Brexit delay and FOMC outlook in focus

Good morning, Anthony here on the desk at Amplify. It is Wednesday, 20th of March. Just taking a quick look of what we've got ahead of us today, and it's going to be an interesting one. Obviously later on this evening we've got the FOMC, so we'll talk a little bit about that in the briefing. Also updates, of course, on the Brexit situation. And then also got a slight negative tone to proceedings this morning, at least from an equity space. A little bit softer in Asia overnight, fairly contained though in terms of the spillover this morning. So we'll discuss a little bit about trade wars, the headline you can see to the side of me at the moment, and what the latest is with that. That's still being one of the biggest global kind of risks out there at the moment. But let's just have a quick overview of what the charts look like this morning. Just while I'm speaking, I can see gold on the top right just touching on fresh lows. So coming in sight of its S1 already this morning. So breaking through the Asia-Pacific low, probably just adding a bit of weight following the technical break. The dollar is up this morning. The DXY trading up about 0.1% and consequently then just keeping an eye here on cable. Likewise, just with a little bit of mild dollar strength, we're just testing close to the 1.3300 handle. That of course was that low point that we had from yesterday afternoon coming in here. So we'll get into some Brexit headlines and what the latest is there in a second. You'll probably observe there's a bit of underperformance in the DAX future even though it is now moving higher. Uh, it's worth bearing in mind that one of the biggest constituents of the index, uh, that is the pharmaceutical company Bayer, they've basically lost a first phase of a roundup trial and are going to face liabilities. This is to do with claims that one of its weed killers causes cancer. This was a big headline affecting both Bayer and I think it was Monsanto, the US-listed name of a similar kind of sector or product mix. And Bayer represents about 8.3% as an index weighting of the DAX, and they're called down in a range of 9 to 10%, I'm told this morning. So hence the reason why the DAX future is underperforming a touch. It's on the back of that news— major company and some major negative news for them. Now I think this moves on to the settlement stage, and obviously this is going to be have wide-ranging repercussions. Um, getting things underway then, the first sort of story to touch upon, and obviously Sam will look at the charts and technicals in a bit more detail after I've finished kind of my piece, but it's this one: top US trade officials head to China next week for new trade talks. And apparently, I mean, if you look at the Aussie currency overnight, um, the Aussie dipped the Japanese yen strengthened, um, you had a little bit of weakness in Asian equities. So although things remain a little bit more calm since we've come in, overnight was a bit of a, a kind of risk-off sentiment. And what's being discussed here is about that China are said to be behind closed doors now pushing back a little bit against the US's demands on the trade discussions, particularly around the quite contentious issue of intellectual property which was apparently making some headway over the last couple of weeks, and now that's said to have turned around. So this is sparking a little bit of concerns, reigniting on the trade war. That is ultimately, you know, really important for, for global assets. I know we feel quite dominated domestically by Brexit at the moment, but that really is the bigger, the bigger story at play as a risk factor for the likes of the Fed and global economics, if you like. So stock futures did ease a little bit as well overnight, but the latest being then is that they're going to look to try and meet next week for another round of talks according to a Trump administration official. So the kind of show goes on for the moment. So probably worth keeping an eye out for Donald Trump tweeting. If the equity market responds to this in a negative way, if when the US come in later then I'd probably be expecting Trump to come out and maybe try to ease the situation and tweet something along the lines of, you know, we're gonna meet again, we want to push things forward, to try and just support any weakness that does materialize. But so far hasn't really dripped into the European Open. All right, well, let's, let's get stuck into Brexit and what the latest is. And as per usual, I would say although the pound has just seen a slight dip here, I do realize that EURUSD also just tested its Asia-Pacific low, kind of broke out of a bit of a range low from what was seen the best part of the Asian session. So I do think a little bit of this, this pound weakness or cable weakness is just more bit of a technical breach, just bumping up the dollar a little bit rather than anything so clearly news-driven. The latest here then on Bloomberg is that Theresa May is stuck in a fight over Brexit delay, and obviously there's only 9 days now left, 29th of March if you can believe it. If we don't strike a deal or secure an extension, then that kind of crashing out worst-case scenario would materialize. So what I've tried to do here is I've basically gone through a couple of different news sources and and I've done my best to kind of summarize what I feel is the best overview of the current state of play. So let me read you through, and I'll give you a few thoughts as I do so. So the EU said to be playing hardball on the conditions of any extension, and Europe's chief negotiator, so Michel