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Biden tax plan weighs on stocks, Bitcoin tumbles
European equity indices opened a tad lower on Friday morning after stocks fell on Wall Street on reports Joe Biden is planning to slap much higher capital gains taxes on the wealthy. This was always part of the equation when we looked at the implications of a Biden presidency, but markets have been pepped up on a mix of fiscal stimulus, the Fed’s extraordinarily accommodative stance, a strong cyclical impulse from the vaccine-led reopening and a bounce back in earnings. The major averages fell in lockstep, dropping by almost 1% , though the Russell 2000 ended the session flat as the selling was led chiefly by the longer-term growth names like Tesla and Amazon. The Dow Jones finished the day at 33,815, a decline of more than 300 pts. The S&P 500 closed down 0.92% at 4,134 and the Nasdaq Composite notched a similar decline to finish at 13,818. The FTSE 100 opened lower and is heading for a decline of more than 1% for the week. As of send time the CAC 40 had inched into the green. I would not describe risk as being offered as such; it’s been a pretty choppy week and I would be equally unsurprised if stocks turned around this afternoon and ended the week higher as I would if Wall Street led a sharp decline into the weekend.
The Biden administration is looking to raise the top marginal income tax rate to 39.6% from 37%, whilst also doubling capital gains tax to 39.6% for people earning more than $1 million. Tax the rich, hand it out to the poor. Sounds like furlough, but on a permanent basis. The big problem (one of many) in all this is the Senate – it would require support of all the Democrats in the upper chamber and this is far from assured. Stocks would probably be a lot lower if investors were really worried, and I think markets can overcome this move, even if it manages to pass through the Senate, which I don’t think it will. Nevertheless, coming off record highs and a good run up through the start of the year, the macro picture not really changing, rising Covid cases globally, strong earnings and other supportive factors largely priced in and the extent to which investors are ‘all in’ equities, we could be set for a downwards move in equities over the coming weeks. Beware seasonal factors (I dare not say ‘sell in May’…)
The economic picture continues to improve in the US. Initial claims for unemployment insurance fell to 547,000 last week, down from 576,000 the prior week and below the roughly 600,000 estimated. The number of continuing claims also fell.
Likewise, UK retail sales numbers were very positive in March as consumers opened their wallets ahead of the reopening of non-essential shops. Sales rose by 5.4% from February, well ahead of the 1.5% expected. Clothes, gardening goodies and specialist food items from bakers and butchers were in vogue.
Even Europe is showing immense resilience in the face of lockdowns – France’s Services PMI came in at 50.4 against 46.7 forecast, whilst the manufacturing survey surged to 59.12. The composite PMI rose to 51.7 from 50 previously, with the outperformance in services meaning it easily beat the 49.4 expected. Germany’s composite PMI came in at 56, still in expansion territory, but short of the 57 expected and down from the 57.3 in March.
The dollar is offered in early trade, with EURUSD jumping to 1.2050, Yesterday’s ECB presser high of 1.2070 is the main target for bulls. GBPUSD also tried to sustain a rally to 1.39 but hit resistance at 1.3890 and reversed a touch.
The euro remains steady following yesterday’s ECB meeting, which left markets on an even keel as the central bank managed to maintain its dovish stance and fend off chatter about wrapping up its emergency bond buying programme. Christine Lagarde played down any taper talk, saying this was ‘premature’ and that the recovery still has a long way to go. The yield on 10-year German bunds moved lower.
Bitcoin prices have tumbled. Spot trades under $48k this morning, meaning it’s down 25% from last week’s all-time high. The low tested several times in Feb at $44k is the big support. Basically, it seems to have been bid up on a lot of speculation (even more than usual) ahead of the Coinbase IPO and all this froth has evaporated like a lot of hot air. There has also been a cluster of regulatory reports and rumours that point to a clampdown and tighter regulation. JPMorgan analysts led by the closely-followed Nikalous Panigirtzoglou say the rollover in prices has been led by a steep liquidation in speculative futures positions. “Momentum signals will naturally decay from here for several months, given their still elevated level,” he says.
Shares in Coinbase are in for a hit should cryptos go further south. Also, Cathie Wood’s ARK Innovation ETF is still loading up on COIN – watch this one ,too. The Coinbase listing – the ultimate poacher-turned-gamekeeper moment – might have been the high watermark for Bitcoin.
