England Lockdown Rules To End July 19 Despite Risks

Okay, very good morning folks, it's Tuesday 13th of July, so going to get you up to speed on the close on Wall Street where the major 3 indices closed in a fairly uniform fashion of gains of around 1/3 of 1%. Fresh record highs as far as the S&P and the NASDAQ 100 are concerned, and since that point in time, as you can see on the charts here, we've seen a little bit of a fade off those initial high prints that were seen just after the close on Wall Street and retested early in the Asia-Pac session. We've just drifted south since there, which, as we've been talking about in, in subsequent briefings— or previous briefings, I should say— over the last few weeks or so, whenever we get this kind of push-up, um, we see generally a bit of light profit-taking at those more elevated levels. Now, where we're trading at the moment, you've got that pivot downside coming in at 4365.25, and that kind of coinciding with that previous all-time high that was seen just at the recommencement of trade on Globex on Sunday night. So on the pullback here, I would expect that to be, to be held for the moment. Obviously a lot of anticipation for the US latest CPI print, which is going to come out at 1:30 this afternoon, which will probably dictate proceedings from thereafter. The NASDAQ, very similar in that sense. So further push-up, you can see here now the resistance area quite clear from the high we printed going back to really the midpoint of last week on, on the recommencement of trade for this week. We've had the test up before then, bit of volatility at yesterday's open, and then by the close again in fairly familiar fashion, a sell-off at the open, recovery by the close, and that pattern holding true for the time being. And then that same area of resistance holding. Technically through the Asia-Pac session before just a bit of a drift off going into the European open. Otherwise, other asset classes pretty quiet. In fact, the Euro, um, Eurodollar respecting the, the trend line that we were looking at yesterday, held up quite nicely for the session. The Dixie this morning seemed pretty flat overall and might well remain that way because a lot of people will be sitting on their hands waiting for the CPI report. Otherwise, T-notes are unchanged, sitting around pivot, which is near-term area of resistance given that was last night's futures overnight high. And then in the commodity space, both gold and oil trading just a touch higher. Gold up about $5 at $1811. WTI up about 34 cents. Some reports last night confirming that the next anticipated, um, conversations for OPEC not going to happen until next month, but I don't think that really is that surprising given recent commentary we've had over the last week or so. So let's get straight into it and talk about some of the headlines. I'm going to start off with with China, and export growth unexpectedly accelerated in June. And actually, um, in the overnight session, we did see the Chinese currency firm up. The yuan rose to a near 1-week high against the dollar. Remember, a lot of people were looking at the action that the PBOC took to cut the reserve requirement ratio last week as a sign then of potentially a slowdown in their economy. So people were generally tilted on the negative side for any upcoming data releases this week, and the trade data actually surprised to the upside. So the actual export number year on year came in at 20.2% above the expected 15.1%. Some of the sweet spots there that were helping that figure was the global appetite for medical goods and work-from-home equipment still helping lift that, that figure, but overall broad-based expansion was seen. In all the different areas. So that doesn't really translate too much in terms of the market sentiment as far as Europe and the US now is concerned, but it certainly did help just flesh out those, those retests at those highs on the record territory for the, the indices as I just discussed. Otherwise, the other talking point of course was Boris Johnson gave that speech last night, an update then in confirming the confirmed curbs would be ending on the 19th of July in the UK, but urged a degree of public caution going forward. A couple of things here, and I've got a few graphics via the FT released last night which I think are quite interesting. And for one of the things here, people are talking about this, this kind of gamble to some respect, and I'll try and explain what that gamble is and, and what my kind of outlook for the situation with UK COVID is, and subsequently any impact for the pound that we might see. And so first things first, let's give a bit of context. And this is a graphic looking at a full reopening on the 19th of July, and it could send daily hospital admissions back above 1,000. So a couple of things to be aware of here. So scientists believe the most likely scenario will be a surge in infections going forward with this latest loosening, the final kind of unlocking, if you like, of lockdown. Causing around 1,000 to 2,000 people to be admitted to hospital every day when the expected peak hits in August. And you remember that number coming in context from a ratio of the fact that we are anticipating