Sterling hit by polls as traders weigh hung parliament chances

Morning Note

Sterling remains highly susceptible to polls and specifically exposed to big downside moves on anything other than a solid Tory majority: last night’s MRP edition from YouGov showed a sizeable narrowing in the Conservatives’ lead and raised for the first time the possibility of a hung parliament. The central case remains for a Tory majority of 20-30, but we are dealing with fine margins for error. Markets for the first time need to worry about a hung parliament and what that might mean in terms of more uncertainty over the economy and Brexit.

For traders – it means election night could be very interesting indeed. We’ll be increasing staffing overnight, looking particular at the exit poll at 22:00, and preparing for a potentially highly volatile session, with all that would normally imply in terms of reduced liquidity for GBP pairs and U.K. assets anyway. Then it’s going to be all hands on deck on Friday morning as the markets reopen to whatever brave new world the voters have chosen for us. Spreads may widen out of hours for assets like the FTSE and GBP crosses, whilst gapping even in FX pairs may occur. A hung parliament takes back to a 1.27 handle on cable, and could see UK-focused stocks on the FTSE 250 hit hard.

Having been bid up ahead of the poll’s release, the pound took fright at the poll data and GBPUSD plunged nearly one big figure from north of 1.32 to around 1.3110. The pair has pared losses overnight to reach 1.3140.

The good news is the polling is just about over – the next major one is the exit poll just after 22:00 on Thursday. This has been very accurate over the last 25 years.

Yesterday, Wall Street slipped as the tariff deadline comes into view and markets stand by for the Federal Reserve decision today. Trade talks appear their usual on-again, off-again self.

Stocks were mixed but generally flagged. The S&P 500 eased back 0.1% but had been positive at times, while the DAX was down 0.3%. The Stoxx 600 pared losses of 1.1% at one stage to close down 0.3%.

European markets this morning are set to open flat with the FTSE 100 at 7235 off the back of the pound’s fall since the close yesterday.

FOMC on tap at 19:00 GMT. The Fed is likely going signal it’s sticking to its dovish mantra. Whilst no rate cut is anticipated, we may well see evidence of a noticeable shift in the Fed’s stance: specifically that it’s now willing to do whatever it takes to stimulate the economy. Powell has already said it will take a sustained and significant uplift in inflation to warrant a hike, whilst there’s chatter about essentially parking the 2% inflation target to let the economy run hot.

The persistent lack of inflation means it has a free hand to go as low as it likes, it’s only maintaining the mask of prudence by not cutting more aggressively. Moreover the drag lower from trade, global economic stress and the move to lower rates in other major economies means this is by far the path of least resistance. Out go concerns about financial stability or asset bubbles. The danger now is the Fed is becoming the monetary policy wing of the White House.

OPEC risks disappointment, US jobs report on tap

Morning Note

OPEC and allies are poised to formally agree to a policy of deeper production cuts, but there’s not a lot for bulls to be glad about. The 500k bpd increase to 1.7m bpd sounds good but only reflects existing over-compliance, led by Saudi Arabia, which has been pumping less than it is allowed, and it’s going to be short-lived. The deal looks at the moment to only extend through the first quarter of 2020. If OPEC doesn’t extend the curbs through to the end of next year it could act as a de facto loosening of supply that markets would punish with lower prices. There’s a real risk that even with deeper cuts OPEC fails to live up to expectations. We could of course see another meeting soon after this one to agree an extension – critical to today’s formal announcement therefore is whether there is any extension beyond March 2020. And we’ll wait to see if any arm-twisting by the Saudis forces Iraq and Nigeria into complying – but why would they bother now when they’ve not complied thus far?

Oil prices are reflecting a tinge of disappointment with WTI softening to $58.40 after hitting a high above $59 yesterday. Brent meanwhile has eased back off the $64 level to trade around $64.30 – importantly on Brent we failed to beat the November high, a sign that the market isn’t buying into this deal. The 200-day moving average remains a hurdle a little above $64. Prices for WTI and Brent are simply back to where they were before the attacks on the Aramco facilities in September. It’s all got a buy the rumour sell the fact look about it. But we must stress that if OPEC accompanies the deepening of cuts with an extension, at least to the next scheduled meeting in June, but perhaps until Dec 2020, prices could enjoy more upside.

There was good news for Saudi Arabia as Aramco priced well at the top of the range and raised $25.6bn in its IPO. A record listing values the company at $1.7tn, but we shall see where the shares head on day one. Regional and domestic investors have come good but the worry is that the big foreign institutional demand has not been there – if you’re just recirculating oil money among Arab states and Saudi households (levered) then what good has this float actually done?

In equities, Asia has been broadly higher amid more upbeat sentiment around trade talks.

Equities stumbled in Europe yesterday but the good old cocktail of trade optimism and a Friday mean they are pointing higher. However some very nasty German industrial numbers have taken the shine of European stocks ahead of the open.

Wall Street was steady with the Dow and S&P 500 trading mildly higher yesterday. Futures indicate more gains today. Trade will be the deciding factor.

After the usual pump and dump comments from Trump saying that trade talks are ‘moving right along’, we got more concrete news on trade as China agreed to cut tariffs on some pork and soybeans from the US, although it did not mention the quantities involved. This could be due to necessity from a shortage of pork because of African swine fever, more than desire to get a trade deal done, but nevertheless it’s pointing in the right direction. Nevertheless, the toing and froing of trade talks continues – we’ll be waiting for any fresh signal and will only believe a deal once it’s been served up on the table, not when the chefs say it’s in the oven.