I refer to two points we highlighted when Coinbase registered to go public:
1. Earnings are inextricably tied to crypto prices. This may be obvious, but it is interesting to see in black and white. “Our total revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines, our business, operating results, and financial condition would be adversely affected.”
2. More than anything it’s highly dependent on Bitcoin. A majority of Coinbase’s net revenue is from transactions in just two crypto assets: Bitcoin and Ethereum. For the year ended December 31, 2020, Bitcoin, Ethereum, and other crypto assets represented 70%, 13%, and 13% of assets on the platform respectively. “If demand for these crypto assets declines and is not replaced by new demand for crypto assets, our business, operating results, and financial condition could be adversely affected” says the filing.
Caveat emptor and all that.
Excess is good for the stock market
Me, You, Madness…no it’s not a story about Roaring Kitty, GameStop and Melvin, though someone has to make that into a film (Michael Lewis will be writing the novel already, I’m sure). It’s actually a 2021 film starring Louise Linton, wife of ex Treasury secretary Steve Mnuchin. I have not seen it, but I have seen the trailer. The setup sounds fun – Linton plays a psychopathic hedge fund boss. But while it contains just everything you can cram into a feature film; it looks exceptionally bad. So bad it’s actually good. Maybe. How it ranks in the canon remains to be seen. It’s really a vanity project, which is really a form of excess that we see in lots of corners of the market right now – think Tesla, the meme stocks, Bitcoin (just don’t include the FTSE…).
Biden’s $1.9tn stimulus package is probably excessive. t’s certainly full of waste, full of ways to prop up failing businesses and deliver helicopter money to a lot of people who don’t really need it. The economy is rebounding anyway. Jobs are coming back. A lot of the money will find its way into things like paintings, cars or fine wine. It will also find its way into stocks, or crypto-assets, or even non-fungible tokens (NFTs).
It will also find its way into paying down debt, and this is huge. The US government is embarking on a massive debt transfer from households to government. It can unleash huge potential by transferring the burden from productive capital (private) to unproductive (public) and is potentially one of the most explosive forces in capital markets in several generations. This transfer of debt will unleash entrepreneurial spirits that would otherwise be restricted. I fail to see how it do anything but increase asset prices, including stocks – despite the rise in yields. It allows households to take on more debt, start businesses and buy more stuff. It also lets them invest in stocks directly. The craziest thing is that it won’t help inequality- poor folks need the money for bills, food etc. Middle class folks will put the money to work. Those without big outgoings will reduce debt so they take on more risk in future because they’re not saddled with big debt obligations like student loans. We’re going to be hit by a massive surge in growth and bond yields will spiral. Inflation will spike and unless the fed gets a grip, it will lose control of inflation. I feel like we’re at the start of a massive economic boom, at least in the US, where policy makers have been vastly more ambitious than they have elsewhere. I might be over-egging the pudding, but I sense people don’t appreciate just how important this debt transfer is going to be for the structure of markets and the economy.
Inflation is dead. Inflation is temporary…
Year-on-year comps will start to show inflation rising. The NY Fed’s Empire State Manufacturing Survey yesterday contained something interesting in its inflation component: “Input price increases continued to pick up, rising at the fastest pace in nearly a decade and selling prices increased significantly.” Other datasets have shown input prices starting to inflate at the fastest pace in years.
Yesterday I touched on the way [some] central banks seemed kind of unconcerned by the rise in yields – last time he spoke Powell didn’t take the opportunity to push back against the rise in yields (no hint of a Twist), and the BoE’s Bailey said yields are rising because of growth. And now we have the RBA – the first to blink by stepping up asset purchases to counter the rise in bond yields – saying in the minutes to its last meeting that the gyrations in bonds are not that significant. And now the ECB – after another communication failure by Christine Lagarde – says yield curve control is unnecessary. ECB chief economist Philip Lane pointed out to the FT that the is not like the last crisis with years of lost output. Which means CBs don’t need to worry about taming yields in the same way.
