A Strong Case For Fed Rate Cuts Lifts Markets

Okay, very good morning, Thursday, 11th of July. Hope everyone is, is doing well. A quick overview of what we're going to cover in the session this morning. Going to have a look obviously in the aftermath of Jerome Powell, the Fed minutes, what exactly happened and how do the charts look this morning, and a couple of thoughts and insights into that matter and what the Fed are going to do in the future. We're also going to have a look at, well, a number of different things actually related to oil, from further tensions brewing in the, in the Gulf with Iran specifically, but also a developing weather pattern happening with an anticipated storm to hit the Gulf of Mexico. I believe there was quite a few headlines when I was off the desk yesterday, but a few things I can update you on on that matter. And WTI crude is seen a little higher as well this morning, about $0.40. Then we can have a look at the calendar ahead. Remember what I was saying yesterday ahead of Powell speaking. It's not just Jerome Powell, it's not just the minutes, it's also US CPI. So another critical kind of component that the central bankers at the Federal Reserve will be looking at in order to make the best possible decision going forward. But importantly for us, giving hopefully more clarity about the aggressiveness or not of future rate cuts. So quick overview of the charts this morning, very much kind of the dust settling after what was a particularly, um, busy day yesterday in a dovish sense. So the dollar depreciating, as to yields moving lower, uh, and consequently equities higher on the basis of the fact that the Fed are going to continue to lend support to the global economy. One of the big comments I thought jumped out initially, not only about the deterioration that Powell explicitly said to the House Financial Services Committee about the global economy kind of softening, but weak inflation, they said, would be more persistent than they currently anticipated. And that's kind of been the one sticking point where you remember a few months ago the Fed were quite quite persistent in this idea of transient conditions for inflation and that actually any weakness was only going to be temporary in nature. But now this is kind of an admission, if you like, of the fact that weak inflation is more persistent than they originally thought. And as such, you know, triggering, you know, that very violent move at the time—equities moving higher, gold popping, T-notes to the upside. So kind of a classic monetary policy play in the response to further support from the central bank. So in this case, a non-classical economic move. And by this, what I mean is stocks and bonds rallying at the same time on the back of this headline. So on that point, let's kick things off and discuss a few things, um, as to where we go from here. So this is the kind of headlines that you're reading this morning: Jerome Powell flagging rate cut. Global chill outweighs good US news. So the good US news obviously is in reference to the, the jobs report, the nonfarm payrolls that we had at the end of last week, which on the headline figure certainly exceeded expectations by a large degree. But on the balance, trade is just one of the growing risks to the world economies, the ongoing trade war, but also the softness in other elements of the US economy and inflation being one of those, as we just mentioned. The other thing though was that we had the Fed minutes last night. Now the Fed minutes show many saw a stronger rate cut case. And if I jump to this screen here, I know it's a bit small, so let me give you the, the overview. This was some of the main points that came out of the minutes last night: uncertainties, risks regarding global outlook, so trade war being mentioned, a decline in business confidence um, the spread between the 10-year and 3-month Treasury yields have turned negative. The continued shortfall in inflation risks a softening of inflation expectations, downward revisions of estimates for the long-run normal rate of unemployment. So there's, there's plenty of ammunition here to support the argument that given the current state of play, the central bank should be easing at this point. I don't think that was really debatable. I really don't think that there was any chance that July was going to be taken off the table, given the market pricing of 100% that that was going to occur. That would be a radical miscalculation or miscommunication on the Fed's behalf. So they're kind of going as you would expect at that point. But this was quite interesting, uh, and this was something that Eddie, who works at Amplify, He was messaging me at 11 PM on a Wednesday night. I think, Eddie, you should get a social life rather than messaging me on WhatsApp about research reports on the AI model of Nordia Bank research team. And what this is, so let me just give you a quick summary here. So basically what Nordia have is an algorithm that basically reads the words of every Fed minutes, and it basically assigns it kind of like a scoring system. But it reads all of the words and it generates a kind of composite scoring, and it's read all of the Fed minutes going back historically for decades. And what happened was that using this technology, that signal in Nordia's algorithm has punched out that the minutes have taken a big enough material shift that it's giving the most dovish sentiment scoring since the financial crisis, basically. So you can see here you had the dot-com bubble, and when this, this Fed sentiment scoring hit its overall all-time low here on this graphic, the financial crisis got very close to that. And the shift that we've seen from month month to the last minutes from the mid-June ones we saw last night, apparently now are