Dow off 575 points; Market turmoil deepens as trade war panic sets in

Forex
Indices

Where to start? Last week’s surprise announcement from President Donald Trump of new tariffs against China continues to panic markets. Just when it looked like relations were beginning to thaw again, we’re back where we started.

The trade war looks to have no end in sight. The new 10% tariffs on $300 billion of additional Chinese goods could be raised higher. It may even go above the 25% level imposed upon other imports. Beijing has already retaliated (even though the new tariffs don’t come into effect until September): the People’s Bank of China has let the yuan depreciate to its lowest levels in years.

Incredible losses for Dow: Equities hammered again as sell-off deepens

Two weeks ago the stock market seemed like a rosy place. Belief was that the Federal Reserve was about to start a sustained cutting cycle, and that US-Sino relations were on the mend.

Fast forward to today. The Dow is off a whopping 575 points, the SPX is recording 2.2% losses, the FTSE 100 is at a two-month low and the Dax is not far off the lows of April 1st. The ASX has plunged 2.8%, or 191 points, while the Hang Seng has been knocked for six, with losses of 3.8% or 1,000 points taking it down to lows not seen since January 8th.

Meanwhile, the VIX is up two points and challenging the highs of early May.

FX: Chinese Central bank braces for trade pain with yuan devaluation

The yuan is trading above 7 per dollar for the first time in over a decade today after the People’s Bank of China set the daily mid-point of its trading range at US$6.9225.

The dollar may be up against the yuan – and the commodity trio – but elsewhere it is sliding. EUR/USD has leapt 0.6% to trade around 1.1175, USD/JPY has dropped half a percent to trade just above 106, which makes it very likely it’ll be the lowest close of 2019 for the pairing. Meanwhile the greenback has dropped 0.8% against the Swiss franc to 97.50 – its lowest level since the end of June.

While Sterling is holding its ground against the dollar, elsewhere it has tumbled as well. A spokesperson for the European Commission has claimed that the current Brexit agreement is the ‘best deal possible’, denting hopes that Brussels will budge and open the way for more negotiations ahead of the October 31st deadline.

Gold surges as investors flee to safety, oil slides further

Gold is up 1.8%, adding around $25, to trend around $1,465 as markets dump risk and look for shelter in safe-haven assets. Silver has jumped 1.8%.

Meanwhile, crude oil has dropped 1.4% to trade below $54.50 and Brent is down 1.2% and trading around $60.60 after giving up support at $6.

Natural gas is taking an absolute hammering, off more than 5% and trading around $2.035 – not that far from the key psychological $2.00 handle.

Cryptocurrency: Sell off? What sell-off?

Things are much rosier in the cryptocurrency market today, with Bitcoin up 14% to test the $12,000 handle again. Litecoin is up 6.2% ahead of this week’s halving, Ethereum has gained nearly 5%, and Bitcoin Cash and Dash are both trading up 3.3% on today’s opening levels. Ripple is something of a straggler today, registering comparatively small gains of 1.5%.

Some view cryptocurrency as something of a safe-haven, with the equity sell-off prompting many to pile into cryptos.

Boris enters Number 10

Morning Note

As the prime minister elect prepares to enter Downing Street, markets are wondering what the regime change will mean for investors.

Plus ca change: A new prime minister, the same problems. Key questions remain over who he appoints to cabinet and what tack he’ll take with the EU over the coming days.  A lot of the Boris factor is priced in – what’s not is an actual no-deal. If Boris does well in selling a new(ish) deal – lipstick on the pig if you like – then the pound can rally hard from here. 

Sterling has been steady and didn’t look too closely at last week’s lows yesterday. Nevertheless there is yet potential for the pound to slip lower still. The arithmetic hasn’t really changed for Boris, but what has is that Tory MPs now realise they have the Brexit Party knocking. At send GBPUSD was holding around 1.2450. 