Barnier, last night dropped the strongest hint yet that the bloc would like to see a second referendum. So obviously this has been one of the options on the table for some time. It's something of which the kind of opposition, Jeremy Corbyn, has been reluctant but has now put his backing behind. And that's said to be what the EU are pushing for, and hence the EU are more favorable at this point at least to a longer extension, because what they want to see is a political change to break the current impasse, and they foresee that as potentially a new political direction led by a second referendum, of course. Second referendum, just quickly, uh, even though latest polls from the likes of BMG, YouGov, Survation, and so on would actually show there's been quite a distinct shift, and if there was a second referendum tomorrow, then the likelihood is on that data that we'd vote to remain, I would say take that with a massive pinch of salt. We were supposed to remain the first time according to the polls, and obviously that didn't materialize, so Hence the reason why there's a lot of reluctant MPs to go down that referendum route. It's not plain sailing that that would totally reverse the outcome. Moving on, the risk is that Britain, or if Britain chooses a short extension— so this is where we're at at the moment— to the Brexit deadline, it could just be postponing a chaotic cliff-edge departure by 3 months, prolonging the uncertainty and increasing the potential cost for business. So there's two things here. One is that, you know, businesses do require some clarity. Now, either this could come in the form of acceptance of her deal, the technical extension, and moving to transition, or a prolonged kind of can-kicking exercise of 9, 12, 24 months that basically gives them enough breathing room, at least, to restore a little bit of confidence. Otherwise, all that's going to happen, if— what the EU don't want to get into is this kind of 3-month rolling repetition that's only going to, over time, compound its negative impact on the UK economy. So, a couple of other things on that point. One is that Theresa May, of course, heads to Brussels for the summit with fellow European leaders. That's going to be happening today. And tomorrow. But Eurosceptics inside May's cabinet, they obviously hate the idea of a long protracted Brexit extension. We know this, the Brexiteers have been saying that that basically increases the probability of potentially having no Brexit at all. They also fear that taking part in European parliamentary elections in May will represent the government's failure to deliver Brexit. So a couple things here. Brussels, the picture is different, with officials likely to tell Theresa May today she has just 3 weeks to decide whether to extend the Brexit deadline until 2020 or risk leaving with no deal in July. If the UK doesn't take part in European parliamentary elections, it will be ejected in July according to a draft EU plan. So, couple things here just to supplement these points. One, the Eurosceptics inside May's cabinet hate the idea of delaying Brexit, again for the reason of potentially opening the door to no Brexit. But secondly, there are local UK elections happening on the 2nd of May, and obviously a number of constituents within the UK voted to leave and are becoming increasingly aggravated by the lack of execution on behalf of the government. So, you know, imagine just being an MP and going to your local area and trying to explain yourself of why now you've signed up for a long delay. It would be absolutely devastating for, I'd say, the Conservative Party to manage that kind of situation. Probably the only good thing that they have going for them is the lack of credible opposition, but, you know, could this be a moment where that changes? The other thing is European elections obviously are quite key. Now, Europe have basically said they're going to tell Theresa May today, according to reports, that she must decide by mid-April whether to extend Brexit to 2020 or risk leaving in 3 months without a deal. Now, the reason why these timelines are coming in is because of this graphic. If you look dead center, this is basically the timeline of Brexit and the events to come. And I quite like this because this encapsulates all these different dates that you need to be aware of. Now, as you can see here in the center, 12th of April is the deadline for the UK to give notice for European Parliament— parliamentary elections. So don't forget, you can't just turn up on the 2nd of July and just start taking part in European elections. There's a lot of background and legwork that needs to go into this. So basically, if that happens— and this is why the timelines are so set by Europe, by a kind of process point of view— is we need to say by the 12th that we, we're going to have a longer extension, so we need to take part in these elections. They have pre-election hearings that happen on the 18th. Before then, in the summer, the actual first European Parliament session sits. And obviously, as potential an issue if the UK is still in the EU but hasn't elected MEPs. So hopefully that makes a little bit more sense on that side. Um, according to what the press is saying about Theresa May this morning, she is said to be drafting a letter to the EU to set out her request for extending Article 50 deadline beyond March 29th. She wants a short delay, but obviously for all these reasons I've just discussed The EU are reluctant to agree to that, and I'd say will probably stay away from that, at least for this week during these European Council meetings, I would think. A separate hybrid option said to