indicating the most dovish sentiment that they've seen since the financial crisis, opening up of course a lot of debate of is 50 basis points still on the table for the Fed. And I guess the best thing to look at would be, well, what is the markets expecting? Let the federal funds futures tell you that rather than guess. And the, the calculated probability of a 50 basis point rate cut. Remember, before Powell spoke yesterday, the 50 basis point was kind of seeing some slight fluctuations, but more broadly speaking was basically 2-3%. It's now 31%. So there is now certainly a real prospect of potentially 50 still being on the table. I must admit that myself, again, I'm going to sound quite central banking, but dependent on incoming data and information, unless something changes, I don't think that they would do that. My base case thinking here is that very different from this period here and this period here is that interest rates were well over double digits in this period, and interest rates prior to the financial crisis were north of 5%. Interest rates now are at 2.5%. So for me, I don't think the Fed will want to, um, to utilize that much ammunition so much up front in advance of time. I do get the point that maybe they want to send a signal, but I think even that signal is difficult to manage because if you go 50, I think the market almost— it's a counterintuitive reaction where the market panics. And all of a sudden now you're chasing your tail, having to deliver more and more easing because the market think, well, if the Fed are panicking, what are they panicking about? There must be something bad looming on the horizon. So personally, I think no, no 50 for end of July, not unless there's a massive miss in the inflation number later on today, and unless there's another big episode of fallout in the trade war situation between now and July 31st. That's how I see things for the moment, but obviously subject to change. So again, that's kind of a summary of where we're at on the Fed side. So as, as per the Asia-Pacific session, very much taking on the baton from where we finished on Wall Street. And this morning, I think we're kind of holding on to some of that move. But really, it's interesting to see now, you know, where do we go from, from here now that we've gone and pushed back up to near record levels in in US indices. You know, is this enough to really push on again, or are we still going to see that kind of fade from that initial, that initial push-up now we know the latest status from the Fed? Okay, other things I want to discuss. Uh, as I said, Sam, as usual, we'll look over the charts in more detail. So I'm just covering the news. Uh, but this is one of the big headlines that a lot of the media or financial press are covering this morning. Um, British Navy was forced to intervene to stop Iran blocking a commercial oil tanker. This is from BP, on its way through the Persian Gulf in an escalation of tensions between the two countries. So there was a, a cargo vessel carrying as much as 1 million barrels of oil. Apparently it was being followed by a military ship of the United Kingdom, which then had to kind of put out threats to say to these Iranian vessels to back off, but The whole point here is that although nothing actually physically so much happened, it's just increasing risks in the Straits of Hormuz, which we know is such a strategically important choke point for the seaborne-going traffic of oil. And so, yeah, this is just another sign that tensions around Iran definitely have not gone away. Remember about a week ago I was talking about how people were so G20-focused so Fed-focused, Iran have kind of dropped off the map as far as the hierarchy of news and the press coverage. However, this is right back in investors' minds right now, so definitely we'll be keeping an eye on oil going forward on the back of this. Interestingly, but I would say unsurprisingly, Iran's President Rouhani has said the UK will face consequences for seizing the Iranian tanker describing operation as very cheap, wrong, and a mistake. This is very, I guess, classic rhetoric from the Iranian state given how they would normally as well comment on the US, and they have done in some of the recent episodes of those vessel attacks and drone being shot down as well. So again, still being fairly inflammatory though with these comments. So a situation worth keeping an eye on. And just to boot, if you think about all the major players in this issue Trump, of course, threatens new Iran sanctions over the nuclear program. Warning comes as US draws fire over world powers on their Tehran strategy. So yeah, definitely a hotbed of potential issues that could quite rapidly flare up and cause a very meaningful and sharp reaction in oil. So I would definitely be keeping an ear out on the, on the squawk as we go through the day. Not only that, remember yesterday you had a drawdown of what, 9.499 million in the supply situation, the regular DOE inventories. So you've got to draw down, you've got tensions rising in the Middle East, and now we are in hurricane season. So hurricane season, um, in the States typically kicks off in June, but this is really the first one of any magnitude that we've seen develop in this year's season. And so one thing to refresh your memories that's very useful to use as a tracker for weather conditions, this is the National Hurricane Center, the NHC. And what you can do on here is basically it picks up weather formations across basically what we're most concerned with here, the Atlantic. You can look at other things like Central Pacific and East Northern Pacific, but if you look at the Atlantic, you can see here there's a potential Tropical Cyclone 2 that's been forming. Now what the National Hurricane Center will be doing is