Rising tensions between the US and China has dampened the mood in the markets. 

Europe

The US government ordered the closure of China’s consulate in Houston, and the Beijing administration has vowed to retaliate. Recently, the relationship between the two largest economies in the world has been strained because the Chinese government is eroding Hong Kong’s autonomy, and that has attracted the anger of many countries. Dealers are fearful that today’s development could spark a new escalation in tensions. President Trump has an election to contest in a few months, so he might not be overly aggressive with China for that reason. Nonetheless, dealers dropped stocks as they were coming from a relatively strong position on the back of the €750 billion rescue fund deal from the EU, and the hopes for a Covid-19 vaccine.    

The rally in gold and silver has assisted Mexican miner Fresnillo – the stock hit a two year high. Silver hit its highest level since October 2013 and Gold hit a mark last seen in September 2011. The mining company registered a 6.4% fall in gold output in the first quarter to 184.4 Koz. Fresnillo lowered its full year gold production to 785-815 Koz, from 815-900 Koz. The silver production guidance was left at 51-56 Moz.

Kingfisher confirmed that second quarter sales were strong, and it now projects that first half adjusted pre-tax earnings will top last year’s figures. The re-opening of stores and strong e-commerce sales helped like-for-like sales (LFL) in the second quarter until 18 July jump by 21.6%. The stellar numbers were a product of pent up demand, and the rise in popularity of DIY activity brought about by the lockdown. It is encouraging to see that sales remained strong even as things have gone back to normal. Kingfisher’s share price has hit its highest level in over one year on the back of the announcement.

Stagecoach has been hit hard by the health crisis and even though lockdown restrictions have been loosened, its passenger numbers are 40% of last year. The slight reopening of the economy has helped passenger figures, as they are 10% higher from the peak of the lockdown. Full year adjusted EPS was 13.5p, which was a 38% fall on the year. The group fears there will be a long-term impact on the transport business, as more and more people are likely to carry out their shopping and work from home. The medium-to-long-term outlook for the sector isn’t too optimistic. In the near-term, Stagecoach should tick along as it has access to £800 million in cash and government support should help too.  

Melrose cautioned that revenue in its aerospace division could see a decline of approximately 18%. In addition to that, the company said it does not expect to see a rebound in the second half. Revenue in the first half dropped by 27%, and the firm is considering cutting jobs on account of the current environment. The group has a cash balance of more than £300 million, and it is likely to see a small increase in operating profit in the first half.                  

US

Traders in the US have largely shrugged off the threat of retaliation from the Chinese government. US stocks are holding up considering the health crisis is still rumbling away, and that the relationship with China has taken a hit. The earnings season continues and Tesla will be in play today. 

The US government has struck a deal with Pfizer, whereby it will pay the pharma giant $1.95 billion for 100 million doses of a Covid-19 vaccine, provided it is safe, secure and receives approval. The deal also gives the US government an option to buy an additional 500 million doses. Pfizer and BioNTech are working together to develop a vaccine for the coronavirus. Obviously, developing the drug is a big hurdle, but at least it has a buyer lined up. 

Tesla is in focus as it will post its second quarter figures after the close. Last week it set yet another record high. On a year-to-date basis, the stock is up over 270%. Traders will be paying close attention to the production forecast. The first quarter update in April showed the company made a profit of $16 million, its third consecutive quarterly profit. Tesla delivered over 88,000 cars in the three month period, and keep in mind the original annual production target was 500,000. The stock price has been driving higher recently, and with that comes high expectations, but the group will probably struggle to achieve its 500,000 yearly production target. 

Snap shares are in the red as the group’s second quarter loss widened to $326 million, from $255 million in the same time frame last year. On the bright side, revenue was $454 million, while equity analysts had predicted $439.1 million. Daily active users is a closely watched metric for social media companies, and in the second quarter it grew by 4% on a quarterly basis. Last year, the metric grew by 17%, so dealers are worried its popularity is plateauing.

FX

EUR/USD traded above 1.1600, it hasn’t traded at that level since October 2018. The slide in the greenback remains in place and that has been a big help to the euro. Yesterday, it was announced the EU agreed upon the terms of the €750 billion rescue package. That has played a role in the single currency’s upward move too as it shows that the right steps are being taken. Christine Lagarde, the head of the ECB, was speaking today. The central banker described the rescue fund as ‘ambitious’.

GBP/USD is in the red today following its upward move since Friday. Yesterday, it hit its highest level in over one month and now it appears dealers are booking some profit. It is a little concerning the pound is in the red versus the dollar seeing as the US dollar index fell to its lowest level in over four months, but sterling is off versus the euro too.  

Commodities

Gold is driving as the bullish run continues. The metal hit its highest level since September 2011. The inverse relationship between the US dollar and gold continues to be strong and the weakness in the greenback is propping up the metal. Fear about a jump in inflation in the months or years ahead is one of the reasons for the bullish move in gold. The depressed bond yields are a factor too, especially as some yields are negative. Silver has more industrial uses than gold, and that has enjoyed a very bullish move also, as traders are hopeful about the reopening of the global economy. It hit its highest level in over six years.  

WTI and Brent crude are in the red on the back of the American Petroleum Institute report. Last night’s update showed that inventories grew by 7.5 million barrels, while the consensus estimate was for a build of 2.1 million barrels. It is worth noting the oil market hit a four month high yesterday, so the API announcement acted as an excuse to take profit. The Energy Information Administration report injected some volatility into the energy market. Oil inventories jumped by 4.89 million barrels, while traders were expecting a decrease of 2.6 million barrels. Gasoline inventories dropped by 1.8 million barrels.               

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