Week Ahead: All eyes on US nonfarm payrolls

Week Ahead

US nonfarm payrolls

US nonfarm payroll data for September rounds off the week. The figures released last month smashed expectations after clocking in at 266k versus expectations of a 180k print. Average hourly earnings missed expectations on a month-by-month basis, but annualised growth came in above forecasts at 3.1%. Forecasts this time around are for a 168k increase in payrolls and 0.3% wage growth.

UK services PMI

Another dose of UK economic data, following on from last week’s reading that showed the second-worst pace of contraction for the manufacturing sector since 2012 in December. November’s reading showed the service sector had slipped back into contraction, but business optimism was at a four-month high. Were companies right to be feeling more positive?

Costco December sales release, Walgreens earnings

December is a make or break month for many retailers. With Costco being one of the few major retailers to still issue monthly trading updates, the December report will be closely watched as a gauge for consumer activity over the key shopping season.

Meanwhile, this week also sees Walgreens Boots Alliance, Constellation Brands, Bed Bath & Beyond, and Acuity Brands reporting earnings.

Corporate Diary

Jan 8th – Walgreens Boots Alliance – Q1 2020
Jan 8th – Constellation Brands – Q3 2020
Jan 8th – Bed Bath & Beyond – Q3 2020
Jan 8th – Costco – December Sales Release
Jan 9th – Acuity Brands – Q1 2020

Key Economic Events

(All times GMT)
09.30 GMT 06-Jan UK Services PMI
10.00 GMT 07-Jan Eurozone Flash CPI Estimate
15.00 GMT 07-Jan US ISM Non-Manufacturing Composite PMI
00.30 GMT 09-Jan Australia Trade Balance
00.30 GMT 10-Jan Australia Retail Sales
13.30 GMT 10-Jan US Nonfarm Payrolls / Average earnings

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

Brexit
CFD Trading
General Election
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Equities steady with Brexit vote, key US data ahead

Morning Note

There was more Christmas cheer in London as the FTSE 100 broke higher again to finish up at 7573. European equities are looking a touch softer without investors offered little to focus on as the Christmas wind-down commences. However we could yet see more upside to the FTSE on positive flows.

It was the same story on Wall Street as the S&P 500 ground out another record high to close at 3,205. Impeachment, what impeachment? The markets have totally shrugged off the proceedings against the President. It only further delineates the two partisan camps ahead of the presidential election next year.

USMCA trade deal has been backed by the House of Representatives and should pass the Senate soon. China situation looks ok – nothing new to rock the ship. Mnuchin says phase one will be signed in January.

Asia has been mixed overnight with no real momentum from the slow steamroller in the US. Japanese inflation was 0.5% year-on-year, in line. Tokyo closed 0.2% lower. 

Sterling is still on the defensive with GBPUSD briefly taking a 1.29 handle and looking a tad shaky here at 1.30. Looking to consolidate around this round number but the trend remains bearish. 

The Brexit vote takes place in Parliament today – GBP crosses may be sensitive to some of the headlines but by-and-large there ought to be no surprises with the bill expected to pass easily. 

Today sees some pretty important US data in the shape of the Fed’s preferred gauge of inflation, the core PCE numbers. If this ticks up a bit then it will only add to the sense the Fed is right to pause its rate-cutting cycle and could push up yields and the USD. EURUSD looks vulnerable to a downside move should the PCE number beat – that 1.12 level looks increasingly distant and a 1.10 handle may come first. Cable could also be susceptible to pressure if the core PCE emerges as firmer than expected. Core CPI was strong in Nov and suggests core PCE could beat the 1.5% expected. 

UK GDP later expected at 2.1% – secondary to feelings about Brexit and the Boris Bounce for UK assets though. Andrew Bailey of the FCA reported as the new Bank of England governor after Mark Carney. Not an unblemished record but likely a safe pair of hands.

Crude oil continues to roll higher in the uptrend past $61 as it just keeps on making new highs. Gold is static at $1478. 

Equities 

Shell has delivered an update on the fourth quarter. It expects post-tax impairment charges in the range of $1.7-2.3 billion for Q4, with capex at the lower end of the range. 

Upstream production narrowed, now expected to be between 2,775 and 2,825 thousand barrels of oil equivalent per day, vs 2,650 – 2,800 thousand boe/d guided on Oct 31st. Downstream oil products sales volumes are expected to be between 6,500 and 7,000 thousand barrels per day, vs 6,650 – 7,050 thousand boe/d previously guided. Gas guidance is unchanged – Integrated Gas production is expected to be 920 – 970 thousand boe/d. LNG liquefaction volumes are expected to be 8.8 – 9.4 million tonnes. 

