Primark sales recovering, sterling eyes Brexit talks

Is there a better guide to the health of the high street than Primark? The cheap-as-chips clothing jumble sale is about as good a barometer as any for what’s happening, with Next going increasingly online and M&S not what it once was in clothing and more of a grocer than ever. Primark also doesn’t do online so we get an unmuddied view.

So, it’s good news that AB Foods reports Primark sales have bounced back strongly since reopening. Sales to the year-end since reopening are due to hit £2bn, but in the UK sales are still likely to be down 12% from last year on a like-for-like basis. Shopping centre and regional high street stores are trading broadly in line with last year.

Large destination city centre stores, which rely on tourism and commuters, have seen a significant decline in footfall. Exclude the big 4 city centre stores and the LFLs are only -5%. Perhaps there is life in the British high street after all? A lot of this will be pent-up demand, but Primark’s low-pricing model makes it very resistant to cyclical downtrends.

ABF shares rose 4% at the open before paring gains to trade around 2% higher.

European stocks move higher, US markets shut

Stocks in Europe were broadly higher on Monday after a pullback at the end of last week seemed to run out of steam. US markets are shut for Labor Day, which will keep volumes thin. The FTSE 100 notched its weakest close since May on Friday, a whisker under 5,800. Early trade on Monday took the index back to the 38.2% retracement at 5850 and we are looking for this level to hold for the market to build any upside momentum.

Tech shares led the worst two-day decline for US stocks in some time, but the bulls fought back late in the day on Friday. The S&P 500 closed down 0.8% at 3,426 but this was some 75 points above its lows. Futures show weakness though at 3,400 on our indicative cash market.

Vix futures (Sep) have come down sharply from the highs hit last week in the depths of the sell-off, but are holding the rising trendline and the October contract remains solidly in contango implying election risk remains a problem.

Is the European economic rebound losing steam?

On the data front, Chinese exports rose a healthy 9.5% in August as its trading partners reopened their economies and pent-up demand for goods fed into the figures. However, imports declined 2.1%, indicating softer domestic demand.

Meanwhile German industrial production rose in August but at a much slower pace than July. Output climbed by just 1.2%, short of the 4.7% expected and the +9.3% recorded in the prior months. There are clearly signs that the bounce back in the Eurozone is running out steam – lots for the European Central Bank to consider when it meets this week.

GBPUSD trades above 1.32 despite Brexit focus

Brexit talks also resume this week (The Week Ahead: Brexit talks resume, ECB frets over exchange rate contains a full preview). Of course, we remain a long way from getting a deal done – at least if the pessimism from Michel Barnier is to be believed.

A lot of the chatter and commentary is very downbeat. But this should be expected – the nature of the brinkmanship means a deal always seems further away than it may be in reality. News that the UK is drawing up legislation to override the withdrawal agreement’s requirements for new Northern Ireland customs arrangements is likely to set a fire under the EU.

To me this looks like the Johnson government’s brinkmanship designed to show they mean it when they say that no-deal is an option. Expect negative headlines to weigh on sterling; although this morning it’s put in a decent opening trade, with GBPUSD finding bid north of 1.32. However, the near term downtrend remains in force unless bulls can regain the rising trend line at 1.3250 and push clear of Friday’s swing high at 1.33190.

Crude prices continued to slide after Aramco said it would cut prices in October as the pandemic keeps a lid on demand. WTI (Oct) declined towards $38.56 before paring losses to hold the $39 handle after a letter on Saturday said Aramco would cut its US-bound crude by 50-70 cents, with pricing for Asia discounted by 90 cents to $1.50. Gold remains a very narrow range at $1930.

Adelanto semanal: reanudación de las negociaciones del brexit; el BCE se centra en el tipo de cambio

Esta semana se retoman las negociaciones en torno al brexit en lo que supondrá otra ronda de tiras y aflojas que, a día de hoy, apenas ha dado frutos. ¿Conseguirán ambas partes salir de este impasse o harán mella los últimos acontecimientos en la libra esterlina? Entretanto, el Banco Central Europeo se reúne tras un considerable repunte del euro, que ha inquietado a los legisladores.

Negociaciones del brexit

Se prevé que esta semana comience la siguiente ronda formal de negociaciones entre la UE y el Reino Unido en Londres, e introducirá un riesgo eventual tanto para los cruces del GBP como para el FTSE por implicación. Los ánimos subyacentes no son muy optimistas. La última ronda de negociaciones, que tuvo lugar en agosto, concluyó sin apenas avances.

Posteriormente, Michel Barnier, el negociador principal de la UE, afirmó que parece «improbable» alcanzar un acuerdo y mostró su preocupación ante la situación. Su homólogo británico, David Frost, declaró que las negociaciones eran útiles pero que se habían hecho pocos avances.

Las charlas informales de la semana pasada también resultaron infructuosas, puesto que Barnier confirmó que se encontraba «preocupado y decepcionado» ante la postura británica en las negociaciones.

El grueso de las negociaciones se vertebra en torno a lidiar con la incertidumbre de la competencia relativa a la soberanía (Reino Unido) y la integridad del mercado único (UE). Ambas partes deben hacer compromisos filosóficos antes entrar en compromisos prácticos. Empiezo a creer que este será un importante escollo a la hora de alcanzar un importante acuerdo integral.

Reunión del BCE

El Banco Central Europeo (BCE) se reúne con un euro en acusado repunte como telón de fondo, algo que suscitado la preocupación de los legisladores. Aparentemente, 1,20 era la línea roja del banco central, un nivel que hizo que el economista jefe del organismo, Philip Lane, comentara que, aunque el BCE no tiene en cuenta el tipo de cambio, «el tipo euro-dólar sí es importante».

