ECB to loosen policy, data to prompt Fed and BoE easing bets?

Forex
Indices

Welcome to your guide to the week ahead in the markets. 

ECB monetary policy meeting  

Expectations are high ahead of this week’s European Central Bank policy meeting. A run of poor Eurozone data has raised bets on further rate cuts, while investors have snapped up government bonds in the bloc in anticipation of a potential restart to the quantitative easing programme. 

US ISM was dire – will CPI, retail sales and sentiment be any better? 

Key releases on the US calendar this week could crank up the odds of more easing from the Federal Reserve before the year is through. Last week’s ISM manufacturing print shocked, with the index falling into contraction territory. Soft readings from the upcoming CPI, retail sales, or University of Michigan sentiment index could see further dovish bets. 

UK GDP and average earnings – background noise? 

Sterling remains almost exclusively at the mercy of Brexit-related news flow, but growth and wage figures might draw some attention. After having been stuck on hold thanks to the uncertainty of Brexit, the Bank of England may have to be quick out of the starting gate once the October 31st departure deadline passes. Data recently has been weak and another blow from either growth or earnings would see expectations of a rate cut climb. 

Kroger earnings 

It’s been another bad year for Kroger so far. KR is down 12% year-to-date, compared with rises of 14% for the S&P 500 and 16% for its industry. Peers such as Target and Walmart have had strong quarters. Will Kroger’s own investments in expanding online and delivery offerings help it deliver a strong Q2 report? 

Corporate diary 

September 11thHermes InternationalH1
September 12thWM Morrison SupermarketsQ2 2020
September 13thKrogerQ2

Coming Up on XRay

We’re got loads of great sessions for you this week. with our expert guests and residents. Watch live, or catch up when it’s convenient for you. Subscribe to submit questions that our presenters answer in real time.

07.15 GMTSeptember 10thEuropean Morning Call
15.30 GMTSeptember 10thAsset of the Day: Bullion Billions
15.45 GMTSeptember 10thAsset of the Day: Oil Outlook
07.00 GMTSeptember 12thLive Trading Room
18.00 GMTSeptember 12th The Stop Hunter’s Guide to Technical Analysis

Key Economic Events

Stay ahead of the markets by understanding what key economic events are coming up, and what impact they could have on your trades.

08.30 GMTSeptember 9thUK Monthly GDP
01.30 GMTSeptember 10thChina CPI
08.30 GMTSeptember 10thUK Average Earnings
00.30 GMTSeptember 11thAustralia Westpac Consumer Confidence
11.45 GMTSeptember 12thECB Monetary Policy Rate and Statement
12.30 GMTSeptember 12th US CPI
12.30 GMTSteptember 13thUS Retail Sales
14.00 GMTSeptember 13th US Preliminary Michigan Sentiment Index

Market Insight: Earnings Season

Earnings season is just around the corner, with reports trickling out until the action starts week beginning July 15th. However, companies have already warned that this earnings season could be worse than even the pessimistic analyst forecasts.

According to information from FactSet, 77% of the 113 companies that have issued earnings per share guidance have warned that their figures are likely to be worse than analyst estimates. The report revealed that the number of S&P 500 companies issuing negative EPS guidance for Q2 is the second highest since 2006. The worst was in the first quarter of 2016, which saw 92 negative such warnings.

Against continuous rallying from Dow Jones and the best June for S&P 500 since 1955, this is a challenging circle to square. While markets are sluggish and trade tensions are having an impact, equities remain attractive.

Earnings also declined by 0.29% in Q1, so it’s likely to become an earnings recession. There have been rumblings of recession for a while now, but markets remain fixated on the Fed and are not pricing in bad news.

Neil Wilson, Chief Markets Analyst for MARKETS.COM said: “The problem for bulls from here is that several rate cuts by the Fed are already priced in, meaning, in the absence of a material rerating of valuations, we would need to see an improvement in earnings to push equities higher still. 

There are therefore two big risks coming up: The Fed doesn’t cut as expected (even one cut this year won’t be ‘enough’), and two, corporate earnings guidance is significantly weaker than the market expects.”

What to expect from Earnings Season

Aside from some early releases, earnings season really gets going on July 15th and wraps up around mid-August. So, for three weeks, traders need to keep a close eye on the market and their assets to ensure they’re making the most of the volatility.

While estimated earnings fell by 2.6% for Q2, this decline is smaller than the five-year average (-3.3%), however the volume of companies issuing negative guidance is higher than the five-year average by some margin (77% to 70%).

