Good Morning,

An interesting shift in investor sentiment yesterday, as stellar US retail sales data didn’t result in markets heading noticeably higher. Up until now, bad data has been explained away and good data has been reason enough to go even longer into equities, but the news yesterday showed that the market might be waking up to the idea that the US can’t continue to rebound if people are back under lockdown. The number itself showed that retail sales in June were higher than they were before the pandemic, meaning that pent up consumer demand and payroll support dished out by the Federal Government have both played their part.

To continue the theme of available income, the US government are going to have to get an agreement over the line on their next stimulus package, but yesterday the White House warned that they’re going to insist that it comes with a round of payroll tax cuts, something that even Trump’s own party don’t broadly agree on. Trump has been angling for further cuts for this for months and probably sees it as a bit of a vote winner, but the budget deficit in June surpassed all previous records, with an $864bn shortfall of income versus expenditure and there are well founded concerns that cuts now will mean even less chance of getting that under control in the future. Another feature of the deal that Republicans want to put in is employer lawsuit protection, that would stop individuals suing their employers for all manner of covid related reasons, such as substandard PPA, or injuries received whilst undergoing a virus test! (yes, really). Opinions within parties are divided and the parties themselves are many miles – and trillions of dollars – apart on what this next phase might look like.

Staying with the US: Netflix had a shocker in post results trading yesterday, despite adding ten million new subscribers and seeing a 25% increase on revenues compared to the same quarter last year. The stock fell 10% as Netflix quite rightly warned that they were unlikely to keep up with that level of growth! Talk about your best never being good enough…

This side of the Pond: Bloomberg are reporting that some major banks see the Bank of England having no choice but to do more to support the economy and probably take interest rates negative as we head into a perfect storm at the end of the year. A surge in unemployment numbers, Brexit looming and a possible winter second wave will probably be enough for the central bank to signal their intent to do more next month, to at least let markets know that they’re ready and waiting. The market itself is already pricing in a zero interest rate by February next year and short sterling futures for September 2021 are already changing hands at effectively negative interest rates. Further QE is almost certainly a given before the bank decide to experiment with charging depositors.

This comes on top of news that the UK Debt Management Office is going to have raised £385bn by the time we get to the end of November, as their next auction timeline was announced. They’ll shift another £110bn between September and November, to keep Rishi Sunak with enough cash in the current account to pay for everything that he’s promising. Their purchaser of first resort is the Bank of England and their activity in the market will mean that the coupon on this debt is likely to remain close to zero, even with the issuances spiralling higher, so it’s not unaffordable, but this will be an exercise in maintaining confidence. If the market starts to think that the government haven’t got this under control then it wouldn’t take too much for bond yields to spike and that would mean the Bank of England’s hand being forced to do more (something that Andrew Bailey has said isn’t guaranteed) or the government having to suffer exponentially greater financing costs.

Speaking of confidence: Boris is going to tell everyone to get back to work later today as he goes against the science, but with the economic needs, to try and encourage people to get back out there. The announcement is also going to come attached to a further £3bn of NHS funding to get ahead of what could be a nasty winter second wave, with deaths over this period forecast as high as 120,000. The stockpiling of medicines is already beginning and according to this interesting FT read it was only because we’d stockpiled certain drugs in anticipation of Brexit that we didn’t run out of them during the height of the pandemic in May. The move now is to get to the front of the queue as most other governments will be doing the same and supply chains in India where a lot of generics are made are still disrupted.

Other than what Boris has to say, there’s not really too much of note outside of a few European central bank speakers. The weekend does see a European leaders summit, starting today and going on through to Sunday afternoon. There’s no point in listening to the initial press conference as that will be full of optimism. It’ll be the Sunday afternoon ‘we’ve been at this for days and still can’t agree’ presser that’ll be the one that decides the market’s mood for the Monday open! Their plan is to agree on the recovery package, but as we’ve seen since they announced it, there are a lot of conflicting views on who gets what and what they need to do in return.
The FX market has a few options expiries very close to current levels, so its possible that we see the market stay in these tight ranges all the way to the European close and then a load up on the order books ready for Sunday night.

Be well.


* indicates required


Sign up to get our insights directly to your inbox

Sign up