Trump’s London calling, US-China trade war worsens, oil smoked

Forex
Morning Note

Global stocks were down by around 6% in May – can we get a better June? The runes are not looking great. 

Futures indicate European shares are lower today as trade tensions continue to mount and investors exhibit greater fear about the global economy and the risk of recession. Asian markets were generally lower after a big selloff on Wall Street on Friday that saw the S&P 500 decline 37 points, or 1.32%, to finish at 2,752.06, below its 200-day moving average. FTSE 100 held the 7150 level, but this is likely to get taken out today. 

Trade fears are heating up 

The trade war is not cooling down; in fact, it looks like the rhetoric is heating up and further escalation seems likely. China is raising tariffs on $60bn of US goods in retaliation for tariffs, coming up with its own blacklist of foreign companies, has accused the US of resorting to ‘intimidation and coercion’, and begun an investigation into FedEx. And the Chinese defence minister says if the US wants a fight, they will ‘fight to the end’. No end in sight, and the chances of a G20 détente are slim.

Futures 

US stock futures were lower along with oil amid growing fears about this trade setup. Nothing like progress has been seen re Mexico, and now the market is dealing with reports that the US has been eyeing slapping tariffs on some Australian imports, As we noted last week, the escalation last week with the attack on Mexico – especially as it represented a weaponization of trade to pursue non-economic policies – represents a major turning point and could bring others into the fray. Again, the EU could come under fire soon. 

PMI day 

Data overnight has been mixed but still indicates slowdown. China’s Caixin PMI read 50.2, unchanged from a month before but a little ahead of expectations. Japan’s PMI has gone negative, moving to 49.8, signalling contraction. Japanese manufacturing output down for 5 months in a row, while new export orders fell for the 6th straight month. Japanese equities were down sharply overnight. UK PMI at 09:30, with the ISM numbers for the US due at 15:00. 

London calling 

Trump heads to the UK today – unfortunately he’s meeting a lame duck PM so we can’t expect much of importance. There will be lots of talk of a trade deal with the US post-Brexit. Harder Brexiteers in the Tory leadership race are likely to be emboldened. Expect the no-deal talk to increase.  

Sterling is sure to be under plenty of pressure until the leadership race is clearer. GBPUSD remains anchored to 1.26 for now, having made fresh multi-month lows last week. However, Friday’s bullish hammer reversal may provide the basis for a short-term rally. Just a hint that the pound is oversold and could be ready for a wee bounce. 

Oil smoked, gold higher 

Oil has taken a beating as markets worry more about a slowdown in global demand than supply constraints. Brent has declined by 10% or so in just a couple of days and is holding on $61, while WTI is clinging to $53. Speculators are liquidating long positions wholesale, with Friday’s COT report showing net longs down by 40k contracts. Net long positioning has fallen by about a fifth (100k contracts or more) since the late April high at 547.4k. 

Stockpiles are at their highest in two years. Speculative long positions continue to be cut. Supply uncertainty is losing out to demand uncertainty. Simply put, with OPEC and co curbing output, there is ample excess capacity in the market should it be needed. 14-day RSI and 20-day CCI suggest oversold and ready for a bounce, but this is like trying to catch a falling knife. 

Gold meanwhile is picking up safe haven bid as this decline is not just about valuations but about big fears for the global economy. The easing off in the US dollar has also supported gold. Having broken $1300 gold was last around $1310, with next target $1324.

FTSE rebalancing etc

Finally, there’s a fair bit of chatter about the FTSE rebalancing – will Marks & Spencer survive in the 100? Will JD Sports be promoted? I wouldn’t get too worked up about it all, even if it’s good sport. EasyJet likely to go – shares have been hammered but the business is tightly run and it’s always been one of the smallest in the FTSE 100. MKS lucky to survive with only the rights issue saving it.

Kier – warning on profits – going from bad to worse after the rights issue flopped.  