case rates to get as high as 100,000 over the course of the next 4 weeks or so, as what was stated as a prelude from the newly appointed Health Secretary, Sajid Javid, last week. Um, between 100 to 200 patients a day could die from COVID-19, but both the hospitalization and death rates would be significantly below the peak in late January. So remember, although it might constitute then a death rate of 200, this is in comparison to a death rate of around 1,200 deaths per day we were seeing in England per day at the beginning of the year. So although case rates are particularly high, the actual end result of death is much lower than before, and hence the government's ability then to push ahead with this predefined plan of reopening as per the timeline they had outlined. A couple of things here to be aware of, and I've got a few— excuse me, I'm just on the border of sneezing because my hay fever— but a few other graphics to have a look at. This is, I guess, a bit of a litmus test for what the UK could experience And this is looking at the Dutch situation. Now here we're looking at new weekly cases per 100,000 is the red line for the Netherlands. And you can see going through May and June, they were seeing a really positive development in terms of the actual decrease of COVID cases that then allowed subsequently at the end of June, the 26th of June, Netherlands to reopen. And then only around a week or two after that, Netherlands was doubling COVID cases every 4 days. And as we know, this is because it's a particularly transmissible Delta variant that's been spreading through most of mainland Europe of late. And that has led to then at the weekend the restrictions being reimposed on, on nightlife in the Netherlands, and actually a public apology from the Dutch PM. And so we look at the UK trajectory and it's almost the opposite situation where the Dutch took the decision to reopen upon a more positive development of decreasing cases, the UK is doing the final reopening as in the middle of doubling of COVID cases every 20 days. This comes as well after the French Health Minister has been out this morning talking, talking about the circulation of virus currently doubling every 5 days in France at the moment. So it's pretty rampant at the moment in mainland Europe. And given the final reopening, meaning then that it's up to, as the government would say, people to use their own kind of discretion and personal responsibility in terms of mask wearing, and also up to companies to provide more guidance about going back to work, although they're kind of dropping that stay at home and work from home kind of being a necessity, we are expecting that number to accelerate going further forward. So The more pessimistic scenarios, in which people rush back to work in offices and ignore advice on mask wearing, is the particular worry, and that could see hospital admissions exceed January figures, albeit the death count might well remain much lower. I guess a bit of context is quite important going into the, the planned reopening. The UK already has the highest COVID case levels among all major European countries, and this graphic you can see by the green line really puts into comparison the acceleration that we've seen in the Netherlands over the last few weeks. It really is pretty much vertical in terms of that line. In terms of the current rates of 30,000 a day, obviously we, we've been informed that that's going to rise pretty rapidly to 50,000 and then potentially 100,000 or beyond. From a vaccination point of view, just over 87% of UK adults have had at least one vaccine dose. But only two-thirds have had two doses needed, of course, for maximum protection, given those efficacy rates jump considerably up into the mid-90% level once you've had two vaccines. And typically there's some variance then with the likes of AstraZeneca, particularly to the latest Delta variant, being much lower on just a single shot. And again, this is what's going to complicate the situation a little bit and, and probably see a more acceleration in the case rate, given that the younger demographic have still typically only received one shot, if a shot at all, at this point. And so going forward then, the fact that they're probably going to be more mobile in regards to most younger people, probably have a situation which would be more tied towards being in the office, given a lack of ability to be able to work from home, obviously profession to profession. But the point being then is as well that from a social perspective, more intermixing is going to lead to more spreading, particularly given the fact that it's not going to be a government requirement to be wearing face masks and down to personal discretion. So at the moment, I mean, the pound, as far as I see the pound performing, I mean, it's, it's flat at the moment this morning. The dollar is unchanged and everyone's waiting for CPI right now. I don't think that what the government's done and this, this whole outlook, which sounds pretty bearish and negative going forward, is weighing on the pound. I don't think that's the case this morning. If anything, euro-dollar and the pound have been drifting south, running into some short-term technical resistance as