Equities

Equities are firmer again – Wall Street pushed up again yesterday to move close to record highs again. SPX rose 0.68% to 3,005. Asia positive with the Nikkei up 0.4%. European shares are around the flat line but on the open we see the FTSE 100 is underperforming, slipping into the red as the rest of the main bourses were higher.

The trade outlook is a little better – or at least the news flow is onside this week – as we wait for face-to-face negotiations between the US and China to take place next week. Things can change quite quickly on this front. Markets still eyeing the ECB likely to turn very dovish tomorrow.  

Oil steady, Bitcoin tests key support

Oil – Brent remains anchored around $64 and WTI at $57. Reports of a second Iranian drone maybe being shot down by the US last night. API data showed a bigger draw on stocks than expected last night – US crude stocks declined 11m barrels versus the 4m expected. EIA figs today forecast for a draw of 4.2m. So some bullish news flow and data points but as ever it’s the demand side that is really important in a world that remains awash with crude – on that front we need a big turnaround in the macro data and/or a China-US trade deal. Smart money moved more net long last week of course.

Bitcoin is weaker again, slipping the $10k level and is finding support on the 50-day line around  $9650. If this goes then that bearish flag formation we’ve traced looks important. Look for a possible bounce off this level though and return to $10k.

Stocks firmer, China slows, earnings in focus

Forex
Indices
Morning Note

Bad news = good news. Relatively lacklustre growth in China has the market baying for more stimulus. To be fair, despite the headline Q2 GDP number slipping to a 30-year low at 6.2%, there were some signs of encouragement. Industrial production rose 6.3% in June, an improvement on the 5% growth in May. Retail sales also beat forecasts so. Most of the recent softness seems trade-related, with exports having dipped 1.3%.

Asia has broadly ticked higher despite, or indeed because of, the softer China GDP numbers. Futures show European markets are higher after a fairly lacklustre weak. Indeed European equity markets moved lower last week just as the US was punching record highs. Time for Draghi and co to turn the taps on. 

Indices march higher

Wall Street continues to roar higher, with the S&P 500 closing up half a percent on the day at 3,013.77. Oil and gold fairly steady.

Bitcoin is weaker, slipping to support around $10k having given up the $11,600 level. FX steady – GBPUSD holding at 1.2570, with EURUSD at 1.1270. Volatility in FX has collapsed with central banks turning the liquidity taps back on.

Earnings season kicks off

Earnings season is coming with fairly low expectations. Two weeks prior to earnings season 82% of companies that had revised earnings estimates going into the reporting period had lowered them. Lowballing by Wall Street ahead of earnings season is normal, but the scale of the downward revisions is noteworthy. This happened ahead of the Q3 2018 earnings, just before we saw stocks slump into a bear market, albeit one that has proved very temporary.   

Recession – We’re likely to see an earnings recession. Q1 earnings declined 0.29%, therefore making this likely to become a full-blown earnings recession, that is, back-to-back year-on-year declines in EPS. In 2016, the last time this happened, we saw earnings decline for 4 straight quarters. S&P 500 companies are expected to report a roughly 3% decline in EPS this quarter. 

Trade concerns – whilst we had a degree of détente at the G20, existing tariffs are still in place and no meaningful progress has been seen. There’s a growing acceptance that the US and China are in this for the long-haul. The US election cycle means we are unlikely to see a reason for Trump to do any deal until 2020. Whilst for now the mood is upbeat, in the event of no deal, the lack of progress through the rest of the year would likely begin to drag on sentiment and affect equity markets. If corporates see additional tariffs being imposed their EPS forecasts would need to be revised substantially lower. The impact of the US-China trade war on earnings is yet to be fully felt but we could hear from a number of large-caps voicing concerns. The extent to which CFOs highlight worry about trade on EPS forecasts will be of particular importance. Of course we are likely to see a lot of kitchen sinking with companies blaming trade for all manner of ills.  