Este supuso un intento del BCE de intervenir en el repunte, ya que un euro más fuerte dificultaría un aumento de la inflación, lo que mermaría el crecimiento. Lane simplemente hizo saber al mercado que el tipo de cambio sí que importa. Lo último que necesitamos en este momento es una guerra de divisas, pero parece que el BCE está a punto de declararla. Quedamos a la espera de la valoración de Christine Lagarde al respecto.

Mientras tanto, también deberíamos estar atentos a si el BCE sigue la estela de la Reserva Federal (Fed) y deja entrever su intención de no dejar que la inflación (en caso de que llegara a materializarse) se interponga en el camino de la recuperación.

La gran pregunta gira en torno a si el BCE pugna o no por mantener un doble mandato similar al de la Fed. De hecho, ya ostenta un mandato más amplio: además de su principal objetivo de respaldar la estabilidad de los precios, tiene la misión de apoyar las «políticas económicas generales» de la UE. Si no es este, ¿qué otro mandato podría darle vía libre para respaldar el empleo?

En Jackson Hole, la Fed anunció un cambio de política que repercutirá en gran medida en las expectativas en torno a los tipos y a la inflación. El organismo estadounidense ha adoptado un enfoque más racional. En lugar de declarar que los resultados económicos deben adaptarse a sus modelos —algo que siempre ha sido una mera valoración—, dejará que los resultados sean los que guíen la política.

En opinión de algunos, esto supondría un paso hacia la completa adopción de la TMM, aun si Powell se ha mostrado reacio a seguir esta postura en el pasado. La cuestión es que la crisis ha lanzado a la TMM del seno de la teoría económica a la práctica sin que realmente se haya sometido a debate. Powell se ha adscrito a un principio fundamental de la TMM: ¿por qué el precio a pagar para conseguir una inflación baja debe ser dejar a millones de personas sin perspectivas laborales y en paro?

Considero que el BCE seguirá este derrotero y que su reunión se antojará muy interesante.

Datos económicos fundamentales

Además de los acontecimientos anteriores, lo primero que debemos tener en cuenta es que, con motivo del día del trabajo en EE. UU., el lunes será festivo por lo que los mercados al contado permanecerán cerrados. Ese mismo día, Halifax publicará su índice de precios de la vivienda británico, justo antes del informe Sentix relativo a la confianza de los inversores de la zona del euro.

El martes, estaremos atentos al informe de confianza empresarial del NAB para Australia, así como de los datos del gasto y del PIB japoneses. El miércoles, conoceremos la decisión del Banco de Canadá relativa a los tipos de interés, así como los pedidos preliminares de máquinas-herramienta de Japón, un interesante indicador avanzado de la demanda. Además de la reunión del BCE, el jueves verán la luz las cifras de la inflación del índice PPI y los inventarios de crudo semanales. Por último, el viernes se despide la semana laboral con los datos del PIB británico, los de la inflación del IPC estadounidense y darán comienzo las reuniones del Eurogrupo de los ministros de economía europeos.

Informes de resultados fundamentales

Esta semana, entre los informes de resultados de las principales empresas, encontramos Lululemon, Oracle, Richemont y Slack. No obstante, la atención puede que se centre principalmente en Peloton, una de las grandes beneficiadas de la Covid cuyas acciones han repuntado en las últimas semanas hasta alcanzar cotas históricas.

La semana pasada, JPMorgan aumentó su precio objetivo de 58 a 105 dólares e incluyó a la empresa en su lista de selección de valores principales.

En palabras del analista Doug Anmuth, «En nuestra opinión, el principal reto a corto plazo de Peloton es mantener la elevada demanda, con unos tiempos de unas 6 a 7 semanas de media desde el pedido de bicicletas hasta su entrega en las 20 principales áreas de mercado designadas estadounidenses, según constatamos el 1 de septiembre».

En la plataforma, encontrará un completo calendario económico y de acontecimientos corporativos.

Lo más destacado en XRay esta semana

Descubra toda la programación de formación y los análisis del mercado financiero.

17.00 UTC 07-Sep Blonde Markets
From 15.30 UTC 08⁠-⁠Sep Weekly Gold, Silver, and Oil Forecasts
13.00 UTC 09⁠-⁠⁠⁠⁠Sep Indices Insights
14.45 UTC 10-⁠⁠⁠⁠Sep Master the Markets
17.00 UTC 10-⁠⁠⁠⁠Sep Election2020 Weekly

European equities bounce, dollar fights back

What is the right multiple when the Fed is stoking inflation and says it will not withdraw accommodation? What price should stocks carry in a world of ZIRP and QE-4-ever? It’s very hard to say: the usual model for forming a judgment on how richly or poorly valued stocks should be – using interest rates and earnings – is becoming out of step with the reality of unlimited central bank support. How do you derive the right discount rate?

We have always assumed that central banks will withdraw accommodation as the economy gets hot and inflation picks up. Or in other words, it’s always been there to take away the punch bowl whenever the party got a little rowdy. Indeed, often it was too quick to turn the music off just as people started to dance.

Now the Fed says it won’t do that and the ECB and others are set to follow – where the Fed goes usually the rest of the world needs to follow. If it’s unlimited Fed support, who cares if the forward multiple on the S&P 500 is x25? If there is no hiking cycle on the horizon, then stocks could continue to rally from these already very stretched levels.

Vix points to uncertainty as US Presidential Election nears

Of course, as repeated nearly every day, near term I worry that this extended rally is ripe for a pullback as the US election approaches, and I am not alone. Whilst retail investors rich on stimulus cheques still think ‘stonks only go up’, there are signs investors are worried about how far this has gone.

