Stocks have opened higher at the start of this week, the dollar continues to bask in the glory of the stronger than expected NFP data, and US bond yields are approaching the key 2.4% level. This week is shaping up to be a critical one for data releases, central bank speak and earnings releases, and it could all add up to an important director of asset prices throughout the summer months. Volatility is also lower after there were no adverse surprises from the G20 meeting in Hamburg.
All that glitters isn’t gold…
The unexpectedly high NFP number, which City Index’s prop model predicted correctly, seems to be setting the tone for a higher dollar, which is weighing heavily on the precious metals market and the gold price is heading back towards $1,200. Not only is it moving inversely to the dollar, but gold is also struggling under the weight of the recent hawkish tone to global central bank speak. Ironically, some of the sell-off in the yellow metal may also be down to the spectre of low inflation in the west, especially wage growth, which could ultimately limit how far central banks can hike rates. This exemplifies the fears that could keep gold bears up at night: a surge in volatility or a talking down of rate increases from CB’s like the Fed, Yellen testifies to Congress this week, could see a dramatic turnaround in the gold price.
Merkel’s G20 reduces eurozone breakup risk even further
The G20 meeting passed off without too much event, even if riots in the streets and Donald Trump’s new way of doing business with the rest of the world has shaken up global diplomacy. EUR/USD is back above 1.14 today, and remains close to May 2016 highs. Some argue that the weekend’s meeting was a success for Angela Merkel, and reminded the world that she is the de facto leader of the EU. This could bode well for her re-election prospects in September, which also removes the tail risk of eurozone break up, further boosting the attractiveness of the single currency.
Will the BoE’s Haldane and Broadbent become dissenters?
Looking ahead to this week, UK BOE members’ Haldane and Broadbent are both speaking on Tuesday. Both have voted with the governor in keeping rates steady at 0.25%, however, Haldane has started to talk like he might switch his view and vote for a hike. With so much flip-flopping from MPC members of late (Mark Carney, in particular), it will be interesting to see if Haldane continues to keep up the hawkish tilt in his speeches.If Broadbent joins him then the market may start to wonder if the split could tilt to 5-4 for no hike at the next meeting, lowering the bar further for a rate hike from the BoE just at the time that wages look like they are stalling and the economy is taking a turn for the worst. This could hurt UK stocks, particularly the FTSE 250, which has fallen more than 3% since peaking in early June. Expect volatility in the pound this week as we also wait for critical employment data due out on Wednesday.
Earnings are a go-go
Earnings season also gets under way with gusto this week. We will be looking at this in detail throughout the week, but here are our initial thoughts:
US banks could struggle to deliver profits in their investment bank segments after low levels of volatility may have depressed earnings.
Marks and Spencer's (LON:MKS) trading update on Tuesday could deliver an improved sales picture for womenswear and homeware trading, with sales expected to fall ‘only’ 1.3% in Q1, after falling 5.9% in Q4 2016. Food sales are also expected to move into positive territory, rising some 0.6%. So, although weak, an improving picture in the all-important womenswear department could see the stock continue its recovery after falling to a 3-month low at the end of last month.
BT's (LON:BT) AGM on Wednesday could be lively to say the least, as the CEO is likely to be asked questions about how he could have missed an accounting scandal in the firm’s Italian division that blew a £500mn hole in the balance sheet. Questions about the pension deficit and the regulatory impact of having to break up its Openreach infrastructure could also feature. The price BT Sport paid for the rights to air the Champions League football matches, at £7mn per game, could also see investors’ demand answers from the CEO. If the market views this update as kitchen-sinking - getting rid of all of the bad news - then we could see the share price potentially stage a mini recovery after it fell to a 4-year low in recent weeks.
Burberry's (LON:BRBY) AGM, also on Wednesday, is expected to see investors’ ask tough questions about the former CEO Christopher Bailey, now head of creative, and his pay packet after sales fell more than 20% last year. Burberry is a big play on the strength of the Chinese economy, so if sales in Asia do well it could see sales bounce back later this year. New CEO Marco Gobetti, is considered a safe pair of hands, and expectations that he will announce a £100mn cost –cutting drive could trigger an uplift to the Burberry share price, which has fallen some 15% since peaking at the start of June.
Elsewhere, watch Tesla’s share price today. The new, more economical, Model 3 is about to roll off the production line at the end of this month. With $500mn in deposits already collected, can Musk and co. actually deliver on producing that many cars when it has had problems with production on the X model? Tesla (NASDAQ:TSLA) has scaled back on features for the 3 to try and make it easier to mass produce, however with only 3 being made a day in August they have a long way to go. Tesla’s share price has been hit hard by the US tech sell off, and is down 20% since end of June. It is approaching the key 300 level, if it can bounce from here then Tesla could be the summer come-back king.
Overall, this week could prove to be a turning point for markets. Central bankers are the lynch pin for the direction of asset prices in the coming months. Any ramping up of the hawkish rhetoric in the face of low inflation pressures could trigger an increase in volatility and see stock markets struggle, especially if earnings data fails to give investors’ another sugar high.
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Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.