Lunch wrap: bulls limp, pound holds losses

Forex

Bulls have been a bit limp, stumbling out of the gate with their tails up but quickly getting bogged down on decidedly heavy going turf.  European markets perked up early but ran out of steam heading towards lunch. Having initially popped higher the Euro Stoxx 600 turned negative, sliding 0.3%, while the DAX edged 0.4% lower before paring losses a touch. The FTSE 100 held onto slim gains as sterling softened as the odds shortened considerably on the Bank of England cutting interest rates this month.

Chinese trade delegation is said to have left Beijing, on their way to Washington to sign phase one deal.

GBPUSD is softer, beating a retreat under 1.30 as markets aggressively reprice for a BoE rate cut this month following comments from rate setter Vlieghe and weak eco data (See earlier note, BoE: Stitch in time saves 9). EURUSD has been steady at 1.112 but USDJPY is firming with the pair crossing key resistance around the 200-week moving average around 109.70/80, to hit 109.9  

Crude oil is steady at $59 with little in the way of catalysts. Lots on the wires from Saudi Arabia on production but long and short is they are looking to extend output curbs agreement come March. Likewise, gold held the line around $1550 but is showing no real direction. 

US pre-mkts 

US stock futures indicate a solid open with the Dow eyeing a c70pt gain, having earlier looked at a triple-digit gain when the cash equity market opens. 

Lululemon shares rose c2% pre-mkt after it said raised its guidance, saying Q4 revenues would be between $1.37bn and $1.38bn, from previous guidance of $1.32bn to $1.33bn. 

Alphabet is on the verge of joining the $1 trillion market cap club. Shares were a little higher pre-mkt after Evercore ISI raised their price target on the stock to $1600 from $1350.  

Tesla bears are throwing in the towel. Shares were up 2% pre-mkt to $488 after Oppenheimer raised its price target to a Street high $612 from $385. Microsoft price target raised to $180 from $155 at Credit Suisse, whilst Apple’s price target was raised to $375 from $300 at Davidson. 

Equity Strategy: US earnings Q4 preview: Two major stocks to watch

Week Ahead
  • S&P 500 EPS seen just higher in Q4
  • Valuations are stretched after 2019’s multiple expansion
  • Tesla & Apple are top stocks to watch this earnings season

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

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

Last year we saw multiple expansion massively outweigh earnings growth as the driver of the 28% rise in the S&P 500 last year. This poses problems as it means valuations are already rather stretched and reliant on strong EPS growth in 2020. The S&P 500 forward PE has jumped to 19 from a start of about 14 at the beginning of 2019, having averaged 16-17 over the last five years. Remember though that the starting point of the year was exceptionally weak given the Christmas 2018 drubbing. From the 2018 high through the recent all-time highs, the S&P 500 has only risen by a more modest 10%. 

Two top stocks to watch this earnings season 

Tesla – The stock has enjoyed a remarkable run up to record highs at $472 as the company turned a profit in Q3, reported a surge in deliveries and sent investors into a frenzy with its Shanghai plant and promise of electric growth in China. That and a huge amount of short covering.

Shorts have been crushed. A surprise profit in the third quarter has been the catalyst while we have seen remarkable progress in China and with the Model Y. Last week Tesla said it delivered 367,500 vehicles last year – double that recorded in 2018. It was above the forecast of at least 360,000 offered in Oct, but still at the low end of the expectations for 360,000-400,000 forecast at the start of the year. Investors seem to be shrugging off the fact that growth in 2019 was below the run rate seen in H2 2018 as it ramped production to beat a cut-off for US tax credits. 

In Q3 Tesla made $143m against a loss of $1.1bn in the first half. And revenues came in at $6.3bn, down from $6.8bn a year ago and short of the $6.5bn expected. Deliveries had reached a record in the quarter but fell a little short of expectations.  

We suggested in October when the Q3 numbers were released that this could be the turning point for this battered stock. After spending big to get the Model 3 out the door it’s managed to cut costs by 16% and has cash on hand of $5.3bn. The company expects the higher margin Model Y will vastly outsell all other models ‘combined’. 

That cash pile will be needed though as Tesla also plans to create a new ‘gigafactory’ in Europe and invest in rolling out its new Semi heavy duty electric truck. 

The usual concerns remain – cost control, production capacity and the fact that despite being very firmly in the growth category vehicle deliveries remain a problem. The breakneck speed of production in H2 18 seems to be a high watermark. Moreover, like a number of companies that have attracted great attention but have yet to consistently make a profit, Tesla has not had to contend with a recession yet. 

The Analyst Recommendation tool on the Markets.com platform indicates the Street remains split – analysts still don’t agree on this one.

Apple – The fiscal first quarter is always Apple’s strongest as it chalks up the holiday season and new iPhone models. We’ve had decent indications from the Services side of the business indicating that its pivot to being more of a Services business is in full swing. App store customers spent a record $1.42bn between Christmas and New Year, 16% up on last year, the company has said. Management also revealed that Apple News is drawing over 100m monthly active users across the US, UK, Canada and Australia. This is all to the good – Services margins are about double that for the rest of the business and will mean re-rating of the stock going forward. 

