Are Stocks Getting Ready For Another Crash?

OK, very good morning. Hope everyone is well. It's Thursday the 8th of August. Gonna have a quick review of what's been going on. So talking about China, the yuan fix of course is absolutely critical at the moment to watch and monitor and really dictates all the market sentiment at present. So as per these headlines here, we'll review that and What's the current status? We're also going to talk about the inversion of the US yield curve. Not only that, but crude hit a 7-month low yesterday. Gold's at a multi-year, well, record high, having gone north of $1,500. Hedge funds have become basically the most bearish on stocks in a long while as well. So we're going to talk about what does that mean. But a lot of things happening at the moment. But that's all broader context. If we actually just start the briefing with the actual charts this morning, equities recovered. So much like on the sell-off that we had on Monday with the original episode of concerns about potential mass capital outflows out of China as they allowed that currency to weaken, we recovered quite sharply the following day. And then we had kind of similar yesterday, miniature kind of rout in equity markets. Only for then a pretty solid recovery to take hold into the close. So at the moment, losses remain contained. Um, gold, albeit still elevated somewhat, just given the magnitude of the move yesterday. And we were talking in the briefing about how we, you know, could see further upside in gold, and that materialized pretty quickly. Even before really America came into the market, it was already on the ascent. Up here looking on the top right-hand corner. So a little bit of backing off from that run-up of a decent kind of $24, $23 move I think is warranted. The point being is we're still a clear distance above the $1,500 level for the moment, the pivot providing a little bit of near-term support. And as I said, oil price is going to be the other one we're going to look at, um, with some significance because it's prompting a lot of new OPEC rhetoric. Apparently behind the scenes, Saudi having lots of conversations now about potential intervention in order to prop up prices, given the fact that we've hit a fresh 7-month low. So let's get straight into the headlines, and then Sam will look at the charts in more detail. Starting off with this: China sets yuan fixing stronger than expected, helping soothe nerves. So not allowing the currency to continue to weaken too much. The one thing that they did do though is they did set the daily fixing at 7.0039. So if there was that key psychological or symbolic level of 7, it's the first time since 2008 that the fixing was weaker than 7. Again, the point being here is although it's got to that mark, that was actually stronger than what markets were expecting. Um, looking at this then, a couple things to be aware of. Uh, really interesting comment from Goldman Sachs, their Asia-Pacific head, and I think this was really important what he was saying. He said basically right now he suspects that China, they want to desensitize the market to this magic number of 7 and make sure that they are not going to have capital outflow problems. And I think that's That's exactly right. I think that strategy from China is absolutely what their intention is. You know, 7, why 7? Well, again, it's one of those technical almost analysis indicators where it becomes self-fulfilling if enough people believe in it. And yes, in previous years, 7 has been that barrier and the market has bounced in terms of the weakening of the yuan. But 7 is just a number, and 7 could become 7.5, no problem, as long as this is done in a managed way which resets us, the market, and our behavior that now 7 is 7.5. 7.5 can become 8 and so on. Kind of like the whole 2019 issue where the global economy is heavily indebted, and yet that's just the new norm. No one talks about sovereign issues so much now, but a few years ago that was the a big issue, downgrading of sovereign nations like the US back in, what, 2011. So point being is I think China rightly are trying to reshape the market's feelings around that 7 so that they can create some room as the economic impact of the tariffs starts to hurt their economy more. Then technically speaking, they're looking to counteract some of that, well, as well with other measures, and by allowing this currency to weaken, but importantly, it not resulting in capital outflows. So, yeah, absolutely spot-on comment, I thought, from Goldman's this morning. This is what it looks like as well when they talk about stabilization of the yuan. Here it is. PBOC selling stronger than expected fixed, albeit granted above 7. But here it is, having spiked right just a few days ago. Um, we've now come off just a touch. The other thing that's happened overnight, we did have some Chinese trade data. To give you the stats here, July exports rose 3.3% from a year earlier. That's the fastest level since March of this year, stronger than expected. But imports remained weak, they declined by 5.6%. So continuing to highlight potentially some of the weak domestic demand. but exports perhaps getting a little bit of