LCG: US to open lower at China broad trade reluctance, HSBC job cut talk
Shares in Europe look soft this morning and futures point to a lower start on Wall Street. Enthusiasm for Friday’s “goldilocks” US jobs report has been nullified by China taking a hard line to this weeks’ trade talks
Europe: Factory orders down
German factory orders fell more than expected in August. Even the monthly change showed no sign of improvement despite the base effects of having a huge drop last month. The main takeaway is that Germany manufacturing remains in recession. Its whole economy probably is too. We will know for sure when the next quarterly growth figures are released. The euro faces downward-pressure from both the weak German economy and the resumption of QE by the ECB starting next month. The Dax index down 3-weeks after the announcement of more central bank asset purchases is testament to how damaging the soft German data has been to investor sentiment.
UK: HSBC job cuts, Brexit still
The 2-day rebound didn’t stop the FTSE 100 having its worst week in nearly a year. Early losses on Monday point to more difficulties in a key week for Brexit. We said last week that the EU are just paying lip service to negotiating over Boris’ “new” Brexit offering. By cancelling talks this weekend, the EU wasn’t even doing that. We think was probably an attempt to limit optimism before last-ditch talks resume this week. French President Emmanuel Macron has said the EU could decide on the UK PM’s deal by the end of this week. We assume that the EU says it is too late to reach an agreement. Cue the “extension rebellion!” The British pound is down slightly against the euro this morning over the waning Brexit optimism. The Scottish court document showing the Prime Minister does plan to apply for extension by Oct 19 in case there isn’t a deal agreed would appear to delete the main downside risk to Sterling- and if somehow Boris can square the circle of a Brexit deal, then upside is substantial.
Not even reports of 10,000 job cuts at HSBC, normally perceived as bad for workers but good for the share price helped the FTSE. HSBC shares were 0.75% lower in early trading. The cut to nearly 0.4% of the workforce is HSBC acknowledging the problems it faces from a slowing economy in China, unrest in Hong Kong and lower interest rates across the US and Europe. The shares could react more favourably once the job cuts are formerly announced, though this could depend on the timing. Given the shake up at the top, reports of job losses- it might be fair to assume some difficult quarterly results.
US: from Goldilocks jobs to trade talks
We are a far-cry from the lows of last week, but gains are fading with a negative open expected for the S&P 500 and the Dow on Monday. Friday’s jobs numbers simultaneously showed the US economy in good stead while opening the way to another cut in interest rates this month. The resilient economy should have given the US a strong negotiating position for trade talks this week but politics has intervened. It seems more than a coincidence that China has taken a tough stance in trade talks just as impeachment proceedings begin against President Trump. A second whistle-blower in the Trump-Ukraine scandal will embolden China even more. The optimism over these trade talks had already been washed away with last weeks’ market sell off. News that China wants to restrict the topics covered by a trade deal with the US is another blow to getting the comprehensive deal desired by the US.
Bottom-fishers have been buying Brent crude oil near the August low and just above $55 per barrel. Nonetheless we think sellers are firmly in control of the oil market. Prices have been in freefall since the spike in prices caused by the Saudi drone strikes. News that China is playing hardball in the trade talks this week means its hard to see how forecasts for demand will shift enough to undo the price slide.
The neutral daily close for gold on Friday reflected the mixed US unemployment report. While on the one hand a gold-friendly US rate cut looks more likely this month after the headline miss, a record low unemployment rate hardly speaks of the need for the Fed to get very aggressive. We remain positive on gold but think it’s probably due a retrenchment while the gap remains between the Fed and market expectations for further monetary easing. The bearish technical clue will be if/when gold falls back below its head-and-shoulders neckline at $1485 per oz.
US opening calls
Dow Jones to open -125 points lower at 26,448
S&P 500 to open -15 points lower at 2,937