Amplify -2019 Market Outlook

Hello and welcome to our Amplify Look Ahead to 2019. I'm joined here by two special guests. Forget this guy, we've got this lady. So Theresa's joined us. Thank you, Theresa, for taking the time out to come from Brussels. I know it's been an incredibly stressful year, but we really admire you doing everything you can, and thank you for giving up half an hour of your time for joining us. And then the other person sat here, of course, is Piers, our head of trading, who you know very well. And basically I'm going to lead a discussion of getting his thoughts, and I'll add some of my own, of what we think 2019 has got in store, starting off with, I guess, a bit of a talk-through of what exactly is it that's happened this year. So if I just quickly transition my charts to this graphic, and I guess we've got to kick things off, Piers, with talking about, um, the renewed— or the comeback of the VIX, renewed volatility, which is such a contrast to when we were having this discussion 2017. Yeah, it was the one of the most dull points of markets, one-dimensional kind of equity rise, record lows in the VIX, and now here we are, the change. So I guess at 89% relative performance year-to-date, what do you think? Do we go— how much further do we go? Do we pull back from that in the next coming months?

Well, yeah, I mean, I think definitely this year, and you can see that also, I mean, obviously the VIX is looking at the— it's kind of a measure of volatility when you look at the S&P 500. And I think that I'm just going to transition back to just the long-term S&P chart. And, you know, it's quite clear 2017 was a year where stocks just went up and up and up and up and up and up. Record ever low volatility year. And I think the big contrast between this year and last year is definitely that volatility is back in style. And go back to that chart, you can see the VIX top of the list here, 89% higher. And that's because, yeah, volatility is back. And I guess for Depends who you are in these markets. It depends how you operate, whether you're long-term, short-term, whether you're long only. I think for us, short-term, where we can go long or short, you know, these kind of volatility conditions are absolutely ideal. You know, 2017 was, was a slow old year, and I think a breath of fresh air into short-term trading this year. And the thing looking into 2019 is that, yes, 89% up on the VIX, but go back to the S&P chart. You know, this, this violence that we've seen this year in this index, I think it's definitely set to continue as we hit 2019. So, you know, from our point of view, short-term trading, I think that these conditions are very healthy and are here to stay. I think if you're a long-term investor, quite the opposite. You know, I think we're at that kind of major— you— these long-term investors have not had a stronger test of their, um, their confidence, uh, in a decade now. I think, you know, ultimately we've been in a decade of buy the dip. Anytime stocks drop it's get long because then we're going to go to new highs yet again. And of course, going back over the years, that's been a lot to do with the, you know, the monetary policy in this world, the stimulus from the central banks that have been that safety net. And of course, the Fed stopped stimulating back in 2014. But of course, 3 months after the Fed ended QE, the ECB started QE. And so, you know, the baton was passed on. And we've had, you know, central banks propping up this asset class for a decade. It's just that when we hit 2019, and you're already seeing that now, of course, the volatility here this year for many reasons, but one of them underlying it all, I think, is that central banks have now stepped back. And obviously the ECB are ending their QE program in a few weeks' time. And then you've got the two central banks, well, firstly, the Fed hiking. And now the ECB stopping their stimulus. And I think this will continue to contribute to volatility remaining elevated as we, as we go into the start of next year and through next year, probably.

So then on that point, then, we saw about a week ago a lot of the big banks putting forward their S&P year-end forecasts. And we know that that's obviously incredibly difficult to be accurate with, but most are looking for a return back to near the top of where we were at the all-time highs on average basis. So if we are then withdrawing the stimulus, the Fed to kind of are on track, if you like. Obviously a big decision next week could be firm, see about where do we go with the rate sequence from there after the December hike. But if the ECB are finishing, let's say, is there What would be the alternate argument then? I.e., if trade war got worse and the slowdown we've seen evident in data in Europe continues, we have a hard Brexit or no deal. Let's just put a real negative spin, worst case. Where does this— what happens to the S&P as an initial reaction, but then ultimately the mechanism of monetary policy coming back in? How quickly would they act? What would they do?

