China Plunges Overnight As Market Re-Open

Okay, so very good morning, Monday the 3rd of February. Hope everyone is doing well and had a great weekend. Uh, just going to run through from my point the fundamental update for the week, and then Sam will have a look at the charts in a little bit more detail, both from the intraday and from a kind of week-long perspective. But just having a look at things this morning, and obviously a lot of sensational headlines circulating Twitter, I saw when I was coming in, and Bloomberg obviously loving life this morning because there's a big fat number to look at, which is a kind of crash in the Chinese stock market last night. But one thing I would like to say is just keep calm and rationalize the situation. I mean, I did issue a macro piece that I shared online yesterday, and I was commenting on the fact that the Chinese futures trading on the Singapore exchange were down 8% by the end of last week. And so when Lunar New Year holiday is over and Chinese markets open in the mainland for the first time since January 23rd, technically speaking, we should get a gap down of around 8-9%. And that is exactly what's happened. So, um, not quite sure— well, I am sure Bloomberg are just trying to to pump a sensational headline, but I'd just like to reiterate that markets are just playing catch-up overnight in China, and the fall of 8, 9, actually hit limit down in many shares at 10%, really is not that important. What is more important, as we'll discuss, is what the Chinese authorities are doing everything that they can, barring the kitchen sink, to try and just restore some calm in markets. And the reason why I'm pointing this out is look at the markets this morning, and if you actually have a quick cross-check on things— let me just change this to the S&P so we've got our usual setup on my, my screens. You know, stock futures are up, you know, DAX is up 20, uh, NASDAQ, S&P, they're all trading higher this morning. So, you know, I just wanted to go over this quite clearly because when you come in in the morning, obviously you get this whole negative tone coming from the press. But you know, you've got to just review it. It is a pure function of the fact that their markets were closed. And so yeah, I wouldn't be just blindly just trying to just come in this morning and think the market's going to drop like a stone just because China did. So just having a look at other assets, and this will lead partly our discussion, oil did gap down obviously was under a little bit of pressure. I think copper futures as well, similarly iron, these China-linked products as they come back online all got hit. But you can see oil here having gapped down has already recovered that, and we're trading pretty much flat from where we were from Friday's close. Gold markets, if anything, down. So, you know, logically then, if this was a, a real credible new occurrence, then obviously gold would be much higher, but that's not the fact. The case. They were down around $5.50 at the moment. No currency really standing out. The pound under a bit of pressure, a bit of a gap down. You can see in the center top chart, and we've just edged lower throughout the Asia-Pacific session, came back up to pivot and then started to push back down again. So underperforming the euro this morning, down 56 pips in cable. And I'll explain what's driving that move from a fundamental perspective in in a moment. So a couple things to talk about then, um, from my side of things. We'll also review the calendar for the week ahead, but Chinese stocks obviously the worst rout since 2015. This is putting that into a bit of context. Those who are around in 2015 will remember that period probably quite well because that was when it was impacting global markets, this kind of fear of a of an overall hard landing in China, and that was when actually we were seeing some limit downs for US markets at the time. That's certainly not the case at the moment, but going back then, the move overnight takes us back to that era, uh, so some time ago, the summer of 2015. But as I said, what is more important in my mind is what are China doing in order to try and mitigate this well-known fact that was going to happen today, and I don't think it was unsurprising. They've come out in a variety of different ways. So they've injected cash into the financial system, with the central bank seeking to ensure ample liquidity as the outbreak impact locally starts to intensify on the ground. The People's Bank of China cut the rates on funds by 10 basis points and Flip over to here. So the central bank in total injecting, uh, what would be approximately $171 billion US dollars of liquidity into the market. You'll also see from this bullet point here as well in this Bloomberg article, the China Securities Regulatory Commission have also told some brokerages that their proprietary traders are not allowed to net sellers of equities this week. According to people familiar with the matter. In addition, they said one of the few short-selling tools available in China is going to be banned from Monday until further notice. So again, this is— I know it sounds a bit odd, basically the regulators in China saying that you can't be net sellers of equities, but this is China and this isn't unusual practice in terms of how their authorities try to