MARKET WRAP: Stocks relief rally, gold & oil collapse, Tesco, IAG

January 9, 2020

INDICES: Relief rally with Iran ‘standing down’

European markets have opened on the front foot on Thursday. That follows a broad rally across Asian equities with record highs for US indices. LCG pricing points to a higher open on Wall Street.

A ceasefire between the US and Iran has seen a relief rally take hold across global markets. All investors needed to hear was the US President say it appears Iran is ‘Standing down’. After that we were off to the races with fresh record highs for the S&P 500 and the Nasdaq.

There are probably two truths here. One is that tension between Iran and the US does not end here and could easily escalate again. Already, two unexplained rocket attacks in Baghdad and threats of more revenge against the US from Iran are examples of how things can quickly get out of hand. Two is that markets have heard what they needed to hear and are ready to refocus on the signing of the US-China phase one deal. The deal is supposed to be signed next week and investors are hoping it removes the biggest source of uncertainty over the economic outlook, paving the way for more investment returns this year.

EQUITIES: Tesco and Willie Walsh leaves IAG

Tesco shares are among the top performers on the FTSE 100 on Thursday. The gains add to the weekly tally for Tesco shares which benefitted as other rivals eked out a performance that exceeded low expectations. Tesco reporting a marginal increase in sales is not half-bad given the BRC just told us this was the worst year for retail since their records began in the mid-90s. If you factor in the disruption from the December UK election, you can conclude that British consumer is not quite tapped out just yet. We are expecting a business investment comeback in 2020 and these Christmas sales results tell us consumer spending can prop up the economy until it does.

Willie Walsh leaving BA has been very well telegraphed so the modest 1% rise in IAG shares probably better reflects the overall market mood than a reaction to the retirement news. Iberia has been very much an equal partner in the group with BA in recent years so it makes sense that the Iberia chief Luis Gallego takes the reins. In 15 years Walsh has navigated some difficult times, including fuel prices spikes and cut-throat competition from budget airlines. Gallego is a new face for new challenges, not least how IAG operates with passengers less tolerant of the impact air travel has on climate change and the environment.

COMMODITIES: Unceremonious drop in gold & oil

It has been an unceremonious retreat across precious metal and oil markets in the last twenty-four hours. As we noted yesterday ‘If tensions do die down between the US and Iran, as we expect they should, then inevitably gold will give back some of its recent gains.’ Though we have been surprised by the size and speed of the about-turn in gold. Of course there was profit-taking near eight-year highs and $1600 per oz. But it goes beyond that. Our view has been that if gold is to have another good year, it will most likely not be on the back of its quality as a haven. Indeed we are still optimistic on equities. Gold needs real yields to come lower and central banks to press forward with the kind of easy monetary policy that makes that possible.

The one-day collapse in Brent crude oil by half a big handle was quite stunning. It is not without president but does greatly reduce the possibility of another run above $70 in the near term.  The apparently imminent signing of the phase one US-China trade deal we think should be oil-positive and stave off a drop below $63 per barrel.