Banks start the ball rolling this week. Big question over interest rates – rate cuts may well be coming in the US and this will have implications for banks. Net interest margin would likely fall although the easier credit conditions would offset some of the negative effects. Citigroup unofficially kicks off the earnings season on Wall Street today. How much will banks be affected by Fed rate cuts? In investment banking, is there anything from the Deutsche carcass worth stripping? 

Equities 

Sports Direct – the soap opera continues – delays annual results due to House of Fraser uncertainty. The big question was what impact House of Fraser and various other acquisitions of dubious value would have on Sports Direct results. A material impact, one can only assume. HoF must be losing money hand over fist.  Looking to the earnings, top line growth is expected to rise but profits are seen weaker as the cost of acquisitions weighs. Since reporting an 27% decline in underlying profits in the first half we’ve not heard a peep from Sports Direct on performance. The delay in delivering the annual results does not sit well with investors, who must be nervous about what it means. It seems likely it’s been a tough ride in the core Sports Direct retail division, whilst acquisitions have added nothing but increased costs.

The Fed has concerns about Facebook’s Libra – Bitcoin and other cryptocurrencies slump

While stock markets are holding all-time highs on the back of Federal Reserve Chair Jerome Powell’s speech last night, the cryptocurrency market has moved in the opposite direction.

Bitcoin is off around 2% to trade below $11,800 after yesterday’s comments from Federal Reserve Chair Jerome Powell.

Speaking to the House Financial Services Committee, Powell stated that:

“Libra raises serious concerns regarding privacy, money laundering, consumer protection, financial stability. These are concerns that should be thoroughly and publicly addressed.”

That’s the opposite of what the market wanted to hear. Traders were betting that Libra would work to allay institutional fears surrounding cryptocurrency. It is intended to be a stable cryptocurrency (tethered to a basket of fiat currency), overseen by a not-for-profit, and governed by a panel of industry big names including finance giants like MasterCard, Visa, and PayPal.

It seems that central bankers don’t see that this makes much of a difference.

Security concerns continue to hound Bitcoin

Criminality has always been one of the banes of cryptocurrency. The anonymous nature of transactions makes it useful for money laundering. On top of that, because crypto is usually stored in virtual wallets or on cryptocurrency exchanges, it is a prime target for hackers. The world’s biggest crypto exchanges have lost millions in Bitcoin and its peers over the past few months.

While many in the cryptocurrency community have claimed Libra isn’t a real crypto, parallels were always going to be drawn between the two. Libra could have opened doors for Bitcoin and the like, instead it could bring the regulators down upon digital currencies.

Powell has called for the project to be paused until regulators are satisfied that their main concerns have been addressed. Regulators have long-circled the cryptocurrency market, and the threat of action has been a key drag on crypto prices.

Libra could have sped up the process. There’s a chance this might work out for the best – regulation was always going to come, so maybe tackling the issue headlong could remove a barrier to the mainstream for BTC and its fellow altcoins.

But the fact remains that Powell’s attitude towards Libra is a fundamental punch to the speculative rally Bitcoin is currently undergoing. Adoption looks to be a long way off, and opposition to Libra means the best chance the crypto market has of mass adoption has already stumbled.

Shares climb post Powell, gold and oil rally

Forex
Indices
Morning Note

All power to Powell, but is this the Waterloo for the bull market? His dovish remarks lit the green buy light across the board. Stocks, oil, gold, bonds and currencies ex the dollar are pretty well all bid up with the Fed apparently happy to keep its hand on the pump. What happens when it stops cutting (one and one for insurance purposes?) and what happens if the US-China trade sitch goes awry? Market seems priced for perfection and earnings are slowing.

The S&P 500 briefly broke through 3,000 to achieve an all-time high, but closed a few points short of its record close at 2,993.07. The Dow also set a new intra-day peak, while the Nasdaq set a closing high. 

Asia has been lifted higher on the coattails of Wall Street. European markets are up across the board. Roughly quarter point gains for the main bourses – hardly euphoria in Europe and still some way off all-time highs. Come on Mario, now’s your time!

