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Updated Market Outlook: Risk assets rally on bumper jobs report, HSBC, ABF & more

US jobs figures boost sentiment
July 2, 2020

Updated 14.30

US stock futures jumped, and European equity indices pushed to highs of the day after a stand-out jobs report. Today’s US jobs figures show the economy is bouncing back, but there is a still a long way to go to replace all the millions of jobs lost due to the pandemic. Permanent destruction of demand and productivity will take years to claw back. 

US employers added 4.8m jobs in June, which smashed the consensus expectations of around 3m. The unemployment rate declined more than expected to 11.1 per cent. Revisions to Apr and May left employment 90k better than previously thought. Labour force participation improved to 61.5 per cent. Wages are up 5 per cent year-on-year. 

But, a couple of things we should say about this to take the shine off the report.  First, weekly continuing jobless claims were a little worse than expected at 19.3m – this was a little better than last week but the number ought to be improving at a faster rate. Second, the total gains in employment over the last two months total 7.5m - but this is still dwarfed by the –20.8m recorded in April. 

Three, the BLS notes that employment in leisure and hospitality increased by 2.1 million, accounting for about two-fifths of the gain in total nonfarm employment. Meanwhile, employment in retail rose by 740,000, so about 2.8m of the 4.8m was in sectors that are highly exposed to fresh lockdowns and the slowing of reopening, which has been the result of the recent spike in cases. So we cannot expect the same contribution from these sectors over the summer if states are in a stop-start reopening scenario.

Four, while the number of unemployed classed as being on temporary layoff decreased by 4.8m in June to 10.6m, following a decline of 2.7m in May, the number of permanent job losers continued to rise, increasing by 588,000 to 2.9m in June. 

Risk assets rose on the report as it was overall bullish. US futures jumped, with the S&P 500 heading above 3150, taking it some or 150 points, or around 5 per cent,  above last week’s lows. The Dow is up 1000 points from last week’s lows. European indices rose the risk rally higher too. 

Elsewhere, we saw limited reaction in the dollar, but GBPUSD shot lower shortly after the release on a separate report saying that a meeting between the UK and EU chief negotiators that had been scheduled for Friday had been cancelled.  

Gold slipped lower, making a fresh low under $1760 and a possible breakout of the bearish flag signalled this morning, potentially calling for a retreat to around the $1750-$1747 area. 

Meanwhile Tesla shares just keep on going and are set to gap up $100 after the company said it delivered 90,650 vehicles in the second quarter, well ahead of both what the company had guided and the Street expectation for 83k vehicles. The company has successfully ramped production at its Fremont site and the Shanghai plant also came back online after being forced to shutter in the first quarter due to Covid. China sales are picking up with Tesla selling almost 12,000 Model 3s in May. The stock also got a lift after Wedbush Securities increased its price target on the stock to $1,250 from $1,000, whilst the bull scenario got a PT of $2,000. Chinese rival Nio delivered 3,740 vehicles during June, a monthly record, and exceeded prior guidance with second-quarter deliveries of 10,331 vehicles. 

 

The FTSE 100 was well poised for a move and duly broke out of the descending trend line from the June peak, fresh horizontal resistance seen around 6260. 

 

 

 

 

10am

European equities followed the US and Asia higher on hopes for a vaccine and a strong US jobs report, whilst shrugging off soaring numbers of new cases in the world’s largest economy. 

US cases of Covid-19 continue to surge, rising more than 50,000 in a single day for the first time. Florida’s new case count rose 4.3 per cent, vs the previous 7-day average of 5.7 per cent, so indications perhaps that the rate of new cases may be coming down there. But California, Texas and Arizona recorded their largest one-day rise in cases. Meanwhile, Tokyo also reported its highest number of cases in two months. Whilst the rise in cases is slowing the reopening of many states, some may argue that the US is simply heading for herd immunity a lot faster than anywhere else; in the long run this may help, not hinder, the country’s ability to get back to normal social and economic functioning. 

Investors largely are shrugging off higher cases though as Pfizer reported positive results from a vaccine trial. But we have been here before – it's too early to get too excited – but a working vaccine is the holy grail as it would allow real normality to return to the economy.  

The S&P 500 rallied 0.5 per cent to move to the 61.8 per cent retracement, whilst the Nasdaq Composite set a new record high. The Dow finished a little lower. Shares in Asia took the cue to rally, whilst European bourses have opened with strength on Thursday morning. Lots of noise around but equity markets are not showing any real trend - major indices are still sitting around the middle of the June ranges. 

UK Company Announcements

HSBC (HSBA) & Standard Chartered (STAN)

US lawmakers have passed a bill sanctioning banks that do business with Chinese officials who suppress Hong Kong's pro-democracy protests. That could lead to some awkward conversations between the Asia-focused lenders and their most sensitive clients.

Associated British Foods (ABF)

367 Primark stores out of 375 are open again, having closed during lockdown, and trading has been “encouraging”. But ABF’s retail arm expects full-year adjusted operating profits of £300-350m, against £913m in 2019.