the dollar's just picked up a bit of pace as we've gone into the European Open. I do, though, however, think that the market overall is a little bit complacent about the COVID situation. We saw that last week with quite a distinct shift back, re-questioning the reopening trade, which I think was a big part of why yields started to decline like they did and why then growth and tech stocks have really started to reaccelerate, kind of reverse, if you like, some of that recent multi-month move. As we saw last week, year-to-date growth now outperforming value. So I do think that the market has adjusted a little bit. But specifically for the UK, I do think that tactically, when I think about it politically, I think that Boris Johnson used— utilized quite a lot of his political capital when he chose to roll over from June 21st to July 19th. And so he doesn't really have too much wiggle room now but to push ahead. The medical team. Whitty was saying yesterday that a wave is inevitable at the final reopening to kind of justify that, but was a little bit more hesitant when it came to the rules around face masks and the increase in transmissibility that that could have by not adhering to that in certain social circumstances. So I do think that when we start seeing case rates hitting 75K, 100K, which I think will likely be the case in the coming weeks. I think then politically Boris will have the flexibility to be able to then reinstate certain types of COVID rules, not in constituting a lockdown, but certainly more definitive government advice about certain things. So I do think that is coming, and I think that politically he's kind of exhausted his avenues at the moment. He's had to push ahead of this. Things are going to get worse. And therefore that will then allow him the substance to be able to appease those critiques of the lack of reopening, that some things will need to be reinstated at that point. So I do think that, um, partially then there's still a little bit of the, the pricing around the reopening trade specifically for sterling in the UK still to be done at this point. It's just a matter of timing. I think right now is a bit early, but I think once we start getting to about a fortnight from now that might start to become more of a material thing going forward is my kind of my view at the moment. Now, on the vaccine side, talking of COVID this was the latest, and this was the US FDA on Monday added a warning to the fact sheet for J&J's vaccine saying that the data suggests there's an increased risk of a rare neurological disorder in the 6 weeks after inoculation. Now, when you read this sort of headline and I make a statement like that, it does sound quite quite scary and quite frightening, but it's always super important to kind of add a bit of context. And the context is, by numbers first, around 12.8 million people have received the J&J vaccine, um, their one-dose vaccine in the US, and there have been about 95 serious cases that have required hospitalization, and there's been one death. So there's been one death out of 12.8 million vaccines administered. So the number is very low. And secondly, last week European regulators recommended a similar warning for AstraZeneca's COVID-19 shot, which is based on similar technology, um, to J&J's vaccine. And so as such, then it kind of neutralizes any impact that that would have because it's not that surprising given they're utilizing the same kind of technological techniques in that sense. So something to be aware of. I don't think it's a big deal. I don't think it jeopardizes any type of government strategy at this point, and subsequently no timing or then market impact on the, the COVID vaccine rollout. But something to be aware of nonetheless. Otherwise, there's a few other things I want to talk about, and just going to have a look at earnings. And the reason why I'm going to mention that is because today it really kind of kicks off earnings season. You've got JP Morgan, Goldman Sachs, two of the bigger banks coming out pre-market, PepsiCo as well, another slightly larger firm reporting ahead of the opening bell. Um, but this is a full table of some of the main companies to look out for. Um, so this week very much dominated by big banks. So tomorrow Bank of America, Wells Fargo, Citi, and the like. And then next week things start to, um, get a bit more broad-based. Uh, IBM, Netflix, Coke, J&J, Intel, uh, and the like. And then the week after that is when we start seeing the likes of Apple, uh, Facebook, Boeing, some of those much bigger weighted market cap stocks. So not for another 2 weeks or so, but if you want to get this graphic, you can just check out my Twitter. I did reshare it, um, with everyone in the community earlier this morning. But focusing in on the 2 pre-market big banks, because the way that earnings season typically operates is that the first companies to report of a certain sector tend to act as a bit of a bellwether then for the overall sector performance. So in terms of an intraday day trading impact, although there will be nuances and in single stock fluctuations, generally from a top level macro perspective, people will put quite a lot of emphasis on the first to report. First companies of the