US-China trade deal incoming, Quiz has more questions than answers

Morning Note

Just when you thought it was safe to go back in the water…it turns out that tariffs won’t be lifted as part of the phase one trade deal between the US and China. 

Weighing on risk appetite, reports yesterday said the US will likely keep tariffs on Chinese goods until after the November presidential election, at which point they will review compliance with the phase one deal. It’s a deal Jim, but not as we know it: tariffs are here to stay. I don’t think Big Ben would be bonging for this one, if the Americans have an equivalent.

It suggests there will be limited progress in 2020 – perhaps this is as good as it gets? Indeed, it’s possible that instead we see Trump threaten China more, dangling the prospect of abandoning the deal and taking an even tougher stance going into the election. What is not clear the extent to which this will hurt growth rates and may contribute to upwards pressure on inflation. 

Treasury Sec Steve Mnuchin confirmed that tariffs are here to stay, for now at least. “These tariffs will stay in place until there is a Phase 2. If the president gets a Phase 2 in place quickly, he’ll consider releasing tariffs as part of Phase 2,” he said. Mnuchin also said there will be a firm dispute resolution mechanism. Whilst not specifying the election, it is unlikely we will get a quick phase two deal. The election seems an opportune moment to re-evaluate. Moreover Trump has an election and impeachment to fight. 

We have certain risks now more clearly delineated (with no doubt more twists and details to come today).

  • the key risk is that phase one is just not as good as the market hoped for – either in content or the processes, timings and mechanisms therein
  • China needs to buy $200bn of goods and services over 2 years to comply. Failure to comply risks more tariffs being slapped on, or abandoning the deal. Before the trade war started, in 2017 China bought nearly $187bn in US goods and services.
  • Trump could well use this deal only as further leverage, threatening more aggressive tariffs, leaving this deal in tatter
  • with phase one baked in, we’d hoped for immediate progress on phase two, but this seems very tricky (though not impossible) with phase one still effectively incomplete – i.e with tariffs still imposed. 

However Treasury Sec Mnuchin said tariffs will be in place until phase two is agreed, indicating there will be efforts to progress talks speedily – but good intentions don’t butter many parsnips.

US indices retreated from record intra-day highs on the news. The Dow finished up 0.1% at 28,940 having earlier risen above 29,000, boosted by a record year for JPMorgan. The S&P and Nasdaq were both a shade lower at the close having hit fresh intra-day highs in the session.

Treasury yields were a touch lower after US inflation rose less than expected in Dec, indicating the Fed’s decision to cut was – in their narrow view of inflation – the correct decision.

Europe – markets are flat and directionless again as investors wait for the signing of the trade deal today.

Elsewhere, in FX it’s a ghost town. Although we are seeing just a whisper of the dollar weakening this morning, sideways markets dominate – EURUSD stalling around the 1.113/4 region, but uptrend remains intact. GBPUSD has regained 1.30 but with little momentum. USDJPY is still flirting a few pips either side of 1.10. Gold steady at $1550.

Oil bears remain in control with WTI now struggling to bind to the $58 handle. 

On tap today:

BoE’s Michael Saunders to speak. (Dove, voted for cut at last 2 meetings) who is likely to reiterate the dovish rhetoric we’ve seen from fellow MPC members lately. 

German GDP 9am. More weakness. 

U.K. inflation 09:30 – likely not to be chief driver now as markets think the BoE is close to cutting come what may. 

Over the pond, earnings seasons continues with Goldman Sachs numbers due later. After the earnings and revenue beat for JPM, particularly on investment banking and fixed income, the GS Q4 figures may be better than expected. GS has markedly lagged JPM over the last two years but there may be signs that it can claw back some ground.  GS stock has not got near all-time highs again but is starting to build upwards momentum. 

Q3 EPS came in at $4.79 versus the $4.86 expected, and down sharply from the $6.28 registered in Q3 2018 and from $5.81 in Q2 2019. The lack of IPO activity saw revenues in its Investment Banking division down 15%. Return on tangible equity slipped to 9.5% in Q3, leaving the nine months YTD figure at 11%. 

For Q4, the forecast EPS is $5.50 based on 22 estimates, according to the platform.  

UK equities 

Persimmon reported lower revenues as it tries to improve build quality. They’re learning, slowly. FY numbers seem in line with expectations. Shares were flat to slightly negative.

Ashmore shares rose after it reported +7.1% in assets under management to $91.9bn, with net inflows of $3.3bn.

