No Shortage of Event Risk
Next week sees earnings season get underway in the US, with the major banks all reporting on the second quarter and offering insight – if they have any – into the rest of the year. Understandably, US corporates were a little shy on the guidance last quarter but investors may not be so willing to accept a repeat performance this time around, not while turning a blind eye to second quarter performance.
The outlook remains murky but there are signs of promise, it’s possible that the bar is so low now that investors may leap on anything remotely positive and give these markets another kick higher, not that the Nasdaq is exactly in need of such a lift.
Geopolitical risk remains heightened, with China and Hong Kong remaining at the centre of the increasing hostilities. There is no shortage of speculation around the direction of travel on this front but it remains an ever-present risk, one that could escalate in a heartbeat. The fact that Trump is fighting an election in a few months probably doesn’t help the situation. Especially if the President wants to divert attention away from the rising number of Covid cases in a growing number of states.
The big banks kick off earnings season and this time the focus might be more on job cut announcements, slashing of dividends, and ending of share buybacks. With around 80% entering this earnings season with no real guidance in place, investors will look for signs on how strong companies balance sheets are and whether they remain optimistic about the US consumer. JP Morgan, Citigroup, and Wells Fargo report on Monday, while Goldman Sachs delivers results on Wednesday. Bank of America and Morgan Stanley report on Thursday morning and Netflix reports after the close.
A wrath of economic data should also show the US economic rebound continued in June. Retail sales are expected to remain strong following the biggest monthly increase ever. Regional surveys from NY and Philadelphia are also expected to show the recovery is heading in the right direction, but further stimulus is still needed.
No major surprises are expected from the Fed’s Kaplan on Monday, Harker on Wednesday, and Evans on Thursday. The recovery will likely take a lot longer and policymakers will likely reiterate they are ready to act further if needed.
It is all about the Presidential election. Former-VP Biden has a growing lead across several key battleground states. President Trump has an outdoor rally in New Hampshire on Saturday as he will try to convince voters his economic plan is superior to Biden’s recently announced one.
Democrats are eagerly awaiting former-VP Biden’s decision on his running mate. Prior to COVID-19, the Democratic National Convention was originally scheduled in July, meaning we should have found out his decision by June. Since the convention was delayed till August 17th, he will have more time to evaluate his candidates. Biden will turn 78 a few weeks after the election, so his VP selection will be critical for many voters.
This week Rishi Sunak announced the latest raft of measures aimed at stabilizing the economy and protecting jobs, as a number of major retailers were making an announcement of their own, in the form of thousands of redundancies. This comes on top of the thousands already announced in recent weeks and the many more to come as the Chancellor winds down the furlough scheme.
The full impact won’t be seen in the jobs report next week but as the months go by, the unemployment rate will start rising rapidly. The furlough scheme combined with surveys on how employers expect to act once the scheme comes to an end suggests we could see near double digit unemployment rates. But this will inevitably change as the economy reopens and we see the real impact, for better or worse. More will be needed from the Chancellor in the months ahead. This is just a good start.
EU leaders will meet late next week for further discussions on the recovery fund, with some countries including Ireland pushing for a Brexit fund to be included in the budget in the event of no deal being agreed by the end of the year. We appear to be nearing an agreement, with the details of how countries will apply for grants to be agreed.
The ECB is unlikely to add any stimulus next week, with the economic prospects seemingly improving. The Pandemic Emergency Purchase Program was already increased by €600 billion to €1.35 trillion in June and extended by six months to the middle of next year so there’ll be no rush to add to it again, although there is an expectation that they will need to later this year.
US announces sanctions on Chinese technology companies and Officials associated with minority repression in China. Concerns rising that the US will also try to block China banks access to US Dollars. This is highly unlikely. More measures are surely to come elevating the geopolitical tensions above the usual. The key will be China’s response. Trade negative, equities negative.
China Balance of Trade and GDP next week. GDP undershoot could see markets turn negative across Asia and Australasia.
China stock markets rose by 12% at one stage this week after the government told citizens to buy into China tech stocks. Today government entities have sold stocks to slow down the exuberance. You can’t make this up. Liquidity remains tight and Chinese bond markets remain under strong pressure.
First week of Hong Kong security law passes without incident. Hang Seng coat tails Mainland stocks higher. Two key concerns. HK to shut schools again after community transmission of Covid-19 increases. International companies are worried about breaching HK security law by complying with new and upcoming China/HK sanctions. Potentially weighing on HK markets.
Talk of the US trying to undermine HKD peg is a storm in a teacup.
Covid-19 cases continue skyrocketing. India is now in top 4 for infections. INR remains under pressure as stress on the government budget and banking sector continue. Very real possibility that India will repeat Indonesia’s recent playbook, and get the central bank to directly purchase new government bond issues. Negative currency and stocks.
Australian Dollar range trading. Stock market concerns mounting over new Victoria State selk-isolation and Melbourne lockdown. Covid-19 cases climbing in Melbourne.
Australia offered a citizenship pathway to Hong Kong students studying in Australia this week and other highly skilled HK migrants. Negative rhetoric is increasing with China. Real threat that China will retaliate through trade bans. Equitys and AUD negative.
Australian unemployment on Thursday.
USD/JPY range trading. BoJ rate decision on Wednesday, expecting unchanged at -0.1%. Recent poor data suggest BoJ may tweet their QE and lending programmes. JPY negative.
Covid-19 cases remain stubbornly high in Tokyo. Officials say no cause for alarm, but disquiet rising.
Overall direction dictated by geopolitics next week
Oil is enjoying a summer break. It was an impressive recovery back to $40 but it’s been relatively uneventful since then. The $40 mark seems to be a widely accepted fair price for now, with WTI seeing resistance around $42 and support in the high 30’s. Similarly, Brent is seeing nice support around the $40 mark and resistance around $44. The fact that we’re seeing rising support may indicate that the path higher is still looking more plausible but many downside risks still remain, including second waves and a messy end to an otherwise successful coordinated production cut.
Gold is struggling to hang onto gains above $1,800, despite peaking around $1,817 on Wednesday. It’s held above since then but as we head into the end of the week, it’s coming under a little pressure and $1,800 is now being tested from the upside. A weekly close above $1,800 could be very technically significant for the yellow metal. A close below may be a red flag after a decent run for gold over the last month.