a sidekick from the fact that their currency has been weakening. So all in all, stabilization in yuan and Chinese trade data actually not that bad. I mean, the export numbers were surprisingly strong and exceeded expectations, so helped to calm some of these growing nerves in markets this week. One thing on a broader context though that a lot of people are looking at is this, and this always comes about whenever there's, you know, quite extreme bouts of selling in the equity market. People start to get very gloomy about the economic future for the global economy, and inevitably the news agencies start to feed that narrative. Obviously, negative headlines are usually much more compelling a case than talking about positive things, but we are not short of negative catalysts in the market right now. Now, this of course is factual, but You know, this has happened a few months ago and we averted that storm, but it's back in focus again. Basically, the inversion of the yield curve. The yield on the 3-month US Treasury traded as much as 41.23 basis points above that of the 10-year government bond in the US. That's the widest gap since 2007. Um, so yeah, the difference between the 3-month and 10-year Treasury yields So investors seeing no end to yield curve inversion for the moment. Why is that important? Well, such an inversion of the yield curve has preceded basically every economic downturn or recession of the last half century. So that's the reason why people look at this more of an indicator, not necessarily if you're just trading government bonds and spreads. If you're looking at a sign about market's overall confidence in the future, this would be be a negative, uh, signal. The other thing Tommaso keeps telling me about, uh, is the amount of total negative yielding debt in the world. So about a quarter of the global bond market, which is equivalent to around $15 trillion, currently offers a negative interest rate. So just, just to be clear, you're— if you take that bond, uh, as the person purchasing it, you're actually losing money. You're getting less at the redemption date 10 years down the line. So you would think, well, why on earth would someone do that? Well, when everything is falling, actually losing just a little is not as bad as losing a lot. So yeah, negative yielding debt has absolutely exploded over the course of basically the last couple of months. You can see it's gone from— it's basically more than doubled in a case of about one year, which is quite a frightening prospect about where— how are central banks— again, this is what's going to make, I think, the next, the next 18 months, 2 years of financial markets so incredibly interesting, is that central banks are facing quite huge obstacles as about how can they re-stimulate an economy given rates in many nations are so low still, and the fact that the world is so indebted and the yields are already so heavily negative, it's going to be such an interesting time to see how they, they manage that. From a short-term intraday perspective, obviously the more uncertainties there are, more volatility it creates, the more potential opportunity obviously to trade. But yeah, just thought I'd point these things out. The other thing is, again, it's going to sound rather gloomy again, is hedge funds have turned their most bearish since 2016. So, um, yeah, Sam's just saying to me, buy, buy, as soon as he starts hearing these headlines. He could be right on one point, so let's talk this through. So the details here is that the ratio of hedge funds long to short positions— this is known as net leverage— it's sunk to its lowest level since February of 2016. The bulk of those positions are basically short. So if you— what happens here is, um, every week we get updates from the CFTC about the market's futures positioning across different products. That allows us to see how long or short the market is in a more simple sense. The, the premise being the ratio of hedge funds long to short is now at its lowest since 2016, indicating that in the most in many years markets getting short. So underlying, even though equities have gone up to record high levels, hedge funds are getting more and more building up their short positions. Now, long positions among those funds— this is what makes this potentially a storm brewing for market movement in the equity space— is that apparently, uh, the faith in crowded stocks has surged to a 5-year high. Now, to explain this, what it means is that those people who are long are basically highly concentrated in only a certain select few stocks. So particularly those in the software and biotech space, the ones where the biggest large short positioning is in, is in materials and financials. You can— I think the latter is pretty self-explanatory. The economic slowdown, materials will get hurt on the growth prospects diminishing, and financials in this low-rate environment will also get hit. Point being is though, the more concentrated a few names becomes, well then, if everyone's short, if the market starts to come up, well, you're gonna get a bit of a short squeeze. And that's where you get these kind of episodes of quite sharp recoveries where we get