In FX, the US jobs report is the big set piece event. A very weak ADP reading this week has forced some to revise forecasts for the NFP, although as always stressed, the ADP number is not always a reliable predictor for the NFP. Consensus is 180k but this is affected by GM workers returning. The three bears likely won’t be happy – expect more low unemployment, which is seen at 3.6%, and decent wage growth (3%). But markets are in a reasonable nervous frame of mind right now – a big miss could signal weakness in the US economy  – bears are sniffing around for anything that points to recession.

Last month’s reading showed US labour market strength remains intact: we saw a strong beat for the US labour market report with nonfarm payrolls up 128k in October, well ahead of the 85k expected, whilst there were upward revisions to the prior two months. The August print was revised up 51k to 219k and the September number was hiked by 44k to 180k. The 3-month average at 176k against the 223k average in 2018

Momentum behind sterling remains solid. GBPUSD has continued to drive higher and has consolidated around 1.3160 – perhaps resting for the assault on the May high at 1.31750. Looking at the charts it’s just one bull flag after the other, but possible 14-day RSI divergence should be watched. A debate tonight between Boris Johnson and Jeremy Corbyn may produce some moves – the election is Johnson’s to lose so he simply needs to avoid any booby traps. Polls as ever need to be heeded – latest from BritainElects shows the Tory lead down to just under 10pts. At present it does not look like the gap is narrowing quickly enough for Labour to mount a serious challenge, but upon such complacency have many best laid plans gang aft agley.

The euro remains steady with EURUSD holding onto 1.110, despite some very nasty looking German industrial numbers – down 1.7% vs +0.1% expected. The collapse in German manufacturing is staggering. Whilst PMIs are indicating recovery, these numbers suggest the very opposite. USDJPY has steadied above 108.60 having found decent support on the 50-day moving average.

Elsewhere, gold was down at $1473 having encountered firm resistance on the 50-day line at $1482. At send time gold was trading at $1473, with November lows sitting at $1445.

Volatility returns as stocks slip on trade worries, eyes on ISM today

Morning Note

Volatility is a double-edged sword for the trader and, for better or worse, it’s back. The confident march of the bulls into the year-end has come unstuck. With the S&P 500 up 23% and Europe, ex-UK, up about 15% this year there is still room for investors to be booking profits into Christmas that could spell further downside pressure. Last year it was the Fed to blame, today it’s Trump and trade.  Things may get a little dicey as we run towards the Dec 15th deadline for the planned tariff hike on $156bn in Chinese goods by the US.

Stocks continue to feel the heat from Donald Trump’s salvoes tariffs and the mounting risk that the US-China trade war will continue festering like an open sore well into 2020.  China today is saying that it will take necessary countermeasures to defend its interests, refused to set a timeline for a deal and stressed that a trade deal needs to be on the basis of ‘equality and mutual respect’ – not the one-sided deal that Trump is demanding. Nothing in these comments is especially new.

Wall Street had a tough session with the VIX suddenly emerging from its slumber to try a squeeze on 18. The Dow ended down 1% to 27,502 and the S&P 500 dropped two-thirds of one percent to 3,093. But having opened sharply lower bulls took a grip and steadied the ship and we closed at the highs of the day. US large caps should at least benefit from a flight to quality in all this mess.  

Asia has been broadly softer overnight with Sydney and Hong Kong moving down well over 1%. European markets are flattish ahead of the open – FTSE 100 a tad weaker, the DAX a shade higher.

Few pointers 

  • Markets are discounting a trade deal with China being done this year, but it’s still not impossible. The caprice of Trump means, as we have consistently stressed, anything can happen.
  • An EU-US tit-for-tat trade war is a risk but not to be overplayed yet  – most think it can be avoided 
  • Global equities have had a good run this year – there is still plenty of profit taking that could occur in the run-up to Christmas- do we see a repeat of last year and the ‘nightmare on Wall Street before Christmas’? 
  • The market, and Trump, ultimately know the Fed has their back. Pullbacks are to be expected as the market drifts higher and higher
  • After the soft manufacturing PMI on Monday, eyes on today’s ISM non-manufacturing PMI for a health-check of the US economy – could be important as – at present – the market does not seem overly stressed by worries about the US economy after the yield curve inverted and then uncoiled again  – have markets been prematurely ecstatic? Usually after inversion you see a sharp steepening before the recession strikes.

The bid for havens has seen the yen move sharply against the dollar. USDJPY has moved one big figure on the ratcheting up of trade pressures to trade around 108.50, having begun Monday at 109.70 and with bulls confidently eyeing 110. Now we are looking at support emerging from the 50-day moving average at 108.470. A possible golden cross needs to be watched.

Elsewhere in FX, GBPUSD dutifully pulled back from the highs after touching on 1.30 and trying to make to reach its highest since May. As of send time the pair was hovering around 1.2990 – if it taps on the door enough it should open. A lot depends on the confidence the market has in the polls which shout loud and clear that a Tory majority government is coming. Services PMI on tap at 09:30 GMT is of secondary importance but could produce some movement.

EURUSD has done little since moving up to 1.1070. AUDUSD is holding the 68 handle for now. 

Gold has also found bid with yields coming down – US 10s back under 1.7% point to the pressure in equities. Gold rallied to $1482 and a look at the 50-day moving average at $1483 which may offer some resistance near-term. 

