Investors look to Apple product show as equities struggle for momentum

Morning Note

Weak start for equities this morning, taking the baton from a mixed bag for indices in the US and Asia. FTSE 100 off about 0.5% in early trade heading towards 7,000 again, whilst the DAX is closer to the flat line. US CPI inflation later is the chief attraction as well as Apple’s product show. Shares in China fell, while Tokyo closed at a 5-year high.

 

US stock markets showed growth-value divergence: the Nasdaq slipped and the Dow and the S&P 500 rallied as the market attempted to consolidate after a run of five straight losses. We saw a bit of a case of futures pumping, cash dumping: i.e. futures rallying but the market selling off on the cash open, which is never a good setup for the market. Futures are weaker today, whilst the US dollar is weaker, sitting in the middle of the recent range, after running into resistance at 92.85 area for the second time in a week. 

 

Large cap growth/tech dragging a bit, cyclicals and energy doing better. So, some rotation away from tech/growth towards the value/cyclical part of the market. Rotation magic still working on the broader market and keeps it steady in the face of a bigger pullback, for now. Apple up a touch as markets continue to digest the impact of the Epic court ruling and look ahead to today’s product event. Expect new models but I don’t believe there is any game-changing tech about to be revealed. 

 

The market has been conditioned to buy the dip since TINA – there is no alternative. But we have not seen this so much so it’s a market that could be unlearning what it was taught because of things like inflation. Persistent supply problems, labour shortages etc will mean it’s not as transitory as people think and since it’s supply-shock, cost-push (bad) inflation not just demand-pull (good) inflation, it is not good for the market.  Today’s CPI will be closely watched of course, but will be enough to change anyone’s thinking about whether inflation is stickier than the Fed tells us?

 

Big trouble in China: Shares in Evergrande plunged again after the company issued a statement saying it was struggling to offload assets to cover its monster debt pile amid a liquidity crunch. Shares fell more than 11% and trading in some of its bonds were halted.  

 

Crypto pump and dump: Litecoin shot higher in a frenzied spike on a press release purporting to be from Walmart, the retailer telling customers it is introducing a pay with Litecoin function in store. Wow, we all thought, Litecoin has been doing nothing for months and then it’s suddenly in with the biggest retailer in the US. The market obviously felt it was legitimate and was even more assured when Litecoin’s Twitter account share the tweet. It didn’t take long for it to be outed as fake news, however, and Litecoin came crashing down again. Litecoin jumped 35% in the space of 10 minutes before it went south. Pure Wild West – clearly a well-orchestrated bid by one or more holders who wanted to drive the price higher for just long enough to get out with the heads above water.  

 

There was a strong read across for other cryptos (note the spikes on the 5-min charts) but they are mainly starting to regain some momentum.

 

Ocado shares fell after it reported a 10% drop in revenues, caused by the fire at its Erith site on July 16th. Revenues were down before the fire – tough comparisons with last year – but slumped 19% in the period after. More capacity is incoming for the UK but no update on international progress. JD Sports ramped higher again on yet another strong performance with profit before tax and exceptional items rising to £439.5 million. Management forecast outturn headline profit before tax for the full year of at least £750 million.

 Can’t make it up: Last week talked a bit about how Coinbase was getting in a twist over the SEC suing it for launching Lend, a product that would let people earn interest (yield) on their Bitcoin holdings. So, it was quite amusing to see them this week tap the bond market, which lets people earn yield on their assets, ie the bonds. Coinbase said it would offer $1.5 billion in senior bond notes. “This capital raise represents an opportunity to bolster our already-strong balance sheet with low-cost capital,” the company said, though they’ll paying up to 4-5% for the privilege.

MicroStrategy is at it again, the company revealed it has purchased an additional 5,050 bitcoins for about $242.9 million in cash at an average price of $48,099 per Bitcoin. Down about $19m on that deal so far, then. “As of 9/12/21 we #hodl ~114,042 bitcoins acquired for ~$3.16 billion at an average price of ~$27,713 per bitcoin,” tweeted the boss Michael Saylor.