Quiz has more questions than answers right now. Christmas trading was worse than expected, but cost-cutting and a disciplined approach to promotional activity means profits should just hold up as guided.

Group revenue fell 9.3%, hit by a 7% decline in its U.K. physical stores, both standalone and concessions. There does seem to have been a problem with certain third party websites, which led to a 14.8% decline in online revenues as Quiz terminated relationships with these partners. Sales via Quiz’s own brand websites rose 5.9%.

It’s been a tough start to life on the stock market for this little fledgling. It’s been more of a turkey than Aston Martin, with shares worth less than a tenth of what they were when it floated in 2017.

For the six months to the end of September Quiz made a loss of £6.8m with group revenues down 5%. Online sales were steady, with international sales marginally higher. No surprise the UK high street was the trouble spot with sales down 11% – the fact this has moderated to -7% is the about the only thing management can cling to.

Store closures are certain. Up to half could go from the current estate of 75 stores, 171 concessions. Quiz has battled a very tough retail market, and the disasters at House of Fraser and Debenhams have hit the brand hard via its concessions. It also seems to have made some wayward decisions with third party websites. Shares sank 13% on the open to 16p.

Europe lower as US-China trade deal nears completion

Morning Note

Game on: a phase one deal is ready to be signed, we’re just not that sure what’s in it. Sentiment turned risk-on after the US said it will remove China from its list of currency manipulators. US-Iran tensions simmer but have taken a back seat. Europe is off to a softer start though after a mixed bag overnight in Asia.

A commitment by China not to engage in competitive devaluations is expected in the trade agreement document to be signed this week. In short term, it’s almost there – the news is good. 

But just because the US is removing the currency manipulator tag from China don’t mean it can’t talk tough on trade later on – how will it be seen if the renminbi depreciates again? Again, enforcement is the problem. And with the election now heaving into view, and a phase one deal complete, there will be pressure to take a hard line with China with regards any future deal and concessions.  This is a truce, not a peace treaty.

Moreover, one final doubt that will keep investors waiting and watching – we don’t as yet know all the details of the deal. According to Politico, it will include provisions for China to buy more US energy and manufactured goods totalling $200bn over two years.

It’s been a tentative start to trade in Europe, with the major indices selling off on the open, although investors ought to be buoyed by trade optimism and fresh records on Wall Street. Asia has been mixed and a little lacklustre overnight, although the ASX has pushed higher following a 17.7% leap in Chinese imports (exports +9%).

The S&P 500 rallied 0.7% to close at a new record 3,288.13. The Nasdaq also broke new ground, up 1% to 9,273.93. The Dow rose 83 points to close just a little above 28,900. 29k is in view again, this time for more than a brief minute.

The standout performer was Tesla, which breezed past $500 and carried right on to $524, a near 10% gain on the day. Short covering is helping to lift shares. It’s fair to say shorts are being crushed and there is still a sizeable portion of the free float out on loan – could $600 before long. 

We’ve felt the risk-on trade in FX too as USDJPY has broken clear of key multi-year resistance to hit 110 for the first time since May last year. The breach of the 200-week moving average around 109.70/80, following a move clear of the descending trend line and clearance of the 200-day moving average around 109.50/60 sets up a move towards 112.

GBPUSD is struggling to keep its head above 1.30 and was at 1.2960. Sterling is offered as the market aggressively reprices the likelihood of the Bank of England cutting rates this month.

EURUSD stalled at 1.1140. This rally off the lows since September is proving a long hard slog but the bullish is just about dominating.

US CPI inflation data is the chief eco release to watch. The Fed has made it very obvious it’s not bothered if inflation rises. A weak reading only judges the Fed to cut again, whilst a string printer justifies (in the Fed’s eyes) the decision to cut last year.  CPI MoM for Dec seen at +0.3%, flat from the previous month, with core at +0.2%. This would equate to year-on-year inflation of 2.4%, up from 2.1% the previous month, with core seen steady at 2.3%.

The US move remove China from its currency most wanted list scrubbed another $10 off gold, with prices now moving around $1540.

Oil remains in a downward spiral. Bulls failed to defend $59 and were now testing the $58 support level coinciding with the 50% retracement of the move up off the lows since Oct 2019. For all it’s worth it’s got a $55 handle written on it.

