US and European equities made a series of fresh record highs yesterday and the positive mood seems to be carrying forward into Wednesday. The prospect of stimulus and receding fears over the coronavirus combined to drive the Stoxx 600, DAX, Dow and S&P 500 to new all-time highs. The iShares Momentum ETF also notched a record.
US stocks hit big intra-day highs early but then rolled over and we had a timid finish. President Trump blamed Jay Powell for jawboning it lower...a drop for Boeing (NYSE:BA) as it reported taking no new orders last month and a new FTC investigation of big tech probably had more to do with it. The market just got a little ahead of itself - and it was still a record high close for SPX.
Asian markets carried the torch with a positive session overnight, though individual performances were mixed. Hong Kong and Shanghai both rose 1%, whilst shares in Shenzhen were up 1.6%.
Futures indicate European markets are enjoying the tailwinds from a slowdown in new coronavirus cases, whilst a weaker euro is also helping out. FTSE 100 called up at 7525, with the DAX making new highs at 13,673.
The number of new coronavirus cases in mainland China fell to its lowest since January. There’s been a change in how cases are recorded so we should be cautious about taking Chinese claims at face value. Foxconn says it will have 50% of production in China back up and running by the end of the month.
Bernie Sanders did his presidential bid no harm as he secured a narrow win in New Hampshire. The greater the chance of Sanders securing the nomination, the greater the chance Trump has of being re-elected. That’s how the conventional wisdom has it and I would not disagree.
Jobs - is the great American job creation machine slowing? Job openings in the US slumped to a two-year low. Openings fell 364k to 6.4 million in December, the lowest level since December 2017. This followed the 574k drop in November, which was the biggest drop since Aug 2015. It’s not a great signal and while the key nonfarm payrolls numbers continue to look strong, it’s potentially a sign of weaker numbers to come.
Powell testimony - Jay Powell sounded pretty upbeat. It wasn’t hawkish - that’s so 2018 - but it wasn’t ultra-dovish. He reiterated that risks to the outlook remain and that the Fed is closely monitoring the impact from the coronavirus spread.
I think what you do have is the market thinking about what things may look like when the Fed steps back from open market operations. That’s a serious question.
Powell said he expects to continue Treasury bill purchases and repo operations at least through April, while the Fed will reach a level of ‘ample reserves’ by the middle of the year. QE-lite it may be, but it could be just as difficult to kick as the hard stuff.
As far as the FTC investigation of big tech goes, we’ve been here before and lived to tell the tale, though it could present some overhang. The FTC is looking at Micrsoft, Alphabet (NASDAQ:GOOGL), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL), asking for information on past acquisitions to see whether they stifled competition. Unless they go the whole hog and break these companies up – which I don’t see happening right now – we’ve seen how fines can be swallowed.
The RBNZ kept rates on hold and signalled it’s pretty sanguine about coronavirus risks. It looks like the central bank will keep the OCR on hold for the rest of the year – unless there is a sudden hit on growth from the outbreak. "There is a risk that the impact will be larger and more persistent. Monetary policy has time to adjust if needed as more information becomes available, the RBNZ said.
Oil has rallied off its lows as China reported a slowing in new cases. The hope is airlines and industry will be back online soon. I’d be cautious about this. We’re also mindful of secondary and tertiary outbreaks in Europe and North America even as new cases slow in China. Meanwhile we’re watching Russia closely to see if they will join OPEC with cuts.
WTI bounced at $49.40 but remains trapped in broad range around the $50 handle. The rally seems to have run out of steam at the old $50.60 pivot. Support at $49.30, resistance next around $51.40 and then last week’s highs at $52.20. Until we know more about the economic effects of the coronavirus it’s hard to call this bottom for oil, but we are seeing a tentative, fragile basing pattern forming.
Also weighing, the US Energy Information Administration (EIA) has cut its global oil demand growth forecast for 2020 310,000 bpd due to coronavirus concerns in China. Meanwhile the API data showed a larger-than-expected build in crude stocks. US crude inventories rose by 6m barrels in the week to Feb 7th, twice the 3m expected. EIA inventories on tap today.
In FX, EURUSD broke below 1.09 but the low was rejected and we have seen the euro pare some of the losses. However the bears still are very much in control and a dive to 1.0880, the Oct low, is still looking like the path of least resistance. We will need to see whether the rejection of the 1.08 handle has any strength at all. But there isn’t a heap of support from 1.0880 down to 1.05.
Equities
Dunelm has been a real bright spot amid the dark days of U.K. retail, thanks to a remarkable turnaround steered by CEO Nick Wilkinson. Worldstores has finally been digested after causing some heartburn. This has been pivotal in making Dunelm an online player in the big league. Online sales in the first half soared by 33%. Stores growth was the only blemish coming in at only +1.2% in the second quarter.
Expectations are higher now. In December management raised its full year profit guidance, sending shares soaring. Management guided £83m in pre-tax profits and have slightly beaten that with H1 profits at £83.6m, up 19.4% year on year.
The key remains costs and keeping them under control. Again, we see continued progress as gross margin improved 120bps to 51.5%. Profit growth of near 20% against like-for-like revenue growth of 5.6% in a tough market is enviable.
A recovery in the housing market following the Tory election win should be a big positive - the more people move the more they need Dunelm’s wares.