Specifically, certain industries have issued more negative guidance than others with Materials and Industrials sectors leading the decline. Freeport-McMoRan, DuPont and Mosaic all recorded a decrease in their mean EPS estimate of more than 10%, while in industrials the decrease was led by Boeing, 3M and American Airlines.

Perhaps surprisingly, the Energy sector recorded the largest increase in expected earnings growth for the quarter, led by Chevron.

With a gloomy outlook for the global economy and the ongoing trade tensions, traders are unlikely to be surprised by a grim earnings season. But all eyes are on the Fed today as market participants hold their breath for a rate cut. While corporate earnings don’t directly impact policymakers, reduced earnings based on a weaker economic outlook and trade worries make a rate cut (or two) look more likely.

Jay Powell is giving his semi-annual testimony later today, and the minutes from the last FOMC meeting are published tomorrow, so traders could get some insight into where the Fed is looking.

Wilson sums it up by saying: “Expectations for earnings are low but may not be low enough. Forward earnings guidance for the remainder of the year may face downward revisions, which would drag on equity markets. However, with little else out there in terms of yield and bonds looking pricey, equities may still appeal as central banks drive investors towards risk. Over to Mr Powell…”

NFP beat dampens rate cut bets, but not by enough

Indices

This afternoon’s US non-farm payrolls report was even more closely watched than usual. It is common for traders to get twitchy ahead of arguably the most important monthly data release on the economic calendar, but this was different.

Markets are betting that the US Federal Reserve will cut interest rates when it meets again at the end of this month. Pricing suggests multiple 25 basis point cuts over the coming 12 months.

The Federal Open Market Committee hasn’t exactly been on the same page as the markets for some time, and the latest jobs numbers given strong ammunition with which to defend their hawkishness. Economists expected to see a 165,000 increase from today’s payrolls, after May’s dire reading of 75,000, but in fact the US economy added 224,000 jobs during June.

A slight tick higher in the participation rate saw the unemployment rate inch up to 3.7%, against expectations of no change at 3.6%.

Wage growth, key inflation predictor, slowed to 0.2% month-on-month, and 3.1% year-on-year. In both cases the readings were 10 basis points lower than analysts had expected.

Market reaction to non-farm payrolls

Stock futures tumbled, with the Dow quickly shedding 180 points and the S&P 500 dropping 0.8% following the announcement as markets cut bets on easier Fed policy. US ten-year treasury yields gained six basis points in the space of 10 minutes to trade back above 2%. EUR/USD fell 0.6%, breaking through three levels of support to hit 1.1222, while GBP/USD dropped 0.7% to test 1.2500.

The latest non-farm payrolls have highlighted the disconnect between market expectations for monetary policy and what the economy is signalling is needed. It’s true that growth is beginning to slow, and some data has revealed weakness in areas such as manufacturing, but so far the market is expecting a disproportionate response from US policymakers.

Markets expect three rate cuts between now and April 2020, although bets of four are not far behind. There are no expectations of interest rates remaining in the current 2.25-2.50% range – wise, considering the data and global macroeconomic conditions – while a handful of uber doves have gone as far as pricing in seven cuts by April 2020.

Those expectations are likely to cool in the wake of the latest NFP data, but the market is still convinced that the Fed is about to embark on a rapid cycle of loosening policy. It will take a lot more than one better-than-expected data print before we reach a realistic middleground.

Eurozone bank shares slip further on weak yields, eyes on Fed speeches

Eurozone bank shares are amongst the worst performing today. The sector has fallen 1% overall, greatly outpacing the wider market dip.

The biggest movers include Sabadell, with losses in the region of 1.1%, Credit Agricole, off 1.5%, UBI Banca, down 1.7%, and ABN Amro, also down 1.7%.

The sector has been hit by weak Eurozone government bond yields, which are currently hovering just above record lows. The German 10-year bund currently yields -0.311%. That’s just above the -0.329% record low seen last Tuesday.

All eyes are back on the Federal Reserve ahead of a set of speeches, including one from chair Jerome Powell during the US session.

Federal Open Market Committee members signalled after last week’s policy meeting that a rate cut was on the way. This wasn’t enough for President Donald Trump, who responded that the Fed “blew it”. The President called a few months ago for 100 basis points of cuts and the reintroduction of quantitative easing.

