Risk-off start to week, Greggs punches above its weight

Morning Note

We are starting the week in risk-off mode: Fiery protests in Hong Kong and the US-China trade war are conspiring to dampen the mood in markets on Monday. As usual expect the risk switch to be flicked to ‘on’ pretty quickly with the standard trade war pump in due course. And in terms of Hong Kong, we wonder how long term this de-risking kneejerk will last.
 
Asian shares were broadly weaker after another weekend of clashes in Hong Kong, in which at least one protestor was shot. The Hang Seng dipped almost 3% and the Nikkei dipped 0.25%, but Sydney rose. Overnight data showed Japan’s machine orders down for a third straight month.  

European markets are off to a soft start at about -0.5% across the board and are set for a weaker session as they take the cue from Asia, whilst political deadlock in Spain is not a help. 

In Spain, after a fourth election in four years, there is still political deadlock. No clear winner emerged from the vote, but the Right is resurgent. The lack of any consensus here is a troubling reminder of what might happen in Britain if there is a hung parliament. 

US equity markets notched a fresh record on Friday as a flurry of buy orders late in the day pushed the S&P 500 to an all-time closing high at 3,093. Futures are indicating a lower open.  

Gold has rallied off its lows back to $1463 on haven flows. It comes after a torrid week for gold bulls as a blow-up in the bond market torpedoed havens. Speculative positioning has barely changed, the CFTC’s COT report shows. 

Oil was lower round $56.65 in the middle of the rising channel trend since the start of Oct. A touch on the lower band at $55 may be possible before resumption of the uptrend. Traders have added to long positions in the last week, the latest CFTC data shows. IEA World Energy Outlook on Wednesday and the IEA Oil Market on Friday should be watched. 

A bid for safety boosted the yen, sending USDJPY back under 109 and under the 200-day moving average again. Dollar bulls will look to drive up again. GBPUSD traded with a 1.27 handle as markets exhibit a degree of caution over the General Election, but should be looking again for comfort at 1.28. On the open we saw GBPUSD rise slightly. Traders have continued to reduce short positioning. EURUSD has found support along the 1.10160 line and is looking to recover the 50-day line at 1.1040. 

On Saturday Donald Trump said trade talks are moving more slowly than he had hoped, adding that China is keener to do a deal than he is. It comes after last week’s pushback over claims the US is prepared to roll back existing tariffs as part of any deal. Despite this, it’s clear the economic reality is not lost on the White House.  
 
The US-China trade war will provide the pulse of daily market shifts. However, there are some additional factors to consider this week: 

  • Germany is in recession. This ought to be confirmed on Thursday with the Q3 print. Ahead of this we have the ZEW report. Interesting times for Christine Lagarde, who takes charge of her first ECB meeting this week, although it’s not a monetary policy event.
  • Fed chair Jerome Powell will discuss the economic outlook before the Joint Economic Committee of Congress on Wednesday. It comes after the Fed’s third rate cut this year and a signal that it is pausing the easing cycle. Given the introduction of press conferences after every FOMC meeting there are not expected to be many surprises. However Mr Powell can’t be completely relied upon not to drop an erratic comment. Likely to be more interesting is a speech on monetary policy by Richard Clarida on Tuesday. 
  • US inflation and retail sales are also due this week. Core inflation has risen to 2.4% – further upside from the last three rate cuts would be a (in central bank land) a sign of success following three rate cuts, but ought to raise questions about just how accommodative the Fed should be right now. Retail sales are expected to bounce and underline the resilience of the US consumer. 
  • A batch of UK data is crossing this week, providing traders with a clearer picture of the state of the economy as we enter the year-end. GDP and manufacturing numbers (Monday) are followed by unemployment and earnings figures (Tuesday), CPI inflation data (Wednesday), and retail sales (Thursday). But against the back drop of a Brexit election, these will only really mild distractions for sterling.  
  • The Reserve Bank of New Zealand is expected to cut interest rates when it convenes on Wednesday. There is a roughly 65% the central bank will cut the OCR to 0.75% from 1% and leave room for further cuts in the future. The recent rise in unemployment from 3.9% to 4.2% is seen warranting additional stimulus. 

Equities 
 
Greggs has the magic touch – another upgrade. The vegan sausage roll effect lingers on.  We’re now talking about a £2bn sausage roll seller.

Despite exceptionally tough prior year comparisons trading in the first part of the fourth quarter has proved remarkably strong. In the six weeks to Nov 9th, sales rose 12.4%, and +8.3% for company-managed like-for-like sales. Management now anticipate 2019 full year underlying profit before tax to be higher than previous expectations. 

We’ve also got a positive 10-month update from Informa. The company reported underlying revenue growth of 2.8% ahead of the significant, November/December trading period. Full year guidance unchanged. 

Aston Martin has been raised to buy at HSBC. On a purely valuation basis there is an argument, but debt levels are a worry.


Sirius Minerals has revealed a strategic review identifying a two-stage plan that will require significantly less capital than the previous incarnation. The plan would require c$600m for phase one, with an additional requirement of $2.5bn for the second phase. A possible way out of the mire, but needs to be picked over in more detail.