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.

Gold & bitcoin firmer, stocks and dollar softer

Morning Note

Stocks and the US dollar were softer whilst gold and Bitcoin continued to drive higher as markets look ahead to the G20 meeting.

Stocks have eased as markets look ahead to the G20 meeting – optimism is fading a little and we would expect investors to perhaps take some risk off the table ahead of the meeting, particularly given the recent bump. Bear in mind also this is a weekend meeting that implies gap risk. 

Equities

The S&P 500 eased 5pts yesterday to finish on 2,945. Asia has been softer overnight. Futures indicate European shares are lower today since there is really little fresh catalyst for bulls before we learn more about the Trump-Xi meeting in Osaka and what this means for global trade, tariffs et al.  

US trade supremo Robert Lighthizer spoke to Chinese Vice Premier Liu He on Monday, at least paving the way for talks to take place in Japan. The FTSE 100 might struggle to hold the 7400 level today.

The US has hit Iran with more sanctions. No sense of de-escalation, but also no material worsening in the situation. The tensions offer short-term support for oil still with Brent steady around $64 and WTI shade below $54. 

Gold

Gold firmed again overnight as we see the path to more gains being cleared. Gold hit a fresh six-year high amid a perfect blend of supporting factors. Four things are really driving gold – falling yields, a weaker dollar, a soft macroeconomic outlook and geopolitical risks rising in the Middle East. 

Prices hit $1438, breaking resistance on $1433 before paring those gains to trade around $1426 at send time. Looking to break $1446 next. 

Gold has huge negative correlation with real yields, which have come right down. US 10yr around 2%, now back to where they were in 2016 – if it goes lower, we would expect further gold strength. The surge in negative-yielding debt is undoubtedly key to the rally, and can be viewed as similar to the rise in gold prices and negative yield assets in 2016. 

Forex

The dollar remains on the defensive. The dollar index has dropped further to trade around 95.50. 

Sterling can’t catch much bid – GBPUSD remains off its lows around 1.2750 but is failing to make real inroads versus the greenback as Brexit uncertainty weighs heavily. Short positioning has eased but this remains a crowded trade. 

We have the no-deal exit risk of course – Boris Johnson has said he is prepared to take Britain out without a deal come October 31st. But we also have General Election risk – chatter about a no-confidence vote being supported by a dozen or so Tory rebels could lead to the government falling and inevitably an election. Boris Johnson could end up the Lady Jane Grey of Downing Street if that were the case. This introduces risks of a) Brexit delay and ongoing political uncertainty, b) a hung parliament with no clear route out of Brexit, and c) a Corbyn-led Labour government that would be very risky for UK assets and equites. 

The euro is faring better, with EURUSD up to regain the 1.14 handle, trading at 3-month peaks. 

Cryptos

Bitcoin firmed again, cementing the gains above $11k. I would reiterate the comments from yesterday – it’s a hard market to stand in front of when it builds momentum like this. The buzz and the hype has returned. You can talk about Libra, or the halving next year, more and more institutional interest and so on, but ultimately this is a bubble again. Look for $11,600, the highs from Feb last year as offering the big test. 

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.

Fed holds, pound breaks $1.27 ahead of BoE

Forex
Morning Note

Stocks firmed and the dollar fell, whilst gold rallied to a 5-year high as the Fed opened the door to cutting rates.

It’s like 2010 all over: the race to the bottom is on. Only this time the global economy is coming off a period of remarkable synchronised expansion, not a terrible recession and the worst financial crisis in a generation or more. So what gives!? Must Powell acquiesce to the whims of his president? Must Draghi end his tenure not normalising, but actually cutting rates even deeper?

Draghi to be fair has little option. In the absence of structural and fiscal reform – blame Germany – he can but tinker around the edges of the zero lower bound, hoping to weaken the currency to get some competitiveness back. Powell is in a different position, although really it looks like central banks are spitting in the wind in trying to shift inflation expectations. They should try to focus on boosting oil prices instead.