Trouble in the energy markets seems to be getting worse and there is going to be a rough winter as prices seem to be going only way. Call it political insanity led by the green agenda or a perfect storm of short-term factors, it’s not looking pretty right now.

European natural gas benchmarks keep hitting new highs. Henry Hub natural gas prices were up another 4% to $5.20, a fresh 8-year high and a 14-year high for this time of year. Demand for natural gas is actually growing but supply is failing to keep pace. Problem is the drillers can’t get the funding and they’re over geared as it stands so there is not the ability to go big on drilling to take advantage of the higher prices. Which means inventories are going to keep being squeezed and prices are going one way.

Oil is well and truly back to the races for a fresh run at the YTD highs after breaking above the Aug range at long last. As anticipated given it had completely backloaded its prior demand forecast for 2021 with all the growth to appear in H2, OPEC has finally had to cut its outlook. The cartel trimmed its world oil demand forecast for the last quarter by 110k bpd due to Delta.

“The increased risk of COVID-19 cases primarily fuelled by the Delta variant is clouding oil demand prospects going into the final quarter of the year,” OPEC said in the report. “As a result, second-half 2021 oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into first-half 2022.” OPEC is sticking with the 6m bpd increase in 2021 vs 2020 though, with Q3 showing resilience despite the ongoing problems with the pandemic. But the outlook for 2022 is bullish, with OPEC raising its oil demand forecast for next year by 900k bpd from last month’s outlook, taking demand growth in 2022 to 4.2m bpd. Meanwhile short-term pressure on supply remains with Hurricane Nicholas making landfall in Texas this morning.

WTI made a 6-week high and now clear of the August range and near-term trend resistance.

Stagflation: Industrial giant 3M yesterday warned that inflation is currently higher than company thought in Q3, seeing broad-based inflation, warns on chip shortages. 

 

And it’s not looking like it’s as transitory as the Fed keeps telling us. The Fed reports that consumer 3-year ahead inflation expectations hit 4%, a series high. One-year-ahead inflation expectations rose for the 10th straight month to a median of 5.2% in August. Food prices are expected to grow by 7.9% annually, up from 7.1% in July. Rent is expected to rise by 10%, and the price of medical care is expected to rise by 9.7% over the next year. 

 

Ok so supply chain problems are not the Fed’s fault, but AIT was always going to let inflation expectations become unanchored since it means the market no longer anticipates the Fed will step in. Previous incarnations of the Fed would have sought to guide the market to expect tighter financial conditions by now.

European stocks pull back while dollar feels weak

Morning Note

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.

European stocks edge higher, BoE meeting ahead

Morning Note

Stocks seem to be largely marking time until there is more clarity on economic data like inflation with the major European bourses a little higher this morning but well within ranges. Bonds are steady with US 10s around 1.5% and stocks are likely to remain similarly directionless until the former start to motor. Wednesday saw US indices essentially flat but they remain +1% higher on the week after a sharp turnaround from the Fed-induced selling last week. The Nasdaq rose marginally to notch another record high with subdued bond yields allowing investors to get back into big tech growth. More Fed speakers today to watch for in the shape of Bostic, Harker, Williams, Bullard and Barkin but the sentiment seems to be that if the Fed is going to more mindful of inflation than was judged for most of the last year then it ought to keep control of yields and allow for gently rising stock markets. I’d still be mindful of a tantrum later this year when yields ought to pick up some steam. 

 

Sterling trades close to $1.40 ahead of the Bank of England monetary policy statement today. As detailed in our preview, no change is expected but there are signs that inflation might run hotter than the MPC currently forecasts so we will be watching for any commentary around this. Yesterday’s UK PMI report pointed to strong inflationary pressures that will take CPI above the bank’s 2% target – the question is how far above and for how long – and how does the Bank respond. Bailey has made clear the MPC won’t tolerate above-target inflation for long. Could he spring a hawkish surprise today and say something like ‘inflation pressures are building and the bank has the tools to respond’?  I don’t think this is the time yet to do this, but that’s why it would be a surprise.

 

GBPUSD: near term resistance at the 1.40 round number, support holding on the 100-day line at 1.3950.

