Equities flat, pound eyes new PM, oil steady
Stocks are on the back foot as the market pares expectations for how deep the Fed will cut rates. Expectations for a 50bps cut are diminished and the market is now looking to the ECB this week to see how dovish they go. SPX closed 0.62% lower on Friday. Softer earnings are not helping, albeit the market here is not really trading yet on company reports. Asia has been softer overnight. Futures indicate European markets are off to a flat start.
Oil – tensions between the UK and Iran don’t really seem to
be moving oil prices much. Friday’s gain was modest given the reports of a
seizure by Iran of a British vessel. Brent is firmer above $63, while WTI was
holding $56. There is not the same impact from one-off events like this – the oil
market is not as susceptible to shocks that it once was. That said, if we had a
real crisis that blocked the Strait of Hormuz, we’d definitely see higher
prices. Speculative net long positions have increased sharply in the last week.
Gold looks to be firm on the $1425 level, look for a push
to $1450. Bitcoin is holding at $10,600 or thereabouts. Support
around $10k, resistance around the $11,500 mark.
What to watch this week
Boris coronation – a new regime will be installed this week
at Number 10. Watch for a harder tone on Brexit and the very clear message that
Oct 31st is a hard date. As previously argued, the reality of
parliamentary arithmetic may see this soften in due course. Pound traders will be watching the new PM like hawks over the
Sterling will remain
vulnerable to the prospect of a no-deal exit on Oct 31st. There is
more downside from here without breaching the 2017 lows. GBPUSD was last
just below 1.25 – look for 1.24 again and maybe then we can see 1.2360, which
brings 1.21 back into focus. Of course should Hunt
surprise then we would expect a big snapback in GBP to the upside.
ECB – likely to be very dovish indeed. Mario Draghi only
has three meets left before he shuffles off. Given the about turn by the Fed,
the ECB has a blank cheque to lower rates and restart QE. We would expect the
ECB – if it does not get a jump on the market this week by lowering rates
and/or announcing a restart to QE – to give a very clear signal that
it will do so soon. The best thing for the ECB and
for Draghi is to make sure Lagarde is just left selling his policy for the
first few months.
Meanwhile we have plenty of political risk rearing its head
again in Europe. Italy’s government is said to be on the brink of collapse.
Spain reported close to deal but
It’s a massive week for US earnings. So far the proportion of sales beats is lower than usual, according to GS. Considering that the bar has been set very low, this ought to concern. By the end of this week we should have a much clearer picture of the state of US businesses and the health of the world’s largest economy. Plenty of big bellwether stocks reporting this week, including Boeing, Caterpillar, Coca-Cola, Ford, Harley Davidson, Visa and Starbucks. We also have the bulk of the tech giants with Amazon, Alphabet and Facebook on tap. Watch also Twitter, Snap and Tesla.
US GDP – Estimates for US Q2 growth were revised up
after better-than-expected retail sales figures last week. The question is
whether there is enough strength in the quarterly growth numbers to make the
market rethink just how much the Fed will cut rates. The first reading of the
Q2 GDP estimate is due on Friday.
Metro Bank has confirmed it is looking to sell a
c£500m loan portfolio back to Cerberus. The move would clearly deliver a
welcome capital injection at an important moment for the bank. Coupled with the
recent equity raising this should allow the bank to move back into a surer
position and look at growth plans again, which have been on hold since
the loan fiasco. Half year results are due Wednesday. Pressure on Vernon
Hill to depart is mounting.
Centrica – said to be ready to slash the dividend.
As we noted in May: Centrica and boss Iain Conn are in a jam. The
company is facing a cocktail of headwinds and it is increasingly clear it will
not be able to defend the dividend for much longer.
Management stuck to its full year guidance but did not seem
to be all that confident it can achieve it. The share price reflects despair in
the strategy. Iain Conn will face more pressure.
Again, from our May note: Unless the July update
comes with a convincing strategic update I wouldn’t think he’ll be sticking around for much
FY adjusted operating cash flow was guided in the
£1.8-£2.0bn range, which is of course below the £2.1-£2.3bn range for
2018-20. From the tone of the May update it did not sound like they were
terribly confident of achieving even this lower target. The first four months
has been challenging but this was largely expected. It’s rather foggy outlook
Even with the aggressive cost cutting going, there are
doubts about how long you can keep doing that. And even then, it’s all weighed
to the second half – £58m of £250m of the expected annualised efficiencies
delivered so far this year. Divestments, including the sale of Clockwork,
should bring in another £500m or so. It all rather looks like Centrica is
scrambling around looking for cash to protect the divi and buy some
time for Iain Conn.
So based on the reports, it looks like the
big strategic move is to cut the divi and sell Spirit.
That may buy Conn more time, but for how much longer?