The prospect of more stimulus may keep markets relatively buoyant

Stock markets remain in choppy trading ranges. The optimism that fuelled the rally at the start of week has fizzled out, leaving indices back towards the middle of the June range and back close to where they finished up at the end of last week. Investors continue to look at soaring case numbers on the one hand and on the other the pace of recovery and massive stimulus which has already been administered.  

Asian markets slipped, albeit China stood out as it continued to rally on some good stoking by the state-run press. The ASX fell 1.5% as investors reacted to the lockdown in Victoria. European stocks followed suit and were softer on the open on Wednesday. The FTSE 100 pulled back further below 6200 where it has found some degree of support at 6153 on the 38.2% retrace of the pullback in the second week of June that has formed that range of the last month and a half.  

Treasury yields slipped on a broad risk-off mood. US 10s went to 0.655% which left 10yr TIPS – our favourite gold indicator – at fresh seven-year lows at –0.78%. This gave further succour to the gold bulls and lifted prices to fresh seven-year peaks above $1797 and it looks like $1800 can be taken out. The gold bull thesis rests not only on the requirement for safe assets given the economic uncertainty, but also longer term on fears of a surge in inflation caused by the massive increase in the money supply caused by central banks. In large part due to the corresponding fiscal actions, unlike the QE that occurred after the financial crisis, this time the excess cash is not going to get lost in the banking sector. 

While yields dipped and gold is at multi-year highs, the prospect of more stimulus may keep markets relatively buoyant for the time being. The worry is that as the support packages roll off, particularly the kind of financial aid for employees from the likes of the UK’s furlough scheme, the pace of recovery slows drastically. The economic data could really start to crunch as temporary layoffs become permanent and the pressure for governments to continue to ‘do whatever it takes’ will increase.  

Today, Britain’s chancellor Rishi Sunak will respond with a ‘mini budget’, to be delivered at 12:30 BST after PMQs. This will aim to shift the support on offer from the emergency to the more lasting with measures such as cash for training young people to prevent the risk of mass youth unemployment, a stamp duty holiday to goose the housing market, a maybe a VAT cut to help the hospitality sector. Housebuilders ought to be among the main beneficiaries of the budget, but shares in Barratt and Taylor Wimpey slipped this morning after rallying this week ahead of the statement. Meanwhile Marston’s and Mitchells & Butlers shares plunged around 5% this morning ahead of the statement which may not have as much for the hospitality industry as some had hoped.

Sterling held gains above 1.2540 ahead of the statement, having gained sharply yesterday arguably on some hopes that the budget will get the economy moving a bit quicker. GBPUSD remains well within the recent range and shows little signs right now of mounting a serious ascent to 1.30, however having created a bottom at 1.2250 the recent move higher can continue and the bullish bias persists – the Jun high at 1.28 is the key.

A huge part of the problem facing investors in this market is figuring out what the data is telling us. As noted many times in recent weeks, the economic data is noisy and difficult to interpret because the speed and magnitude of the collapse was like nothing we have ever seen. For example, France’s statistics body, Insee, says the French economy will rebound 19% in Q3, but still be down 9% in 2020. This points to the difficulty in reading too much into the easy part of the recovery process as lockdowns end. The longer-term recovery to activity levels comparable with 2019 will take a lot longer. 

Eurogroup members to vote on a new president tomorrow. The vote comes at an important moment for the Eurozone as it tries to agree on financial aid package as part of budget talks. The summit of July 17th and 18th is the date for your diaries.  Christine Lagarde said the ECB may hit the pause button on its easing programme, telling the FT that the ECB has ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. This should put to rest any thoughts the central bank would announce fresh easing measures at its meeting next week. Ms Lagarde wants to stress that it’s time for the EZ member states to step up and sort out the fiscal support rather than leaning ever more on the ECB and lower rates.

Meanwhile, the White House is said to be looking at ways to undermine the Hong Kong dollar peg to the US dollar as a potential way to hit China. If such a tactic were to be deployed, it could raise risks for Hong Kong banks to access dollars and we could feasibly see ripple effects across the FX space – albeit I don’t see the US embarking on any kind of outright manipulation to weaken or strengthen the dollar. It’s probably not a tactic that will be considered seriously or pursued by the administration, but it’s one to watch. 

Crude oil (WTI for August) was steady still around the $40 handle. API data showed a build in US crude stocks of 2m barrels, whilst gasoline stockpiles fell by 1.8m barrels. Crude at the Cushing, Oklahoma, hub rose 2.2m barrels. Meanwhile the U.S. Energy Information Administration presented a more bullish fundamental case and raised its WTI price forecast for 2020 to $37.55 a barrel, up almost 7% from the June forecast.  2021 prices are forecast to average $45.70 in 2021, a gain of 4% from before. The EIA said changes in supply and demand have shifted global oil markets from an estimated 21 million barrels per day of oversupply in April to inventory draws in June. EIA crude oil inventories later today are forecast to see a draw of 3.2m barrels, but the consensus estimate has been wide of the mark for several weeks now.