European equities rally as euro, pound crack lower

Forex
IPO
Morning Note

European markets were on the front foot on Friday morning despite a weak cue from the US and Asia as currency weakness and expectations for yet lower interest rates fuelled risk appetite. Asian shares plumbed a three-week low but European bourses are trading up again. The FTSE 100 continued the good work from Thursday to hit 7400 and make a clear break out of the recent range. With the move north a decent case to make for the 7450 area, the 61.8% retracement of the August retreat.

The S&P 500 declined quarter a percent to 2977.62 against a back drop of political uncertainty in Washington. Markets won’t like these impeachment hearings but ultimately the risk of Mr Trump being ousted by Congress appears very slim indeed.

Another stinker of an IPO – Peloton shares priced at $29 but were down $2 at $27 on the first tick and ended 11.2% lower at $25.76. First day nerves maybe but this stock has fad written all over it. Think GoPro.

On the matter of dodgy prospectuses and dubious IPOs… S&P has downgraded WeWork debt another notch, and slapped a negative outlook on for good measure.

FX – the euro now looks to be on the precipice, on the verge of breaking having made fresh two-year lows on EURUSD. Whilst the 1.09 level may still hold, the banging on the Sep 3/12 lows at 1.09250 has produced a result with overnight tests at 1.09050. We’ve seen a slight bounce early doors in Europe but the door is ajar for bears. The Euro is under pressure as ECB chief economist Lane said there is room for more cuts and said the September measures were ‘not such a big package’. How much more can the ECB feasibly do?

Sterling is tracking lower against the broader moves in favour of USD. There is a chance as we approach crunch time on Brexit that GBPUSD pushes back to the lower end of the recent range, the multi-year lows around 1.19. Bulls have a fairly high bar to clear at 1.25. At time of publication, the pound had cracked below yesterday’s low at 1.23, opening up a return to 1.2280 and then 1.2230. The short-covering rally is over – time for political risk to dominate the price action.

Bank of England rate setter Saunders made pretty dovish comments, saying it’s quite plausible the next move is a cut. In making the case for a cut now it conforms to the belief in many in the market that the Bank is barking up the wrong tree with its slight tightening bias in its forward guidance. The comments from Saunders are clearly an added weight on the pound.

On Brexit – there’s a lot of noise of course and all the chatter is about MPs’ use of language and how could Boris possibly still take the UK out of the EU by October 31st without a deal. The fact is he can and he intends to. There is some serious risk that GBP declines from here into the middle of October on the uncertainty and heightened risk of no deal. This would then be the make or break moment – extension agreed and we easily pop back to 1.25, no deal and it’s down to 1.15 or even 1.10.

Data to watch today – PCE numbers at 13:30 (BST). If the core CPI numbers are anything to go by, the Fed’s preferred measure of inflation may point to greater price pressures than the Fed has really allowed for. Core durable goods also on tap, expected -1.1%. Plenty of central bank chatter too –de Guindos and Weidmann from the ECB follow Lane and then Quarles and Harker from the Fed. Should keep us busy this Friday.

Oil is in danger of entirely fading the gap back to $54.85, the pre-attack close, having made a fresh low yesterday at $55.40. There’s still a modicum of geopolitical risk premium in there though, but bearish fundamentals are reasserting themselves over the bullish geopolitics. WTI was at $56.10, ready to retest recent lows at $55.40. Bulls require a rally to $57.0 to mark a gear change. However we are now touching the rising trend support line drawn off the August low at $50, so could be finding some degree of support.

Gold is pretty range-bound now, but we are seeing it test the $1500 level which could call for retreat to near $1482, the bottom of the recent range and key support.

Trade progress boosts equities, dents gold; oil soars as OPEC gathers

Forex
Morning Note

It’s been a week of good progress so far, with positive noises on trade and oil production cuts. Markets are firmly risk-on, which is good news for equities and oil, while gold is feeling the pressure.

Equities have recorded strong gains today on the back of trade progress at the G20 meeting. The US and China have agreed to restart trade talks after President Donald Trump met President Xi Jinping at the gathering of world leaders.

European indices have shot higher, with the FTSE 100 up over 1.1% and above 7,500 points for the first time in around 10 weeks. The DAX has hit a fresh 11-month high thanks to a gain of 102 points to trend above 12,559. Futures suggest a strong US open, with both Dow and S&P 500 futures up 0.8% at the time of writing.

