Mexico fix green light for risk, oil rebounds, Thomas Cook carve-up

Indices
Morning Note

It’s a sea of green as stocks rebound on Trump’s Mexican fix. Investors are relieved at Mexico and the US coming to an agreement to avoid the latter slapping the former with tariffs, and this sent equity futures north. SPX closed Friday +1% for the day to cap a remarkable turnaround after a very rocky period. Futures show further gains Monday – looking now for a retest of 2900 –remarkable considering we were sub 2800 just a few sessions ago. Wall Street had its best week since Nov as weaker data cemented the market’s belief the Fed will cut rates – 4 cuts now more likely than 1 in 2019, according to the market. This looks overly optimistic. Futures indicate European shares are positive thanks to the Mexican deal with the FTSE 100 eyeing a return to 7400 and the DAX looking to return to 12,200. 

Tariff reprieve for Mexico

Late Friday the US ‘indefinitely suspended’ tariffs on Mexico after striking a deal. Whilst this is positive for risk assets, one should be cautious that this may only embolden Mr Trump to use tariffs as policy tool for the pursuit of non-economic interests. As previously suggested, the EU could be next – maybe to get the 2% defence spending target.  

Meanwhile as we raised on Friday, the US Treasury Sec Steve Mnuchin criticised China for purposefully letting its currency slide. The thesis is basically ‘no intervention is now intervention’. This has been talked about extensively before. Offshore USD/CNH was last around 6.950 – a little below Friday’s highs – expect the 7 handle to face stiff resistance but the jawboning is pushing it in that direction and suggests the PBOC won’t defend 7 at all costs like we might have assumed in the past. The onshore version sank to its weakest in six months today. 

Data overnight positive – Japan GDP Q1 revised higher, from 2.1% to 2.2%; while Chinese exports climbed in May, an unexpectedly strong performance. 

Dollar steady, oil rebounds

The US dollar was solid on Monday but could come under pressure. EURUSD holding at 1.13 and GBPUSD holding 1.27 but thus far failing to show any further momentum higher.  

Oil was firmer as the recovery in risk sentiment boosted crude. Saudi comments about extending OPEC cuts seem to be helping but largely this is baked in already – it’s the demand side that matters the most right now. Brent was last trading around $63.50. We await to see whether this is just another bear flag or the start of a meaningful recovery. Speculative net long positions fell again to 400k from 439k, indicating traders are continuing to unwind their bullish bets oncrude. E

Ferguson 

Good numbers from Ferguson but cloudy outlook means shares fell about 5%. Ongoing revenue growth of 6.2%, including 8.4% in the USA. Gross margins lightly ahead of last year, rising 20bps to 29.5%. Ongoing trading profit of $359m was $8m ahead of last year. FY guidance unchanged.  

Ferguson remains a play on the US economy, particularly new housing starts. Shares in the company are still subdued following the selloff last autumn and are yet to recover the kind of level we saw in September.  

Fears about the economic outlook in the US are a factor, but the expectations the Fed will cut rates should act as a support. US mortgage rates have come down as yields have retreated to 2-year lows. US new housing starts have picked up in the last two months and confidence has returned to the sector, some of which should be reflected in the Q3 numbers. New home sales dipped in April, but this was from an 11-year high as the market recovered from the disaster in the final quarter of 2018. 

Thomas Cook

 Thomas Cook confirmed that it is in discussions with Fosun following receipt of a preliminary approach. It follows reports over the weekend that 18% shareholder Fosun is ready to pounce for the tour operator business excluding the airline, which it cannot own due to EU aviation rules. As noted on May 16th, when we suggested an approach was in the offing, as once the airline is sold a major obstacle to the Chinese group making a bid will have been removed.

Management says it has received multiple bids, including for the whole, and parts, of the airline business. Triton may make life more difficult for Fosun but whatever the outcome, it seems the writing is on the wall after some bad losses and a ratcheting up in debt levels. First half losses jumped to almost £1.5bn – its biggest ever – as it took a £1.1bn write-down on My Travel. Underlying EBIT losses increased by £65 million to £245 million, which was down mainly to margin pressure in package holidays. Net debt has risen to £1.25bn

Sadly, it rather looks like Thomas Cook will be carved up in some fashion or other. This may not be a bad thing – clearly managing this large, complex holiday business proved daunting. But selling off the various bits of the business is likely to be even more complex.”

