Fear casts a long shadow. If the virus doesn’t get you, the fear might. It’s almost a trope in economic and trading circles: it’s not the virus causing the damage to the economy and businesses, but the twin enemies of a chaotic government response and worst of all, fear. Fear is what gets you in the end. Fear is what cripples the recovery, be that fear of the virus (I won’t go out) or fear of arbitrary knee jerk responses (why bother booking a holiday abroad). Fear of tax raids is another we might add for many investors looking at how public policy may affect their returns.
There is a fear stalking some companies. Dunelm this morning warned off a ‘severe but plausible’ scenario in which there are further lockdowns over Christmas. Sales might not recovery fully until 2023, management worry. Meanwhile IAG has warned demand has eased and now expects capacity to decline this year more than previously thought. Available seat kilometres are forecast to drop by 63% in 2020 and still be 27% below 2019 levels in 2021. Previously it had forecast declines of 59% and 24% respectively. The forecasts came as IAG (LON:ICAG) announced a €2.75bn discounted rights issue to strengthen its balance sheet. Even Morrison’s, which has seen sales surge, is nursing a drop in profits because the new order means more of the lower margin online business is required.
Names like Azhag the Slaughterer and Gorbad Ironclaw are designed to strike fear into people’s hearts, but investors in Games Workshop have had less reason to be afraid than many. Today’s trading update shows continued strong progress despite the pandemic – indeed staying indoors for long stretches is something their customers are not afraid of. Shares jumped over 10% after the company reported a very strong three months to August 30th, with sales up to £90m from £78m a year ago. Online growth has been strong. It also declared a dividend of 50p. Peel Hunt raised its price target on the stock.
Yesterday saw a big risk rally as global equities recovered from a 3-day sell-off led by US tech shares. Wall Street - equity markets bounced strongly. The Nasdaq added 2.7%, while the S&P 500 was up 2%. The Nasdaq held its 50-day moving average, with this level offering the major support for the rally. The S&P 500 ran into resistance at the 21-day line. There was some selling into the close though, which makes you wonder if it’s a classic bull trap before the next swing lower. Vix futures (Sep) broke the rising trend line to trade at 28.50, having taken a 37 handle last Friday. The FTSE 100 climbed over 1.3% to recover the 6,000 level, while the DAX added 2%.
European stock markets turned lower this morning as investors look ahead to the ECB meeting today. The meeting comes amid a sharp rally for the euro that has left policymakers concerned. The line in the sand for the central bank was 1.20 on EURUSD – a level that prompted chief economist Philip Lane to comment that "the euro-dollar rate does matter”. Traders should pay attention to any nod to currency worries from Christine Lagarde. Whilst the consensus is that the ECB will take no further policy action, policymakers may choose to act, albeit any action at all would be around the PEPP programme rather than slicing interest rates lower. As noted earlier this week, the sharp decline in inflation could force the ECB to take swifter action than the market is anticipating. Eurozone inflation turned negative in August, declining to –0.2% from +0.4% in July. Sources yesterday indicated the ECB is more confident in its economic projections – it was not entirely clear whether they meant they are more confident that they are right about the , or more confident they will improve.
However, even here the ECB probably doesn’t need to push its PEPP envelope, given only €500bn has been used out of €1.35bn available. I think Christine Lagarde may seek talk up this being a target, rather than a ceiling.
In summary, on the balance of probabilities the ECB will not make any monetary policy changes but will lean hard on jawboning the euro lower and talking up the unused room in the PEPP programme and that it will do whatever it takes to support the recovery and stand ready to expand it if required. EURUSD trades at 1.1820 in a steady pattern ahead of the meeting.
The pound rebounded yesterday afternoon and held gains after the EU said it would not kybosh talks because of the U.K. threat to rip up the withdrawal bill - the internal market Bill. This removed the immediate risk of a collapse in trade talks, which appears to have driven the aggressive move lower in the morning with cable hitting a six-week low. This sent cable hard back to 1.30 in a sharp risk reversal that many newly minted shorts firmly on the wrong side. But we should caution that sterling remains very exposed to further negative headlines and risks appear still skewed to the downside for the time being and we can only say that sharp moves lower - in the region of one big figure - are to be expected. The EU this morning is said to be considering legal action against the UK over the bill. GBPUPSD just traded a little under 1.30 again as morning trading got going in London, possibly with this news weighing on sentiment – again highlighting the headline risk.
Today sees the talks wrap with the usual order of service involving the two sides giving separate press conferences. The focus on the EU side will be to what extent the internal market build has undermined trust. Remember a deal will always look a lot more distant than it may be in reality.
US jobless claims numbers are also due later. These have become a useful barometer for the US economic recovery and tend to show that the momentum from the initial post-lockdown snapback is waning. Last week, the initial jobs claims improved but the methodology changed somewhat and the only stat we really cared about was that the total number of people claiming benefits in all programs for the week ending August 15th was 29,224,546, an increase of 2,195,835 from the previous week.