counteract these types of quite sharp movements in their local market. So yeah, a whole trifecta of different ways to try and support the market. And as far as that goes going forward, I don't think this is going to be a consistent theme where the Chinese market is just going to get hammered again and again and again of a similar degree in multiple days. What is actually happening with coronavirus? Well, the usual screen of live updates that we monitor. So total confirmed cases now are just over 17,000. Total recovered on the right-hand side now actually is starting to open up a gap over the actual number of total deaths, which currently sits at 362. So certainly, uh, numbers are going north, but as I said, these aren't shocking numbers. I I think, as per how markets are perceiving this situation. So as I said, I would anticipate that this number will go further north, but unless it starts really racking up and this chart down at the bottom here, which is the total confirmed case kind of line, starts to go almost vertical again, then I don't think it's going to be something which Western major markets are going to be influenced by to a great degree, albeit it still warrants monitoring at this point in time. Quite interesting for the crude market, although the market, as I said, gapped down but recovered. This was quite an interesting statistic: Chinese oil demand has dropped by about 3 million barrels a day, or 20% of its total consumption. Let me just flick over to this chart here so you can visually see that. This is as the coronavirus squeezes the economy, obviously that's going to have a material impact on productivity in China, so subsequently their demand for oil decreases. But China is the biggest net importer of oil on the planet, more so than America. And so definitely quite an interesting point as to see how oil is going to play out over the, the coming weeks as this actual physical demand for oil has to be factored in. So that's the kind of the update generally on the, the Chinese situation. So as you can tell, I'm fairly more calm in some respect than perhaps some of the market news agencies are trying to, to pretend this situation out to be this morning. And so really, as per usual, looking forward to the US open and the cash equity space to just see how, how markets react. Could we have a little bit more downside? Yes, perhaps. But is it going to be anything radical like what we saw overnight in China? I don't think so. It's my kind of net summary. One of the other articles, of course, I mentioned the pound underperforming a little bit this morning. This was quite a lot of commentary over the weekend, an update on Brexit. So now that we've had the kind of symbolic move in toward this transitional period. As of last Friday, UK is now out of the European Union, albeit still tied on all the same rules as they try to negotiate by the end deadline of the implementation phase at the end of 2020. So Prime Minister Boris Johnson is set to give a major speech basically in London today, and he is set to threaten to walk away from talks with the EU rather than accept accept demands from Brussels to sign up to the bloc's single market regulations and the rulings of its court. Um, Boris, likely to say, wants a Canada-style deal. Now, just from a context point of view, the European-Canada deal took roughly 7 years to negotiate, so it's not a— certainly not a quick job to get these types of things done when you're talking about nations to the size and to the depth of the previous ties that they had with a land border, of course, with Northern Ireland and the Republic to figure out. Now, the Foreign Secretary Dominic Raab reinforced the point that there won't be a close alignment or regulations in free trade deal. And that basically is the biggest sticking point. Of course, Michel Barnier is also due to give his red lines on the European side in Brussels today. So yeah, the pound definitely just re— I guess factoring in this idea of a credible threat of a no deal. So I know it feels like perhaps, can we have a no deal? Absolutely yes, we can have a no deal at the end of 2020. So just because Brexit, quote, has been delivered, you know, we're far from it in reality being delivered as yet. And so there still is a risk of this. And as per our expectations, we've been talking about the briefing and the desk for a while. This is just the way of which negotiations start. I would expect Boris, probably under the hand of Dominic Cummings— absolutely, there's no other way that I would have thought he would approach these talks. But he needs that kind of weapon on the table as a credible threat And I would imagine he will continue this type of rhetoric we're going to hear today in his speech. I would anticipate for the next coming months. And as the time starts to dwindle, of course, on the stopwatch of the transition phase, that's going to become an increasingly negative force fundamentally for the pound, irrespective of the fact that there might be some short-term reprieve in the economic data on the back of the securing of the majority government. As per the soft data we've had in the PMIs recently. As I said, the real deal-making— I don't think movement on these so-called red lines is going to start coming until the summer when that end of June deadline comes from an extension