Also watch BATS and IMB after Congress approved a bill to ban tobacco and e-cigarette sales to anyone under the age of 21 in the US. The move is a long time coming but there may be a slight negative reaction. Some 19 states and 500 cities had already raised the minimum age to 21 but it’s indicative of the squeeze on big tobacco. Quite whether making something illegal for youngsters stops them trying it and becoming hooked is another matter, but the pressure to combat marketing aimed at young people ought to help.  

Trump impeached, Bank of England ahead

Morning Note

Discretion is the better part of valour. Caution is preferable to rash bravery. Falstaff’s words probably can be applied to markets as we head into the year-end. For sterling traders today we have the double spectacle of the Queen’s Speech and the Bank of England meeting. Caution and discretion will be the watchwords for the Monetary Policy Committee; less so the government’s likely agenda.

GBPUSD has been steady at 1.3080 but we are seeing a bit of bid for the pound early doors with cable taking a 1.31 handle again to print 1.3170.

The Bank of England decision is today at midday, with no change expected. We could see a dovish bias as the MPC catches up with the market. Market odds of a cut next year have jumped from about 30% last week to more than 75% today. Two dissenters called for a cut last time around, so there is  the intellectual basis to cut rates.

Nevertheless, with the election still not cold, and a new governor about to appointed, the MPC will prefer to wait until 2020 and a little more surety before it cuts. Moreover, the added uncertainty that we see – reflected in the pound movements over the last week – from the PM’s decision to shackle the government to leaving the transition period by Dec 2020 come what may, means the BoE will demur.

It is a sign of the times when the impeachment of the president of the United States produces nothing but a shrug. By becoming only the third president in history to be impeached, Mr Trump joins a select club. Markets simply don’t care.   

The Republican-controlled Senate will never abandon their president. Democrat speaker Nancy Pelosi has suggested she may delay sending the letters of impeachment up to the Senate, but this is posturing. The impeachment process has and remains so partisan that Mr Trump will not be removed from office.  

Yesterday, the S&P 500 closed a little lower having earlier attempted to break into fresh record territory. Europe was mixed: the FTSE 100 closed up 0.2% at 7540, while the DAX was down 0.5% at 13,222.  

On Thursday, Asia has also retreated a touch from an 18-month high. Data is offering little in the way of a catalyst and with a trade deal baked in, further upside may be tricky in 2019 as traders book profits and start to focus on Jan 2020. 

European markets are set to open flat as investors weigh the balance of risks and probably start to think that now might be a good time to park some profits. 

Overnight, China’s finance ministry has set out six products from the United States that will be exempt from tariffs starting Dec. 26th. Across the wires as I write China says it is close communication with the US on singing the phase one deal and that details of the deal would outlined once it is signed. 

Australian jobs data was strong at +39.9k vs 14.5k expected and a big turnaround from the prior month. Just a little bit of help for the Aussie, which has risen steadily overnight. AUDUSD based at 0.6850 late last night and has marched through to 0.68825. 

Elsewhere, US yields are higher, with 10s striking 1.927%. The dollar index also advanced. The combination is troublesome for gold bugs – gold has trended sideways now for days and seems locked around $1477. Oil got a boost from the US inventory data, with a spike towards $61 from $60.30 just about holding at $60.85. Inventories showed a draw of 1.1m barrels vs 1.5m expected. 

Sterling trips on new cliff edge, Unilever dips

Forex
Morning Note

Sterling tripped over its heels as Boris Johnson is looking to legislate for Britain to leave the EU fully in Dec 2020 with or without a trade deal. That means no possible way to extend the transition period. I must confess to believing he wouldn’t need to be so drastic, that a large majority offered the flexibility yet strength a government craves in deal making. This sets up another cliff-edge and could create yet more months of uncertainty for investors just when we thought all was squared away.

GBPUSD plunged to the 1.3240 area before paring losses to trade around 1.3260. Elsewhere in FX, the Australian dollar was softer as the RBA signalled it’s looking at further cuts, possibly in February. AUDUSD traded at 0.68580 as of send time, its weakest since last Wednesday. EURUSD steady at 1.1140. Signs in the dollar index that it’s rolling over.

Equity markets remain buoyant but we are seeing some softness in Europe on the open. We’ve had a really good run for the last two or three sessions so it’s a good time for a pause and consolidate around this level. In particular we need the FTSE 100 to hold this 7500 level.

