Wall St hits new highs, Europe looks to von der Leyen election

Forex
Morning Note

Equities squeezing out new ATHs, just about. Amid a hotly-anticipated earnings season that’s only just starting US stocks are  still firming up with the three major indices notching fresh record closes Monday. The S&P 500 ended at 3,014 points to make a modest gain, whilst the Dow eked out a 27pt rise to finish at 27,359 and the Nasdaq added 0.2% to close at 8,258. Asia has been mixed overnight with nothing really to drive direction. Europe looks lacking direction. 

Citigroup posted decent numbers, with a headline EPS beat. But this was flattered by a one off IPO. Net interest margin declined, though, cementing the view that lower rates will pressure financials.  Banks reporting today including JP Morgan and Goldman. 

US retail sales will be eyed for consumer demand and what that may mean for Fed policy once we get this July cut out the way.

Trade – some blustering from Trump but nothing new. Talks between Japan and Korea haven’t gone well. 

RBA minutes

The Reserve Bank of Australia is leaving the market in doubt it’s got its foot on the easing pedal and is quite happy to keep it there. Expect further cuts unless we see a big rebound in the next two months.  Chinese slowing undoubtedly weighing on the bank’s thinking. AUDUSD susceptible to downside risk here if the RBA outpaces the Fed but now is firming on the 70 handle. Failed to break out above 70 so far though so this is looking like a resistance level.

Euro headwinds?

Europe – we will find out tonight if compromise pick Ursula von der Leyen is voted in as Commission President. If she fails it would be big a blow for the main centrtist groupings and further indicate the splintering within European politics. Make no mistake, she is no certainty. She needs 347 MEPs to back her but with the major centrist grouping not what it once was, and the Greens and Socialists against, there is a risk of falling short. 

Failure to select Leyen would reawaken slumbering Euro political risk, introduce further uncertainty around the status of Europe, cohesion around various internal political and economic issues (Italy) and throw the EC into turmoil at a critical point for Brexit.

Or she’ll scrape through and we’ll just keep calm and carry on. EURUSD struggling to catch bid and looks susceptible to downside moves again having failed to hold 1.1270. Potential head and shoulders formed to drive price action back into the 1.11 level?

Equities

Ryanair – uncertainty over Boeing 737 MAX aircraft has shattered Ryanair’s 2020 planning. Management say they’ll be basing schedules for next year on having about half the MAX planes they thought they would have. So summer 2020 will be planned around 30 MAX aircraft versus the 58 they’d been banking on.

This will significantly affect passenger growth, which management says will be fall to around 3% for summer 2020 against 7% previously expected. Full year to March 2021 traffic now seen at 157m against 162m previously guided. 

We may also see decline in passenger growth this year as Ryanair is planning to cut capacity ahead of the 2019 winter season in readiness.

It’s not all bad – stripping out a load of excess capacity should boost pricing power and lift margins for others, as well as for Ryanair. Again scheduling problems at Ryanair seem set to benefit rivals. Shares up across the board.

Burberry – the big question facing Burberry has been to what extent the Chinese consumer is reining in their luxury buying. So are they feeling the pinch? Not so much, it seems, with Burberry saying sales growth in mainland China rose in the mid-teens percentage in the first quarter, boosting Asia Pacific region growth to high single digits. Strong retail sales figures from China proved a good guide.

The weak pound boosted tourist spend in Burberry in its home market. Growth in the Americas was flat.

Response to the new Ricardo Tisci products has been positive. It’s now 50% of the offer and helped lift overall comparable store sales up 4%. Outlook unchanged, expect profits and further acceleration in sales growth to come through in the second half. 

A.G. Barr – Relying on the Scottish weather for sales is not much of a strategy…A nasty little profits warning this morning. Not so little in fact – management expects profits to be down by up to 20% this year and revenues down 10% in the first half. There is an element of strategy shift – from the heavy focus on volume last year and back to value now. But this only explains some of the trouble. It’s not been such a good summer in Scotland and northern England versus last year and management are pointing to ‘brand challenges’ for Rubicon and Rockstar. H1 performance has been well short of expectations. This is a surprising development and undoubtedly will disappoint shareholders.