request point of view for the transition. So yeah, pound a little bit underperforming this morning on the anticipation of this kind of rhetoric to come from both sides about how far away they are from getting a a trade deal done. Quick look and review of the calendar then. What else is coming out? Um, well, let's have a look at some overview of US economic data. You've got ISM Manufacturing later on this afternoon. That then leads into Non-Manufacturing PMI in the US on Wednesday. So Monday, Wednesday, and you've got the ADP employment change on Wednesday as well. So remember, from those key data points, we're going to be looking out at the employment constituents in particular from the ISM readings. ADP of course acting as a solid precursor then to the regular jobs report from the BLS, which is going to come on Friday. So non-farm payrolls, I think expectations were for a headline reading around 156K, with the unemployment rate still remaining down at record low territory around 3.5%, which would be kind of holding steady. Now, non-farm payrolls, as a summary, I don't think is— obviously it's a trading event to be aware of and does impact conditions intraday on Friday for sure, uh, but overall I think non-farm payrolls is going to do very little overall to change people's expectations about when and what the Fed are going to do with their policy going forward. But nonetheless, these are key indicators to be looking out for throughout the week. As I said, Monday, Wednesday, and Friday on the US data front. And you also get US factory orders on Tuesday. As you can see though, after market today you get the final of the, the big kind of companies to report. So Alphabet— this is being from the FAANG names— we've already had the likes of Amazon, Microsoft, they've all come out with particularly good earnings reports. Amazon, of course, jumping 10% after market following their earnings last week. And so Apple have also followed suit. So can we get the, uh, Make America Great Again slogan for the trillion dollar club? Uh, we shall see. But one of the key things people looking out for with the numbers tonight, a metric, is their type of revenue generation outside of their paid advertising space. So things like YouTube, for example, and how are they performing will be quite, quite closely monitored. Uh, talking of earnings, this is the overall summary of major companies coming out. So just to give you some of the top, uh, kind of larger market cap and bellwether names, you've got ConocoPhillips pre-market on Tuesday, got the likes of Walt Disney aftermarket on Tuesday. Wednesday, Merck, General Motors, Qualcomm aftermarket. Thursday, quite interesting from some of the smaller cap but more sensitive, let's say, to general risk appetite. You got Twitter pre-market, Uber and Pinterest coming after market, uh, are kind of the main headlines that you're likely to read as we go through the week. Um, from a statistics point of view, I think there's roughly about 90-odd companies reporting in the S&P, and we're roughly about halfway through the entire 500 companies being reported thus far in the earnings season. From a European earnings perspective, you've got BP for the FTSE on Tuesday, GlaxoSmithKline coming out on Wednesday. So some of the biggest FTSE companies reporting Tuesday, Wednesday. And then from France, you've got a decent portion as well of the market coming out because you've got BNP Paribas on Wednesday, and then you've got Sanofi and Total. So pretty much the 3 biggest companies in France and subsequently in Europe reporting on Wednesday. Thursday pre-market. Other than that, that is pretty much it overall. Final word I'd say on the RBA, could be quite an interesting one. I think the— we had some better than expected jobs data last week which has pushed back markets' expectations about the how immediate they might be with an interest rate cut. And actually on the balance, Wall Street is anticipating the RBA to remain on hold later on tonight. So we should know the result of that by this time tomorrow. This comes then despite the Aussie, and I'll get Sam to bring up the Aussie when he comes on in a moment because there's been some quite interesting moves. There's a key technical area we're at at the moment and we've had a bit of a repricing in of a rate cut at some point in the coming months, really twofold by external events that the Australian economy has been hit by. The most new one, of course, is the impact that's going to have with their biggest and most important trade relationship, which is a lack of demand coming out of China, which is being impacted by the coronavirus, and then the ongoing and severity of the bushfire season, which has had implications as well for the economic ability of Australia to perform as per what it normally should do. At this point in time. So interest rate cut is happening at some point. I think markets are pricing in now April for the RBA rather than tonight's meeting. All right, that is it from me. I'm gonna hand you over to Sam, and I wish you a good week ahead. I will post in this link, so if you did want to get a bit of a feel for what are the key themes going— coming out for this week. Excuse the rumbling in the background, someone's just finishing his bacon sandwich. And I'll hand you over to Sam. All right guys, have a good one.