Astra – hails Lynparza pancreatic cancer drug trials success 

William Hill – bid rumours are doing the rounds 

Dignity – says it welcomes Treasury/FCA proposals  

Trump’s Mexican standoff rattles investors

Forex
Indices
Morning Note

Mexican standoff

A Mexican standoff is one in which there is no strategy that exists that allows either side to gain victory. Donald Trump may take note.

Any hopes May would end on a high were dashed as the White House slapped tariffs on all goods from Mexico. Tariffs of 5% will take effect Jun 10th, and could rise to as much as 25% by October. The intent is to ratchet pressure on Mexico to stop illegal immigration to the US.

Coming at a time of a breakdown in talks with China, it’s another blow to bulls and we should consider further downside risks from escalation. The worry is who’s next on Trump’s list – the EU may be next.

A fight with its neighbour and largest trading partner was not on the agenda. With all eyes fixed on China, and with Nafta 2 agreed and all apparently all hunky dory on the Mexico front, the caprice of Trump has caught investors off guard and will weigh on investor sentiment.

Trump has weaponised trade and economic might of the US. We have to assume that talks with China are going nowhere, and that this therefore – in the absence of being able to find a new stick with which to beat Beijing – is Trump finding a new ‘enemy’ to attack.

Futures sink

It’s early yet but following yesterday’s steadying of the ship, futures in the US are off south again and a retest of the 200-day moving average on the S&P 500 seems assured. Dow futures are printing a 24k handle and are on course to close sharply lower for the month. Sell in May and go away turns out to have been accurate this time. You’d have anyway wanted to see a much firmer rally yesterday to suggest the bottom had been found.

Futures show European equities are retreating on this fresh trade threat and it’s set to be a down day. FTSE 100 key support at 7150 and may well get taken out today.

FX: Peso hit

Needless to say the Mexican peso plunged on the news and will now be sensitive to news flow on any escalation of tariffs, or likewise, any detente. USDMXN has broken up through 19.64 and is trading very near the highs of the year from Jan. Peso bears will have the 20 handle in their sights.

Japanese auto stocks were hit as they use Mexico as base to import to US. Mazda, Nissan, Toyota among the sharpest fallers. This is likely to have some read across for European carmakers in today’s session.

Havens that had briefly retreated amid yesterday’s more upbeat session, are once again bid. USDJPY has fallen through support to find the 108 handle. Gold has rallied through $1294 even as the relative safety of the dollar left greenback just a few pips from two-year highs.

GBPUSD has held the 1.26 handle but, having broken through this level and below last week’s lows, the pound is now sensitive to further downside squeezing as uncertainty over the next prime minister and the direction of Brexit persists.

Overnight data is not helping risk today. China PMI figures slipped to 49.4 against 49.9 expected, signalling contraction in factory activity again. The PMI data suggests China is feeling the heat from the trade war and tariffs. Caixin PMI is due Monday and May show an even steeper contraction.

Oil

The whole picture is bearish for oil. Crude prices are at three-month lows. US inventories yesterday showed a smaller than expected drawdown at just -282k versus -860k expected. Stockpiles are at their highest in two years. Speculative long positions continue to be cut. Supply uncertainty is losing out to demand uncertainty. Simply put, with OPEC and co curbing output, there is ample excess capacity in the market should it be needed, so supply worries can be overstated. Traders are also betting Permian offtake constraints will lessen as the year goes on. Copper’s also been slipping and is retesting the Jan lows. Commodity markets are telling us there’s trouble in the global economy.

Uber

Uber losses hit $1bn but this was at the lower end of guidance, whilst revenues came in at the top of the guided range at $3.1bn. Top marks for that, but fundamental questions remain over top line growth in bookings.