be under consideration is said to involve a 9-month delay with the option of Britain to quit the bloc if an agreement is reached sooner. So two real things to look out for here. One is Theresa May is going— is said to have requested and is going to address the 1922 Committee. That's the backbenchers who carry a lot of sway within the Conservative Party, particularly of the more Eurosceptic disposition. She's said to be addressing them at 5 PM tonight. So I'd say any time between, I guess, 5:30 onwards, you'd be looking out for any rumors, updates about what did the ERG think what do these other kind of more Brexiteer-minded Conservative member MPs think about, about the outcome and putting the pressure on her for a short extension. The other side is going to be Thursday and Friday when we're going to get updates, of course, on the European side of what exactly are they willing to agree to. So that's, that's, that's your Brexit update. I'm not going to go any further than that. As I say, this move that we're seeing at the moment. To me, actually, we're seeing a bit of dollar strength at the moment. The Dixie now up 2 tenths. So as you can see, both EURUSD and Cable have hit session lows. Now EURUSD just breaking here, uh, the low from overnight. We've already seen that in Cable, and it's also subsequently broken the 133 handle and its S1, probably just adding a bit of weight. Now for me, the moves that you're seeing right here now in the currency market, and it's reflecting in gold to a certain degree, I guess T- notes maybe not so much, is as we're going to discuss, the Federal Reserve meeting is tonight. And I think that the market is way overextended with what it thinks, with what the Fed's intentions are for interest rate hikes through 2019. Now, what I mean by that is the probability of an interest rate hike in 2019 is zero as far as the market is concerned. And actually, if you start looking at the FedWatch monitor— well, let's just get it up, give me one second— we can have a look because actually, forget interest rate hikes, the market in terms of federal funds rate futures, so in short-term interest rates, is pricing in a rate cut, not a rate hike this year. So let me just show you, this is the FedWatch tool which gives you an implied probability of a 25 basis point interest rate hike from the Fed. So as you can see from tonight's meeting, there is a, what, 98.7% probability that interest rates remain on hold. If we go to the May meeting, same, 97%. Go to June though, and look at that. June, even though the majority of the market, 90% of which expect rates to remain on hold, there's now coming up to a 10% pricing in the market of a 25 basis point cut. And there's even some people thinking there's going to be 2 interest rate cuts by June. Start pushing this out to, say, September, and you can see this, this level starts to go up quite considerably. Go to the end of the year, and we're looking at potentially 3 rate cuts and 22% pricing in at least a 25 basis point cut, albeit the majority still that we're gonna basically flatline for 2019. So I think there's been a massive disconnect between, and always has been, Fed communication and how dovishly priced markets are, creating this divergence or overextension of markets' kind of dovish expectations of what they think from the Fed. So this morning, I think what you might see is a little bit of realization about this disconnect And actually, a little bit of bump up in the dollar this morning, I don't think is that surprising because I think if reading all the bank research that's kind of circulating this morning, they're all talking about the same thing and how actually the Fed are probably going to sound relatively dovish, but they're only going to change the rate hike sequence for 2019 to probably from 2 to 1, not 0. And Also as well, you know, they're going to suggest they're going to pause and that's about it. So maybe the market needs to realize this and reprice a little bit between now and 6 PM when that event comes out. So with the Fed, what exactly are we looking at? Well, here's a couple of things you've got that I'll run you through. Obviously the dot plot is the one that a lot of people are talking about What my intention is, is I'm going to do a, a way more thorough preview for the Fed event later on tonight. Um, so going to be covering this live via YouTube later on this evening from 5:30. I'll probably be on for just over an hour. Um, the cool thing is about that is it's going to have a chat facility, so you better talk amongst each other and also to the team. We'll do a full briefing then. The event, remember, given the time differential between the US and the UK, means it's going to be 6 o'clock and 6:30. And this is one of the meetings where it's the full monty. You're going to get the rate decision, the statement, the summary of economic projections, and the press conference with Jerome Powell. So with the dot plots, again, not to go into it in too great a detail, just to give you an overview, what we're looking for is this green line to be reshaped into a more flat trajectory, indicating then that interest rate hikes are going to be limited to the upside. Um, and by the curve becoming more shallow, this idea then that they've got options on the table to hike, but probably then going to pause for a considerable few months at least to see how things play out from an economic data point of view, from a trade war point of view. and from an inflation point of view, which is quite key as well. A few other things then to, to look at is, uh, yields have dropped. Obviously this is part of that discussion. So this is