The stock has run up quite a head of steam to hit $300. We’ve seen a potential topping pattern on the chart as it fails to make new highs and the 14-day RSI indicating overbought conditions. MACD could also be turning. Moreover, on a trailling 12-month (TTM) basis Apple’s PE has soared to 25 from around 11 last year. Upside potential may therefore be limited. A lot depends still on iPhone sales. 

Our analyst recommendations tool highlights that while the broad consensus on the Street is positive, the average price target indicates the stock may have topped out, temporarily at least.

One thinks that the Street is just playing catch up and will rerate, although it’s fair to say that Apple stock is relatively expensive vs its historic average. 

Apple posted record Q4 revenues despite slower iPhone sales and guided for a very strong holiday quarter. Earnings per share beat handsomely at $3.03 vs $2.84 expected and up 4% year on year. Revenues jumped 2% to $64bn.  

iPhone sales matter a lot less… 

The improvement on both top and bottom line in the fiscal fourth quarter came despite a 9% drop in iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it shows how much of the lifting is now being done by other parts of the business. It suggests Apple is reaching an inflection point where it’s no longer dependent on the iPhone for EPS growth. This is across the board a positive. Indeed for 2019 as a whole, iPhone sales fell 14% but the stock was up 89%. 

…because Services and Wearables are roaring ahead 

Wearables, Home and Accessories knocked it out the park, with sales up 54% to $6.52bn. This was by far the fastest growing segment and will account for an increasing percentage of sales, currently c10%. 

Services growth remains good at 18%. Stripping out certain one-off items that knocked the Q3 number, this represents consistent sequential growth from the last quarter. Whilst still very positive, it’s a comedown from the +20% levels seen in preceding quarters. But with a clutch of new services rolling out, not least Apple TV+, a renewal of past growth rates is on the cards. Higher margin, recurring Services revenues are a key reason why multiple expansion may be maintained. 

American consumers are in good shape 

The US consumer remains strong. Almost all the growth came from the Americas, which is dominated by US sales. American consumers still look in good shape. Sales in Europe, Japan and Greater China fell. 

Holiday quarter could be record breaking 

Guidance for the fiscal first quarter is bullish, and Apple could mark a record for quarterly revenues. Apple is guiding revenue of between $85.5 billion and $89.5 billion. Early indicators suggest the iPhone11 is performing well with consumers. Favourable comparisons in China from last year are assured, given the previous year’s downswing in iPhone sales in the region.  

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

Morning Note

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

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

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

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

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

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

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

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

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

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

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

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

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

Stocks firm before NFP, Dax bulls eye all time high

Forex
Morning Note

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

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

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


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

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

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

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

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

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

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

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

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

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

Midday wrap: Europe higher as risk appetite returns, DAX near ATHs

Forex
Indices

European markets enjoyed solid gains Thursday as risk appetite returned. But the rally hardly betrays a wanton desire for equities because a) we’re already at or near record highs and b) the selloff had not been especially deep despite US-Iran conflict fears seeing havens enjoy firm bid. Even a shaky ceasefire is enough right now to support the bulls. Stronger-than-expected German industrial production figures (+1.1% vs -1.7% prev and 0.8% est) are helping sentiment, particularly in Frankfurt.

The DAX has led the charge with a 1.25% push higher to 13,485, having earlier touched a high of 13,522. With investors apparently keen to load up on risk with US-Iran tensions easing and a US-China trade deal baked in, we may well see the drive to January 2018’s all-time high just shy of 13,600. Geopolitical risks remain of course with the situation in the Middle East still fluid, but you get the sense the bulls are keen to push this over the line. 

The FTSE 100 added 0.5% to break 7600 with resistance seen at 7675, the high posted Dec 27th.  A softer pound is compensating for the weaker oil price.

Elsewhere US markets are firmer again with the Dow shaping up for a triple-digit gain on the open.

Oil has held just short of $60 with no further losses while gold is also holding the line around $1545. 

In FX, the pound took a drubbing as the market decided Bank of England governor Mark Carney’s comments were more dovish than before. GBPUSD slipped the 1.31 handle to test support on the 50-day moving average around 1.3010. I don’t see much in what he said as particularly more dovish than in the past. Commentary around the likelihood of the UK agreeing a trade deal with the EU before the end of 2020 is also weighing on the pound today. 

Meanwhile, as flagged in the morning note, the bullish engulfing daily candle for USDJPY is resulting in further gains today with the pair moving to 109.50 and momentum in favour of USD across the board. Having cleared the 200-day and other MAs bulls are looking to break the trend line drawn from the falling highs since the swing high of Oct 2018. Big 61% Fib level to cross at 109.60 where we have seen rallies hit a wall several times lately. This level will offer a decent amount of resistance as a result. 

