19 case numbers in the UK, as well as the softer dollar.

UK PMI data is due this morning although the markets may be anticipating a slowdown in both services and manufacturing output. Labour shortages and higher input costs, similar to those in the US market, may have stymied July’s growth.

Crude oil, both WTI and Brent, drop away from gains made over the weekend. WTI futures are currently trading at around $73.11, while Brent is hovering around the $74.60 area.

Bitcoin has cleared $40,000 this morning, but it did so several times in the last week before falling away again and staying in the $39,000 range. The world’s most popular cryptocurrency has had a tough time sustaining incremental gains last month, so it’ll be interesting to watch BTC price action as August progresses.

UK growth cools, British Land resumes dividend

Morning Note

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.

Equities hold ranges, gold jumps as US real yields sink

Morning Note

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.

Stocks stage fightback, Trump raises China stakes

Morning Note

US stocks staged a mighty comeback and closed at the highs as beaten-up financials managed to recover ground. The S&P 500 traded under the 50% retracement level at 2790, dipping as low as 2766 as US jobless claims rose by another 3m, before rallying to close up 1% at 2852. Financials, which have failed to really take part in the rally since March, led the way as Wells Fargo rose 6.8% and Bank of America and JPMorgan both rallied 4%. Energy stocks also firmed as oil prices rallied.

European indices were softer on Thursday but managed to recover a little ground in early trade on Friday. The FTSE 100 rose over 1% to clear 5,800, with the DAX up a similar amount and trying gamely to recover 10,500. Asian shares have largely drifted into the weekend with no clear direction.

The rally for Wall Street snapped a 3-day losing streak but the indices are still on for the worst weekly performance since mid-March. We’re still in this tug-of-war phase as the real-world impacts of Covid-19 run up against the stimulus and central bank support. Markets are still trying to figure it all out.  SPX needs to rally to 2915 today to finish the week flat, while the FTSE 100 requires 5,935.

The deterioration in US-China relations is another worry for investors, with Donald Trump saying he doesn’t even want to speak to President Xi and threated to ‘cut off’ China ties. He’s not angry, he just ‘very disappointed’. As I’ve pointed out in a past note, in an election year with the economy suffering from the worst recession in memory, Trump is likely to go very hard against China, particularly as this has bi-partisan support and polls indicate anti-China feeling running high. This will be partly a political game, partly what the US ought to be doing anyway, but either way it will likely provide yet another downside risk for investors.

Neckline support of the head and shoulders pattern is feeling pressure but yesterday’s rally is positive for bulls. Expect further push-and-pull around this region.

Overnight data showed Chinese factory output rise while consumer demand slowed. Retail sales declined 7.5% vs 7% expected in April. US retail sales today  are forecast at -12%, or -8.6% for the core reading.

Oil put on a good show with front month WTI rising above $28. The August WTI crude oil contract trades a little higher than $29, meaning the contango spread has narrowed by two-thirds in the last week. Price action suggests traders are far less worried about the underlying demand and storage constraints that have dogged prices for the last couple of months.

In FX, as flagged sterling tested the Apr 6th low, which has held for the time being and GBPUSD has recovered the 1.22 handle. Risks look to the downside, but short-term momentum looks like we could see a nudge up.

Gold has driven off the support and was last up a $1736. Whilst Covid-19 is initially a deflationary shock (negative for gold), the extent to which governments have fired up the printing presses and the fact that monetization of this debt seems the only way out, a significant period of inflation could be around the corner. Gold is still the best hedge against inflation. The Apr 23rd high at $1738 is first test before a retest of the previous top at $1747 and then $1750 to call for a breakout to $1800.

Equity markets track lower after Wall St falls

Morning Note

Public Health England has approved an antibody test from Roche, which could mean easing lockdown restrictions sooner. A junior health minister described it as a ‘game changer’. We shall see – the record on testing so far has been sketchy but it’s a step in the right direction. Russia has also announced positive trials of a treatment drug favipiravi, which was first developed under the name Avigan in Japan. Despite some good news around these drugs however, it seems markets are waking up to the economic reality at last.

US Treasury yields fell and equity indices rolled over, with the S&P 500 down 1.75% at 2820 and the Dow dropping 500 points as hopes for a swift recovery from the Covid-19 recession faded.

Fed chair Jay Powell painted a pretty gloomy picture, He warned that additional policy measures may be needed to avoid an extended period of low productivity. He is erring towards doing more not less. Nothing explicit on negative rates, just repeating the preference for not using them.

As we near the end of earnings season, the recent gains look like over exuberance. David Tepper, a billionaire hedge fund guy, said it’s the second-most overvalued market ever – only ‘99 was worse. Certainly at 20 times forward earnings, it looks pricey – the priciest in 18 years. Earnings in Q1 for S&P 500 companies are down 14% and are seen weaker all year, with Q2 especially hard hit. Already this is the 4th quarter in 5 of year-over-year earnings declines. Valuations are starting to look exceedingly optimistic at these levels – 2600 on SPX is a lot more realistic than 3000.  We may not retest the lows, but a significant pullback from the post-trough highs around the 61.8% level seems likely.

At the lows SPX tested the 2790 level, the 50% retracement. MACD crossover confirmed.

Asian markets tracked the fall on Wall Street and European bourses traded broadly weaker on Thursday.

WTI and Brent futures spiked after a surprise draw on US oil stocks but have pared gains. EIA figures showed a 745k barrel drawdown vs an expected build of more than 4m barrels. Stocks at the key Cushing, Oklahoma hub fell by 3m barrels, the first such draw since February.

The Commodity Futures Trading Commission warned brokers and clearing houses “to prepare for the possibility that certain contracts may continue to experience extreme market volatility, low liquidity and possibly negative pricing”. The June WTI contract expires on May 19th.

In FX, the pound weakened further as the risk-off trade hit currency markets. Andrew Bailey, the Bank of England governor, said markets’ basic assumption was that there would more QE.

GBPUSD breached the 1.2250 support and headed for the bottom of the range and is now on track to knock on the Apr 6th low around 1.2160.

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