AUD rallies overnight after RBA announcement

Okay, very good morning, Tuesday, 5th of February. Gong Hei Fat Choy to all our Chinese followers. Year of the Pig, my year. So for any fellow piggies out there, may I wish you a very healthy, prosperous year ahead. As you can tell then, given the fact that the impact that this has not only on China but the broader region. It's meant that conditions overnight have been particularly quiet. The kind of single isolated big move overnight came, as you've probably seen, in the Chinese currency— excuse me, the Australian currency. We've had some news out in particular focused on the banking sector and then followed up by a Reserve Bank of Australia, RBA, interest rate decision and the comments that were made specifically have seen quite a meaningful move in the Aussie, um, overnight. So we're gonna have a review of that. We're also gonna have a look at a few other things, um, including, uh, some earnings out of Alphabet, so the parent company of Google. Um, we've also got a couple of central bank comments as well to be aware of, and we'll have a look at the State of the Union address, which was delayed of course due to the government shutdown, and that's going to be happening later on. So a few thoughts on that. Looking at the charts then this morning, as you can see from the— here, just to refresh your memory, I've got EURUSD top left, followed by cable and gold. So the currency pairs, very slight negative territory for both. If anything, EURUSD, you can see here, just coming back down to retest around the support levels that were seen back on the 30th, down about 17k. Well, pretty flat really overall. Comes amid a slightly firmer dollar. The Dixie's trading up about 0.1%. As you can see from the US index futures, absolutely sideways in very tight ranges. This is very typical then of, of the, the Lunar New Year holiday period, the lack of participation in the overnight session. But European indices off to a much more positive start. Uh, the DAX just having a bit of a run-up. Euro Stoxx also on the front foot. We had in the UK single stocks— we've had BP report this morning, their shares opened up just shy of 4%. So a couple of things certainly at play. So yeah, generally a positive open to proceedings here for European equities. This did come after in Australia Let me just run through some of the headlines. Australian banks surged overnight and this was due to— this was the story. Basically, there's been a long-going investigation into the sector that could have materialized in breaking up a number of the banks. Tighter lending conditions could have come in, but effectively what the results have been is that that's not going to be the case. And a lot of this legislation change that would have been a net negative for the banking sector domestically is not going to happen. And so these banks ramped up overnight. And in fact, this is looking at, um, so it's the ASX, which is a major domestic market over in Australia, and this is looking at the sub-index of the financials that make up that index in itself. And you can see here we had the biggest daily change in the financials index of the ASX basically since late 2016. So about a 2-year pop, best percentage gain in excess of 4% after the commission's report on the banking industry. So that was kind of part 1, if you like, of the Australian story. But if we go— let me just bring up the Aussie currency chart, which is here. And let me just really highlight the price activity from overnight, which is the ellipse. Now I'm just circling of that sharp appreciation of what I'm looking at here is the Aussie future. Now this was the headline: Australia keeps rates on hold despite pressure from property slump. Let me just run through here a couple of the comments and I'll make a little bit more sense at why the the currency, uh, moves so aggressively to the upside. Uh, so they basically said low rates are supporting the economy. Again, they, they kept rates as expected on hold at 1.5%. But if you hear out what they did say, it'll make a bit more sense. They said labor market remains strong. They see a gradual inflation pickup over the next couple of years. Uh, they said progress on inflation and unemployment expected to be gradual. So on the balance, what's happened here is not that it's expressly hawkish, it was just interpreted as less dovish than some had expected. If you think about— if you have, and if you trade the Aussie, if you've been tracking Australian economic data, it has been showing some signs of slowing down. This has shifted expectations to the RBA to towards a potential cut in 2019. So the fact that they're kind of sticking to this view about the labor market, and certainly on an inflation side of things, kind of caught traders by surprise slightly. And we've popped up technically. Here is the chart here. So that was the move that was seen overnight on the back of the, the comment here in the ellipse that I've got marked up. So a decent pop for about 127.15 up to a high of about 60. But the kind of descending, if you like, trend line from the price activity from the end of Jan, early Feb, on the first test that we had at the end of last week, and that's just acted as a pretty nice area of resistance for the price to come and respond to that level. So does this ultimately Am I expecting this to create now a new definitive trend for the Aussie to just break higher, kind of targeting that 73, which was that test on the end of January and then beyond? Uh, probably not. I just think this is just, uh, a kind of isolated move seen and probably benefiting as well from a bit of a lack of normal volume and liquidity given the Chinese out of the market as well for that geographic region. I just think it was just a trade of slightly misaligned expectations not quite being met. The moves happened and now the price is just fading back again. So yeah, that was the, the Aussie story. Um, if we have a glance over at a few other things, one is here, if I make this bigger, is the NASDAQ future. And again, if I highlight a specific area, which is that red candlestick forming overnight That came on the back of the earnings report out of the final kind of big tech stock being Alphabet. Let's have a look at what exactly happened, and really the title says it all: Alphabet profit margins slide as Google costs march upward. The company investing heavily in data centers, YouTube, and hiring. So their revenues actually exceeded Wall Street estimates, but The one thing that people look at quite closely is the amount of expenditure