Brexit Delay All But Inevitable?

Okay, very good morning to everyone. It's Wednesday, 9th of October, a little bit later than normal, had a few technical issues to deal with. But what I'm going to do now is run through all of the major headlines that we've had this morning, going from Brexit to Boris's hopes of this delivery of a deal or threat of no deal and where we're at with that at the moment and how that's influencing the pound. Going to talk a little bit about The trade war still undeniably the main story in town, moving global markets. Then we can look at Trump and impeachment, Jerome Powell, a key speech he delivered last night, and then we look at the calendar ahead. And then Sam will have a quick run-through of some levels as well. So I'll try and keep this as, as brief and concise as possible. First off, just having a look at the charts this morning, you can see that equity index futures managed to just claw back some of the losses following a lower close on Wall Street last night. The Dow closed down about 313 points, a significant loss that was seen in global indices actually in the last 24 hours. And all of this is derived from the renewed fallout between China and the US, and this of course comes ahead of high-level talks about trade which are taking place in Washington starting tomorrow and also on Friday. So with that kind of risk-off feel, that lower close on Wall Street kind of fed through into the Asia-Pacific session. Slight about-turn to get things underway as Europe has come in. But as I say, we're just mildly positive now in index futures. But gold remains elevated, albeit at a technically relevant area of resistance which has held the price action from yesterday and just running into that same level of resistance around 1515. And then elsewhere, bottom right, you can see the US 10-year has seen— I already put an ellipse around it from a conversation earlier when I came in here— some exaggerated price movement last night at around half past 7 PM London time on the back of Jerome Powell, who did speak and made some significant comments. So we'll go into that as well. So let's jump straight in with Brexit. Where are we at the moment? And Brexit talks go on hold as leaders focus on pinning blame. You probably saw the tweet from the European Commission President yesterday, Donald Tusk, basically just direct— this is the, the new format of diplomacy, of course, in, in global politics, Twitter— and directing this squarely at Boris Johnson, talking about this isn't about winning some stupid blame game, it's about the future and security of of both our nations and what do you want, basically. So high criticism. This of course comes after Boris told Angela Merkel yesterday that the deal is essentially impossible, according to a source. Merkel, according to other unidentified people, apparently told the Prime Minister that he would have to accept that Northern Ireland would stay in the customs union forever. And so Germany, which was relatively open, it seemed, amongst the senior officials within Europe to potentially looking to construct some kind of concession or deal, has now fallen back into line with the European fold and has now distanced themselves from any deal being cut. What has this led to? Well, a few different things that I just want to quickly get up to speed on. This is in The Guardian this morning, and basically their sources are indicating that basically the EU officials are going to be discussing and have been at the moment about the EU summit which is taking place next week on Thursday and Friday. This was supposed to be the key one of which, well, the initial plans of the government was that a deal was going to be ratified so that then they could, you know, push on with proceedings with Brexit. But what's actually— sources are saying is that the EU are now going to offer an extension to Brexit till the summer of 2020. So as much as I think that that's— I don't think we'd get anywhere near that, at least in the interim period, without some kind of significant political shakeup. I don't think Boris would survive that long if it was to be drawn out for that extended period. But we know what Boris is planning, and Boris knew all along from mid-September when UK legislation changed with the Benn Bill that there was no way he was going to get no deal done and Brexit was going to get extended. And the solution he has for Northern Ireland was never going to get over the line for many different reasons I'll save for a different video. So Brexit is getting delayed as far as I'm concerned. And what does that mean? Well, I'm not the only one thinking this, and I don't just make these kind of rash judgments of putting my neck on the line without actually letting the market be my guide. And actually, if you look at the options market and you're looking at pound-dollar one-week risk reversals, basically you're seeing a large divergence between option positioning and the actual spot price of cable. Now, we haven't had this type of divergence to this magnitude. You can see since August. And what happened then after this period of when the options market did