The S&P 500 made a fresh record top, though Boeing’s travails left the Dow glittering a little less. Europe’s Stoxx 600 made a record high. Asia took the cue to make 8-month highs overnight. 

Equities

Unilever shares fell 5% in early trade as it warns that sales growth is more meagre than expected. Management expects underlying sales growth for 2019 to be slightly below its guidance of the lower half of its 3-5% multi-year range. 

The company puts it down to economic malaise in South Asia, with the CEO on the conference call saying it’s down largely to India’s rural markets, although these are expected to bounce back in the second half of next year. Meanwhile management says trading conditions in West Africa remain difficult. Developed markets continue to be challenging, but management did point to ‘early signs’ of improvement in North America as it picks up ice cream market share.

Earnings, margin and cash are not expected to be impacted. Weaker sales growth is a problem, but lately we have been encouraged that earnings growth is being driven by price rather than volume. However, the problem for fast-moving consumer goods giants with the big brand names is that consumers have a lot more choice and are more discerning than ever.

UK assets surge on huge election win for Boris Johnson

Forex
Morning Note

Sterling jumped sharply, enjoying its best gain in a decade as the Conservatives romped home to a convincing victory, while the FTSE also rose as investors enjoy the Boris Bounce. Broadly equity markets were well bid as hopes of a US-China trade deal crystallise into something more concrete.  

Huge win for Conservatives in UK general election

The Conservative Party has secured an historic mandate with a thumping victory, providing clarity for investors where there was confusion. For the markets and for business this is the perfect result – a clear majority for the Tories, the Corbyn risk nullified entirely, a major reduction in uncertainty around Brexit and even a quick Budget to inject the economy with some added impetus. The only doubts are around the next phase of Brexit – the future relationship – but with a large majority the government will be in a better place to negotiate and do what it needs to do.

GBP/USD, MARKETSX, 10.50 GMT, December 13th 2019

Sterling was heavily bid on the news. The going was looking a tad heavy but the ground firmed once we had the exit poll. GBPUSD surged to as high as 1.35 but pared gains a touch to trade around 1.3470 heading into the morning session. Near-term a look to 1.36 and thence to 1.37 seems feasible.

UK stocks surge on Tory election win

The FTSE 100 rose over 100 points to trend above 7,388, moving higher despite a clear drag from the stronger pound, which will cap gains. The City has awoken and the relief rally on a massive Tory win has begun. I think 8,000 looks overly bullish as a target, but something like 7700 before the year is out is doable. Near-term, 7440 offers a big test.

FTSE 100, MARKETSX, 10.50 GMT, December 13th, 2019

Now calls for a rebound in confidence in UK plc. Fundamentally undervalued UK equities – forward PE multiples have been very cheap versus European and US peers of late – will now look especially appealing as they have largely missed out on the rally seen elsewhere. The FTSE 250 put in more considerable gains – up 1,000 points to easily take out 21k and hit an all-time high. Sterling and UK equities are in for a Boris Bounce.

Remember just how cheap UK equities had become – trading on 12-month PE multiples of about 13 vs about 15 in Europe and 18 on the S&P 500. The FTSE 250 nearly made it to 22k but topped out an all-time high at 21,910. The FTSE 100 added about 100 points.

UK equities were basking in the warm glow of the Tory victory as investors threw out their worst-case scenarios for the British economy. There are some seriously relieved investors – and bankers and corporate financiers.

In particular, we are seeing some absolutely stonking moves among the UK-focused equities. Anything largely exposed to the UK economy took off at the open, while the drag on dollar earners from the stronger pound was not so large as to worry the market. It all points to a huge vote of confidence in the prospects for the British economy as a result of the Tory win. You just cannot understate the sense of relief here in the City.

Utilities had been suffering from a significant Corbyn discount and exploded as the threat of nationalisation evaporated with the Labour vote – United Utilities, Severn Trent and National Grid all jumped around 8%, while Centrica jumped 9%. 

Housebuilders were also undervalued and caught a bid on hopes that construction will benefit from the Conservative victory. We should also consider the potential risk that a Labour government could have posed to their profits being removed. Barratt Developments and Taylor Wimpey both rose more than 10%, while Persimmon was among the top movers at +14%. 

Banks were also bid – with the most heavily exposed banking stocks to the UK economy enjoying the biggest gains. RBS and Lloyds both rose 11%, with Barclays up nearly 8%. Investors are also needing to dial back their expectations for a Bank of England rate cut so this is an important boost for the banking sector in the UK, with Lloyds in particular the most exposed to the mortgage market.

Elsewhere retailers found new support with Dixons Carphone shooting 16% higher, with Marks & Spencer and Sports Direct +6%.  