Markets are waiting to see whether the Fed will bow to pressure and crank up the dovish rhetoric. President Jerome Powell has so far had little time for the President’s attempts to intervene. But with market expectations racing way ahead of what the data and policymakers themselves would suggest is necessary and a President intent on getting a weaker dollar to help him in his trade battle with China, can the Fed afford to go at its own pace?

Elsewhere stocks were holding near opening levels, with losses capped by the merger of two of the biggest business consultancies in Europe. The deal sees Capgemini purchasing Altran for €3.6 billion. Shares of Capgemini are up 7% to trade at a 2-month high, while Altran shares, reflecting the selling price, have shot up 21%.

Fed holds, pound breaks $1.27 ahead of BoE

Forex
Morning Note

Stocks firmed and the dollar fell, whilst gold rallied to a 5-year high as the Fed opened the door to cutting rates.

It’s like 2010 all over: the race to the bottom is on. Only this time the global economy is coming off a period of remarkable synchronised expansion, not a terrible recession and the worst financial crisis in a generation or more. So what gives!? Must Powell acquiesce to the whims of his president? Must Draghi end his tenure not normalising, but actually cutting rates even deeper?

Draghi to be fair has little option. In the absence of structural and fiscal reform – blame Germany – he can but tinker around the edges of the zero lower bound, hoping to weaken the currency to get some competitiveness back. Powell is in a different position, although really it looks like central banks are spitting in the wind in trying to shift inflation expectations. They should try to focus on boosting oil prices instead.

FOMC holds

So yesterday the FOMC nudged towards a cut. Nearly half the 17 members of the FOMC think cuts will be warranted this year. The median dot plot suggests 50bps in cuts through 2020. The dots evinced a shift from a tightening bias to an easing bias. The patient mantra was dropped, whilst the economy is now only expanding at a ‘moderate’, not ‘solid’, rate. The market took this as a sign the Fed’s listening to their demands – a cut in July is now fully priced in.

But there’s yet optionality for Powell and co. The Fed refrained from explicit references to cuts. The median dot plot shows no cuts this year still. The market is ahead of itself again. If we believe the dots, rate cuts will come slower than the market wants them to.

In some ways the Fed thread the needle here – keeping the market and the president happy without actually committing to cuts. The dots suggest the Fed is saying: “Of course we will cut, just not yet-good enough?”. For now it is. But the tail seems to be wagging the dog, forcing the Fed to follow sooner or later.

Certainly revising inflation expectations lower points to concerns that tame price growth cannot simply be attributed to transient factors. Yet at the same time the Fed thinks unemployment will be lower and growth stronger than it thought in March.

The problem we have is that Fed looks like it is flip-flopping; changes its mind based not on economic data but on the caprice of financial markets; appears in thrall to the White House; and is therefore at a very serious risk of losing its credibility.

Markets

Yields hit the deck. US 10yr bond yields slipped beneath 2% again for the first time since 2016. Bunds heading deeper into negative territory.

Gold rallied on the outcome as yields sank, breaking north of $1385. It’s now cleared a tonne of important multi-year resistance, paving the way for a return to $1400 and beyond. This is a big move, but if the Fed doesn’t deliver the cuts the bulls could be caught out.

Stocks liked it – the S&P 500 notched gains of about 0.3%, Limited upside as the Fed was not as dovish as the market wanted and because a lot of this was already priced in. Asian markets rallied across the board.

Futures show European stocks are on the front foot, catching a tailwind from Wall Street and the Fed. The FTSE 100 may underperform though as the pound is finding bid.

Oil has climbed as US inventories feel three times more than expected. Brent was up at $63.50, threatening to break free from its recent range – look for $63.80. WTI at $55.50 also close to breaking out of its trough.

FX

The dollar kicked lower after the Fed decision – but with the ECB looking super easy the gains versus the euro are limited. Likewise the yen with the Bank of Japan also ready to step up stimulus. Likewise the Australian dollar, with RBA governor Lowe talking up a further, imminent, cut. The race to the bottom is on. Is it too soon to talk about currency wars?

The exception here is the Bank of England, which is heading towards raising rates. We get to learn more about the BoE’s position later today. The difference here is the inflation expectations, which are moving up, not down like they are elsewhere. Britain’s also enjoying strong wage growth and a super-tight labour market. All of this is dependent on a smooth Brexit – this is not a given by any means.

