China steps up trade war of words

Okay, very good morning, Wednesday, 29th of May. Hope you are well. I'm just going to give you a bit of an overview of what we're going to cover in the session the next 20 minutes or so. I'm going to talk about renewed emphasis, if you like, on the inversion of the yield curve as people continue to fret over the latest breakdown of trade negotiations between the US and China. And certainly a bit of a risk-off, uh, kind of start to proceedings this morning in UK and European trade. So stock futures on the back foot, fixed income futures generally supported, and gold seeing a bit of a push to the upside this morning, reflecting that kind of sentiment shift to a more kind of negative phase. But also going to talk about the trade war in a bit more detail. There's some retaliation that's been a little bit more specific towards rare earth metals. And so we're going to have a look at that and what does that mean, as well as some commentary out of the US. They released a currency kind of semi-annual report yesterday. What does that mean? Does it have any ramification towards the ongoing talks? We've then got some updates out of Russia about the OPEC+ deal, and we've also got the House Speaker John Bercow saying some comments last night that's going to make Sam very unhappy about Brexit. Um, and then we're also going to have a look at what the latest banks, both domestically and on Wall Street, are saying about the prospect of a rate cut from the Reserve Bank of Australia. So we're going to cover all that. So I'm going to predominantly focus, as per usual, on the news, and then Sam can go through the charts from a technical point of view, intraday and medium term. But again, quick look at the broader kind of feel across asset classes, and as you can see Just to remind you, you've got the currency pairs top left, EURUSD and cable, ultimately quite quiet, actually pretty flat overall with a flat Dixie. But as you can see top right, gold looking to break out of what was the fairly tight range trading just around the pivot from overnight. So a bit of a push to the upside now, up $6. Oil, you can see down here at the bottom chart, down about 67 with stock futures lower overnight. We've kind of dripped lower in US futures following what was generally lower trade overnight in the Asia-Pacific region. And as such, small gap down in the DAX, and that's moved down to its S1. And as a consequence of the kind of risk-off feeling, we're getting T-notes up about 8.5 ticks, finding some support around the, the R1. So let's get straight into the headlines and look at why this is happening. And this is one of the things that people are looking at again And this is the yield on the US 10-year. And obviously, as the T-notes go bid, that kind of inverse, if you like, the price rallying, so the yield is dropping, reflecting of the fact that people have become ever more nervous once again about the impact that the breakdown on the trade negotiations could have on global, global growth, in short. And as you can see here, technically, last couple of sessions we've seen a meaningful break in the US 10-year yield below that point that we hit in March where we got down to, I guess, about 2.3% roughly before we bounced back up to 2.6%. However, obviously breaching through that after a brief test that was seen a few weeks ago, we have now punched through, and that takes the 10-year yield to the lowest point that we traded since really the back end of, of 2017. The gap between the 3-month and 10-year rates has now reached -12 basis points. As of today, and that's the most since 2007 after breaking past that March, uh, level. I think that's actually 2017, that's supposed to be the stat that Bloomberg are running this morning. A few things then that are, that are in focus, and this is one that's particularly interesting that's come out overnight during the Asia-Pacific session. And a couple of different things, obviously the, the headline talks about rare earths, that's one point. But the other point here is that the US, according to the flagship newspaper of the ruling Communist Party overnight, the US should not underestimate China's ability to fight the trade war, according to the People's Daily. So this is the kind of state-run media. The newspaper's commentary included a rare Chinese phrase that means, quote, "Don't say I didn't warn you." Now, a couple of the people looking at the historical context of using such particular phrasing and wording. And the last time that China has used this was basically when it went to war with India, um, going back to the '60s, and also when conflict broke out between China and Vietnam in the late '70s. So they're definitely ratcheting up the, the kind of rhetoric, if you like, to, to new levels. And this comes on the coattails of what this is, which this headline would suggest is that China are gearing up to weaponize rare earths in trade war dispute. Now, this graphic probably helps make a little bit more sense of why this is particularly important, because the US relies heavily on China, who's the leading global supplier for about 80% of its rare earths. Now, you might ask yourself, well, what's rare earths used for? And it's used in a whole host of different applications, from smartphones to electric vehicles to military gear. And as you can see by this pie chart, the US is highly reliant. And