Elsewhere, oil is holding in the upwards channel trend with support at $56 holding as we run into the OPEC meeting. Talk of OPEC and allies increasing their curbs – that is, deepening cuts from 1.2m bpd to 1.5m bpd may be overconfidence, but bulls will be hopeful. 

Advent of trade deal seen delayed, stocks start Dec positive

Morning Note

After a somewhat truncated week it’s back to business. US and European markets were weaker on Friday but still notched gains for the month of Nov – in the US it was the best month since June. And December is starting with promise.

Asian shares are higher after stronger-than-expected factory data from China. The Caixin PMI rose to 51.8, signalling the fastest pace of expansion since Dec 2016. After Eurozone PMIs last week also showed promise, it’s another tentative sign that global PMIs have bottomed. The US ISM prints today at 3pm GMT.

Futures show European equities will open mildly higher with the FTSE 100 seen up at 7365. US futures have also traced a move higher from Friday’s close and may notch fresh record highs again today. However the uncertainty over a trade deal could just keep bulls on their toes.

Markets continue to cling to hopes for a trade deal but increasingly this looks unlikely to be agreed, signed and delivered before year end. Markets though won’t particularly mind – they don’t look in the mood to allow a bit of can-kicking to derail the party, albeit we do see pullbacks along the way on headlines. As long as it can-kicking and not a complete breakdown in the talks, then markets should remain on an even keel. But what we still don’t know is to what extent Donald Trump’s support for the Hong Kong protestors is a game-changer or not.

On the details of the trade deal, China seems stuck on not only getting the US to abandon slapping tariffs on $156bn of Chinese imports on Dec 15th but also for it to roll back existing tariffs. I’d expect agonising over trade to continue to guide market swings, such as they are, in the coming days. We could be in to the New Year before the phase one deal gets signed – but delay of implementation of the Dec 15th tariffs would be enough to keep the market contented that things are moving in the right direction.

Elsewhere, it is worth noting that the Fed is said to be preparing a change in policy which could allow it to let inflation run above 2%. Stripping this down to its bare essentials it means even less chance of a hike, which equity markets will enjoy.

Oil prices have rebounded from Friday’s sell off as expectations for OPEC to extend output curbs underpin sentiment. Friday saw a sharp fall as US output hit a new record of 12.46 million bpd from 12.397 million bpd in August. Despite this all is not well in US shale. WTI slumped to $55 where it found support and was last testing the $56 level for a sign of recovery. We remain at the bottom of the broad uptrend channel in force since the start of Oct.

OPEC this week (see OPEC preview: the first is not always the deepest) will almost certainly extend production cuts further into 2020. The question is whether the cartel goes deeper in an effort to boost prices for Aramco. There are questions about how much Russia will support – currently it is shouldering a third of the 1.2m in cuts. The role of Russia is key, but the long and short of this is just much Saudi Arabia wants to support its Aramco IPO. CFTC data shows smart money speculators continuing to add to net long positions.

Elsewhere natural gas prices have started the week on the back foot after selling off aggressively on Friday due to signs of a mild winter.

In FX, GBPUSD  is muddling around the mid-point of the range at 1.2920. USDJPY has advanced as it builds momentum having crossed the 109 threshold decisively. EURUSD is totally moribund…but has firmed north of 1.10 having slipped as low as 1.09810, breaching that big support level at 1.0990.

What else to watch this week

U.K. Election

Polls show the Tory lead over Labour narrowing. Can Jeremy Corbyn do it again and turn an unassailable Tory majority into a hung parliament? Markets will be eyeing the polling data closely. Whilst Labour  has made inroads, the big picture is that the Conservatives still are in a commanding position and should win a majority if the polls are accurate. But relying on accurate polling is a false confidence and as we have seen before when momentum builds in one direction, elections can throw up surprises. Latest polling aggregator data from Britain Elects shows the Conservatives on 42.4% and Labour on 30.9%, with the Lib Dems trailling on 14.3% and the Brexit Party on 3.9%. Looks like Boris Johnson will give Donald Trump – in the UK for the Nato birthday – a wide berth this week. Anything other than a Tory majority is near term dangerous for the pound, but longer term there may be limited upside unless such a government could work quickly on its future trade deal with the EU.

PMIs turning? 

There are just a few signs that PMI surveys have hit the bottom and thus week will fill in some gaps. Later today is the ISM report for the US manufacturing sector, expected 49.2 from 48.3 a month ago. Elsewhere, the UK services PMI on Wednesday will be closely watched for signs about the state of the UK economy as the election and Brexit approach. 

Nonfarm payrolls

The monthly US labour market is always closely monitored, but with the Fed apparently on hold, it’s unlikely to deliver as much volatility as it has in days gone by. Whilst running at a slower rate than 2018, US labour market strength remains intact. Last month’s report showed nonfarm payrolls up 128k in October, well ahead of the 85k expected, whilst there were upward revisions to the prior two months. The August print was revised up 51k to 219k and the September number was hiked by 44k to 180k. The 3-month average at 176k against the 223k average in 2018. The revisions are really the bright spot as it indicates August and September prints were nowhere near as weak as we thought.

Will the RBA cut rates?

Markets have strongly priced in odds of no change to interest rates from the Reserve Bank of Australia on Tuesday; but will the accompanying statement hold any surprises? Minutes from the November meeting showed policymakers agonised over the poor run of data and seriously considered cutting rates. It’s widely anticipated that the RBA will cut again, but the question is one of timing.

