US pre-markets: futures extend losses


Scores on the doors midway through the European session and an hour before the US cash open: in summary, not good. As per the morning note, China risks abound with eyes on the Evergrande contagion. Markets also have one eye on inflation and the Fed meeting this week, plus the German election coming on Sunday. Many people – most investors seemingly – have been eyeing a correction in Sep/Oct after such a solid ramp this year and they’re getting one, it seems. If you have the Fed post max-accommodation – that is, on a path to tightening not loosening, inflation sticking around much more than optimists had thought, earnings growth stalling, and the economy past peak growth, you have the kind of perfect powder keg for a pullback and Evergrande may be the spark to set it off. Add to that a German election and an energy crisis in Europe and it is not the ideal backdrop for risk. The end game is not set here – a lot depends on what Beijing is prepared to do – or when it thinks it has sent a strong enough message to indebted companies in the property sector.

Euro Stoxx 600 down 2.3%, set for worst day since Dec 2020. DAX – 2.7% – its life as a 40-constituent index not off to the best start. FTSE 100 –1.7%, not as badly hit – make-up of the index and some pronounced sterling weakness alleviating some of the worst effects. Basic materials -4%, led by Anglo American -6% as iron ore prices collapse. Polymetal, Sainsbury’s, Astra and IAG managing to rally but 9:1 decliners to advancers tells the story of the day.

US futures keep extending losses – no signs of let up today and whilst we can expect some bounce at some point when cash equities are open for trade this may well get a lot uglier before it’s better. Dow called off 650pts, biggest decline since July 19th, while the S&P 500 is called down roughly 80pts at 4,353 for its biggest fall since May – looking perhaps to test the 100-day SMA at 4,326. Tails up for volatility longs with VIXX is north of 24 and highest since July 19th. There were ~10% corrective moves in Sep 20 and Oct 20 – a similar move would see SPX return to test its 200-day SMA near 4,100.

The 5-min chart for e-minis shows how relentless the selling has been this morning – not a freefall, but very steady.

US 10yr yields slipping sharply to 1.31%, on track for biggest decline in 5 weeks – reflects broader market tensions around the sell-off and the potential fallout Evergrande could have on the Chinese property sector and therefore growth. Gold not doing an awful lot despite the risk-off sentiment and drop in yields as the dollar is catching some very solid bid, keeping the metal’s progress in check around $1,760.

Bitcoin continues to feel the heat as the entire crypto space gets a pounding today. Who knew the crypto market was so correlated to Chinese property stocks…suffice to say this is not an uncorrelated asset. Bitcoin -9% with a $42k handle as it tests the Aug lows.

Bitcoin Chart 20.09.2021 PM

The FTSE 100 keeps making new lows today – the rally of 6% from Jul 19th through to the August peak is now in jeopardy as the index trades around 6,840. Looking for a bounce here, perhaps to around 6,900 but longer-term momentum clearly with the bears. That July swing low around 6,800, which sits right on the 23.6% retracement so we look to this level to offer some near-term support. If this cracks – and we look to see what kind of follow through we get when the US cash equities open at 14:30 for a guide – then we consider the next level to watch out for is around 6570, the 38.2% retracement.

UK 100 Futures 20.09.2021

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Stocks rise despite DC turmoil, Sainsbury’s bumper Christmas

Morning Note
  • European stocks rise tentatively after strong session the day before
  • Wall Street record highs as DC turmoil is shrugged off
  • Congress confirms Biden election as president
  • WTI hits $51, bond yields rise further

“The people cannot be all, and always, well informed. The part which is wrong will be discontented in proportion to the importance of the facts they misconceive; if they remain quiet under such misconceptions it is a lethargy, the forerunner of death to the public liberty.” – Thomas Jefferson.

No one can accuse the US of tending to lethargy. Turmoil in Washington D.C. has been largely shrugged off by global markets, as investors bet more stimulus and fiscal expansion from a Democrat-controlled Congress will be the driving force for the upside to show more gains. The Dow Jones industrial average ended the day at the record high even as scenes of protestors entering the Capitol were broadcast. The Dow climbed 438pts, or 1.4%, to close at a record high, having touched the 31k level earlier in the session. The S&P 500 rose 0.6% to 3,748, achieving an intra-day high at 3,783. The Russell 200 closed almost 4% higher off the back of the reflation-rotation boost from the Democrat win in Georgia. Any whispered concerns about higher taxes and more regulation are being shouted down by the prospect of more spending.

European markets have shrugged off the scenes since it most think it shouldn’t amount to much more than a rather bizarre, unfortunate (and deadly) footnote in the history of the Trump presidency. Following the protest Joe Biden has now been confirmed as president which should hopefully draw a line under the last four years and deliver more certainty to the market.

The FTSE 100 struck 6,900 in early trade having yesterday enjoyed its best day since November 9th – when it rallied almost 5% following the announcement by Pfizer and BioNTech of their vaccine’s high efficacy. The blue chip index jumped 3.66% on Wednesday following a good day for value, especially energy and financials. Basic materials also performed well on hopes that reflationary macros and expansionary fiscal policy will boost demand. Signs that the UK government is taking serious steps to get vaccines rolled out as quickly as possible is encouraging and allows investors to continue to ignore short-term risks from lockdowns going on for longer and ride the reopening narrative. HSBC and Standard Chartered +10% or so in a day was not normal and probably highlights how mispriced some of these value stocks have become due the pandemic and vaccines. The FTSE is up over 6% this week.

Sainsbury’s shares advanced 4% after raising full-year profit guidance to at least £330m from the previous guidance of around £270m after surging champagne sales, among other things, helped to put the fizz in a sparkling Christmas. Like-for-like sales over the festive period rose 9.3% with Q3 LFLs +8.6%. Digital sales rose 81% and made up a remarkable 44% of total sales.