Quarter on quarter bookings growth of a mere 3.4% is a worry, and shows how tough this market is becoming. Costs rose 35% from a year ago, whilst grids booking revenues were up 34%. Monthly active users jumped to 93m from 91m. Nevertheless these were solid results in line with management expectations, which should give investors some confidence

European stocks rebound, euro about to give it up

Forex
Indices
Morning Note

Stocks were lower across the board yesterday as the weight of the US-China trade dispute pushed everything down. From pretty much assuming the US and China would strike a deal, the market is repricing for a prolonged fight.

SPX closed lower by 19 points, or 0.69%, at 2,783, resting close on the 100-day moving average. This was a little off its lows of the day and a shade above the all-important 200-day moving average at 2776. The Dow shipped over 200 points and was briefly below 25k. 

The FTSE is also flirting with the 200-day line having closed 83 points lower at 7185. The pattern looks decidedly bearishy and flaggy right now. Support on the 38% retracement of the bottom-to-top rally from the 2018 low thru Apr high sits at 7150, which we saw tested and rejected yesterday. This was also an area of support that produced a bounce through the third week of May. 

We are seeing a small rebound in Europe on the open but there’s still lots of nervousness out there and the downward pressure is rather powerful and looks hard to resist. Any gains look hard won and easy to give up at the moment.

Forex

Dollar is still bid, pressuring everything else, with the dollar index on the 98 handle as it hoovers up haven demand. The euros is on the brink of capitulation on the 1.11 handle, with the pair last at 1.11343, ready to test those key May lows again, which marked a 2-year trough for the single currency. A breakdown through 1.11 on the downside brings 1.08 back into the picture.

GBPUSD doing very little still, trapped around the 1.2640 region. Whilst we are yet to retest Thursday’s low at 1.2610, we are making progressively lower highs and lower closes – the pound is still under a lot of pressure and this doesn’t look like having much chance of lifting until we know who the next PM will be. Brexit uncertainty remains.

That renewed dollar strength seems to be weighing on gold, which was last back at 1277. Rising trend support appears around the 1270 mark but for now the metal looks caught in a range. 

The GDP second print for Q1 is later – with the market already betting big on a rate cut this year it’s hard to see how a downward revision will really shift things. The first reading showed 3.2% and is expected to be revised down to 3.1%.

Watches of Switzerland

Meanwhile the latest IPO is in London – Watches of Switzerland has priced at the top of its range, at 270p. Shares will start trading today on the open. As we’ve seen this year IPOs can be a rough ride for shareholders and management. Hopefully for the management and buyers it won’t turn out to be another turkey like Aston Martin – one feels the omens are better for this one.

Morning Note: China’s long march, Britain’s interminable May

Forex
Indices
Morning Note

Wall St was higher yesterday as markets look on the bright side of the US-China dispute, focusing on the 3-month reprieve for Huawei. But news that the White House may also blacklist Chinese surveillance company Hikvision has weighed on risk appetite again.

It’s not looking too great overall, and we continue to witness Washington push hard in one direction and then beat a tactical retreat to test its opponents. 

The situation we’re in now is a marked deterioration from the start of May. Beijing is now talking about a ‘new long march’, and trade talks have completely broken down. From this point we need to start to consider escalation looks like – tariffs on the $300bn of remaining Chinese exports being discussed would lead to a material impact on the US economy, corporate earnings and inflation. There is a risk that the market is complacent to what may be a very long, drawn out affair, albeit having clearly taken on some of the warnings – SPX closed at 2,864, down 3-4% from the all-time highs. However, this may not yet reflect the downside risks from a full-blown trade conflict. 

Forex

Sterling is on the backfoot again this morning after going through the ringer yesterday. GBPUSD is below 1.27 again, having whipsawed on the prospect of a second referendum.  The government plans to bring the Brexit withdrawal bill again to parliament but it’s clear it lacks the votes to get through. Pressure on the PM is excruciating.