Bank of Canada

On Wednesday the Bank of Canada meets but is not expected to change course. Indeed the central bank is now expected to hold rates through to the end of 2020, according to a Reuters poll of economists. Markets have been eyeing a cut but governor Stephen Poloz and deputy Carolyn Wilkins have said that monetary conditions are ‘about right’ for now.

Sterling rallies, European markets drift after Trump backs Hong Kong protestors

Morning Note

One way traffic? US equities were squeezed to fresh records again yesterday  as the main indices nudged higher on good US data and of course, the usual trade deal hopes. European stocks are drifting lower after Donald Trump signed a law that backs the Hong Kong democracy movement, casting the phase one initiative into a new spasm of doubt.

The FTSE 100 slipped under 7400 in early trade having yesterday threatened to break through the late Sep highs at 7440. Having touched that high, without any real catalyst a bit of a pullback is to be expected. Meanwhile the stronger pound is bound to be hurting the blue chips. Ex-dividend factors are scrubbing 8pts off the index also.

A batch of surprisingly healthy US economic indicators were a boost to investors and specifically US equity markets. Q3 GDP was revised up to 2.1% from 1.9% and durable goods orders far exceeded expectations. It was a sign that the US economy, as the trade war is said to bite, is maybe a lot more resilient than feared. From a market perspective it was perfect as inflation undershot – core PCE came in short of expectations at 1.6%, below the prior month’s 1.7%. Growth decent, inflation not moving up = ideal for markets as the Fed has made clear now it will only raise rates if it sees a strong and sustained uplift in underlying inflation.

Markets continue to work on the expectation of a trade deal  its close, so close – but this might be a case of labouring under a misapprehension. The message from China is there is no news on trade talks – just the tiny matter of Hong Kong…

Donald Trump has signed a law backing the Hong Kong protestors. At such a delicate moment for trade talks this could tip the balance against agreement. To rob a phrase, Trump seems apt to bring discord where there was harmony. China has promised countermeasures. It’s interesting how economic disagreements are being politicised. We’ve seen how Trump has used tariffs as a diplomatic tool – this move, albeit in reverse, is in this vein.

Now closed for Thanksgiving, markets across the pond at least should be quiet.

Over here, markets took signs of a decisive Conservative win as a cue to buy sterling.

The pound rallied firmly as a key poll signalled a whopping Tory victory in the Dec 12th election. GBPUSD had found decent bid all day and broke through 1.290 to hit 1.2950 and held the gains. The widely-watched YouGov MPR poll showed the Conservatives taking 359 seats to Labour’s 211, which would give Boris Johnson a commanding 68 seat majority. Some Labour northern heartlands would turn blue for the first tome in living memory, whilst the Tories would limit damage in Scotland to just two losses and the Lib Dem’s would fail to make the incursions they’d hoped. The Beast of Bolsover would be tamed.

It’s easy to overstate the importance of this poll but as it backs up every other poll, the picture looks quite clear now. 

However, the margins in many seats is very narrow and complacent Tory voters could stay home. The majority may be much smaller than this poll predicts, we may still get a hung parliament. Betting markets will be mis-pricing the result for sure. As politicians are wont to say, there’s only one poll that matters.

Two things to consider:

– The poll is based on national polls with Tories 11pts ahead – latest polls suggest Lab has narrowed the gap.

– predicted vote margins of under 1% in about 20 seats, under 5% in at least 30 seats.

Having pushed up through the mid-point of the range, we wait now to see if the bulls have the stomach to drive it up to 1.30 and attempt a breakout.

Whilst a clear Tory majority provides near-term certainty, the rapid timetable for agreeing a future trading relationship with EU is loaded with further downside risks for the pound.

Traders, cowed by the Brexit referendum and Donald Trump’s election, may be shy of putting all their eggs in the frying pan before the oil is hot enough. It would be prudent to consider the fine margins of this latest poll and the fact there’s still two weeks of campaigning to go. And Boris Johnson still hasn’t faced a mauling from Andrew Neil.

Elsewhere, having taken a bit of a scare as the dollar was bid on that stronger US data, and touching on a key support level at 1.0990, EURUSD has stabilised but is encountering near term resistance at 1.10080.

USDJPY seems to building momentum north of 109 but the Thanksgiving holiday may mean there’s not much impetus for further moves higher.

Oil broke a two-day win streak as US crude stocks rose 1.6m barrels last week against expectations for a 400k drawdown. Production hit a record high 12.9m bpd. Gasoline inventories swelled by 5.1m barrels vs the 1.2m increase expected.

WTI dipped through $58 but bounced easily in key support at $57.50. Thus level looks likely to offer a bulwark against more bearish data in the near term, until the OPEC meeting convenes next week (see note: OPEC Preview – the first cut may not be the deepest.)

Sterling traders fix eyes on MRP poll

Morning Note

If I had a pound for every time we heard a phase one trade deal was close…but it is apparently still close, but is it very close like it was a few days earlier? Donald Trump says it’s close anyway and that’s all the excuse the bulls needed to get to new all-time highs on Tuesday. Trump said the sides are in the ‘throes’ of doing a deal but added he’s ‘holding it up’ to get a better deal. The usual stuff.

US equity indices pushed up to new intraday and closing highs again on Tuesday. Upbeat outlooks from a couple of retailers boosted retail stocks – important signs of strength from the consumer in the run-up to Black Friday and the key Christmas quarter. Dicks Sporting Goods and Best Buy led the way as they upgraded forecasts. The Dow finished at 28,121 whilst the S&P 500 closed at 3,140.50.