The mantra seems to be that inflation – previously thought dead – will only be temporary and yields are just moving up because economic activity will hit 2019 levels this year. It’s just not that simple: yields reflect the fact that there is a lot more cash sloshing around – US bank reserves have doubled to about $3.4tn since the start of the pandemic. More stimulus, more growth, more money in the system, more debt issuance – yields are marching higher for number of reasons but mainly reflect growth expectations, inflation expectations and issuance – both real and expected. The extent each exerts a pull on yields (and the extent to which each is affecting the other) is obviously up for a lot of debate and a lot harder to measure. But what seems clear to me is that yields are facing a lot of upwards pressure. Then we have market functioning elements like extending SLR – failure to extend could see a heap of Treasuries come onto the market, making things more volatile.
But I think the big question that we are yet to really answer is how much markets are worrying about debt. I’ve banged on a lot about MMT before – deficits don’t matter and all that – not with any real view on what we should be doing, but rather with an interest in the debate about how we approach fiscal and monetary policy. If markets really are worried about the debt and their ability to absorb all this issuance, then it probably does have some important long-term implications, such as whether you can keep running perpetual deficits, can you always just increase the debt ceiling, and should you look to balance the books? How quickly do you suck the money back out of the system? And with the Democrats gaining those Senate seats in Georgia there is a lot more stimulus coming over the hill.
The back up in long end real rates took off on January 5th – after the Georgia runoffs – indicating people think issuance is a factor.
Inflation expectations are at multi-year highs.
Stocks in Europe took the cue from a positive session on Wall Street, with the main bourses mounting a fresh stab higher after yesterday’s early promise somewhat fizzled out in the latter part of the session. Positive Zalando and VW updates provided comfort to the Stoxx 600, whilst the DAX rose 0.6% in early trade. The FTSE 100 trades higher with a fresh attempt to clear the big resistance around 6,800 – near-term trend support is about to run into this level so a big test lies ahead with a possible leg up should 6,800 finally be taken out with conviction. Overall the mood in Europe was probably constrained yesterday by several countries halting the AstraZeneca vaccine, but this should prove a major constraint for the market.
Did you doubt that the arrival of ‘stimmy’ cheques would do anything other lift stocks? Yields didn’t really do anything so there wasn’t that immediate stress for the growth end of the market. Investors are looking at the yields and probably thinking yes it means multiple compression, but then you have to look at the $1.9tn coming over the hill at a moment of a strong cyclical recovery as fresh juice. US 10-year notes hovered around 1.6%. The Nasdaq 100 ended up 1% and the best of the induces after a big rally into the close. The Dow Jones rose 0.5% to a fresh record high as it notched its 7th straight daily gain. The S&P 500 also made a fresh ATH after rising 0.65% – its 5th straight day of gains. Futures point to another higher open.
Tesla rose 2% despite the company saying that Elon Musk’s title was changing to Technoking of Tesla, whilst CFO Zach Kirkhorn would henceforth be known as ‘Master of Coin’. GameStop sank almost 17%, AMC Entertainment rose 25% as it embarks on reopening cinemas. Keep your eye on these meme stocks as stimulus cheques could do a lot of work for them.
Yields remain the big threat to daily gains – if you see Treasury yields pop it will rock the market, but longer-term stocks can handle higher rates and unless there is another exogenous shock or a meltdown in funding markets like we saw with the repo stress a couple of years ago [watch that SLR decision], the path of least resistance is up. The Fed meeting this week is the clear risk event for yields but today we also have US retail sales to watch.
Sterling retreated to a one-week low vs the dollar. GBPUSD declined to around 1.3830 and may seek a test of the 50day SMA. The yield on 10-year gilts spiked to 0.86%, the highest in a year, but has this morning retreated back under 0.8%.
Bitcoin trades higher this morning with the 200-hour SMA offering the support. MACD bullish crossover seen.
Week Ahead: Big Fed & BoE decisions & US retail sales
Potential big rate decisions are being made on both sides of the Atlantic this week with the Bank of England and the US Federal Reserve holding meetings. We’ll also get a glimpse of US economic recovery as retail sales data is released. Was January’s upswing a fluke or is sustained growth back in action?
BoE rate decision: unlikely to change but post-budget outlook has changed
Interest rates and inflation are expected to take centre stage once again as the Bank of England reveals its latest monetary policy decision this week.
2% inflation is still the target, and it’s probably that the 0.1% bank rate will remain in place. In February, at the last major BoE rate meeting, the bank’s Monetary Policy Committee (MPC) members voted unanimously to keep that in place.