Property, retail, banking, utilities – the whole lot is seeing a huge rotation.

Asian stocks higher on trade sentiment

Asian markets have rallied strongly overnight, taking their cue from the records on Wall Street as it seems a phase one trade deal is as good as done. Although not quite signed, sealed and delivered, it seems like the US and China have come to terms. 

The White House will cancel the planned tariffs on $156bn in Chinese goods scheduled to take effect on Sunday, whilst also cutting by half the existing tariffs on around $360bn of Chinese goods.

Does it mean we get a comprehensive deal in 2020? Hard to say, but it this has created the necessary Christmas cheer for a decent Santa Rally. It does rather look like some of the worst risks and headwinds are fading away – a phase one deal complete, greater political certainty for the UK and even a slightly upbeat ECB. 

Some doubts creeping in about whether China has accepted this deal – of course if it were to be scuppered now there would be a sizeable downside for equity markets given the ramp we have seen.

Tokyo surged 2.5% to its best level in over a year above 24k. Hong Kong rallied 2% and mainland China is up over 1%. 

Earlier US equity markets had surged to new all-time highs after Trump first tweeted the deal was oven ready. 

European indices are pointing broadly higher.

The dollar was offered with DXY down to a 96 handle and its weakest since July. EURUSD has rallied through 1.1170 and held the gains.  

Risk-on moves hammer bonds, gold dragged lower

Bonds were crushed by the risk-on sentiment from the trade deal – US 10s taking 1.95% at one point.   Higher yields knocked gold but prices haven’t capitulated entirely. Having traded at a high of $1486, gold has retreated to $1467 having hit a low of $1462. The fact prices haven’t retested the earlier Dec lows suggests there is still bid there. Crude oil held gains with WTI above $59.50.

Sterling hit by polls as traders weigh hung parliament chances

Forex
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

Forex
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.

Week Ahead: UK General Election plus FOMC, ECB, Aramco IPO

Week Ahead

General Election

British voters head to the polling booths on Thursday with the result critical to the future of Brexit, the economy and by extension, UK equities and sterling. Polls have consistently shown the Conservatives are heading to a comfortable majority, but a last-ditch surge by Labour is not out of the realms of possibility. Follow our election coverage daily on XRay.

Final FOMC meet of the year

The last FOMC meeting of the year is not expected to produce any change in the fed funds rate, but it will be another chance to see how close the Fed is to further cuts having signalled a pause to its easing cycle when it cut rates for the third time in succession in October. Lately it’s made it pretty clear that it would require a significant and sustained rise in inflation to warrant a hike, whilst there have even been reports that the Fed is thinking about changing its 2% inflation target to allow inflation to run even higher.

Saudi Aramco to start trading

The bookbuilding is complete and the price has been set – trading on Aramco shares on the Tadawul is expected to start this week. After the OPEC meeting last week and following concerns about valuations, this will be the largest and most hotly anticipated IPO in history. Our Aramco Grey Market is still open for new orders.

First ECB meeting for Lagarde

The first outing for Christine Lagarde as the chief of the European Central Bank (ECB) will be a closely-watched affair. Whilst markets do not expect the Governing Council to back any changes to rates or QE, the commentary from Ms Lagarde in the press conference will be picked over in fine detail for clues about her leanings and what we can expect from the ECB over the coming years.

Corporate Diary

Dec 12th – TUI full year results
Dec 12th – Dixons Carphone interim results
Dec 12th – Adobe Q4 2019
Dec 13th – Balfour Beatty trading update

Key Economic Events

(All times GMT)
Dec 9th – Tentative – China trade balance
Dec 10th – 00:30 GMT – Australia NAB business confidence
Dec 10th – 01;30 GMT – China CPI inflation
Dec 10th – 09:30 GMT – UK GDP, manufacturing production
Dec 10th – 10:00 GMT – German ZEW economic sentiment
Dec 10th – 23:30 GMT – Australia Westpac consumer sentiment
Dec 11th – 13:30 GMT – US CPI inflation
Dec 11th – 19:00 GMT – FOMC statement, fed funds rate
Dec 11th – 19:30 GMT – FOMC press conference
Dec 12th – 08:30 GMT – Swiss National Bank policy rate
Dec 12th – 12:45 GMT – ECB interest rate, policy statement
Dec 12th – 13:30 GMT – ECB press conference
Dec 12th – All day – UK General Election
Dec 13th – 13:30 GMT – US retail sales
Dec 14th – Tentative – US Treasury Currency Report (currency manipulators report)

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

Indices
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. 

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