May’s last day, Nonfarm payrolls due

Morning Note

May’s last day, Mexico trade standoff, US jobs, Yuan looks to 7

And so, the time has come for Theresa May to shuffle off. Except she won’t quite as she will remain on as a caretaker PM. Boris Johnson is frontrunner. If he gets in – and we’ve detailed why we think he will – it could be a troublesome one for the pound. Votes start next week and we should be down to the final two before June is over.

Trade v Fed 

US equities continue to march higher as the Fed story is all that matters – investors are still guzzling that Kool-Aid. The Dow added 180 points, leaving it up over 1100 points from the low hit this week.  SPX rose 0.61% to 2,843. Looking first for 2870 and then 2889 for bulls. Support around 2817 and 2800. 

European equities were softer as the ECB was not dovish as expected. Mixed bag in Asia overnight – Nikkei and ASX higher, Kospi down, India flat, China weaker.  

Futures show European markets on the front foot, bouncing back modestly from Thursday’s dip. 

EURUSD failed to break out any further after the ECB meeting. After pushing up to 1.13 it’s found well-trodden turf at 1.1260 for comfort. At send time sterling was steady at 1.27 against the dollar. 

Oil has bounced after looking a bit oversold. Brent testing resistance around $62.50, the 50% retracement of the Dec-thru-Apr rally. 

Some progress on the Mexican-American talks over tariffs. VP Pence said he was ‘encouraged’ by the discussions as Mexico offered to deploy 6,000 members of its new National Guard police force, but has reiterated that the 5% tariffs are still slated for Monday. 

Fed jawboning continues but with a slightly different tone. NY Fed John Williams was more hawkish – or at least one feels more representative of the Fed’s unwillingness to flip-flop into a rate cut. His base case is for the US to grow above trend at 2.25%-2.5%. His baseline is a ‘very good one’. Not language suggestive of a cut, albeit he acknowledged risks to the downside. 

Yuan risk 

USDCNH rallied, with the yuan weakening amid concerns the PBOC is not worried about devaluation. Bloomberg reports PBOC governor Yi Gang said he wasn’t worried about the seven level being breached. Given the tensions over trade, devaluation in the CNH would risk escalation as it would be perceived with suspicion in Washington. USDCNH was last at 6.941, threatening to break out above last October’s highs around 6.97. Gang is right that no one level is particularly more important than the next, but the 7 handle on USDCNH holds a very real psychological hold over the market. If that goes we would expect Trump to counter-attack.

ECB fallout 

Markets are still digesting the impact of the ECB’s forward guidance change yesterday. The pressure to launch a new round of QE will only build. I see the market testing the ECB on this and driving it towards opening its toolkit again. EURUSD gains seen capped, whilst the relative quality of the dollar versus a world of ugly sisters should underpin the buck.

Jobs! 

Nonfarm payrolls are the headline risk event. The ADP print earlier in the week could herald a bad-un, but we’re still looking for something in the region of 180k, in line with the long-term trend. We should recall that the 27k print for the ADP number came after a whopper the month before of 271k – look for the 3-month average. Jobs growth remains solid, but this month’s print could be a tad light. Look for 100k maybe. The super tight labour market may well see hirings start to decline a touch anyway. Unemployment is seen at 3.6%. 

It’s far too easy to read way too much into a single jobs number. Remember the 20k print for Feb was followed by prints of 196k and 263k in the following two months – and had preceded by Jan and Feb printing above 300k. 

The wage data is probably more important as far as Fed expectations as it matters for inflation. Average hourly earnings are forecast to increase 0.3%. Traders likely to remain cautious ahead of the nonfarm payrolls. 

Equities 

Ferrexpo – welcome bit of good news after auditor strife and corporate governance concerns – sees material improvement in earnings – group EBITDA in 1H 2019 is expected to increase materially compared with 1H 2018. Improvement driven by higher pricing, production and sales volumes, while cost inflation lower than expected due to a fall in oil prices and the European gas price, which has partially offset by an appreciation of the Ukrainian Hryvnia versus the US dollar. 

Banks – the FCA is coming down very hard on overdraft fee charging, but stops short of ending free banking. 

Beyond Meat – last night Beyond Meat reported much better than expected Q1 results. The stock market darling shows no signs of falling out of love – shares popped 25% at one stage in after-hours trading and were last up 18% – close to 5 times above its $25 IPO price at $117.49. Losses rose to $6.6m but revenues tripled to more than $40m. Massive growth opportunity but the multiples are crazy and competitors are coming – you’re entering a space that is really ripe for the FMCG giants to take over. 

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