At send time the pair held on 1.2690, having fallen to 1.26844. Support seen around a series of Dec lows at 1.2610, which coincides with the 78% retracement of the top-to-bottom move up from the Jan YTD low to the Mar YTD high. This area could well be a strong line of support. If it goes then we are looking at a potential retreat to 1.24. The pound was also weaker against the euro, with EURGBP continuing its march to 0.88, having notched up its worst losing streak on record versus the single currency. 

Sterling oversold?

But are we set for a pullback? The short sterling trade seems pretty crowded and the 14-day RSI calls for the pound to bounce on both EURGBP and GBPUSD. Sense from the momentum indicators that this decline for sterling against both the euro and dollar is running out of steam – of course that could just mean a temporary pause. We are also quite heavily extended at the respective lower (GBPUSD) and upper (EURGBP) extremes of the Bollinger Bands. Nevertheless, risks still appear skewed to the downside given the complete lack of certainty on the political front. Expect heightened volatility in sterling crosses.  

Mrs May needs to realise her deal is never going to get through Parliament, whatever amount of convoluted bargaining she attempts. Her gamble on offering a confirmatory referendum on her deal has clearly failed at the first hurdle. 

Broad-based dollar strength is also weighing on the pound as the greenback is finding safe haven bid in the current trade climate. The dollar index has just pulled back from the 98 handle but is looking firm. EURUSD has pulled back further to 1.1150 but seems to be building some support around this region. With the massive descending wedge nearing completion – are we set for an upside breakout? We’ve talked before about it being too early to call the top of the dollar rally, but as we look into the second half of the year, that is when many think the dollar will see a retracement. 

Data watch 

Japanese macro data overnight was soft – exports declined for a fifth straight month. We note the big drop in exports to China – down 6.3%, outpacing the overall decline of 2.4%. Core machine orders were down 0.7%, although this was weak, it was better than the 5.5% decline registered a month before. 

On tap later we have the UK CPI figures – 2.2% is the consensus. However, we expect the number to be skewed by the hike in the energy price cap. Core inflation is seen at 1.9%. Whether this is the peak in inflation will depend a lot on Brexit, and whether we see wage growth pick up. The Bank of England will look through any above-target print for a while, at least until Brexit is clearer. 

FOMC minutes on tap too – watch for the markets to find these a little more hawkish than they would like. One gets the sense that the Fed is not quite ready to end its hiking cycle. Again one feels the market is not correctly pricing the chance the Fed will raise rates later in the year – albeit the base case is for it to stand pat until 2020. 

Sell in May and go Huawei: US-China ad nauseum

Forex
Indices
Morning Note

When can we stop talking about the US and China? European stocks called to open higher after a robust session in Asia showed investors are weighing the latest US-China spat over Huawei for what it is. SPX closed down 0.67% yesterday on the broad US-China-Huawei-Google spat, with tech stocks the worst hit. The Nasdaq 100 shipped 126 points to close 1.7% lower. Chip makers were rocked but look set to bounce back today – these rose in after-hours trading and Asian peers were much firmer overnight. 

US-China, Google-Huawei

After blacklisting the Chinese firm, the White House has issued three-month reprieve to allow US companies continue to do business with the group. It’s all rather like the way Trump slaps on tariffs but delays the execution to allow room for negotiation. Whether it’s Huawei or tariffs, I would see all of this in the broader context of giant tug-of-war between the two superpowers being played out in front our eyes. As such, the more this goes on the lower the chance of a meaningful resolution to any of it. Trade disputes ad infinitum, ad nauseum. 

China has vowed to retaliate but stocks in China rose overnight – the more damage the US tries to do the more the market expects stimulus from Beijing.

Brexit continues

We don’t even have a lot on the Brexit front to worry about today. Euro elections are centre stage this week – as noted in yesterday’s FX note, the Brexit Party is set to win in the UK, whilst Eurosceptics and populists of various hue will sweep about a third of the vote across the continent.  Watch therefore for action in EUR and GBP crosses, as well as Italian spreads.  

