ECB to loosen policy, data to prompt Fed and BoE easing bets?

Forex
Indices

Welcome to your guide to the week ahead in the markets. 

ECB monetary policy meeting  

Expectations are high ahead of this week’s European Central Bank policy meeting. A run of poor Eurozone data has raised bets on further rate cuts, while investors have snapped up government bonds in the bloc in anticipation of a potential restart to the quantitative easing programme. 

US ISM was dire – will CPI, retail sales and sentiment be any better? 

Key releases on the US calendar this week could crank up the odds of more easing from the Federal Reserve before the year is through. Last week’s ISM manufacturing print shocked, with the index falling into contraction territory. Soft readings from the upcoming CPI, retail sales, or University of Michigan sentiment index could see further dovish bets. 

UK GDP and average earnings – background noise? 

Sterling remains almost exclusively at the mercy of Brexit-related news flow, but growth and wage figures might draw some attention. After having been stuck on hold thanks to the uncertainty of Brexit, the Bank of England may have to be quick out of the starting gate once the October 31st departure deadline passes. Data recently has been weak and another blow from either growth or earnings would see expectations of a rate cut climb. 

Kroger earnings 

It’s been another bad year for Kroger so far. KR is down 12% year-to-date, compared with rises of 14% for the S&P 500 and 16% for its industry. Peers such as Target and Walmart have had strong quarters. Will Kroger’s own investments in expanding online and delivery offerings help it deliver a strong Q2 report? 

Corporate diary 

September 11thHermes InternationalH1
September 12thWM Morrison SupermarketsQ2 2020
September 13thKrogerQ2

Coming Up on XRay

We’re got loads of great sessions for you this week. with our expert guests and residents. Watch live, or catch up when it’s convenient for you. Subscribe to submit questions that our presenters answer in real time.

07.15 GMTSeptember 10thEuropean Morning Call
15.30 GMTSeptember 10thAsset of the Day: Bullion Billions
15.45 GMTSeptember 10thAsset of the Day: Oil Outlook
07.00 GMTSeptember 12thLive Trading Room
18.00 GMTSeptember 12th The Stop Hunter’s Guide to Technical Analysis

Key Economic Events

Stay ahead of the markets by understanding what key economic events are coming up, and what impact they could have on your trades.

08.30 GMTSeptember 9thUK Monthly GDP
01.30 GMTSeptember 10thChina CPI
08.30 GMTSeptember 10thUK Average Earnings
00.30 GMTSeptember 11thAustralia Westpac Consumer Confidence
11.45 GMTSeptember 12thECB Monetary Policy Rate and Statement
12.30 GMTSeptember 12th US CPI
12.30 GMTSteptember 13thUS Retail Sales
14.00 GMTSeptember 13th US Preliminary Michigan Sentiment Index

Week Ahead: Earnings, ECB and US GDP to drive markets

Week Ahead

ECB

The European Central Bank (ECB) provides the main headline risk event for traders as we look at whether policymakers are ready to pull the trigger on a fresh round of stimulus.Options are limited for the ECB but markets are increasingly betting it will choose to cut interest rates this year and may restart its bond-buying programme.

US GDP

Estimates for US Q2 growth were revised up after better-than-expected retail sales figures last week. The question is whether there is enough strength in the quarterly growth numbers to make the market rethink just how much the Fed will cut rates. The first reading of the Q2 GDP estimate is due on Friday.

Facebook

Earnings season hits full speed with a slew of corporate updates. Top of the bill is Facebook, which knocked it out the park in Q1. The consensus expected Q2 earnings per share (EPS) is $1.87, up 7.5% year-on-year. Sales are seen rising around 25% to $16.5 billion. But can advertising growth offset worries about regulation and higher costs?

Tesla  

Last month CEO Elon Musk said deliveries in the second quarter hit a record 95,200 cars, well ahead of the 91k expected by Wall Street. Key questions are whether achieving these production targets is leaving the business nursing additional costs, and whether management sticks to its guidance to return to profitability in Q3.  