And then what would the subsequent reaction be? I mean, I know big banks are perhaps thinking back towards the top here. You know, we never quite made it to the 3,000 mark, of course. And I don't agree with that. I think at the start of this year— sorry, at the end of last year, I think I said in this kind of preview that we did 12 months ago for 2018, I said that stocks would have a negative year. And for a lot of this year, that call was looking fantastically incorrect. But here we are, just a few weeks to go, and the S&P— well, go back to that chart here. Actually takes a while to find it, but the S&P is basically in the middle. The S&P right now is down -1.89% on the year, which I don't know, in some ways is surprising given that We've had a lot of chaos and carnage and a lot of downside on stocks of late. It's actually only put the S&P back to pretty much where it started. But I think— I cannot see the scenario where the S&P gets back to the top next year. I think this year has been marginally negative, and I think next year it can be positive for stocks, but not, not back to the 2018 high. But of course, it could be, as you were saying, with some of these negative stories, you know, very much still in the— it's unknown how these are gonna transpire. Then yeah, we certainly could get another negative year, and there's no reason why the S&P can't track back down towards 2,000. I mean, you've got— it would take up that the kind of perfect storm where obviously the big risks ahead are the trade war risk. So that's the US and China, and how does that evolve and develop? And I'd say one of the big dates in your diaries for 2019 is the 1st of April. But we'll know before then. But the 1st of April is Donald Trump's— that's where he's moved the date whereby he's threatened to raise Chinese tariffs from 10% to 25% on $200 billion worth of goods. I think that's a massive line in the sand for you next year. And we've got 3.5 months for the two biggest economies on the planet to come to some form of arrangement. You've actually seen this morning what I find quite interesting just over the last week or so, or since that G20 summit, is You've seen quite a few negatives occur from the US's side. Or, well, let's take the arrest of the, the daughter of the CEO of Huawei in Canada. I thought that was a pretty aggressive move from, let's say, the North American side, you know, ratcheting up the ante. Quite, yeah, an aggressive move. And it's quite interesting, I think, this morning The response really— China have now lowered tariffs on US automotives. Now that's a concession on China. I think up until now what's happened is Trump's been threatening and threatening and threatening, and China has been saying, look, we don't deal like that. We can't come to the negotiating table if you're just going to be threatening and bullying. So, you know, we're not interested. I think maybe you've just seen a slight change in China's strategy on how this all works. And that is one of the reasons for that in the end, is this graphic showing you what's happening economically now in China. I think in the end you've got Trump on one side, you've got Xi Jinping on the other side, and they can, they construct their stuff, they can, they can threaten, um, you know, it's all part of that negotiating process. However, in the end Xi Jinping is a— in the end, his actions will be driven by the economic conditions. And if economic conditions deteriorate, and the data set that we had overnight is very much indicating that that is happening. So you've got quite alarming stuff. Industrial output, um, slowest growth rate since 2008. Retail sales growth rate This is for— these are November 2018 figures. Lowest annualized growth rate since 2003. GDP tracker now, Bloomberg's GDP tracker, down to 6.35%. That's the weakest for nearly 3 years, and so on and so forth. All of this data set overnight is just showing that this trade war risk is continuing to have an ever more negative effect. And if that trend continues, it doesn't matter what the principles are with negotiating. In the end, this economic decline will force Xi Jinping into making concessions, getting to the negotiating table, and getting a deal done. I think Trump— it's similar but different. I think Trump in the end is governed by this thing. It's called the S&P 500. I think he is all about the stock market. I honestly believe his policy decision-making, certainly his tweet— Twitter activity is very much driven by what's going on with the stock market. That is one thing in the US, is the US as a society, you have more US— a higher proportion of US citizens owning US shares than you do in any other country owning their domestic company shares. So, you know, he's very much in tune with, you know, popularity, winning votes. And ultimately, when your electorate owns shares and the share prices are tanking, then you've got a big problem, especially when ultimately it's his fault. When you consider the trade war risk, it's his aggressive policy to try and alter that trade deficit that That is very responsible for this. So I think ultimately, the lower the S&P goes, the worse the economic data gets from China, the more likely you're going to get these two come together and actually do a deal, and therefore avoid that hike in tariffs come 1st of April. So it's kind of weird. You could say there's a bit of a safety net somewhere on the downside for the S&P, because the lower it goes, the more likely a deal gets done. Where that low is, I mean, certainly technically the obvious point to look at is the 2018 low set back start of February, just above the 2,500 handle. So on the downside, that's obviously a target. So trade war risk, clearly. Then what do the Fed do? I don't know if you want to talk about—

you've got, I think, under that circumstance, the trade war escalation and we do start moving lower, not only do I agree with what Trump would do, but I think the Fed— what we'll hear from the Fed next week is that yes, they'll hike rates. I don't think it's a one-and-done, because I think as a Fed strategy, you want to have an incremental step stone down from being hawkish. So whilst this equity market or fears might get worse and that weigh on prices, then not only definitely I think Trump will reverse tact pretty, pretty swiftly, but I think the Fed will want to have this ability to go from 2 to 1 to 1 to none. Yeah, why not in that, in that sense? And I think that's another reason why any significant pullback in the US stock market, I do think, will have a pretty solid floor. If it does get down to, like you said, that, that Feb level. Yeah, I know you said the buy the dip is, um, I wouldn't want to be sat in a buy the dip trade, but I do think there'll be a pretty powerful coordinated, almost, although that would never be vocalized, response between the Fed and the administration. So the fiscal and the monetary, uh, or I say the foreign policy response.

Yeah. I mean, I think the Fed— I'm just showing the interest rate hiking cycle here. I think that's interesting what you said. I mean, in 20— so let's just ignore that one in 2015. In 2016, they hiked once. 2017, they hiked 3 times. 2018, they're probably going to hike 4 times, of course, with the final one being next week. So it's like an acceleration. So are you saying now that they need to decelerate the hiking cycle? It's not like now we can start cutting. So it's almost like next year, will it be 3 or back to 2 hikes?