Vix futures keep moving in an upwards trajectory that suggests investors are paying more for downside protection on the S&P 500. Vix futures settled above 28 and contracts expiring in Oct are north of 33, signalling a lot of uncertainty around the election. The race will be far closer than polls show. Our election tracker shows Trump narrowing the gap.

FTSE lags global stocks

Such concerns about stretched valuations and ever-higher multiples are not a concern for UK investors. The FTSE 100 has rather majestically shrugged off the rally in global stocks and serenely plunged to its weakest since May. A stronger pound undoubtedly took the wind out of the sails and a bit of a catchup trade was in play after the market was closed for the bank holiday on Monday, meaning it didn’t take part in the mild sell-off across Europe yesterday.

But the FTSE’s troubles are not a new phenomenon – a complete absence of tech and growth is a major problem. Dividend cuts have also vanquished income investors, albeit the yield of almost 4% doesn’t seem too bad today. Last night the FTSE 100 settled on the 38.2% retracement of the March to June rally which has offered near-term support for today’s bounce – dollar strength this morning is helping too.

Record closes for SPX and Nasdaq fuel rally in Europe

European stocks rallied in early trade on Wednesday, including the FTSE 100, after the S&P 500 and Nasdaq both hit fresh records. Apple rallied another 4%, seemingly unstoppable. Tesla declined 5% after it announced a $5bn stock sale, which though a bit of a surprise is not a complete shock given Tesla’s vast capex requirements and share price accretion – as it did in February, Tesla is taking advantage of favourable market conditions to raise fresh cash early on in the cycle.

Meanwhile, we are not getting much further on stimulus – US Treasury Secretary Steve Mnuchin rejected the Democrats’ latest $2.2tn coronavirus relief package, but we are set for more spending, more printing until inflation becomes a problem.

The dollar came back fighting with DXY back above 92.50 as both GBP and EUR retreated off key resistance levels. Could be a dead cat bounce for USD. GBPUSD made a run to 1.35 but failed this test and backed off further this morning to take a 1.33 handle.

Watch for the Bank of England’s Andrew Bailey, who will be giving oral evidence to the Treasury Committee in Parliament on the economic impact of coronavirus. Obviously it’s bad, but house prices have hit a record high so that is good if you own one, not so good if you don’t. Messrs Haldane (he of the V) and Broadbent are speaking later, too.

Euro struggles after strong US manufacturing data, US ADP jobs report in focus

The euro – has a line in the sand been drawn? EURUSD pushed up to have a run at 1.20 but got knocked back as the US ISM manufacturing came in better than expected at 56. This could be a line in the sand for the euro bears defending the roaring 20s? Eurozone inflation turned negative in August – a clear signal of the disinflationary pressures wrought by the pandemic.

Inflation fell to –0.2% from +0.4% in July. It lays bare the mountain the ECB needs to climb and simply tells us that the central bank will need to keep monetary policy exceptionally loose for a very long time. It’s worth noting that the much-hyped EU rescue deal has yet to be delivered. EURUSD pulled back under 1.19 in early trade on Wednesday as the dollar caught a bid.

Today, we are looking ahead to the ADP nonfarm employment report ahead of Thursday’s weekly claims count and Friday’s main nonfarm payrolls print. The ADP number is expected to show a gain of 1m jobs from a paltry 167k in July.

US factory orders and crude oil inventories on tap this afternoon, expected to show a draw of –2m barrels. Later we also have the Fed’s Beige Book, while the Fed’s Williams and Mester are speaking.

Risk gains as Powell signals lower for longer on rates

Fed chair Jay Powell announced a new monetary policy framework based on average inflation targeting (AIT), as had been anticipated. I read this as admission by the Fed that the monetary and fiscal response to the pandemic will ultimately prove inflationary (M1 increase, deglobalisation etc), but that the Fed does not want to pull the handbrake on a long and slow recovery by being constrained with a mandate to keep inflation level. It’s also increasingly politically tuned into recent events in prioritising jobs over price stability.

Essentially the Fed is taking a step back from price stability, it is not going to worry about inflation overshooting; the focus is on employment not stable money. It’s about supporting the economy not prices – this is an important shift, albeit one that we have largely assumed unofficially to be the case for some time. The Fed today made it clear it won’t take the punch bowl away as quickly as it would have done in the past.

Fed AIT framework leaves unanswered questions

But the Fed is keeping its hands relatively free by not sticking to any specific formula relating to AIT – this poses some unanswered questions for the FOMC. There was not much in the way of detail of how the Fed plans to  deliver the new framework. For instance, if inflation runs at 1% for 5 years, does that mean it allows it to run at 3% for the next 5?

Powell’s speech lacked in specifics on the nature of forward guidance that the FOMC is clearly leaning towards – this will be an important lever of the AIT approach, so it needs to be clarified at the next meeting in September.

Should forward guidance be based on a time horizon or specific economic data? Yield curve control has been shelved as an idea by the FOMC but remains an option should it desire. The September 16th meeting will be of great importance to iron out how AIT will be delivered.

Powell stressed that if ‘excessive inflationary pressures’ were to build, or inflation expectations were to rise above levels consistent with its mandate, the Fed ‘would not hesitate to act’. This gives it a degree of latitude down the line should there be a major inflation overshoot.

Dollar offered, stocks and gold bid

Markets are trying to make sense of the changes. The dollar index sold off initially to 92.40 but pared losses and came back to 93 as US yields started to pick up with 10s back above 0.719% having dipped to 64bps. EURUSD spiked to 1.190 but quickly retreated to 1.180. GBPUSD surged to 1.3280 before coming back in to the round number support.