Speaking at a Resolution Foundation event on Friday 5th March, Governor Andrew Bailey said the Bank will not raise interest rates in relation to a rapid economy recovery, saying he would need to see “real evidence” that 2% inflation would be sustainable before any rate hikes are implemented.
However, Governor Bailey also said the BoE is preparing for negative interest rates in the event of a disappointing recovery. It is also doing the groundwork to be ready if rapid spending caused by the Covid-19 pandemic could lead to increased inflationary pressure.
Markets don’t expect negative rates to be enacted any time soon. Instead, according to the Financial Times, it’s expected the Bank will raise interest rates in 2022.
Forecasts have also been adjusted to be in line with Chancellor Rishi Sunak’s stimulus-led budget. According to Bailey, they’re looking stronger, as the new spending-heavy budget should help stimulate the economy and job market, bringing unemployment below the previously predicted 7.75% level.
“Our last forecast was pre-Budget,” Bailey said, adding that in the next forecast in May, “we will have a lower profile of unemployment in the near term and probably lower throughout”.
Essentially, the BoE will be looking forwards as always, but it’s unlikely to change its base rate from its current 0.1% when it meets this week.
FOMC press conference – stick or twist?
Across the pond the Federal Open Market Committee (FOMC) meeting will be taking place. It’s pretty much the same story as the BoE meeting, but with a bit of a twist – possibly literally.
Fed Chair Jay Powell has been sanguine regarding yields, vowing to keep policy steady last week, despite his comments triggering a selloff in long-term treasury debt.
Powell said the central bank expected to be “patient” in withdrawing support for the recovery, given that the labour market remained far from the central bank’s goal of full employment and had made little progress in recent months.
What does this mean ahead of the FOMC meeting? CNBC reports that some technical tweaks could be made to the Fed’s existing monetary policy, stimulated by recent turmoil in the bond markets.
One could be the reintroduction of Operation Twist, where the Fed sells short-term bills and buys longer-duration bonds. The objective is to nudge up shorter-term rates and drive down those at the longer end, thus flattening the yield curve. The Fed last employed such a tactic roughly a decade ago during the tumultuous European Debt Crisis.
Another option the Fed could explore would be to increase the rate paid on reserves to cover money markets issues, while also adjusting the rate on overnight repo operations in the bond market.
Prospects for the US economy have brightened somewhat with a slowing in Covid cases, increased vaccination rollout, and the approval by the house of President Biden’s stimulus package. Nonfarm payrolls showed a very healthy increase in jobs added to the US economy last month, surging by 379,000.
But bond yields will need to be tackled, especially as the US treasury needs its next bond auctions to go well. The Fed likely to keep buying its $80bn worth of Treasury securities, using them to buy bonds with a four- and half-year duration, according to CNBC, simply because a large supply of extra stimulus is coming, and it will need to raise capital to deal with a potential deficit of $2.3 trillion.
While no major change is forecast, it’s possible we will see those technical tweaks mentioned above. Bond yields will dominate the conversation, as they have done for the past couple of weeks.
US retail sales – economic retail therapy?
Latest US retail sales data is released this week, and it good be more good news for the States’ economy if January’s upward swing continues.
In the last retail data release, sales were up 5.4% – the largest leap for 7 months – according to the US Census Bureau. The figure sailed past predictions of a small 1.1% rise and were up 7.4% versus January 2020.
Extra cash in the form of stimulus cheques is expected to be behind January’s rise in retail spending. American citizens were given $600 from the Treasury’s pocket – and higher cheques are on the way as President Biden’s centrepiece stimulus package has been approved by The House.
In the long term, retailers predict 2021 will be a good year for the sector. Stimulus and vaccines are forecast to make a real impact in the sector, especially if there is a road out of lockdown this year.
Total overall retails could rise as much as 8.2% across the year to reach over $4.33 trillion in 2021 as more people get the COVID-19 vaccine and the economy reopens, the National Retail Federation (NRF) said in February. Ports are subsequently bracing for a spike in imports of consumer goods.
According to Census Bureau data, demand picked up across all key categories including cars, electronics, recreational goods, grocery stores, building materials and home goods such as furniture. Non-store retail, including e-commerce, grew by climbed 11% in the last review period, suggesting online retail continues to make gains as access to bricks-and-mortar stores remains restricted.
