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

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

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

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

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

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

Bonds bid

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

Oil rallies

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

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

Sterling under pressure

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

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

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

Morning Note: Markets recover but Trump factor remains

From a wine dark sea of red to green across the board: US and European equity markets recovered on Tuesday, with the S&P 500 climbing 0.8% as markets recovered from the steep sell-off on Monday. 

The Dow recovered 200 or so points of the 600+ lost on Monday. European futures are looking positive again as markets cement the gains from yesterday. All sector rose as we saw a broad risk-on recovery. The FTSE was up 1% yesterday and is now looking to push on up from the 7240 level to break 7300 again. 

A series of comments and tweets from the President has markets behaving a little more sensibly, but risks still seem skewed to the downside until there is clarity and a ‘deal’. There is obviously still room for the US and China not to raise their tariffs. Mr Trump sought to play down the tariff hikes and talk up the prospect of a deal again.

Trump factor

The problem right now is that this market is trading on the whimsy of Donald Trump all the time, which makes it a tough place to be.  And yesterday’s rally has not wiped out the losses from Monday. One can only say that we should expect more volatility ahead and more shaking of the tree from Donald Trump. Still don’t discount the prospect later in the year of the Fed raising rates – markets are currently betting big on a cut and if a hike came it would be a major shock.

With that in mind, on tap today we have US retail sales figures. The strong PCE print suggests US consumer spending is strong and we may well start to see the retail sales numbers print higher over the next few months. The US consumer is in fine shape and this could drive the dollar north. 

Alibaba results in focus later with Chinese retail sales growth falling to its weakest in 16 years. Sales rose 7.2% in April. Other China data may also weigh – industrial production fell to a relatively meagre 5.4%, well off the 6.5% estimated.

German economy rebounds

Data just out this morning suggests Germany’s economy is showing some resilience – the economy grew by 0.4% in the first three months of the year.  Some relief perhaps but there is still little to get excited about in terms of the Eurozone economy.  

EURUSD is holding just above the 1.12 level – a breach here could bring in 1.1170 and then the early May lows at 1.11350. 

Brexit talks

News on Brexit – the government will table a vote in June with Theresa May apparently clinging on for dear life and a magical Brexit moment. It’s hard to see it panning out the way she would like. Eurosceptics will scupper anything that she can bring to the table (given the EU won’t renegotiate) and Labour won’t help her out. This is going nowhere – odds on General Election and a second referendum are shortening. 

The Brexit noise is putting some pressure again on the pound. GBPUSD has given up the 1.30 handle and was last holding onto 1.29 and below its 200-day moving average. A breach below 1.2860 would be bearish, before then the dips may seem attractive. 

Week Ahead: Uber IPO incoming, Lyft reports earnings, Walt Disney awaits the Endgame

Coming up this week: one of the biggest IPOs in history as Uber goes public, communications and policy decisions from several leading central banks, as well as key company earnings reports.

Traders seem to be in a frenzy ahead of Uber’s highly-anticipated stock market debut, but will the poor performance of rival Lyft have tainted the shares? Earnings season may be slowing, but there are still some top companies left to update. The focus of much of the week for the FX market will be commentary from central bankers. Top tier UK and US data on Friday could be another source of volatility.

Uber: huge demand, high valuations, no profits

How much are markets willing to pay for a unicorn that sucks in cash and has yet to make a profit? Up until Lyft’s IPO, it seemed the answer was ‘a lot’. But despite opening over $15 above its IPO price, Lyft stock quickly tumbled. As happened to Snap Inc a couple of years back, a must-have stock quickly became a damp squib. Those IPO prices seem like distant memories for the languishing share price.

Ride-hailing giant Uber could be different. While also not profitable, the company dominates the domestic market, has a huge international presence, and boasts several other strings to its bow that Lyft doesn’t, such as Uber Eats and Uber Freight. The company is even working to develop flying taxis.

Uber will go public on Thursday 10th, potentially raising up to $10 billion for a valuation in excess of $80 billion. Has the debacle of Lyft shown that markets aren’t really that eager to hold a piece of a loss-making tech startup? Or is this an indicator that in the battle of the ride-hailers, traders are waiting to throw their backing behind Uber?