All good in the hood? The VIX certainly indicates so as it slips to multi-month lows around 11.50. Volatility has been utterly crushed by the Fed’s pivot to easing. However, bonds are not exactly dancing entirely to the same tune. US 10s have retreated in the last fortnight to 1.74% from a high around 1.96%. 2s down to 1.59% from 1.7%. More flattening and growth is ready to flatline in Q4. The Fed’s Robert Kaplan agreed that Q4 will be soft – enough to get anyone worried – we will watch the bond markets with interest. They may start to shout before the equity markets cotton on.

Today will be the last full trading day in the US this week. Wall Street will be shuffling off for Thanksgiving tomorrow. Friday is a short day and many traders will be away.

UK equities are not entirely missing out this time – the FTSE 100 nudged up above 7400 and the FTSE 250 hit its highest in 15 months. Europe was flat with Frankfurt mildly weaker and Paris a whisker higher. Really Europe lacked for direction, but we are looking at further gains today as the FTSE breaks long-term resistance at 7440.

Asia has been broadly higher. Smart gains for the ASX 200 in Sydney led the way with Japan and Hong Kong following less decisively. Shanghai is softer. Chinese industrial profits slipped 10%, the steepest fall in 8 months.

In FX, USDJPY has firmed up above the 109 level again taking support from the 200-day line on the same number. If a trade deal is signed before Christmas we’d see further gains. 

Having rallied through much of the European session, EURUSD still remains under a weight of gravity and has retraced overnight. Longs are getting squeezed by the weight of carry. As per yesterday, key support can be found at the Nov low at 1.0990 before the Oct low at 1.0880. Bulls need 1.1030 to break the downtrend, which failed to happen on Tuesday as the rally ran out of gas around 1.10250. For all the movement, it’s clearly a massive snooze-fest in FX and in EURUSD in particular with one-month ATM volatility hitting a record low on Tuesday.

We could get some action today though with a major data dump from the US ahead of the Thanksgiving holiday. We have on tap the Chicago PMI, durable goods orders, core PCE and the second reading of the Q3 GDP print. The Chicago PMI is expected to bounce back from last month’s 4-year low at 43.2 to around 47.2. GDP is expected to be unchanged at 1.9%. Core PCE seen at 0.2%, or 1.7% on an annual basis and short of the Fed’s 2% target for a tenth straight month. Personal spending numbers within the PCE release will be closely watched for signs of consumer health of course. Unfortunately for those seeking volatility, the US data is unlikely to do anything especially surprising, but, that said, if it’s on the softer side of evens then we may see yields dip.

GBPUSD stable on 1.2850. Eyes on a golden cross still. Attention in terms of the general election is firmly fixed on tonight’s MRP poll from YouGov. It will be released at 22:00 GMT. Given most traders will be in bed or the pub it could result in some whippy price action in GBP pairs. This detailed survey aims to offer a prediction for every seat (ex-NI) and it correctly predicted the hung parliament in 2017. With the Tories apparently sitting pretty, this poll has the potential to change the narrative of the campaign if it shows a different outcome. Remember, a Tory majority tends to be near-term supportive of the pound as anything else is messy and uncertain.

Elsewhere, gold is trying to firm around $1460 but struggling for momentum and remains in a medium-term downtrend that persists as the dominant force. If US yields do decline though we may see the recovery begin. Oil has firmed a little to above $58.30 – bulls looking for a break north of the high at $58.65 else it could retrace some of the recent gains. Crude oil inventories expected -0.5m.

Equities rally after moves on trade, Hong Kong elections

Morning Note

Asian and European markets rallied early Monday after some more positive steps on trade, whilst the fallout from Hong Kong elections on Sunday will need to be closely monitored for their impact on the protests and risk sentiment. 

On trade, it’s the usual Washington two-step – one step back, another step forwards. The picture on trade remains rather muddy, not least because of the incendiary situation in Hong Kong that is becoming increasingly ‘economized’, but the latest developments will likely lend support for risk. 

Over the weekend US national security adviser Robert O’Brien said a ‘phase one’ trade agreement with China was still possible before the end of the year, but added that the White House would not ‘turn a blind eye’ to events in Hong Kong. Earlier, Donald Trump had said the protests and the response from Beijing had ‘a tremendous negative impact’ on the trade talks. 

Cue a landslide victory for pro-democracy candidates in local elections in Hong Kong which saw a record turnout. The pro-democracy candidates controlled all but one of the 18 districts it seems. This is a humiliation to Beijing – there is no silent majority backing Carrie Lam and co – it will only embolden the protest movement further, which of course carries risks for investors.  

But we’ve had progress in an important area – China has appeared to relent to a degree on intellectual property, a key sticking point to the talks thus far. Beijing on Sunday said it will increase penalties for IP violations, and lower the bar for criminal proceedings to be brought in cases of alleged IP theft. This could be an important step forward, but we as ever will only believe it when we see it. The focus is on agreeing some kind of phase one deal before the Dec 15th deadline for about $150bn in tariffs to raise. 

Last week, US indices snapped a six-week win streak but did manage to rally Friday. European indices were also strong risers on Friday.

Friday saw a big pullback for the euro as the US dollar rallied heavily. Today we have the German Ifo business climate report, which may threaten to knock a few spots off the euro again. We also will be keeping an eye on Jerome Powell’s speech later. 