using quite advanced and sophisticated satellite technology to pick up weather systems in their most kind of infant state, if you like. Weather patterns, precipitation that could then potentially in future turn into a tropical storm, cyclone, and then a hurricane, going up the kind of the, the ladder. Now looking at a few other things if you actually click on these individual, uh, these X's where the weather pattern is— so this is why it's such a, a meaningful weather system for crude traders because of the proximity of the Gulf of Mexico— well then here, this is the, the overview of what we're looking at. A tropical depression expected to form on Thursday over the northern Gulf of Mexico. And here's a nice breakdown of what we're looking for it gives you anticipated likely times of arrival. But to make that much more visually or aesthetically pleasing, here's a much more clear map where you can see the exact distinct time forecast of when we're expecting landfall. But remember, with weather systems, when it comes to trading commodity products, particularly this— what we've seen with Hurricane Harvey, Hurricane Irma, This is very much a 6— can be up to a 6 to 10 day ahead weather looking procedure that these energy traders will, will do, which is trying to pick things up. And they will trade basically well ahead of time based on the mapping of the forecast, on the direction of the weather pattern. So you can see here, this is the Gulf of Mexico, and this is the coastline which encompasses all of the major facilities that contribute to a large proportion of output out of this region. To give you an idea, the US Department of Interior Bureau of Safety and Environmental Enforcement said yesterday the Gulf of Mexico drillers have basically shut 32% of oil production and 18% of natural gas output here ahead of the storm. So again, as we map this, where whether the weather system intensifies, the more ramification that could have. Or could it change direction and not actually hit kind of right through the middle of Louisiana, which is really the, the sweet spot of the activity of oil and gas production within this region? If it tails off and goes somewhere else, well, that can have a, a pricing out effect of the impact it could have. So point being, you need to be now mindful of this particular system. Going forward if you're trading crude oil. All right, quick look at the, the calendar for today and then I'll hand you over to Sam on the, on the charts. So as of this morning, you've had a couple of European CPI numbers, but these are final prints, so they're not having any type of meaningful impact on price. Um, going through the morning, Bank of England Financial Stability Report 10:30, uh, that's not a market mover. That's more of just an update on proceedings, so to speak, so I wouldn't be looking for any trade on the pound on the back of that. The one thing that could be more interesting though is the ECB minutes, just given the general status quo of much of central banking at the moment erring on the side of caution and inevitably then leading to becoming increasingly dovish. I think the ECB minutes could be particularly interesting, so do keep an eye out for that at 12:30. Then Fed's Powell, this time the delivers his semi-annual testimony to the Senate. But this is nearly always a copy-paste repeat of what he said to the House yesterday. I would be expecting that to be very much the same case, and so I wouldn't be looking for any type of similar type of reactions what we had yesterday. Um, but it does have a Q&A session with the politicians, this time of the Senate. However, I would not again look for too much. As I remember from yesterday, much of what the politicians were really asking Powell about, it was about the new cryptocurrency that Facebook has and his thoughts on that. So really not important for the assets, traditional assets that we're trading. The biggest probably event is going to be, um, US CPI. So US CPI today expected at 1.6%. So a decline from 1.8 previously. So definitely, uh, this is the reasons why the Fed are seeing weaker inflation more persistent. You know, the weaker this number is today— we've got a range of 1.5— if it comes in, US inflation down at 1.4, 1.3, then that's only going to further fuel the type of moves that we saw yesterday and will increase the prospect that that 50 basis point option will probably start rising from 31 up to 35 up to 40%, which definitely makes things, you know, definitely more difficult for the Fed. Do we have to hear them communicate further to clarify whether that is truly an option? Because the Fed will be going into their blackout period in the coming days, that period of 7 days before a Fed announcement when they cannot speak. Otherwise, you've got jobless claims, but again, non-event in comparison to the fact that it comes same time as US CPI, and that really is the, the main ticket for today. All right, um, one final point, um, aside from Powell, you do have Fed's Williams at 4:00 PM, Fed's Barker at 5:30, Fed's Bostic at 6:00, Williams again at 6:30. You know, a lot of this is, as I pointed out before Powell spoke yesterday, the kind of protection policy that the Fed has in order for realigning market expectations. But I think overall, I don't think there's much of a necessity to really move the needle too much from what Powell said. So although worth monitoring, again, I would expect them to largely reiterate what the general consensus or communication was from Powell yesterday. Okay guys, that is it from my side. Let me hand you over to Sam, and I wish you a good day ahead. And for some of you who I'll be seeing later at the traders event I'm speaking at in London. I look forward to seeing you this evening. I hope you have a good, good night. Take care.