Economic indicators overnight have been less than stellar. South Korean exports shrunk by nearly 12% in May, having decline more than 8% in April. Singapore’s government has downgraded growth forecasts for 2019. Thailand GDP growth hit a 4-year low. Lots of trade related effects being felt, clearly.

Fed chair Jay Powell spoke yesterday but did not really go into monetary policy. His remarks were focused on financial stability, stressing that ‘business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm … should conditions deteriorate’.  He added though that ‘the level of debt certainly could stress borrowers if the economy weakens’. Move along, nothing to see here. Fed governor Richard Clarida speaks later – will have a lot more on policy and will be closely watched. FOMC minutes are due tomorrow.

Forex – dollar bid

The dollar continues to find bid, with the dollar index touching on 98 again, its strongest since May 3rd. Meanwhile EURUSD has also sunk to its weakest since May 3rd. US 10yr has risen above 2.4% again, having been as low as 2.35% last week. Firmer US yields and the safe haven appeal of the USD in the current trade war situation is keeping the dollar supported.

Yesterday’s emerging three inside up formation on the GBPUSD daily chart fizzled out, with the pound under the cosh still and threatening now to break below 1.27. The 1.2710 region is acting as support for now but the downwards pressure could eventually tell. 

RBA set to cut

The post-election bounce in the Australian dollar proved short-lived as anticipated. AUDUSD was back trading on the 0.68 handle as the RBA gave us a very clear signal it’s ready to cut rates. In fact, this was about as dovish Philip Lowe could be without actually saying ‘I will cut rates in June’.

The June 4th meeting will likely see the central bank move to cut the cash rate to 1.25% from the current 1.5%. The RBA is really tying its policy outlook to the labour market. Unemployment rose to 5.2% in April and the risk is that exposure to China and trade will act as a drag in the coming months. Low inflation currently gives it ample scope to cut rates.

Morning Note: Aussie rallies on election win, equities slow

Forex
Indices
Morning Note

It was a tentative start to the trading week as markets digest the last few day’s ructions, ongoing news flow around US-China trade and mounting concerns about what is going on between the US and Iran. 

The main European bourses have opened in the red although the FTSE 100 put up something of a fight to just about hold in the green. Can probably thank the weaker pound for this. Italian stocks are being hammered this morning.

US S&P 500 e-mini futures are green now having seen the broad market turn south on Friday. Stocks fell in the last couple of hours of trading last week on reports US-China trade talks were on hold. The market remains at the mercy of commentary and news flashes around these talks and it is wise to try and put some ear muffs on at times. 

Australian banking stocks were the main winners as the win for the Liberal-National coalition removed the risk of certain regulatory moves.  

Forex – Aussie wins

AUDUSD – ScoMo’s miracle victory has lifted the Australian dollar a touch, but bulls shouldn’t get too excited yet. AUDUSD firmed up on the first session of trading since the result of the election became known. Having fallen close to decade lows on the 0.68 handle, the pair has firmed on the 0.6920 level. Resistance seen at 0.69440, the 23% retracement of the down move from the April highs. Whilst the election may deliver some short-term relief for Aussie bulls, it’s the RBA that really matters. The market is betting on a rate cut this summer and seems likely, the question is whether this is the first in a cycle of cuts or is one-and-done.  Nevertheless, having taken a look at decade lows, bulls will be hopeful that we have seen a reversal in the long-term down trend.

Elsewhere in FX, sterling remains under the cost. GBPUSD is struggling below 1.28 and is showing few signs of being able to mount much of a rally. The ongoing political uncertainty and the open war in the Tory party will act as drags on risk sentiment. GBPUSD was last at 1.2730 and with support seen at 1.2710, the Jan 10/11 lows. 

And coming up this week we have a potentially volatile period for GBP given the European Parliament elections take place on Thursday through to Sunday. We should also be on guard for any EUR spasms if there is a surge in populist parties threatening to shake things up in Brussels. We’ve heard all this before, but nevertheless markets remain highly sensitive to news flashes – only last week the euro was moving on a series of comments made by Italy’s ruling populist parties.  