Meanwhile, gold is trending below $1,390 today, recording losses of 1.5%, as investors unwind the recent flight to safety.

Oil races higher on OPEC progress

Iran has now given its backing to a proposed extension of OPEC’s joint oil production cuts. Other key OPEC members, as well as non-OPEC ally Russia, also seem to be in favour. This means the cuts could be finalised during the two-day meeting concluding tomorrow.

Oil has shot higher on the news, with crude breaking above $60 per barrel and Brent testing $66.50. Both represent gains of over 3.2%. Crude oil could face resistance near $60.80, the 76% retracement of the top-to-bottom move seen between late May and mid-June. Brent, meanwhile, is trending around the 50% retracement level, with $68.07 the next key resistance, on the 61% retracement line.

Bitcoin tumbles further from 15-month high

Bitcoin has moved further away from the 15-month high struck last week when markets pushed the world’s biggest cryptocurrency towards $14,000. BTC has recorded 10% losses so far today, leaving it to trade in the region of $11,300.

It looks like the once-key $11,000 resistance level has now turned into support.

Bitcoin jumps, stocks steady ahead of G20

Forex
Morning Note

All that glitters is not gold. Bitcoin is sparkling again but beware…breakdown’s coming up ‘round the bend. 

Bitcoin jumped above $11,000, taking it to its highest level since March 2018. Futures are back down to $10,855 around send time. Investors are ignoring what happened the last time we saw parabolic rises like this. Is it different this time? No, but people have short memories. Facebook’s Libra white paper may have stoked renewed interest in cryptos at a time when the buzz had already returned.

Bitcoin is more mature etc, but the fundamentals of this scheme remain unaltered. What I would say is that arguably big money is starting to view this differently and think it could be very costly to ignore if they get left behind. 

It may also be that the sharp liquidity boost we’ve seen from central banks is helping bitcoin. As we noted last week, it was only a matter of time before the $10k level was taken out it and now ultimately a retest of the ATHs near $20k looks very plausible. 

Once this market builds up a head of steam, it’s hard to stop it. As previously argued, this is a big momentum play and the more buzz there is, the more that traders will pile in behind the rising wave. Bears could get burned before the market turns – maybe better to wait and let it fizzle out, which it will eventually. The more it rallies, the bigger the blow-up when it comes. However, we should expect some pullbacks and retracements along the way. 

Equities, G20 

Stocks are maybe looking a little softer with the S&P 500 easing off its all-time highs on Friday and we’ve had a mixed bag from Asia overnight. Japan closed a shade higher at 21,285.  

Futures indicate European shares are trading on the flatline as investors take a breather and look ahead to the G20 later in the week. FTSE 100 finding support at 7400, with resistance at 7460.

Coming up this week the G20 is centre stage for markets. President Donald Trump is expected to meet Chinese counterpart XI Jinping at this week’s G20 meeting in Osaka. 

Last week Mr Trump tweeted: “Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting.” No one thinks the US and China will do a deal in Osaka, but there is some hope that we will have a positive development that marks a shift in the rhetoric and a re-energising of talks following the breakdown in the recent discussions.  

Iran, oil 

Iranian tensions are not going away, providing some support for oil. Brent was trading around the $65 mark, with WTI at $58. Fundamentals remain bearish but the uncertainty in the Middle East, specifically the risk of a closure of sea lanes, is enough to keep crude above water. 

Since last week we’ve had news of the US launching a cyberattack on Iran and warnings from Iran about what a war would mean. Expect lots of turbulence from this but ultimately it does not look like the White House is spoiling for a fight. The risk is, as ever, in a miscalculation. 

Gold remained firm, holding above $1400 as a weaker dollar combined with dovish central banks kept traders happy to bid up the metal. Geopolitical tensions may be a small factor, but ultimately gold has huge negative correlation with real yields, which have come right down. Friday’s move off the lows later in the session were key and the bull trend remains intact. A rebound in USD could trap bulls.

FX 

The dollar is softer with the euro and sterling holding gains. The euro is holding at a three-month high around 1.1380 – look for a push to 1.14. 

Trading around 1.2760, GBPUSD is facing stiff resistance from previous highs and a big Fib level coming in, so we need to see this level breached on the upside to be more confident that the pound can maintain its gains.  

