Morning Note

Equities mixed on stimulus hopes, Chinese PPI + Brexit

Morning Note

Stimulus remains the watchword but equity markets are still looking for direction. Bonds have been sold ahead of the ECB meeting, nudging yields a tad higher with market participants fearing Draghi will leave the market wanting more. 

Yesterday US stocks were mixed but essentially traded flat. SPX slipped a touch while the Dow eked a gain. Buyers are trying to figure out whether last week’s upside break through long term resistance was the real thing or a bull trap. Risk will be constrained by ongoing fears about global macro slowing and trade wars. The bias was tilted more pro-risk last week after confirmation of high level trade talks. However we’re only ever a tweet away.. 

Asia has taken a leg lower as China’s factory gate prices turned south. China’s produce price index declined 0.8% in August amid falling demand for finished goods. The fear is not just that it signals weakness in domestic and overseas demand, but that China is exporting deflation by cutting prices and making it even harder for central banks like the ECB to achieve their inflation goals. Could be a tough session in Europe.

Gold has list its bullish stance with a retreat to month lows indicating bears have tried wrest control for now. Speculative long positioning had become extremely stretched in the last few days and price action had failed to deliver further upside so a retreat fits the narrative. However, with prices recovering around $1490-92, it suggests this is only a near-term pause in the longer term rally. Eye support now around $1469, the 50-day moving average. If we go that low we’re starting to rethink the bullish case.

In FX, sterling will now face several weeks of less constant Brexit related news flow. But it will remain ever present and pervade every bit of price action for GBP pairs.

Boris Johnson’s defeat last night means an election before Oct 31st is off the table. With Parliament prorogued it seems unlikely we will see meaningful direction towards no-deal before Oct 14th. This at least may give bulls some comfort the pound will be offered support in the low 1.20s. It does rather look like there is a floor under sterling for the rest of the month and into October. The question is whether the current momentum is enough to driveGBPUSD north of 1.25 in the near term. Despite prorogation the pound will of course be susceptible to headline risk. Particularly watch for signs the government is working to circumvent parliament and not seek an extension at the key European summit in mid Oct. 

Having stalled around 1.2350 we’ll be looking to see whether bulls can mount another assault on 1.2380 before 1.2520 comes into view. At send time cable was up to 1.2370 and looking to break yesterday’s high at 1.23845.

Elsewhere, EURUSD has attained a slight bullish bias ahead of the ECB meeting on Thursday. With markets fearing they’ve gotten ahead of themselves, the euro may firm a touch more before the announcement. Much depends on broader risk appetite – if haven flows dominate the dollar will be bid. As we detailed in our preview, the bar is set very high for a very accommodative stimulus package, which could leave the market disappointed. Euro gains are evidence of anticipated disappointment. 

Oil seems to be sustaining its rally out of the symmetrical triangle on the upside, touching on $58 for WTI. Next step is the July 11th swing high at $61. The arrival of Prince Abdulaziz bin Salman has got traders thinking the Saudis will go harder on efforts to raise prices. The Kingdom is in a hurry to drive prices higher ahead of the Aramco IPO and because they of course need to balance the budget. His arrival does suggest they weren’t happy with progress and want to do more to push up crude prices before the IPO, in order to get as high a valuation as possible. Whether or not he can achieve anything his predecessor could not is the $2bn question, but for now traders believe it signals an even sharper focus on prices.

On tap today – Apple to unveil new iPhones later today. It’s not expected to be a major refresh as we look forward to 5G devices next year.The recent acquisition of Intel’s smartphone-modem business for $1bn shows Apple is serious about this. However, this is not expected until 2020, leaving the upcoming upgrade cycle of iPhone 11 to likely feature only modest changes. Consumers will likely be holding on and waiting for 5G models next year, which could weigh on guidance and expectations.

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