Asian shares soared overnight on Monday, lending a positive start to the European session as equities rode a broad risk rally. The very strong US nonfarm payrolls number continues to mask a lot of ills and investors are happy to hang their hopes on more stimulus. Hong Kong rose 4 per cent, Tokyo 2 per cent, while shares on mainland China were up around 5 per cent on, among other things, some bullish commentary in state press. Shanghai shares jumped 5.7 per cent, the best one-day gain in five years. It looks like local investors are chasing the market and the spill-over has lifted the boats across Asia. China’s rally sparked a broad risk-on move. Escalation of US-China tensions don’t seem to be a major worry.
European shares took the baton and opened roughly 2 per cent higher in early trade on Monday led by a surge in bank stocks. HSBC rallied 6 per cent apparently on the China trade read across, but elsewhere we saw broad gains as investors looked to new leadership at Lloyds and Commerzbank, whilst hopes of a fiscal lift in Europe may be a factor. Broadly it looks like the Chinese rally has lifted cyclicals like banks and autos. Economic data was better but not as good as hoped - German factory orders jumped 10.4 per cent in May, although the rebound was less impressive than the 15 per cent expected. Orders remain almost a third below where they were a year before. Bank of France Governor Francois Villeroy de Galhau said on Sunday the country’s economy was bouncing back quicker than expected.
UK Company Announcements
| Lloyds (LLOY) | Chief executive António Horta-Osório is to step down next summer, after 10 years at the helm of the banking group. Last month, we questioned whether the bank’s economic projections were too bullish. |
| Royal Dutch Shell (RDSB) | In an interview with Het Financieele Dagblad, boss Ben van Beurden said Shell was not ruling out moving its headquarters to the UK. Its A/B share listing is linked to its base in the Netherlands. |
| Rolls-Royce (RR.) | Further to Friday's speculation that the engine maker is mulling raising funds, The Telegraph reported over the weekend that Rolls is looking to save £500m by closing its final salary pension scheme four years early. As the rumours swirl, Thursday’s scheduled trading update will be crucial to providing investors with clarity. |
| Aviva (AV.) | For family health reasons, Maurice Tulloch has stepped down today as chief executive and retired from his position on the board. Amanda Blanc has been appointed as his replacement. |
| Hochschild Mining (HOC) | The gold and silver miner has stopped production at its largest mine, Inmaculada in Peru, after a rise in Covid-19 cases. It was previously closed for two months up to May. |
| Cohort (CHRT) | Subsidiary Chess Dynamics has secured a two-year contract to supply a Northern European customer with surveillance equipment. The contract is worth £20m and deliveries will commence in the second half of the group’s 2021 financial year. |
| Macfarlane (MACF) | The shares jumped over 9 per cent in early trading after the packaging group revealed that revenue for the three months to 30 June was only down 7 per cent versus a year earlier. It had previously expected a 20-25 per cent year-on-year decline in the second quarter. |
| Rentokil (RTO) | The group announced back in February that chief financial officer (CFO) Jeremy Townsend would be retiring. It has been decided that will be succeeded by Stuart Ingall-Tombs, who is currently the CFO at Rentokil’s North American business. |
| Network International (NETW) | The payments service provider expects revenue to drop by as much as a fifth in 2020, as client transactions continued to fall in the first half. |
| Boohoo (BOO) | Boohoo shares are down 12 per cent following allegations in this weekend's Sunday Times surrounding working practices. Boohoo this morning has denied that Jaswal Fashions is a declared supplier and is investigating how Boohoo's clothing ended up in this facility. |
| Cineworld (CINE) | Cineplex has launched legal action in response to Cineworld exiting a $2.3bn deal to acquire it last month. Cineplex is seeking damages of up to $2.18bn less the value of Cineworld shares held by its shareholders, claiming that it breached contractual obligations, which Cineworld denies. Cineworld is launching a counter-suit, claiming that Cineplex breached covenants as part of the original deal. |
Meanwhile, Andrew Bailey, the governor of the Bank of England, has written to UK banks warning of the operational challenges of negative rates (new computer systems, lower net interest margin). This could be taken either way; either it’s an explicit message to get ready, or it’s way of saying to them not to worry because we know it’s a massive pain. The letter said negative rates remain "one of the potential tools under active review" should the Bank think more stimulus is required.
The rally left the DAX close to the top of the June range, trading above 12,800. The FTSE is close to the 61.8 per cent retrace of the pullback in the second week of June. US futures point towards strong gains when Wall Street reopens after the three-day weekend, with the S&P 500 moving clear of the 78.6 per cent retracement. June peaks are starting to come into view and will be a key test for whether this rally has further to run or whether it’s time for a pullback.
Whilst markets face a wall of worry, investors are confident of getting a leg up from further stimulus. Britain’s chancellor Rishi Sunak will set out a mini-Budget this week focused on jobs. A meeting of Eurozone finance ministers on Thursday will set the tone for the key July 17th-18th summit. Whilst the various countries disagree over the composition of grants and bailouts, on conditionality and over how the funds are divided up, Germany’s Angela Merkel is bound to make sure that a deal is done: the squabbling needs to stop. Meanwhile the US Congress is set to work on a second stimulus bill this month. At the same time, Covid-19 cases continue to soar – markets are getting used to the numbers – but the pace of recovery in the US will flatten if rising cases means states re-impose lockdown restrictions. As noted last week, the headline number in the jobs report masked some ills, so we will again be very much focused on the weekly initial and continuing claims numbers this week.
Elsewhere, the broad risk rally sent the dollar lower, with DXY at 96.80. Sterling pushed a little with GBPUSD back about 1.25, looking to break last week’s peak a little short of 1.2530. EURUSD was a whisker short of 1.13, entering the resistance formed by the July 2nd peak. Clearing this opens up the path to the Jun 23rd swing high at 1.1350. Market positioning remains quite aggressively short, with net speculative positions on the euro the most bearish in three years. Crude oil was a little higher, with WTI (Aug) just about nudging the $41. Gold is steady at $1776, with the latest CFTC figures showing speculative net longs at the highest in two years. Finally, Warren Buffett is making a $10bn bet on natural gas prices rebounding – the veteran investor thinks the market, which hit a 25-year low last month, has bottomed, making assets cheap and is on course for a rebound.
Neil Wilson is chief markets analyst at Markets.com