FOMC holds

So yesterday the FOMC nudged towards a cut. Nearly half the 17 members of the FOMC think cuts will be warranted this year. The median dot plot suggests 50bps in cuts through 2020. The dots evinced a shift from a tightening bias to an easing bias. The patient mantra was dropped, whilst the economy is now only expanding at a ‘moderate’, not ‘solid’, rate. The market took this as a sign the Fed’s listening to their demands – a cut in July is now fully priced in.

But there’s yet optionality for Powell and co. The Fed refrained from explicit references to cuts. The median dot plot shows no cuts this year still. The market is ahead of itself again. If we believe the dots, rate cuts will come slower than the market wants them to.

In some ways the Fed thread the needle here – keeping the market and the president happy without actually committing to cuts. The dots suggest the Fed is saying: “Of course we will cut, just not yet-good enough?”. For now it is. But the tail seems to be wagging the dog, forcing the Fed to follow sooner or later.

Certainly revising inflation expectations lower points to concerns that tame price growth cannot simply be attributed to transient factors. Yet at the same time the Fed thinks unemployment will be lower and growth stronger than it thought in March.

The problem we have is that Fed looks like it is flip-flopping; changes its mind based not on economic data but on the caprice of financial markets; appears in thrall to the White House; and is therefore at a very serious risk of losing its credibility.

Markets

Yields hit the deck. US 10yr bond yields slipped beneath 2% again for the first time since 2016. Bunds heading deeper into negative territory.

Gold rallied on the outcome as yields sank, breaking north of $1385. It’s now cleared a tonne of important multi-year resistance, paving the way for a return to $1400 and beyond. This is a big move, but if the Fed doesn’t deliver the cuts the bulls could be caught out.

Stocks liked it – the S&P 500 notched gains of about 0.3%, Limited upside as the Fed was not as dovish as the market wanted and because a lot of this was already priced in. Asian markets rallied across the board.

Futures show European stocks are on the front foot, catching a tailwind from Wall Street and the Fed. The FTSE 100 may underperform though as the pound is finding bid.

Oil has climbed as US inventories feel three times more than expected. Brent was up at $63.50, threatening to break free from its recent range – look for $63.80. WTI at $55.50 also close to breaking out of its trough.

FX

The dollar kicked lower after the Fed decision – but with the ECB looking super easy the gains versus the euro are limited. Likewise the yen with the Bank of Japan also ready to step up stimulus. Likewise the Australian dollar, with RBA governor Lowe talking up a further, imminent, cut. The race to the bottom is on. Is it too soon to talk about currency wars?

The exception here is the Bank of England, which is heading towards raising rates. We get to learn more about the BoE’s position later today. The difference here is the inflation expectations, which are moving up, not down like they are elsewhere. Britain’s also enjoying strong wage growth and a super-tight labour market. All of this is dependent on a smooth Brexit – this is not a given by any means.

Indeed, Brexit is keeping the lid on sterling’s gains – the prospect of Boris Johnson taking Britain out of the EU come October 31st is a risk. There’s now talk of a possible general election if he gets in – risky, we know what happened to May. The prospect of a general election would not do anything to remove uncertainty around UK assets. Zero clarity still.

EURUSD moved through 1.12 and was last at 1.1280, but failing to gain enough momentum to rally above 1.13 and scrub out the Draghi-inspired losses.

GBPUSD has reclaimed 1.27. Quite a chunky move here, blasting through a couple of big figures in under a day. Maybe the prospect of a more hawkish BoE is helping the pound, albeit the market is actually pricing in cuts, not hikes. At least Mark Carney doesn’t have to deal with a political leader on his case…

USDJPY lost the 108 handle to trade at 107.50, now breaking free into new 2019 lows (ex the Jan flash crash).”

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) 

Euro dives on Draghi, stocks rally

Forex

The euro fell and stocks rallied after ECB chief Mario Draghi talked up the prospect of interest rate cuts and more QE.

The euro shipped 50 pips in short order and euro area bond yields dropped as Mario Draghi gave the strongest signal yet the European Central Bank is about to launch a fresh round of easing measures.

Speaking at the annual central banker bean feast in Sintra, Draghi said: ‘Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,’ and added that the asset purchase programme ‘still has considerable headroom’ and that in the absence of inflation returning to target, additional stimulus will be required.

