Updated 3pm
Was this really the moment that we learned what the Treasury has spent months working on to get the economy moving again? Without wishing to sound too mean spirited, it appeared somewhat more reactive than proactive – a therapeutic not a vaccine. £10 off your lunch in August (only Mon-Wed) does not speak to much global ambition.
It was heavy on some old classics – goose the property market, plug some vague job-trainee-youth type scheme, cut VAT for a bit. But it had something new too: the eat out to help out scheme has the air of the kind of bag-of-fag-packet policy idea dreamt up on the hoof by Ollie Reeder in The Thick of It. I almost expected to hear the chancellor announce more quiet carriages on intercity trains and a grant for buying kids wooden toys.
Paying employers £1k a month to bring back workers through to January is interesting, but essentially is part-extension of the furlough scheme that the chancellor, Rishi Sunak, was at pains to stress needs to end.
It’s unclear whether the marginal impact of the stamp duty cut will really make a difference to people’s lives. Whilst it ought to grease the wheels of the property market, it’s not going to make a substantial difference, particularly if people’s jobs are at risk or already gone. Long-term spending decisions such as buying a house are dependent on how safe people feel in the future earnings potential, combined with job security – taxes and rates are less important. What I would note is that once the market expects a cut or holiday, transactions seize up until it comes, so Sunak had little option.
Sterling was moving around a little on the announcements as they came through but hasn’t really budged. GBPUSD was last at 1.2550, almost unchanged on the day. With the Bank of England in full easing mode and hoovering up bonds gilts were pretty unmoved too as there no was nothing here to indicate radically new amounts of issuance.
Some stock sectors rallied then pared gains. For example, Foxtons leapt but quickly retreated to trade up around 1.5 per cent. Pub chains like Mitchells & Butlers and Marstons started the day –5 per cent, spiked to +1 per cent on the VAT cut and food voucher news before giving up gains to trade down around 5 per cent again.
Elsewhere, as the US markets have opened stocks in Europe held onto losses even as Wall Street moved higher. Gold has broken out above $1814, with the breach of $1800 catalysing further gains and the move potentially extending to $1900 now we have this breakthrough. The 2011 high at $1921 is now in play and we may start to see some parabolic moves up.
10am
Stock markets remain in choppy trading ranges. The optimism that fuelled the rally at the start of week has fizzled out, leaving indices back towards the middle of the June range and back close to where they finished up at the end of last week. Investors continue to look at soaring case numbers on the one hand and on the other the pace of recovery and massive stimulus which has already been administered.
Asian markets slipped, albeit China stood out as it continued to rally on some good stoking by the state-run press. The ASX fell 1.5 per cent as investors reacted to the lockdown in Victoria. European stocks followed suit and were softer on the open on Wednesday. The FTSE 100 pulled back further below 6200 where it has found some degree of support at 6153 on the 38.2 per cent retrace of the pullback in the second week of June that has formed that range of the last month and a half.
UK Company Announcements
| AstraZeneca (AZN) | ‘Lynparza’ has been approved in the EU for patients with a type of metastatic pancreatic cancer. AstraZeneca develops the drug alongside Merck (US:MRK). Both companies have encouraging pipelines. |
| Boohoo (BOO) | Boohoo has launched a review of its supply chain following allegations concerning working conditions. Asos and Zalando are among clothing companies to have dropped Boohoo's garments in response. |
| Medica (MGP) | First-half revenues are expected to land at £17m, from £22m in the first half of 2019, because of Covid-19’s hit to radiology reporting activity. The teleradiology services group said its cash position “remains robust”. |
| Tritax Big Box (BBOX) | 97 per cent of third-quarter rents are expected to be collected by the end of August, with 84 per cent of rents paid to date. |
| Segro (SGRO) | 93 per cent of the rent due on the UK quarterly payment date of 24 June has now been received. Last month, Segro raised £680m to invest in development projects and acquire land. |
| FirstGroup (FGP) | The bus and rail operator swung to an operating loss of £152.7m in 2020, which management said in part reflected the impairment charge on its subsidiary Greyhound. |
| Finablr (FIN) | The group’s Travelex business said its debt holders will take over the company and provide £84m of new liquidity, as part of a new debt restructuring agreement. |
| Marlowe (MRL) | Revenue surged by more than two-fifths to £185m in the year to 31 March, with 7 per cent organic growth. Helped by eight acquisitions made during the year, like-for-like adjusted cash profits (Ebitda) jumped by over 50 per cent to £16.6m. |
| Cohort (CHRT) | The defence technology group’s MASS business has secured a joint command and staff training contract for the UK’s Strategic Command worth more than £11m over two years. The shares jumped 5 per cent in early trading. |
Treasury yields slipped on a broad risk-off mood. US 10s went to 0.655% which left 10yr TIPS – our favourite gold indicator – at fresh seven-year lows at –0.78 per cent. This gave further succour to the gold bulls and lifted prices to fresh seven-year peaks above $1797 and it looks like $1800 can be taken out. The gold bull thesis rests not only on the requirement for safe assets given the economic uncertainty, but also longer term on fears of a surge in inflation caused by the massive increase in the money supply caused by central banks. In large part due to the corresponding fiscal actions, unlike the QE that occurred after the financial crisis, this time the excess cash is not going to get lost in the banking sector. Read Chris Dillow's thoughts on Gold's uses.