Powell power 

Powell said the stronger jobs report last week didn’t alter his outlook – so what might? Certainly the jobs market has slowed a touch this year – employment growth has averaged 172,000 per month thus far this year, compared with an average monthly gain of 223,000 in 2018. But it’s hardly requiring a cut.  

As noted yesterday: Investors are buying the Fed put hook, line and sinker. 

The Fed chair has well and truly left the door open to a rate cut in July, albeit there remain doubts about whether this is going to be first of several cuts or just an ‘insurance’ cut designed to keep markets on an even keel. The testimony didn’t appear to tell us anything about what the Fed is thinking longer term. His comments though did nothing to nudge market expectations towards a more neutral position. He seems happy to allow markets to crystallize their belief in a July cut.

Minutes 

Interesting set of minutes from the FOMC’s last meeting coming in the middle of this Powell testimony. What’s clear is that they will cut in July. Hat tip to Helen Thomas of BlondeMoney for noting that the Fed has basically admitted that it is going to cut because the market wants it to. From the minutes: “While overall financial conditions remained supportive of growth, those conditions appeared to be premised importantly on expectations that the Federal Reserve would ease policy in the near term to help offset the drag on economic growth stemming from uncertainties about the global outlook and other downside risks.” 
 

French-US relations 

The threat of EU-US trade spat needs to be considered. The White House is not happy with France’s digital tax, which it says unfairly targets the big US tech giants. For sure it does – but that is because they do not pay an appropriate level of tax. It’s also because Europe doesn’t really have many big tech firms that would be affected. Nonetheless, Trump will use this to beat the French and we can expect Tariff Man to do something. The US doesn’t want to cede the regulatory leadership to Europe either. 

FX – Dollar weakness has returned after Powell’s testimony. Some bid seen this morning for the euro and sterling. Neither the euro nor pound however are able to mount a serious challenge yet – we’re not seeing this as a major technical breakout. GBPUSD has firmed above 1.25, but Brexit fears are unabated. Richard Branson says no-deal would take cable back to 1. Pound-dollar parity is a risk but longer-term it wouldn’t last. A kneejerk to that level is possible, but we’d anticipate the pound recovering ground.

EURUSD at 1.1270 is still well short of the Jun highs around 1.14. Potential head and shoulders – we could in fact see a big breakdown to the downside if the ECB turns extra dovish. Need to clear the left shoulder at 1.1350 for bulls to be happy. 

Oil – Brent futures firming up above $67 and WTI north of $60 after a big drawdown on US stockpiles and an escalation in tensions around the Strait of Hormuz. Reports indicate a Royal Navy frigate warded off Iranian boats that tried to impede a BP tanker. Iran had warned that it would retaliate after Royal Marines seized an Iranian ship off Gibraltar. Dollar weakness and Fed dovishness are also supportive.

Bitcoin – another rollercoaster session. Bitcoin skidded sharply lower yesterday and continued to move south overnight. Seems to have encountered fairly stiff resistance around that $13,300 level we mentioned previously but the selloff was pretty brutal – down to $11,600 in short order, where it has found support. Look for another push higher to the $13k mark, but if the $11,500/600 level fails to hold then $10k is possible in double quick time.

Bitcoin mining difficulty surges as miners follow the bulls

Just like traders, miners are piling back into Bitcoin as the price continues to surge. After coming off the boil once hitting a year-to-date high on June 26th, BTC has rebounded and is within striking distance of the key $14,000 handle.

The huge appreciation seen in Bitcoin has not gone unnoticed in the mining community. Miners earn newly-minted Bitcoin as rewards when they process transactions – using computational power to solve complex proof-of-work algorithms to verify transactions and record the data as a new block on the chain.