Stocks advance as trade deal looms, pound slips as BoE doves circle

Morning Note

European stocks are a tad higher after a lacklustre end to the week. US-China trade deal will be the main talking point for risk. Early doors Monday the FTSE 100 is back above 7600 and the DAX is north of 13,500 – will that all-time high be achieved this week? Asia has been higher, with Japan closed for a holiday. On Friday, US stocks fell after the bell as bulls tried to shake out the weaker hands before staging the rally that took the Dow to 29k. But gains were quickly unwound and selling built through the day to close -133pts. US futures are pointing a touch higher today.

The US-China trade deal is the focal point. White House officials are adamant it’s a fait accompli, save translating the 86-page document into Chinese. It’s expected to be signed on Wednesday.

With the phase one deal baked in, what markets want to know is how quickly – if at all – the two sides can move things forward to phase 2. There’s no doubt that building on this deal is going to take a lot more effort and compromise. Of course, phase one could unravel at any moment if either side wants to walk. Enforcement is an issue too.

It’s easy to miss it, but US earnings season gets underway this week as the big banks begin reporting on Jan 14th. Weak corporate earnings growth could dent optimism around US stocks, but with the fourth quarter of 2019 out of the way, the market’s real focus is going to be whether we get the 10% earnings growth forecast in 2020.  As ever the focus is on the guidance.

Consensus estimates indicate a 1-2% decline in Q4 earnings, but the tendency to beat expectations suggests we will see earnings growth, albeit small.  

Last year we saw multiple expansion massively outweigh earnings growth as the driver of the 28% rise in the S&P 500 last year. This poses problems as it means valuations are already rather stretched and reliant on strong EPS growth in 2020. The S&P 500 forward PE has jumped to 19 from about 14 at the beginning of 2019, having averaged 16-17 over the last five years.

Starting to see some focus on the US presidential election with the key Iowa Caucus on Feb 3rd. A poll last week showed Sanders leading Warren.

Oil – speculative long positioning hasn’t been this stretched since 2018, partially explaining why we saw such a sharp turnaround last week. Net longs rose 567k contracts. WTI has recovered the $59 handle but weakness is evident throughout. Saudi energy minister on the wires today saying that OPEC+ will take a decision on extending cuts in March.

Gold – likewise long positions were stretched, as net longs rose to 322k. We’ve not seen such a crowded long trade in years. Prices holding around the $1550 level for the time being.

In FX, still lots of uncertainty about the dollar in the wake of that NFP release. We have chewed on this but ultimately it doesn’t tell us much new. We have an average earnings figure that was well short of expectations, which will tame any tentative Fed hawks as it suggests inflation won’t run hot. Payrolls were a tad light at 145k but not by enough to be a worry about USA plc. Wages though were substantially short at 2.9% annual vs 3.1% expected (0.1% vs 0.3% monthly). Unemployment steady at 3.5%. Revisions to the last two months were modest at -14k. 

A dule of doves? Or a cote of doves? Either way, they’re gathering at Threadneedle St. A cut is coming. The pound is under pressure at $1.30, briefly taking a $1.29 handle, as Bank of England doves circle. MPC member Gertjan Vlieghe said he’d like vote to cut if data doesn’t show a turnaround sharpish. He’s joined Carney and Tenreyro in arguing that more stimulus may be needed sooner rather than later. One senses the Bank doesn’t want to get behind the curve and is seeking to get a jump on markets whilst still teeing up the cut. Michael Saunders – who along with Jonathan Haskell has voted to cut at the last two MPC meetings – speaks on Wed and will no doubt reiterate his belief a cut is needed now. 

Doubts about the UK’s ability to negotiate a trade deal with the EU this year are dragging on the pound. On tap today – November month Industrial Production, Manufacturing Production, monthly GDP and trade numbers will be a smorgasbord if delights but not the main course.

USDJPY is stalling at 109.60. Having cleared the 200-day and other MAs bulls seem to have now decisively broken resistance on the trend line drawn from the falling highs since the swing high of Oct 2018, at 109.50. Long term 61% Fib level to cross at 109.60 where we have seen rallies hit a wall several times lately. This area is offering a decent amount of resistance as a result but if taken out could see a sharp spike higher. The 200-week moving average sits just above at 109.70/80 – a break here calls for a sustained drive back to 112. EURUSD is holding a 1.11 having bounced off key trend support and the 50-day SMA.

Stocks firm before NFP, Dax bulls eye all time high

Morning Note

Fading Middle East tensions and a US-China trade deal so close you can smell it helped lift the three major US indices to record highs yesterday.