Can this continue into February? It’s possible. It depends really on how much ready cash Americans still have to spend on consumer and luxury goods, but strong sales will be a good barometer to judge the pace of US economic recovery.
Major economic data
|Tue 16th Mar||12.30pm||USD||Core Retail Sales m/m|
|12.30pm||USD||Retail Sales m/m|
|Wed 17th Mar||All Day||EUR||Dutch Parliamentary Elections|
|2.30pm||USD||US Crude Oil Inventories|
|6.00pm||USD||FOMC Economic Projections|
|6.30pm||USD||FOMC Press Conference|
|Thu 18th Mar||12.30am||AUD||Employment Change|
|12.00pm||GBP||MPC Official Bank Rate Votes|
|12.00pm||GBP||Monetary Policy Summary|
|12.00pm||GBP||Official Bank Rate|
|Fri 19th Mar||12.30pm||CAD||Core Retail Sales m/m|
|12.30pm||CAD||Retail Sales m/m|
Key earnings data
|Tue 16th Mar||Volkswagen||Q4 2020 Earnings|
|Wed 17 Mar||BMW||Q4 2020 Earnings|
|NorNickel||Q4 2020 Earnings|
|Thu 18th Mar||Nike||Q3 2021 Earnings|
|Enel||Q4 2020 Earnings|
|FedEx||Q3 2021 Earnings|
European shares tread water after Dow hits record
- Dow record high
- US House passes $1.9tn stimulus package
Stocks in London, Paris and Frankfurt opened tentatively higher after fresh records on Wall Street and a decent handover from Asia. The Dow Jones rose 464.28 points, or 1.5%, to notch a new record closing high at 32,297.02, after House Democrats passed Joe Biden’s $1.9bn Covid relief package. Stimulus cheques are coming and there is a realisation that a lot of this cash will go straight into stocks, as well as being spent on goods and things that drive company earnings. Relative calm in bond markets is helping to boost sentiment in stocks – US futures are trading higher. Gains in Europe were a little muted however as trading progressed in the first half hour, perhaps on some caution ahead of the European Central Bank (ECB) meeting later today.
Yesterday’s 10-year Treasury auction was a little soft but not enough to really worry the market. There was enough demand to let the yield on the US 10-year retreat a little. 10s are back under 1.5%, the lowest since March 4th and the 2s10s spread at 1.34% from a high of 1.47% earlier this month. Maybe it was over-hyped but nevertheless, I think this suggests the market is saying: it’s ok, rates can rise. Long-end yields have jumped a lot this year and we are in consolidation mode for the time being. There are 1.9 trillion reasons why yields can continue to rise. 30-year auction is today. US CPI inflation was in line at +1.7% year-on-year, but this was the last ‘easy’ print as base effects going forward will see the number rise. The Nasdaq 100 was a little softer yesterday following the stunning +4% rally on Tuesday.
Crazy volatile: If ‘stimmy checks’ find their way into the system – and they will – meme stocks will be first in the firing line. GameStop surged yesterday before collapsing 40% all of a sudden, triggering stops all over the place. GME finished up 7% for the day at $265 but traded at a high of $348.50 and a low of $172. Another Reddit favourite, Koss, more than doubled in value before ending up 70% on the day.
A broader recovery: According to Bloomberg, the percentage of NYSE-listed shares at 52-week highs has climbed to 21%, the highest since December 2016 and rising from a low of 0.1% in September 2020. The broadening out of the rally to value and cyclicals is something we’ve been banging on about for months, but it’s yet to really translate to the FTSE. So, we come back a persistent thread – why are UK stocks not making all-time highs when the Dow and DAX are able to do so? The FTSE 100 remains 200 points or so below its January peak and some way short of the all-time high. The rotation into cyclicals and the underperformance of the UK market to peers for some years should be translating into better gains than we have seen so far: is there something wrong with our market? The pound is a lot stronger than has it been, but the prospects for global growth are too. Oil prices are rebounding and metals have hit multi-year highs. The FTSE 100 should be doing better.