WTI made a fresh high above $74 amid ongoing expectations that restrained supply and improving demand is leading to an increasingly tight crude market. Yesterday the EIA reported crude oil stocks declined by 7.6m. Stocks at the Cushing, Oklahoma hub fell to their lowest since March 2020 and US total petroleum demand rose 20.75m bpd, getting close to pre-pandemic levels. Meanwhile OPEC is signalling a stronger oil market. Chatter is that the cartel will increase production by 500,000 bpd from August as they continue to cautiously unwind production curbs. 

 

Copper has staged a bit of comeback this week but there are some bearish indicators on the physical supply front with China releasing metal from reserves to counter rising inflation. Wednesday saw a bounce in copper as the release of 100,000 tonnes of base metals was less than expected, but this is being reversed. Import demand in the country is also reported to be the weakest since 2017, whilst LME stockpiles are 30% higher this month.  

 

Bitcoin futures just running into resistance at the 200-day line, which had acted as support during recent plunges.

GameStop soars on ‘ecommerce hopes’, stock markets diverge as investors look to bonds

Morning Note

It’s a short squeeze. It’s dealer gamma exposure. No, it’s a fundamental deep value trade based on the company’s ability to be a disruptive force in gaming and deliver a compelling e-commerce offering that supports the long-term investment thesis, which is based on an increasingly progressive free cashflow model. You never actually thought GameStop rally was just froth? Roaring Kitty made a pretty stubborn defence of the fundamental thinking behind his long GME position when he talked to lawmakers on the financial services committee. Most Redditors would agree and maybe, just maybe, there is a fundamental basis for this stock’s 930% rally year-to-date. I’m sure some people genuinely do think it will be the Amazon of gaming.  However they are probably less worried about execution risk than they might be.

 

Shares surged over 41% to almost $195 yesterday, as it looks as though GameStop has taken the first big step towards to fulfilling its latent ecommerce potential. Whilst the ousting of the CFO Jim Bell last month indicated that something was afoot, an update from the company filled in some blanks and underlined that Chewy’s Ryan Cohen is taking charge of this ship.

 

GameStop has formed a “Strategic Planning and Capital Allocation Committee” which will focus on identifying actions that can “transform GameStop into a technology business and help create enduring value for stockholders”. The committee will be responsible for evaluating areas that include GameStop’s current operational objectives, capital structure and allocation priorities, digital capabilities, organizational footprint, and personnel. The Committee is comprised of Cohen, former Chewy CMO Alan Attal, Ryan Cohen, and Kurt Wolf, another activist GME investor. In addition, the board is appointing a Chief Technology Officer and two new executives to lead the company’s customer care and e-commerce fulfilment functions, respectively. There is also a plan to replace the ousted Bell at CFO. 

 

Divergence: In the broader market, European stock markets and the Dow Jones rallied though tech weighed on the S&P 500 as the sell-off in growth and momentum continued. The DAX in Frankfurt rallied over 3% to mark a new record high, whilst the Dow Jones climbed 300pts to a record high 31,800. The Nasdaq composite declined 2.4% and the NDX 100 was off almost 3%. Tesla declined another 6% almost to $563, whilst Apple fell over 4% to $116. A record high for the Dow just as the Nasdaq enters correction territory: We’ve not see such a divergence between the industrials and growth in a long time. The S&P 500 is caught somewhere in the middle, though the weighting of the tech names (the 5 FAANGs were worth about a quarter of the market until recently).

 

It’s a buying opportunity? ARK’s Cathie Wood played down the problems at her flagship ETF, saying she is even more confident in her highest-conviction trades such as Tesla and that the selloff is simply a buying opportunity. At these moments she looks to “concentrate” portfolios to the “highest conviction names”, so this means selling more liquid stocks (eg Apple) which are participating in innovation but are not ‘pure play’ innnovators. The fact that the bull market is broadening out is a good thing, she says, and this is certainly true. But it doesn’t mean Tesla should be worth what it was valued at. She also suggested that the 60:40 stocks to bonds portfolio could one day be 60:20:20 stocks:bonds:cryptos … 

 