The Dow rallied 200pts and got within 12pts of breaking the 29k level. Overnight futures prices have ramped higher, taking the Dow through this level and indicating it could open around 29,040 when the cash equity market opens. The S&P 500 ran into a brick wall at 3275 but futures imply a breach today on the open to 3283. This steamroller is not one to get in front off to pick up pennies.

Apple shares smashed new all-time highs to hit $310 with data showing an 18% surge in China sales. The stock has already rerated to trade about 25x forward – much upside left? Needs solid EPS growth which I think we will get in Q4. We’ve already had decent indications from the Services side of the business indicating that its pivot to being more of a Services business is in full swing. App store customers spent a record $1.42bn between Christmas and New Year, 16% up on last year, the company has said. Management also revealed that Apple News is drawing over 100m monthly active users across the US, UK, Canada and Australia. This is all to the good – Services margins are about double that for the rest of the business and will mean re-rating of the stock going forward. 

Asia has been broadly higher and European equity markets are on a firm footing again.

The DAX is looking to open higher, through 13,520 adding to yesterday’s 1.3% gain. A tilt at the all-time high and a breach of 13,600 is on the cards if sentiment holds.

Today’s nonfarm payrolls are the main economic event. Markets anticipate payrolls +162k, with average earnings +0.2% and unemployment at 3.5%.

Remember last month a blowout jobs number sent equities higher along with the US dollar and Treasury yields, as it suggested the US economy was doing better than many corners of the market feared. The headline print was miles ahead of expectations, coming in at 266k vs 180k expected. Unemployment at 3.5% was exceptionally strong, too.  September was revised up 13k to 193k, while October was also revised higher by 28k to 156k. Private payrolls also very strong at 254k. Should we worry about the Fed pivoting again? I don’t think so and the market clearly thinks the same.

The Fed can stand this sort of hot reading for a while yet – jobs growth is averaging only 180k this year vs 223k last year. And whatever privately you might think about whether the Fed should be maintaining an easing bias in this environment, it’s made it very clear that it will take a sustained and pronounced rise in inflation to warrant a hike.

The Fed has made it clear it will let inflation and the economy run hot, so today’s numbers can’t really miss as far as equities are concerned. A weak reading only raises prospect of quicker policy response and may lead to the USD handing back some of the recent gains. 

Oil remains weaker having taken a decisive step under $60 to trade through the bottom of the rising channel it’s tracked since Oct. Support is clear at $59, where our lower trend line meets the 50-day moving average, and this may be where longs stage their defence.

Gold likewise seems to have based for the time being with support holding around $1545. In early European trade we saw a push back to $1550. Real yields are not supportive of pricing as they creep back higher.

In FX, the dollar is still bid. USDJPY is facing double resistance. Having cleared the 200-day and other MAs bulls are looking to break the trend line drawn from the falling highs since the swing high of Oct 2018, at 109.50. Then there is long term 61% Fib level to cross at 109.60 where we have seen rallies hit a wall several times lately. This area is offering a decent amount of resistance as a result but if taken out could see a sharp spike higher.
EURUSD was little changed at 1.11090. Yesterday’s doji candle looks more like indecision than reversal but having touched on the 50-day moving average and rejected it, bulls may sniff something. However the momentum remains with the bears.

GBPUSD has come off its lows to trade at 1.3080, following Mark Carney’s outgoing speech which the market decided was more dovish than before. He’s on the way out anyway, two doves are already voting for cuts – the BoE will cut this year. What Carney says is no longer relevant.

Stocks bounce, oil + gold rallies fizzle

Morning Note

There has been an abrupt reversal in risk appetite after Donald Trump’s measured respond to the Iranian strikes. Far from stoking tensions, he used the moment to step back from the brink, saying Iran appears to be standing down and raising economic sanctions. It looks as we called it – Iran saves face with those air strikes but the regime made damn sure the US wouldn’t escalate. In short, it looks like the shooting war is over for now, but there is always the potential for escalation at any point. But the relative calm should mean the focus will come back to the economic data and US-China trade deal.

US stocks made gains as investors turned risk-on with the Nasdaq setting a fresh intra-day and closing high, rising 0.7%. The S&P 500 made a new intra-day high, but dipped at the death on some sketchy reports of rockets being fired in Baghdad to finish 0.5% higher at 3,253. The Dow’s gains were held in check by Boeing but still rallied 161pts to mark a near 700-pt swing off the lows of the day hit before the cash equity market opened.