Avon Rubber (AVON)

The ‘milkrite-Interpuls’ division is to be sold to Swedish dairy business DeLaval for £180m. The deal is expected to complete in the three months to 31 December, leaving Avon Rubber solely focused on its respiratory and ballistic protection business.

Meggitt (MGGT)

Organic revenue from civil aerospace is expected to be 30 per cent lower for the six months to 30 June, translating to a 15 per cent year-on-year decline for the wider group. A “significant” free cash outflow is anticipated, although this will be offset in the second half by the $146m (£117m) sale of Meggitt Training Systems.

Mitchells & Butlers (MAB)

The pub group plunged into a half year pre-tax loss of £121m, having taken a £148m charge linked to the valuation and impairment of properties, largely because of the coronavirus pandemic. Mitchells has secured more covenant waivers after warning in April that enforced closure could force a breach of its financing agreements.

Premier Oil (PMO)

After re-negotiating its deal with BP, Premier will not buy another 25 per cent in the Tolmount field from Dana Petroleum for $191m, an acquisition it announced at the same time in January.

Gamma Communications (GAMA)

The cloud communications group has acquired around 80% of the issued share capital of HFO Holding AG for €20.4m (£18.4m), strengthening its position in Germany. Gamma has the option to acquire the remaining 20% over the next three years.

DS Smith (SMDS)

Revenue from continuing operations dipped 2 per cent at constant currencies to £6bn thanks to lower paper prices. But adjusted operating profit edged up 4 per cent to £660m as the margin expanded to a record 10.9 per cent. There was a £15m hit to operating profit from Covid-19 during the period.

The ADP jobs report showed private employers in the US created 2.4m jobs in June, while the figure for May was completely revised to show a gain of 3m gained versus a previous estimate of 2.76m lost. Nonfarm payrolls today are again especially hard to call given the crisis. For May the consensus was for 8m jobs to be lost, but instead 2.5m were added. For June the consensus is for 3m+ to be created. But the exceptionally wide range of forecasts suggests no true consensus – as I’ve mentioned a few times here the data is particularly difficult and noisy right now. Even if we get 5.5m created over the last two months, it still leaves 15m or so from the 20.5m lost in April unemployed, so recovery to the status quo ante remains a long way off.  

Fed minutes indicated policymakers are keen to offer more detailed forward guidance about the path of interest rates but seemed less ready to go for yield curve control – a policy it last pursued during the second world war and one that the Bank of Japan is currently practising with limited success in achieving its goals. 

Which leads us on nicely to the theme of Japanification, which is a thread which we like to explore from time to time (see thoughts on the ECB from the end of May). It can be summed up long-term economic malaise, deflation and a reliance on ever-larger monetary easing and low bond yields to prop up growth. Usually it’s Europe that seems to be tarred with this particular brush, but lately there are murmurings that the UK is heading down the same path. For the first time, 30-year gilt yields fell below their Japanese counterparts this week. This is anomalous for a couple of reasons. First, the fact that gilt yields across the curve are at or near record lows highlights that investors haven’t blinked at the super-high issuance by the government to fund its response to the pandemic – the Bank of England’s asset purchase programme is doing its job. Two, the yield on Japan’s long bonds went up because the Bank of Japan said it would increase purchases of debt up to 10 years in maturity but keep buying of longer-dated maturities unchanged. This pushed up the yield curve, a fine example of yield curve control in action.  

Whilst the crisis is disinflationary at present, the vast increase in the supply of money, which unlike the post-2008 QE is not going to end up sloshing around the banks but be put to work directly in the economy, means it may be too soon to call Britain the next Japan, whatever the chart vigilantes tell us. 

Gold pulled back off its recent multi-year high in a sharp corrective move but has found support around $1765. Yesterday I said fading momentum on the CCI with a bearish divergence to the price action suggested a near-term pullback may be required – this came a little swifter than expected and we may see further weakness as a bearish flag formation may call for another leg lower to $1750.

Crude oil stocks declined by 7.2m barrels vs an expected drop of about 1m, driven by lower imports due to an expected drop from Saudi Arabia. Price action was weaker on the news though as gasoline stocks rose 1.2m barrels vs an expected decline of 1.6m. WTI (Aug) initially eased back but has recovered a little to sit on $40. Again, as mentioned previously, the estimates on WTI stocks right now are also way off the mark.  

In FX, GBPUSD broke out as the dollar was offered across the board. The double tap on 1.2250 produced a strong bounce that carried forward to see the downtrend broken as it broke out of the channel resistance and cleared the 50-day simple moving average. Bulls will need to see the last swing high around 1.2540 cleared to reassert an uptrend. Brexit headline risk remains a big hurdle to getting real momentum behind a rally for cable, but if there is a breakthrough the upside could run very quickly. EURUSD pushed up on dollar weakness with bulls needing to take out the Jun 29th high at 1.12877.

 

Neil Wilson is chief markets analyst at Markets.com