a big sell-off and all of a sudden though, market starts coming back up. And as it comes back up, starts then pressing a lot, putting a lot of pressure on these short positions, and some of them are gonna, are gonna have to buckle. And at that point, the market jumps back up and we get a new elevated record high even though the market is short. So yeah, this, the inversion of the yield curve, the trade war risks, yeah, interesting, definitely interesting times from macro top-level perspective. And And certainly it does feel like, you know, the chips are kind of stacking up at the moment for a significant episode of volatility at some point in the near future. Okay, moving on. Looking at oil prices. Well, let me just have a look. Yesterday was obviously really interesting. We had a significant down day in price action yesterday, particularly in the afternoon. We also had the inventory data as well. But I wanted to just quickly put it on a daily continuation chart so you can see the fact that briefly, very briefly, you can see here looking at the futures, we got below that low point that we printed, that kind of double bottom in June, and that would put us back down to the lowest levels basically in 7 months to the beginning of the year, right into kind of mid-January. But as you can see from the peak of price action that we printed 23rd of April, we've now pulled back 24%. So obviously bear market territory if you're looking at the, the type of movement on the pullback that we've had. So I'll let Sam give his thoughts technically about what he thinks about that, but the point being is we know if we start looking at a longer time frame chart, let's bring in this sweet spot here which is at 42. Now you'll remember Saudi Arabia obviously at the moment have this very ambitious project called Vision 2030, which is a diversification project away from its dependency on crude oil, a necessity for that nation now given the fact that Americans and Russians have diminished the power that Saudi has in order to just manipulate supply to move the price of oil. In that diversification plan, they obviously need to raise money. Now, part of that strategy would be then that the, the belief is that Saudi really needs oil trading north of $80 in order to finance this type of project. However, the price is coming against them, so if anything, they're offside in that trade, if you want to look at it— excuse me— in that way. Now, what does that mean? Well, the verbal rhetoric starts to come out from these these oil nations, and particularly Saudi Arabia, because they know if we can break below that June double bottom as we tested and seen a very, very sharp bounce yesterday— I mean, we've bounced about a clear $2 off that test— but a break of that level technically really does open up a lot of clean air to bring us back down to these lows that we were, we were trading right in the middle of that Q4 2018, uh, route that we had across global markets. and Saudi know that. So what have they done? They've already started verbally intervening in the market. So this is 101 OPEC strategy. Um, basically, Saudi Arabia has phoned all other major oil producers, so including that of Russia, to discuss possible policy responses, um, as oil prices have hit this fresh 7-month low. The kingdom apparently, that they said they will not tolerate a continued slide in prices. They're considering all options. And the important thing is, is they've kind of been brought into action by the severity and the pace of the sell-off yesterday. But this comes ahead of an OPEC gathering happening in Abu Dhabi on the week starting the 9th of September. So pretty much a month to the date they're going to be meeting. This is one of their kind of interim meetings on a catch-up of OPEC members, because as you can see, they know, or we know, that they have been continuing to roll over supply cuts, which has meant that OPEC output— this is a graphic going back from March 2019 to the current day, and you can see OPEC output has continued to decrease. So you've got the volume here of millions of barrels a day, so it's gone from around 30.7 million in March, all the way down to way sub-$30. And yet despite that, the price still keeps coming down. The idea here being then that because of these, uh, multiple indicators about slowing economic growth, the demand at the moment is outpacing the supply cuts, uh, the demand decrease, that is. So do OPEC need to take more aggressive action? What I would say is if you're trading intraday, that's a really big level now, what we bounced off the low yesterday. You can see it quite clearly from a technical area of support. That's the key area to watch. I think if we break that, don't forget the $50 psychological handle is sitting just underneath there by about 58 cents. That does open for me the trapdoor for a push lower. Who's going to enjoy that price slide? Well, it does fit the narrative of Trump politically looking to manage the middle class with a kind of artificial tax cut, if you like, with cheaper prices at the pump. However, Trump starts to also get nervous when the price gets down to that, um, 2018 low that we had down at the $42 handle. That's