Stocks rose with Wall Street hitting fresh record highs at the open as AIT is fundamentally supportive of risk assets, entailing as it does lower interest rates for longer. The S&P 500 approached 3,500 for the first time, meaning it’s up 100 points for the week. Gold drove sharply higher to $1976 but retraced as quickly as it rallied to $1940 as yields climbed. The key for the market is what will AIT do to inflation expectations.

Earlier data showed just what a big task the Fed has in getting unemployment back to pre-pandemic levels (3.5%). It’s clear the US still has a very troubled jobs market – initial claims still above 1m, continuing claims only came down a small amount to 14.54m from 14.76m a week before. Q2 contraction in the US was a little less than previously estimated, with the annualised figure coming in at –31.7% vs –32.9% on the first reading.

Ex-divis hit FTSE, US stocks near record high, trade comes back in focus

US stocks rallied to close near its all-time highs yesterday amid what some are saying are signs of greater confidence in the economic recovery in the US. Or perhaps it’s just even speedier decoupling between Wall St and Main St. Nevertheless, bond yields pushed higher amid a faster-than-expected rise in US inflation, whilst the market is starting to focus again on trade and tariffs.

The fact that the broad stock market is at all-time highs is a testament to unbelievable amounts of monetary and fiscal stimulus – the patient is hooked, and only more drugs will do. The disconnect between the stock market and the real economy is too stark, too unjust and too indicative of a system that continues to favour capital over labour that, sooner or later, a change is gonna come.

Europe soft despite strong close on Wall Street, TUI posts earnings wipe-out

Never mind all that for now though, stonks keep going up. The S&P 500 rose 1.4% to end at 3,380, just six points under its record closing high at 3,386.15, with the record intraday peak at 3,393.52. Asian stocks broadly followed through, with shares in Tokyo up almost 2%.

European stocks failed to take the cue and were a little soft on the open, with the FTSE 100 the laggard at -1%, though 22.3pts are due to BP, Shell, Diageo, AstraZeneca, GSK and Legal & General among others going ex-dividend.

For a taste of the real economy, we can look at TUI, which said group revenues in the June quarter were down 98% to €75m. It’s a total wipe-out of earnings, but it’s not a surprise – the business was at a virtual standstill for most of the period and was only able to resume some limited operations from mid-May. Just 15% of hotels reopened in the quarter, whilst all three cruise lines remain suspended.

TUI posted an EBIT loss of €1.1bn for the quarter, taking total losses over the last nine months to €2bn, with €1.3bn due to the pandemic forcing the business to be suspended. Summer bookings are down over 80% but it has got another €1.2bn lifeline from the German government. Shares fell over 6% in early trade.

Trade in focus as US-China weekend talks approach

US-China tensions are rearing their head again. Officials meet this Saturday to review progress of the phase one deal. White House economic adviser Larry Kudlow the deal was ‘fine right now’. Sticking with trade, the US is maintaining 15% tariffs on Airbus aircraft and 25% tariffs on an array of European goods, including food and wine, despite moves by the EU to end the trade dispute.

Crucially it did not follow through with a threat to hike tariffs, however it still leaves the risk of further escalation when the EU is likely to win WTO approval to strike back with its own tariffs.

Strong US CPI raises stagflation fears

Yesterday, despite the optimism in the market, there was – for me at least – some potential signs of bad news for the real economy (not the stock market, remember) with US inflation picking up faster than expected. You can read this as the economy doing better than fared as consumers return, but you can equally take a glass half empty view and see this as a major worry that prices of essentials are going to rise whilst economic growth stagnates – which can be a cocktail for a period of stagflation.

Given the enormous amount of money being pumped into the system, there is a better than evens chance we get an inflation surge even if the pandemic was initially very disinflationary. Unlike in the wake of the financial crisis, the cash is not being gobbled up in the banking system as increased capital buffers etc, but is going into the (real) economy. Moreover, it’s being done in tandem with a massive fiscal loosening.

Short-lived pullback for USD?

Year-over-year, headline inflation rose from 0.6% to 1%, whilst core CPI was up 1.6% in July vs the 1.2% expected. Food prices rose 4.6%, whilst the cost of a suit is down a lot. The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle.

Investor optimism is keeping the dollar in check. The dollar index moved back to the 93 mark, whilst the euro broke above 1.18 against the greenback for a fresh assault on 1.19, twice rejected lately. Sterling is making more steady progress but is well supported for now above 1.30, however the dollar’s pullback may be short-lived. Gold held onto gains to trade above $1930 after testing the near-term trend support around $1865 yesterday.

US EIA data, OPEC report boost oil

Oil prices held gains after bullish inventory data and OPEC’s latest monthly report. WTI (Sep) moved beyond $42 after the latest EIA report showed a draw of 4.5m barrels last week. Meanwhile, as noted yesterday, OPEC’s new report indicated the cartel will continue with production cuts for longer.

In its monthly report, OPEC lowered its 2020 world oil demand forecast, forecasting a drop of 9.06m bpd compared to a drop of 8.95m bpd in the previous monthly report. But the report also sought to calm fears that OPEC+ will be too quick to ramp up production again. Specifically, OPEC said its H2 2020 outlook points to the need for continued efforts to support market rebalancing. Compliance was down but broadly the message seems to be that OPEC is not about to walk away from the market.

