Market buzz: Rapid retail rebound continues; EIA sparks further oil surge
1641: BoE's Jon Cunliffe has provided three broadcast interviews which will be aired later on Wednesday and on Thursday morning.
1616: "Equities are reaching for the stars once again," say analysts at IG, fresh from briefing City media on their opinions on where markets are going.
"Many market watchers will remember when it was the Fed that was scared into policy changes by financial market volatility. Now the financial markets appear to be doing the same to the US president. Trade war concerns remain high on the agenda, but the White House’s comments on using existing legislation rather than new rules has helped boost risk appetite.
"Having tied himself so closely to the stock market early on in his presidency, Mr Trump will be wary of anything that prompts a sustained rout in equities. Of course, he may decide that the political advantages of talking tough on trade outweigh those arising from a buoyant stock market. But for now investors will be pleased that a softer tone is being adopted."
1600: Brent crude up 1.4% to $77.7 as EIA confirmed indications overnight from the API of that oil stockpiles in the US was falling sharply.
The US Energy Information Administration reported a fall of 9.89m barrels in oil inventories in the week to 22 June. Market analysts' had expected a drawdown of just 2.57m barrels, following an American Petroleum Institute report of a 9.13m decline
1523: Goldman Sachs' chief investment officer sees "some upside to oil prices" and potential for sterling to recover over the next 12 months.
Sharmin Mossavar-Rahmani says signs of Bank of England interest rate rises on the horizon could spark a rebound in the currency, with "10% appreciation potential" in sterling, adding she and her colleagues see it reaching $1.41-1.42 in the next 12 months with the pace dependent on how soon the BOE rate hikes happened.
Not much of a big call, really, especially with those clauses.
1521: The Chinese government is lifting its ban on UK beef and lamb exports, the Department for International Trade reveals, estimating this will be worth £250m over the next five years.
1508: Both headline US durable goods orders (-0.6%) and orders ex-transportation (-0.3%) have declined for May, the US Census Bureau confirmed a short while ago. The headline fall was partly due to a 7% decline in the volatile aircraft orders category. Core orders, a more reliable gauge of underlying manufacturing demand, declined 0.2% month-on-month, but was revised up by a sizable 1.3pp to a 2.3% gain in April, which far outweighs the downside miss in May.
Mickey Levy at Berenberg says report was mixed, reflecting weaker-than-expected core orders and shipments, but sizeable upward revisions to April’s data "suggest that May’s softness reflected a payback from April".
Investment in mining, oil field, and gas machinery has declined so far in 2018, which Levy says is "somewhat surprising" as the increase in energy prices has boosted oil and gas drilling and hiring.
"Oil prices are hovering around a sweet spot, enough to spur investment, and manageable enough for consumers amid gains in employment and incomes. As the U.S. continues to ramp up capacity and infrastructure for its fast-growing energy industry, demand for mining oil field and gas field machinery has plenty of room to grow.
"The durable goods sector would be early in reflecting any adverse effects of the global trade tensions, but so far strong underlying fundamentals, healthy corporate profits and cash flows, and a boost from certain provisions of the Tax Cuts and Jobs Act aimed at incentivizing investment and a sizable lift to fiscal spending has allowed businesses to look through the erratic trade negotiations and uncertainties reflected in financial markets."
1458: The FCA has suggested tougher action could be in store for banks after raising concerns about how overdraft fees pay for current accounts.
A review by the regulator has found that 10% of current account customers generate a third to half of the profit from those accounts, mainly by paying charges for unarranged overdrafts. The findings suggest those fees fund "free" current accounts, most of which have no upfront costs for the customer unlike in many other countries.
The FCA said it would consider the findings when deciding what measures to take on overdrafts. It has already said it is concerned that potentially vulnerable people are paying too much in fees to go overdrawn by small amounts.
1331: "The markets are likely to get little relief from political theater, as the EU summit kicks off tomorrow, Trump mulls his options with China and other mini-themes play out in the background," say currency analysts at TD Securities, flagging the "chunky discount" in the likes of EUR, JPY, and GBP versus the USD.
"We also note that the US (2s10s) curve continues to flatten, sitting at 33bp. This dynamic remains an increasingly negative factor for the USD, leaving us sellers on rallies. We still like downside in the dollar bloc and eye a break of 0.68 in NZDUSD into the RBNZ and think the path of least resistance is higher in USDCAD. Despite the recent rally, it still trades at a discount to our HFFV gauge. Poloz is a coin toss later today."
1315: With the Competition & Markets Authority's decision over the Sainsbury's-Asda merger likely to remain unknown until mid-2019, Barclays remains sceptical about store disposals being highly material given that both companies have taken extensive advice and were continuing to invest "considerable credibility" into the transaction.
However, having had more time to run the numbers and explore alternative scenarios, the bank's analysts chose to upgrade Sainsbury's to 'overweight' from its previous 'equal-weight' stance.