this? Uh, the pound rallied against the dollar 2%. And I think that this is exactly the same sort of thing. Well, actually, hold on, headlines just come out. EU ready to make a major concession by allowing a double majority in the Northern Irish Assembly to leave new Irish backstop after unspecified number of years, the Times has just reported. So just seen, just putting the pound cable chart here on a 1-minute, you've just had a pop just as I've been talking. Uh, you just had a pop of 50 pips in cable in the last 2-3 minutes. So yeah, just to go over this again, um, EU ready to make a major concession by allowing a double majority in the Northern Irish Assembly to leave new Irish backstop after as yet unspecified number of years, because before it was a, it's a 4-year period. Again, a lot of this, I'm not going to pass judgment on what does this mean and my interpretation of it without really reading more into it, because it does get quite complicated. But nonetheless, just trade what you see, and in that case, the pound accelerating to the upside, adding to what already was a bid tone being seen. So perhaps then, um, let's just have a look at the actual Times article that's just come out. Let me see if I can get it up for you guys now while I'm on the mic. One moment. This is the article that people have just put out, is this one here. The EU throws Boris Johnson a lifeline over the Irish backstop. It just came out— well, actually came out at 9 o'clock, but I guess Bloomberg probably snapped the headline, which is why you've had such a more violent reaction the last 3 or 4 minutes. So the Times has learned that the EU is ready to make major concessions on Brexit deal by providing a mechanism for Northern Irish Assembly to leave a new Irish backstop after a set number of years. The diplomatic sources close to talks said European governments are prepared to concede a unilateral, uh, revocation of the withdrawal treaty by Stormont after a period of time, uh, and so on. So yeah, that's the latest. Uh, yeah, we'll see. I, I'll have to have a speak to a couple people about their interpretation on the back of this, but One of the things here that I was just going into, and just to conclude my conversation here, is that the way of which the markets are sitting at the moment would be indicative that expectations are that either there's a deal or there's a delay. The idea of a no-deal Brexit is not priced into markets at all at this point. So if you did have, for whatever means, a no-deal Brexit, there would be a significant and severe move in the market. Now, the other thing that a lot of people are looking at is this, and this looks at the pound's term structure and volatility surface. This is what this is looking at, uh, and it's basically— you're looking at various different things, but it gives you an indicative idea of the cost of insuring against undue swings in a currency. And it's the highest, as you can see from the red part of this curve here, on a 2-month horizon, which would be indicative that people are not expecting there to be massive disruption at the end of the month. They are expecting, though, disruption to happen in 2 months' time. So what that would be pricing in, of course, is the risk of a new general election happening. Just realized as well, I've got Sam's name on the— on under my face, so I've just changed that now just to make, make that clear. Um, so yeah, that, that's the ultimate part with, with Brexit at the moment. I'm not going to spend more on this. In terms of the, the final parts on the subject is that any hope of a deal, particularly Northern Ireland, of course, has been, still is, and will remain the main sticking point. You've obviously just had this Times article about potential EU concession about how to deal with the mechanisms on the backstop, and Johnson meets with his Irish counterpart Varadkar on Thursday and Friday of this week. So probably more to come, I'm sure. The other point here though, just to be aware of, that I was stressing to the other guys, is that Boris has got some internal pressures happening if he does pursue a no deal, even though he just tweeted that exact mantra about 5 minutes ago from his account, is that Johnson is now facing an internal cabinet revolt over no deal. And so the people in question here being the culture secretary. Probably the biggest hitters are the actual Northern Irish minister, Julian Smith, the health minister Hancock, and of course Attorney General Geoffrey Cox. Geoffrey Cox are all on the resignation watch list if he continues down that road. The reason why they're unhappy is that they feel that the person driving the government ship at the moment, um, from a strategic or strategy point of view, is basically an appointed advisor, i.e., Dominic Cummings. And not MPs or the cabinet, as should be the democratic case. And they are so dissatisfied with that, uh, that they're threatening to resign. All right, a few other headlines just so you're aware. China, obviously this is still the main focal point for markets, and I would expect more source comments to come as we go through the day because we're