Stocks continue to chop around their June-July ranges after risk sentiment rolled over at the start of yesterday’s US session. Surging Covid cases, hospitalizations and deaths in several US states continues to weigh on risk sentiment, Donald Trump was dealt a blow by the Supreme Court, and Joe Biden – who may well become the next president – said he would end the era of ‘shareholder capitalism’. Around 3pm yesterday we saw a sharp reversal in risk appetite as stocks, bond yields and oil fell and the dollar rallied.
California, Texas and Florida reported their biggest one-day increase in Covid-19 related deaths. Stocks hit the lows after Florida reported a spike in Covid-related hospitalizations, but recovered somewhat after Dr Fauci, director of the National Institute of Allergy and Infectious Diseases, revealed Moderna’s coronavirus vaccine candidate would enter phase 3 trials soon.
The Supreme Court ruled Donald Trump’s tax returns should be seen by the Grand Jury, but it threw out rulings that allowed Democrat-led Congressional committees to obtain Trump’s financial records. Although this means further litigation, it should mean the documents are not a factor in the election.
Meanwhile, Joe Biden launched his $700bn economic plan by taking aim at Wall Street a threat to ‘end to the era of shareholder capitalism – the idea that the only responsibility a corporation has is to its shareholder’. Whilst no Bernie Sanders, there is little doubt that Biden will raise taxes and regulation risk - equity markets need to start to price in the risk better and there are signs that some investors already are. Investors need to be wary of a Democrat clean sweep of the House, Senate and White House, which could greenlight some pretty aggressive redistributive policies. ‘During this crisis, Donald Trump has been almost singularly focused on the stock market, the Dow and the Nasdaq. Not you. Not your families,’ Biden added. After 2008 it was fashionable to bash the banks, now all corporate America is fair game if they are not woke enough. ‘Wall Street bankers and CEOs didn’t build America,’ Mr Biden said.
European shares were choppy after Asian markets fell and China’s equity rally finally ran out of steam. The FTSE 100 fell under 6,000 this morning before paring losses, returning to the low end of its June range. After a weak open, European indices were turning green after the first hour of trade. The S&P 500 struck a low at 3,115 yesterday before closing down 0.5 per cent at 3,152, flat for the week. Energy stocks led the drop, declining 4 per cent as oil prices sank. Futures are lower and indicate a weaker open at the 61.8 per cent retracement of the June-July range. The Nasdaq rose 0.6 per cent to a fresh record as the tech sector continued to be the only real area of safety.
UK Company Announcements
| Restaurant Group (RTN) | After starting the phased reopening of its restaurants earlier this month, the group intends to have 60 per cent open by the end of August and 90 per cent by the end of September. The casual dining group has also secured a covenant waiver for December 2020 with covenants next tested at the end of June 2021 and extended the term of the current RCF facility by six months to 30 June 2022. |
| Senior (SNR) | Amid the downturn in civil aerospace and pressure in the ‘flexonics’ market, the group is guiding that revenue for the six months to 30 June will come in 30 per cent lower than a year earlier with “significantly lower” margins. |
| Focusrite (TUNE) | Shares jumped as much as 7 per cent in morning trading, after management said that revenue and profits are likely to exceed market expectations for 2020. |
| Great Portland Estates (GPOR) | 69 per cent of rent due on the June quarterly collection date, although that figure falls to 58 per cent after rent deposits are excluded. Just 22 per cent of rent was collected from the commercial landlord's retail tenants, rising to 28 per cent after including those that have switched to monthly payment terms. |
US unemployment numbers were a little better than expected but continue to show just how long the road is ahead. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.
Treasury yields fell, with US 10s back to 0.58 per cent having notched a record low yield on an auction. UK 2- and 5-year gilt yields have hit a record low this morning, following Eurozone and US yields lower. Investors are showing no fears that massive issuance is going to force up borrowing costs as long as central banks remain in full support mode.
Read this week's cover feature on the new wave of monetary stimulus and what it means for investors.
Crude oil fell sharply with stocks as risk rolled over. WTI (Aug) broke down through the trend support and may push lower. From a technical perspective we can start to consider completion of the head and shoulders reversal pattern and look for the move to head towards the neckline around $35. The IEA’s July report this morning suggested oil demand will pick up in the second half and that the worst of the demand destruction is behind us. The IEA said oil demand this year will average 92.1m bpd, down by 7.9m bpd versus 2019, which is a slightly smaller decline than forecast in the April report, mainly because the decline in the second quarter was less severe than expected. But at this point it remains very hard to say how demand will recover longer-term given we do not know how the virus will progress nor how governments and citizens will respond – at least it seems negative prices were only a blip.
Fresh shutdowns in the populous Sun Belt states remains the worry, albeit we did see a decent draw on gasoline stocks last week, according to the EIA. Nevertheless the IEA noted that the accelerating number of Covid-19 cases is ‘a disturbing reminder that the pandemic is not under control and the risk to our market outlook is almost certainly to the downside’.
Elsewhere, gold fell with risk assets, with the near-term pullback finding support at $1796 and should look for consolidation around the $1800 level. The outlook for gold remains constructive and we should expect lots of pullbacks along the way – nothing goes up in a straight line, and gold is particularly prone to these tactical retreats. In FX, the dollar rallied on the broad drop in risk sentiment. GBPUSD moved down to test near term trend support formed by the bullish channel. EURUSD pulled back from highs at 1.1370 to chop around the 1.1270 region.
Neil Wilson is chief markets analyst at Markets.com
