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Stocks, shopping and borrowing all rise
Stocks are firmer on Friday though major indices continue to show indecision as they rotate around the 50-60% retracement of the recent pullback through the second week of June. Economic data remains challenging and in the US at least there are fears about rising case numbers.
US jobless claims were disappointingly high, missing expectations for both initial and continuing claims. Following the surprisingly good nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m.
The slowing in the rate of change is a concern – hiring is not really outpacing firing at a fast-enough pace to be confident of a decent recovery. You would prefer to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.
US Covid-19 cases climb, UK retail sales jump in May
Worries about the spread of the disease persist, though second wave fears are not exerting too much pressure as investors start to get used to rising case numbers – remember it’s not cases that count, it’s the lockdown and people’s fear of going out that hurts the economy and corporate earnings. California and Florida both registered their biggest one-day rise in cases. As previously stated, I don’t believe there is the will to enforce blanket lockdowns again.
UK retail sales rose 12% in May, bouncing back from the 18% decline in April as we rushed to DIY stores but are still 13% down on February levels before the pandemic struck these shores. Australia also posted a strong bounce in retail sales of more than 16%.
Will US quadruple witching boost volatility for range bound stocks?
Stocks were broadly weaker yesterday in Europe and the US. Shares across Europe have opened higher on Friday and remain set to end the week up. As per yesterday’s note, the major indices remain in consolidation mode around the middle of the range from the Jun 8/9th peaks to the Jun 15th lows. The S&P 500 finished at 3115, on the 61.8% retracement of the move.
Trading around the 6240 level this morning the FTSE 100 is similarly placed but also flirting with the 50% retracement of the Jan-Mar drawdown. Remember it’s quadruple witching in US when options and futures on indices and equities expire, so there can be a lot more volume and volatility.
UK public debt is now higher than GDP, official data this morning shows. That’s not happened since the 1960s as the nation recovered from the second world war and highlights the damage being wrought on the public finances by the pandemic response. Picking up from the Bank of England yesterday, which increased QE by £100bn, the amount of issuance may require additional asset purchases from the central bank.
Sterling bears eye 1.22 in the wake of BoE decision
Sterling broke to almost three-week lows yesterday, with GBPUSD testing the 1.24 round number support in the wake of the BoE decision. This morning the 50-day simple moving average at 1.2430 is acting as support but having already broken down through the key support levels the path to 1.22 is open again. The euro was also making fresh lows for June, with the 1.12 round number holding for the time being after a breach of the 1.1230 area at the 23.6% of the 2014-2017 top-to-bottom move.
OPEC compliance promises lift oil
Oil is higher, with WTI (Aug) progressing back towards the top of the recent consolidation range close to the $40 level, which may act as an important psychological level. Iraq and Kazakhstan have set out how they will not only comply with OPEC cuts but also compensate for overproduction in May. Other ‘underperforming participants’ have until Jun 22nd to outline how they will compensate for overproduction following Thursday’s Joint Ministerial Monitoring Committee (JMMC). OPEC conformity stood at 87% in May and the JMMC did not recommend extending the maximum level of cuts into August.
Hopes that non-compliant nations will make up for cuts helped raise sentiment around crude and sent Brent into backwardation for the first time since the beginning of March, with August now trading a few cents above September and October contracts.
Stocks stage mild comeback after tough day, US jobless claims in focus
Stocks suffered yesterday as bulls hopes ran up against a wall of bad economic data, another drop in oil prices and banks’ earnings reports, but have recovered some composure in early trade today.
Wall Street fell about 2%, with the S&P 500 back under 2800 after a couple of shocking economic data releases ratcheted up the pressure on the bulls to find reasons to sustain the rally. US retail sales were sharply lower, falling around 8.7% month on month, the sharpest fall since it was first tracked in 1992. Britain followed suit, with UK retails down 4.3% in March from the same month a year ago, marking the steepest decline since records began in 1995.
Meanwhile the Empire State Manufacturing Index, a gauge of factory activity in New York state recorded its steepest ever fall to hit –78.2, far worse than the –32 expected. April will be even worse for these data sets, as much of the US was not shut down for the entirety of the survey period.