from a cost basis, I believe that US could be doing this, but it's infinitely more expensive. And so hence they import it from China. So again, much like China initially a few months ago were kind of surgically pinpointing soybeans, for example, and looking to hit the kind of farm belt land of the electorate of what is supporters of Donald Trump. They're now kind of focusing to other areas like rare earths to try and, you know, retaliate more to where it hurts the US more, you know, get more impact out of it. So definitely things are starting to heat up, and that's not it either, there's more. Basically, there was a meeting yesterday at the World Trade Organization, and China basically lashed out at the US over the treatment of Huawei, accusing it of abusing national security exemptions to global trade rules. So again, China, you know, kind of a three-fold, three-pronged attack here. They're bringing it up vehemently at the WTO meetings that it's an inappropriate use of power in regards to the US and what they're doing with Huawei. They're targeting now rare earths, and also they're upping the rhetoric from the public perception domestically in the, in the, in the domestic media. So definitely this is why markets are trading a little bit risk-off. China never really has been an aggressor in these negotiations since they began. They've always just retaliated, but they're definitely— this feels like it's stepped up a notch or so. What's the latest out of the US? Well, they've not really responded to any of this as yet, but one interesting thing that did come out last night was that the Trump administration effectively refrained from calling China a currency manipulator. Now again, it's kind of a classic Trumpism, because if you think about it, Trump since day one of the campaigning prior to becoming president has called China a currency manipulator right from the beginning. And yet by the US's own rules, China is not a currency manipulator. You know, go figure. But the point is, obviously Trump is trying to massage a political kind of angle with the public in his treatment of making, obviously, America independent, making it great again, and it definitely resonates on that level. But in actuality, you know, China is part of one of several countries that are on a watch list, but none of which are actually currency manipulators. Obviously, the US could have gone one step further and And, and one of the things here is that Steven Mnuchin, the Treasury Secretary, recently changed the rules of what would be the qualification for the threshold of being termed a manipulator. He's basically watered those down, and hence the reason why you've now got Ireland, Italy, Vietnam, Singapore, Malaysia, plus China, Japan, South Korea, and Germany all on the watch list. India and Switzerland were removed. So again, this is a semiannual foreign exchange report to Congress. The US, of course, could have again fueled the flame by putting, um, or labeling, uh, China as a manipulator, but they didn't. So again, that's quite an important thing. I'd say you'd probably be seeing more harsh downward movement in equity futures and a more firmer bid tone in T-notes than gold than what we are seeing if that wasn't the case, if, if, if US decided to go that far. But they didn't, importantly. So that's the latest on the trade war side. Certainly that's the dominating factor still from a hierarchy, if you like, of all the macro driving themes in markets. It is still number one story in town without a shadow of a doubt. Um, other things Let's move, uh, to a different direction. Obviously, we're coming quite quickly into the month of June, which is the next kind of scheduled OPEC meeting. And so people quite closely watching for what is the latest that Russia are saying. Russia obviously pivotal for any type of supply, um, production cut to have any meaningful impact on price, given the fact that they're such a large producer. And basically, the Deputy Prime Minister, this chap you're looking at here on the screen, Um, he said Russia would carefully consider extending its oil output reduction agreement with OPEC and other producers. So a little bit more lukewarm, if you like, rather than sitting on the fence towards the prospect that they might look to, to step in. I guess forward thinking, they might be looking at the fact that should the trade talks turn sour, as you can see, this has demand implications on not just global growth considerations that weigh on equities, but for a similar degree weighs on oil. So maybe they might think that they want to get ahead of that and then look to continue to commit to roll over the existing OPEC+ supply cuts. So that's the latest from Russia. Moving to Brexit, this is the headline from the House Speaker, which I'm sure is going to highly offend Brexiteers. and they will be out in force, one would imagine, throughout today, given, uh, I believe it's in Washington where John Bercow made these comments, but he basically warned candidates vying for the Conservative leadership race that Parliament would not step aside and allow the country to tumble out of European Union without a deal. Now obviously his position as House Speaker predominantly, you would think, is to chair the proceedings that go on in the House of Commons. Now, he has not been really shy about really what his view is, which is that we're better off in than out. And