Yeah, I think for 2 reasons. One, there isn't this, you know, everyone's already talking about the inversion of the yield curve, the recession coming, the late cycle, so on and so forth. This immediate— this was a, this was a response. To something which— okay, fine, the inversion was, I think, in what, in '07? It came before. But that just so happened in my point of view. I think this was an unknown thing. This was the black swan event that required immediate aggressive action. I think here it's all about, as a central banker, keeping some ammunition, some bullets on the table. And it's been such a hard graph for them to get off of here. They definitely don't want to— they want to keep this up as high as possible until absolute needs must. And then I think it starts to— because then you get a bit of bang for your buck on every time that, let's say, you, you go from the sequence just getting more shallow to the point of then no change, to the point of then cutting. Yeah, you're basically buying yourself time. Yeah, all the meanwhile, you know, you might be looking that statistically speaking, the inversion, I think, of the 2s, 10s to the recession taking place, something like 765 days.

Right now, that's the average.

That's the average over the last few recessions. And though I know there's obvious risks that could obviously—

so recession end of 2020 then, is that what you're saying?

Right, so at which point, let's say, okay, perfect storm— well, not, not perfect if you're Donald Trump. But so then a lot, you know, there's a lot of things that could change then, this kind of the policies and then the changing of political narrative.

And yeah, so I've got a question for you then. I think there's a problem here because I think you're right from the Fed's point of view and their credibility perspective, and in terms of ammunition for the next recession, you know, it's not like hike next week and then stop and, right, start to look to cut, you know, in 2019. But of course, if the other factors— so let's say Europe, if the economic situation in Europe continues to deteriorate, which will have a knock-on negative effect on the emerging markets space— and if the Fed, let's say they do hike next year, one, two times, whilst you're getting negative trends elsewhere, well then, that— isn't that gonna feed into another episode, a wave of dollar strength, which is then just gonna exacerbate the pressure on the emerging market space? It's almost like, yeah, that negative feedback loop. It's hard to see how that doesn't happen.

Well, like you said, the— if the Fed are gonna hike again in 2019, it's got to happen sooner rather than later. So it's got to be March when the next dot plot comes out. That then is the meeting 2 weeks before the tariffs then expire. So can you pull the trigger at that point? Well, I mean, they're pulling the trigger right now, right? So of course they can. I guess we've then got to reassess 3 months down the line, what is the state, not just of the US, because one of the, you know, one of the things that the Bundesbank was saying this morning in Germany was that Yes, Germany slowing down, it's not awful, it's Brexit, right? So with the Fed, remember what, what you said here. Remember in 2015 they said they were gonna hike 4 times here. Yeah, they obviously did 1, and their main reasons were— but this almost sounds like a history repeating— it was China, absolutely, risks of China hard landing, and Brexit, well, the EU referendum, which wasn't supposed to happen. Yeah, and here we are again, a couple years down the line, it's the same 2 real key risks. And then throw in an additional small issue of a trade war.

Yeah. So, well, so actually thinking timing-wise for 2019, then the end of quarter 1 is everything because you've got Brexit, yeah, you've got the Fed potentially hiking, and then you've got the tariff deadline. And so there you— there you have 3 kind of major risk, global risks, right? And they're all coming together. So I think actually What happens to, let's say, the S&P or any global market for that matter? What happens to these markets in 2019? Now, what are year-end targets? Well, I think ultimately what happens by the end of Q1 will determine whether we hit the kind of square down here where we're breaking lower. This sell-off in October, November is just the beginning. You know, if we get down there, you know, you're gonna— to get down there, you're gonna need again, a breakdown in talks with China. So that tariff hike looms. You're gonna have to see carnage in Westminster ultimately. I don't know, it's hard to know what happens, but by the end of January— what is it, 21st, 22nd of January is the proposed kind of final, final date for Parliament to vote through any kind of deal. And let's say that doesn't happen, and I have to say it's hard to see how that is gonna happen at this point. But given what happened last night in Brussels, Europe just not interested in having any kind of legal obligation to end the Irish backstop, then it's hard to see how this deal can be altered for it to be voted through Parliament. So yeah, I'd say by the end of quarter one you're gonna— well, no, um, and it could be the top. Of course, it could be that a deal gets done with China, happy days. It could be that the Fed do hike in March because the economy is strong enough, but with a dovish tilt saying, look, we are hiking, but we're near the top. Um, and let's say somehow miraculously Brexit— oh well, who knows— referendum, no Brexit. Then that could have, you know, quite a positive impact on Europe more broadly. So I think by the end of Q1 we're going to know where we're going to go.

So what, can we cancel Christmas and just move on? Can January start right now? Sounds—

yeah, yeah.

I mean, for certainly what my role is here at Amplify, then I can't wait because obviously I don't want to be the bearer of bad news, but like he said, equally it could be quite positive. But what the point is here is you've got to understand the news and all the macro factors. It's really now is more important than ever, in addition to the kind of technical setups, that really understanding these, these are key drivers going forward. So, well, let's push the conversation on. We've talked about the S&P, talked about the Fed and stocks quite a lot, and Trump. Let's talk, let's move, let's get the pound chart up. Yeah, and let's just talk, got to talk Brexit. I guess rather than get stuck into the nitty-gritty, you've kind of given a good snapshot of what happened last night. I guess the bigger picture is, you know, where do we go from here? You mentioned 21st of Jan, that's the self-imposed deadline from Theresa May, so definitely I mean, I've always been saying in regular briefings that I think this— the fate of Brexit really is contingent on what happens over the coming weeks. It's going to define whether, whether we break 120 or whether we commence then, I think, if we can move into a smooth transition period. And I do firmly believe that a transition will lead to a transition and So, hang on, but the thing that you'd have— I was talking to one of the guys here— is that if you were Labour, rather than striking now, would it be more opportune to go into transition, wait till 2020, when economically then, if we are having this downturn, you then basically probably will get to a point where not a lot has changed. We're 2 years further down the line. We have the exact repeat of now, but in 2020. The only difference is then the economy, if it does go into timed recession, when people, households who are already under pressure, then are really feeling physical pain, then is that a better time then for opposition parties to strike?