1210: The London midday market report finds stocks just a touch higher as a strong performance from energy shares and an upbeat survey on the retail sector were offset by profit warnings.
The FTSE 100 was up 0.1% to 7,547.40, while the pound was flat against the euro at 1.1351 and 0.1% lower versus the dollar at 1.3213 as Bank of England governor Mark Carney warned about significant risks of disruption to financial services from Brexit and called on the EU to do more to ensure a smooth transition.
1159: Commenting on the strong CBI retail survey, Howard Archer of the EY ITEM Club, says: "Improved consumer activity provides some reassurance on second quarter growth prospects after a dire set of April manufacturing, construction and trade data.
However, he cautions that "consumers still face a pretty challenging environment and there is no guarantee that they will spend at a robust rate over the coming months. Consumers have faced an extended squeeze on their purchasing power, while consumer confidence has been fragile."
He points to the rise in oil prices to a three-and-a-half year high in May as a likely lift for inflation in the near term that could hold back the improvement in consumer purchasing power.
Pantheon Macroeconomics's Sam Tombs points out that the CBI’s survey's mid-month closing date tends to reflect how sales performed in the previous month as well as the current month.
"We already know from the official data that retail sales jumped in May. Moreover, it is difficult to see how strong growth in retail sales can be maintained. A wave of price hikes by energy companies will push inflation up over the summer, preventing wages from rising in real terms," he says.
With both business surveys and job vacancy data pointing to a slowdown in employment growth, alongside a pick-up in saving intentions and mortgage rates climbing, have inclined him to believe that a better trend in retail sales "won’t emerge until next year".
1137: Another day, another profit warning from the retail sector, as high street behemoth John Lewis says half-year profits will be "close to zero" this year amid "market uncertainty", while profit for the full year will be "significantly" lower than the last.
The retailer expects to see profit growth for Waitrose but a decline for John Lewis, with significant extra cash costs at the partnership level due to greater IT investment, which it said will be "a big driver" behind the overall profit change.
It also announced plans to close four Waitrose stores and a supermarket, but did not say which ones, as it looks to make adjustments to its overall estate.
1105: Retailers reported an average sales jumped to a balance of +32 in June, according to the CBI's distributive trade survey, up from May's +11 and better than the +10 the market expected.
The survey provides more evidence of a recovery from the weather-affected first quarter.
Anna Leach, the CBI's head of economic intelligence, said: "Higher-than-average temperatures seem to have had a positive impact on shoppers, with retailers benefitting from above-average seasonal sales and improved order volumes growth."
1048: The Bank of England has warned about significant risks of disruption to financial services from Brexit and called on the EU to do more to ensure a smooth transition.
In its financial stability report the BoE said progress had been made on Brexit preparations but that there were risks to derivative contracts. The BoE’s financial policy committee, chaired by Governor Mark Carney, called on the EU to show willingness to solve the problem.
1023: The US 10-year treasury yield has fallen three basis points so far today to a one-month low at 2.836%.
The notable decline in 10-year yields was set in motion by the ECB’s dovish stance set at its most recent meeting, says Rabobank but has been magnified by global trade concerns with China’s Commerce Ministry reportedly assessing the impact of expected US investment restrictions and exploring ways of supporting businesses by offering subsidies to those companies and industries most impacted.
Chinese state run newspaper the Global Times suggested overnight that such support should form part of a suite of “self-defence measures” that would be allowed under World Trade Organisation guidelines and serve to reinforce China’s ability to counter the Trump trade tariffs and investment restricting measures.
"While implementing self-defence measures is one approach, there has been some notable speculation over China responding to US trade measures by offloading its holdings of USTs," Rabobank says, noting that the last time Beijing reduced its holdings of US debt it was to stem the weakness of the renminbi in the wake of the 2015 devaluation.
"Faced with mounting obstacles in terms of international trade, China is much more likely to be targeting currency weakness rather than working to limit it. As such, purchasing of USTs would be a more logical step. Even if the Chinese were to take the unexpected step of shooting themselves in the other foot by offloading some of their US$1.2trn of USTs (thus threatening to erode the value of their remaining holdings), the massive escalation of geopolitical tension such a step would imply stands to prompt a sizeable safe haven bid with US bonds being the most obvious beneficiary."
1020: Emerging markets have provided a key source of demand in global fixed income markets, but Oxford Economics says there are both temporary and structural reasons why EMs’ role may diminish, potentially placing upward pressure on yields.
"Declines in capital inflows have led EM to sell securities for the last few months (they stopped buying American securities earlier, in September 2017). It is probably a temporary episode, but the knock-on effects have nevertheless completed a triple whammy for US markets. Upward pressure on yields has also arisen from surging supply driven by US fiscal expansion and the Fed’s balance sheet unwind.