Boeing  

How much has the 737 MAX grounding affected sales and earnings? We should find out more about how much of a it Boeing expects to take when we get the second quarter numbers on Thursday. Boeing also has exposure to tariffs and has led to analysts downgrading the stock lately.  

Corporate Diary

Earnings season continues this week so here’s your head’s up on the names to watch. The following companies are set to publish their quarterly earnings reports this week:

Pre-Market23rd JulyLockhead Martin Corp – Q2 Earnings
23rd JulySantander SA – Q2 Earnings
After-Market23rd JulyVisa Inc – Q2 Earnings
08.00 BST23rd JulyUBS – Q2 Earnings
After-Market23rd JulySnap Inc -Q2 Earnings
Pre-Market 23rd JulyCoca-Cola C – Q2 Earnings
After-Market (Paris)24th JulyLVMH – Q2 Earnings
24th JulyAMD – Q2 Earning
12.00 BST24th JulyGlaxoSmithKline Plc -Q2 Earnings
After-Market24th JulyFacebook – Q2 Earnings
After-Market24th JulyFord Motor Co – Q2 Earnings
24th JulyDeutsch Bank – Q2 Earnings
Pre-Market24th JulyUnited Parcel Service – Q2 Earnigns
Pre-Market24th JulyCaterpillar Inc Q2 Earnings
After-Market24th JulyTesla – Q2 Earnings
Pre-Market24th JulyAT&T Inc – Q2 Earnings
After-Market25th JulyAlphabet – Q2 Earnings
Pre-Market25th JulyBoeing Co – Q2 Earnings
After-Market25th JulyStarbucks Corp – Q3 Earnings
Pre-Market25th JuyComcast – Q2 Earnings
07.00 BST25th JulyUnilever – Q2 Earnings
25th JulyTelefonica
13.00 BST25th JulyTOTAL SA – Q2 Earnings
06.15 BST26th JulyNestle – Q2 Earnings
Pre-Market26th JulyMcDonalds Corp – Q2 Earnings
Pre-Market26th JulyTwitter – Q2 Earnings
XRay

Don’t miss the expert analysis and opinion, live-streamed direct to your platform. Here are the highlights from XRay this week.

17.00 GMT22nd JulyBlonde Markets
15.30 GMT23rd JulyAsset of the Day: Bullion Billions
19.00 GMT23rd JulyLIVE: Trader Training
11.45 GMT25th JulyECB Decision LIVE
Key Economic Events

Watch out for the biggest events on the economic calendar this week:

From 07.15 GMT24th JulyEurozone flash PMIs
13.45 GMT24th JulyUS flash manufacturing PMI
08.00 GMT25th JulyGerman IFO report
11.45 GMT25th JulyECB Interest Rate Decision
12.30 GMT 25th JulyECB Press Conference
12.30 GMT26th JulyUS Q2 GDP first reading

The pound tumbles; Carney trade wars warnings; Lagarde to lead ECB and better than expected NFP

Forex

With Brexit unknowns continuing to rumble away, it’s been a tough few months for sterling. The weakening pound hit a six-month low against the dollar today, which was buoyed by better than predicted US jobs report.

The figures come hot on the heels of Mark Carney’s speech on Tuesday in which he warned that trade tensions and Brexit uncertainty had the potential to “shipwreck” the global economy.

“Business confidence has fallen across the G7 to its lowest level in five years, with sentiment among manufacturers particularly weak. Households have also become gloomier about the general economic outlook, though they remain relatively upbeat about their own financial situation, likely reflecting robust labour markets. This is a similar pattern to that which emerged in the UK following the referendum,” he said.

He warned that policymakers were underestimating the impact of the ongoing US trade wars with China, Mexico and Europe. In his speech, he said trade tensions had significant downside risks for the UK economy, given it is already struggling under the Brexit quagmire. But he added that the global uncertainty has caused a “sharp slowdown” in global trade, manufacturing, production and capital good orders.

His comments caused gilts to rally and led to speculation of a BoE rate cute later this year, despite his claims that global markets are already pricing in more stimulus than is necessary.