Oil higher

We have some can kicking but it rather looks like OPEC is leaning to an extension and could adjust the volumes. Compliance was at 160% in April, which gives ample scope to raise output or reduce the production curb commitments. Brent remains bid above $73 on this as well as the mounting tensions between the US and Iran

Morning Note: European markets lower, oil gains, pound under pressure

Forex
Indices
Morning Note

European markets opened lower, with the major equity indices pulling back after Wednesday’s kneejerk move higher amid a very noisy, confusing picture for investors regards trade, growth and interest rates.

The FTSE 100 lost 20 points to retreat to 7275, losing the 7300 handle achieved yesterday. Auto stocks are weaker this morning – perhaps a dose of reality in the cold light of the morning after yesterday’s gains. 

Markets recovered ground yesterday, switching from red to green sharply as reports suggested the US will delay auto tariffs by six months. This, combined with some more jawboning from Mnuchin on trade talks, tended to ease the worries about the US-China trade spat. 

But the US president add pressure elsewhere – issuing an executive order banning US firms from working with Huawei. Lots and lots and lots of noise from all sides – making this a tough market to be in.

SPX bounced off support around the 2817 level, which was a big area of resistance in the not-too-distant past, to close at 2,850. 

Bonds bid

The 10-year Treasury remains below 2.4%, with bonds finding bid as the US retail sales and industrial production numbers missed yesterday. 3m-10yr inversion again flashes the recession amber lights – expect to hear more of this talk even though the US seems a long way from recession right now (3.2% print GDP, consumer spending and retail sales at multi-year highs, unemployment at 50-year lows…I could go on).

Oil rallies

Oil – Brent has rallied above $72. Bullishness seems to be down to mounting geopolitical risks in the Middle East. Specifically, oil is higher because the market is worried that the US and Iran are at risk of a flare-up. Oil rose despite a surprise build in US inventories, which were up 5.4m barrels in the last week according to yesterday’s EIA data. We also saw a build in inventories in Cushing.  

Meanwhile the IEA revised its demand growth outlook lower by 90k barrels a day to 1.3m. Whilst this was bearish, the group also highlighted the significant supply side uncertainty – Iran, Venezuela, Libya etc. As we noted in a recent strategy note on oil, the IEA says the supply picture is ‘confusing’. 

Sterling under pressure

FX – Unemployment data from Australia overnight came in weaker and leads us to assume the RBA will cut over the summer (or winter). Although employment rose, jobs growth seems likely to slacken. The RBA has made it perfectly clear that should inflation or unemployment not improve it will be cutting soon. This may well create further downside on the Aussie, which is of course under pressure from the whole China-trade-growth story.

AUDUSD is seriously threatening the 0.69 level on the downside. There is a lot of pressure there and it could go, which would open up move to 2016 lows at 0.68. We’re at multi-year lows here so there is a lot of support to contend with. Whether AUDUSD gets squeezed lower still though will depend on whether the RBA signals it’s one (maybe two) and done, or if it’s embarking on a longer-term easing cycle. 

GBPUSD remains below the 1.2860 level having breached this important support yesterday. Brexit worries abound – it’s either no deal or no Brexit by the looks of things. Next up we could see it slip to the mid-Feb lows around 1.2780. Below that we start to consider a return to the 2019 lows around 1.24 as a possibility. The rebels are putting their pieces in place to oust May if (when) her Brexit bill fails against for the umpteenth time.  Meanwhile as we noted yesterday’s note, amid a broad downturn in risk appetite the pound is exposed. EURGBP is advancing past the 0.87 marker and was last at 0.874, pushing up to 0.88 and the Feb highs.”