EURUSD was at 1.10260 and eyeing the support at 1.0990, a break of which would call for a pull back to around 1.0950 and then the Oct low at 1.0880. 

USDJPY just won’t roll over entirely and was last at 1.0880, seeking again to surmount 1.09 and the 200-day line first at 1.0890. The 50-day line is offering support around 108.275. 

GBPUSD is trapped in its range between 1.28 and 1.30 – expect it to remain so. Polls indicate the Conservatives are stretching out – one poll over the weekend shows the Tories with a 19-pt lead with 47% of the vote. This ought to lend support but we await to see whether the dollar can extend gains posted on Friday.

Oil – The uptrend remains in force as markets eye a potential expansion of crude output cuts by OPEC. Net longs increased to 430k contracts according to Friday’s COT report from the CFTC. Upside break to $58 on Wed/Thu has not been sustained entirely but the 200-day line around $57.50 starts to offer support. 

Gold – bearish trend persists with the rally off the $1445 low rather lacklustre and losing its mojo early. But speculative long positions increased in the last CFTC report to net +285.9k. As traders bulk up on long gold positions it may indicate the market is poised to retrace some of the recent drop.  

Equities softer on Trump tariff threat, Hong Kong woes

Morning Note

In a rare feat, Donald Trump managed not to move markets with his speech at the Economic Club of New York. Perhaps like the perpetual drunk droning on, the regulars have stopped listening. It was the usual smattering of boasts, ridicule and attack on the Fed (‘Give me some of that money’).

On trade, a phase one deal ‘could happen soon’. Well we’ve hearing that for months. And Trump threatened to raise tariffs on China if no agreement is reached – this has not helped sentiment in Asia and is also a factor for European sentiment. ‘They’re going to be raised very substantially. And that’s going to be true for other countries that mistreat us too,’ he said. Delay to tariffs on EU autos is awaited but not in the bag until it’s signed.

Markets recovered ground yesterday. The S&P 500 rose to a shade below Friday’s all-time high. The Dow was completely flat and the Nasdaq hit a record high before paring gains. Europe rallied to erase much of the damage wrought by Monday morning.

Today though mixed messages on trade from Trump and ongoing fears about the seemingly uncontrollable situation in Hong Kong has left Asian equities shaken. Hong Kong dipped another 2%, with China, Tokyo and Sydney all weaker. Hong Kong appears to be a city in complete chaos. One fears it could get a lot darker for the people of the city before the light emerges. 

European equity markets are taking their cue from Asia with a softer open. The Stoxx 600 dipped about 0.25% in early trade while the FTSE 100 was off 0.5%. There are jitters again like we saw on Monday morning.

Jittery markets provided support for gold, which rallied off lows around $1450, briefly touching $1445, to trade around $1462. Pressure remains on the bulls though with near-term downtrend in tact. The rally lacks confidence. Potential moves back to long-term trend support and a double 50/38% Fib level around $1360-70 looks feasible. The chart pattern is more bullish, pointing to a bullish flag retracement nearing completion. Next support is at $1440. Oil was weaker along with Asian equities.

There’s always one….The Reserve Bank of New Zealand surprised just about everyone by electing to leave rates unchanged at 1%. Markets had been positioned for a cut – the kiwi flew through 64 as a result. NZDUSD jumped from 0.63250 to north of 0.64 and held gains. The RBNZ is keeping ammo in reserve.

In FX, EURUSD which had trapped in a narrow range at 1.10125 is threatening to breach 1.10 on the downside. German and US inflation data later today may offer some escape. The October 15th low at 1.0990 offers support. GBPUSD is holding around the 1.2850. We can expect the pair to bounce about the 1.28-1.30 channel until closer to the election. USDJPY is holding the 109 level and the 200-day line is now the support.


The REITS are facing a war on the high street. After Land Securities’ harrumphing about CVAs dragging its into the red, British Land has also felt the pinch from a struggling retail market after writing down the value of its by £600m in the last 6 months. 

The company wrote down the value of its portfolio by 4.3% to £11.7bn from £12.3bn as of March. But within this Retail values slumped 10.7%, whilst Offices rose 0.4%.

Reported losses ballooned from £48m in HY 18/19 to £404m in the first half of the current financial year. Underlying profit fell 10% to £152m.

We’d thought that the more diversified REITs (offices, mixed use space, not so retail heavy) would not be as badly affected as Intu by the high street collapse. But they too are facing immense pressure on rents and valuations as retailers shut up shop. A third of store vacancies since April 2017 following CVA or administration are still empty.

Unlike Intu though there’s no talk about raising cash – diversified REITs are in better shape as the office market remains robust – as long as those Services PMIs hold up.

Taylor Wimpey has also reiterated full-year guidance and sees strong cash generation and demand holding up. A sales rate of 0.92 vs 0.77 last year is noteworthy. Some mixed signals on margins ( sees lower) and cost pressures (also seen lower).

Low interest rates, strong employment levels, rising real wages and Help to Buy mean things remain pretty solid for housebuilders. Key question – will the next government extend Help to Buy?

Smiths Group – guidance unchanged after 11% rise in underlying revenues in last quarter.

Equity markets bounce easily, eyes on Trump, Vodafone+ ITV rally

Morning Note

Markets at the moment don’t like to stay risk-off for terribly long. Today, European shares rose in the early part of the session after yesterday the bulls rallied the troops late in the day despite broad risk-off moves in the first part of the session.