Carney’s warning, alongside the weakening pound and sluggish growth in the first and second quarters, suggest that the BoE forecast for the UK economy next month could be grim reading.

Sterling lost more than 1% over the week against the dollar, and is heading for its ninth consecutive week of losses against the Euro. With little good news on the horizon, the outlook for the currency is bleak.

Lagarde new ECB president

Carney’s name just keeps popping up in the news this week, as he’s one of the contenders tipped to replace Christine Lagarde as the head of the IMF.

Mario Draghi steps down in October and Lagarde has been nominated to replace him. The nomination has surprised many, as Lagarde would be the first ECB president without any experience of setting central bank policy. She would also be the first female president of the ECB.

It’s a tough time to take over the ECB presidency, with pressure to improve growth across the Eurozone and – crucially – keep the area intact. It’s tough not to keep coming back to Brexit, but the UK’s disorganised and divisive split from the EU has done nothing to reduce calls for similar EU-exits from member states.

However, Lagarde is clearly no stranger to a challenging role, taking over as head of the IMF in 2011 when many countries were still struggling to overcome the effects of the financial crisis.

Investors must feel that she is a safe pair of hands, as the impact of the announcement on the markets was instant. The FTSE 100 closed up 0.7% at 7,609 points on the day the news broke, while the New York S&P 500 hit a record high as it moved closer to the 3,000 mark. There was almost palpable relief that a monetary hawk, such as Jens Weidmann from Germany, has not been handed the reins.

Non-Farm Payroll better than expected

Finally, the US got a boost in what is already a celebration week with better than expected Non Farm Payroll figures.

It showed that 224,000 jobs were created in June, many more than the 160,000 that economists had forecast. The figures are a rebound from the disappointing figures in May, and will be a relief to many worried about the economic outlook.

The Greenback strengthened on the (already weakening) pound following the figures, and EUR/USD is falling toward 1.1200 – the lowest in two weeks.

However, despite the impact on the dollar, investors would be wise to be cautious. Wage growth was disappointing compared to expectations and trade wars continue to cause tensions in global markets. Nevertheless, concerns of a recession may be over-egging it.

As Rewan Tremethick explains here, these figures have come just at the right time and show that the gap between market expectations, and what the economy actually needs, could be shrinking – just.

Euro dives on Draghi, stocks rally

Forex

The euro fell and stocks rallied after ECB chief Mario Draghi talked up the prospect of interest rate cuts and more QE.

The euro shipped 50 pips in short order and euro area bond yields dropped as Mario Draghi gave the strongest signal yet the European Central Bank is about to launch a fresh round of easing measures.

Speaking at the annual central banker bean feast in Sintra, Draghi said: ‘Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,’ and added that the asset purchase programme ‘still has considerable headroom’ and that in the absence of inflation returning to target, additional stimulus will be required.

Draghi has really opened the door to more cuts and a new round of quantitative easing. He’s in full dove mode now, the towel has been thrown in. Building on the last ECB meeting, at which some members discussed reopening QE, this looks like a clear signal that the central bank is preparing markets to expect monetary policy to become more accommodative this year.

This is entirely in line with our long-held view that the ECB would ultimately be forced to do more to stimulate the ailing Eurozone economy. Inflation expectations are being crushed – Euro 5y5y inflation swaps lately sunk to record lows- below 1.2% for the first time. Economic indicators continue to show a deep and persistent slowdown.

The euro dived lower and the breakout now looks lost. EURUSD was trading at 1.1240, already under pressure having slipped the 1.13 handle, before it dropped sharply to trade on the 1.11 handle at 1.1190. The Fed meeting is unlikely to help the euro with dovishness well and truly baked in – in fact the Fed has a low bar for a hawkish surprise that could put more pressure on the euro.

German bund yields are lower again, with the 10-year sinking towards -0.3%.