Forex: central banks dominate the week until Friday’s top tier data

The Reserve Bank of Australia announces its latest official cash rate decision during the Asian session on May 7th. This is just the start of a string of policy communications from some of the world’s biggest central banks. The Bank of Japan publishes its Summary of Opinions and policy meeting minutes in the following session. The Reserve Bank of New Zealand follows with its OCR decision. There’s also a press conference and inflation expectations from the RBNZ to watch.

The European Central Bank publishes the accounts of its latest policy meeting during Tuesday’s European session. As with most of these communications, the risks seem tilted to the downside. The Federal Reserve is still cautious, albeit less so following last week’s FOMC meeting, so it’s hard to see how any of the other world’s central banks could find much room for optimism. We’re certainly not expecting that from the BOJ or the ECB.

Markets are unlikely to be expecting bullishness from President Mario Draghi and colleagues. Even so, there are still downside risks to the euro if it seems that the Governing Council seems in favour of more quantitative easing. A more bullish case for EUR/USD notes the descending impulse wave pattern on the daily chart. Five complete waves in the trend suggesting a potential three wave correction which could push the pairing higher.

Meanwhile, the Aussie is braced for a potential rate cut. Nothing is a given, but there is a strong consensus amongst analysts that a downward move is imminent. Meanwhile, the RBNZ will likely signal that it intends to remain sitting on its hands for a long time to come. Perhaps frozen policy could be an upside for the Kiwi, with traders breathing a sigh of relief that the RBNZ isn’t planning on following the RBA on a more dovish trajectory.

False hope from UK growth data, US CPI could dash rate cut hopes further

US CPI figures wrap up the week, which could tilt the US monetary policy outlook ever-so-slightly back towards the hawkish side of the spectrum. A solid consumer price index reading, while not the Fed’s favourite measure of inflation, could give markets reason to expect a little more optimism at the next policy gathering.

The UK’s first quarter GDP print is also due on Friday. This could make interesting reading. While analysts generally agree that the UK economy is likely to slow this year, as Brexit uncertainty and softer global growth conditions weigh on output, companies have been busy stockpiling ahead of the UK’s departure from the EU. This flurry of activity could inflate the first-quarter reading. It’s already helped push some for the PMIs for the January-March quarter higher.

Equities: Lyft to chronicle losses, Disney to pave the way for Q3 strength

Earnings season may be winding down, but there are still some points of interest on this week’s calendar. BMW kicks things off with its Q1 earnings during Tuesday’s European session. The highlight, however, will be the after-market first-quarter results from Lyft.

It’s been a bumpy road for the ride-hailing company since its IPO. The stock has plummeted following the traditional debut surge to trend around 30% lower.

The issue of profitability is key. Lyft will undoubtedly report another large loss for the first quarter. Traders will want to know how quickly the company can slow the cash burn and when management envisions the company entering the black.

Lyft had better make some progress fast, or it could see itself becoming another Tesla – constantly battling the short sellers and limping from quarter to quarter.

There are a trio of euro stocks due on Wednesday: Siemens, Commerzbank, and Wirecard. After being hit by an accounting scandal over the past few weeks, Wirecard will be hoping to return the focus to its fundamentals and away from its business practices. A poor set of numbers could see Wirecard tumble, especially as there is no longer a ban on shorting the stock.

Walt Disney releases prequel to highly-awaited Q3 results

Walt Disney releases its Q2 figures after the US closing bell on Tuesday. The House of Mouse is riding high at the moment, boosted by the recent announcement of its long-awaited streaming service, and the storming box office success of the Avengers: Endgame, the studio’s latest Marvel superhero offering. With the record-breaking film having been released during the company’s fiscal third quarter (a period which also contains the hugely-successful Captain Marvel) management’s latest guidance should make for interesting reading.

Thursday brings fourth-quarter earnings from BT Group and AGMs from Adidas and Ford Motor Co.

Indices: S&P to retreat from highs as rate cut odds dwindle?

The S&P 500 hit a fresh record intraday high last week, as well as notching up a record closing high. The strong number of beats this earnings season (against a particularly low set of expectations) helped push markets that little bit higher.

But equities lost a key fundamental driver last week. The Federal Open Market Committee concluded that the US economy is on a pretty solid footing, even if it is lacking inflation and recent PMI’s have been softer than hoped.

This means the odds of a rate cut this year aren’t as high as the markets have been counting on. Indices were quick to undo some of their previous bullishness. President Donald Trump may be demanding a 1% cut to the federal funds rate and another round of quantitative easing, but the Fed won’t bow to such request and this has left the equity rally looking overextended.