when those credit spreads of those US energy majors, which have borrowed a lot of debt in order to finance these projects to really, um, make the most of the shale revolution with oil output in the US up at record levels, they start to be pressured. And then you'll see Trump quickly reversing his calls then if we ever got back down to that lower, lower bound price. So yeah, a couple things to be aware of there for crude. I'll let, um, Sam look at more of an intraday strategy with you guys. Um, this is The Sun newspaper. Um, when I first brought up this webpage, I wasn't sure if I was looking at the right website. It looks more like a cartoon, but not going to judge. But the point being is that, you know, when it comes to information that can move financial markets, you've got to look at all press publications, and The Sun is no different. The Sun have a very good political correspondent, very timely with news and sources, and basically he's come out with the latest piece this morning saying that a general election could be held on the 1st of November. Obviously, that's the day after a no deal. The idea being is that Boris can then go to the public, "I've delivered you Brexit," and then the day after he will call a general election. That's the latest rumor that's doing the rounds this morning. Okay, calendar-wise, what have we got? This morning is particularly quiet, not too much going on. Um, you've got the weekly jobless data at 1:30, wholesale inventory sales at 3 o'clock for the US. It's kind of a side point, I would say. Um, and that's about it. So really, I'd say calendar-wise, there's not a great deal going on. Main take-home points are a little bit of reprieve from the concerns emanating out of China. They did fix the currency just above 7, however, it was stronger than expected. Trade exports also exceeded expectations, so that should calm or alleviate some near-term concerns in the short term. However, a lot of headlines that are quite negative at the moment— hedge funds being bearish in their short positioning accumulation, um, you've got the inversion of the yield curve again. So I think definitely today's a more sentiment-driven day. I do think the volumes really will start to pick up and be much more US-centric So I'd suggest really focusing your ammunition and energy capital towards that part of the day, keeping an eye on the equity market. Sure, oil on that, that lower bound price as well, I think it's going to be quite key as we go forward throughout the day. Okay, that's it. Let me hand you over to Sam, and I wish you guys a good day. Thanks very much.

Hi everyone, good morning. Just gonna bring the pound into, into play. It's having a bit of dollar weakness for the euro and the pound against that dollar. And just having a quick look here is we're getting squeezed from both directions. We went through this yesterday and you can see we had a brief go at trying again to get below the lower part of that trend line and another false break. It's a pretty tricky one to call what's going on there. But more interesting, up from the top end, you're going to get the— what would be the fourth test around today's R1, yesterday's highest. So you can really see pound going on. We've reiterated there's not really much driving things at the moment, and sort of waiting for a clear break either way might be the favored move. Obviously things are moving better elsewhere in a market that's just been drifting really, albeit higher, but those, uh, highs as well have been getting lower. So worth just keeping an eye on what happens around this R1 top end of that trend as well for price to get squeezed. Break above that, obviously the main target areas to look at— you'd also want yesterday's high to go, but we'll be looking back to the high that we had of the week at 122.32, I think, on the futures. So worth keeping that marked up on the chart. For the euro, uh, we found support yet again, uh, down on that low, um, yesterday. And we're just, you know, again similar to the pound in that we are just sort of drifting from both directions, not necessarily in the shape of a pattern, but those last two highs are coming down and those two lows as well, uh, are getting higher. So just getting squeezed in from both directions. In terms of opportunity-wise, I think from the downside, and it hasn't really caught hold of, you know, a real recovery from these— this move that we had from the beginning of August to the upside. But, you know, breaks of these lows, uh, and then obviously back down to 112, uh, handle could be, could be key for anyone looking for that dollar strength to resume. And if we are to break out of this little 3-session, 3-day range, you would obviously want those highs to go. We are coming to what's been a pretty key level over the last few days. 1.1254 was resistance point back on Tuesday morning and then yesterday morning, and we're coming up to it today. As well. And, and those levels, as we just squeeze this chart to the left-hand side, you can see how important that was as it was the breakdown area before we moved lower on the 22nd. So just a point of price action, key level to be aware of, 1.1254, uh, and a