season, first companies of the sector, always quite important. So what are people looking at? I mean, with Goldman Sachs, I've got a few notes here. They're expected to edge past the consensus estimate for revenues and earnings. I mean, let's face it, they always do a degree of kind of engineering, if you like. They always smashed the EPS out of the park, and I'd expect that to be the case again today. But the bank outperformed the consensus estimates in the first quarter of 2021 by a huge margin. This was mainly driven by a significant jump in investment banking and sales and trading revenues on a year-over-year basis, followed by positive growth in their asset management business. So be interested to see about— just given obviously the volatility that have been seen in markets adding to good trading volumes— whether or not then subsequently the lower volatility we've had what does the momentum look like then for someone like GS, and also the activity in that positive growth in their asset management business. Elsewhere, analysts are expecting a pretty mixed card coming out of JP Morgan. Their earnings per share expected to rise at a rapid pace, albeit significantly slower in Q1, really for those aforementioned reasons about trading volatility. But the troubling sign is their revenue is expected to decline its fastest pace in at 14 quarters. So just fleshing that out a little bit on what to look out for with their earnings: the bank's trading revenue benefited from heightened volatility in securities markets over the past 12 months, but for Q2, analysts expect JP Morgan's bond and equities trading revenues to decline from a year-ago quarter, with bond trading in particular seeing the steepest drop. So that would be something to have a look out for— how much has dropped to constitute the type of reaction we might see on the, on the back of that. Otherwise, let's have a look at the situation with what's coming out today. And we have German final CPI, so already done and dusted by this time. So for the European morning, things are very quiet. The, oh, the showpiece for today for sure is the US CPI numbers coming out at 1:30. CPI for June, as you can see here, is expected at 4.9%, so continue to hold on to this very high elevated level we saw last month in May of 5%. Quite a lot of attention is going to be paid to the core CPI year on year. It's expected to move up to 4% from 3.8%. We've got a range of 3.8% to 4.3%. As you can see here, the core reading was already tracking up at its highest since 1992. So really, a 4% pretty much puts us at the same sort of levels, if not bumps us back into the 1991 period where we were trading up around the 5% margin. So I think that the surprise shock factor of inflation really came last month. I personally, I don't actually think today's number, unless it's significant deviation away from the consensus estimate, I think a lot of the sting has been taken out by the jump what we saw last time. Business executives that continue reporting brisk price increases according to some of the reports we were seeing from the ISM PMIs last week. Prices paid by manufacturing firms are rising faster than at any point since the late '70s. Those paid by services companies are rising at levels last seen since 2008. And a lot of analysts as well anticipating that used cars as it continues to contribute to a significant jump in inflation, but therein lies still one of the key transitory factors that even though it's been a little bit more sticky and long-lasting, it will inevitably fade over time is the likelihood with that. So the CPI is important. I definitely think it constitutes a main focus for sensitivity for markets and Federal Reserve officials. And on that point, for anyone interested, I did reshare a good timeline here. I know it's a bit difficult to see on the screen right here. But again, if you go on my Twitter account, you can locate this, this graphic. And it's Bank of America's timeline for tapering. And it basically has then the blue, which is what's already materialized, and then the stepstone approach towards the baseline for the start of tapering in January, and the timings and subsequent events and meetings where there's probably going to be the buildup in signals, the formality of then it coming in. And with more details upon then the execution and commencement of tapering at the beginning of the year. So quite a nice graphic there, timeline to convey that, that information. Otherwise on the calendar, so aside from the CPIs, aside from the earnings, you've got the API inventories due after, after market, late in the evening as per usual. Fed speaker Bostic, voter, does speak on the economy at 5 PM, speaking again at 7 7:30. Non-voter Rosengren speaks at, um, 7:50 this evening London time. Supply coming out Italy and Germany this morning, and then following up some of the bond auctions yesterday in the US. You've got $24 billion of a 30-year bond auction coming out this evening. And that is it, gonna leave it there, let you guys get on with the session. But of course, any questions at all, just feel free to drop me a line, uh, in the comment section below. More than happy to help. But have yourself a good day ahead. Thanks very much.