that companies like Google make. And Google has been very good at trying to diversify, putting a lot of money into new R&D for potential kind of long payoffs or long-term payoffs from other revenue streams. They are actually investing quite heavily in cloud technology, also YouTube for the advertising spend side of things. The long story short, what's happening here is their profit margins have shrunk. Operating margin at the company has gone from, as this chart is depicting, 24% to 21%. One other quite mind-blowing chart here is this is quarterly capital expenditure, and at Alphabet it's doubled in 2 years, which I think is actually quite phenomenal. So they're spending about $7 billion comparative to really just over 2 that they were in the second quarter of 2016. So, you know, phenomenal spending that's going on there at the moment. Um, the stock is up about 9% on the year. So don't forget, um, obviously the January S&P 500 performance was the strongest we've had in over 3 decades, uh, so since 1982. 7, uh, just given the about-turn in now the dovish stance underlying this very sharp recovery after that aggressive sell-off seen at the end of last year. So the fact that Alphabet shares were down 3% last night, it's been reflected in a little bit of a pullback in the NASDAQ future. Does this mean that I'm negative on kind of the index going forward for today's session? Probably not, to be honest. Um, they're still up a good kind kind of 6% on the year, and that being just 4 weeks price activity, irrespective of the slight pullback seen overnight. So the Alphabet story, given the fact we've already had much of the big tech names report, I don't really think changes the, the outlook too much in the, in the near term. A few other things to have a look at from a data point of view. If I go back to the charts, uh, let's look back at the euro Uh, not too much reaction, still holding very steady, but obviously the equities in Europe have had a fairly positive start to proceedings. We have had a couple of the related service PMI data coming out of Europe, so as it comes out, as I deliver this briefing, I will keep you informed. We've just had some of the bigger nations in Central Europe— Spain, their PMI for Jan coming in at 54.7, that's actually above expectations of 53. So we're going to get Italy, France, Germany coming up throughout the morning, which obviously is, is important because overall these forward-looking kind of soft indicators have been deteriorating, certainly in Europe, just given the various economic and political issues that have affecting pretty much each major eurozone country in isolation. So keep an eye out for those, they could act as a net positive. If they follow the similar trend to the, the decent beat of expectations that Spain has seen. All right, other things that we're looking at this morning, and again, I wouldn't say these are real trigger points for market activity. I think overall, um, today remains pretty similar outlook to yesterday in that this week is way more quiet comparative to last week when there was just an absolute catalog of major market events happening. This week is, you know, way different. And so I think the approach needs to be then, you know, kind of changed. And, and your kind of outlook in terms of how aggressive you can be, in terms of profit targets and things, does need to be kind of recalculated and possibly slightly more conservative than maybe what we had last week. From a Brexit point of view, there's absolutely nothing really to update you on, and this is exactly the kind of timeline that I'm expecting, just given the fact that really it's not until the midpoint of next week when really she's got to be coming back for a meaningful vote or another amendment, kind of round 2 of what we had last week. Which was kind of— the timeline is the 14th of February. I don't really expect there to be too much political movement or deal-making until we get closer to that deadline. So as you would expect, no real major headlines for me to update you on. In case we do hear anything, just so you're aware, Theresa May is on a 2-day trip to Belfast. She's delivering a speech later today, and obviously this is to try and address this key issue which he's been sent back to Brussels to, to negotiate, which is that of the legality of the backstop. Cable then, pretty quiet this morning. Looking at some other things, I thought this was interesting, and this is a very important point. Interesting is very different from it being a tradable piece of information. This is far more bigger picture, and this is something where I think if it wasn't for so many near-term macro risks, I definitely think this would be much more of a real talking point and a market mover at the moment. It's just the fact that there's just so many other obstacles happening that's preventing markets really focusing too much as yet. And this is the fact that Mario Draghi is due to end his term as ECB president at the end of this year in October. And what's happened is quite interesting because last week you had basically the German government make the decision that this chap here stood with the president. His name is Jens Weidmann. So for those in the market who've been around a while will know him very well. He has been typically the uber hawk of the governing council. Interestingly if he was very far hawkish, he's almost started to move away from that stance to be lesser of an outlier and more kind of center-right, if you like, a center hawk, in order to potentially line himself up for that, um, that position. Very unlikely if he was to remain so outright hawkish that he be able to act in the president role. So that's part one. Part two is that the German government opted last week not to propose a replacement for the ECB chief economist Peter Praet. So there was a potential that Weidmann could have been put forward for that, and so that not being the case keeps his candidacy alive for the president role. And then Probably Italy, which would be one of the biggest barriers to probably supporting someone like a German individual heading the ECB. Italy's finance minister has said— I think this was yesterday— that the long-standing opposition to the Bundesbanker, that he told German newspaper that he would be open to the prospect and unbiased. To Jens Weidmann taking the helm. Now, the reason why this is quite interesting is Bloomberg have been running a kind of a scoring system about who's the most likely, of which they see, um, Liikanen, who was a former Finnish central banker and part of