Indeed, Brexit is keeping the lid on sterling’s gains – the prospect of Boris Johnson taking Britain out of the EU come October 31st is a risk. There’s now talk of a possible general election if he gets in – risky, we know what happened to May. The prospect of a general election would not do anything to remove uncertainty around UK assets. Zero clarity still.

EURUSD moved through 1.12 and was last at 1.1280, but failing to gain enough momentum to rally above 1.13 and scrub out the Draghi-inspired losses.

GBPUSD has reclaimed 1.27. Quite a chunky move here, blasting through a couple of big figures in under a day. Maybe the prospect of a more hawkish BoE is helping the pound, albeit the market is actually pricing in cuts, not hikes. At least Mark Carney doesn’t have to deal with a political leader on his case…

USDJPY lost the 108 handle to trade at 107.50, now breaking free into new 2019 lows (ex the Jan flash crash).”

Closing on all-time highs, FOMC preview

Morning Note

Equity markets buoyant after Tuesday’s rally ahead of the key Federal Reserve meeting.

You can just about smell the all-time highs. The S&P 500 rallied 28 points to 2,917.75, just a shade under 1% below its April record high. The Dow added 350+ points to 26,465.54. 

And yet the latest BAML data shows fund managers are at their most bearish since the global financial crisis a decade ago. Equity allocations have experienced their second worst drop on record – we’ve seen a huge move into cash. And yet and yet, we’re close to all-time highs again for US equity markets at least. This is what you may call an unloved rally. 

Asian shares were encouraged by Wall Street’s gains. Japan closed 1.72% higher. Futures indicate European shares are treading water ahead of the FOMC decision later today. A touch of caution after an exuberant session yesterday. 

Oil rallied again – demand outlook matters a lot more than supply constraints. The world is awash with oil whatever OPEC does. Brent was close to its $62.50 comfort, the 50% Fib level that continues to anchor prices. WTI has regained $54. On both charts signs of either double-bottom reversal or bearish flag continuation patterns. 

The prospect of president Trump meeting his counterpart Xi Jinping at the G20 assembly later this month, combined with signs of renewed stimulus efforts by the ECB, has investors eyeing short-term gains. We need to wait and see what the Federal Reserve does. So hold on tight, let the flight begin. 

FOMC Preview 

Summary 

You got to know when to hold ‘em, know when to fold ‘em. Markets expect the Fed to cut 3 times this year, but the Fed needs to be careful about reacting too easily to markets. There is not the need to be as pessimistic about growth and inflation as bond markets suggest, despite some softness in recent labour market data. The Fed will seek to avoid sounding overly hawkish, but one feels there is a need to steer markets away from expecting the Fed to ride to the rescue of financial markets.  

Backdrop 

It’s hard to recall a time we headed into an FOMC meeting with so much at stake and with so much uncertainty about what might be agreed and what the guidance for the rest of the year will look like. This means the potential volatility around the event is likely to be substantially higher than at most recent FOMC meetings. 

Macroeconomic indicators suggest slowing growth whilst there have been no positive developments on trade. Inflation is tame but there is arguably enough to keep the Fed on the side lines for the rest of the year. And quite how much the data has softened since the last meeting to suddenly warrant a cut is beyond me. 

Moreover, last week’s retail sales data has gone against the downbeat, pro-cut grain. The Atlanta Fed GDPNow model predicts 2.1% GDP growth in Q2, up from the previous 1.4%. The model now anticipates second-quarter real personal consumption expenditures growth of 3.2% to 3.9%. 

Talk of demoting Jay Powell further clouds the picture as Trump heaps pressure on the  Fed chair to cut. Know when to walk away, know when to run. 

Market pricing 

Markets do not currently anticipate the Fed will cut rates this week, but they are pricing in a cut in July and a subsequent 1-2 25bps cuts.  

Pricing for a rate cut this week dropped sharply – from nearly 30% to around 21% – after the strong retail sales print on Friday. It’s since crept back up to 26%. For July, though, market pricing indicates an 87% chance of a cut, whilst there is a 95% chance for September. 

The blackout period ahead of the meeting has tied tongues that were in overdrive in the preceding days. 

Powell’s comments in Chicago at the start of June were the trigger for a relief rally in equities. He noted ‘recent developments involving trade negotiations and other matters’, adding that: ‘We do not know how or when these issues will be resolved’. 

This was the key remark: ‘We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion’. 

Critically he did not signal a cut, but only stuck to the Fed’s oft-stated stance. Markets have read much more into this, and could be left disappointed. The problem for Powell now is to gently steer markets back to the right course. 