Morning Note: Trade war escalates, Uber IPO caution, IAG profits sag

Forex
Indices
Morning Note

Tariffs on $200bn worth of Chinese exports were raised to 25% last night. Trump was true to his word, and there is no can kicking. This marks a sharp escalation in the trade spat, but it’s not gone nuclear yet.

Talks between the Chinese and the Americans are continuing today, although we don’t hold out much hope of anything meaningful being achieved this week.  

It all tends to suggest Mr Trump is playing one of his aces in order to force the Chinese into concessions. His bet is that the US economy can weather any hit from tariffs better than China. He is probably right but this will not help ease uncertainty about the global economy. Beijing is weighing whether to retaliate. 

Yesterday the S&P 500 bounced off its lows, closing down just 0.3% at 2870.72, having plumbed lows around 2835. The Dow was offside by 139 points on the close, but was over 400 points lower at one point. Algos seemed to bidding it up after the ‘beautiful letter’ nonsense.

Oil has rallied, indicating markets have had enough of the selloff. Brent was last pushing up at 70.75, above the key 70.60 resistance point. The flag pattern does look like it could be a bullish continuation pattern that is just about complete – watch for a leg higher. But failure to cement the tentative gains we see this morning would be bearish – look for the area around 69.50 for support.

Asian stocks bounced overnight and European futures point higher today. Chinese stocks were last about 3% higher – just remember how much these stocks had sold off earlier in the week.  There is still hope that a deal will be done.

Uber prices at low end 

Uber priced at the bottom end of the range at $45. It’s a rough time to be coming to the market after the selloff this week but this IPO exists to a degree in its own bubble. Are you betting on the long payoff? If not, you may well be disappointed – profits are not coming any time soon.  

But shares could yet pop higher today, partly because of this conservative approach that Uber clearly learned from Lyft’s bumpy ride post-IPO. I said yesterday (Uber set for big pop despite Lyft worries, 09/05/19) that I would not be surprised if the people selling Lyft stock are simply doing so in preparation for the Uber listing, so be careful reading too much into the Lyft troubles. FOMO is a strong emotion. 

Nevertheless, my main concern is the slowing revenue growth. Whatever the cash burn, you’d want to see accelerating top line growth in a disruptor coming to market.  

IAG profits sag

Profits at IAG were hit by rising fuel costs and a big FX headwind, whilst we see a broader thread across airlines with margins being competed away. Excess capacity remains a problem, as we heard from Lufthansa. In fact, we can pretty much regurgitate what we noted about Lufthansa – lots of competition means no one has the pricing power, whilst labour costs are a factor, but the biggest headwind right now is fuel costs, which were up 15.8%. Non-fuel costs were 0.8% higher. 

Although passenger revenue growth was at a healthy clip, up in excess of 5%, first quarter operating profit slumped to €135 million before exceptional items, which was down 60% from a year before on pro forma basis. Profits after exceptional items – which were zero in Q1 – were down 86%. FX headwinds knocked €61m from the bottom line. 2019 operating profit is seen in line with 2018 – which means no growth in the year ahead. 

Morning Note: Powell pulls rate cut rug from equities, Europe to open lower

Forex
Indices
Morning Note

Is the US economy running hot or not? The economy is growing at +3%, but inflation isn’t there. PMIs are softening, but the labour market is as tight as it can be. The yield curve has started to steepen again – the big recession indicator has dimmed. 

For the Fed, the glass is half full, still. That means it sees no need to cut rates this year – markets have been pricing in a 65% chance of a cut before 2019 is out. Now they need to rethink this. As I’ve been saying for some time, the market was mis-pricing where the Fed sits on the economy and inflation and was overly dovish.

Jay Powell last night made it clear the Fed thinks that the low inflation is down to ‘transitory’ factors. This word was key, and has given risk assets a bit of a fright. The Fed’s preferred gauge of core inflation has slipped from around 2% to 1.6% in recent months, but policymakers remain relaxed. If weaker inflation persists, however, the Fed may need to consider a cut.