Draghi has really opened the door to more cuts and a new round of quantitative easing. He’s in full dove mode now, the towel has been thrown in. Building on the last ECB meeting, at which some members discussed reopening QE, this looks like a clear signal that the central bank is preparing markets to expect monetary policy to become more accommodative this year.

This is entirely in line with our long-held view that the ECB would ultimately be forced to do more to stimulate the ailing Eurozone economy. Inflation expectations are being crushed – Euro 5y5y inflation swaps lately sunk to record lows- below 1.2% for the first time. Economic indicators continue to show a deep and persistent slowdown.

The euro dived lower and the breakout now looks lost. EURUSD was trading at 1.1240, already under pressure having slipped the 1.13 handle, before it dropped sharply to trade on the 1.11 handle at 1.1190. The Fed meeting is unlikely to help the euro with dovishness well and truly baked in – in fact the Fed has a low bar for a hawkish surprise that could put more pressure on the euro.

German bund yields are lower again, with the 10-year sinking towards -0.3%.

This Draghi put lifted stocks – the Euro Stoxx 50 rallied over 30 points quickly to trade at 3409, having been languishing around 3370. The DAX shot up more than 150 points. All else equal, which it seldom is, more easing from the ECB should be a boost for equity sentiment.”

Equities flat ahead of big week for central banks

Indices
Morning Note

Shares open flat as markets look ahead to the FOMC meeting later in the week, whilst Lufthansa shares tumble on a profits warning.

European equities look pretty flat on the open after a decent run last week for global equity markets. The S&P 500 closed a shade lower on Friday. Asian shares a bit wobbly overnight. Gains may be hard to sustain with the Fed in focus and no clear signs of progress on trade.  Investors may take a bit of risk off the table in the next couple of days.

US commerce secretary Wilbur Ross has poured cold water on any hopes that we might get a trade deal from the G20 meeting and said the US is ready to increase tariffs on China if necessary. 

FOMC meeting

All eyes are of course on the Fed meeting this week. 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. This means the potential volatility around the event is likely to be substantially higher than at most recent FOMC meetings. Traders may start to show some nervousness ahead of the Fed meeting if they think it won’t be accommodative as hoped. 

We’ve also got the BoE and BoJ expected to stand pat. We could though see some hawks on the MPC vote for a rate hike to signal their intent, as it appears waiting for Brexit clarity could take a while longer than policymakers had anticipated. Three members of the rate-setting Monetary Policy Committee have in the last week or so said that rates will likely need to rise at a faster clip over the next two years than the market is currently pricing. This week could be when they signal their intent.

EURUSD is looking softer ahead of the Fed meeting with the apparent failure of the double-bottom breakout from the descending wedge. Last trading on 1.12, a breach on the downside of this handle opens up a return to the 1.110 level immediately. Sterling remains softer too ahead of the Bank of England meeting with the dollar broadly firmer. GBPUSD has last holding support at 1.2580 where we long-term rising trend support coming in.  

Oil 

A fair old whipsaw last week as geopolitical tensions in the Middle East temporarily lifted prices. But on the whole the bleak demand outlook is weighing on prices and we have seen Brent retreat to the comfort of $62-$62.50. WTI is a shade below the $53 level.  Yet to see a sustained downside break again but it may be coming, albeit rising geopolitical tensions may offer support.

Speculative long positions have been heavily reduced – CFTC data showing a trimming in net long positions of around 50k contracts from 400k reported in the COT on Jun 7th to 351k reported on Friday. That’s down from a high of around 547k at the end of April. The reduction in net long positions reflects worries about a supply glut as demand weakens and US production ramps. 

Effectively the market has decided that OPEC will choose to extend its production curbs when it meets later this month/early July. To do anything else would be to risk a collapse in prices. Saudi oil minister Al-Falih is optimistic about extending cuts. His confidence is now being discounted by the market however.

Equities

Deutsche Bank – If no one wants to marry you because you’ve got too much baggage, the answer is to get rid of the baggage. Deutsche plans to set up a bad bank (that’ll make two then) to offload some of the least profitable elements of business. This is Sewing’s big play – we await to see whether it’s enough to really convince shareholders that we’ve hit the bottom. Profitability targets still look rather distant.