Coming up this week – Fed speakers and the PCE inflation print will keep the FX market interested.

Closing on all-time highs, FOMC preview

Morning Note

Equity markets buoyant after Tuesday’s rally ahead of the key Federal Reserve meeting.

You can just about smell the all-time highs. The S&P 500 rallied 28 points to 2,917.75, just a shade under 1% below its April record high. The Dow added 350+ points to 26,465.54. 

And yet the latest BAML data shows fund managers are at their most bearish since the global financial crisis a decade ago. Equity allocations have experienced their second worst drop on record – we’ve seen a huge move into cash. And yet and yet, we’re close to all-time highs again for US equity markets at least. This is what you may call an unloved rally. 

Asian shares were encouraged by Wall Street’s gains. Japan closed 1.72% higher. Futures indicate European shares are treading water ahead of the FOMC decision later today. A touch of caution after an exuberant session yesterday. 

Oil rallied again – demand outlook matters a lot more than supply constraints. The world is awash with oil whatever OPEC does. Brent was close to its $62.50 comfort, the 50% Fib level that continues to anchor prices. WTI has regained $54. On both charts signs of either double-bottom reversal or bearish flag continuation patterns. 

The prospect of president Trump meeting his counterpart Xi Jinping at the G20 assembly later this month, combined with signs of renewed stimulus efforts by the ECB, has investors eyeing short-term gains. We need to wait and see what the Federal Reserve does. So hold on tight, let the flight begin. 

FOMC Preview 

Summary 

You got to know when to hold ‘em, know when to fold ‘em. Markets expect the Fed to cut 3 times this year, but the Fed needs to be careful about reacting too easily to markets. There is not the need to be as pessimistic about growth and inflation as bond markets suggest, despite some softness in recent labour market data. The Fed will seek to avoid sounding overly hawkish, but one feels there is a need to steer markets away from expecting the Fed to ride to the rescue of financial markets.  

Backdrop 

It’s hard to recall a time we headed into an FOMC meeting with so much at stake and with so much uncertainty about what might be agreed and what the guidance for the rest of the year will look like. This means the potential volatility around the event is likely to be substantially higher than at most recent FOMC meetings. 

Macroeconomic indicators suggest slowing growth whilst there have been no positive developments on trade. Inflation is tame but there is arguably enough to keep the Fed on the side lines for the rest of the year. And quite how much the data has softened since the last meeting to suddenly warrant a cut is beyond me. 

Moreover, last week’s retail sales data has gone against the downbeat, pro-cut grain. The Atlanta Fed GDPNow model predicts 2.1% GDP growth in Q2, up from the previous 1.4%. The model now anticipates second-quarter real personal consumption expenditures growth of 3.2% to 3.9%. 

Talk of demoting Jay Powell further clouds the picture as Trump heaps pressure on the  Fed chair to cut. Know when to walk away, know when to run. 

Market pricing 

Markets do not currently anticipate the Fed will cut rates this week, but they are pricing in a cut in July and a subsequent 1-2 25bps cuts.  

Pricing for a rate cut this week dropped sharply – from nearly 30% to around 21% – after the strong retail sales print on Friday. It’s since crept back up to 26%. For July, though, market pricing indicates an 87% chance of a cut, whilst there is a 95% chance for September. 

The blackout period ahead of the meeting has tied tongues that were in overdrive in the preceding days. 

Powell’s comments in Chicago at the start of June were the trigger for a relief rally in equities. He noted ‘recent developments involving trade negotiations and other matters’, adding that: ‘We do not know how or when these issues will be resolved’. 

This was the key remark: ‘We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion’. 

Critically he did not signal a cut, but only stuck to the Fed’s oft-stated stance. Markets have read much more into this, and could be left disappointed. The problem for Powell now is to gently steer markets back to the right course. 

Coming Up Today (GMT) 

GBP- CPI y/y (08:30) 

CAD- CPI m/m (12:30) 

EUR- ECB President Draghi Speaks (14:00) 

USD- FOMC Economic Projections (18:00) 

USD- FOMC Statement (18:00) 

USD- Federal Fund Rate (18:00) 

USD- FOMC Press Conference (18:30) 

BRL -Interest Rate Decision (21:00) 

NZD- GDP q/q (22:45) 

Pound slips to 6-month lows: Morning Note

Forex
Morning Note

BoJo sees pound lose mojo , Aussie soft on RBA, equities steady ahead of Fed, Middle East tensions.

