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Market Outlook: Gold makes fresh highs, equities retreat, BHP, JD Sports & more

London equities are in the red but gold is shining
June 24, 2020

Gold broke out to fresh multi-year highs above $1770 as real Treasury yields continued to plunge. US 10-year Treasury Inflation Protected Securities (TIPS) dipped to new 7-year lows at –0.66 per cent and have declined by 14bps in the last 6 days. The front end of the curve has also declined more sharply in the last couple of sessions, with 2-year real rates at –0.81%. Indeed, all along the curve real rates have come down with the 30-year at –0.14 per cent. Gold has also found some bid on a softening dollar in recent days, with the dollar index down 1 per cent in the last two sessions. Fears that global central banks are fuelling a latent inflation boom with aggressive increases in the money supply continue to act as the longer-term bull thesis for gold.

As previously discussed, gold is a clear winner from the pandemic. Gold was initially sold off in February and the first half of March as a result of the scramble for cash and dollar funding squeeze. Since then gold has made substantial progress in tandem with risk assets since the March lows because of central bank action to keep a lid on bond yields. The combination of negative real yields and the prospect of an inflation surge due to massively increased money supply is sending prices higher. Whilst the Covid-19 outbreak is at first a deflationary shock to the economy, the aftermath of this crisis could be profoundly inflationary. Gold remains the best hedge against inflation which may be about to return, even if deflationary pressures are more pronounced right now. Remind yourself of Alex Hamer's thoughts on gold from earlier this month. 

Stocks are a little shaky this morning after a strong bounce on Tuesday. European markets opened lower, with the FTSE 100 slotting back under 6,300 at the 61.8 per cent retracement, which called for a further retreat to the 50 per cent zone around 6220. The DAX is weaker this morning and broke down through support at 12,400, the 61.8 per cent level. The Dow is holding around 26,100 and the 50 per cent level of the pullback in the second week of June, while the S&P 500 is finding support on the 61.8 per cent level around 3,118. Equity markets continue to trade the ranges as investors search for direction on how quickly the economy will recover and whether second waves threats are real. 

UK Company Announcements

Company 
BHP (BHP)

According to Reuters, the company has hired JP Morgan to sell its Mt Arthur coal mine in Australia following pressure from investors to improve its environmental credentials. The report cites anonymous banking sources saying a sale could occur by the end of the year for $1.5bn-1.8bn (£1.2bn-1.4bn).

Avon Rubber (AVON)

The group has been awarded a sole source contract by the US Department of Defence to supply the M50 Mask system. Worth $50m over five years, the first deliveries are expected to commence in the second half of the current financial year, which ends on 30 September.

Petrofac (PFC)

Amid Covid-19 and the oil price crash, ‘engineering and construction’ revenue is guided to be $1.6bn for the six months to 30 June versus $2.3bn a year earlier, with the net margin dropping from 6.5 per cent to 2.0-2.5 per cent. The company has swung from $15m of net cash at the end of 2019 to $139m of net debt (excluding lease liabilities).

Petropavlovsk (POG)

S&P Global Ratings has upgraded the company’s credit rating from ‘B-’ to ‘B’, seeing a stabilising operating performance and supportive gold prices. S&P expects net debt to remain below 2 times cash profits (Ebitda) with the refinancing of its 2022 loan notes providing sufficient liquidity.

Crest Nicholson (CRST)

The suspension of work on construction and sales sites in the wake of the pandemic caused completions to decline by more than a third during the six months to the end of April and forward sales also fell by a tenth. Adjusted pre-tax profits for the full year are expected to be between £35m and £45m, compared with £121m in 2019.

Iomart (IOM)

The cloud computing firm reported its twelfth consecutive year of growth in 2020, with profit before tax up by 4 per cent to £16.8m.

JD Sports Fashion (JD.)

The sports fashion retailer announced that it has acquired its Go Outdoors brand from administrators for £56.5m.

National Express (NEX)

National Express chief executive Dean Finch has stepped down from his role to become CEO at housebuilder Persimmon.

Premier Foods (PFD)

First-quarter revenues for FY2021 are up by about a fifth, due to greater demand for grocery brands during the Covid-19 pandemic. The group now expects to exceed full-year revenue and trading profit expectations.

Alpha Financial Markets (AFM)

Despite ending its year with £21m of net cash, the consultancy has drawn down on its bank facility and cancelled the final dividend. However, demand for advice from consolidating asset managers has "been pretty solid" since April, reports chief executive Euan Fraser.

On the second wave, the US looks clearly to have suffered a new, and in the words of Dr Fauci, ‘disturbing surge’ in cases. Virus hotspots like Texas, Florida, California and Arizona are seeing cases soar. Such is the worry the EU may ban Americans from travelling to its member states. Tokyo has also reported a spike in cases, whilst Germany is locking down two districts in North Rhine-Westphalia and there has been an outbreak in Lower Saxony.  On stimulus, Treasury Sec Steve Mnuchin said the administration is looking at extending the tax deadline beyond 15 July and is seriously looking at additional fiscal support to build on the $2.2tn Cares Act. 

In FX, the dollar has been offered this week, allowing major peers to peel back off their lows. GBPUSD has regained 1.25, while EURUSD has recovered 1.13. The kiwi was offered today after the Reserve Bank of New Zealand left rates on hold but said monetary policy easing would need to continue. The RBNZ said it will continue with the Large Scale Asset Purchase programme of NZ$60bn and keep rates at 0.25 per cent. The central bank noted that the exchange rate ‘has placed further pressure on export earnings…[and] the balance of economic risks remains to the downside’. 

WTI (Aug) pulled back having hit its best level since March, dropping beneath the $40.70 level that was the Jun 8th peak, but remained clinging to $40. Prices have slipped the near-term trend support. Again, I’m looking at a potential double top calling for a pull back to $35. However, the fundamentals are much more constructive, and indicate a stronger outlook for demand and supply than we had feared in May. API data showed inventories rose 1.7m barrels last week, gasoline stocks declined by 3.9m barrels, while distillate inventories fell by 2.6m barrels. Crude stocks at the Cushing, Oklahoma, fell by 325,000 barrels for the week. EIA figures today are forecast to show a build of 1.2m barrels. 

 

Chart: Gold up over 20 per cent from its March low 

 

Neil Wilson is chief markets analyst at Markets.com