Airlines – Lufthansa’s profits warning has taken the wind out of the airlines today. The margin on its preferred metric is seen between 5.5% and 6.5%, down from the previous guidance for adjusted EBIT margin of 6.5 to 8%.

At the end of April we noted that Lufthansa’s Q1 loss wasa red flag for the airline sector. Over-capacity in the European short haul market, intense competition and the resulting pressure on fares can be blamed for the decline in profitability, whilst rising fuel costs are an added headache. The sector always does a good job at competing away margins in the good times. No signs that anyone is prepared to reduce capacity therefore we would anticipate the wave of consolidation in European short haul is not over.

Babcock/Serco – Babcock confirms speculation it’s been approached by Serco. Not an immediately obvious move but the two are a pretty good fit and we had anticipated some consolidation in the sector given the problems for outsourcers. Serco has been doing well against a tough backdrop for outsourcers, meeting new higher performance targets, whilst Babcock has been suffering.  Babcock has been downgrading its forecasts for a while and has been on a persistently downward spiral. Last month Babcock reported profits down 47% last year and warned of a tough outlook for the coming one. 

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.”

May’s last day, Nonfarm payrolls due

Morning Note

May’s last day, Mexico trade standoff, US jobs, Yuan looks to 7

And so, the time has come for Theresa May to shuffle off. Except she won’t quite as she will remain on as a caretaker PM. Boris Johnson is frontrunner. If he gets in – and we’ve detailed why we think he will – it could be a troublesome one for the pound. Votes start next week and we should be down to the final two before June is over.

Trade v Fed 

US equities continue to march higher as the Fed story is all that matters – investors are still guzzling that Kool-Aid. The Dow added 180 points, leaving it up over 1100 points from the low hit this week.  SPX rose 0.61% to 2,843. Looking first for 2870 and then 2889 for bulls. Support around 2817 and 2800. 

European equities were softer as the ECB was not dovish as expected. Mixed bag in Asia overnight – Nikkei and ASX higher, Kospi down, India flat, China weaker.  

Futures show European markets on the front foot, bouncing back modestly from Thursday’s dip. 

EURUSD failed to break out any further after the ECB meeting. After pushing up to 1.13 it’s found well-trodden turf at 1.1260 for comfort. At send time sterling was steady at 1.27 against the dollar. 

Oil has bounced after looking a bit oversold. Brent testing resistance around $62.50, the 50% retracement of the Dec-thru-Apr rally. 

Some progress on the Mexican-American talks over tariffs. VP Pence said he was ‘encouraged’ by the discussions as Mexico offered to deploy 6,000 members of its new National Guard police force, but has reiterated that the 5% tariffs are still slated for Monday. 

Fed jawboning continues but with a slightly different tone. NY Fed John Williams was more hawkish – or at least one feels more representative of the Fed’s unwillingness to flip-flop into a rate cut. His base case is for the US to grow above trend at 2.25%-2.5%. His baseline is a ‘very good one’. Not language suggestive of a cut, albeit he acknowledged risks to the downside. 

Yuan risk 

USDCNH rallied, with the yuan weakening amid concerns the PBOC is not worried about devaluation. Bloomberg reports PBOC governor Yi Gang said he wasn’t worried about the seven level being breached. Given the tensions over trade, devaluation in the CNH would risk escalation as it would be perceived with suspicion in Washington. USDCNH was last at 6.941, threatening to break out above last October’s highs around 6.97. Gang is right that no one level is particularly more important than the next, but the 7 handle on USDCNH holds a very real psychological hold over the market. If that goes we would expect Trump to counter-attack.

ECB fallout 

Markets are still digesting the impact of the ECB’s forward guidance change yesterday. The pressure to launch a new round of QE will only build. I see the market testing the ECB on this and driving it towards opening its toolkit again. EURUSD gains seen capped, whilst the relative quality of the dollar versus a world of ugly sisters should underpin the buck.

Jobs! 