Monday morning hangovers are a sign of a good party. The Dow took the hair of the dog most easily and closed at a fresh record high despite earlier losses, helped by Boeing’s lift-off after an update on the MAX 737 which said deliveries could recommence as early as December. The S&P 500 was 0.2% lower at close of play, but well off the lows of the day. 

European equity markets were looking very groggy on Monday morning but bulls took a cold shower at lunch and staged an afternoon rally to pare a large chunk of earlier losses. The FTSE, which had been down as much as 1.25%, ended 0.4% lower. The DAX finished -0.23% and the CAC ended higher. The FTSE 250 rallied to finish up a quarter a percent on hopes of a conclusive election result in the U.K. (see below for FX).

Overnight Asia is broadly higher with Tokyo, Seoul and Hong Kong rallying, although Chinese stocks were a shade softer.

Nevertheless worries about trade remain – specifically will a phase one deal between the US and China be completed by Christmas. The White House has been careful to say it hasn’t agreed to roll back tariffs yet. But hope springs eternal, especially when the Fed has your back. 

If you worry about markets being complacent, the volatility trade will not do anything to persuade you otherwise. The Vix remains at super low levels, up a touch yesterday from Friday’s trough when it hit its lowest since July. And speculative short positions on the Vix have reached a record high. Looking at past cycles this short Vix trade looks susceptible to a short-term spike in volatility that crushes everyone. A regular theme in these notes – markets are lining up for disappointment. Having paused its cutting cycle the Fed may yet be goaded into further cuts. 

All eyes will on Donald Trump after markets close in Europe as the president is due to deliver a speech at the New York Economic Club later, expected at 17:00 GMT. This poses all kinds of risks – on everything from China and trade to the Fed and impeachment. Markets will be on tenterhooks. The president’s speeches are akin to throwing a dart blindfolded. We may get an update on planned US tariffs on EU autos, which are expected to be delayed for six months. The deadline for the president to kick this into the long grass is tomorrow.

Elsewhere, gold was still weaker as the respite from the early risk-off beat to the market gave way. Prices have found near term support around $1450 but momentum is with bears, with a test of $1440 looking on the cards. We await to see what bonds do as the US market reopens following a holiday. Crude caught bid as equities rallied to reach $57 moving back to the upper band of the rising channel since the start of Oct.


USDJPY has broken through 109 again to trade above the 200-day moving average. EURUSD is in a tight range at 1.1030 ahead of the German economic sentiment data – resistance at the 50-day moving average on 1.1040 is proving the barrier. At send time it was weakening to 1.10250. We know Germany is in recession so these ZEW figures might be more optimistic than the market is assuming.

Sterling took a leg higher on Monday as the Tories were given an early Christmas present from Nigel Farage.

GBPUSD took off from $1.2830 to flirt with $1.29 after the Brexit Party said it won’t be contesting any of the 317 seats won by the Conservative Party in 2017. The pound (and domestic earning U.K. equities) rose since a clear, decisive election win for the Conservatives will provide clarity on Brexit – anything else becomes messy.

This is a big boost to the Conservative Party as the Brexit Party had talked about fielding 600 candidates. It changes the electoral map. Mr Farage seems to have been persuaded by Boris Johnson’s commitment not to extend the transition period beyond December 2020. It would have been crazy politics for the Brexit Party to take Leave votes away from the Tories and enable a pro-Remain grouping to take seats.

At present the Brexit Party will contest seats held by Labour and other pro-Remain parties. However there is talk that Mr Farage will step aside in some key Tory targets..

Overnight, New Zealand inflation expectations fell, giving the RBNZ the green light to cut tomorrow. 


ITV third quarter numbers are broadly positive. Total advertising revenues rose 1% in Q3, which was at the top end of guidance. For the year ad revenues are seen declining 2% with guidance for Q4 to be flat to +1%. Studios is seen with a strong Q3 and Q4 but weaker in 2020 because of the phasing of deliveries this year. Organic growth in Studios has stalled, but management expect 5% total revenue growth medium term. Acquisitions will be important to deliver on this. Online revenues rose 23% in the nine months YTD. For the nine months YTD, external revenues were -2%, vs -7% after six months. The improvement in ad revenues in the third quarter is a plus point.

As Disney+ launches today, and in the spring in the UK, it’s a timely reminder of the threat posed by cord cutters to the ITV business model. Freshly-minted BritBox doesn’t look like it has the heft to compete in an increasingly crowded streaming space.

Advertising revenues are under a lot of pressure both cyclically and structurally. 2019 was always going to be tough but there are also structural problems in terms of the cord cutters taking market share and the shift towards digital ad spend over traditional TV. The rebound in the second half we are seeing is encouraging. Shares rose 2% in early trade to 138p.

B&M continues to show good LFL growth and highlight the strength in the value end of U.K. retail, but Germany is proving a tougher nut to crack. Group revenues (excluding Babou which was acquired after the half year in FY19) increased by +12.4% to £1.76bn. UK revenue was up +13.8%, or 3.7% on a like-for-like basis. Management says Q3 trading has been solid and is optimistic over the key Christmas quarter.

However, profits slumped 70% to £32.2m which included a £59.5m impairment charge relating to Jawoll, its German business. Management say they will carry out a strategic review of Jawoll in light of the poor performance. Shares were in the bargain bucket with a -9% sticker.