So you're assuming we make it into the transition period then?

On that discussion point, yes.

Okay, so how does that— first question before we talk about the transition period— how does that happen? Because right now Theresa May's got a deal, okay, that is spectacularly unpopular, to the point where she couldn't even bring it to to the vote, okay. So she's gone back to Europe to try and get some concessions around, obviously, particularly the Irish backstop, okay. And first attempt, that's failed, right. So she now comes back. So there's gonna be another EU summit, or there'll have to be, now early January, early to mid-January, before the 21st of January. What's going to change in the next 4 weeks for Europe to give some concessions? Or do you think that staring into the abyss on the 21st of January, the deal is the same? Do you think MPs will change their minds in Westminster?

So the latter. I actually think that the problem that you've got with this negotiation, or what you have had is there's, even though you've been backed into a corner, there's always been a little place to wiggle out to go, well, there's still a little bit more time, there's still another week or another day. But I think the problem that you have is that Article 50 in a sense can also be extended. Yeah. So this, this is where you're gonna get this brinksmanship now. Europe will be resolute that that's not the case. Right. Europe will say what they said last night. And if I was Europe, I would have said exactly the same to Theresa May last night, knowing that we've got another 4 weeks to basically show her, but also everyone else in Europe, that this is not, we are not flexible to someone's demands upon leaving Europe and so on because of their own agenda or unity to protect. All the meantime, European economic conditions are deteriorating.

Yeah.

What I need for my view to play out is I need these yellow vest, for example, in France protests, which are happening again despite Macron's efforts across the nation this weekend. I need to— I need that to continue. I need the PMI data we saw this morning to continue to soften. And obviously, we haven't got a lot of time for statistical data to come out. But these guys, you know, will know what the sense is economically on the ground. And does that almost then force them in on the European side? Because I'm not just looking at the domestic side here. The Europeans have also got to basically give a major concession. But then on the MP side in Britain, I just think that, I mean, you vote against the deal, you're then risking then Europe having to agree to the extension of Article 50. And then at that point, that's the only alternate then I can see this falling apart and we go down the route of this second referendum side.

The only way I think Europe will agree to extend Article 50 is if there's a general election or there's another referendum. And then they'll say, alright, fine, Let's pause, let's delay that deadline to see what happens. Will Europe extend Article 50 just because the UK still aren't happy with the deal and want more time to negotiate? I actually think Europe will not— will not— there'll not be a consensus in the EU27 to extend Article 50 just to allow more time for the UK to negotiate when really they don't want to negotiate any further. Will Westminster therefore vote through the bill on the 21st of January if it's— or will Europe give concessions on the backstop? If not, will MPs in Westminster vote through Theresa May's bill? I don't— I honestly think for the first The first, I'm moving now more towards the idea that we're either going no Brexit— sorry, no deal, I should say— rather going no deal, or it might get to the point where Conservative MPs are so, so, so, so desperate— that's the, the Remainers— are so desperate that they team up with Labour and to vote this bill down and trigger some kind of election event or some kind of referendum event. I think that the views in the Conservative Party are so entrenched, so could you— I think looking into the abyss doesn't matter.

Yeah, could you not then, rather than risk a general election, which obviously carries then— not that this would happen according to the polls, obviously Labour's not nowhere near an outright winner in that situation. Yeah, but could Theresa May not then create some kind of deal internally to say, okay, I said I was gonna resign at this date, I'll resign a lot sooner, you back this through, get this in, or, you know, the cabinet changes, she changes her timelines of her leadership. Something— she's already, like we were saying the other day, they were asking, well, she's here right now, Theresa, You were saying only a few weeks ago, and for many months actually, that anytime anyone asked you a question about your leadership, you were just swerving them. No comment. Now you're saying— what was the date she said she was going to step down?

Before the next election.

Before the next election, which is May 2022. So she's already, it seems, to get the— to survive the no confidence, she's had some backdoor conversations, I'm sure, with the 1922 committee members and so on and so forth, the ERG. So Could she use that as leverage to appease them without them running the risk of then— I mean, teaming up with— teaming up with Labour, absolutely. Teaming up with Jeremy Corbyn, that's a whole nother level for these guys. And as anti-Euro-sceptic they might be, I mean, we've not even talked about the political policies here and working in that fashion. So, well, look, let's move this on and talk about the chart. And let's say your view comes through first. So between now and then, obviously things politically are going to deteriorate, which means the price fundamentally should continue to move lower.

Yeah, I think so. The break of the summer low this week obviously has been key, and down to test the 125 handle.

And make that a bit smaller. You keep talking.