Today’s focus will be the US weekly initial jobless claims, expected to show again that more than 5m Americans claiming unemployment insurance last week. US 2yr yields sank to an 8-yr low on the news to 0.195% whilst stocks fell across the board amid a very weak day for risk.
The FTSE 100 broke down through the rising trend support line to close under 5600. In early trade Thursday the index was up 1%. Travel & leisure at the top indicated a better day for risk, but there is a caution about the move. I think we are back to looking for more good news on the virus now.
We’ve also had a bunch of bank earnings out that weighed on sentiment. With the largest US banks pretty well done with earnings, what is obvious is that the single biggest take-home is the extent of the increase in loss reserves. It’s a funny situation where the main thing we’ve learned also leaves with the biggest unanswered question – will these loan loss provisions be enough?
At Bank of America, credit loss provisions rose $3.8bn, from $1bn in the first quarter of 2019 to $4.8bn today. Citigroup hiked its provisions to $7bn from $2bn, a much bigger hike than others likely down to exposure to credit card debt, which is going to be probably the nastiest area of credit. Wells Fargo raised its reserves by $3.1bn and took a $950 impairment charge. JPMorgan provisions for losses jumped to $8.3bn.
Trading revenues were strong across the board after the massive dislocation in markets, huge volatility and widening of spreads. The strength there makes it a good time to be setting aside cash for loan loss provisions.
Couple of points to make:
1) The big banks are all to slightly varying degrees taking big upfront provisions for expected losses. This looks prudent – better to front load the bad news now so they can over deliver later down the line. If you’ve had a good quarter in trading – which they have – it’s sensible to effectively take those profits and put to one side now. Good news today won’t mean much, better to hold it back.
2) It’s guesswork. We still don’t know what kind of damage the economy will suffer, and we don’t know how quickly it can bounce back. That is to say; we don’t know the extent or duration of economic recession. Banks have been keen to stress the provisions for loan losses could well increase. JPM says it could be worth $45bn this year, implying a significant upward revision of loan losses in the worst-case scenario.
On the coronavirus outbreak itself, UK health secretary Matt Hancock says this morning that the country is reaching its peak but lifting the lockdown now would be premature. Some good news, but there is no time for celebration.
On the shape of the recovery, the W-shape is gaining more credence. The Economist Intelligence Unit is warning of a recession to be followed by a ‘possibly much worse’ downturn sparked by a sovereign debt crisis among highly indebted countries. Helen Thomas of BlondeMoney and a regular contributor to XRay, thinks a U shape is most likely. “The economic outlook is grim, with a double dip recession or even absolute stagnation the most likely outcome,” she says.
Oil took another dive yesterday as the International Energy Agency (IEA) warned that demand in 2020 would crumble, whilst US inventory data showed more massive builds of crude. The IEA said demand would fall by 29m bpd in April, around 30% of global demand, and by 9.3m bpd across the whole of 2020. The Energy Information Administration in the US said crude oil inventories rose 19.248m barrels vs 12.7 million barrels expected, the largest stockpile build on record. WTI plunged as low as $19.20, marking a fresh 18-year low.
In FX, the US dollar is staging a fightback as the dire economic outlook again makes it look like the least ugly sister. GBPUSD broke down through the 1.25 level and EURUSD has retreated below 1.09. For GBP we are monitoring the events around Brexit – the UK is keen to get on with it, whilst the EU and IMF would prefer to wait. Expect this to lead to fresh jitters around GBP once the coronavirus news starts to drop down the running order.
EasyJet shares jumped 8% expected to lose as much as £380m in the first half and has no idea when flights will resume but added that it can survive an extended grounding with a notional cash balance to last 9 months. That would be an absolute worst-case scenario and would burn through about £3bn – slightly more than £1bn for every quarter of grounding is expected. Management say they have already raised £1bn to cover 3 months initially. Investors are relieved for now and will be hopeful that once the lockdown ends people start booking up flights again.