While yields dipped and gold is at multi-year highs, the prospect of more stimulus may keep markets relatively buoyant for the time being. The worry is that as the support packages roll off, particularly the kind of financial aid for employees from the likes of the UK’s furlough scheme, the pace of recovery slows drastically. The economic data could really start to crunch as temporary layoffs become permanent and the pressure for governments to continue to ‘do whatever it takes’ will increase.
Today, Britain’s chancellor Rishi Sunak will respond with a ‘mini budget’, to be delivered at 12:30 BST after PMQs. This will aim to shift the support on offer from the emergency to the more lasting with measures such as cash for training young people to prevent the risk of mass youth unemployment, a stamp duty holiday to goose the housing market, a maybe a VAT cut to help the hospitality sector. Housebuilders ought to be among the main beneficiaries of the budget, but shares in Barratt and Taylor Wimpey slipped this morning after rallying this week ahead of the statement. Meanwhile Marston’s and Mitchells & Butlers shares plunged around 5 per cent this morning ahead of the statement which may not have as much for the hospitality industry as some had hoped.
Sterling held gains above 1.2540 ahead of the statement, having gained sharply yesterday arguably on some hopes that the budget will get the economy moving a bit quicker. GBPUSD remains well within the recent range and shows little signs right now of mounting a serious ascent to 1.30, however having created a bottom at 1.2250 the recent move higher can continue and the bullish bias persists – the Jun high at 1.28 is the key.
A huge part of the problem facing investors in this market is figuring out what the data is telling us. As noted many times in recent weeks, the economic data is noisy and difficult to interpret because the speed and magnitude of the collapse was like nothing we have ever seen. For example, France’s statistics body, Insee, says the French economy will rebound 19 per cent in Q3, but still be down 9 per cent in 2020. This points to the difficulty in reading too much into the easy part of the recovery process as lockdowns end. The longer-term recovery to activity levels comparable with 2019 will take a lot longer.
Eurogroup members to vote on a new president tomorrow. The vote comes at an important moment for the Eurozone as it tries to agree on financial aid package as part of budget talks. The summit of July 17th and 18th is the date for your diaries. Christine Lagarde said the ECB may hit the pause button on its easing programme, telling the FT that the ECB has ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. This should put to rest any thoughts the central bank would announce fresh easing measures at its meeting next week. Ms Lagarde wants to stress that it’s time for the EZ member states to step up and sort out the fiscal support rather than leaning ever more on the ECB and lower rates.
Meanwhile, the White House is said to be looking at ways to undermine the Hong Kong dollar peg to the US dollar as a potential way to hit China. If such a tactic were to be deployed, it could raise risks for Hong Kong banks to access dollars and we could feasibly see ripple effects across the FX space – albeit I don’t see the US embarking on any kind of outright manipulation to weaken or strengthen the dollar. It’s probably not a tactic that will be considered seriously or pursued by the administration, but it’s one to watch.
Crude oil (WTI for August) was steady still around the $40 handle. API data showed a build in US crude stocks of 2m barrels, whilst gasoline stockpiles fell by 1.8m barrels. Crude at the Cushing, Oklahoma, hub rose 2.2m barrels. Meanwhile the U.S. Energy Information Administration presented a more bullish fundamental case and raised its WTI price forecast for 2020 to $37.55 a barrel, up almost 7 per cent from the June forecast. 2021 prices are forecast to average $45.70 in 2021, a gain of 4 per cent from before. The EIA said changes in supply and demand have shifted global oil markets from an estimated 21 million barrels per day of oversupply in April to inventory draws in June. EIA crude oil inventories later today are forecast to see a draw of 3.2m barrels, but the consensus estimate has been wide of the mark for several weeks now.
Neil Wilson is chief markets analyst at Markets.com
