After two weeks away, what did I miss? Stimulus measures keep being debated, vaccine hopes are at first raised then more sensibly assessed, and stocks in the US keep going up; the S&P 500 has risen about 5 per cent, whilst European markets are flat over the period. I seem to recall in July a lot of chatter about European equities outperforming, but there has been little to show from that trade so far. Gold has smashed a new all-time high and profits been taken, an easy win for most, whilst oil prices have barely moved.
So, what has changed? Britain’s economy is on the ropes, but we knew this already. UK GDP fell by 20.4 per cent in the second quarter, which was largely in line with expectations. Economic activity is bouncing back – the economy grew 8.7 per cent in June but remains well below the levels seen in February. Having been out and about over the last three weeks, I can safely say there will be more recovery recorded in July and August. But getting back to 2019 levels of activity is going to take a very long time as we see permanent impairment in certain sectors of the economy, as well as behavioural and social changes. Cable recovered off the 1.3020 horizontal support formed by the low on Monday on the update to continue to trade its August range. With the dollar turning around and seemingly finding its near-term support, GBPUSD may struggle to hold its 1.30 level.
The Democrats and Republicans can’t agree anything. Stocks on Wall Street slipped after gridlock in Washington left investors wary of pinning their hopes on a bipartisan stimulus package, but the S&P 500 was at one point just a few points from its all-time high at one point and could still take it out this week. Senate majority leader Mitch McConnell naturally blamed the Democrats for this but revealed the two sides had not spoken since Friday. The Dow and S&P 500 both snapped a 7-day winning streak, whist European markets rose a touch on Wednesday’s open after a strong run-up on Tuesday. The FTSE 100 continues to trade the narrow range of the June pullback without any signs of breaking out.
UK Company Announcements
| ASOS (ASO) | ASOS shares leapt 8 per cent this morning after the clothing retailer raised full-year revenue and profit forecasts in an unscheduled trading update. Revenue growth is expected to be between 17 and 19 per cent, while pre-tax profits will come in around £130-150m. Customer product returns have not recovered as anticipated. |
| Spirax-Sarco Engineering (SPX) | Revenue dipped by 4 per cent to £570m in the six months to 30 June, although this was head of an 8 per cent decline in wider industrial production. Adjusted operating profit fell by 8 per cent to £119m, with the margin contracting by 1 percentage point to 20.9 per cent. The interim dividend has been increased by 5 per cent to 33.5p. |
| CLS (CLI) | A lower valuation uplift on the property portfolio meant the commercial landlord reported a decline in pre-tax profits of almost two-thirds over the first half of the year. However, it collected 99 per cent of rent due for the second quarter and 95 per cent of third quarter rent so far. |
| Capital and Counties (CAPC) | Net rental income declined 41 per cent during the first six months of the year after the Covent Garden landlord collected just 71 per cent of rent due for that period. Only 30 per cent of third quarter rent has been received. Meanwhile a 16 per cent fall in the value of the portfolio meant the group's loan-to-value ratio increased to 32 per cent, from 16 per cent the same time last year. |
| Ørsted (0RHE) | The Danish energy company's second half pre-tax profits fell 12 per cent to DKK4.83bn. Low energy prices and slow construction activity on wind farms drove turnover down by a fifth. |
| Just Eat Takeaway.com (JET) | The costs of combining Just Eat and Takeaway.com, along with the proposed £6bn acquisition of Grubhub, drove interim pre-tax losses of €121m, compared with €7m in 2019. |
| Avast (AVST) | Adjusted cash profits nudged up 2 per cent in the six months to June, as the work-from-home trend supported the cybersecurity company’s core consumer desktop business. Install and conversion rates are mostly returning to normal levels. |
The lack of fresh stimulus left gold bulls wary and profits were taken but we have seen a big bounce off some important technical support this morning. Spot dropped under $1900 but found support on the old resistance at $1865 and the 200-period SMA on the 4hr charts may offer some technical support. More important is the trend support offered by the line drawn from the lows made since the March trough. Gold’s rally has been all about stimulus and inflation and so doubts about whether there will be more stimulus saw investors recast inflation expectations a little and the technical exhaustion of the move needed to be factored in. US real rates rose, with 10yr TIPS back to –0.99 per cent, having struck a low of –1.08 per cent last week. Benchmark 10yr yields rose to 0.66 per cent but whilst real rates are so deeply negative gold will have support.
Chart: Gold recovers $1,927 after finding support at $1,865
Joe Biden named Kamala Harris his running mate for the race to the White House. Two points about this really stand out. The duo needs to get the vote out, and Ms. Harris should energise many who may not otherwise vote, but they cannot risk losing the centre in the rust belt where the issue is the economy. But the problem for Trump is that accusations that Biden’s VP pick was too zealous a prosecutor when acting as California attorney general make it difficult for Republicans to say the Democrats won’t be tough on crime. Her appointment will somewhat blunt Republican attacks on law & order. The key question for investors is who wins in November and whilst details like VP picks are important, they are just a small part of the story. Trump still wins in my opinion whatever the polls are saying.
New Zealand is in full panic mode, locking down Auckland amid a mystery outbreak of Covid. The RBNZ duly announced it would expand the Large Scale Asset Purchase programme to $100bn, which just nudged the kiwi lower. But the real focus is on negative rates – a full four mentions of the committee looking at a negative OCR were in the release. Lower and negative rates are increasingly the path of least resistance for the RBNZ, which makes the NZD open to further downside risk.
Oil prices were up a touch, with WTI (Sep) taking a $42 handle this morning ahead of the inventory figures from the US Energy Information Administration, which are expected to show a draw of 2.9m barrels. API data yesterday showed stockpiles fell 4.4m barrels last week.
Elsewhere in FX land, watch the double top on the EURUSD pair with the rejection of 1.19 looking more convincing we look for neckline support around the 1.17 level to hold for bulls to make a fresh drive higher. However, the pullback in US Treasuries and uptick in yields may offer support for the dollar to push back hard.
Neil Wilson is chief markets analyst at Markets.com
