Stimulus keeps the party going, Brexit chaos continues

Morning Note

Stimulus, stimulus, everywhere, nor any drop to drink. More and more stimulus is underpinning equities but how long can this party go on?

The softer US jobs number in Friday only underlines the Fed will cut rates next week, whilst China announced fresh stimulus late Friday with cuts to banks’ reserve requirement ratio, or RRR, which is lifting Asia today. On Friday Jay Powell reiterated that the Fed will do whatever it can to sustain the expansion. 

This week’s big set piece is the ECB – so expect yet more stimulus – although as we detail in our preview, the bar for doves has been set very high.

With central banks refilling the punch bowls, markets can shrug off the weakening economic data and put off the coming dawn for another hour. The party goes on for now, but it’s looking increasingly precarious.

China’s export figures made for chastening reading. Exports declined 1% despite the softer yuan, indicating the real bite of the trade war with US. Exports to the US were down 16%, while imports from the US declined over 22%

The Sino-US trade spat is behind these softer figures. Trade data won’t go anywhere but south as the second half of the year plays out and China feels the impact of the latest rounds of tariffs. Moreover the indications are that we’ll encounter further escalation from here.

But expect the usual warm manure from the White House over the coming weeks. I reiterate that we should not expect a trade deal of any kind until 2020, when the presidential election is a lot closer.

European shares have started the week in positive territory as investors soak up yet more stimulus and expect more to come from the ECB. The FTSE 100 is holding the 7300 level but if there’s not much appetite to drive it over 7350 we could see a pullback again to the 7240. The DAX continues to march higher and may look to take out the 12400 region.

Asia was stronger on Monday after Wall St finished higher, with the 0.1% gain for the S&P 500 cementing a second straight weekly gain, the first since mid-July.

On Brexit, there have been a range of news flow and reports over the weekend. We’ll stick to what we know, which is the Boris will do whatever it takes to get Britain out on Oct 31st. A second attempt to call a general election will be made today, which the PM is expected to lose.

There is increasingly talk the PM would ‘break the law’ to see Brexit through by Halloween. I’ve not heard of such things in the past and it’s increasingly clear we’re into uncharted constitutional territory as MPs on both sides push the boundaries of what’s acceptable and sustainable. An election to break this sclerotic parliament is clearly what’s required. 

The pound will remain highly sensitive to headline risk and any further evidence of a lower no-deal risk will further squeeze shorts. If Boris gets his way, it’s increasingly likely that no-deal is the outcome. 

GBPUSD rallied well last week to break through 1.23 but has since retraced some of the gains as it encounters near-term resistance around the 50-day moving average. Bulls will need a push to 1.23560, last week’s swing high, to regain the momentum. Plenty of support at 1.2210. CFTC figures show speculators have trimmed their net short exposure a touch in the last week, as expected given the short squeeze we saw last week.

Oil – Saudi Arabia has sacked oil minister Al-Falih, in a shock move that’s going to add some additional uncertainty into oil markets. It looks like the persistent weakness in oil prices, despite Saudi-led production curbs, did for Al-Falih. There may also have been disappointment at the slow progress on the Aramco IPO. Either way he’s gone and it means there’s something of a cloak of uncertainty hanging over Saudi energy policy for the time being. Prices ticked higher with WTI rising through $57 to trade around $57.20 at send time, with bulls eyeing last weeks’ highs around $57.60. Brent has rallied to $62.20. CFTC data shows speculators have slightly trimmed their net long positions to 384.2k contracts from 391.6k the previous week.

Gold appears in a consolidation phase around the $1500 level.Goldhas pulled back to $1508 and there’s a chance of a pullback now to the $1492 support region if risk prevails. Bulls will look to regain the $1516 first. CFTC figs show speculators added to their net long positions. In a world of negative rates, gold is sure to shine.