Hi guys, good morning. I hope we're all doing well. We'll have a quick look over the currency markets to see the DAX come back towards its pivot, the key level. Just before we do go currencies, you would say it's just above that pivot, the previous low of the morning, which broke broke through on the open 22 minutes ago. So that'll be the key, key area to keep an eye on there, uh, on the DAX, just above the pivot. And how that holds or doesn't will obviously be key for where this market goes. And that's just coming through now and just testing that area. So keep a close watch on that. Just first finding a bit of resistance, uh, we'll come back to that shortly as of course that's, uh, testing as we speak. EUR/USD yesterday, decent push to the upside, as did most dollar pairs. And just having a look at where we're trading now, quite key, uh, just from a previous range there that we were in going back to the beginning of the month. You can see quite a few of the lows, uh, coming to this area just above the high of the day today. Where was the high of the day? Pretty much the low of the morning of the of the 4th. But as a zone goes, pretty key, especially, you know, going back to that area from the 2nd and obviously 3rd, 4th, and then the breakdown as well. Quite a key zone. And, and very much the same for most dollar pairs. And just before the breakdown that we had on Friday, and so Thursday, Wednesday, Tuesday lows, for example, are all just being tested now. The previous low that we had of this week Obviously marked up quite nicely with the 18th, and, and since then we've just drifted back higher. How long this will last, I guess time will have to tell. Every time we think the— or you may think, I should say, that the euro is going to push higher, it evidently doesn't and comes back down after a sharp breakthrough. Looking more intraday here at the euro, obviously got yesterday's high, which for a couple of the pairs has acted as then support for potential push higher. So that's one to keep an eye on, not just in this one. The Aussie dollar is currently on its previous high as well. Just having a look, you can see a couple of trend lines coming in from those previous lows, quite well respected. It would be one of those cases where if you're long and, you know, using the previous high today and yesterday as that area, you'd be happy to to hold that as long as it stays above that trend line. Uh, that would be, would be my advice going forward. If we were to, to break down there, obviously got the lows of the day, and then around the pivot looks quite key as well that price could drift down to. Above the, uh, the high of the day, above the R1, obviously all of those lows back from the beginning of the month would be somewhere you'd want to keep an eye on. Just going to the Aussie, as mentioned, that is on the or just tested the, the previous high of yesterday. You can see there with a couple of ticks above, so nice area of support, uh, for the Aussie, uh, there, which has held well. And then if we just put that on that longer time frame, you can see quite a bit of resistance would be found around that R1, the breakdown before we push lower, uh, on the 8th, on, on Monday as well. So R1, pretty key, keeping a close watch on that should this higher the day from yesterday actually hold. If we were to, to get a break lower in that, or again similar in that, around the pivot looks quite key. And then of course you have all of these previous highs from Tuesday and Wednesday morning, but they would obviously— it would take a big move for us to, to get to that area really. Having a look over at the pound, uh, a bit of a a relief yesterday for any pound traders, uh, any pound bulls, to say. Obviously helped, of course, purely by the, uh, the dollar weakness. And that's come back up to an area now similar to the euro in, in testing some quite key resistance just above where the highs are of the day. So you've got the, the high there of the 8th, and it was also the low of the pre-nonfarm payroll, uh, low on the 11th on Friday. So that would be certainly somewhere I'd have marked up as a key area resistance above that. And certainly on the hourly time frame, there could be a bit more room to go, uh, up towards 1.26. To the downside, similar sort of trend lines you can see for that euro. We really squeezed in, uh, overnight. Oh, where's that trend line gone? There you go. And you can see a decent push ahead of that. And similar to the Aussie and similar to the euro, very correlated this morning. Yesterday's high is acting as that support. So definitely one to keep an eye on from a correlation point of view, and any retest of these, uh, trend lines from the pennant, uh, would be worth keeping an eye on. And similar, obviously, if we were to come lower, the pivot remains pretty key. Having a look at the yen, um, didn't— hasn't made it to