so what he's saying, I guess, technically isn't incorrect. The point being is that as much as they, you know, the more Brexit-minded the, the Boris Johnsons of the world might be quite keen to use the simplicity of no deal being an option. The reality is far from it. The composition of Parliament does not allow it, and there's enough political will on the other side of the table that would stop a no deal from materializing. So that's kind of where he's coming from, but I can almost guarantee you that the Brexiteers will be out condemning his comments, uh, without doubt. How much is that going to move the market? To be honest, it's a pretty sexy story. It's an absolute non-event really from a market-moving point of view, and hence the reason why there is close to zero movement in cable in reaction to the developments. But I thought I'd mention it anyhow. On the European side of the Brexit debate. The European Union have said, Jean-Claude Juncker last night, we will not renegotiate the Brexit deal that Theresa May has agreed. So at the moment, and I think this to be absolutely as expected, whether or not Europe will stick to that stance, this is obviously politics, so it's a very fluid situation. But for the moment, I guess Europe just playing the most obvious hand, which is staying by their, uh, their stance at the moment, which is the deal has been negotiated, this is it, there is no renegotiation. The other story that I thought I'd point out is following some recent comments from RBA. So this is Australia, the Reserve Bank of Australia's Lowe signaling this month that rates are heading lower. Given, uh, the importance of the relationship on China's economic prosperity and how that translates relates into the economic performance of Australia, and that's being brought into question, as well as, you know, housing issues and lots of other things that are materializing, a lack of inflation in Australia. The prospect is they're going to follow in step with the RBNZ, and they're going to look to cut rates. Now, what's quite interesting is the aggressiveness of how banks now are expecting the RBA to follow, and JP Morgan being one They've said overnight that it expects the central bank, the RBA, will have to cut its 1.5% benchmark rate by a full 100 basis points by the middle of next year in an attempt to achieve the inflation goal and the employment goals of the central bank. That follows projections of a 0.75% cut over the same time frame from Westpac Banking Corp and Capital Economics as as well. So, um, again, is this impacting— is this really a story that's just moving the Aussie right now? Well, no, I'd say the Aussie is moving more because of the overall broader story, which is that of the kind of souring trade negotiation between the US and China at the moment. But it certainly fits that medium-term fundamental view that rates are heading lower, more likely than not, in Australia. Okay, quick look at the calendar for today. What have we got on the schedule? So a few different things coming up in about an hour's time. The German unemployment rate and change. Um, you've then got the Bank of Canada is the main kind of scheduled release for the afternoon. There is no major 1:30 data coming out of the US. And then you get your API inventories, of course, not until late into the evening from the US. Speakers-wise, um, Kuroda did speak overnight, didn't really say anything particularly new, hence the reason why I've not commented specifically on his comments. So, um, I would say if you're looking at, uh, dollar-yen, you're probably again, as per usual, looking at more the risk environment as to how that's reflecting into potential yen strength. Dollar-yen is trading at its around its lows at the moment, having tested the S1 in the futures overnight. And we're testing that level again, which is around the 109 handle. Maybe worth keeping an eye on if the equity market continues to push lower when the US come in. Otherwise, other speakers— Weidmann, again, quite an interesting one potentially to look out for, given that he is shortlisted as a potential candidate for ECB president. So his comments are quite highly scrutinized at the moment by the market. He's gonna be speaking in a few minutes and throughout the next hour. Mersch also speaking, and then otherwise it's a pretty quiet agenda on that, on a schedule point of view. So again, main things to be looking out for, I guess, from a fundamental point of view at least, is gonna be any updates on the trade war. What does the US have to say in response to the rare earths being targeted by China, and this new kind of more stern wording that they've been using in some of the, the kind of flagship newspapers that are run by the state overnight in China. I'd say that's probably where the balance of play could come that could shift sentiment in either way. The more aggressive obviously the US become, then the more we get a follow-through of the moves that we're seeing carry out at the moment. If they come out and they offer more of a conciliatory stance, at least to manage the situation from Trump's point of view, you might see a bit of a meaningful rebound in some of the price activity. But that's probably going to be the main key to market direction today. All right, that's it from me. I'll see you in the chat room. I'll hand you over to Sam. I wish you a good day ahead. Thanks very much.

