LCG: Equities flat as markets readjust hopes on US-China deal

24 september 2019

Global sovereign bond yields are heading south, again, as the appetite in riskier equities remain limited on rising confusion regarding the upcoming US-China meeting after Chinese officials headed back home skipping the US farmland visits last week.

Shanghai’s Composite and Hang Seng reversed early session losses, as Japanese equities traded marginally higher on Tuesday, after Japan’s PMI came in at a seven-month low.

Australia’s ASX (+0.05%) and the Aussie remained flat.

Oil markets consolidated a touch lower than Monday levels, as metal markets were painted in red on rising fear that US and Chinese officials may not come to any agreement in October, although both sides said that last week’s talks were ‘constructive’. The market sentiment dampens as another disappointment in trade talks becomes increasingly plausible after investors got their hopes up on anticipation of an interim deal, until this week.

With building stockpiles in the US and elsewhere, the global oil supply remains at totally acceptable levels for now, and that, despite the Aramco’s production disruption and the rising tensions in the Middle East. Hence, a downside readjustment in US-China deal prospects could pull oil prices toward the average pre-attack levels. Oil bears could reasonably target a retracement toward the 200-day moving average of $56.40 in WTI crude.

US yields fall, equities flat as the dust settles in the US repo markets

The US 10-year yield retreated to 1.66% then retraced above the 1.70% mark, as the US PMI data hinted at a faster expansion in economic activity in September. Chicago Fed National Activity index turned positive in August.

US equity futures gained following a slow session in New York on Monday. The S&P (+0.37%), the Dow (+0.34%) and Nasdaq futures (+0.41%) headed higher.

It appears that the dust in the US’ short-term debt markets has been settling down, thanks to the Federal Reserve’s (Fed) daily repo operations to ease the upside pressure on overnight borrowing rates.

The Fed will continue pumping at least $75 billion via repo operations until October 10.

Euro slips below $1.10 on weak data, German IFO in focus

Meanwhile, economic data in Europe tells a sad story. German preliminary manufacturing PMI tanked to 41.4 in September, warning that the Eurozone’s growth engine slows at an alarming pace due to global trade headwinds. Due today, German IFO data could also hint at deteriorating business sentiment and dampening expectations at the heart of Europe.

The euro slipped below the 1.10 mark against the US dollar, as the weak economic data spurred dovish European Central Bank (ECB) expectations. The single currency remains sensitive to economic data, as the deteriorating activity across the Eurozone, combined with Brexit shenanigans weigh on investor sentiment. Big put option expiries should keep the downside pressure tight below the 1.1000/1.1030 area versus the US dollar throughout this week.

Christine Lagarde, who is preparing to take the rein of the ECB in November said that trade is the ‘biggest hurdle’ for the global economic growth, as relations between the US and China remain fragile and unpredictable.

But investors put their trust in Christine Lagarde for a creative monetary policy. So far, the low-to-negative interest rates and tens of billions of euro worth of asset purchases failed to revive growth yet disturbed the balance of the financial markets significantly. Although the outgoing ECB President Mario Draghi highlights the bank’s readiness to act further to sustain growth in the Eurozone, the ECB is left with a limited margin to add more stimulus via the existing tools, as the sovereign yields are already distressingly low, if not negative.

The DAX and the CAC slid 1.01% and 1.05% respectively on dampened investor optimism on Monday but are set for a slightly positive start on Tuesday.

Pound under pressure, as UK’s public borrowing may have jumped to 7 billion in August. Supreme Court decision due today.

The UK government borrowing may have surged to 7 billion pounds last month, as revenues from taxes have certainly failed to keep up with the increased pace of government spending in preparation of a possibly difficult Brexit under Boris Johnson’s lead. The UK’s budget deficit was 1.2% of the GDP in the fiscal year ending in March 2019 according to Office for National Statistics, still far from the 3% upper threshold. But the government’s growing need for extra cash to navigate through a bumpy Brexit path could possibly inflate the budget deficit faster than anticipated earlier this year. A higher budget deficit should further weigh on the pound sterling.

Else, the pound remains under pressure ahead of the UK Supreme Court’s decision on Johnson’s disputed suspension of parliament. The court decision is due at 10.30 British Summer Time today. A verdict against Johnson’s parliament suspension would allow British MPs to reconvene immediately and give a boost to the pound.

Presently, Cable consolidates near 1.2440 mark, the minor 23.6% retracement on September rebound. If, however Johnson wins, the pair could rapidly fall to 1.2350, the major 38.2% retracement, on renewed worries that the UK may leave the European Union Johnson’s way.

In the stock markets, Thomas Cook’s bankruptcy left British stock investors downhearted. But the competitor Tui had a solid session, as the share price jumped above the 200-day moving average for the first time in a year. The optimism could remain short-lived however, as subdued economic fundamentals in Europe should continue weighing on European tourists’ travel budgets for longer.

The FTSE 100 closed 0.26% lower on Monday. FTSE futures (+0.30%) point at a slightly positive open on Tuesday. But energy and mining stocks will likely come under a renewed downside pressure on reinvigorated concerns about the US-China trade deal.

The FTSE is expected to open 24 points higher at 7350p.

Opening calls

FTSE to open 24 points higher at 7350

DAX to open 32 points higher at 12374