Stocks advance as trade deal looms, pound slips as BoE doves circle
European stocks are a tad higher after a lacklustre end to
the week. US-China trade deal will be the main talking point for risk. Early
doors Monday the FTSE 100 is back above 7600 and the DAX is north of
13,500 – will that all-time high be achieved this week? Asia has been higher,
with Japan closed for a holiday. On Friday, US stocks fell after the bell as
bulls tried to shake out the weaker hands before staging the rally that took
the Dow to 29k. But gains were quickly unwound and selling built through
the day to close -133pts. US futures are pointing a touch higher today.
The US-China trade deal is the focal point. White House officials are
adamant it’s a fait accompli, save translating the 86-page document into
Chinese. It’s expected to be signed on Wednesday.
With the phase one deal baked in, what markets want to know is how quickly – if
at all – the two sides can move things forward to phase 2. There’s no doubt
that building on this deal is going to take a lot more effort and compromise.
Of course, phase one could unravel at any moment if either side wants to walk.
Enforcement is an issue too.
It’s easy to miss it, but US earnings season gets
underway this week as the big banks begin reporting on Jan 14th.
Weak corporate earnings growth could dent optimism around US stocks, but with
the fourth quarter of 2019 out of the way, the market’s real focus is going to
be whether we get the 10% earnings growth forecast in 2020. As ever the focus is on the guidance.
Consensus estimates indicate a 1-2% decline in Q4 earnings,
but the tendency to beat expectations suggests we will see earnings growth,
Last year we saw multiple expansion massively outweigh
earnings growth as the driver of the 28% rise in the S&P 500 last year.
This poses problems as it means valuations are already rather stretched and
reliant on strong EPS growth in 2020. The S&P 500 forward PE has jumped to
19 from about 14 at the beginning of 2019, having averaged 16-17 over the last
to see some focus on the US presidential election with the key Iowa
Caucus on Feb 3rd. A poll last week showed Sanders leading Warren.
Oil – speculative long positioning hasn’t been this stretched since
2018, partially explaining why we saw such a sharp turnaround last week. Net
longs rose 567k contracts. WTI has recovered the $59 handle but weakness is
evident throughout. Saudi energy minister on the wires today saying that OPEC+
will take a decision on extending cuts in March.
Gold – likewise long positions were stretched, as net longs rose to
322k. We’ve not seen such a crowded long trade in years. Prices holding around
the $1550 level for the time being.
In FX, still lots of uncertainty about the dollar in the wake of that NFP
release. We have chewed on
this but ultimately it doesn’t tell us much new. We have an
average earnings figure that was well short of expectations, which will tame any
tentative Fed hawks as it suggests inflation won’t run hot. Payrolls were a tad
light at 145k but not by enough to be a worry about USA plc. Wages though were
substantially short at 2.9% annual vs 3.1% expected (0.1% vs 0.3%
monthly). Unemployment steady at 3.5%. Revisions to the last two months were
modest at -14k.
A dule of doves? Or a cote of doves? Either way, they’re
gathering at Threadneedle St. A cut is coming. The pound is under pressure
at $1.30, briefly taking a $1.29 handle, as Bank of England doves circle. MPC
member Gertjan Vlieghe said he’d like vote to cut if data doesn’t show a
turnaround sharpish. He’s joined Carney and Tenreyro in arguing that more
stimulus may be needed sooner rather than later. One senses the Bank doesn’t want
to get behind the curve and is seeking to get a jump on markets whilst still
teeing up the cut. Michael Saunders – who along with Jonathan Haskell has voted
to cut at the last two MPC meetings – speaks on Wed and will no doubt reiterate
his belief a cut is needed now.
Doubts about the UK’s ability to negotiate a trade deal with
the EU this year are dragging on the pound. On tap today – November month Industrial Production,
Manufacturing Production, monthly GDP and trade numbers will be a smorgasbord
if delights but not the main course.
USDJPY is stalling at 109.60. Having cleared the 200-day and other MAs bulls seem to have
now decisively broken resistance on the trend line drawn from the falling highs
since the swing high of Oct 2018, at 109.50. Long term 61% Fib level to cross
at 109.60 where we have seen rallies hit a wall several times lately. This area is offering
a decent amount of resistance as a result but if taken out could see a sharp
spike higher. The 200-week
moving average sits just above at 109.70/80 – a break here calls for a
sustained drive back to 112. EURUSD is holding
a 1.11 having bounced off key trend support and the 50-day SMA.