On Thursday, US stock futures point to modest gains. Asia rose overnight with the Nikkei jumping more than 2%.

European markets won’t miss out on the party and are set to bounce amid this broad relief rally. The DAX is looking to open up about 100pts higher around 13,445 while the FTSE is shaping to rally 30pts for a 7600 handle.

Oil has completed an 8% round trip to $65 and then back below $60. Certainly the geopolitical risk premium is vastly diminished, but the genie’s out of the bottle and we may expect the gently rising slope of price action to continue once it bases. Yesterday’s outside day bearish engulfing candle points to near-term downside risks. Crude prices are starting to test 50% Fib level of the decline from the 2018 high to the low the same year around $59.60, with the 50-day MA coming in at $59. Even the lower end of the uptrend channel is starting to come into view – could start to see a bounce but hard to say when the base is found. Bearish US inventory data added to the pressure on oil prices as EIA data showed a build of 1.2m barrels, following draws for the last three weeks.

Gold was also substantially weaker, slipping to the $1545 region having earlier smashed through $1600. Another bearish engulfing candle suggests near term weakness and the rout has continued into today’s session.

USDJPY also shows a big engulfing candle – this time bullish –  pointing to the recent downward move ending and offering near-term upside potential. The falling trend line from the 2018 high is coming into play and offering resistance around 109.30. Clearance of the 200-day moving average is bullish.

Elsewhere in fx the euro and sterling are softer vs the buck but not tumbling. GBPUSD is finding round number support at 1.31 and has rallied from last evening’s lows. The failure of EURUSD to break 1.12 to the upside continues to back a bearish near term view but the extent of the pullback is up for debate. Rising trend support around the 1.110 has been tested and held for now. On the 4-hr chart the hammer candle points to a bullish reversal on the rising lower trend line of our channel. 4hr moving averages turning south however.

Oil, havens retreat as Iran waits

Morning Note

Markets can be absurdly quick to discount risk and recover from geopolitical spasms, particularly those in the Middle East. US stocks recovered to finish higher on Monday, bouncing back from their worst day in a month on Friday and despite weakness in Europe. The Dow rallied from a 200-pt drop to end up 68.5 pts at 28,703. The S&P 500 rose 0.35% to end on 3,246. US 10s rose back above 1.8%.

Yesterday I’d questioned how long the risk-off moves would last as, particularly as it entails fighting the Fed, but the move back into positive territory was even swifter than could be expected.

The lack of any direct response so far from Iran has becalmed markets. I would stick to the view that that the regime is afraid of major open conflict and will seek to avoid it whilst still ‘responding’ in some way. The US seems more ready for the fight but cannot be seen to be the aggressor. But this risk rebound is entirely contingent on Iran being cowed – if it does respond in a way seen to escalate the situation – that is, push the two sides closer to open conflict – then the risk play is unwound pretty sharpish again. 

Iranian foreign minister Zarif – who has been denied a visa to attend the UN Security Council in NY on Thursday, says the country’s response will not be urgent. This has been followed by comments from the Supreme Council Sec Shamkhani, who said that the ‘revenge operation’ against the US will be more than one single operation. We will wait and see, but one senses that Iran understands the US means business and needs to tread a tightrope to avoid a full-scale war.

So despite all the chest-thumping and threat of retaliation, the fading in the geopolitical risk in a relative sense has European stocks looking to open higher after a bit of a drubbing on Monday. Having closed at 7575, the FTSE is seen up north of 7600, while the Dax is seen almost 100 pts above 13,200. 

Oil is retreating amid overbought conditions and little in the way of fresh geopolitical or fundamental stimuli to drive further gains. Yesterday’s candle suggests rejection of the $64 handle for the time being and bears may take control now to fade the gap back to the rising channel we’ve been in since the start of Oct. WTI balked at the 61.8% retracement resistance at $63.70 and the failure to overcome the Apr 2019 highs is suggestive that the rally has not got the legs – although we remain in a broad uptrend, bulls have been overextended on this jump. The upside risk remains though from any geopolitical fallout in the Middle East and/or disruption to oil supplies around the Strait of Hormuz. 