"Longer term, we see signs of a structural reductions in EMs support to global fixed income markets as a result of changes in the way they react to capital inflows. China appears more likely to allow currency appreciation in response to capital inflows, limiting build-up in its FX reserves and hence its demand for USTs."
1017: Given the persistent headwinds for the UK property market, HSBC economists say it is "hard to see current trends improving much from here" and there "is a risk of a material downward correction in prices".
"But a period of sustained deflation is unlikely, in our view," economist Chris Hare says. "We do not see the current headwinds getting worse: We do not expect real income growth to slow further; the government is unlikely to devise policies that will weigh too heavily on demand; and affordability constraints might have peaked. Meanwhile, continued low interest rates should keep mortgage costs manageable. We also note that house prices tend not to fall outside recessions --the major exception was in the 1950s, but that came during a housebuilding boom which is unlikely to be repeated."
So HSBC thinks house prices will keep rising by 1-3% per year for the next couple of years, broadly in line with consumer prices. House price to income ratios are likely to stay high but are sees falling gently as pay growth outstrips house price rises.
"But a gentle adjustment in house prices could also have its upsides -- for a nation ‘obsessed’ with home ownership, enabling more people to get onto the property ladder can, for much of the population, be seen as a good thing," Hare says.
0957: After BHP Billiton's Samarco announcement yesterday, UBS wonders what did the announcement "really mean"?
"On the plus side, the market's concern that the agreement would result in a large compensation number has not been realised. However, neither is there a definitive compensation amount as yet, nor any timeline for a restart.
"We understand BHP are going to look to have the BRL20bn claim dismissed and that there is now clear intent from both sides to settle the BRL155bn claim, but settlement looks unlikely before the two year mark. At the end of two years whether or not BHP & Vale will need to pay more remains unclear though and will thus remain an overhang to some extent on the stock, in our view.
"Due to degree of uncertainty still we have not factored in an outcome to our forecasts and believe that the market is also likely not pricing in a material adverse outcome."
Ignoring Samarco, UBS has upbeat view on commodity pricing, with BHP benefitting from a simplified portfolio, a stronger balance sheet, and the imminent sale of shale, so "we believe shareholders can expect higher returns" in 2019, with a potential return of $10bn via an off-market buyback, boosting EPS 9%.
0820: Nationwide's housing survey shows house prices in the UK rose at their slowest annual rate in five years in June.
House prices increased 2%, down from 2.4% growth in May but above expectations for a 1.7% jump. On the month, prices were up 0.5% in June, accelerating from 0.2% growth the month before and ahead of expectations of 0.3% growth.
0816: The gap between the 2-year and 10-year US Treasury yields has narrowed to 33 basis points, the lowest since summer 2007. In other news, the FTSE 100 is on the up, climbing 18 points or 0.24% to 7,556.36 so far.
BP and Shell are both surging on the open after oil prices rallied overnight after US API oil stocks posted a massive 9m barrel drawdown, the largest since September 2016, and the US ratcheted up pressure on oil importers to eschew deliveries from sanctions-hit Iran.
"FTSE Energy could continue to benefit from the post-OPEC rebound, to extend the February rally," says Mike van Dulken at Accendo Markets.
A positive open for the FTSE comes on the back of positive albeit lacklustre close on Wall St, he says, noting that President Trump softened some of his China trade rhetoric to the delight of the tech sector.
0758: The FTSE should open flattish, maybe up a couple of points.
Overnight, Wall Street indices finished in the green, as investors appeared to brush off concerns stemming from sharp losses the day before. The Dow Jones ended up 0.12% at 24,283.11, the S&P 500was ahead 0.22% at 2,723.06, and the Nasdaq 100 added 0.43% to 7,068.20.
0750: Whitbread says it expects annual results to meet expectations as the company reported declining like-for-like sales at its Premier Inn and Costa businesses in the first quarter.
IWG warns annual profit would be up to £20m lower than the serviced office group had expected because of weak performance at its UK business and short-term losses from opening new sites.
0745: Peel Hunt has a note on JD Sports says with the the Finish Line deal done, the potential for that acquisition to elevate JD to the next level is twofold, lifting its share price target to 525p from 500p after adding the US contribution to its forecasts. This add 5% to EPS for 2020.
"Firstly, in a world in which brands are increasingly going 'direct to consumer', relationships with Nike and adidas aren’t just important, they are life and death. Finish Line (FINL) adds scale and is another crucial piece in JD’s global jigsaw. The deal itself is fascinating. Our store visits revealed a portfolio with a big delta between flagships and poor performers, and we met store managers desperate for a higher allocation of key product. If JD can solve these issues, the upside potential is material."
0740: Chinese equities and the Hang Seng are declining in Asia again, though other indices are mixed. The US 10y is unchanged and oil up slightly, iron ore up 0.5%.