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.

Bond blowout, equities take breather, Scottish Mortgage feels pain

Morning Note

Stocks rally on trade optimism, dip on trade fears – rinse, repeat. Only, in the US at least, the market just keeps on cranking higher, seemingly no matter what. 

Yesterday, US equities pushed the record highs again and bonds tumbled, while European stocks firmed around 4-year peaks on hopes and perhaps signs of real progress on trade following remarks, just before the London open, that the US and China were in agreement on rolling back tariffs as part of a managed ceasefire. 

There was confusion over exactly what the Chinese official said, but seemed to be clarified by the US saying the phase one deal would include tariff rollback. White House ‘sources’ reports later talked of ‘fierce internal opposition’ with no final decision made.

There a strong sense of the ‘if’ about this. If a first phase trade deal is done, there is agreement to roll back some existing tariffs, but only if the deal is agreed. Usual story – mixed reports really all just noise.

The bulls took it happily. The S&P 500 broke 3090 but closed off the highs of the day, still though at a record high at 3,085, up 0.3%. The Dow and Nasdaq continued their run.

European markets are riding this wave too. The Euro Stoxx 600 has reached its best level in 4 years, and is now only c2% off the all-time highs. Within this we’ve seen the DAX take a real lead. 

Asian equities have been weaker overnight, and Europe is off to a softer start in early trade.

Bonds were blasted as the risk-on mood took hold of debt markets. US 10s shot 15 basis points higher to 1.96% on the sell off. Yields eased off the highs a touch overnight as selling waned.

The blowout in bonds left gold bulls in tatters, nursing heavy losses. Having looked steady around the $1485 support area, gold dived sharply to nearly touch $1460. Pressure has eased overnight with prices managing to climb back to $1470. Bulls will seek to recover the 100-day moving average at $1477. Failure to test the October lows despite this large selloff indicates bulls remain, just, in charge. $1460 held – if it goes then the bears take over.

It’s all sparked renewed bid for the dollar. EURUSD is starting to come under heaps of pressure on the approaches to 1.10 with a couple of tests around 1.10350.

Bid for risk saw USDJPY push through the 109 barrier and the 200-day moving average.

Sterling is in a post-BoE funk, not helped by dollar strength. GBPUSD is testing the bottom of the range at 1.28.

Equities

Scottish Mortgage Investment Trust is something of a quiet hero of the stock market. It’s only cut its dividend once. But it’s entered one of those sporadic bouts of underperformance which can afflict even the steadiest. Since the end of March  net asset value per share (NAV), rose but 3.2% compared with 9.9% for the FTSE All-World Index, in total return terms. To put that in context, over five years the NAV has gained 137.5% vs 86.5% and over 10 years it has increased by 415.1% vs 204.4%. Dividend is flat.

When you look at the makeup of the trust it’s clear why. The company has invested heavily in high growth tech stocks from the US and China, which have been stars since the crisis. But lately there has been a rotation out of growth and into value which has hit returns over the last six months. A pummelling for Baidu, which was once a very significant holding, has not helped.

Interesting comments on the state of public stock markets, with management saying they are ‘convinced that the long term risk taking, essential to economic and social progress, is continuing to migrate to private markets and at an accelerating pace’. SMT looks to be happy to go with the trend too. The risks of being in unquoted entities have been clearly highlighted by the Woodford and SoftBank travails. Public markets exist for a reason.

IAG shares came under pressure due to softer medium terms guidance. The British Airways owner is forecasting slower capacity growth and weaker earnings potential.  

Management now see ASK – available seat kilometres as a measure of capacity – growth of 3.4% per annum compared to approximately 6% per annum for 2019-2023 previously guided. ASK growth in 2020 is currently planned to be 3.2%. Average EPS growth is now seen at 10%+ per annum against the previous guidance for 12% growth, reflecting the slower pace of capacity growth. 

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