Likewise, gold has pulled back from its highs to trade at $1565. The rally for gold is partly geopolitical risk but look to the real US yield curve – 10-yr TIPS are almost negative again. If we see US yields pick up over the coming days back towards 2% for the 10-yr then it could be a fairly brutal unwinding for gold. Speculative net long positioning has jumped above 305k and looks fairly extended and crowded. 

A weaker dollar is helping major peers. GBPUSD has recovered last week’s falls to find support on the 23.6% retracement at 1.3140. Look for this to hold to deliver a rally back to the 1.3250 level we saw at the very start of the year.  

EURUSD also firmer ahead of the CPI flash estimate for the Eurozone at 10am GMT. Forecast at 1.3% vs the 1% last time. The euro remains in a broad uptrend with near-term support on 1.110 and bulls eyeing fresh eyes above 1.1240 once the 23.6% retracement level is cleared at the 1.120 round number. US services ISM survey due later as well – seen at 54.5 from 53.9 last time out. 

Oil and gold spike, risk offered on US-Iran tensions

Morning Note

January has started 2020 with a flurry of risk-off moves as investors seek shelter from the risks of Gulf War III. The US air strike on Iran’s top general is the major focus for the markets, particularly energy markets. The killing has lit a fire under oil and gold as US-Iran tensions necessitate a higher geopolitical risk premium. 

Risk is offered – European equity market sentiment is weaker on Monday morning and the major indices are lower. US markets closed weaker on Friday. Even in the event of a limited conflict in the region, I would question just how long this will persist when it entails leaning against the Fed, which looks more than ever like its happy to cut to the bone to let the economy run hot and drive inflation to 2%. 

WTI spiked north of $64 but has failed to make a sustained push beyond the May 2019 highs. For this to really make a difference we should be looking for a rally above the Apr 19 highs at $66.60. If that does not get taken out then we may consider the gap to be open to filling. Brent has topped $70 for the first time in three months but again we are looking to the May 19 peaks above $73 to signal a step-change. Fundamentally oil markets are just not as exposed to oil price shocks as they were in days gone by. US shale and a host of production sources coming on stream mean the threat to global supplies from a Middle East conflict is, though significant, not gargantuan.

We have seen similar moves as those seen in the wake of the Iranian attack on Saudi Arabian facilities in September. That time the gap was filled relatively swiftly as there was no retaliation by Riyadh – there was no escalation. We are in a different territory here and a new order of magnitude, but the rules are the same.

The big uncertainties right now for crude centre on the Iranian response to the killing and on that front we should expect some kind of a response. Will Tehran target US bases? It could focus more on shipping in the Strait of Hormuz, but we have already seen attacks on a US base in Kenya killing three and rockets fired into the Green Zone in Baghdad. Iran does not need to use conventional military forces to respond and indeed so far it has not delivered a conventional military response despite all the chest thumping. It does not want to give the US further excuses to bomb it to the ground with an overt reply. Trump is no Obama – enemies believe he will strike. The White House has said it has 52 Iranian targets it will hit if Iran retaliates. European powers are calling for restraint, but the war is already raging. Whether it escalates into large-scale attacks over the coming days and weeks, and grows into a full-blown US-Iran conflict, is very hard to say. But the risk premium genie is out the bottle again. 

Tehran has however all but pulled out of the 2015 nuclear agreement, saying it will no longer limit its centrifuges for enriching uranium. This unleashes the prospect of Iran acquiring nuclear capability in the near future – given the US is already exerting ‘maximum pressure’ this risks pre-emptive actions on the part of the US a la Gulf Wars 1+2. Fundamentally there may be a bigger risk long term by Iran holding back from responding today and focussing on getting a nuclear weapon. My sense – and it is only my sense – is that if Iran responds aggressively now the US could set its nuclear programme back years with targeted strikes. 

Gold is on a tear as a result of the heightened geopolitical risk and depressed US yields. Prices for gold jumped to the highest since 2013, rallying close to $1600 at $1588. We need to look for a break north of that round number and then to $1620, the March 2013 peak.  

Data since the Christmas break has not been overly constructive – the US ISM manufacturing PMI fell for a 5th straight month, slipping to 47.2% in Dec from 48.1% in Nov and marking its worst reading sine Jun 2009. The effects of the trade war are biting – hopes are pinned on the US and China agreeing to the phase one deal this month or we are in for a rollercoaster.

Elsewhere, GBPUSD has settled above 1.30 having been sold off quite heavily over the first two trading days of the year. EURUSD has recovered the 1.1160 level. USDJPY has recovered 108 having taken a seven handle on haven bid. A lot of pressure on that pair as JPY finds bid but it could be overdone. 