One of our underperformers is Rolls Royce: shares rose 2% to 115p despite reporting a larger-than-expected loss as it stuck to previous guidance, reiterating that it expects to turn cash flow positive in the second half. Pre-tax losses amounted to £4bn last year with negative free cash flow of £4.2bn reflects an exceptional year on all fronts for the aerospace giant. Underlying revenues of £11.7bn were down from £15.4bn last year but ahead of the consensus estimate of £11.03bn. The company has sufficient liquidity even if there is no recovery this year, according to the CEO.
Oil is firmer after yesterday’s EIA inventories and a weaker dollar also supported. Bullish data on oil products more than offset another big build in crude stocks – the market is still out of alignment following the weather event in the Southern states. Stocks rose a whopping 13.8m barrels, creating at 6% the widest surplus to the five-year average since Jan. However, gasoline inventories tumbled 11.8m barrels and distillates declined by 5.5m barrels. It looks as though demand is picking up strongly in the US, and this suggests that US crude stockpiles will start to decline in line with global stocks. OPEC has helped create a deficit in the market that should see prices advance further.
Gold has rebounded and broken above the next resistance level we identified as the dollar softened and US yields retreated a touch. Near-term bulls and bears battle on the horizontal resistance around $1,740, with the next leg seen around $1,754.
Stocks up, Rolls-Royce down on rights issue
Stock market bulls got the signal they needed from US Treasury secretary Steven Mnuchin, who said the White House was serious about doing a deal with House Democrats on a stimulus package. Nevertheless, no agreement was reached after talks between Mnuchin and Nancy Pelosi.
The Democrats pulled a vote on their $2.2tn package; the White House has come up with a $1.5tn counteroffer. Stimulus is coming, the question really is only when – a deal before the election still looks difficult. Meanwhile end of month and end of quarter flows likely had a positive impact after a soft September.
Stocks end September lower
The S&P 500 rallied and closed above its 50-day moving average, perhaps offering bulls a signal of strength. The next major level is 3,400 and then the Sep 16th intra-day high at 3,428. The close at 3,363 left the broad market down 3.9% in September, its first down month since March. The Dow Jones fell 2.3% last month, while the Nasdaq was more than 5% weaker for September.
European markets did not fall as much, but they also didn’t rally as much in August. In fact, European equities have been stuck in a range for months now and are failing to really spark into life. Cyclically weighted indices leave investors searching elsewhere for growth (US tech mainly) amid a slow recovery from the pandemic. The FTSE 100 is still struggling to hold the 5,900 level.
European stocks remain in their broad ranges – nothing to get excited about yet and the implications of US election angst and rising case numbers is likely to prevent any material breakout. A vaccine could help, but it’s also no silver bullet to depressed demand and structural inefficiencies in the economy that have been years in the making.
Shares in Tokyo didn’t trade after an outage that last all day on what ought to have been a busy day for equity books. The Tankan survey showed business sentiment improved, but not by as much as expected. Chinese markets were closed for a holiday.
Palantir starts trading after direct-listing
Palantir got its direct-listing IPO with the odd hiccup as insiders struggled to access the transactional platform provided by Morgan Stanley. Nevertheless, the stock opened at $10 and reached as high as $11.42 before closing at $9.50.
It’s been a very solid year for IPOs despite the huge volatility in the spring. A dearth of growth and hunger for any kind of yield as actually made this a surprisingly good time for tech companies in particular to go public. The Renaissance IPO ETF, which tracks the newest and largest listings, is up almost 70% YTD.
Rights issue plans send Rolls Royce skidding
Rolls Royce shares sunk over 6% after the company finally outlined a rights issue that has been required for some time. The company has over £3bn in debt due next year so had to come up with something given the ongoing hit to cashflows. RR will raise £2bn by way of a 10-for-3 rights issue priced at a 41% discount to 130p closing prices yesterday.
Given the strategic importance to the UK, the government is also on hand with support in the shape of a further £1bn from UK Export Finance. Shares were trading at a 16-year low after the news and are down 82% this year – the rights issue comes after a sustained period of weakness with investors betting that management needed to shore up the balance sheet.
The pandemic has created a perfect storm for airlines and this has left Rolls Royce’s aerospace business in the mire.
Dollar retreats but Brexit headline risks threaten GBP
As called for, the dollar finally rolled over from the resistance at 94.60 to test the support at 93.70. The 21-day comes in around 93.50. Dollar softness left cable making weekly highs at 1.2950, but the 3-week range of 1.27-1.30 remains.