Down, down through— well, down to test the 125 handle, which has so far survived, but It definitely— that's technically massive, that break of the summer low. And I think if you are just looking technically only, forget about all the various, well, almost impossible, um, uh, different outcomes that might happen politically. Technically, we're now going to test 120. You know, that, that key break of the summer low, I think, is very significant. Um, the 120 handles coming. And I think, you know, even if it— I don't know how it would happen, but even if a deal gets done and what have you, I think in the next few weeks, you know, we're gonna see the sentiment around Brexit continue to stay negative, if not get even more negative. And I think that that almost guarantees more downside for sterling. And I would be fantastically surprised if the 1.20 handle is now not tested. And when we get there, I don't know. But before the 21st of January, yes. And then I think, I think then what happens around the, that, that mid to end of January then will determine whether 120 again is a great bottom and we bounce, or a break at 120.

Okay, so yeah, no deal, break 120. Yeah, where do we go?

Well, here I think you need to look on a super long term. I mean, when were we last— actually, there's no point. It's like, it's like a 30-year low, isn't it? Can I go to a yearly chart here? Okay, we've only got data going back to 2001. We haven't been through 120 for all of that time. You know, you're talking 35, 36-year lows down here. So how far do we go below 120? Well, potentially.

Well, I guess, I mean, what I can say is that the bank reports that I have read, yeah, quite a few are tabling 110.

Yeah, so I mean, I think when you get, when you get through prices that you haven't seen for decades, then the big handles become the targets. There's not a surprise that the 2016 and 2017 low is at 120, so inevitably you're looking 115 or 110. Everyone, if you break 120, it's 115 or 110. Yeah, for sure. And so those big handles will be the targets. So yeah, I mean, I think certainly, I think more downside for the pound into year-end. Technically, this looks quite nice for the trend to continue. Whether we get to 120 before Christmas, I think probably not. That's asking a bit too much unless something major— well, I guess you're gonna need some more negative developments. Of course, it's possible.

So then, if— let's talk the complete opposite. Yeah, smooth passage into transition phase secured by then end of March. So they're kind of— the pressure cooker, if you like, is the tension alleviated substantially. For at least a period of time. Let's assume that Theresa May is still there at this point. Yeah, no deal, backdoor deals or anything. So if we saw a meaningful recovery here, do we see one? And if so, where to?

So I think people— I think the ability for sterling to appreciate against the dollar, even with a move into the transition period, I think, is limited. You know, I think ultimately, if you now just talk economically and look at the European situation— I'm going to talk Europe and the UK here because, like, data this morning, for example, from Europe was particularly worrying. When you look at charts— actually, I'm going to show you So one second, I'm going to show you the French data here this morning. Um, here's the French services PMI for November— oh, sorry, December— flash estimate, big sharp drop. Now, how much of that is due to the Yellow Vest Brigade? We don't know. We're going to need to see January's figures really. But certainly this is— and this is below 50 now. So French services PMI below 50, that's contractionary territory. Um, check out the Well, let's go to German manufacturing PMIs. And, you know, here you're seeing a continuation of this downtrend. And, you know, this is very worrying. And when you look at German GDP, well, for quarter 3, it's negative, right? So we've definitely got— whether it— how much of it is Brexit related when you're looking at Germany, it's hard to know, but you've definitely got a downward trending economic conditions in Europe, okay. Now clearly the UK is, is the same, you know, and this is more for Brexit reasons. If we look at UK GDP, all right, we've had a little bit of a rebound here, but I think this is when we went through the summer when you got stuff like the World Cup going on and you've got actually some positive developments on Brexit and all the rest of it. But, you know, I think if we go into transition, I guess the point I want to make is if we we go into transition, then don't we still have the uncertainty that we've been living with for the last 2 years? The uncertainty still is, well, what's the trade deal going to be? And this— so that the uncertainty lives on. Plus then, at the same time, underlying everything, have we had Europe reach the peak of the economic cycle? You know, yes, Brexit is is playing a role there. But actually, is it bigger than just Brexit? And is it that we're actually in an economic— we've peaked, and then we're going to see the economic conditions deteriorate? And if so, what I'm mostly worried about for Europe— if a hard Brexit can just accelerate this, but even with a move into transition period, I think underlying economic conditions are weakening. And the big The problem, of course, if we move to a recession, let's say end of 2019, well, one way of dealing with a recession is monetary stimulus. And unfortunately, the ECB's ammunition box here is absolutely empty. And they're literally just ending QE, right? They want to get away from this, this permanent QE. Addiction to monetary stimulus and they want to get back to normal. But it could be they turn off the QE tap and actually we're still so dependent on it that these economic conditions slide. And what do they do? They start— restart QE. I just don't think it's an option. Draghi got asked this yesterday. One of the journalists asked a really interesting question and he asked that, you know, what would happen if we have a continuation of the downturn? 'Are you concerned that traditional monetary policy tools have been exhausted? And what would you do? What are the alternatives?' And Draghi said, 'No, I'm not concerned. Traditional monetary tools have not been exhausted.' And I'm like, 'What?' This was the—

just at that point, this was a classic phrase he made. I had to tweet it at the time.