Competition for those rewards is heating up. Multiple miners work on the same bundle of transactions, but only the first to correctly complete the algorithm in the ‘block header’ adds their block to the chain and earns the reward. This is shown by the biggest two-week rise in mining difficulty in 12 months.

Difficulty is adjusted every two weeks to make sure that new blocks are added to the chain at a consistent rate. This is done every 2016 blocks – at a rate of 10 minutes per block this should take two weeks to discover the next 2016. If more blocks than that are added during the previous two-week period then the difficulty is increased to bring the rate of discovery back down.

Because of this, Bitcoins are always produced at more-or-less the same rate. No matter how popular BTC mining becomes again, the market isn’t facing an increase in supply – if prices are going to fall, it won’t be because of increased mining activity.

How does this affect the BTC outlook?

The increased mining difficulty does nothing to change market fundamentals, but it does signal increased confidence that at least some of the huge gains recorded during the recent rally can be consolidated.

Whether or not a break above $14,000 and a move towards the all-time high near $20,000 is on the cards, the signs are that the market expects to leave 2019’s $3,300 lows far behind.

Bitcoin rollercoaster, focus on G20, pound higher

Forex
Morning Note

Markets turn higher in Europe amid talk of a trade truce between the US and China ahead of the G20.

All eyes on the G20 in Japan and we’ve not had the most auspicious preamble – Trump has criticised the US-Japan defence pact, saying the Japanese would watch the US being attacked on a Sony TV.  

SPX marginally lower at 2913. It started as a more risk-on day, but the rally fizzled out. Defensives were the drag as growth sectors rose. Looks like bond proxies came off a little with diminished expectations for Fed rate cuts. We’ve got this strange balance between risk-on and risk-off right now that makes it a tough market to be in.

Asia was higher across the board. European markets are on the foot front, with the DAX leading the way. The FTSE 100 is close to the flat line around 7240. A stronger pound in early trade appears to be keeping the lid on the FTSE’s gains. 

Forex

GBPUSD drove up to 1.270 – look for a break above 1.2710 to suggest a sustained push higher. Dollar is coming off a touch this morning with a similar move in favour of the euro. But the yen back at 108 – looks like broadly risk-on environment ahead of the G20.

We can now expect an awful lot of news flow on trade and tariffs over the next two days so it’s wise to be cautious about reading too much into statements.

Cryptos

Bitcoin endured a tumultuous session, but bulls are regaining control of the situation. Bitcoin pushed higher towards $1,400 before it crashed around 21:30 last night, with futures dropping a staggering $2k in a few minutes.  

It looks to have been down to problems with the cryptocurrency trading platform Coinbase. These technical glitches have been resolved and Bitcoin was last trading around $12,500, still some way short of yesterday’s highs.  

Flash crashes like this can happen anywhere to just about any major market, but bitcoin seems particularly susceptible to them. This indicates that there is yet not the maturity or liquidity in this market than many of the crypto evangelists would like to think. Still volatile, still very risky – still Bitcoin. 

We’ve talked a lot about the catalysts for this rally and we have now another positive for Bitcoin – LedgerX has won CFTC approval to offer physically-settled futures and swaps contracts in Bitcoin. 

Commodities

Gold lower but holding the $1400 level. At send time it’s testing key support around that zone. Risky-looking head and shoulders for bulls. With the dollar creeping up and yields basing for now, we could gold pull back further. Ultimately if the Fed follows through with rate cuts and we a further depression in nominal and real yields we could yet see gold topping $1500 and even $1600. 

Oil – steady with little in the way of new news on Iran and uncertainty about the G20. Prices spiked yesterday after a big surprise drawdown in US inventories. EIA showed a 12.8m barrel draw, well ahead of forecast and coming after the API figures also showed a large draw on stocks. However bearish fundamentals are not abating and we need to see what the G20 brings, specfically the meeting between Trump and Xi. Brent holds $65, with WTI at $59. 