Vodafone raised guidance and put Indian troubles behind it. Adjusted EBITDA for FY20 is now seen at €14.8-€15.0 bn, up from the previous guidance of €13.8-14.2bn. Free cash flow is now seen around €5.4 billion (previously ‘at least €5.4 billion’) as lower cashflows from India and the sale of New Zealand offset the initial accretion from the Liberty Global acquisitions.

Risk-off start to week, Greggs punches above its weight

Morning Note

We are starting the week in risk-off mode: Fiery protests in Hong Kong and the US-China trade war are conspiring to dampen the mood in markets on Monday. As usual expect the risk switch to be flicked to ‘on’ pretty quickly with the standard trade war pump in due course. And in terms of Hong Kong, we wonder how long term this de-risking kneejerk will last.
Asian shares were broadly weaker after another weekend of clashes in Hong Kong, in which at least one protestor was shot. The Hang Seng dipped almost 3% and the Nikkei dipped 0.25%, but Sydney rose. Overnight data showed Japan’s machine orders down for a third straight month.  

European markets are off to a soft start at about -0.5% across the board and are set for a weaker session as they take the cue from Asia, whilst political deadlock in Spain is not a help. 

In Spain, after a fourth election in four years, there is still political deadlock. No clear winner emerged from the vote, but the Right is resurgent. The lack of any consensus here is a troubling reminder of what might happen in Britain if there is a hung parliament. 

US equity markets notched a fresh record on Friday as a flurry of buy orders late in the day pushed the S&P 500 to an all-time closing high at 3,093. Futures are indicating a lower open.  

Gold has rallied off its lows back to $1463 on haven flows. It comes after a torrid week for gold bulls as a blow-up in the bond market torpedoed havens. Speculative positioning has barely changed, the CFTC’s COT report shows. 

Oil was lower round $56.65 in the middle of the rising channel trend since the start of Oct. A touch on the lower band at $55 may be possible before resumption of the uptrend. Traders have added to long positions in the last week, the latest CFTC data shows. IEA World Energy Outlook on Wednesday and the IEA Oil Market on Friday should be watched. 

A bid for safety boosted the yen, sending USDJPY back under 109 and under the 200-day moving average again. Dollar bulls will look to drive up again. GBPUSD traded with a 1.27 handle as markets exhibit a degree of caution over the General Election, but should be looking again for comfort at 1.28. On the open we saw GBPUSD rise slightly. Traders have continued to reduce short positioning. EURUSD has found support along the 1.10160 line and is looking to recover the 50-day line at 1.1040. 

On Saturday Donald Trump said trade talks are moving more slowly than he had hoped, adding that China is keener to do a deal than he is. It comes after last week’s pushback over claims the US is prepared to roll back existing tariffs as part of any deal. Despite this, it’s clear the economic reality is not lost on the White House.  
The US-China trade war will provide the pulse of daily market shifts. However, there are some additional factors to consider this week: 

  • Germany is in recession. This ought to be confirmed on Thursday with the Q3 print. Ahead of this we have the ZEW report. Interesting times for Christine Lagarde, who takes charge of her first ECB meeting this week, although it’s not a monetary policy event.
  • Fed chair Jerome Powell will discuss the economic outlook before the Joint Economic Committee of Congress on Wednesday. It comes after the Fed’s third rate cut this year and a signal that it is pausing the easing cycle. Given the introduction of press conferences after every FOMC meeting there are not expected to be many surprises. However Mr Powell can’t be completely relied upon not to drop an erratic comment. Likely to be more interesting is a speech on monetary policy by Richard Clarida on Tuesday. 
  • US inflation and retail sales are also due this week. Core inflation has risen to 2.4% – further upside from the last three rate cuts would be a (in central bank land) a sign of success following three rate cuts, but ought to raise questions about just how accommodative the Fed should be right now. Retail sales are expected to bounce and underline the resilience of the US consumer. 
  • A batch of UK data is crossing this week, providing traders with a clearer picture of the state of the economy as we enter the year-end. GDP and manufacturing numbers (Monday) are followed by unemployment and earnings figures (Tuesday), CPI inflation data (Wednesday), and retail sales (Thursday). But against the back drop of a Brexit election, these will only really mild distractions for sterling.  
  • The Reserve Bank of New Zealand is expected to cut interest rates when it convenes on Wednesday. There is a roughly 65% the central bank will cut the OCR to 0.75% from 1% and leave room for further cuts in the future. The recent rise in unemployment from 3.9% to 4.2% is seen warranting additional stimulus. 

Greggs has the magic touch – another upgrade. The vegan sausage roll effect lingers on.  We’re now talking about a £2bn sausage roll seller.

Despite exceptionally tough prior year comparisons trading in the first part of the fourth quarter has proved remarkably strong. In the six weeks to Nov 9th, sales rose 12.4%, and +8.3% for company-managed like-for-like sales. Management now anticipate 2019 full year underlying profit before tax to be higher than previous expectations. 

We’ve also got a positive 10-month update from Informa. The company reported underlying revenue growth of 2.8% ahead of the significant, November/December trading period. Full year guidance unchanged. 

Aston Martin has been raised to buy at HSBC. On a purely valuation basis there is an argument, but debt levels are a worry.

Sirius Minerals has revealed a strategic review identifying a two-stage plan that will require significantly less capital than the previous incarnation. The plan would require c$600m for phase one, with an additional requirement of $2.5bn for the second phase. A possible way out of the mire, but needs to be picked over in more detail.


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