looking at a generic government 2-year yield in the US, and as you can see, they've kind of been edging lower as we've gone through the beginning of the year. You had this real trough, if you like. This was right when equity markets were getting killed, if you remember, back in Q4 over this kind of fear of too fast a policy tightening from the Fed going up to this higher neutral rate in combination with an escalating trade war and global economic growth concerns. And so no surprise to see yields falling at that point, and we're coming back down to that lower bound at the moment. The other things that we're, I guess, to consider is US GDP is called from mid-2018 and is poised to slow further. Remember, US economic data, generally speaking, has been deteriorating. However, one thing that might give the Federal Reserve some room to sound a little bit more neutral and not ultra-dovish is that even with US economic data, things have to some degree stabilized after what had been quite a severe string of downside surprises. Things are starting to to come back into line to a certain degree. So have we seen the worst of it yet? But from a GDP point of view, I mean, going forward, we're looking at growth rates to come way down towards sub-2%, towards 1%. Let's not forget, we also have to throw in the government shutdown, uh, in the mix as well, which would have had a couple of basis point impact on GDP. This is kind of the other key area. So other than the dot plots, which obviously derives a lot of the attention. This is the Fed's balance sheet, and what a lot of people are looking for is the Fed's balance sheet since they've started this process of normalization through interest rate hiking cycle, but overlaid with quantitative tightening. So letting bonds that mature on their balance sheet that they hold and not reinvesting the principal, which had been the case. They stopped QE actively in 2014 And as you can see, it basically just remained in the system up until the point now that they've started to be gradually ramping up the size of, of winding this down, essentially. So as you can see, they've made fairly decent progress here from around $4.5 trillion down to $4 trillion. The question marks tonight are going to be, do they have an explicit target of where they want to get the unwind to. A couple of banks I've seen have been tabling things like $3.75 billion, because if you remember, if they just stopped doing this, that's a net stimulative, um, function for markets because you are removing one of the ideas of the policy tightening measures. So do they have an explicit target, or do they have particular combination of the types of bonds that they'd prefer to keep on their balance sheet i.e., Treasuries or mortgage-backed securities, for example, uh, or is it timeline dependent? Do they put a calendar date in and say, actually, we're going to continue this process until we get to end of year, for example? So yeah, this is going to be quite key. I'd say of— if you're going to break down basically the Fed event into 3 simple things, I'd say what's going to be key is the dot plot, particular emphasis on 2019 and 2020. Then you've got the, the Fed's balance sheet and those issues or potentialities that I just discussed. And then you've got the press conference with Jerome Powell, which will be key about what does he feel about the risks to the economic environment, particularly that of the trade war probably being, being the major one of concern. All right, well, let's have a, a quick look at the calendar. What have we got to come? And then I'll hand you over to Sam. So main thing for this morning is you're going to be looking at the UK CPI data. Now let me just flash up— this is what it looks like on a year-on-year basis for headline CPI, 1.8%. As you can see, as the Brexit kind of impact Demand has been diminishing for goods as household and consumers have become increasingly less confident, let's say, about the economic outlook, and subsequently their ability to spend or appetite to do so has meant that inflationary conditions have kind of ebbed away over time. That also layering in the kind of general broader economic sentiment. So the range for the year-on-year Although expected at 1.8%, you've got a range of 1.8% to 2%. Uh, the core reading expected at 1.9% with a range 1.7% to 2%. As ever with UK data, um, yes, of course there could be a momentary reaction to this upon its actual release, but I think unless you get a number down at 1.5% or 2.2%, kind of way breaching the upper and lower bound of the data I wouldn't be any looking for anything other than a fast money reaction move. So yeah, trade accordingly, uh, quick execution times if that is the case. Otherwise, probably not even worth touching given the broader issues at play being political. So a whole batch of data here, obviously, on the inflation metrics for the UK as per normal— CPI, RPI, and PPI going into the afternoon. It's then relatively quiet for US perspective, you have the oil inventory numbers coming out later, so I will recap in full the APIs from last night ahead of that event. Remember, that's at 2:30, just given the clock change. And then what could well be the case for this afternoon, barring any shocks in fresh news, is the market could become relatively quiet as the— as we kind of await and see, and everyone goes into preparation mode for the FOMC. That kicks off, as I said, at 6 o'clock, and Jerome Powell is going to be speaking at 6:30. All right, well, that's, that's it from me. Let me hand you over to Sam, and, uh, I'll catch you in the chat room. Wish you all a very good day ahead. Thanks very much.