Brexit talks continue and EU ‘sources’ are out this morning saying the two sides have failed to close differences on state aid. Expect the usual headline risk for GBP crosses as the ninth round of negotiations wrap up on Friday. US weekly jobless claims today will be watched closely ahead of the NFP numbers tomorrow.
Oil prices rose after the EIA reported US crude inventories fell by 2m barrels, against expectations for a rise of 1.9m. Nevertheless, stocks at Cushing, Oklahoma rose 1.8m barrels and gasoline inventories also climbed.
As stated earlier this week, the outlook for crude is murky as production comes back on stream and demand recovery wanes. We need to also pay close attention to global stocks flipping to builds from draws over the next three months. WTI closed lower in September for the first time since April.
Chart: Dollar softens, looking at potential RSI trend line being broken and potential MACD crossover if 93.70 fails to hold
Banks lead European stocks higher
Asian shares soared overnight on Monday, lending a positive start to the European session as equities rode a broad risk rally. The very strong US nonfarm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus.
Hong Kong rose 4%, Tokyo 2%, while shares on mainland China were up around 5% on, among other things, some bullish commentary in state press. Shanghai shares jumped 5.7%, the best one-day gain in five years.
It looks like local investors are chasing the market and the spill-over has lifted the boats across Asia. China’s rally sparked a broad risk-on move. Escalation of US-China tensions don’t seem to be a major worry.
Bank stocks surge as Europe opens higher
European shares took the baton and opened roughly 2% higher in early trade on Monday led by a surge in bank stocks. HSBC rallied 6% apparently on the China trade read across, but elsewhere we saw broad gains as investors looked to new leadership at Lloyds and Commerzbank, whilst hopes of a fiscal lift in Europe may be a factor. Broadly it looks like the Chinese rally has lifted cyclicals like banks and autos.
Eco data was better but not as good as hoped – German factory orders jumped 10.4% in May, although the rebound was less impressive than the 15% expected. Orders remain almost a third below where they were a year before. Bank of France Governor Francois Villeroy de Galhau said on Sunday the country’s economy was bouncing back quicker than expected.
Meanwhile, Andrew Bailey, the governor of the Bank of England, has written to UK banks warning of the operational challenges of negative rates (new computer systems, lower net interest margin). This could be taken either way; either it’s an explicit message to get ready, or it’s way of saying to them not to worry because we know it’s a massive pain. The letter said negative rates remain “one of the potential tools under active review” should the Bank think more stimulus is required.
The rally left the DAX close to the top of the June range, trading above 12,800. The FTSE is close to the 61.8% retrace of the pullback in the second week of June. US futures point towards strong gains when Wall Street reopens after the three-day weekend, with the S&P 500 moving clear of the 78.6% retracement. June peaks are starting to come into view and will be a key test for whether this rally has further to run or whether it’s time for a pullback.
Bets of further stimulus boost stocks
Whilst markets face a wall of worry, investors are confident of getting a leg up from further stimulus. Britain’s chancellor Rishi Sunak will set out a mini-Budget this week focused on jobs. A meeting of Eurozone finance ministers on Thursday will set the tone for the key July 17th-18th summit. Whilst the various countries disagree over the composition of grants and bailouts, on conditionality and over how the funds are divided up, Germany’s Angela Merkel is bound to make sure that a deal is done: the squabbling needs to stop.
Meanwhile the US Congress is set to work on a second stimulus bill this month. At the same time, Covid-19 cases continue to soar – markets are getting used to the numbers – but the pace of recovery in the US will flatten if rising cases means states re-impose lockdown restrictions. As noted last week, the headline number in the jobs report masked some ills, so we will again be very much focused on the weekly initial and continuing claims numbers this week.
Dollar softens, oil edges higher, Buffett bets on natural gas rebound
Elsewhere, the broad risk rally sent the dollar lower, with DXY at 96.80. Sterling pushed a little with GBPUSD back about 1.25, looking to break last week’s peak a little short of 1.2530. EURUSD was a whisker short of 1.13, entering the resistance formed by the July 2nd peak. Clearing this opens up the path to the Jun 23rd swing high at 1.1350. Market positioning remains quite aggressively short, with net speculative positions on the euro the most bearish in three years.