US inflation hot, stocks keep higher as bonds slip

US inflation was a little hot and certainly has a stagflation feel about it, but this won’t be a concern for the Federal Reserve in the slightest. CPI rose 0.6% month-on-month in July, unchanged from a month before and ahead of the 0.3% expected. Year-over-year, headline inflation rose from 0.6% to 1%, whilst core CPI was up 1.6% in July vs the 1.2% expected. Food prices were +4.6% YOY, with beef +14.2%.

Fed unlikely to worry if inflation heads higher

The Fed is going to become more relaxed about letting inflation run above its 2% target. Despite the indicators in the market like TIPs and gold prices suggesting that the massive dose of fiscal and monetary stimulus we have just had, combined with a supply constraint, the output gap is still huge and the economy will run well short of its potential for many years.

So that means the Fed should and could be relaxed about headline inflation running above 2% for a time, instead prioritising the employment level, but it also means inflation expectations can start to become unanchored as they did in the 1970s, which may have longer-term implications for the path of prices and relative values for gold and stocks.

In a nutshell, if inflation expectations lose their anchors then we are faced with a stagflationary environment like nothing we have seen for 50 years. High inflation, low growth for years to come is the unwanted child of a global pandemic meeting massive government intervention.

Treasury yields nudged up with the 5yr up to 0.307% from 0.269% and 10s up to 0.69%. Gold has largely held onto gains after a sharp turnaround this morning with spot trading around $1,935 after touching $1,949 this morning. Higher yields are bad for gold, but higher inflation is so good so the CPI numbers seem to be netting out for now.

EUR/USD moves off lows, SPX eyes all-time high

Earlier in the session, Eurozone industrial production rose over 9% in June but remains down 12% from pre-pandemic levels. EURUSD has moved up off its lows despite the print falling short of the 10% expected.

Stocks were well bid heading into the US session with Europe enjoying broad gains and the FTSE 100 leading the way at +1.5%. The S&P 500 is eyeing a fresh run at the all-time highs with the index only about 1.5% short; the scores on the doors are: record intraday 3,393.52, with the record close at 3,386.15.

The market came up a little short yesterday but you just sense bulls will push it over the line sooner or later. After yesterday’s reversal traders may be a little gun shy but the bulls have the momentum. The Nasdaq remains on the back foot pointing to the kind of rotation out of tech.

Oil heads higher after OPEC report

Crude oil rose with WTI (Sep) north of $42.50 after OPEC’s monthly report indicated the cartel will continue with production cuts for longer. In its monthly report, OPEC lowered its 2020 world oil demand forecast, forecasting a drop of 9.06m bpd compared to a drop of 8.95m bpd in the previous monthly report.

This report seemed to be quelling fears that OPEC+ will be too quick to ramp up production again. Specifically, OPEC said its H2 2020 outlook points to the need for continued efforts to support market rebalancing. Compliance was down but broadly the message seems to be that OPEC is not about to walk away from the market.

What will happen to the US dollar if Trump wins re-election?

After years of threatening a devaluation, in the face of China’s own currency manipulation, President Trump recently indicated that he is now in favour of a strong dollar. Given the President’s inconsistency on the issue, and the current turbulent economic environment, what exactly would a second term entail for the most important currency in the world?

How a second Trump term could impact USD

The crucial distinction here is one of means versus ends. In the mind of President Trump, the currency is just a tool to deliver a buoyant stock market and booming economy, whatever he might tweet.

The Trump administration will do whatever it takes to catalyse the recovery, whether appreciation or depreciation is the required remedy. In our view, the latter will prove to fit the bill, and so the US dollar’s value will fall if the Trump train continues to roll through November.

Whilst the dollar has been relatively stable in its value over the course of Trump’s first three years in office, the gargantuan nature of the economic task at hand means that this trend simply cannot continue.

When he began his first term, the economy looked to be in a relatively healthy state. Discounting the remote possibility of a miraculous economic recovery, his second term will debut in very different circumstances.

Massive relief spending set to continue

Looking at the demand side, one could be forgiven for assuming that a dollar appreciation was imminent. The US economy comfortably outperformed the G7 and G20 averages in the first quarter of 2020, shrinking by just 1.3% compared to 2% and 3.4% respectively.

This is likely the result of mammoth congressional stimulus packages, which have allowed the US to lead the world nominally in terms of relief spending and come second in terms of percentage of GDP.

A second Trump term would almost certainly see further waves of relief, likely in the form of his $1 trillion infrastructure plan. This particular avenue of execution benefits from relatively healthy levels of bipartisan support, meaning that such spending can be expected no matter who controls the Congress come 2021.

US stocks likely to continue outperforming, pressuring USD

And in terms of the stock markets, the US has also consistently outperformed global averages throughout the President’s first term, including in the post-Covid era.

This is exemplified by the fact that the S&P 500 index has risen by over 50% since 2016, whilst the FTSE has fallen by around 9% in this same period. Given all of the above, the US is likely to continue attracting investors the world over, delivering inflationary demand-side pressures that would support USD.

However, the aforementioned upward pressure caused by a healthy economy will be insignificant when compared with the deflationary pressure instigated on the supply-side.

Federal Reserve stimulus measures will help Trump get weaker dollar

Since February, the Federal Reserve has increased its balance sheet by almost $3 trillion, moving from $4.2 trillion to $7 trillion. This rapid increase is expected to continue, with Trump calling the policy ‘something that’s really great for our country’.

In addition, the possibility of extreme measures in the form of yield curve control is rising, with several current Fed governors commenting that the policy should be on the table if necessary.

All of this is indicative of our central point: the authorities are prepared to do whatever it takes to prop up the stock market and the real economy and will stop at nothing to achieve this end.