This Draghi put lifted stocks – the Euro Stoxx 50 rallied over 30 points quickly to trade at 3409, having been languishing around 3370. The DAX shot up more than 150 points. All else equal, which it seldom is, more easing from the ECB should be a boost for equity sentiment.”

Pound slips to 6-month lows: Morning Note

Forex
Morning Note

BoJo sees pound lose mojo , Aussie soft on RBA, equities steady ahead of Fed, Middle East tensions.

Equities steady before Fed 

Equities remain cautious ahead of the start of the Federal Reserve meeting today. The S&P 500 and the Dow were pretty well flat yesterday, whilst the FTSE 100 notched a slight gain.  Asia has been mixed. Futures indicate European equities are trading on the flatline again. Equities are lacking direction and will wait for the Fed to get a steer.

Equities investors are likely to display caution with the Fed in view. They may be disappointed with what the Fed offers – realization of this may manifest in mild selling ahead of the meet.  We’ve got no signs of progress on trade and little sense the G20 will produce anything. And now we have building tensions in the Middle East.

The White House has ordered 1,000 US troops to the region, with fears of escalation rising. Tehran says it will breach uranium stockpile limits in days. The Iran nuclear deal looks dead. Markets may start pricing in risk of escalation. Whilst this is only a very small number of additional manpower, and is clearly designed to act as a warning to Tehran, troop build-ups only tend to lead in one direction.  

Pound lacks mojo

The pound is at its lowest in almost 6 months on heightened fears of a no-deal exit. Boris Johnson is the clear favourite to become the next PM – in fact it rather looks like he’s going to walk it. Currency markets display fear that he has said he is prepared to take Britain out on October 31st without a deal if needs be. More BoJo, less mojo. Whilst a crowded trade there is real slippage here with little to spark life into the pound. 

The calculus is simple – failure to take Britain out of the EU this year risks a General Election and wipe out at the polls at the hands of the Brexit Party, potentially handing Jeremy Corbyn the keys to Number 10. The EU says it won’t renegotiate (it may have to), MPs won’t accept the existing deal, and Parliament has limited scope to stop this train.  

Sterling is increasingly reflecting the no-deal risk. Cable was last hovering close to its lowest of the year at 1.2530, having dipped as low as 1.2510, its weakest since the start of January. 2018 lows around 1.2470 could be the next target on the downside. BoE this week may signal tightening bias and readiness to hike earlier than previously expected, but the pressure on the pound remains because of Brexit. The BoE should be minded to remain on the sidelines until Brexit is decided. 

Aussie soft 

Australia’s dollar is also soft and susceptible to a major downside breach after minutes from the last RBA meeting showed more cuts are coming. More likely than not we should get at least one more cut this year. 

The minutes said: ‘Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.’ This was extremely strong signal and suggests more cuts to come and soon. Excluding the Jan flash crash we are now testing multi-year lows, on the cusp of a move back to decade lows not seen since the height of the financial crisis. At 0.6830 the AUD/USD cross was testing major support – this could hold until we get further clarity from RBA governor Lowe on Thursday. 

Oil soft, gold up 

Oil has failed to catch any tailwinds from the Middle East tensions. Brent was below $61 again but remains clear of last week’s lows. WTI was holding $52. All looking very bearish and flaggy right now. Until we get a good dose of economic data this rut seems set to continue. 

Gold keeps cranking higher – the prospect of lower US yields and geopolitical tensions seem to be acting as a tailwind. Last at $1346 the big target for bulls is the 2018 peaks at $1365 and then the 2017 highs at $1375.

Equities 

Ashtead FY numbers are positive, with EBITDA at £2.11bn, a slight beat as revenues rose 19%. The medium term outlook looks confident. Despite fears of slowing growth in the US, management say they expect to continue to experience strong end markets in North America.

On tap (GMT) 

EUR – ECB President Draghi Speaks (08:00) 

EUR – German ZEW Economic Sentiment (09:00) 

EUR – CPI (09:00) 

USD – Building Permits (12:30) 

GBP – BoE Gov Carney Speaks (14:00) 

EUR – ECB President Draghi Speaks (14:00) 

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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