Equities steady before Fed 

Equities remain cautious ahead of the start of the Federal Reserve meeting today. The S&P 500 and the Dow were pretty well flat yesterday, whilst the FTSE 100 notched a slight gain.  Asia has been mixed. Futures indicate European equities are trading on the flatline again. Equities are lacking direction and will wait for the Fed to get a steer.

Equities investors are likely to display caution with the Fed in view. They may be disappointed with what the Fed offers – realization of this may manifest in mild selling ahead of the meet.  We’ve got no signs of progress on trade and little sense the G20 will produce anything. And now we have building tensions in the Middle East.

The White House has ordered 1,000 US troops to the region, with fears of escalation rising. Tehran says it will breach uranium stockpile limits in days. The Iran nuclear deal looks dead. Markets may start pricing in risk of escalation. Whilst this is only a very small number of additional manpower, and is clearly designed to act as a warning to Tehran, troop build-ups only tend to lead in one direction.  

Pound lacks mojo

The pound is at its lowest in almost 6 months on heightened fears of a no-deal exit. Boris Johnson is the clear favourite to become the next PM – in fact it rather looks like he’s going to walk it. Currency markets display fear that he has said he is prepared to take Britain out on October 31st without a deal if needs be. More BoJo, less mojo. Whilst a crowded trade there is real slippage here with little to spark life into the pound. 

The calculus is simple – failure to take Britain out of the EU this year risks a General Election and wipe out at the polls at the hands of the Brexit Party, potentially handing Jeremy Corbyn the keys to Number 10. The EU says it won’t renegotiate (it may have to), MPs won’t accept the existing deal, and Parliament has limited scope to stop this train.  

Sterling is increasingly reflecting the no-deal risk. Cable was last hovering close to its lowest of the year at 1.2530, having dipped as low as 1.2510, its weakest since the start of January. 2018 lows around 1.2470 could be the next target on the downside. BoE this week may signal tightening bias and readiness to hike earlier than previously expected, but the pressure on the pound remains because of Brexit. The BoE should be minded to remain on the sidelines until Brexit is decided. 

Aussie soft 

Australia’s dollar is also soft and susceptible to a major downside breach after minutes from the last RBA meeting showed more cuts are coming. More likely than not we should get at least one more cut this year. 

The minutes said: ‘Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.’ This was extremely strong signal and suggests more cuts to come and soon. Excluding the Jan flash crash we are now testing multi-year lows, on the cusp of a move back to decade lows not seen since the height of the financial crisis. At 0.6830 the AUD/USD cross was testing major support – this could hold until we get further clarity from RBA governor Lowe on Thursday. 

Oil soft, gold up 

Oil has failed to catch any tailwinds from the Middle East tensions. Brent was below $61 again but remains clear of last week’s lows. WTI was holding $52. All looking very bearish and flaggy right now. Until we get a good dose of economic data this rut seems set to continue. 

Gold keeps cranking higher – the prospect of lower US yields and geopolitical tensions seem to be acting as a tailwind. Last at $1346 the big target for bulls is the 2018 peaks at $1365 and then the 2017 highs at $1375.

Equities 

Ashtead FY numbers are positive, with EBITDA at £2.11bn, a slight beat as revenues rose 19%. The medium term outlook looks confident. Despite fears of slowing growth in the US, management say they expect to continue to experience strong end markets in North America.

On tap (GMT) 

EUR – ECB President Draghi Speaks (08:00) 

EUR – German ZEW Economic Sentiment (09:00) 

EUR – CPI (09:00) 

USD – Building Permits (12:30) 

GBP – BoE Gov Carney Speaks (14:00) 

EUR – ECB President Draghi Speaks (14:00) 

Oil rallies on Oman tanker fire

Morning Note

Oil rallied on geopolitical tensions in the Middle East while equities started to look like they are range-bound ahead of the FOMC meeting.

Oil jumps

Oil has shot up sharply after slumping to 5-month lows overnight. Reports of an oil tanker being on fire in the Sea of Oman rattled markets and sent Brent up $2 in a matter of minute, but await to see whether this will hold or is an algo-based kneejerk that will be faded. We know that geopolitical tensions in the region are worsening and raise supply-side concerns in terms of short-term outages etc – but with OPEC already curbing output and US production at a record high the market is far less susceptible to a shock.