Expanded balance sheet, flat interest rates, yield curve control to cause dollar depreciation

Trump has repeatedly held up rising stock prices as a beacon of success in his first term and will continue to do so if he wins a second. With quasi-control over the Fed, afforded to him by his position at the bully pulpit, the President will get what he desires, no matter the cost.

In this particular instance, the cost will be an expanding Fed balance sheet, rock-bottom interest rates and, if it comes to it, yield curve control measures. The sheer enormity of the response on the supply-side will be more than enough to drown out any inflationary pressures on the demand-side – depreciation inbound.

Overall, Pres Trump doesn’t really care about the value of the dollar outside of its utility as an economic tool or a stick with which to hit China. The real motivation behind the President’s actions in a second term will mirror those of the first: growth in the stock market and the real economy, in that order of importance.

In his pursuit of these goals, no policy instrument is off limits, whether it be a trusty expansion of the Fed’s balance sheet, or an as yet untested tool like yield curve control.

Whilst the Fed is technically a quasi-independent body, such independence is illusory, particularly in the context of Trump’s propensity for the use of public pressure. Whilst some demand-side inflationary effects will be initiated by a better-than-average recovery, such effects will be lost in the vastness of the supply-side avalanche that is to come.

If he achieves a second term, Pres Trump will leave office in 2024 having achieved two things that he initially desired: a stock market on the rise and a depreciated dollar.

Stocks firm, earnings unmask weakness, OPEC+ decision eyed

European markets moved up again this morning after stocks rallied on Wall Street and futures indicate further gains for US equity markets despite big bank earnings underlining the problems on Main Street. Sentiment recovered somewhat after Moderna’s vaccine candidate showed ‘promising’ results from phase 1 trials. It is too early to call a significant breakthrough, but it’s certainly encouraging.

Cyclical components led the way for the Dow with top performers the likes of Caterpillar and Boeing, as well as energy names Exxon and Chevron up over 3% as the index rose over 500pts, or 2.1%, its best day in over two weeks. Apple shares regained some ground to $388 ahead of an EU court ruling today on whether the company should repay €13bn in unpaid taxes.

Asian markets were mixed, with China and Hong Kong lower as US-China tensions rose, but shares in Japan and Australia were higher. European shares advanced around 0.75% in early trade, with the FTSE reclaiming 6,200 and the DAX near 12,800.

However, Tuesday’s reversal off the June peak may still be important – lots of things need to go right to extend the rally and you must believe this reporting season will not be full of good news, albeit EPS estimates – such as they are – may be relatively easy to beat.

My sense is what while the stock market does not reflect the real economy, this does not mean we are about to see a major drawdown again like we saw in March. The vast amount of liquidity that has been injected into the financial system by central banks and the fiscal splurge will keep stocks supported – the cash needs to find a home somewhere and bonds offer nothing. It will likely take a significant escalation in cases – a major second wave in the winter perhaps – to see us look again at the lows.

For the time being major indices are still chopping around the Jun-Jul ranges, albeit the S&P 500 and DAX are near their tops. Failure to breakout for a second time will raise the risk of a bigger near-term pullback, at least back to the 50% retracement of June’s top-to-bottom move in the second week of that month.

Trading revenues, loan loss provisions surge at US banks

US bank earning highlighted the divergence between the stock market and the real economy. JPMorgan and Citigroup posted strong trading revenues from their investment bank divisions but had to significantly increase loan loss provisions at their consumer banks. Wells Fargo – which does have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn.

This begs the question of when the credit losses from bad corporate and personal debt starts to catch up with the broader market. Moreover, investors need to ask whether the exceptional trading revenues are all that sustainable. Shares in Citigroup and Wells Fargo fell around 4%, whilst JPMorgan edged out a small gain. Goldman Sachs, BNY Mellon and US Bancorp report today along with Dow component UnitedHealth.

UK retail earnings

In the UK, retail earnings continue to look exceptionally bleak. Burberry reported a drop in sales of 45% in the first quarter, with demand down 20% in June. Asia is doing OK, but the loss of tourist euros in Europe left EMEIA revenues down 75% as rich tourists stayed clear of stores because of lockdown. Sales in the Americas were down 70% but there is a slight pickup being seen. Encouragingly, mainland China grew mid-teens in Q1 but grew ahead of the January pre COVID level of 30% in June, Burberry said. Shares opened down 5%.

Dixons Carphone reported a sharp fall in adjusted profit to £166m from £339m a year before, with a statutory loss of £140m reflecting the cost of closing Carphone stores. Electricals is solid and online sales are performing well, with the +22% rise in this sector including +166% in April. Whilst Dixons appears to have done well in mitigating the Covid damage by a good online presence, the Mobile division, which was already impaired, continues to drag.

Looking ahead, Dixons says total positive cashflow from Mobile will be lower than the previous guidance of about £200m, in the range of £125m-£175m. Shares fell 6% in early trade.

White House ends Hong Kong special status, US to impose sanctions

US-China tensions are not getting any better – Donald Trump signed a law that will allow the US to impose sanctions on Chinese officials in retaliation for the Hong Kong security law. The White House has also ended the territory’s special trade status – it is now in the eyes of the US and much of the west, no different to rest of China. This is a sad reflection of where things have gone in the 20+ years since the handover.  Britain’s decision to strip Huawei from its telecoms networks reflects a simple realpolitik choice and underscores the years of globalisation are over as east and west cleave in two.

The Bank of Japan left policy on hold but lowered its growth outlook. The forecast range by BoJ board members ranged from -4.5% to -5.7%, worse than the April range of -3% and –5%. It signals the pace of recovery in Japan and elsewhere is slower than anticipated.