Clearly, everyone is looking at the bond market right now, but some are not convinced that yields are only going one way. David Tepper, the founder of Appaloosa Management, told CNBC that the move in rates may be just about over. He pointed to a flip in Japanese investors, who he thinks are likely to become net buyers of US Treasuries (after years as net sellers) following the rise in yields – the 10-year has risen from 1.09% at the end of Jan to north of 1.6%. This, he says, will cap the rise in yields. Whilst yields pared back yesterday, stocks weren’t really listening. Ten-year and 30-year bond auctions this week will be crucial tests of demand – it was a weak sale of 7-year debt last month that sent reverberations around the market. Today we have an auction of $58bn in three-year paper but it is the 10-year and 30-year offerings that will be the big test. Investors will be angsty about how these auctions go off – a repeat of the Feb 25th 7-year auction would undoubtedly create another broader sell-off in rates and lead to yet more instability in equity markets. A key unanswered question remains about whether the Federal Reserve extends looser capital requirements – the supplementary reserve requirements (SLR). Last April the Fed let banks exclude Treasuries and cash from their calculations – but this means banks are sitting on a tonne of US government bonds that would need to liquidate if the looser SLR rules are not extended. This could create further trouble in the bond market if all this were to hit the market at once. 
 
Is WFH dead? Zoom, the poster child of the work from home trade that drove much of the 2020 rally up until the November vaccine bounce, declined almost 8%. It’s now worth around half what it was at the peak in October. It was reported after the closing bell that CEO Eric Yuan has transferred about 40% of his stake in the company – valued at around $6bn- to two unspecified recipients. Another work from home name – DocuSign – declined fell over 5%, meaning it is down around a third from its recent all-time high. There are two things at work here – first is the reopening and expectations people won’t be so reliant on WFH as last year. Second, these were some of the most richly rated of the growth names and therefore most likely to be pulled down by a rise in rates.  

 

Domino’s posted strong final results as it enjoyed pandemic related stay-at-home demand. Strong appetite in the UK & Ireland saw system sales up 11.4% to £1.35bn. Underlying profit before tax of rose £2.4m to £101.2m, but this was limited by Covid-related safety costs  and other efforts to placate franchisees. The free cash improvement (+73% to £99m) was another mark in its favour. Nordic disposals have helped – it never really got a handle on the Norwegian and Swedish markets. It’s also looking to offload its Swiss and Icelandic businesses. Trading this year has started strongly with “exceptional trading” over the New Year period as the company notched its busiest ever week. The question is whether Domino’s has the momentum now to deliver its goal boosting sales growth as consumers prepare to get out and about much more? Shares rose 10% as the company also announced it was returning £88m to shareholders via a 9.1p dividend and £45m in share buybacks.

 

Shares in ITV dropped over 6% in early trade as the company reported a 16% decline in total external revenues, led by a 25% drop in Studios and 11% decline in Advertising, despite VOD being +17%. That left adjusted earnings before nasties down 21% at £573m which was not as bad as expected and was driven by the strong end to Q4 and tight cost control delivering £116m of overhead savings, of which £21m are permanent. Now the focus is on beefing up Studios earnings by working closer with streaming platforms on delivering content – anything that dilutes the importance of traditional ad revenues should be a positive, albeit consumer brand spending on media this year ought to be markedly better than last year. Indeed, whilst Q1 has been challenging management think April ad revenues are expected to be up between 60% and 75% on last year. 

 

Oil prices are proving to be very volatile. After Brent rallied to $71 yesterday it’s now trading with a $68 handle this morning. Clearly a spot of panic after the attacks on the Saudi facilities was overdone, but I stick to the view that the market is tight and will become increasingly tighter now that OPEC is rolling over cuts into April.  

Elsewhere, Bitcoin trades above $54k, its highest since around Feb 23rd, whilst gold continues to test the 61.8% retracement support at $1,690. Yesterday’s swing high at $1,714 is the first hurdle, thence $1,724.

Gold continues to test the 61.8% retracement support at $1,690.

What are the top Nasdaq stocks of 2020?