This week: 

Brexit withdrawal bill vote – a majority of 80 makes this a formality. 

Fed – Richard Clarida to speak. Minutes from the last FOMC meeting released on Friday show doves have won the day – worries about not hitting the 2% inflation target are prominent. Loretta Mester, a noted hawk, says she is happy to let inflation run above 2% and said accommodation is necessary. The hawks have turned. 

Payrolls – Nonfarm payrolls could well show a softer Dec but seasonal numbers will make it hard to read. Fed is not doing anything but cutting anyway. 

Equities steady with Brexit vote, key US data ahead

Morning Note

There was more Christmas cheer in London as the FTSE 100 broke higher again to finish up at 7573. European equities are looking a touch softer without investors offered little to focus on as the Christmas wind-down commences. However we could yet see more upside to the FTSE on positive flows.

It was the same story on Wall Street as the S&P 500 ground out another record high to close at 3,205. Impeachment, what impeachment? The markets have totally shrugged off the proceedings against the President. It only further delineates the two partisan camps ahead of the presidential election next year.

USMCA trade deal has been backed by the House of Representatives and should pass the Senate soon. China situation looks ok – nothing new to rock the ship. Mnuchin says phase one will be signed in January.

Asia has been mixed overnight with no real momentum from the slow steamroller in the US. Japanese inflation was 0.5% year-on-year, in line. Tokyo closed 0.2% lower. 

Sterling is still on the defensive with GBPUSD briefly taking a 1.29 handle and looking a tad shaky here at 1.30. Looking to consolidate around this round number but the trend remains bearish. 

The Brexit vote takes place in Parliament today – GBP crosses may be sensitive to some of the headlines but by-and-large there ought to be no surprises with the bill expected to pass easily. 

Today sees some pretty important US data in the shape of the Fed’s preferred gauge of inflation, the core PCE numbers. If this ticks up a bit then it will only add to the sense the Fed is right to pause its rate-cutting cycle and could push up yields and the USD. EURUSD looks vulnerable to a downside move should the PCE number beat – that 1.12 level looks increasingly distant and a 1.10 handle may come first. Cable could also be susceptible to pressure if the core PCE emerges as firmer than expected. Core CPI was strong in Nov and suggests core PCE could beat the 1.5% expected. 

UK GDP later expected at 2.1% – secondary to feelings about Brexit and the Boris Bounce for UK assets though. Andrew Bailey of the FCA reported as the new Bank of England governor after Mark Carney. Not an unblemished record but likely a safe pair of hands.

Crude oil continues to roll higher in the uptrend past $61 as it just keeps on making new highs. Gold is static at $1478. 


Shell has delivered an update on the fourth quarter. It expects post-tax impairment charges in the range of $1.7-2.3 billion for Q4, with capex at the lower end of the range. 

Upstream production narrowed, now expected to be between 2,775 and 2,825 thousand barrels of oil equivalent per day, vs 2,650 – 2,800 thousand boe/d guided on Oct 31st. Downstream oil products sales volumes are expected to be between 6,500 and 7,000 thousand barrels per day, vs 6,650 – 7,050 thousand boe/d previously guided. Gas guidance is unchanged – Integrated Gas production is expected to be 920 – 970 thousand boe/d. LNG liquefaction volumes are expected to be 8.8 – 9.4 million tonnes. 

Also watch BATS and IMB after Congress approved a bill to ban tobacco and e-cigarette sales to anyone under the age of 21 in the US. The move is a long time coming but there may be a slight negative reaction. Some 19 states and 500 cities had already raised the minimum age to 21 but it’s indicative of the squeeze on big tobacco. Quite whether making something illegal for youngsters stops them trying it and becoming hooked is another matter, but the pressure to combat marketing aimed at young people ought to help.  

Trump impeached, Bank of England ahead

Morning Note

Discretion is the better part of valour. Caution is preferable to rash bravery. Falstaff’s words probably can be applied to markets as we head into the year-end. For sterling traders today we have the double spectacle of the Queen’s Speech and the Bank of England meeting. Caution and discretion will be the watchwords for the Monetary Policy Committee; less so the government’s likely agenda.

GBPUSD has been steady at 1.3080 but we are seeing a bit of bid for the pound early doors with cable taking a 1.31 handle again to print 1.3170.