Bargain retailer B&M also reported a strong Q3 over Christmas with sales up 22.5% on a constant currency basis, with UK LFLs +21.1% over the period. The company also said it would return £200m to shareholders with a 20p special dividend.

Oil prices rose with WTI spiking above $51 a barrel again as US crude oil inventories declined by more than 8m barrels, far exceeding that roughly 2m drawdown expected and marking the biggest decline since August. Crude oil stocks at the Cushing, Oklahoma hub rose 792k, whilst gasoline stocks rose 4.5m barrels despite production dipping from 9.2m bpd to 8m bpd for the week. Distillates inventories rose 6.4m barrels. Saudi Arabia said it would raise prices for US and Asian customers and has committed to unilaterally cutting output by an additional 1m bpd.

The dollar eased off its lows, with some bid come through for USD around 13:30 yesterday as yields drew in and the 10yr Treasury dipped under 1%. Deflation continues to stalk the Eurozone, which maybe weighed a tad on the euro’s ascent, with Germany reporting its fourth straight month of deflation in December. CPI declined –0.3% for the month. This combined with some decent factory orders numbers from the US (+1% vs +0.7% expected) lifted the USD off its lows through the afternoon session here in Europe, albeit US 10s returned to 1.05% by the European close and have advanced to 1.063% this morning as the European session gets underway. EURUSD retook 1.23, having yesterday hit its strongest level since Apr 2018 at 1.2340 before taking a trip to 1.2266; and GBPUSD recovered 1.36 in early trade this morning after taking lows at 1.3540 yesterday.

Gold finally took fright at the rising yield outlook with spot retreating from a HOD at $1,960 to dip under $1,910 again, closing the gap back to Monday’s opening lows. But the bears couldn’t hold the close here and prices eased back to $1,920.

Gold finally took fright at the rising yield outlook with spot retreating from a HOD at $1,960 to dip under $1,910 again but prices eased back to $1,920.

Stocks firmer, China slows, earnings in focus

Morning Note

Bad news = good news. Relatively lacklustre growth in China has the market baying for more stimulus. To be fair, despite the headline Q2 GDP number slipping to a 30-year low at 6.2%, there were some signs of encouragement. Industrial production rose 6.3% in June, an improvement on the 5% growth in May. Retail sales also beat forecasts so. Most of the recent softness seems trade-related, with exports having dipped 1.3%.

Asia has broadly ticked higher despite, or indeed because of, the softer China GDP numbers. Futures show European markets are higher after a fairly lacklustre weak. Indeed European equity markets moved lower last week just as the US was punching record highs. Time for Draghi and co to turn the taps on. 

Indices march higher

Wall Street continues to roar higher, with the S&P 500 closing up half a percent on the day at 3,013.77. Oil and gold fairly steady.

Bitcoin is weaker, slipping to support around $10k having given up the $11,600 level. FX steady – GBPUSD holding at 1.2570, with EURUSD at 1.1270. Volatility in FX has collapsed with central banks turning the liquidity taps back on.

Earnings season kicks off

Earnings season is coming with fairly low expectations. Two weeks prior to earnings season 82% of companies that had revised earnings estimates going into the reporting period had lowered them. Lowballing by Wall Street ahead of earnings season is normal, but the scale of the downward revisions is noteworthy. This happened ahead of the Q3 2018 earnings, just before we saw stocks slump into a bear market, albeit one that has proved very temporary.   

Recession – We’re likely to see an earnings recession. Q1 earnings declined 0.29%, therefore making this likely to become a full-blown earnings recession, that is, back-to-back year-on-year declines in EPS. In 2016, the last time this happened, we saw earnings decline for 4 straight quarters. S&P 500 companies are expected to report a roughly 3% decline in EPS this quarter. 

Trade concerns – whilst we had a degree of détente at the G20, existing tariffs are still in place and no meaningful progress has been seen. There’s a growing acceptance that the US and China are in this for the long-haul. The US election cycle means we are unlikely to see a reason for Trump to do any deal until 2020. Whilst for now the mood is upbeat, in the event of no deal, the lack of progress through the rest of the year would likely begin to drag on sentiment and affect equity markets. If corporates see additional tariffs being imposed their EPS forecasts would need to be revised substantially lower. The impact of the US-China trade war on earnings is yet to be fully felt but we could hear from a number of large-caps voicing concerns. The extent to which CFOs highlight worry about trade on EPS forecasts will be of particular importance. Of course we are likely to see a lot of kitchen sinking with companies blaming trade for all manner of ills.  

Banks start the ball rolling this week. Big question over interest rates – rate cuts may well be coming in the US and this will have implications for banks. Net interest margin would likely fall although the easier credit conditions would offset some of the negative effects. Citigroup unofficially kicks off the earnings season on Wall Street today. How much will banks be affected by Fed rate cuts? In investment banking, is there anything from the Deutsche carcass worth stripping? 


Sports Direct – the soap opera continues – delays annual results due to House of Fraser uncertainty. The big question was what impact House of Fraser and various other acquisitions of dubious value would have on Sports Direct results. A material impact, one can only assume. HoF must be losing money hand over fist.  Looking to the earnings, top line growth is expected to rise but profits are seen weaker as the cost of acquisitions weighs. Since reporting an 27% decline in underlying profits in the first half we’ve not heard a peep from Sports Direct on performance. The delay in delivering the annual results does not sit well with investors, who must be nervous about what it means. It seems likely it’s been a tough ride in the core Sports Direct retail division, whilst acquisitions have added nothing but increased costs.


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