Indices

November saw a spectacular rally in global equity markets on hopes vaccines will see a return to normality next year. The big theme of the month was the rotation from Growth to Value, with the Russell 2000 small cap index notching its best ever month. The FTSE 100 enjoyed its best month in 31 years and Europe’s Stoxx 600 rose the most in a single month since records began in 1986.

But it’s just worth a little reminder that as far as year-to-date gains go, it’s a story of tech and growth over value, energy and financials. The Nasdaq 100 is up 40% YTD, whilst the FTSE 100 is down 15%.

Here are the top stocks of 2020 on the Nasdaq 100.

YTD
NDX 40.48
  Moderna Inc 680.88
  Zoom Video Communications Inc 603.06
  Tesla Inc 578.41
  Pinduoduo Inc 267.03
  DocuSign Inc 207.49
  Mercadolibre Inc 171.59
  JD.Com Inc 142.27
  NVIDIA Corp 127.82
  Advanced Micro Devices Inc 102.05
  PayPal Holdings Inc 97.95
  IDEXX Laboratories Inc 76.53
  Align Technology Inc 72.48
  Amazon.com Inc 71.45
  T-Mobile US Inc 69.52
  Cadence Design Systems Inc 67.68
  Qualcomm Inc 66.8
  Synopsys Inc 63.43
  Apple Inc 62.17
  Lululemon Athletica Inc 59.8
  Lam Research Corp 54.81
  Autodesk Inc 52.75
  Netflix Inc 51.65
  Seagen Inc 49.05
  Xilinx Inc 48.87
  ASML Holding NV 47.91
  Take-Two Interactive Software Inc 47.44
  NetEase Inc 47.36
  DexCom Inc 46.15
  Adobe Inc 45.07
  KLA Corp 41.42
  eBay Inc 39.66
  Regeneron Pharmaceuticals Inc 37.43
  Workday Inc 36.69
  Splunk Inc 36.33
  Microsoft Corp 35.75
  Applied Materials Inc 35.12
  Maxim Integrated Products Inc 35
  Facebook Inc 34.94
  Charter Communications Inc 34.41
  Intuit Inc 34.39
  Fastenal Co 33.83
  Activision Blizzard Inc 33.76
  Monster Beverage Corp 33.41
  Costco Wholesale Corp 33.29

Source: Reuters Eikon, Dec 1st 2020

US jobless claims data beats expectations – but Wall Street struggles

Equities

Global stock markets are struggling around or below opening levels today despite an improvement in US jobless data.

The Dow has crept higher, while the Nasdaq has eked out a new intraday high before trimming gains. The S&P 500, which is now under 2% away from February’s all-time high, is trading marginally lower.

Jobless claims drop, but the overall picture remains bleak

Markets are little cheered by the latest labour market data, with investors instead awaiting any news of progress as lawmakers continue to argue over a new stimulus bill. The proximity of tomorrow’s nonfarm payrolls report is also keeping markets soft.

This is despite initial weekly jobless claims printing at 1.186 million – well below the 1.415 million expected by analysts and also the lowest reading since the pandemic sent claims jumping by nearly 7 million at the end of March.

Continuing claims – which counts those claiming benefits for two or more consecutive weeks – have dropped from 16.95 million to 16.10 million, again below forecasts.

While this points to improving labour market conditions, the bigger picture remains bleak. This is the 20th straight week that the US has registered more than a million new weekly claims. 31 million Americans remain unemployed.

The figures have further complicated the outlook for the labour market, which had been showing signs of weakening again. Yesterday’s ADP private payrolls report showed jobs growth of just 167,000 compared to expectations of over 1 million.

Nonfarm payrolls in focus – is the jobs recovery under threat?

The latest numbers will put tomorrow’s nonfarm payrolls report under even greater scrutiny, as markets look for more clarity over the direction of the labour market.

Economists expect payrolls grew by 1.6 million, which represents a sharp slowdown in jobs gains after payrolls jumped 2.7 million in May and 4.8 million in June. However, payrolls returned to growth more quickly than expected.

President Donald Trump has promised “big jobs numbers are coming on Friday”.

Are high-yield corporate bond spreads suggesting continued caution for equity investors?

Equities

Over the last 8 weeks, the NASDAQ has rallied as much as 40%, from its lows on 23 March to a swing high at the beginning of last week.