yesterday's high. So quite a decent push higher here for, for the yen. And while we still have, uh, similar, uh, to the other currency pairs, and we're just hitting resistance from previous day's levels of support. We are just perhaps just drifting lower a touch now, and I'll be keeping an eye on all the previous highs. So the high of the 8th around the R1, good price action around this point, just from a level to, to be aware of that I'd have marked up on the chart. However, just keep an eye on what happens around here just in case we were— or we are, I should say— to, to to get a sort of third test of this trend line. And if that was to hold, then obviously you could hold the key as your, your sort of line in the sand and may change your mind whether you'd want to go long R1 or not at all. Having a look over then to— well, have a quick look back at the, the DAX to see what happened there. So you can see that, that resistance level holding firm on that first retest. So we had good support, 1, 2, 3, breakdown and the first retest offering, uh, that resistance point. Have a looking over now at the S&P. The all-time high traded, uh, yesterday, little pop through. We had another go this morning at trying to get there, not quite, uh, having it, uh, for now. Just having an update of those levels. So just above the high of the day, obviously you would want to be careful of going long because of how close yesterday's high is. Just come back down to test this trend line here in the, in the S&P. 1, 2, 3, 4th test here. So quite a key trend line to have marked up. A break of that could see further run down. Uh, of course you've got 3,000 there on the futures just below, which is also a high from this morning. Uh, but it wouldn't be too surprising if, especially if DAX was to, to continue lower. I'm not saying that it will because obviously this trend line is good enough in its zone. But if the DAX was to maybe lead the way, a further breakdown towards the pivot, which obviously looks quite a key zone of support just going back from yesterday and even previous days around there as well. So quite, uh, quite a key level I'd be monitoring should we push lower. I think for the S&P, in terms of going long, if we can get anywhere around the pivot, that would be obviously a good opportunity for that. But for now, that trend line acting pretty well. Uh, and the NASDAQ, you can see similar, uh, in that we have just trended higher and a decent, uh, pullback just from pushing lower, uh, initially. Quick look at gold and oil to, to wrap things up. Uh, gold, another push higher yesterday from the, the dollar weakness, as you would expect. We did just drift down a bit, but we found support, uh, on an area where overnight we did so as well. To the upside if that's what you're, you're favoring here. We know what gold is like when it can break these trend lines. Can we get a third test of this one and a breaker? That would lead to a decent push to the upside. For the downside, I'd only really feel comfortable, uh, in going short should we break out, uh, this neckline. If you look yesterday's high, this morning's low, almost tested it again there. So I would say short below there, long above there for now would be an opportunity that I'd be, uh, prioritizing for that. Oil— hang on, was I just looking? Yeah, oil. I'm gonna say they look very similar this morning, uh, but oil pushing above that $60, helped by a decent push above that monthly, or last end of month, last month's high. And you know what was not too long ago looking down near $50, what a push higher it has been. In terms of a key level, uh, we have just broken above it. This is, you know, massive, um, in terms of just sentiment, especially if we finish the week back above what was the, the high that we had from the back end of last month, beginning of this one. It was the low of the 3rd of what looks like May, uh, so above there and yeah, well, it can continue to push high from a technical point of view. Intraday, where's a good point to, to get long? Well, you'd still consider 60 28 as an area for sure. And if it got down below towards the pivot, you might not fancy as much just because, uh, the importance of this level. So to be back below it, you may be put off slightly. So I'd say that's your line in the sand, 60.28 for now anyway. Just having a look to see if there is anything else I'd be interested in. Not right now, I would say, for oil. Just having a look at that. As usual, uh, any questions, please, uh, do let us know. Uh, we'll obviously be in the chat throughout the day, and some decent speakers into the back end of the afternoon, and obviously some important data in and around 1:30 at the US with those inflation numbers. So should be a good afternoon, if not a relatively quieter morning. But as usual, any questions, please do let us know, and I hope you all have A great trading day.