Yeah. 'Continuing confidence with increasing caution.' Yeah, I love it. That's sim— His way of trying to describe, trying to say, yes, we obviously— the data's showing that we're downtrending. And if you look just at this, you know, here are their economic projections. So they have to acknowledge the fact that we've got a slowing economic situation. But of course, he doesn't want to say we're really worried about it. Yeah, because then that obviously feeds through into the same sentiment, and then we'll just drive an ever more accelerated move lower. So I just think one of the big risks for 2019 is Europe, not necessarily Brexit. Brexit can exacerbate it, but I just think Europe now become the, the, the sick man of the world as it is. And, and so I'm worried that they're the region that have got the least ability to deal with it because Can I just say one more point before you come in? There's two ways to deal with a recession. Yeah, monetary stimulus. Well, they haven't got any. The other way is fiscal, fiscal stimulus. Now, are you telling me that Europe can now fiscally stimulate, given what's been going on with Italy over the last few months, who are trying to fiscally stimulate, and Europe are like, no, you're not allowed to do that. And what, are they now gonna flip and say, actually, yeah, let's go for it? That would be— I think relationships amongst the European leaders would be quite significantly damaged.

Yeah, no, I was just gonna really add further fuel to your, your points, which is not even discussed. Italy is unresolved, Merkel is leaving, France is literally in flames. It's kind of It's almost like you said, a perfect storm of— outside of the economics, which is a pretty compelling case, is politically, I don't think Europe's— it hasn't been stretched so much as it is now. It's almost on all fronts. The kind of European ideology is being severely tested. This is the stress test to the maximum. But it's gonna be interesting. I mean, does an— is a sizable economic downturn actually what brings European nations back together? I don't know.

Or it could drive them further apart.

Depends how bad the downturn is.

Here's the DAX, and we talk about the S&P back to, you know, back to flat for the year or just negative. But look, the DAX is, you know, that's I just get my pointer tool— we're back to quite a key sort of area which we've broken. And this was the kind of set of resistances that we had through Q3 and Q4 of 2016 now that we broke and then drove higher. And these are— we haven't seen these prices since for 2 years. This is a 2-year low for the DAX. A very— you know, we often talk about the S&P and In some ways Brexit and trade war, some ways is a bit of a distraction. That's the media are so heavily focused on that. It's almost like just subtly underneath that, actually Europe's, Europe's turned over here. And I think I, for me, Europe is— yes, US and China trade war, fine, but I actually think Europe is an undervalued risk. So Colin's asking who has the highest debt per capita in Europe, and of course it is Italy. Italy— and this is why Europe is so anti-Italy fiscally stimulating— is because they're worried that they're, they're too indebted to attempt that kind of policy, because if it doesn't work, if fiscal stimulus fails, if it doesn't kickstart an acceleration in economic activity, well then all you're left with is just more debt. And Italy, unfortunately, have already got too much. Yeah, Ireland as well, Colin's adding in. I mean, certainly Ireland are in a similar situation. I guess we're still— and if you look at debt-to-GDP levels, let's just say broadly, I'll pick on Italy, but Yeah, we're still at the top. If I, if I show you on a 10-year— let me show you maximum— look, we're still at the top. We're still— not only have we not recovered from the fiscal stimulus that was required after the crisis 10 years ago, not only have we not recovered, we haven't even started to recover. So still actually right out at its worst. So fiscally, there's not much stimulus left to use. Monetary policy-wise, there isn't much stimulus left to use. So I, I'm just a bit— for me, Europe's an underrated risk outside of Brexit. It's just, I think people should have this as a higher risk on their radar.

Right, to throw into that equation then, there's all obviously this as well, which is Draghi's term comes to an end. Now, does that have a a meaningful impact then on the response nature of central banks.

What do you think? Who's gonna replace Draghi? Because Draghi got asked— oh no, he didn't. He got asked who was gonna be vice president. Yeah, go on, who's replacing Draghi? What nationality?

This is the big question, because obviously the Germans very much would like to line themselves up and If you actually look at the course of 2018, obviously everyone knows that these central bankers serve a term, and Weidmann's language actually has quite radically changed in order to come off the fringe of being an associated outright hawk. If he's going to govern the ECB, he obviously needs to become more centrist. Has he become that?

Well, not quite, but is he becoming more less hawkish just to get the job, and then he'll revert to tight.

Right, that's, I guess, a possible risk. But would— I mean, I guess I'd need to check, but it'd need to be agreed and voted upon. And who gets to say who takes the helm, the president role? And I'd imagine that there'll be a lot of countries who'd be very unhappy with a German-led central bank. So whether he in fact, or someone a little bit more already middle ground, I'd say is probably more suitable. I don't— and again, we've not really looked at this a great deal at this point, but this will definitely be a talking point, definitely a risk starting beginning of next year, because this is so crucial then for how ECB could respond if we are in fact going into this downturn. Yeah, you know, the mechanisms of QE restarting, you know, and so on and so forth. So yeah, I don't know about whether this is a shoo-in for Germany. I think actually it's far from the case, but that's another thing just to be aware of.

What else on this chart?

Let's talk oil prices because I get a lot of questions about this. Let's get the oil chart up. Let's have a look at— obviously we've seen this spectacular reversal of price price from excess of $75 down to $50. We kind of stabilized, um, now the OPEC of OPEC+ in this agreement of a 1.2 million cut. Um, you know, where do we go from here? The price point here, technically you can see there is $50 is just psychologically such a, such a, an important marker. But not only that, we know we've talked it before, the North American shale industry and the pressures that that would come under, and could that backfire on Trump looking to deliver his tax cuts to the middle class if the price went too low? Well, he's gonna— that 50-year low in US unemployment's gonna change pretty quick when these refiners or the shale industry start laying off people as sites start to close down and and they can't meet their debt obligations in that respect. So I guess the question is then, going forward, on the chart here, the next OPEC meeting is in April, so on the right-hand side. So we've already had the agreement at the moment, and my kind of belief is that—

OPEC meeting in April?