A surprise build in US inventories was to blame for the drop yesterday and ultimately be more important than what’s happened in Oman. EIA figures showed stockpiles climbed by 2.2m barrels, against an expected decline of around 500k. At this time of year we’d normally see stocks decline but they keep moving higher. More supply, not enough demand. This is squeezing longs and we should see further liquidation in speculators’ net long positions, twisting the screw more.

With the demand outlook so clouded there is no sense that the bear market will end any time soon. Massive US supply has changed the rules of the game and there’s not a lot OPEC can do about it. Brent recovered to the $60.50 area having dropped below $60, before it spiked on the Oman news to trade through $62. Risks skewed to downside – it looks like $50 will be seen before $70. However, we’re in a major support zone and the latest dip could be the second trough in a double-bottom reversal.

Equites retreat

Equities pulled back again yesterday – nothing new in terms of trade, just a loss of stamina it seems. SPX encountered important technical resistance and retreated to 2880 on the close. Markets in Europe retreated as the rally ran out of legs.

European shares were on the back foot again on Thursday but then turned green. Bulls may retake control but until the FOMC meeting Wednesday we may expect the major indices to trade in these ranges. Hong Kong again weaker again amid the protests.

US president Donald Trump says China will make a deal. Well we’ve heard all this before. The markets starting to ignore this rubbish. There is precious little signs that we are even close to seeing a deal done at the G-20. Maybe a top-level handshake between Trump and Xi but hard to see much more.

Trump also said he’s still looking at placing sanctions on the planned Nord Stream 2 pipeline. It’s been talked about before but it raises spectre of increased tensions between Germany and US (see euro below softer). The project is controversial enough within the EU and creates the potential for further fracturing among EU states. On this Trump has many European allies. And as the Mexico farrago showed, Trump is not afraid to weaponize trade/tariffs for the pursuit of non-economic policies. We know he wants EU members to stump up for defence.  It’s not a giant leap to see Trump weaponizing trade to achieve this ambition. One can anticipate deterioration in relations.

Tory race

In the UK political space, the Tory leadership first vote takes place today. It’ll sort some the wheat from the chaff but still doesn’t get us to the final two. But there will be implications for who’s going to pick up the votes later on from the candidates that don’t make the first pass.

Sterling had rallied a touch on Boris’s speech – algos in overdrive most likely – before slipping back below $1.27 again as Parliament refused to back Labour’s motion to take over business and take no-deal off the table.

Euro breakout fades

In FX, the euro inched up a touch Thursday after a fairly significant sell off yesterday that will have stressed bulls. The drop in the euro seems to be down to the Trump talk on Nord Stream 2 and the prospect of a worsening in relations with Germany. Last look EURUSD was trying to regain the 1.13 handle. This breakout looks like Monty’s sluggish, meat grinder approach to Caen.

Meanwhile inflation expectations have been crushed – the markets calling out the ECB over stimulus hints and says you can do more but we’re not sure if it will work. Euro 5y5y inflation swaps sunk to record lows- below 1.2% for the first time. The ECB will be forced to do more.

Mexico fix green light for risk, oil rebounds, Thomas Cook carve-up

Indices
Morning Note

It’s a sea of green as stocks rebound on Trump’s Mexican fix. Investors are relieved at Mexico and the US coming to an agreement to avoid the latter slapping the former with tariffs, and this sent equity futures north. SPX closed Friday +1% for the day to cap a remarkable turnaround after a very rocky period. Futures show further gains Monday – looking now for a retest of 2900 –remarkable considering we were sub 2800 just a few sessions ago. Wall Street had its best week since Nov as weaker data cemented the market’s belief the Fed will cut rates – 4 cuts now more likely than 1 in 2019, according to the market. This looks overly optimistic. Futures indicate European shares are positive thanks to the Mexican deal with the FTSE 100 eyeing a return to 7400 and the DAX looking to return to 12,200. 

Tariff reprieve for Mexico

Late Friday the US ‘indefinitely suspended’ tariffs on Mexico after striking a deal. Whilst this is positive for risk assets, one should be cautious that this may only embolden Mr Trump to use tariffs as policy tool for the pursuit of non-economic interests. As previously suggested, the EU could be next – maybe to get the 2% defence spending target.  