Coming Up Today (GMT) 

GBP- CPI y/y (08:30) 

CAD- CPI m/m (12:30) 

EUR- ECB President Draghi Speaks (14:00) 

USD- FOMC Economic Projections (18:00) 

USD- FOMC Statement (18:00) 

USD- Federal Fund Rate (18:00) 

USD- FOMC Press Conference (18:30) 

BRL -Interest Rate Decision (21:00) 

NZD- GDP q/q (22:45) 

Pound slips to 6-month lows: Morning Note

Forex
Morning Note

BoJo sees pound lose mojo , Aussie soft on RBA, equities steady ahead of Fed, Middle East tensions.

Equities steady before Fed 

Equities remain cautious ahead of the start of the Federal Reserve meeting today. The S&P 500 and the Dow were pretty well flat yesterday, whilst the FTSE 100 notched a slight gain.  Asia has been mixed. Futures indicate European equities are trading on the flatline again. Equities are lacking direction and will wait for the Fed to get a steer.

Equities investors are likely to display caution with the Fed in view. They may be disappointed with what the Fed offers – realization of this may manifest in mild selling ahead of the meet.  We’ve got no signs of progress on trade and little sense the G20 will produce anything. And now we have building tensions in the Middle East.

The White House has ordered 1,000 US troops to the region, with fears of escalation rising. Tehran says it will breach uranium stockpile limits in days. The Iran nuclear deal looks dead. Markets may start pricing in risk of escalation. Whilst this is only a very small number of additional manpower, and is clearly designed to act as a warning to Tehran, troop build-ups only tend to lead in one direction.  

Pound lacks mojo

The pound is at its lowest in almost 6 months on heightened fears of a no-deal exit. Boris Johnson is the clear favourite to become the next PM – in fact it rather looks like he’s going to walk it. Currency markets display fear that he has said he is prepared to take Britain out on October 31st without a deal if needs be. More BoJo, less mojo. Whilst a crowded trade there is real slippage here with little to spark life into the pound. 

The calculus is simple – failure to take Britain out of the EU this year risks a General Election and wipe out at the polls at the hands of the Brexit Party, potentially handing Jeremy Corbyn the keys to Number 10. The EU says it won’t renegotiate (it may have to), MPs won’t accept the existing deal, and Parliament has limited scope to stop this train.  

Sterling is increasingly reflecting the no-deal risk. Cable was last hovering close to its lowest of the year at 1.2530, having dipped as low as 1.2510, its weakest since the start of January. 2018 lows around 1.2470 could be the next target on the downside. BoE this week may signal tightening bias and readiness to hike earlier than previously expected, but the pressure on the pound remains because of Brexit. The BoE should be minded to remain on the sidelines until Brexit is decided. 

Aussie soft 

Australia’s dollar is also soft and susceptible to a major downside breach after minutes from the last RBA meeting showed more cuts are coming. More likely than not we should get at least one more cut this year. 

The minutes said: ‘Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.’ This was extremely strong signal and suggests more cuts to come and soon. Excluding the Jan flash crash we are now testing multi-year lows, on the cusp of a move back to decade lows not seen since the height of the financial crisis. At 0.6830 the AUD/USD cross was testing major support – this could hold until we get further clarity from RBA governor Lowe on Thursday. 

Oil soft, gold up 

Oil has failed to catch any tailwinds from the Middle East tensions. Brent was below $61 again but remains clear of last week’s lows. WTI was holding $52. All looking very bearish and flaggy right now. Until we get a good dose of economic data this rut seems set to continue. 

Gold keeps cranking higher – the prospect of lower US yields and geopolitical tensions seem to be acting as a tailwind. Last at $1346 the big target for bulls is the 2018 peaks at $1365 and then the 2017 highs at $1375.

Equities 

Ashtead FY numbers are positive, with EBITDA at £2.11bn, a slight beat as revenues rose 19%. The medium term outlook looks confident. Despite fears of slowing growth in the US, management say they expect to continue to experience strong end markets in North America.

On tap (GMT) 

EUR – ECB President Draghi Speaks (08:00) 

EUR – German ZEW Economic Sentiment (09:00) 

EUR – CPI (09:00) 

USD – Building Permits (12:30) 

GBP – BoE Gov Carney Speaks (14:00) 

EUR – ECB President Draghi Speaks (14:00) 

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