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Market Outlook: Euro, gold break higher as dollar snaps bullish trend, Stagecoach, Rolls Royce & more

Markets are mixed with blue chips selling off in London but mid caps holding their own
July 22, 2020

The euro rose to 18-month highs after EU leaders agreed their stimulus package and a broad risk rally saw the bulk of dollar crosses achieve long-awaited technical breakouts. EURUSD has broken out above 1.15, the key March swing high resistance, with the next target in sight for bulls at 1.1570, the January 2019 peak. Three consecutive daily gains show strong momentum with the bulls. The pair needs to hold onto this 1.15 to move up into the 1.1760 area around the long-term 38.2 per cent Fibonacci retrace. 

Elsewhere in FX markets, sterling rose to its best level in a month against the dollar, as the greenback came under pressure across the board. GBPUSD has cleared 1.27 but the rally lost near-term momentum around 1.2770, short of the Jun highs at 1.2810. The Aussie has also cleared some big levels and AUDUSD is looking to take out its Apr 2019 highs at 0.72 before it can consider the Nov 2018 peak at 0.74.  

I don’t like to call the dollar top anything like as easily as many, but the dollar is set up to retrace some more of the last two years’ gains. The dollar index has broken down at two-year trend support which may call for further downside pressure to build, particularly now the EU has apparently got its house in order and the US needs to keep up. This morning we have seen USD push back a little – GBPUSD needs to hold yesterday’s low 1.2650 needs to hold for sterling bulls.

Dollar index snaps two-year trend 

UK Company Announcements 

Stagecoach (SGC)

Stagecoach's full-year pre-tax profits slumped by 60 per cent to £40.6m. The transport operator is slashing in costs in preparation for sustained low levels of public transport use, and has also recorded a £16.5m impairment in response to the pandemic.

Rolls-Royce (RR.)

The group will provide the propulsion system for Bell Textron’s V-280 Valor aircraft, which is competing to win a contract in the US army’s ‘future long-range assault aircraft’ (FLRAA) programme. The announcement helped lift the shares by 8 per cent yesterday. While this is positive news, the heavy exposure to civil aerospace leaves us sticking to our ‘sell’ call.

St Modwen (SMP)

A sharp reduction in the value of its strategic land and regeneration assets caused the group to swing to a £151m pre-tax loss for the six months to May. Like-for-like rental income also declined almost a third due to the closure of retail and leisure assets at Trentham Gardens and increased provision for lost rent.

Computacenter (CCC)

Adjusted pre-tax profits in the first half of 2020 were “substantially ahead” of the same period last year, supported by a surge in demand for IT products that enable remote working.

Fresnillo (FRES)

Covid-19 restrictions only hit the Mexico-based precious metals miner’s gold production in the first half, with a 12 per cent year-on-year drop. Silver production was down 3 per cent in the half.

Mears (MER)

Revenue from continuing operations for the six months to 30 June will come in 8 per cent lower at £405m, and the group will swing to an adjusted pre-tax loss of £6m. Covid-19 disruption has seen contract tender processes deferred, meaning the new order intake is expected to be low.

Knights (KGH)

Revenue jumped by more than two-fifths in the year to 30 April, to £74m, aided by 10 per cent organic growth. This benefitted from the addition of net 108 fee earners. Underlying pre-tax profit surged by 45 per cent to £14m although statutory earnings dropped by 23 per cent to £4.1m, weighed down by one-off costs associated with acquisitions.

Tristel (TSTL)

While results for FY2020 were ahead of expectations, the group flagged that it now needs hospitals – particularly in the UK – to return to pre-coronavirus levels of patient throughput. The shares were down more than a tenth this morning.

Nichols (NICL)

With out-of-home sales shuttered during lockdown, half-year group revenues fell 17 per cent. Still, UK brand value for Nichols’ ‘Vimto’ drink edged up 6.6 per cent, compared with industry growth of 1.3 per cent.

Mediclinic (MDC)

An AGM update revealed ongoing improvements in performance during June, following on from signs of encouragement in May as lockdown measures were relaxed and elective procedures were reintroduced. Mediclinic conceded that the full impact of coronavirus remains uncertain.

Kingfisher (KGF)

Kingfisher shares jumped 10 per cent after a trading update revealed that sales in its year to 18 July are down just 3.7 per cent, having risen by a quarter in June. Strong e-commerce performance has supported growth, with online sales last month rising by 225.2 per cent.

Gold has broken out to notch fresh nine-year highs at $1,865, bringing the $1,900 firmly into view as well as the all-time high around $1,921 becoming a real target. US 10yr Treasury yields drifted under 0.6% but are just about holding onto this level for now. Real rates continue to stretch out deeper into negative territory, with 10yr TIPS sliding to –0.87% and the whole curve falling. The way interest rates are looking combined with the macro backdrop and the threat of an inflation surge caused by the amount of aggressive monetary and fiscal stimulus, means gold may end the year at $2,000. Unless the inflation comes through though this may mark a medium-term top with real interest rates at the bottom of their multi-year range and without much room to extend further into negative territory. Two big, interconnected questions for gold bulls now – can 10yr TIPS break out to the downside and take out –1 per cent, and does inflation come through in 2021 or even 2022 when the cycle picks up? 

Gold prices (inverted) vs 10yr TIPS  

Oil broke out to finally close the gap to the March 6th level. WTI (Aug) rose above $42 but pared gains on an unexpectedly large build in US crude stockpiles. Crude inventories rose by 7.5m barrels last week, according to the American Petroleum Institute. The Energy Information Administration is forecast to report a draw of 2.1m barrels when it releases its weekly report later today. If the EIA confirms the API numbers it would be the biggest build in inventories since late May. There is a risk that there is a greater and faster build-up in inventories as states have rolled back some lockdown restrictions and demand may not have picked up as quickly as anticipated. Jobless claims figures indicate far fewer trips made for work. 

US stocks finished up on Tuesday but only just and closed near the lows of the day. The Nasdaq fell 0.8 per cent but the S&P 500 rose 0.17 per cent and remains up for 2020. European stocks were a tad weaker this morning, but the DAX has cleared its June range. The FTSE 100 continues to chop around the middle of its range and may face some pressure from a strengthening pound. 

Whilst the EU has worked out its stimulus, the US is trying to fashion its latest package. Senate Republican leader Mitch McConnell said he expects another round of direct payments to feature in the next package, with the $600 weekly top-up cheques coming to an end this month, heralding an abrupt drop in earnings for many households. 

Tesla shares fell over 4 per cent yesterday as the stock continues its wild ride that has seen it rally over 270 per cent this year. The company is likely to report a fourth straight quarterly profit later today after the closing bell on Wall Street, which would clear the way for it to enter the S&P 500 and may explain the recent rally as funds have decided they will need to own some of it. Estimates range from an earnings per share (EPS) loss of $2.50 on revenues of $2.77bn to a $1.5 profit on $6.2bn in sales. 

The stock pushed to all-time highs close to $1,800 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 83,000 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. JMP Securities analyst Joseph Osha, one of the stock’s biggest bulls, downgraded this week to market perform from outperform. 

 

Neil Wilson is chief markets analyst at Markets.com