However, an analysis of the performance of high-yield corporate debt during the current equity market rally, as compared to how high-yield debt has performed in past bear markets, may indicate to traders that continued caution is warranted.

This is because, while the NASDAQ rallied from lows at 6,633 to highs above 9,353, the high-yield spread has only tightened from a recent high of 19.62% to 17.85% on Friday.

The high-yield spread we have considered is the difference between corporate debt below investment grade and government debt.

Historically, we have seen a seen a much greater tightening of spreads when looking at the end of bear markets, such as those that originated during the dotcom bubble crash and the 2008 global financial crisis, compared to what we have seen now.

Instead, what we are seeing now, with spreads remaining high, may look more like a bear market rally rather than the sustained equity bull market uptrend seen when credit spreads have moved markedly lower.

Tech stocks under pressure

Morning Note

Markets remain on the hook to the trade war rumblings, but a new war has opened up that threatens equity investors – a war on tech. What the Fed threatens to give, the DoJ takes away.

Yesterday we saw a soft start in the US before the ISM print missed and investors raised bets the Fed will cut rates this year. But the Fed put was not enough to fight the tide off tech woes. 

Fangs are under severe pressure amid fears they are in the crosshairs of trust busters. The DoJ and FTC are marking targets and loading up. Whilst it’s far too early to say if any would, or could, be ripe to be broken up, there’s a real threat this will depress multiples and mean we need to reset expectations. Given the Fangs have been at the front of the market expansion in recent years, this will act as a drag on sentiment as well.

A couple of very big moves yesterday in Alphabet and Facebook. 

Alphabet –6% – support now seen around $968, before $895 comes into play. 

Facebook –7.5% – key support seen at $159, below that we look to the $145 level. 

Calls have been growing louder and louder for the authorities to at least look at antitrust issues for the tech giants. Political pressure is building – lawmakers sniff votes in tackling big tech. The shift really happened last year with Facebook’s scandals, which broken the illusion of Silicon Valley being in it for the little guy. They’re just big corporations out to make money like any other – the politicians can smell blood. As I noted a year or two ago, I always thought Trump had the hallmarks of a Teddy Roosevelt trust-buster.  

So now we have the Nasdaq in correction territory – down 1.6% yesterday to take it more than 10% off its all-time highs. The Dow was flat, while the S&P 500 notched a decline of 0.3%. The FTSE 100 ended the day in the green, up 0.3% at 7184 with the key 7150 level holding.

Asian shares followed Wall Street’s lead overnight, and futures show European shares are under the cosh again today.

Rates

US Treasury yields continue their slide with the 10yr slipping to 2.085% and threatening to find the 2.05% level now. EURUSD has broken out of technical resistance due to the slide in yields as markets bet on a Fed rate cut. EURUSD faces resistance at 1.126/7 but having broken out of the long-term descending wedge we could now look for more gains. Has the dollar rally ended? Well it all depends on the Fed. 

Today’s Jay Powell speech is now key to market sentiment after dovish comments from James Bullard yesterday. 

St. Louis Fed boss James Bullard – a voting member of the FOMC – says a rate cut may be warranted soon. He talked about a sharper than expected slowdown. He also discussed a cut as insurance – some sense the Fed is seeking to get ahead of the curve – too late! Over to Powell later today.

Bullard has always been one of the most dovish members of the FOMC – the market may have massively miscalculated the US central bank’s view of the economy, inflation and risks to its forecasts. I rather think the Fed will be a lot less ready to ease than the market thinks, and this suggests a significant decoupling between the Fed and market expectations.

EZ inflation

Ahead of this we have the Eurozone CPI print. The last reading showed inflation rose to a 6-month high in April at 1.7%, whilst core price growth rose to 1.3%. However, this uptick seems to be down to one-offs and the core read is expected to revert to trend around 1% in May, with the headline print at 1.4%. 
 

Woodford shut – worse to come? 

