Updated 3.45pm
A number of factors have conspired to create a more risk-off tone to the end the trading week than we saw at the start of the European session. Although European indices are just about holding the line, US futures are indicated lower and we may see the S&P 500 retest the lows under the 50 per cent retracement level at 2790. The Dow is indicated -200pts. The FTSE 100 has retreated sharply from the morning highs of the day and may well stutter into the close should Wall Street drag sentiment down. The DAX is also well off the highs though still positive, the CAC is already weaker, and the Euro Stoxx 50 is flat. US indices are already set for their worst week since the middle of March. Key test at yesterday’s lows at 2,766 for SPX.
In FX, the Japanese yen was the strongest and kiwi was the weakest. Sterling sank to its weakest since late March. Gold as broken out above the Apr 24th peak and now has the $1747 region its sights. A breakout above $1750 could see the next leg higher to $1800. See post
US retail sales were even worse than forecast in April, sliding 16.4 per cent vs 12 per cent expected. Core retail sales fell 17.2 per cent vs 8.6 per cent expected. Trying to read too much into individual data points in the current environment is exceptionally tough, but the optics from these figures are hardly reassuring.
US-China relations sour by the hour, with the White House moving to block semi-conductor shipments to Huawei. Reports suggest China is looking at retaliation with measures against US companies like Apple, Qualcomm and Cisco. I think we can assume a ratcheting up of pressure by the Trump administration in the coming weeks for reasons discussed before.
UK-EU relations are also looking very risk-off. GBP is now in full RoRo mode and cable made fresh two-month lows as it breached the April 6th support at 1.2160 to test 1.2150. It looks like real stalemate. The UK is refusing to countenance the EU’s level playing field demands. Britain also said it would refuse any offer to extend the transition period. Both Frost and Barnier sounded downbeat on the prospects of a deal. Barnier said the positions are extremely divergent, Frost said very little progress has been made. A lot to do to avoid the dreaded no-deal – downside risks for GBP clearly evident. The pound is already beaten up pretty badly due to the wider macro outlook as a risk-on currency these days, and the Brexit risk has reared its head again to impart more pressure.
Advisory note – Trump as ever is the wildcard and we have Rose Garden update on a vaccine from the president at some point today.
9AM
US stocks staged a mighty comeback and closed at the highs as beaten-up financials managed to recover ground. The S&P 500 traded under the 50 per cent retracement level at 2790, dipping as low as 2766 as US jobless claims rose by another 3m, before rallying to close up 1 per cent at 2852. Financials, which have failed to really take part in the rally since March, led the way as Wells Fargo rose 6.8 per cent and Bank of America and JPMorgan both rallied 4per cent. Energy stocks also firmed as oil prices rallied.
European indices were softer on Thursday but managed to recover a little ground in early trade on Friday. The FTSE 100 rose over 1 per cent to clear 5,800, with the DAX up a similar amount and trying gamely to recover 10,500. Asian shares have largely drifted into the weekend with no clear direction.
The rally for Wall Street snapped a 3-day losing streak but the indices are still on for the worst weekly performance since mid-March. We’re still in this tug-of-war phase as the real-world impacts of Covid-19 run up against the stimulus and central bank support. Markets are still trying to figure it all out. SPX needs to rally to 2915 today to finish the week flat, while the FTSE 100 requires 5,935.
The deterioration in US-China relations is another worry for investors, with Donald Trump saying he doesn’t even want to speak to President Xi and threatened to ‘cut off’ China ties. He’s not angry, he's just ‘very disappointed’. As I’ve pointed out in a past note, in an election year with the economy suffering from the worst recession in memory, Trump is likely to go very hard against China, particularly as this has bi-partisan support and polls indicate anti-China feeling running high. This will be partly a political game, partly what the US ought to be doing anyway, but either way it will likely provide yet another downside risk for investors.
Neckline support of the head and shoulders pattern is feeling pressure but yesterday’s rally is positive for bulls. Expect further push-and-pull around this region.
Overnight data showed Chinese factory output rise while consumer demand slowed. Retail sales declined 7.5 per cent vs 7 per cent expected in April. US retail sales today are forecast at -12 per cent, or -8.6 per cent for the core reading.
Oil put on a good show with front month WTI rising above $28. The August contract trades a little higher than $29, meaning the contango spread has narrowed by two-thirds in the last week. Price action suggests traders are far less worried about the underlying demand and storage constraints that have dogged prices for the last couple of months. Remind yourself of Michael Taylor's recent column on why US oil tanker stocks could be set to surge.
In FX, as flagged sterling tested the Apr 6th low, which has held for the time being and GBPUSD has recovered the 1.22 handle. Risks look to the downside, but short-term momentum looks like we could see a nudge up.
Gold has driven off the support and was last up at $1736. Whilst Covid-19 is initially a deflationary shock (negative for gold), the extent to which governments have fired up the printing presses and the fact that monetization of this debt seems the only way out, a significant period of inflation could be around the corner. Gold is still the best hedge against inflation. The Apr 23rd high at $1738 is the first test before a retest of the previous top at $1747 and then $1750 to call for a breakout to $1800. Read why US hedge fund managers are buying into gold as a hedge against currency collapse and also why Chris Dillow thinks inflation could be a boon for equities.
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Neil Wilson is chief markets analyst at Markets.com