Meanwhile as we raised on Friday, the US Treasury Sec Steve Mnuchin criticised China for purposefully letting its currency slide. The thesis is basically ‘no intervention is now intervention’. This has been talked about extensively before. Offshore USD/CNH was last around 6.950 – a little below Friday’s highs – expect the 7 handle to face stiff resistance but the jawboning is pushing it in that direction and suggests the PBOC won’t defend 7 at all costs like we might have assumed in the past. The onshore version sank to its weakest in six months today. 

Data overnight positive – Japan GDP Q1 revised higher, from 2.1% to 2.2%; while Chinese exports climbed in May, an unexpectedly strong performance. 

Dollar steady, oil rebounds

The US dollar was solid on Monday but could come under pressure. EURUSD holding at 1.13 and GBPUSD holding 1.27 but thus far failing to show any further momentum higher.  

Oil was firmer as the recovery in risk sentiment boosted crude. Saudi comments about extending OPEC cuts seem to be helping but largely this is baked in already – it’s the demand side that matters the most right now. Brent was last trading around $63.50. We await to see whether this is just another bear flag or the start of a meaningful recovery. Speculative net long positions fell again to 400k from 439k, indicating traders are continuing to unwind their bullish bets oncrude. E

Ferguson 

Good numbers from Ferguson but cloudy outlook means shares fell about 5%. Ongoing revenue growth of 6.2%, including 8.4% in the USA. Gross margins lightly ahead of last year, rising 20bps to 29.5%. Ongoing trading profit of $359m was $8m ahead of last year. FY guidance unchanged.  

Ferguson remains a play on the US economy, particularly new housing starts. Shares in the company are still subdued following the selloff last autumn and are yet to recover the kind of level we saw in September.  

Fears about the economic outlook in the US are a factor, but the expectations the Fed will cut rates should act as a support. US mortgage rates have come down as yields have retreated to 2-year lows. US new housing starts have picked up in the last two months and confidence has returned to the sector, some of which should be reflected in the Q3 numbers. New home sales dipped in April, but this was from an 11-year high as the market recovered from the disaster in the final quarter of 2018. 

Thomas Cook

 Thomas Cook confirmed that it is in discussions with Fosun following receipt of a preliminary approach. It follows reports over the weekend that 18% shareholder Fosun is ready to pounce for the tour operator business excluding the airline, which it cannot own due to EU aviation rules. As noted on May 16th, when we suggested an approach was in the offing, as once the airline is sold a major obstacle to the Chinese group making a bid will have been removed.

Management says it has received multiple bids, including for the whole, and parts, of the airline business. Triton may make life more difficult for Fosun but whatever the outcome, it seems the writing is on the wall after some bad losses and a ratcheting up in debt levels. First half losses jumped to almost £1.5bn – its biggest ever – as it took a £1.1bn write-down on My Travel. Underlying EBIT losses increased by £65 million to £245 million, which was down mainly to margin pressure in package holidays. Net debt has risen to £1.25bn

Sadly, it rather looks like Thomas Cook will be carved up in some fashion or other. This may not be a bad thing – clearly managing this large, complex holiday business proved daunting. But selling off the various bits of the business is likely to be even more complex.”

Trump’s London calling, US-China trade war worsens, oil smoked

Forex
Morning Note

Global stocks were down by around 6% in May – can we get a better June? The runes are not looking great. 

Futures indicate European shares are lower today as trade tensions continue to mount and investors exhibit greater fear about the global economy and the risk of recession. Asian markets were generally lower after a big selloff on Wall Street on Friday that saw the S&P 500 decline 37 points, or 1.32%, to finish at 2,752.06, below its 200-day moving average. FTSE 100 held the 7150 level, but this is likely to get taken out today. 

Trade fears are heating up 

The trade war is not cooling down; in fact, it looks like the rhetoric is heating up and further escalation seems likely. China is raising tariffs on $60bn of US goods in retaliation for tariffs, coming up with its own blacklist of foreign companies, has accused the US of resorting to ‘intimidation and coercion’, and begun an investigation into FedEx. And the Chinese defence minister says if the US wants a fight, they will ‘fight to the end’. No end in sight, and the chances of a G20 détente are slim.

