LCG: Equities gain on more Chinese stimulus, sterling under pressure ahead of production and trade data

September 9, 2019

Asian equities kicked off the week on a positive note as lower-than-expected jobs report in the US consolidated the dovish Federal Reserve (Fed) expectations and the People’s Bank of China (PBoC) announced more monetary stimulus amid country’s exports fell 1% in USD terms in August as a result of the escalating trade war with the US. Chinese exports toward the US tanked 16%. Chinese officials took additional stimulus measures as data started looking uglier. In addition to 50-basis-point nationwide RRR cut revealed earlier, the PBoC delivered 100-basis-point targeted cut for regional banks. The PBoC’s determination to fight the economic slowdown encouraged investors to buy stocks on Monday open, but gains remained timid.

Shanghai’s Composite gained 0.36%; Nikkei (+0.39%) and Topix (+0.55%) shyly followed, as Japan’s GDP growth fell to 1.3% y-o-y in the second quarter, as broadly priced in. US equity futures recorded limited gains as well; the S&P (+0.20%), Dow (+0.19%) and Nasdaq futures (+0.20%) edged marginally higher.

Energy stocks (-0.24%) traded under pressure in Sydney, while technology stocks outperformed across the board.

Dax (+0.19%) and FTSE futures (+0.35%) hint at a positive open in Europe.

The FTSE 100 is expected to challenge the 7300p in early trading.

Fed to cut 25bps, ECB to cut 10bps or more

Negative vibes of the escalating trade war were felt across the Pacific Ocean, as well. Friday’s payrolls data showed that the US economy added 130’000 nonfarm jobs in August, well below the 160’000 expected by analyst. Though the average earnings rose to 0.4% m-o-m from 0.3% printed a month earlier, as the participation rate improved.

The US 10-year yield came off the 1.60% high, but the Fed expectations remained broadly unchanged. Investors expect a 25-basis-point cut at this month’s FOMC meeting, but not more.

Doves will rather be flying over the European Central Bank (ECB) this week. Rising trade tensions, weakening global demand and Brexit uncertainties have recently taken their toll on the Euro zone’s economy. Hence, the ECB is expected to lower the deposit rate by at least 10 basis points to -0.50% at Thursday’s policy meeting to show a better support to the economy.

The euro will likely remain in bears’ hands into the ECB meeting. The EURUSD could make another attempt below the 1.10 mark. Investors are broadly hedged against a fall below this level; put options prevail at 1.1000/1.1050 at this week’s expiries.

The single currency is preparing to test the 100-day moving average (0.8928) against the pound.

Pound gains as Tories fall apart under Johnson’s leadership, but data could hammer short-term gains

In the UK, Johnson’s no-deal Brexit threat eases as Tories fall apart. Despite numerous Tory resignations and three consecutive defeats last week, Johnson should continue pushing for a general election before the October 31st deadline, but his chances of convincing the British MPs to throw a snap election before the end of October, or to get them to agree on a no-deal Brexit decrease by the day.

Johnson’s defeats push the pound higher. The latest CFTC data confirmed that investors trimmed net short speculative positions in sterling in the week ending September 3rd for the fourth straight week. At this point, there is an increased likelihood of a delayed Brexit deadline, followed by a general election and a possible defeat of the Conservative Party, even if the hard Brexiteers came together under the same roof to get the Brexit done as soon as possible.

Though Jeremy Corbyn’s Labour Party has never been investor’s darling, it now carries the hope of a softer Brexit which is a better outcome for the market. Hence Tories’ falling popularity under Boris Johnson’s rule should remain encouraging for the pound sterling even with the looming political uncertainties. All scenarios are better than a no-deal Brexit on October 31st.

But the deteriorating economic data could get on the way of sterling’s short-term recovery. Due today, the data should confirm a further contraction in the UK’s industrial and manufacturing production in July and the trade deficit may have widened over the same month. A key support to the recent pound recovery stands at 1.2200 against the US dollar, the major 38.2% Fibonacci retracement. This level should distinguish between the consolidation of the short-term positive trend and another wave of sterling sell-off.

In the medium run, Cable has potential to recover toward the 1.25 mark, if British MPs continue fighting against a no-deal Brexit.

Gold and oil

Gold remains bid near the $1500 an ounce despite the actual risk-on trades. The precious metal has become a powerful hedging tool and a good alternative to developed economies’ extremely low yielding sovereign bonds. Gold is, and will likely stay, where investors want to be during a time of rising global uncertainties, dovish central bank expectations and falling sovereign yields. A key support could be found at $1490, minor 23.6% retracement on May – September rise.

Elsewhere, Saudi Arabia replaced its Energy Minister with one of King Salman’s sons on rising frustration over falling oil prices. Oil markets gave a limited reaction to changes in Saudi, as the new minister has not many choices but to maintain a low production regime in place to match the slowing global demand amid escalating trade tensions between the US and China. OPEC and its allies will meet in Abu Dhabi in September 12th to review their strategy. There is not much the allies could do to boost the fading market prices other then considering more production cuts.

WTI crude trades around its 200-day moving average of $56 a barrel, while Brent tests $62 level with limited conviction on the topside.

Opening calls

FTSE to open 25 points higher at 7307

DAX to open 20 points higher at 12212