one day away from the recommencement of the face-to-face high-level talks in Washington. But But China says stay tuned for retaliation over US tech blacklist. Now what has happened this morning is that China have come out and said they may restrict US visas with anti-Chinese links and strongly oppose the US imposition of visa restrictions that they did about the, the way of which certain Muslims were being treated in one province of China. In a, in a break of human rights issues. And so that's the latest. One thing I want you to think about though with this is that nearly every time we've gone into top-level talks between the US and China, typically what happens is the US makes quite a firm posture by taking this type of proactive, more assertive approach to negotiating table. Only difference here a little bit is China's retaliated But generally speaking, what happens then is the market is in such a state of depressed expectations, just any glimmer of hope of any type of progression in talks tends to be met by quite a meaningful response. And that's that trade war cycle that we refer to before. And so definitely that might kick in again once more. It would not be that surprising. Um, this is that article, so I've just mentioned that. We'll skip over that. Um, the other thing with Trump, of course, at the moment is he is still facing an impeachment probe. The one thing that's happening here that's most evident is that Trump is just not playing ball or cooperating at all. What can happen here? Well, Congress does have various different powers. House Democrats could threaten to cut funding, block new laws unless Trump starts to cooperate with the impeachment inquiry. Obviously, Trump doesn't want to cooperate because that would show some kind of implicit nature that he knows of what was going on and things like that. So So he's doing, I guess, as would be advised, the right approach so far, because the Democrats probably have very little political appetite to start cutting funding and restricting the passage of new bills because that would reflect bad on them going into a political campaigning period. So that's the latest there. That's not so much a market mover right now. The trade talks way out— so, and supersedes this. As a topic for trading at the moment. The other thing was Jerome Powell. Powell has, uh, gave a major speech last night. In summary, he said that the central bank will resume purchases of Treasury securities in an effort to avoid a repeat of recent turmoil in money markets. Now, what he's referring to here is this. This is the Fed's balance sheet, of which hit its maximum kind of swollen size at the end of the commencement of the active purchasing of the third round of quantitative easing. That was when the Fed's balance sheet in terms of total assets hit $4.5 trillion. They then commenced quantitative tightening through 2018-19 until we've had this latest episode of economic downturn, which has put a block on that. And then we've had these pomos which have been taking place to address then this liquidity squeeze. Now, Obviously there's lots of different things, the timing of corporation tax being paid, Treasury government funding being settled in the fixed income market, but also the fact that they were withdrawing overall some of the liquidity in terms of tightening of the balance sheet. So what he's basically said is that they're actually going to start repurchasing, repurchasing government securities, but they're going to be focused in Treasury bills. For those not familiar with the terminology, Bills is very short-end duration in bonds. So this would be typically— can be anything up to 2 years, whereas anything 2, 5, 7, 10, 30-year bonds, they would be notes. And so specifically looking to address this repo issue which has come to the forefront of markets' attention of the last few weeks, he was explicit to say this is not to be confused with large-scale asset purchases, i.e., QE. The other thing he did say was quite a firm hint towards the probability or possibility of an interest rate cut at the end of the month. And expectations now, federal funds rate futures are priced at 86% for an October rate cut. Final things to have a look at. This was that early article that we've just seen, the EU throwing that lifeline But from a calendar perspective, what we're looking out for today— we had a mixed API inventory report last night, basically conflicting signals between the headline crude and the gasoline figure, the latter being quite a large drawdown. But we'll go over that later as that's the main kind of figure scheduled release for today. Given the lack of other than that real distinctive points of interest until later this evening when we get the FOMC minutes, Powell is speaking again at 4 PM London time, but I'll just be keeping an ear and eye out for any rebuttal to the Times source report we've just had on Brexit, and then any further— and I would anticipate there to be the case— more China-US related comments to come. All right, let me hand you over to Sam quickly. He can run over a couple of other points of interest as well from a technical perspective.