Equities 

Kingfisher – A new hand on the Kingfisher helm. Carrefour veteran Thierry Garnier is taking over from Veronique Laury. Removing management uncertainty may offer a modicum of support to shares in the near term but ultimately investors will want to see what new, if any, strategic direction the new CEO is planning. There should be scope for new management to drive change and carry out disposals that are necessary to make this a leaner business. Splitting up the business into smaller parts is an option. 

The entire ONE sourcing strategy was suspect from the off given that, for instance, the fittings and fixtures in Poland and Germany are not necessarily the same that are needed in France or the UK. Unification of the supply chain and joint sourcing has been the cornerstone of the Kingfisher turnaround strategy but has not delivered. Will there be an overhaul or will Garnier press on? 

Serco – more good progress as it bucks the outsourcer trend. Management today reporting 20% growth in underlying trading profit on 4% organic revenue growth. Order intake looks strong and FY19 revenues are seen at the top end of the £2.9-£3bn guidance. Underlying Trading Profit guidance is maintained at around £105m. The good work by Rupert Soames and co is paying off.  

Order intake boosted by £1.9bn in UK asylum accommodation and support services. It’s also enjoying greater profitability from the Carillion healthcare acquisition, which it bagged at a big discount in 2018. Nothing on Babcock but watch for more acquisitions. 

Super Bitcoin goes ballistic, Fed signals are atrocious

Morning Note

Bitcoin moves higher, threatening $13,000, whilst stocks and gold have dipped as Fed policymakers tempered expectations for a July cut.

Bitcoin has gone ballistic: it is building up a head of steam and there’s no point trying to stand in the way. Bitcoin futures began ramping from 11pm last night as they jumped to $11,600 before driving up to almost hitting $13,000 and then paring gains a touch to trade at $12,770 at send time. Look for these little pullbacks along the way as potential entry points, but there is every chance now we see this top the all-time highs and make $20k. 

Causes can be found in many places – the halving in 2020 is one that is being talked about increasingly as bearing on price action now. Facebook’s Libra whitepaper also looks to be a spark. The biggest players are looking at cryptocurrencies afresh and don’t want to miss out. There’s a ‘haven’ play too as nominal and real yields have retreated sharply, reducing the opportunity cost of holding (or HODLing) bitcoin. And the liquidity injection from central banks has forced a range of assets like gold, bonds, the yen etc, so bitcoin is just being swept along by those macro currents.  Whatever the cause, the momentum is powerful right now.

Other major cryptos were firmer with gains for Ripple, Litecoin, Dash, Ether and Bitcoin Cash. Our traders remain roughly 80-90% net long on these assets.

Stocks ease on Fed

Stocks dropped after the Fed chair Jay Powell asserted the central bank’s independence from politics and cautioned against short-termism affecting monetary policy, in a speech that appeared to try and temper expectations for a rate cut in July. At least it looked like he was saying the Fed is by no means sure to cut – we should remember the recent dot plot did not suggest a cut would come until 2020.  

On top of this we had uber-dove James Bullard, who lest we forget was the sole dissenter at the June meeting in voting for a cut, saying that he did not think a 50-basis point cut in July was warranted. This left the market less confident in getting the two-for-one 50bps cut in July – expectations down from around 40% to 26%.  

The market has baked in rate cuts that the Fed is yet to see as completely necessary. As we noted last week after the FOMC statement, there’s yet optionality for Powell and co. In last week’s statement the Fed refrained from explicit references to cuts. The median dot plot showed no cuts this year. The market is ahead of itself again. 

SPX declined 1% to 2917, while the Dow gave up 180 points as Wall Street had its worst day in almost a month. Asia has been softer overnight. Futures indicate European shares are being dragged lower by the Fed’s less-dovish language and by the broader market fears we are seeing around trade and geopolitical tensions in the Middle East. As we head into the rest of the week, the G20 and the Trump-Xi meeting will be front and centre. A bit of de-risking ahead of the meeting is also to be expected.