Crude oil was a little higher, with WTI (Aug) just about nudging the $41. Gold is steady at $1776, with the latest CFTC figures showing speculative net longs at the highest in two years. Finally, Warren Buffett is making a $10bn bet on natural gas prices rebounding – the veteran investor thinks the market, which hit a 25-year low last month, has bottomed, making assets cheap and is on course for a rebound.
Bank of England wheels for fresh charge
Central banks need to be marshalled like cavalry and stimulus like charges. If your stimulus doesn’t rout the enemy immediately, you can easily get bogged down in a melee in which you lose your advantage. The Federal Reserve keeps wheeling around and managing to rally troops for fresh charges – the corporate bond buying announcement this week was a fine example.
But increasingly the cavalry is wearying and the more this drags on the less impact the Fed’s repeated charges will have against the twin enemies of deflation and unemployment. Investors are clinging on to central bank stimulus like the Gordon Highlanders gripped the stirrups of the Scots Greys, as they rode down the French columns at Waterloo.
BoE preview: more QE on the way
The Bank of England will mount a fresh charge at the enemy formations today. Coordination is the name of the game: it needs to keep on top of the huge amount of issuance – borrowing – by the UK government. Wartime levels of debt means the BoE must expand the envelope to hoover it up or risk yields starting to rise and spreads widening.
So, the BoE is expected to increase QE by at least £100bn, but I think it may well opt for £200bn, or even more, given that even £100bn would only last it until the end of the summer and the real long-term economic problems are going to emerge later in the autumn. Interest rates will stay at 0.1% and expectations firmly anchored for the near future with forward guidance repeating that the Bank will do whatever it takes.
In order to achieve this, the government and central bank will need to coordinate throwing more money at the problem. Indications suggest furlough has been costly but only delayed a lot of the pain – a looming unemployment crisis will require further central bank support, which means more QE is likely. And don’t talk about negative interest rates – Andrew Bailey mentioned it once, but I think he got away with it. Once you go negative, it’s very hard to get back to normal.
Whilst fresh forecasts are not due until August, the Bank will likely set a more defensive tone in terms of its expectations for the recovery. As noted here on May 7th (BoE: for illustrative purposes only) the Bank’s assumptions on economic recovery seem rather optimistic.
Sterling was steady ahead of the decision. GBPUSD held around the middle of its trading range, sitting on the 38.2% retracement of the bottom-to-top rally from the May low to the Jun high. Monday’s test of the 1.2450 (50% level) remains the support whilst the upside seems well guarded by the 200-day moving average just above 1.2690 that sparked the run lower since Tuesday.
Stocks on the back foot on fears of second Covid-19 wave
Wall Street stocks fell yesterday, except for tech, whilst European markets are on the back foot this morning as investors parse new cases in the US and China. The bulls lost energy as new hospitalisations in Texas due to Covid-19 rose 11% in the space of 24hrs. Several other US states are seeing rising cases that are a worry, albeit the kind of mass lockdown seen earlier this year appears an unlikely course of action. The economic damage is too high, and we are generally better equipped to handle it.
Worries about China are also important – markets had largely not bet on a second lockdown in the world’s second largest economy.
Overall, the market swings now suggest investors are reacting to various headlines about recovery, stimulus and new cases without much clear direction as to what it all means as a bigger picture. The major indices are right in the middle of recent trading ranges, sitting around the 50-60% retracements of the move from the multi-month highs at the start of last week to the swing lows this week.
Elsewhere, the US pulled out of talks with Europe over a global digital services tax, which raises the risk of individual countries taking their own steps, in turn sparking a fresh wave of US-EU tensions. An escalation of dormant trade wars is not out of the question if EU nations and the UK decide to tax US tech giants aggressively.
This comes of course after the EU launched an anti-trust probe into Amazon. In Europe, Germany passed additional fiscal stimulus to combat the pandemic costs. This morning Angela Merkel called on the EU to agree to the Covid fund before the summer break.
Crude steady on EIA inventories data
Crude prices were steady as they hold within the consolidation pattern printed since the start of June. WTI for August was holding around the $38 marker after the EIA inventories rose 1.2m barrels, vs expectations for a draw.
This matched the API data (+3.9m) and suggests there are more supply-side pressures at present, but OPEC data indicated demand not falling as much as previously expected in the second half of the year. Meanwhile it seems Iraq is working its way towards complying with OPEC+ cuts.