The Bank of England decision is today at midday, with no change expected. We could see a dovish bias as the MPC catches up with the market. Market odds of a cut next year have jumped from about 30% last week to more than 75% today. Two dissenters called for a cut last time around, so there is  the intellectual basis to cut rates.

Nevertheless, with the election still not cold, and a new governor about to appointed, the MPC will prefer to wait until 2020 and a little more surety before it cuts. Moreover, the added uncertainty that we see – reflected in the pound movements over the last week – from the PM’s decision to shackle the government to leaving the transition period by Dec 2020 come what may, means the BoE will demur.

It is a sign of the times when the impeachment of the president of the United States produces nothing but a shrug. By becoming only the third president in history to be impeached, Mr Trump joins a select club. Markets simply don’t care.   

The Republican-controlled Senate will never abandon their president. Democrat speaker Nancy Pelosi has suggested she may delay sending the letters of impeachment up to the Senate, but this is posturing. The impeachment process has and remains so partisan that Mr Trump will not be removed from office.  

Yesterday, the S&P 500 closed a little lower having earlier attempted to break into fresh record territory. Europe was mixed: the FTSE 100 closed up 0.2% at 7540, while the DAX was down 0.5% at 13,222.  

On Thursday, Asia has also retreated a touch from an 18-month high. Data is offering little in the way of a catalyst and with a trade deal baked in, further upside may be tricky in 2019 as traders book profits and start to focus on Jan 2020. 

European markets are set to open flat as investors weigh the balance of risks and probably start to think that now might be a good time to park some profits. 

Overnight, China’s finance ministry has set out six products from the United States that will be exempt from tariffs starting Dec. 26th. Across the wires as I write China says it is close communication with the US on singing the phase one deal and that details of the deal would outlined once it is signed. 

Australian jobs data was strong at +39.9k vs 14.5k expected and a big turnaround from the prior month. Just a little bit of help for the Aussie, which has risen steadily overnight. AUDUSD based at 0.6850 late last night and has marched through to 0.68825. 

Elsewhere, US yields are higher, with 10s striking 1.927%. The dollar index also advanced. The combination is troublesome for gold bugs – gold has trended sideways now for days and seems locked around $1477. Oil got a boost from the US inventory data, with a spike towards $61 from $60.30 just about holding at $60.85. Inventories showed a draw of 1.1m barrels vs 1.5m expected. 

Sterling trips on new cliff edge, Unilever dips

Morning Note

Sterling tripped over its heels as Boris Johnson is looking to legislate for Britain to leave the EU fully in Dec 2020 with or without a trade deal. That means no possible way to extend the transition period. I must confess to believing he wouldn’t need to be so drastic, that a large majority offered the flexibility yet strength a government craves in deal making. This sets up another cliff-edge and could create yet more months of uncertainty for investors just when we thought all was squared away.

GBPUSD plunged to the 1.3240 area before paring losses to trade around 1.3260. Elsewhere in FX, the Australian dollar was softer as the RBA signalled it’s looking at further cuts, possibly in February. AUDUSD traded at 0.68580 as of send time, its weakest since last Wednesday. EURUSD steady at 1.1140. Signs in the dollar index that it’s rolling over.

Equity markets remain buoyant but we are seeing some softness in Europe on the open. We’ve had a really good run for the last two or three sessions so it’s a good time for a pause and consolidate around this level. In particular we need the FTSE 100 to hold this 7500 level.

The S&P 500 made a fresh record top, though Boeing’s travails left the Dow glittering a little less. Europe’s Stoxx 600 made a record high. Asia took the cue to make 8-month highs overnight. 


Unilever shares fell 5% in early trade as it warns that sales growth is more meagre than expected. Management expects underlying sales growth for 2019 to be slightly below its guidance of the lower half of its 3-5% multi-year range. 

The company puts it down to economic malaise in South Asia, with the CEO on the conference call saying it’s down largely to India’s rural markets, although these are expected to bounce back in the second half of next year. Meanwhile management says trading conditions in West Africa remain difficult. Developed markets continue to be challenging, but management did point to ‘early signs’ of improvement in North America as it picks up ice cream market share.

Earnings, margin and cash are not expected to be impacted. Weaker sales growth is a problem, but lately we have been encouraged that earnings growth is being driven by price rather than volume. However, the problem for fast-moving consumer goods giants with the big brand names is that consumers have a lot more choice and are more discerning than ever.


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