Dollar gains

The Fed’s jawboning lifted the greenback as yields fired a little, with the dollar index climbing back to 95.75. EURUSD was softer, losing the 1.14 handle to trade around 12.1360. Sterling also eased, with GBPUSD down to 1.2670. Boris Johnson goading Jeremy Hunt to say he would take Britain out on Oct 31st with or without a deal is not really helping. Whatever the claims ahead of the poll, the eventual winner would in any event have to face the cold granite of EU negotiations (or lack of, given the EU says it won’t reopen the deal). Dollar firmed up against the yen but remains near 6-month lows.

Gold softer

A stronger USD hit gold, which has retreated from its six-year highs above the big $1433 level to trade around $1406. You would think that gold will need to hold $1400, or it could reopen a move to $1380. Gold’s enjoyed such a strong run that it would make sense to see a pullback – the bull run may not be over by any means. As we noted yesterday in our commodity strategy, the 14-day RSI and standard MACD indicators were showing the market as extremely overbought. 

Oil higher on API data

Oil rose to highest in a month as we saw stockpiles drop 7.5m barrels according to API. This was well ahead of expectations for a c2.5m drop and has given bulls some reason to cheer. Although fundamentals remain weak, prices have pushed up around 10% in the last fortnight largely on Middle East tensions. Brent was last around $65.30, sitting on the 38.2% Fib retracement of the 2019 top-to-bottom decline, after pushing to $66. WTI was holding the $59 handle.

Gold & bitcoin firmer, stocks and dollar softer

Morning Note

Stocks and the US dollar were softer whilst gold and Bitcoin continued to drive higher as markets look ahead to the G20 meeting.

Stocks have eased as markets look ahead to the G20 meeting – optimism is fading a little and we would expect investors to perhaps take some risk off the table ahead of the meeting, particularly given the recent bump. Bear in mind also this is a weekend meeting that implies gap risk. 

Equities

The S&P 500 eased 5pts yesterday to finish on 2,945. Asia has been softer overnight. Futures indicate European shares are lower today since there is really little fresh catalyst for bulls before we learn more about the Trump-Xi meeting in Osaka and what this means for global trade, tariffs et al.  

US trade supremo Robert Lighthizer spoke to Chinese Vice Premier Liu He on Monday, at least paving the way for talks to take place in Japan. The FTSE 100 might struggle to hold the 7400 level today.

The US has hit Iran with more sanctions. No sense of de-escalation, but also no material worsening in the situation. The tensions offer short-term support for oil still with Brent steady around $64 and WTI shade below $54. 

Gold

Gold firmed again overnight as we see the path to more gains being cleared. Gold hit a fresh six-year high amid a perfect blend of supporting factors. Four things are really driving gold – falling yields, a weaker dollar, a soft macroeconomic outlook and geopolitical risks rising in the Middle East. 

Prices hit $1438, breaking resistance on $1433 before paring those gains to trade around $1426 at send time. Looking to break $1446 next. 

Gold has huge negative correlation with real yields, which have come right down. US 10yr around 2%, now back to where they were in 2016 – if it goes lower, we would expect further gold strength. The surge in negative-yielding debt is undoubtedly key to the rally, and can be viewed as similar to the rise in gold prices and negative yield assets in 2016. 

Forex

The dollar remains on the defensive. The dollar index has dropped further to trade around 95.50. 

Sterling can’t catch much bid – GBPUSD remains off its lows around 1.2750 but is failing to make real inroads versus the greenback as Brexit uncertainty weighs heavily. Short positioning has eased but this remains a crowded trade. 

We have the no-deal exit risk of course – Boris Johnson has said he is prepared to take Britain out without a deal come October 31st. But we also have General Election risk – chatter about a no-confidence vote being supported by a dozen or so Tory rebels could lead to the government falling and inevitably an election. Boris Johnson could end up the Lady Jane Grey of Downing Street if that were the case. This introduces risks of a) Brexit delay and ongoing political uncertainty, b) a hung parliament with no clear route out of Brexit, and c) a Corbyn-led Labour government that would be very risky for UK assets and equites. 