Neil Woodford has suspended trading in the Woodford Equity Income. Woodford has clearly made a series of poor investment decisions. Out of love UK stocks with entirely domestic may have been ultra-cheap, but they’re still unloved and still cheap. Provident has been a disaster. Kier, whose shares tumbled 40% yesterday, also disaster. It’s been a tough few years for Woodford and things look like they will get worse still. 

RBA cut 

No surprise the RBA cut rates, it had been fully priced in. The question now is how many more? The statement didn’t tell us anything new. No indication there will be more this year. Worth noting the RBA’s own forecasts are predicated on 50bps of cuts so we’re only half way there. Watch the data. AUDUSD has gained a few pips post the statement, with little detail on future cuts likely to give the bulls some hope. Resistance at 0.6990, the 38.2% Fib level, tested and rejected.

Retail sales

UK retail sales fell off a cliff in May – down 2.7%. This is the worst ever decline in retail sales and will hit the sector today.

Sell in May and go Huawei: US-China ad nauseum

Equities
Forex
Indices
Morning Note

When can we stop talking about the US and China? European stocks called to open higher after a robust session in Asia showed investors are weighing the latest US-China spat over Huawei for what it is. SPX closed down 0.67% yesterday on the broad US-China-Huawei-Google spat, with tech stocks the worst hit. The Nasdaq 100 shipped 126 points to close 1.7% lower. Chip makers were rocked but look set to bounce back today – these rose in after-hours trading and Asian peers were much firmer overnight. 

US-China, Google-Huawei

After blacklisting the Chinese firm, the White House has issued three-month reprieve to allow US companies continue to do business with the group. It’s all rather like the way Trump slaps on tariffs but delays the execution to allow room for negotiation. Whether it’s Huawei or tariffs, I would see all of this in the broader context of giant tug-of-war between the two superpowers being played out in front our eyes. As such, the more this goes on the lower the chance of a meaningful resolution to any of it. Trade disputes ad infinitum, ad nauseum. 

China has vowed to retaliate but stocks in China rose overnight – the more damage the US tries to do the more the market expects stimulus from Beijing.

Brexit continues

We don’t even have a lot on the Brexit front to worry about today. Euro elections are centre stage this week – as noted in yesterday’s FX note, the Brexit Party is set to win in the UK, whilst Eurosceptics and populists of various hue will sweep about a third of the vote across the continent.  Watch therefore for action in EUR and GBP crosses, as well as Italian spreads.  

Economic indicators overnight have been less than stellar. South Korean exports shrunk by nearly 12% in May, having decline more than 8% in April. Singapore’s government has downgraded growth forecasts for 2019. Thailand GDP growth hit a 4-year low. Lots of trade related effects being felt, clearly.

Fed chair Jay Powell spoke yesterday but did not really go into monetary policy. His remarks were focused on financial stability, stressing that ‘business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm … should conditions deteriorate’.  He added though that ‘the level of debt certainly could stress borrowers if the economy weakens’. Move along, nothing to see here. Fed governor Richard Clarida speaks later – will have a lot more on policy and will be closely watched. FOMC minutes are due tomorrow.

Forex – dollar bid

The dollar continues to find bid, with the dollar index touching on 98 again, its strongest since May 3rd. Meanwhile EURUSD has also sunk to its weakest since May 3rd. US 10yr has risen above 2.4% again, having been as low as 2.35% last week. Firmer US yields and the safe haven appeal of the USD in the current trade war situation is keeping the dollar supported.

Yesterday’s emerging three inside up formation on the GBPUSD daily chart fizzled out, with the pound under the cosh still and threatening now to break below 1.27. The 1.2710 region is acting as support for now but the downwards pressure could eventually tell. 

RBA set to cut

The post-election bounce in the Australian dollar proved short-lived as anticipated. AUDUSD was back trading on the 0.68 handle as the RBA gave us a very clear signal it’s ready to cut rates. In fact, this was about as dovish Philip Lowe could be without actually saying ‘I will cut rates in June’.

The June 4th meeting will likely see the central bank move to cut the cash rate to 1.25% from the current 1.5%. The RBA is really tying its policy outlook to the labour market. Unemployment rose to 5.2% in April and the risk is that exposure to China and trade will act as a drag in the coming months. Low inflation currently gives it ample scope to cut rates.

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