half on the, uh, on the futures there, uh, to, to, uh, to have marked up. Quick look over and move to, uh, gold, which of course yesterday just kept pushing into the afternoon, getting as high as 1522 on the, the futures in a bit. Uh, we have drifted down since then. I think, you know, with this market in such a strong move to the upside, you can see, uh, the opportunity may well be on a break of this trend from those highs yesterday to this morning's highs, uh, looking to get long above that. We were respecting a, a trend line all yesterday, and let's have a look how that's coming into play. It depends, I guess, where exactly you would start that, um, but if we get it on there, there we go. It's from the, the 8:30 low on Tuesday, matches up with the second test later that day before this morning. And then just again now. So price just getting squeezed in, uh, the volume not necessarily going to be there, but you can see at least you've got a quite well-respected technical setup. So, you know, the theory behind this would be, you know, waiting for that push to the upside, but of course works to the downside as well. Whether you'd want to, you know, get short gold at the moment, the volume is not there to the downside, it might just give you a better opportunity on a break of that to prefer to to wait for opportunities to go long on previous areas of, of resistance turned support, or the support in general. But probably favoring the move to the upside as this market, of course, is just keeping pushing on and on. Uh, the S&P, we talked yesterday just about the, the, the area, uh, around 2880. Let's move this to the left-hand side and you can see the importance of of this point. Let me just circle, rectangle that area up, just get it above the, by the camera. All around here, uh, pretty, pretty important. Uh, and we're just coming back into that area where it was a bit of a mess and price couldn't really make a decision about where it wanted to go at the beginning of June. And we are just perhaps looking to, to slow down this, uh, recovery, uh, for now. No real reason I would expect it to dramatically push higher today unless we were to get maybe above one of these kind of trend lines that you would have on. Getting squeezed again from, from both ways. Worth having a look at what the DAX is, is doing on the morning. We'll have a look in, in a moment as it just has come down in the last 30 minutes or so. But this market, I don't know necessarily expect too much today in the way of movement. You see the recovery that we had back on the 6th, strong, and then yesterday, relatively flat day overall from, from where we opened. I kind of expect that to be the same thing today. Quick look over at that DAX, which is coming down, and just on that area of support from the morning was the initial high at quarter past 1. So that would be, uh, somewhere to mark up and an important level to have on. Bigger move to the downside, you could probably be, you know, waiting for these trends to break, which, you know, would be at a similar time or could be at a similar time considering that move as well. To the upside, those highs, if they were to go, you can see why today's R1 and the high of the day were as important. As we go back to the 5th, you can see that was the morning high uh, which we haven't come back to test before then. Surprise again, getting squeezed, but not necessarily expecting too much today in the way of, uh, big movement in, in equities. Oil, as Ant mentioned, you've got some key levels, uh, in play. And, and that low from yesterday, just putting this onto that daily continuation chart now, you can see just how important that was just from the back, uh, the beginning, I should say, of June and, and then, uh, January as well. So really key level that's, uh, to break. And, and you now get into that $50 handle. And I'd say below that, $49.37 is an area I'd have marked up, which was the low we had back in November last year. To the upside, and really when you could perhaps say, well, what a great level of support, we're now drifting to the upside. Uh, the breakdown that we had on from the low of the end of July that we broke yesterday, uh, cleanly, 53.55. So that's probably the, the points that I would have marked up. And, uh, at the moment we're looking like we are drifting back to that area, which, you know, looking at oil previously in the last couple of years, when you get these big moves and retracements, you know, really good opportunities to get short back on those. So I'd have that certainly marked up. You can see the original low from yesterday at 3.12, and, and then that area 53.55 marked up on that, uh, as well. So keep an eye on obviously what the DAX is going to do for, for equities. Um, I think that the upside today might just be limited a touch. Uh, the pound obviously coming to a key level. Euro, uh, similar, um, to keep an eye on. And, and gold as well, as mentioned, just getting squeezed from both directions, but probably favoring the upside, just considering the overall trend that we have been on. As usual, any questions, please do let us know. I hope you have a great trading day, and I'll catch you in the chat.