I'm not sure whether that— the April one is probably one of the technical meetings that they hold to see whether everyone's adhering to the agreement. Normally these are semi-annual in Vienna at their headquarters.

But what did they agree? A 6-month cut?

So yeah, timeline is rolling. Yeah, I'm not sure the definitive— I can't remember to hand, but my view on that was that the cut— well, this is two things here. One is a cut of 1.2 million I don't think is necessarily enough. Because we've talked about this, you know, Russia, American, you know, America pumping at north of 11.5 million. It's just incredible the rise that that's been on. But going through all the other OPEC-based nations, nearly everyone's been, you know, trying to pump at a maximum level whilst they can, particularly those that have fiscally struggled like Libya or other countries. That then, in the backdrop of a questionable global economic growth story, I think, is quite, quite worrying. But is the 50— is where we are now, is the consolidation at 50 the reality of pricing in for all of that risk?

Yeah.

And is 50 now the floor, right? And, and, and, or do we go lower? Um, what do you think?

I think You know, I think ultimately, you know, up in the '70s was too high. You know, we were— we got overbought. I mean, it's amazing to think back, you know, you go back to the September and people are— people were like genuinely saying, right, $100 oil here. Yeah. So we definitely got overbought. So for sure, 70 to 80 was too much. Um, yes, they've cut by 1.2 million barrels per day, um, which is not an insignificant amount, but I know people were hoping for a 1.4 million barrel a day cut. Um, but I think, do we go lower or do we go back higher? I think now it's less of a supply-side force, and now it's more about that demand side. So it depends on the economic trajectory of the world as you go through Q1, Q2 of 2019. I think for now though, I think $50 is a good floor. It could break down to $42 at some point next year, but only on the situation where the US trade war risk with China gets worse and we see a hike in tariffs, you know, if this whole Europe, you know, Brexit, but also more broadly European economic slowdown continues, then fine, the demand-side weakness can lead to a break lower. I think in the meantime, the supply-side shock, I think we're kind of priced in here, and I think 50 to $55 may well turn out to be the sort of price range until we know further about the economic reality.

So picking up on one of your points when you talked about the S&P, could crude actually be a bit of an indicator for Trump's, I mean, the kind of narrative that he puts forward on the trade front? So when you're trying to judge then that point of when does— if he softens should it materially get worse. Well, if oil starts coming down, breaks that level substantially, like you said, technically then opens up some clean air, we run lower and we go to $42, which then starts to impact North American firms. He knows that the demand part that's weighing on this is that of, you know, I guess that there could be adjustments on US production equally, as well as putting the pressure on Saudis again to do more and things like that to force it back up. But could, as an equity trader, this is quite pivotal then as a, as an asset to look at?

I think Trump's certainly obviously a big part of this sell-off. I think Trump's happy now, you know, here at early 50s. I think he's done, he feels like he's done his job. He's got oil significantly lower. I think you're right, below 50, I think for Trump it then turns into a negative, um, for from that shale industry point of view. And so actually, I think Trump has kind of— I expect him to now kind of step out of the conversation here now that he feels like he's done what he set out to. And because of the OPEC cut, all right, not as big as some were hoping, I think, I think we do stabilize here. The reason why I say that, I'm not saying we're gonna rebound $55 maybe, But the reason why I say that is because we've had so many opportunities to break 50 in the last couple of weeks, some really big kind of news events, you know, on the supply side. But, and we just haven't broken 50 each time. If you look on the daily chart, each time we flirted with that 50 handle, you know, it has been solid. Now, However, we are going to need to see this, this trend. Of course, I mean, it depends how you draw it, but this trend line, which is phenomenally steep— I don't know where you draw it, but you know, are we getting a break of the trend? Technically, is this looking now like more evidence we are at a floor for now? I think potentially. So I mean, I, I'm neutral in the 50 to 55 bracket. I think the economics of it all— but don't also, don't forget that any kind of supply shock— yeah, Black Swan supply shock event— absolutely, there's potential that could take things back higher.

But yeah, I mean, that's absolutely a point I think that's underplayed. Yeah, big time. You know, let's not forget the situation politically that's that's unfolded in Saudi Arabia the last couple of weeks, the sanctions on Iran. The whole interesting thing on that geopolitical side is the, obviously, the sanctions on Iran with exemptions that people like China can continue buying Iranian crude. Uh, and what is interesting is you're in a trade war with China, obviously, but then China's buying all the Iranian crude, who then— Iran's aligned with Russia and It's just, yeah, it's a fascinating time on that front because you've not even got into Putin and the Russia risk, which I guess is a discussion for another time. But one question there just to finish on the oil front. So, Tim was asking, Saudi's cutting back exports to the US, so on and so forth. Are we looking at a world where WTI is less relevant? I guess that brings about the question of, has OPEC because I had this question, I think a couple of days ago, from one of our kind of junior traders, was, is OPEC done? Is it— do they really have now the clout? Does the group really have the ability to really influence prices?