US pre-mkts 

Cowen has come out with a bunch of price target upgrades 

Facebook raised PT to $245 from $240 

Alphabet raised PT to $1575 from $1525 

Twitter raised PT to $34 from $32 

Elsewhere AMD shares are up c2.5% pre-market after Mizuho raised the stock to buy. 

Benchmark has initiated Lyft with a sell rating , price target of $35, which is $10 below yesterday’s closing price. 

Boeing shares are up a touch pre-mkt despite Berenberg cutting to hold. After enjoying a thumping 5% jump yesterday, Tesla shares are a touch softer pre-market after being cut to neutral at Baird, a long-time bull which seems to think the recent rally has run its course. They said: “we would not short the stock and remain positively biased over the long run.” See yesterday’s Equity Strategy: US earnings Q4 preview: Two major stocks to watchfor more on Tesla.

Stocks bounce, oil + gold rallies fizzle

Forex
Morning Note

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

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

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

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

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

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

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

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

Oil spikes as Iran responds, Trump to speak

Morning Note

Geopolitics will dominate the session on Wednesday as traders grapple with the US-Iran fracas. Geopolitics always means uncertainty – we simply cannot know what will happen next, so look carefully at positions as markets are liable to knee-jerk moves.

Oil and gold spiked and stocks fell as Iran fired 22 surface-to-surface missiles at two US airbases in Iraq, in direct retaliation for the killing of Soleimani. So we know the Iranian response at last – this could actually reduce uncertainty unless we see escalation.

The next move lies with the US. Iran said the attacks were ’concluded’ and said it is not seeking a broader conflict. “We do not seek escalation or war,” Javad Zarif, the Iranian foreign minister tweeted in English. The implication is that they will not carry out further reprisals and wish to draw a line under the situation. Frankly they’ve barely scratched the US with this attack – it appears like nothing but a way to save face. Threats to hit Dubai and Haifi are frankly ridiculous.

However Donald Trump has said previously he would respond to any reprisals with his own. The president plans to address the media on Wednesday morning eastern time.

Following the attacks he tweeted:

“All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.”

The president has a chance to de-escalate – but does he want to? My inclination remains that a broader conflict will be averted, largely because Iran does not want to be lured into a regime-changing conflict before it has the bomb, even if that’s what the US is seeking. But increasingly there is the risk of miscalculation as neither side wants to back down.

Meanwhile, a Ukrainian passenger jet crashed shortly after take-off in Tehran with all 176 souls lost – not sure what this means or whether related. It was a Boeing. The coincidence is too much to ignore – it was surely caught in the crossfire?

Oil surged as the Iran strikes broke but has pared gains. WTI jumped to $65.60 but has since retreated to a little above $63. The May 2019 peak at $66.60 remains intact for the time being. Brent rallied north of $71 but subsequently fallen back to $69. Should this escalate quickly into a broader conflict there is a risk of supply disruption in the region that could send Brent to $80 a barrel. However, we must as ever stress that the global oil market is simply not exposed to shocks like it once was.

Gold surged to new 7-year highs at $1610 before easing back to $1590. Net longs are already stretched – is there any more this can run? As ever keep an eye on US real yields. Against this backdrop of rising geopolitical tension oil and gold are making new highs and higher lows for the time being. Gaps need to be filled quickly or they don’t get filled.

US stock market indices weaker on Tuesday handing back much of Monday’s rally, and we will see the impact of the Iranian reprisals dent European stocks on Wednesday. US futures have dipped but erased most of the initial drop following the strikes. Dow last trading around 28445 having dipped under 28150.

We need this US-Iran stuff to go away to focus again on the data. US services ISM yesterday was v good but Europe is still not swinging. German factory orders were below expectations coming in -6.5% yoy vs expected -4.7%. But the Ifo momentum points to turnaround coming.

In FX, GBPUSD has held the key support around 1.3140 to trade at 1.3150. Brexit comes back on the agenda but the exit is now a done deal. EURUSD is steady at 1.1150 but the failure to surmount 1.12 raises downside risks near-term.

Sterling finds support at 23.6% Fib level

Forex

Sterling has found support at the 23.6% retracement of the rally from the Sep 2019 lows to the post-election euphoria highs. GBPUSD pushed through 1.32 at one stage on Tuesday, moving firmly clear from the support level at 1.3140.

The move erases much of the declines from last Thursday and Friday and may signal a recovery that bulls can use to base for a push north of 1.32 again. 50-day moving average support appears at 1.30 and is rising.

The rally ran out of legs at the 50% retracement of the decline from the Dec highs to the recent lows around 1.3220. Corresponding to this move, it’s the 38.2% retracement at 1.3140 that offers support near term. Double Fib support looks powerful.

Oil, havens retreat as Iran waits

Morning Note

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

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

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

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

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

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

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

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

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

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

Morning Note

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

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

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

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

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

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

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

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

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

This week: 

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

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

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

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