The S&P 500 beat a hasty retreat on Powell’s comments – slipping 0.75% on the day to close at 2,923.73. Bonds were sold and yields climbed. Powell is not listening to Donald Trump and his 1% cut + QE idiocy.  

Why the market is surprised by the commentary from Powell is not really clear. The minutes from the last meeting showed sill that the bias remains mildly towards tightening – I.e. the way policymakers read the economy progressing suggests still another hike before a cut. The market is still not pricing in the chances of a rate hike this year. 

The word ‘transitory’ has done the damage – once again Powell has found a way to make what should have been a fairly innocuous presser quite interesting.  

European markets are seen lower on the open – taking their cue from Wall Street and its risk-off moves. The FTSE 100 is seen opening around 7357, while the DAX – coming back from the May Day holiday – is seen at 12,347 on the open.

The dollar managed to pare losses as Powell’s comments were digested. EURUSD gave up the 1.12 handle and remains below this in early morning trade.  

Having rallied as high as 1.31 at one brief moment ahead of the Fed statement, GBPUSD has retreated to 1.3050. Lots of strong horizontal support now around 1.3030/40.”

Mayday, mayday: SPX record high ahead of Fed, euro higher

Forex
Morning Note

The S&P 500 closed out at a new record high yesterday as the market shrugged off the Alphabet earnings miss and instead chose to focus on the positives – namely a dovish Fed, apparent progress on China trade talks and a humming US economy. Aside from Alphabet the earnings season so far has been a positive surprise.

Apple earnings after the bell were upbeat (see earlier note), whilst a softer dollar was a tailwind. Dow industrials enjoyed positive earnings from Merck, Pfizer and McDonalds. GE also delivered an earnings beat. The Nasdaq finished lower as the Alphabet earnings disappointment weighed. Apple should deliver a boost to the index today. 

The euro is trading at a one-week high against the dollar, whilst cable has also sought to raise its head above the 1.30 mark again. We should be careful about reading the rites on the dollar rally thought – month end rebalancing has been pinned on some of yesterday’s losses for USD.  

Nevertheless, there was some boost as EZ GDP data printed higher than expected and German CPI was also on the upside. German inflation rose to 2% year on year, after leaping 1% month on month in April. I would still caution that other macro data are pointing to ongoing weakness. Leading indicators don’t look so clever with PMI data indicating a slowdown in Q2.   

Euro at week highs

As far as EURUSD goes, Friday’s indecisive candle was an indicator of a short-term rally but the longer-term trend remains to the downside. Trend resistance is coming in around the 1.12650, with April highs horizontal resistance beyond at 1.1320. This suggests we could get a little more upside in the near term before the rally hits a roadblock. EUUSD was last holding above the 1.1210 level. Expect thinner liquidity today as it’s the May Day holiday on the continent with the major European bourses shut.  

FOMC on tap

Coming up later today of course is the FOMC decision. Don’t expect the Fed to tie its hands to anything conclusive right now – there are just too many moving parts and policymakers are split over where they think the economy is heading. I would expect that the Fed retains its slight hiking bias – discussions around the possibility of cuts may take place but the Fed should stick to its patient, data dependent mantra. Declining two-year yields and stable 10-yrs has produced a mild steepening in the yield curve, which may show greater market confidence in the economy and a sign that perhaps the much-talked-about recession is not about to hit.

Markets are still underestimating likelihood of a hike this year –  Currently the market indicates a 65% chance of a cut this year and zero chance of a hike. Whether that would be a mistake or not it not the point. Policymakers will have to acknowledge the impressive Q1 GDP print, as well as booming consumer spending. Softer inflation and earnings numbers mean there is no pressure to raise rates though. Of course, Trump will keep his foot on Powell’s throat and continue to jawbone in favour of cuts. The big question vis-a-vis this meeting and the market response is whether Powell chooses to sound dovish or hawkish in the press conference. Evens. Powell doesn’t have to do anything this time.”

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