Yeah, hi guys, uh, bringing the, the pound to begin with. Obviously just pushing higher as you'd expect of that initial comment. It's always a risk trading the pound after a spike like that because we always know, uh, with a comment is usually the way it's been going anyway over the last few weeks, a denial to come. So just be a bit careful looking to, to get long on, uh, this push to the upside already. We've just broken through this morning. We were talking earlier during the first part of the briefing about this, the importance of this pivot from a technical point of view. And, you know, the reaction we had there was great. And then obviously this is that spike that comes through. So technically it has actually behaved itself quite well. We're now through, of course, on the spike, quite an important zone looking here between 84 and 89. So from a technical point of view, that's pretty significant. The high that we got to was also a bit of support from yesterday early morning, uh, as well. So some technical levels working quite well for the pound. Um, and just be aware that of course if you do get the other side and denials of all of these, uh, major concessions, it has to come back down. And below that pivot, it starts getting, uh, relatively ugly again, shall we say. But it's important, uh, you know, areas to consider just above the spike from the the high also would be looking to get in, you know, a trend line around that mix, which also comes in to today's high. So break of that, then yeah, we can push on a bit. Uh, at its highest point, we were actually then, you know, over the last 2 days actually up for, for the, for the days. However, we have just drifted down a bit from, from those highs, trading now 1.23. Another market which obviously would have spiked from that is the euro. And at the time of the briefing as well, we're talking about how that was finding some very strong resistance on 110, uh, 16. You can see the significance of that. That gets the breakthrough, uh, and of course yesterday morning's lows as well, which in the mix— sorry, that this is the area we're talking about, uh, which has behaved pretty technically as well. Now also up at these highs, the significance of this area— let's put this onto a 240-minute. You can see that low of the what was the 24th, um, morning, uh, area of the 25th, just so significant. So if we can, you know, at some point, maybe today, try to get another, you know, test of all that area and break, break through, be pretty significant for the euro, uh, as well. However, as we know this year, any euro push against the dollar has been met with a decent break to the downside at some point. So don't get too carried away is what I would say. Trend line from those highs worth mentioning here as well. You can see that over the last few trading sessions going back to the 4th, uh, just above the high of the day, got the R1, got some resistance from yesterday. So pretty key level for it to get through before we start getting carried away, away around 1.1050 as well. S&P worth bringing on here just on the daily chart, that trend line uh, that we broke through but couldn't close at the beginning of the week. That again is coming to play. Just bringing that here, you can see almost reaching that in the early hours of this morning, hitting the 3rd of September low. And we have pushed higher since then. Putting it back to a 60-minute chart and just putting the pivots on for a bit more direction. Worth keeping an eye around the pivot just for some nice support support we had there yesterday before that breakthrough above there as well. 2925, which over the last few weeks has also been a key level, and also to the upside if we were to have a super day, 2935 level. But what would really interest me to the downside is a break of the 3rd of September low— yes, this morning's low— and that trend line, and getting a close, and we could really push down as well. Just above 2900 trading for now as well, so Uh, for the moment, stocks having a decent day after a bad one yesterday. You can see the DAX, which has broken through its resistance that we were struggling on during the briefing, uh, earlier. We're now above that, that point as well. So I'd say the next level for the DAX, from a market point of view anyway, around 12,056. So you could expect some resistance there. Also, R1 as a zone looks pretty important again here. Looking on that 60-minute chart. To the downside, if stocks were to push down in Europe, we mentioned that trend line in the S&P. I'd also have one here for the DAX as well. Can we potentially get to, to that, uh, near that double bottom from overnight and this morning as well, uh, below there? And things could really go down as well. Quick look over at gold to, to wrap it up. You know, even though we saw a bit of effectively dollar weakness there as money flew into the euro. Gold couldn't quite push on. We had this trend line drawn on earlier from yesterday's highs, again not quite making that today. Also putting this onto a 240, you can see just the significance if we at any point come back down to that 1492. Every time we come to it, there's something going on. Really is, uh, one of the best levels in markets at the moment to keep an eye on. That's your line in the sand for gold. Quite significantly above there at the moment. And also to the upside, I probably have this as a bit of a zone as well, 1519, 1522, some nice price action around there. So more intraday, taking it back to 60-minute, a break above those trends, a break above our 1, then fine, you know, that 1492 area looks quite distant. Um, but if that was to hold as resistance, then obviously, uh, that could come into play. 1500, obviously a key point as well before we would get there, along with some of those lows from yesterday afternoon. But certainly that's the key level going forward. We'll go through oil later on. Of course, DOE's, uh, out, uh, in their usual slot, 3:30. So we'll cover them as they, they come through. Just keep an eye obviously on the pound. Uh, as we know, these comments aren't a guarantee that price is going to continue uh, in this case to the upside, so to speak, the way I have that scorecard. And you can see already from the high it's come down 22— let's test my maths here— around 40, 50 ticks as well. Hope you all have a good trading day, and I'll catch you in the chat.