Stocks higher as markets look to the ECB meeting

Morning Note

Stocks firmer

US closed higher, stronger session in Asia. The S&P 500 closed up 0.3% at 2,985 and the Dow eked out a small gain, whilst the Nasdaq rallied 0.9% to 7905 as tech led the board. European markets are upbeat ahead of the ECB meeting.

Talk of US trade representatives heading to China next week lifted sentiment among tech firms, particularly chip makers. Analysts also turned bullish on Apple and Amazon just ahead of earnings, adding to the more upbeat mood. Lots of earnings to come today.

Still it’s the prospect of a good dose of central bank easing that is underpinning the markets for now. The ECB meets Thursday and is likely to alter its forward guidance, if not outright announce a rate cut, perhaps by cutting rates 10-20bps. Draghi has plenty of history is being just a step ahead in terms of his dovishness. 

Oil – still firmer after tensions in the Strait of Hormuz. Brent was last just moving above $63.50 with this level capping gains since midday yesterday. A breach above this calls for a move back to Mondays peak at $64. WTI is trying to break north of $56.50 – look for $57 to mark a sustained rally. 

Boris to become PM

What does it mean for sterling and UK assets? Not a lot for the now as so much is priced in. However we are yet to find out what all shakes out in terms of the regime shift. Remember this is not just a new leader, but an entire new regime. The content, tone and emphasis from Number 10 will be very different to what we had under May. We would reiterate that there is a heightened prospect of no-deal under BoJo, yet when faced with the realpolitik of it all, a compromise may well be found. The worry for sterling bulls is that faced with an existential threat to the Tory party, the only option is to leave on October 31st, come what may. Who dares wins.

Sterling has come under a real bout of pressure overnight – GBPUSD was driven below yesterday’s lows and was last trying to hold support at 1.2450. The broad downtrend since March remains very much the dominant force, although we are a little above the 2-year lows hit last week.  

Equities

DP World reported a small rise in volumes at its terminals despite the ongoing pressure from the trade war. Gross volumes rose 0.5% in the first half with strong performance in Asia and India driving the gains. Volumes across the UAE and Australia were weaker. Overall, Asia Pacific and Indian Subcontinent delivered growth of 5.5% on a like for like basis in H1, whilst EMEA was 2.5% lower (dragged down by UAE),and Americas and Australia were down 6.7% in the period. We’ve seen global trade volumes decline lately as a result of the trade war between the US and China, as well as because of a broader weak macro backdrop. DP World is on the frontline of this trade war and is so far keeping it together.

Fevertree – revenues rose 13% to £117.3m, with adjusted earnings before nasties rising 8% to £36.7m. That’s a big slow down in revenue growth, which was 40% last year. We feel there is a good reason to see why this number in the low double digits is going to be the new normal. Margins were lower because of the sugar tax, higher glass costs and rising storage costs due to increased inventory, but they were in line with the full year results from March.

Crucially we see significant progress in the key US market. Growth in the US market, which is the focus of its dark spirits push, stood at 31%. Importantly we see the shift happening with the share of group revenues from the US rising to 17%. UK growth is slower as expected – down to a relatively modest 5%. Europe +13% was steady (25% of group revenues) while 49%  growth in the RoW was good and this now makes up 7% of revenues. Again room to grow here too. Moderation in UK growth is entirely as expected – the key is the US and RoW segments. Hot summer should be good for trade – full year outlook maintained.

Cryptos

Bitcoin futures are fading again but again looking for support on $10k (see below). It’s a big round number and it’s (there or thereabouts) the 38.2% retracement of the big thrust this year. Look for this to hold, if not we much look for $9k again, last week’s nadir. Something decidedly bearish and flaggy about the formation now though. 50-day average starting to offer something in terms of support too, coming in around $9,600. 

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