Hi guys, good morning. Let's have a quick look over some of those currencies before having a look at equities. S&P, by the way, just starting to drift lower, so do keep a watch on on that. Just, uh, bringing in the euro here. Decent, uh, end to the week, has to be said, after the Wednesday, Thursday, um, were perhaps suggesting that we could push higher. Uh, we did on Friday, and, and we're up to, to levels. I'm just gonna bring it here on the daily charts. Let me just remove everything, don't need all of that. Uh, to, to test, and you can see here on this, this daily uh, daily level, the 1.1130 area on the futures. Those lows, you can see we broke through, then it's come back to retest that. So that's a pretty key point that you're going to have people, uh, eyeing up as an area of resistance should the dollar start to, to strengthen. So let's keep a watch on that, see how that reacts should we come up to have another test of that again. You can see that failed test lower of that trend line. We also had um, some decent price action there suggesting that push was going to happen. However, uh, it's kind of decision time, uh, around this point here. This would be the key level that I'd be looking at, those previous lows here, uh, and well above obviously remaining, um, you know, that, uh, we can push higher. I'll be looking towards sort of 112 area, and if that holds, well, it could come down relatively quickly back to test that trend line again. Having a look on that 60-minute. You can see as we came into that zone, uh, in the early hours, um, or right on the close, I should say, we, we have obviously since drifted down, um, and we're testing some of those key points, keys, highs. You can see from the 24th, so keep a watch on that. You've also got the pivot and then any of these previous levels as well that we're perhaps going to retrace to. And with that Let's get the old Fibonacci up just to see if there is anything potentially, uh, interesting on, on that point as well. Any of those levels that do come into play that maybe have another high in the mix for that. The pound, uh, did gap slightly lower, uh, at the open. Boris, uh, the, the reason for that— and it wouldn't be surprising, I think, if we do have a further drift down over the next sort of couple of days the market— this price is in this, uh, no deal stuff yet again. Or, uh, this trend line I think could be a bit of a guide this morning. You can see here that, and you've also got a previous high before the breakthrough, uh, that we saw on Friday as the dollar just weakened across the board. So below there, below 1.3145, I think you could see some further pound weakness. If we look for retracements to get short higher up, any of those previous lows from the morning, decent area, 131.70. I'd like the look of that. However, it has already worked, so just be careful of, you know, waiting to get in without any confirmation. But 131.70, pretty key, and also just a bit above the pivot, 131.86. So from a point of view, just looking to get short on the pound pound, I like it below, uh, the, the trend line and then these areas. I think you're just going to want to see a bit of confirmation, but those are your lines in the sand to the upside. And obviously if you're, you're bullish the pound and you like the idea of getting long, well, above those areas are equally as good at some point this week or in the coming weeks. Just keep a watch on that gap fill as well, uh, 20 ticks from the high where we pushed to today. To the, uh, that low from Friday evening. So just keep a watch on that, have that marked up should we see any strength come in. Aussie dollar, starting longer term here, you can see we're at levels not seen since, uh, October last year. And that is, is pretty key, you know, not the only market that is near these lows. But if you start to, to see some of this data improve, if you start to see, uh, closes or fake breakouts below these levels, well, what an opportunity perhaps to get long. It'd be really interesting to see the, the closing price of, uh, this, this sort of test of those levels, which you can see we haven't quite got down to that lowest point yet. So for me, you still, you know, don't want to pull the trigger necessarily just now. But if you just put this back onto a more intraday, you can see over the last few hours, we have just been chopping along, chopping along there. Not too much going on. It's going to remove that rectangle. As you can see, just below Friday's overnight low at 6685 on the futures, that's the— your area to keep an eye on. To the upside, you've got a nice area of resistance, uh, that's sort of creating this zone as well. Uh, to the upside, if we were to not come down and test it, and the fact that the low has been printed— while I doubt that's the case just keep a watch on any of these potential trend lines to come in, which, uh, when they could— when, if they were to break, could lead to a faster reaction to the upside like you've seen with the euro and the pound. However, this Aussie perhaps needs to really test those lows before any significant move to the upside does take place. Speaking of key levels to the downside, oil is Very similar. Let's have a quick look here at the daily chart. You can see, uh, we have come down and tested all of those lows. What an area, uh, you