Federal Reserve Governor Lael Brainard talked up more stimulus and suggested stricter forward guidance would be effective – even indicating that the central bank could look at yield curve control – setting targets for short- and medium-term yields in order to underpin their forward guidance.

EUR, GBP push higher ahead of US data; BOC decision on tap

In FX, we are seeing the dollar offered. EURUSD has pushed up to 1.1430, moving clear of the early Jun peak, suggesting a possible extension of this rally through to the March high at 1.15. GBPUSD pushed off yesterday’s lows at 1.2480 to reclaim the 1.26 handle, calling for a move back to the 1.2670 resistance struck on the 9-13 July.

Data today is focused on the US industrial production report, seen +4.3% month on month, and the Empire State manufacturing index, forecast at +10 vs -0.2 last month. The Bank of Canada is expected to leave interest rates on hold at 0.25% today, so we’ll be looking to get an update on how the central bank views the path of economic recovery.  Fed’s Beige Book later this evening will offer an anecdotal view of the US economy which may tell us much more than any backward-looking data can.

Oil remains uncertain ahead of OPEC+ decision

Oil continues to chop sideways ahead of the OPEC+ decision on extending cuts. WTI (Aug) keeps bouncing in and off the area around $40 and price action seems to reflect the uncertainty on OPEC and its allies will decide. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd. Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance.

However, an unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower. OPEC yesterday said it expects a bullish recovery in demand in the second half, revising its 2020 oil demand drop to 8.9m bpd, vs the 9m forecast in June. The cartel cited better data in developed nations offsetting worse-than-expected performance in emerging markets. EIA inventories are seen showing a draw of 1.3m barrels after last week produced an unexpected gain of 5.7m barrels.

Stocks pull back as California shuts up shop again, pound retreats

A rolling back of the reopening process in California and rising US-China tensions left Wall St and Asian markets weaker, with stocks in Europe following their lead as surprisingly good Chinese trade data was not enough to calm markets.

European equity indices fell back in early trade on Tuesday after stocks on Wall Street suffered a stunning reversal late in yesterday’s session. At one point the S&P 500 touched its highest since level since the end of February at 3,235 before sellers sold hard into that level and we saw a very sharp pullback to 3,155 at stumps.

After threatening to break free from the Jun-Jul trading range, the fact the S&P was unable to make good on its promise could signal fresh concerns about the pandemic but also investor caution as we head into earnings season – the fact is the market should not be up for the year. Although it’s hard to get a real feel for valuations because so many companies scrapped earnings guidance, the S&P 500 is trading on a forward PE multiple that is way too optimistic, you would feel. Earnings season gets underway properly today with JPMorgan and Wells Fargo.

The Nasdaq also slipped 2% as tech stocks rolled over, with profit-taking a possible explanation after a) a very strong run for the market has left prices very high and, b) signs of a pullback for the broader market indicated now might be a good time to take stock. Tesla rode a $200 range in a wild day of trading that saw the stock open at $1,659, rally to $1,795 and close down 3% at $1,497.

Stocks retreat as California rolls back reopening, US-China tensions rise

California’s economy is larger than that of the UK or France, so when Governor Gavin Newsom rolled back the reopening of the state on Monday, investors took notice. The closure of bars, barbers and cinemas among other business venues followed moves in economically important states like Texas, Florida and elsewhere, indicating the rate of change in the recovery is not going to improve.

Whilst the market had developed a degree of immunity to case numbers rising, it is susceptible to signs that the economic recovery will be a lot slower than the rally for stocks in the last three months suggests.

Overnight Chinese trade data surprised to the upside with exports up 0.5% in June and imports rising 2.7%, beating expectations for a decline and signalling that domestic demand is holding up well. Singapore’s economy plunged into a recession with a 41.2% drop in GDP, while Japan’s industrial production figures were revised lower.

Tensions between the US and China took another sour turn as the White House rejected China’s claims to islands in the South China Sea, which aligns the US with a UN ruling in 2016. It had previously declined to take sides – the move indicates Washington’s displeasure and willingness to go up against China on multiple fronts now.

UK economy undershoots forecasts with tepid recovery

The UK is already seeing what a non-V recovery looks like. GDP growth rebounded 1.8% in May, which was well short of the 5.5% expected. In the three months to May, the economy contracted by 19.1%. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20% rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply.

UK retail sales rose 10.9% in June on a like for like basis excluding temporarily closed stores, whilst overall sales rose a more modest 3.4% and non-food sales in stores were down a whopping 46.8% for the quarter. Suffice to say that headlines of rebounds mask many ills.

Sterling extended a selloff after the GDP numbers disappointed. The reversal in risk appetite late yesterday saw GBPUSD break down through the channel support and this move has continued to build momentum overnight and into the European morning session. The rejection of the 1.2667 region seems to have made the near-term top for the rally. The 38.2% retrace line at 1.250 may offer support before the old 50% retracement level at 1.2464.

WTI (Aug) was a little softer under $40 as market participants eye the OPEC+ JMMC meeting on Wednesday. This will decide whether to roll back some of the 9.6m barrels or so in production cuts by the cartel and allies. The risk is that if OPEC acts too earnestly to raise production again the market could swiftly tip back into oversupply should the economic recovery globally fail to build the momentum required.

Another factor to consider is whether giving the green light to up production is taken by some members as an excuse to open the taps again and result in more production than agreed – compliance remains the ever-present risk for any OPEC deal.

Risk rolls over in early US trade

Risk appetite has well and truly rolled over. US stocks moved lower in the first hour of trade and continued to leg it south, while oil prices swan dived amid a very messy picture for global markets on Thursday afternoon.  Walgreens Boots Alliance shares dragged on the Dow as the stock fell 9% after reporting weaker-than-forecast earnings amid some serious weakness in the UK. The dollar found bid as risk appetite turned south, hurting FX majors like GBPUSD and EURUSD.