Nonfarm payrolls are the headline risk event. The ADP print earlier in the week could herald a bad-un, but we’re still looking for something in the region of 180k, in line with the long-term trend. We should recall that the 27k print for the ADP number came after a whopper the month before of 271k – look for the 3-month average. Jobs growth remains solid, but this month’s print could be a tad light. Look for 100k maybe. The super tight labour market may well see hirings start to decline a touch anyway. Unemployment is seen at 3.6%. 

It’s far too easy to read way too much into a single jobs number. Remember the 20k print for Feb was followed by prints of 196k and 263k in the following two months – and had preceded by Jan and Feb printing above 300k. 

The wage data is probably more important as far as Fed expectations as it matters for inflation. Average hourly earnings are forecast to increase 0.3%. Traders likely to remain cautious ahead of the nonfarm payrolls. 

Equities 

Ferrexpo – welcome bit of good news after auditor strife and corporate governance concerns – sees material improvement in earnings – group EBITDA in 1H 2019 is expected to increase materially compared with 1H 2018. Improvement driven by higher pricing, production and sales volumes, while cost inflation lower than expected due to a fall in oil prices and the European gas price, which has partially offset by an appreciation of the Ukrainian Hryvnia versus the US dollar. 

Banks – the FCA is coming down very hard on overdraft fee charging, but stops short of ending free banking. 

Beyond Meat – last night Beyond Meat reported much better than expected Q1 results. The stock market darling shows no signs of falling out of love – shares popped 25% at one stage in after-hours trading and were last up 18% – close to 5 times above its $25 IPO price at $117.49. Losses rose to $6.6m but revenues tripled to more than $40m. Massive growth opportunity but the multiples are crazy and competitors are coming – you’re entering a space that is really ripe for the FMCG giants to take over. 

European stocks rebound, euro about to give it up

Forex
Indices
Morning Note

Stocks were lower across the board yesterday as the weight of the US-China trade dispute pushed everything down. From pretty much assuming the US and China would strike a deal, the market is repricing for a prolonged fight.

SPX closed lower by 19 points, or 0.69%, at 2,783, resting close on the 100-day moving average. This was a little off its lows of the day and a shade above the all-important 200-day moving average at 2776. The Dow shipped over 200 points and was briefly below 25k. 

The FTSE is also flirting with the 200-day line having closed 83 points lower at 7185. The pattern looks decidedly bearishy and flaggy right now. Support on the 38% retracement of the bottom-to-top rally from the 2018 low thru Apr high sits at 7150, which we saw tested and rejected yesterday. This was also an area of support that produced a bounce through the third week of May. 

We are seeing a small rebound in Europe on the open but there’s still lots of nervousness out there and the downward pressure is rather powerful and looks hard to resist. Any gains look hard won and easy to give up at the moment.

Forex

Dollar is still bid, pressuring everything else, with the dollar index on the 98 handle as it hoovers up haven demand. The euros is on the brink of capitulation on the 1.11 handle, with the pair last at 1.11343, ready to test those key May lows again, which marked a 2-year trough for the single currency. A breakdown through 1.11 on the downside brings 1.08 back into the picture.

GBPUSD doing very little still, trapped around the 1.2640 region. Whilst we are yet to retest Thursday’s low at 1.2610, we are making progressively lower highs and lower closes – the pound is still under a lot of pressure and this doesn’t look like having much chance of lifting until we know who the next PM will be. Brexit uncertainty remains.

That renewed dollar strength seems to be weighing on gold, which was last back at 1277. Rising trend support appears around the 1270 mark but for now the metal looks caught in a range. 

The GDP second print for Q1 is later – with the market already betting big on a rate cut this year it’s hard to see how a downward revision will really shift things. The first reading showed 3.2% and is expected to be revised down to 3.1%.

Watches of Switzerland

Meanwhile the latest IPO is in London – Watches of Switzerland has priced at the top of its range, at 270p. Shares will start trading today on the open. As we’ve seen this year IPOs can be a rough ride for shareholders and management. Hopefully for the management and buyers it won’t turn out to be another turkey like Aston Martin – one feels the omens are better for this one.

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