know, here going back to January last year. What difference a year makes. Highest prices hardly moved. You've got those lows all through there, through June, August. You can argue a bit of October, and we tested that now. So technicians will obviously be keeping a watch where we close. A bullish, uh, close today, and, and well, this market technically could be a good opportunity to get long. However, uh, you know, from a fundamental point of view, if the technicals also get that break below and we're on $50, well, this market really could push lower, and I would be targeting towards sort of $47.50s, $47.81s, and, and I was Speaking with a friend of mine on Saturday morning about oil, and they firmly believe that we are in for a break below this whole area to that sort of 47.50 point as well. You can see here some nice price action around that time, and I, for one, if we can get the close below the 50.55 point, I would be having a bit of that trade myself. However, we finish up and that trade never comes in, and a bullish close like we were saying, and this market can certainly push to the upside. Where would you feel a bit more comfortable about getting long today? Well, maybe the breakdown area that we saw on Friday, 52.16, original low of the day turned into resistance just above the pivot. It's as good a place as any, I would suggest, before, you know, looking to get long and targeting up towards, well, 53. $3 for that trade wouldn't be the worst one in the world. S&P mentioned it was just drifting lower after breaking a bit of support. Not a massive move by any means, but 3240 just gave way and 5, 5 points or so pushed down there to a low that we had in early trade as well. So not the most aggressive open or European open sort of that's followed through to US equities. But, uh, certainly with the way we finished Friday and the, uh, the panic that was going on in the markets, uh, the weekend has been kind, uh, I would say. But looking for that, uh, that selling to continue. If I just move that a bit lower, I'd say 3229.5 is as good a place as any to be looking to get short. I think again you're going to want that confirmation on these moves, especially Monday morning. A lot of people don't really like trading Monday, the ranges aren't in. You know, have a bit of patience is what I would say, even though, you know, you might see some, you know, spikes through for equities. I think if you're looking to get short, certainly on, uh, certainly on the S&P, that would be the, the trade I would be, uh, be looking for to target that low that we had from last week. And having a look on, on the daily chart, let's just remind remove the, the pivots and everything else that comes with it. So far, just where that low was, you can see not a bad area technically that we had never closed. After we made that low on the 31st of December, we spiked below once, twice, 3 times, hit it in the 4th, no close below there. If we were, well, maybe, you know, start— things start to get a bit more ugly again. And that low that we had obviously on the very beginning of January, was that the 3rd? Oh no, the 8th. 31.79 could be a point people would look at. Ideally, from a point of view looking to get long equities for the Trump election push, I would like to see anywhere near that 3100 handle and retest of that, that trendline that of course broke through last year. You can see around that area would be fantastic. Of course course, that is a big move away. And, uh, the way stocks go after a bad January, it's generally quite positive for the rest of the year anyway, from a statistical point of view. The Dow Jones, yes, uh, early trade, and we can't get much better than that. Push higher on the open, come to test the previous low, hits it to the tick, along with some low, uh, highs that we had on Friday. And you're, you're back down there by, what's that, 200, 200 points or so. So really nice opportunity there in, in early trade. If you weren't watching the Super Bowl, that could have been the one to, to have got in on. Similar level for the S&P that, you know, you'd be happy to see break before getting short here on the Dow, 28,231, give or take a point or two. That would be where I'd be looking for that. Quick look at gold, as I know I'm taking a bit of your time here in the morning. You can see obviously spiking higher in early trade to then coming all the way back down and, uh, now down $5 from the open there. Couple of trend lines you probably want to look to, to have on from some of these previous lows just in case we do push, uh, to the, the downside further more. You can see they're sort of coming in here from the lows of the 21st or the 24th, uh, any down move in gold, there's going to be quite a lot of support, uh, for a push to the upside. But if these trends were to go, then you're going to be a bit more comfortable that price could push lower. So the upside for, for gold, similar if the S&P was to, to break those levels to the downside. 1587, uh, 85.7 is a good line in the sand as, as you could like. Just seeing the pound is, is testing, uh, that trend line Um, I think there's a bit more downside to come for the pound given Boris's comments. Hope everyone has a good trading day, good week ahead. We'll catch you all in the chat and we'll get that strategy report sent out at some point this morning.