Supreme Court rules on Trump tax records

Risk sentiment was a bit shaky anyway but it seemed to take a hit as Donald Trump suffered a defeat at the hands of the Supreme Court – not his favourite institution of late. The Supreme Court ruled Donald Trump’s finances and tax returns are fair game and should be seen by the Grand Jury, but it threw out rulings that allowed 3 Democrat-led Congressional committees to obtain Trump’s financial records.

This ruling relates to alleged hush money to women who have claimed to have had sexual relations with the president – a story Mr Trump said was irrelevant. That may be so, but his tax returns may interest voters. Whilst US legal proceedings are far from my area of expertise, I understand that if only the Grand Jury sees the documents it is very unlikely that they would become public records, which could have had serious repercussions for the election. Meanwhile Treasury Sec Steve Mnuchin was also on the wires, saying the Federal government would not bail out states that had been ‘mis-managed’.

Stocks, commodities lower despite solid US jobs figures

The move lower came despite some decent jobs numbers. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.

So, the picture in the US labour market is maybe not quite as bad as feared, but still horrendous. There is clearly a long way to go before getting back to pre-pandemic levels. Moreover, as the number of covid-19 cases rises across most US states, the numbers may well start to improve a slower rate.

At send time indices were at session lows, making new lows for the week – we could see further declines as risk appetite appears to have rolled over today. As of send time the Dow was down over 1.8% to 25,559 at the session low, whilst S&P 500 was down 1.5% at a low of 3,120, making it down for the week.

The dip on Wall Street added to pressure on European equities with the FTSE 100 down over 1.7% to a low at 6,046, taking it negative for the week. Having been bid up on Monday towards the higher end of the recent ranges for little reason we are seeing indices pull back closer to the middle of the June ranges – no conviction trade yet.

Dollar firms against pound, euro in risk-off trade

Meanwhile, sterling eased back as risk appetite soured and Michel Barnier said talks this week confirm that significant divergences remain between the EU and the UK. Sterling pulled back from its highs at the top of the new bullish channel on the news as well as the general risk-off tone but remains in a solid uptrend with GBPUSD ably supported above 1.26. Elsewhere in FX the risk rollover boosted the USD so EURUSD pulled back under 1.13.

WTI (Aug) fell sharply from around $40.50 a low under $39.30 in a very swift and long-awaited reversal – albeit probably a day late given yesterday’s inventory build. Expectations of a slower reopening in a number of US states is a worry for near-term sentiment and I have been calling for a reversal based on the technical set-up, which could see a return to the neckline at $35.

CySEC (UE)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Programa de Indemnización (FSCS) de hasta 20.000 EUR
  • Cobertura del seguro de 1.000.000€**
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Gestión de acciones
  • Quantranks

Markets.com está administrada por Safecap Investments Limited. Autorizada por la CySEC con número de licencia 092/08 y por la FSCA con número de licencia 43906.

FSC (RESTO DEL MUNDO)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Verificación electrónica
  • Protección de saldo negativo
  • Cobertura del seguro de 1.000.000$**

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Creador de estrategias

Markets.com, administrada por Finalto (BVI) Limited (“Finalto BVI”) Regulated by the BVI Financial Services Commission (‘FSC’) under licence no. SIBA/L/14/1067.

FCA (Reino Unido)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Programa de Indemnización para los Inversores (ICF) de hasta 85.000 GBP
    * en función e los criterios y la idoneidad
  • Cobertura del seguro de 1.000.000£**
  • Protección de saldo negativo

Productos

  • Las operaciones con pares de divisas y CFD conllevan un gran riesgo de sufrir pérdidas
  • Cotizaciones de spread
  • Creador de estrategias

Markets.com, administrada por Finalto Trading Limited Regulada por la Autoridad de Conducta Financiera («FCA») con número de licencia 607305.

ASIC (Australia)

  • Los fondos de los clientes se conservan en cuentas bancarias separadas
  • Verificación electrónica
  • Protección de saldo negativo
  • Cobertura del seguro de 1.000.000$**

Productos

  • CFD

Markets.com, administrada por Finalto (Australia) Pty Limited. Tiene el número de Licencia de Servicios Financieros Australianos 424008 y está autorizada para prestar servicios financieros por la comisión del Mercado de Valores de Australia («ASIC”).

Al seleccionar uno de estos reguladores, se mostrará la información correspondiente en todo el sitio web. Si desea ver información para otro regulador, selecciónelo. Para obtener más información, haga clic aquí.

**Sujeto a los Términos y condiciones correspondientes. Consulte la política completa para obtener más información.

Marketsi
An individual approach to investing.

Whether you’re investing for the long-term, medium-term or even short-term, Marketsi puts you in control. You can take a traditional approach or be creative with our innovative Investment Strategy Builder tool, our industry-leading platform and personalised, VIP service will help you make the most of the global markets without the need for intermediaries.

Share Dealing in the Markets Group is only offered by Safecap Investments Limited regulated by CySEC under license number 092/08. We are now re-directing you to Safecap’s website.

Redirect

¿Se ha perdido?

Hemos detectado que está en el sitio de . Puesto que se conecta desde una ubicación en , debería considerar volver a entrar en , sitio sujeto a las medidas de intervención de productos de la . Si bien puede navegar en este sitio por iniciativa propia y exclusiva, al consultar el sitio de su país se mostrará la información reglamentaria correspondiente y las protecciones pertinentes de la empresa que elija. ¿Quiere ser redirigido a ?