The euro is faring better, with EURUSD up to regain the 1.14 handle, trading at 3-month peaks. 

Cryptos

Bitcoin firmed again, cementing the gains above $11k. I would reiterate the comments from yesterday – it’s a hard market to stand in front of when it builds momentum like this. The buzz and the hype has returned. You can talk about Libra, or the halving next year, more and more institutional interest and so on, but ultimately this is a bubble again. Look for $11,600, the highs from Feb last year as offering the big test. 

Bitcoin jumps, stocks steady ahead of G20

Forex
Morning Note

All that glitters is not gold. Bitcoin is sparkling again but beware…breakdown’s coming up ‘round the bend. 

Bitcoin jumped above $11,000, taking it to its highest level since March 2018. Futures are back down to $10,855 around send time. Investors are ignoring what happened the last time we saw parabolic rises like this. Is it different this time? No, but people have short memories. Facebook’s Libra white paper may have stoked renewed interest in cryptos at a time when the buzz had already returned.

Bitcoin is more mature etc, but the fundamentals of this scheme remain unaltered. What I would say is that arguably big money is starting to view this differently and think it could be very costly to ignore if they get left behind. 

It may also be that the sharp liquidity boost we’ve seen from central banks is helping bitcoin. As we noted last week, it was only a matter of time before the $10k level was taken out it and now ultimately a retest of the ATHs near $20k looks very plausible. 

Once this market builds up a head of steam, it’s hard to stop it. As previously argued, this is a big momentum play and the more buzz there is, the more that traders will pile in behind the rising wave. Bears could get burned before the market turns – maybe better to wait and let it fizzle out, which it will eventually. The more it rallies, the bigger the blow-up when it comes. However, we should expect some pullbacks and retracements along the way. 

Equities, G20 

Stocks are maybe looking a little softer with the S&P 500 easing off its all-time highs on Friday and we’ve had a mixed bag from Asia overnight. Japan closed a shade higher at 21,285.  

Futures indicate European shares are trading on the flatline as investors take a breather and look ahead to the G20 later in the week. FTSE 100 finding support at 7400, with resistance at 7460.

Coming up this week the G20 is centre stage for markets. President Donald Trump is expected to meet Chinese counterpart XI Jinping at this week’s G20 meeting in Osaka. 

Last week Mr Trump tweeted: “Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting.” No one thinks the US and China will do a deal in Osaka, but there is some hope that we will have a positive development that marks a shift in the rhetoric and a re-energising of talks following the breakdown in the recent discussions.  

Iran, oil 

Iranian tensions are not going away, providing some support for oil. Brent was trading around the $65 mark, with WTI at $58. Fundamentals remain bearish but the uncertainty in the Middle East, specifically the risk of a closure of sea lanes, is enough to keep crude above water. 

Since last week we’ve had news of the US launching a cyberattack on Iran and warnings from Iran about what a war would mean. Expect lots of turbulence from this but ultimately it does not look like the White House is spoiling for a fight. The risk is, as ever, in a miscalculation. 

Gold remained firm, holding above $1400 as a weaker dollar combined with dovish central banks kept traders happy to bid up the metal. Geopolitical tensions may be a small factor, but ultimately gold has huge negative correlation with real yields, which have come right down. Friday’s move off the lows later in the session were key and the bull trend remains intact. A rebound in USD could trap bulls.

FX 

The dollar is softer with the euro and sterling holding gains. The euro is holding at a three-month high around 1.1380 – look for a push to 1.14. 

Trading around 1.2760, GBPUSD is facing stiff resistance from previous highs and a big Fib level coming in, so we need to see this level breached on the upside to be more confident that the pound can maintain its gains.  

Coming up this week – Fed speakers and the PCE inflation print will keep the FX market interested.

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