Hi guys, hope everyone had a, uh, good weekend— a good evening, I should say. Sorry. And started the day well. Bit of dollar strength coming in, as Anthony mentioned. Euro and the pound just making a new low during the briefing, along with gold there. Probably worth keeping an eye on how they react as they come, in the pound's case anyway, back to that low from yesterday. Just, you know, not too far from testing that. I mean, having a look at the last sort of few days, you can see we're still very much contained maintain within this range. And opportunity-wise, I think you've got to wait for that sort of clean breakout of this. This is going back to sort of Wednesday of, uh, or Thursday of last week, and you can see just really range-bound. So yeah, it might need a proper development to get us out either way, but unless it does so, I would really be, be waiting for that to, to come in. And having a look at the euro, we've got the uh, that trend channel, which we'll bring up in a moment. You can just see how well we test it all yesterday, uh, from the morning into the late afternoon. Just a really, really strong level. So from an intraday perspective, probably worth having a look to see if we can get a breakthrough of that trend line. And if we were, then you might get a stronger reaction. Of course though, with the, uh, the Fed this evening, um, I wouldn't be looking to get too aggressive. And actually might be something that that was to happen potentially, uh, tomorrow onwards, as in, in terms of the actual opportunity. But you can just see how strongly it has reacted there, um, and holding strong for now, along with those previous levels of resistance going back to the lows of the, uh, sort of the 1st and then, uh, the 26th as well. So very key levels to, to keep an eye on there. As Ant mentioned, the Aussie dollar breaking through um, or breaking lower overnight. And having broken out that, uh, I don't want the trend channel on there, but this, this trend line from the, from the bottom got a nice retest there, and it did push lower. However, the dollar strength for this not really impacting it, uh, too much. Having a look at equities in the US, we finished, uh, negative for the day after making new highs for the year and quite a strong reaction into the close We had some negative trade comments, we had some positive ones a second later, but, uh, yeah, a big, big push lower into, into the close. However, quite a key level of support still holding well. So we remember the sort of 2725, uh, level, 2825, uh, in S&P holdings, a very strong resistance. Uh, still got that as now a level of support around sort of S1. If that was to, to come down and be tested, that would be a pretty key level In terms of the upside, the previous lows of, uh, of yesterday morning, high of the Monday as well, we're just getting a test of that. So that's a key resistance point along with the pivot. So as a zone goes, uh, pretty important sort of line in the sand if you want for the bulls and the bears. Above that then, yeah, business as usual, and we, we do look to push on. Uh, the NASDAQ, which, which came down at the same sort of time as S&P, despite the difference of a decent push. We're actually just coming to that pivot now, so keep an eye on the NASDAQ, see how that respects that level. If that was to go, you may well then start to, to get the push elsewhere. Stocks in Europe matching the US in terms of a decent start to the day, but as with S&P and the NASDAQ, that pivot level along with a previous low seems quite important to keep an eye on, uh, all over. Having a look at oil, uh, API obviously out a bit earlier today, uh, the reaction was, was slightly bullish and we have pushed higher this morning. And again, the pivot acting as a resistance point in this market as well as others. So line in the sand, you've got a bit of a high from yesterday afternoon, so that'd be something I'd probably want to focus on as a bit of a range the break of that, then yeah, the continuation may look to, to come into play. And then you're again looking at the, the high of the year. And looking back at the longer term chart for, for oil, I know we went through this yesterday with, uh, the Fibonacci, but that's obviously not now too far away from another— well, I suppose you can call that a test yesterday, pretty much hitting that yesterday from the high of last year to the low of last year, uh, just like the, the 3.82. You can see we're starting to find a bit of resistance there, albeit we did then break through the 3.82, but the first real test, you know, 2 days in a row was pretty strong. So I'll be keeping an eye where we closed the day, uh, for, for that market. Dollar, just in the, in the time that I've been speaking, has actually now weakened a touch. So it's going to be one of those days by the look of it. Euro just pushing back up to towards its, uh, pivot and sort of higher the Asian session, uh, and the pound as well having a bit of a respite. But keep an eye on that previous low as well. Equities coming up to resistance on the pivots to keep an eye on. Oil very similar, um, but it should be a decent sort of afternoon. Um, so that's be something that I'd, uh, just be looking out for. Just have a quick, uh, flick back to that calendar. So I'm the UK numbers at 9:30. So another thing to mention with the previous data release coming 13 minutes early, obviously very unlikely, but never know if that could happen again. And then of course the, uh, DOE, as I was saying, coming out 2:30 as well. Hope you all have a great start to the morning and trading day, and we'll catch you in the chat throughout.