Stocks up, impeachment proceedings widen, Brexit no-go

Morning Note

Always look on the bright side of life: major indices were higher in September whilst bonds and gold weakened. But what shall October bring us? Usually October can be pretty rocky. I blame the shorter days staring to affect traders’ moods. Watch for volatility to spike in the coming days, particularly as markets approach these Oct 10th trade talks with more optimism than they deserve.

US stocks finished the day, month and quarter higher as investors chose to focus on the positives. Easing in trade tensions keeps getting sold as the narrative but I see no real relaxation, only noise and distraction. Rallies are being sold, dips bought. Until we get a fresh signal from either the Fed or the White House we could be oscillating around these levels for a while yet.

Impeachment proceedings are the great unknown but until now hasn’t bothered the market – this could change. Trump’s call to the Australian prime minister Scott Morrison offers Democrats a new line of attack. The situation could quickly get out of hand for the president. Three House committees have subpoenaed Rudy Giuliani, the president’s personal lawyer, for documents about his dealings with Ukraine, Ultimately though it’s all on whether the Republicans stand firm. Even they have a breaking point.

The S&P 500 closed up half of one percent at 2,976.74, leaving it 1.7% higher in September and up 19% YTD. The Dow was 2% higher last month. Both were 1.2% higher over the quarter.

Asian markets have been higher. Tokyo is up while China and Hong Kong are closed for a holiday. Watch for Hong Kong protests to dampen the holiday mood. European markets opened higher.

Data overnight continues to show weakness in the global economy as declining trade chews up exports. South Korean exports fell for the tenth month on the bounce, while sentiment among Japan’s manufacturing companies fell to a six-year low. Meanwhile the sales tax hike in Japan finally takes effect.

Brexit – the FT reports we will know by the weekend whether there’s any chance of the UK making a new deal with Brussels before the Oct 31st deadline. If it’s a no go then sterling bears will circle on the carcass. Before this there is headline risk for the pound as we look to Boris Johnson’s conference speech tomorrow. Meanwhile mooted suggestions to avoid the backstop in Ireland have been dismissed as a non-starter again. There is no way a deal can be done before the deadline. It’s revoke or no deal. GBPUSD doing precious little right now as it treads water at the 1.23 marker.

Australia waltzes into low rate purgatory with another cut to a record low 0.75%. And so now even Australia, that exceptional land of continual growth and no recessions, cannot escape the jaws of easing. Another, third, cut in just a few months signals no end to low rates. Will they go lower? The RBA says it can see a ‘turning point’, but adds ‘an extended period of low interest rates will be required’.

The US dollar continues to ramp in the absence of any other major currency looking even remotely attractive. The least ugly sister, but how much further can the dollar go? The euro suffered its worst quarter in over a year, sliding 4%, and appeared to finally capitulate yesterday.

EURUSD broke key support at 1.09, but has since stabilised. Nevertheless the breach could bring the 78% retracement at 1.0820 into play. Bulls need to clear the last big swing high at 1.10. Key inflation figures out today could shape price action. Both core and headline inflation are seen at a measly 0.9%.

Gold did capitulate in the face of the dollar steamroller. The head and shoulders patter broke cleanly on the neckline and the 50-day line couldn’t. We’ve seen prices rest a little above $1460, at $1461, slap back on the 23.6% retracement of the rally off the lows last year to the recent highs. If that goes then we do start to look again at $1400, the next big Fib level.

Geopolitical worries tried to blind our minds eye to the fundamentally bearish outlook for oil, but the lack of any escalation in the Middle East has kicked those $100 calls into the long grass. 

Oil suffered some heavy selling in Monday as bears finally closed the gap and drive WTI  to briefly take a $53 handle. Prices are coming back a touch as we make $54.50 again. Bearish fundamentals have taken charge from the geopolitics.

Equities update

Metro Bank debt downgrade 

Fitch has downgraded Metro Bank’s debt to “BB” from “BB+”.  Well, thanks for that, always on the case – Metro couldn’t get a £200m bond offer at 7.5% off last week, so it’s hardly ground-breaking stuff. As we said then, it’s a worrying sign that the bank is not able to raise fresh debt and/or capital when the going gets tough.  Management today say they remain confident the bank will meet its MREL requirement as at 1 January 2020, citing ‘a number of different options available to it’. The volatile shares plunged 5% at the open before paring losses to trade –3% at send time. 

JD Sports/Footasylum merger under threat  

Mike Ashley will be looking on with a mild sense of schadenfreude. The merger between JD Sports and Footasylum could be off, as the planned tie-up becomes subject to a more in-depth investigation by the CMA. Last month the CMA said it was minded to refer the merger to a Phase 2 investigation unless JD could come up with remedies. But JD is sticking to its guns and says the acquisition would not result in a substantial lessening of competition. The incredibly fickle CMA is very hard to predict, but one senses that JD’s failure to suggest any kind of remedy at all won’t go down terribly well. JD shares were a smidge lower.

Sainsbury’s loses heir apparent 

John Rogers, the CEO of Argos, is leaving the business to become CFO of WPP at the end of the month. This a blow as he’s been a real strong performer at the retailer. Mr Rogers had been tipped as the strongest candidate to take over from Mike Coupe. Indeed, it suggests Mike Coupe has dug his heals in and won’t be going anywhere for a while despite the botched Asda merger, horrible LFL sales, continued market share loss to discounters and the rather lacklustre strategy update last week. Shares opened 0.4% higher and up to rally 0.9%.  

Greggs rolls on 

Sausage roll maker and vegan champion Greggs continues to deliver depite the stronger year-over-year comparatives. Total sales were up 12.4%, while like-for-like sales rose 7.4% in the third quarter. Expectations for the full-year unchanged. Management say they are stockpiling key ingredients ahead of Brexit. Grist for the mill. Shares rose 2.4% on the open before trimming gains to trade up 1%.