Stocks near record highs, oil spikes on Libya outage
In markets, stocks keep on punching new all-time highs
with the US and China trade deal signalling a turning point for global growth.
Friday capped a strong week for stocks as the
S&P 500, Dow, Nasdaq and the Euro Stoxx 600 notched fresh record highs. The
US big three each had their best week since August. European shares are up 20%
in a year. Asia remains about 7% below all-time highs, with worries about
Chinese growth, the trade war and unrest in Hong Kong weighing.
Economic indicators from the world’s two largest
economies have provided encouragement in recent days. US data is solid – new
home starts rose to a 13-year high, while manufacturing activity was stronger
than expected. China growth numbers that met expectations also soothed nerves.
US markets are shut for a public holiday today so
we may see somewhat reduced liquidity.
European markets are flat at the start of the week but
we don’t expect things to stay completely unmoved all week. The FTSE 100 may be
testing 7700 today. Asia has been broadly higher though Hong Kong is weaker
overnight with rally organiser arrested after protests turned violent.
This week the focus shifts back to corporate earnings.
So far so good in terms of S&P 500 earnings with c80% of companies
reporting so far beating earnings expectations. About 40 are out of the traps
this week. Our highlighted stock is Netflix. See note Netflix: Content to be
primus inter pares?.
In FX, the pound remains on the back foot after weak
retail sales on Friday only added to speculation the Bank of England will cut
rates sooner rather later. The way the MPC members have been talking and the
way the data is going, this month’s meeting is the window. GBPUSD has
again slipped its 1.30 berth to take a 1.29 handle, trading currently at
Noting some concern expressed by businesses after the
chancellor said Britain would not be a rule taker after Brexit and for
companies to expect divergence from European rules and laws.
EURUSD is weaker just below 1.11, threatening to
test trend support around 1.1060. Bulls are trying to hold the 50-day moving
average at 1.11. We may see some volatility around the ECB meeting later in the
USDJPY is holding 110 and moving higher – the
breach of the 200-week moving average was completed and now bulls may start to
look to a push towards 112.
Oil took off amid supply disruption in Libya and
Iraq. Production of 1.2m bpd has been completely crippled after forces loyal to
Khalifa Haftar closed a pipeline. About 800k bpd of that figure has been taken
out, although it could be higher. This is coinciding with disruptions to
production in Iraq. We can expect both countries to provide ongoing supply
uncertainty but these are relatively mild and likely to be shorter duration
outages. I don’t think we are seeing a major disruption – certainly any spare
capacity can simply be absorbed by other OPEC members gladly pumping a little
more to compensate. And the global oil market just isn’t as exposed to shocks
as it once was.
WTI gapped up to $59.70 but have since retraced to
around $59.20. The gap could close back to the $58.60 area fairly quickly if
this gets resolved. Failure to hit $60 shows bulls don’t have much appetite.
The 50% Fib level of the rally from the Oct 2018 low to the recent high, sits
around $58.30. Last week crude stocks fell more than expected, the build-up of
products was huge. Crude inventories dropped by 2.55m barrels for the week
through to January 10th vs -474k expected. But gasoline inventories
were up 6.7m barrels vs +3.4m expected. Distillate stockpiles rose 8.2m vs
+1.2m expected. CFTC data shows speculators trimmed their net long exposure to
530k contracts from 567k a week before.
Gold is steady around $1560 with some signs emerging
that Tuesday’s hammer candle was maybe more than a near-term reversal.
Speculators have slightly trimmed net long positions. Palladium keeps on
jumping on tight supply and rising demand.
Aside from earnings and Davos this week it’s a central
bank trifecta on the running order, albeit we do not see any major surprises in
The Bank of Japan will hold – data has picked up
a touch and the trade war truce between the US and China should offer elbow
room to sit on their hands for a while longer.
The Bank of Canada is expected to hold but
pressure is mounting to cut as growth slows and the rest of the world has
The European Central Bank is also set to leave
rates unchanged – Christine Lagarde will be more focused on Davos, her natural
habitat. Strategic reviews will buy her time – no pressure to cut right now
especially as Draghi slashed to the bone just before she arrived.
Beggars can’t be choosers: Sirius Minerals has
accepted Anglo American’s low ball offer, surprise, surprise. As we noted at
the time, the £386m bid forced Sirius into a corner as it was seeking cash and
they had little choice but to accept what they were given. As we noted: The
fact this offer is public could make raising cash for other sources very tricky
now, if not impossible, forcing SXX into something of a corner – even if the
price is not the best they will have to accept it. The market knows they need
cash ASAP but with this offer on the table, it’s now the only show in town –
they have to recommend it or it’s curtains. Anglo is picking up a distressed
asset on the cheap.
Fevertree has not entirely lost its sparkle, but
tough Christmas sales in Britain are a bitter tonic when it needs to be
focusing on the key US market. The meltdown across the UK retail market left
sales -1%. But USA sales – where the real growth is to be found – were up 33%.
Europe (+16%) and Rest of the World (+32%) were also strong. Group revenue is expected to be £260.5 million representing
growth of c.10%.
But the fact is the UK remains where the earnings come from
so the softness here is a short-term drag on profitability. Management now expect earnings to decline by around 5% when
compared to 2018. Margins are coming under more pressure. Fevertree also plans
to continue to invest in the brand. The company is entering a different part of
the cycle, but USA growth should start to really come through later in the
year. Moderation in UK growth is entirely as
expected – the key is the US and RoW segments. Shares have already
significantly rerated to reflect slower UK growth but probably don’t fully
reflect the potential in the US at present.