Futures 

US stock futures were lower along with oil amid growing fears about this trade setup. Nothing like progress has been seen re Mexico, and now the market is dealing with reports that the US has been eyeing slapping tariffs on some Australian imports, As we noted last week, the escalation last week with the attack on Mexico – especially as it represented a weaponization of trade to pursue non-economic policies – represents a major turning point and could bring others into the fray. Again, the EU could come under fire soon. 

PMI day 

Data overnight has been mixed but still indicates slowdown. China’s Caixin PMI read 50.2, unchanged from a month before but a little ahead of expectations. Japan’s PMI has gone negative, moving to 49.8, signalling contraction. Japanese manufacturing output down for 5 months in a row, while new export orders fell for the 6th straight month. Japanese equities were down sharply overnight. UK PMI at 09:30, with the ISM numbers for the US due at 15:00. 

London calling 

Trump heads to the UK today – unfortunately he’s meeting a lame duck PM so we can’t expect much of importance. There will be lots of talk of a trade deal with the US post-Brexit. Harder Brexiteers in the Tory leadership race are likely to be emboldened. Expect the no-deal talk to increase.  

Sterling is sure to be under plenty of pressure until the leadership race is clearer. GBPUSD remains anchored to 1.26 for now, having made fresh multi-month lows last week. However, Friday’s bullish hammer reversal may provide the basis for a short-term rally. Just a hint that the pound is oversold and could be ready for a wee bounce. 

Oil smoked, gold higher 

Oil has taken a beating as markets worry more about a slowdown in global demand than supply constraints. Brent has declined by 10% or so in just a couple of days and is holding on $61, while WTI is clinging to $53. Speculators are liquidating long positions wholesale, with Friday’s COT report showing net longs down by 40k contracts. Net long positioning has fallen by about a fifth (100k contracts or more) since the late April high at 547.4k. 

Stockpiles are at their highest in two years. Speculative long positions continue to be cut. Supply uncertainty is losing out to demand uncertainty. Simply put, with OPEC and co curbing output, there is ample excess capacity in the market should it be needed. 14-day RSI and 20-day CCI suggest oversold and ready for a bounce, but this is like trying to catch a falling knife. 

Gold meanwhile is picking up safe haven bid as this decline is not just about valuations but about big fears for the global economy. The easing off in the US dollar has also supported gold. Having broken $1300 gold was last around $1310, with next target $1324.

FTSE rebalancing etc

Finally, there’s a fair bit of chatter about the FTSE rebalancing – will Marks & Spencer survive in the 100? Will JD Sports be promoted? I wouldn’t get too worked up about it all, even if it’s good sport. EasyJet likely to go – shares have been hammered but the business is tightly run and it’s always been one of the smallest in the FTSE 100. MKS lucky to survive with only the rights issue saving it.

Kier – warning on profits – going from bad to worse after the rights issue flopped.  

Astra – hails Lynparza pancreatic cancer drug trials success 

William Hill – bid rumours are doing the rounds 

Dignity – says it welcomes Treasury/FCA proposals  

Morning Note: Aussie rallies on election win, equities slow

Forex
Indices
Morning Note

It was a tentative start to the trading week as markets digest the last few day’s ructions, ongoing news flow around US-China trade and mounting concerns about what is going on between the US and Iran. 

The main European bourses have opened in the red although the FTSE 100 put up something of a fight to just about hold in the green. Can probably thank the weaker pound for this. Italian stocks are being hammered this morning.

US S&P 500 e-mini futures are green now having seen the broad market turn south on Friday. Stocks fell in the last couple of hours of trading last week on reports US-China trade talks were on hold. The market remains at the mercy of commentary and news flashes around these talks and it is wise to try and put some ear muffs on at times. 

Australian banking stocks were the main winners as the win for the Liberal-National coalition removed the risk of certain regulatory moves.  

Forex – Aussie wins

AUDUSD – ScoMo’s miracle victory has lifted the Australian dollar a touch, but bulls shouldn’t get too excited yet. AUDUSD firmed up on the first session of trading since the result of the election became known. Having fallen close to decade lows on the 0.68 handle, the pair has firmed on the 0.6920 level. Resistance seen at 0.69440, the 23% retracement of the down move from the April highs. Whilst the election may deliver some short-term relief for Aussie bulls, it’s the RBA that really matters. The market is betting on a rate cut this summer and seems likely, the question is whether this is the first in a cycle of cuts or is one-and-done.  Nevertheless, having taken a look at decade lows, bulls will be hopeful that we have seen a reversal in the long-term down trend.