OPEC are done. That's why you now have OPEC Plus, right? So it was very telling that the week of the OPEC meeting. The OPEC meeting itself was a complete waste of time, non-event, couldn't agree on anything. OPEC+ get Russia to the table, then a deal can be done. So it now has to be— the US supply is so huge now that OPEC on their own have no real major influence on global pricing. So it has to be OPEC and Russia that together have enough of global supply to be in control of price. Now, on the WTI side, yeah, sure, WTI is becoming less relevant, and that's because the US are now becoming closer and closer and closer to being self-sufficient, you know, with, with their crude production up at 11.7 million barrels a day. I'm all right, that demand is more than that, but you know, they're able to buy their oil. Anything they are importing, you know, can come from Canada and Brazil or what have you. You know, the whole idea of the US being dependent on Middle Eastern oil, it's done.

So, so where does that leave Saudi Arabia?

Saudi Arabia are vulnerable. And that's why the Khashoggi event was so dangerous for Saudi Arabia. I think for now, because Trump is in office and Trump loves selling weapons, Saudi still have that, you know, they're still buying a lot of US weapons, obviously, for the war in Yemen. But I think, yeah, Saudi have are gonna probably become increasingly more isolated and vulnerable in the Middle East as they lose their, um, big brother who's got their back. So I think that can lead to, unfortunately, probably in the— I'm talking 5 years, in the next 5 years, maybe an escalation in the instability in the Middle East. And of course, from a supply upside point of view, you know, that could be quite dramatic. I mean, that's not— it's not near term though, but, um, okay.

And then just on that energy point, there was, um, had a question on that original graphic as to natural gas, which you can see here, number 2, a 34% rise, uh, year to date. So obviously a phenomenal move higher, and just saw some good graphics here on the FT, because I know it's not something that a lot of you might traditionally look at, but just wanted to explain very briefly why that's happened. So this was an article back in November, and on that one day in November, you know, so if you don't look at this asset regularly, it rose 18% on a day, the biggest one-day gain in 8 years. And this kind of sums it up: onset of winter tests the ability of shale production to supply the country. And essentially, if you look back down at this graphic, what's happened is— and, you know, we certainly experienced this in Britain, incredibly hot summer, uh, same case in, in North America— and that essentially means then in the country where typical homes will have air conditioning units and demand spikes, and so you draw down on your stockpiles, and we go into what's called an injection season where we look to rebuild our stocks But the problem is, as you can see there on the right-hand side, about 3.2 trillion cubic feet in storage, which is actually a more than decade low. So if then, as it is expected to be, this winter is going to be incredibly cold, well then demand's going to spike again, but you've got even less in supply. And so, you know, things are looking— this is when you get that re-substantial and immediate repricing of this new kind of expectations. So I guess if you were looking at this, then, you know, tracking of weather conditions, as is always the case with natural gas, is going to be very influential. But okay, otherwise, can I just finish? Yep.

On one point, last, last point, looking back at this graphic, down at the bottom end, you're getting your sort of the coppers, you know, that kind of industrial slowdown in China. Scenario. Soybean is kind of part of the trade war risk. European stocks down here, which, as I said, it's just subtly kind of gone under the radar a little bit, just how bad a year it's been for European equity pricing. But one thing that's not on this list, there should be a bar that extends out to 82.5% down. Can anybody tell me what I might be referring to here. There is a market that's 82.5% lower on the year, and the answer to that question is Bitcoin. So here we go. So just as a— just as a— I mean, this isn't the The reason why it's not on our, on our graphic here is because really it's not a proper market.

You're going to get a lot of hate online for that comment.

Sorry, but it's not a mainstream financial asset.

Right, okay, that's acceptable. Let's move on.

So 82.5% slide from 20,000, and you know, certainly technically today just be aware. So I think 3,000 is going to get tested. How far does this go down?

Right, go back. I suppose we— you'll need the actual Bitcoin chart. I was looking at this actually, and like what you said with the S&P or some of the other instruments, when you— or the pound, it was— when we break such a long time frame technical support, right, actually it starts to become, as was the rise, totally driven by human behavior and I think even technically you see that reflected on the creep up in prices from when Bitcoin was trading $950. Yeah, it got to $950, hit a barrier, then went to $1,500, then it went to $3,000. Yeah, so actually I think $3,000, $1,500, and then $950 is kind of just literally the handles going down.

Yeah, $6,000 was such an important— yeah, I mean, floor all year until we've broken— as soon as that gets broken, it's $5,000, it's 4,000, it's 3,000, it's 2,000, 1,000.

Well, I mean, this is it.

100.

I cannot answer that question because I've got no way to value this asset.

Right. Yeah, it goes back.

Okay, so, um, that's it, guys. We'll wrap it up there. Hopefully that was useful. I know there was a couple of people putting a couple of questions in the chat, so I'm sure Piers can pick those up after lunch. But otherwise, thank you very much for joining us. So any questions you do have, then this is going to go up on YouTube. Feel free to leave a comment and we can respond over the coming days if any questions. All right, thanks very much. Have a great Christmas and a Happy New Year.

Thanks, guys.