the European Council before, as to be the replacement. I'd say that would be probably a fairly continuity approach to, to kind of handing the baton from Draghi. Weidmann though would certainly be a quite a radical shake-up, and he's been lagging in about 4th spot, but some of the recent movements would say potentially he's bumped up the list a little bit. Um, and the main point being is that does this create quite a distinctive shift at the end of the year then about overall kind of ECB policy direction? And hence that's why it's very important important. Markets don't wait for October. They will be looking at this sort of thing now. It's just that now there's a lot of short-term distractions, is what I'm saying. This was quite an interesting table as well. You've got things like the European Parliament president, the chief economist at the ECB, various executive board members at the ECB, the Eurogroup president. All of these roles actually are coming up for renewal, which again, although this is not going to make you want to make a trade decision this morning, but it definitely does have consequence for any longer-term investors in the market depending on who replaces or in fact maybe rolls over on these roles. Okay, otherwise from a Federal Reserve policy point of view, I thought I would cover this. Uh, this is Loretta Mester, who is the most hawkish Fed member. If you remember yesterday, we had, um, Neel Kashkari, who's the most dovish member. Now if you remember Kashkari, the headline was, uh, a rate hike or a rate hike pause is the most, uh, best course of action to keep US growth. Loretta last night, US rates may need to rise if US growth stays on track. So the reason why I'm pointing this out you are seeing basically the complete spectrum of Federal Reserve policy thinking, from yesterday's uber-dove to today's uber-hawk. Again, is this creating dollar strength this morning? Um, I mean, the dollar is firmer. Is it down to her comments? I would say no, it's just a coincidence in that respect. She's an outright hawk. She says hawkish comments. I think this makes no difference. One thing that is quite interesting though, you might have caught this headline this morning, and you'll remember when the market was selling off, classic kind of diversion tactics from US President Trump. It's not my fault, it's his fault. I.e., it's Jerome Powell's rate hike cycle and intention to hike rates an additional 2 more times in 2019. It's Jay Powell's fault, not mine, was what Trump was saying. Highly critical of the Fed chair. Now that the Fed chair at the beginning of the year has obviously taken quite a distinct different track and become quite overtly dovish, which has been the real key catalyst for an aggressive turnaround in the US stock market and oil prices after that collapse that we had at the end of last year. Now, of course, Powell and Trump had a candlelit dinner last night, so the reports go, including the Vice Chair Clarida of the Fed and the Treasury Secretary Steven Mnuchin. So they're all now singing from the same hymn sheet, apparently. And again, is this a market-moving type of thing? Well, no, but I think one thing that it does do is it does eliminate, you know, potential complications and risks to broader, you know, kind of market sensitivity. When you had the US president and the head of the Fed, two very critical people for intraday sentiment, going at loggerheads together, this can cause lots of issues. The fact that now they seem to be aligned and kind of back at the quite literally back at the dinner table. Uh, I would say that that, uh, not so much a positive, it just eradicates a potential negative. Um, so yeah, something to, to be aware of. All right, a quick look at the calendar for today. If I just bring this over, make this a bit bigger. As I said, you've had the various service PMIs. We've just had the Italian one come in, a little bit soft. 49.7 against expected 50. Um, the French service PMI, 47.8, minor beat on 47.5. The German one's coming out momentarily, so I'll look to wrap things up in the next minute or so. But European equity markets still on the ascent for the moment. Um, calendar-wise though, apart from that, this morning is relatively quiet. European retail sales I'm not sure why this calendar has got that in bold. That's of absolutely no consequence for moving European assets, I would say, going off historical, um, precedence. In the afternoon, no major 1:30s coming out of the States. You do have Canadian trade balance though if you're looking at the loonie currency. You've got ISM Non-Manufacturing coming out later on this afternoon, and you'll get the API oil inventories this evening. The State of Union address from Donald Trump, uh, that's happening at 9 o'clock local time. So actually, for us based in London, for any European-based traders, that's not going to happen until well into the kind of overnight period for us. The fact that he is speaking though when much of the Asia-Pac region is closed, I think could be quite interesting. The lack of liquidity and the US President delivering kind of one of his keynote speeches— not that I'm expecting anything, uh, kind of new from him, but the fact that if he does say something and there's not a lot of market depth there, you could see quite erratic and large spikes in price movement. Just given the conditions of the time, specifically of the day of which he would be speaking, which will be, as I say, overnight our time. Okay, that's it. Equity markets, DAX here still on, as I said, moving higher. So I'm going to leave it at that because there are some other economic data points coming up. DAX otherwise coming up to its R2, the previous high that we printed would have been Thursday. You've kind of got a double top in some of the near-term price action from the end of the prior week to that and last Thursday. If we can break above that R2 level, which does also coincide with a fairly interesting area of resistance just coming up pre that level at 11,274 as well. So let me just flip over. That's what I'm looking at here in the DAX as we just press highs. So those kind of levels there maybe as potential targets if you were trying trading the momentum move here on the break higher in the DAX this morning. Maybe looking to come out of some around this point, and if holding on to any, the upper bound just around the 11,300 level. Okay, that's it. Gonna let you guys get on with things. Sam available in the chat as well if, if you require any assistance, and I'll be here as well throughout the day. Okay, thanks guys.