Elsewhere in FX, sterling remains under the cost. GBPUSD is struggling below 1.28 and is showing few signs of being able to mount much of a rally. The ongoing political uncertainty and the open war in the Tory party will act as drags on risk sentiment. GBPUSD was last at 1.2730 and with support seen at 1.2710, the Jan 10/11 lows. 

And coming up this week we have a potentially volatile period for GBP given the European Parliament elections take place on Thursday through to Sunday. We should also be on guard for any EUR spasms if there is a surge in populist parties threatening to shake things up in Brussels. We’ve heard all this before, but nevertheless markets remain highly sensitive to news flashes – only last week the euro was moving on a series of comments made by Italy’s ruling populist parties.  

Oil higher

We have some can kicking but it rather looks like OPEC is leaning to an extension and could adjust the volumes. Compliance was at 160% in April, which gives ample scope to raise output or reduce the production curb commitments. Brent remains bid above $73 on this as well as the mounting tensions between the US and Iran

Morning Note: European markets lower, oil gains, pound under pressure

Forex
Indices
Morning Note

European markets opened lower, with the major equity indices pulling back after Wednesday’s kneejerk move higher amid a very noisy, confusing picture for investors regards trade, growth and interest rates.

The FTSE 100 lost 20 points to retreat to 7275, losing the 7300 handle achieved yesterday. Auto stocks are weaker this morning – perhaps a dose of reality in the cold light of the morning after yesterday’s gains. 

Markets recovered ground yesterday, switching from red to green sharply as reports suggested the US will delay auto tariffs by six months. This, combined with some more jawboning from Mnuchin on trade talks, tended to ease the worries about the US-China trade spat. 

But the US president add pressure elsewhere – issuing an executive order banning US firms from working with Huawei. Lots and lots and lots of noise from all sides – making this a tough market to be in.

SPX bounced off support around the 2817 level, which was a big area of resistance in the not-too-distant past, to close at 2,850. 

Bonds bid

The 10-year Treasury remains below 2.4%, with bonds finding bid as the US retail sales and industrial production numbers missed yesterday. 3m-10yr inversion again flashes the recession amber lights – expect to hear more of this talk even though the US seems a long way from recession right now (3.2% print GDP, consumer spending and retail sales at multi-year highs, unemployment at 50-year lows…I could go on).

Oil rallies

Oil – Brent has rallied above $72. Bullishness seems to be down to mounting geopolitical risks in the Middle East. Specifically, oil is higher because the market is worried that the US and Iran are at risk of a flare-up. Oil rose despite a surprise build in US inventories, which were up 5.4m barrels in the last week according to yesterday’s EIA data. We also saw a build in inventories in Cushing.  

Meanwhile the IEA revised its demand growth outlook lower by 90k barrels a day to 1.3m. Whilst this was bearish, the group also highlighted the significant supply side uncertainty – Iran, Venezuela, Libya etc. As we noted in a recent strategy note on oil, the IEA says the supply picture is ‘confusing’. 

Sterling under pressure

FX – Unemployment data from Australia overnight came in weaker and leads us to assume the RBA will cut over the summer (or winter). Although employment rose, jobs growth seems likely to slacken. The RBA has made it perfectly clear that should inflation or unemployment not improve it will be cutting soon. This may well create further downside on the Aussie, which is of course under pressure from the whole China-trade-growth story.

AUDUSD is seriously threatening the 0.69 level on the downside. There is a lot of pressure there and it could go, which would open up move to 2016 lows at 0.68. We’re at multi-year lows here so there is a lot of support to contend with. Whether AUDUSD gets squeezed lower still though will depend on whether the RBA signals it’s one (maybe two) and done, or if it’s embarking on a longer-term easing cycle. 

GBPUSD remains below the 1.2860 level having breached this important support yesterday. Brexit worries abound – it’s either no deal or no Brexit by the looks of things. Next up we could see it slip to the mid-Feb lows around 1.2780. Below that we start to consider a return to the 2019 lows around 1.24 as a possibility. The rebels are putting their pieces in place to oust May if (when) her Brexit bill fails against for the umpteenth time.  Meanwhile as we noted yesterday’s note, amid a broad downturn in risk appetite the pound is exposed. EURGBP is advancing past the 0.87 marker and was last at 0.874, pushing up to 0.88 and the Feb highs.”

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