Hi guys, good morning. Uh, hope everyone doing well. Just, uh, well, having a look here at stocks. You can see this waking up on the wrong side of bed, and we'll bring in the, the S&P here as obviously we're coming into that 2790 area that we've been talking about for a while. Such a key level. of interest. We'll bring up the, the longer term chart. You can see, well, this is an old one where you can see marked up just the importance of this level in general, going back to even, uh, June last year, uh, and obviously July. And then you get those 3 tops from November, October time into December, and that breakdown. So it's quite a, a key level area to, to keep an eye on. Also, for, for those that like the moving average, the 200-day moving average here isn't too far away. Let me just modify this and put that on. Of course, with this, it'll be all about where we close the day, uh, but historically has always offered at least some support, so be worth keeping an eye on that, looking to come in about 10 points below where we are trading now. Of course, on an intraday point of view, be keeping an eye on, on 2800 to act as a resistance did act initially as support yesterday, as you can see here on the daily, before breaking through 12 points below there. Now if we have a look intraday at the, the movement price, we've already found resistance, uh, on that having broken through there this morning. So still be keeping an eye on that should we, we get any retracement there. But you're getting obviously NASDAQ and, and the Dow Jones following suit here as well. So some quite key levels to to come into play, uh, not just for the S&P but of course the, the NASDAQ as well. You can see just testing the previous high that we had back on the 4th of March, just testing, uh, that, uh, was, was the peak there and just coming down there, 7232. And obviously the Dow Jones, as you'd imagine, under pressure as well, just testing that previous low that we had here on the 14th of May. So quite a key, key day today. Can we push on, or is there going to be those 200-day moving averages for the S&P? Is that going to find a level of support? Because if that goes, well, from a technical point of view anyway, and this is what we were talking about in the strategy report yesterday, there could be a bit more, uh, well, there could be a further run down. And I know certainly from a technical point of view anyway, 2750, uh, 2725, 5, not the, not the hardest thing to imagine that happening. Euro yesterday, we're talking with a few people about it, still favoring the downside. I think that's the right way to go. It was anything, maybe the European elections didn't really seem that there was too much in the way of a reaction, which surprised me a bit. I know we had a push down on the, on the 4 PM fix yesterday in, in London, and it's continued to push on since then, pushing lower, just on the low of that day now. So you've got a bit of support just below here, trading at 1.1164 and a half in the futures that I keep an eye on. And of course anywhere higher up as well. Uh, to the upside, just, uh, respected yesterday a few times this trend line from the high of the week. Not that we're that near trading it now. It might be that if we were to get a reaction for whatever reason to the upside, you can see that would most likely come in possibly with the pivot if it was soon, or yesterday's low, or even today's high. So that trend line is something that I would, would very much have on the charts. We finally broke down yesterday the, the good level support around 112, uh, 119, 1197. And that marks up with the pivot today as well. So it's got quite a key area, uh, to the upside that I'll be focusing on, uh, as well. See the, the 112 handle. Aussie dollar, very much, uh, you know, still the same as yesterday. Could just press repeat for, for what we're talking about here. The top of that range, we failed to go again. And you've got that midpoint, if you like, at 69010, 6909, that I'd be obviously focusing on, and then the triple bottom, uh, or quadruple bottom if you like, from, uh, earlier this month. Also more intraday, you can see just the, the range here. This is just a— on the 15-minute chart going from this week, it's a pretty small range, uh, the low of it coming in just around S1 as well. So keeping an eye on that as we are just drifting lower, uh, with a bit of dollar strength this morning. It was just going positive for the day, and equities obviously were under a bit of pressure just a moment ago, although just having a bit of a pause now. The yen, so the yen against the, the dollar, uh, not necessarily pushing on this morning. I know it's still relatively near that high of the range, but that's something, you know, quite key to focus on as well. Just this trend line that starts on the 17th, I would have on to the upside. If that was to go, can we get a further push on? And then the same one as yesterday containing that bottom, you almost got a, a bit of a, a lopsided trend channel, if you like. So for the downside, and this probably, you know, isn't going to come in today, but if it was at some point, a break of that might see a change of things, and that might give you the cue that, you know, equities have recovered as well. But to the upside, if things were you know, either dollar weakness or severe risk-off, a break of the high, break of the trend line and the R1 could be a decent opportunity to look towards to get long to the highs that we had back on the 15th and of course the 13th of this, this month as well. Just having a quick look at the, the bigger picture just while we're trying to make sure we're not missing anything. The DAX obviously just going through 8 o'clock, so the volume is always going to, going to pick up there. We just had a a bit of a spike, uh, through the S1, uh, you know, and also the, the low that we had back on the 23rd. From, uh, I guess a market-related level, you can see we got a bit of support and quite a key level of it historically going back from the 9th of April and then the 13th of May. And that comes in around the S2, so that's somewhere I would be looking at if things were to, to pick up a bit. And obviously the gap fill if we were to get the reversal. Having a look at gold, yesterday it pushed lower, helped by the consumer confidence big, uh, you know, biggest beat, biggest number I should say, since November. That also helped push, push us down. But really since then it got quite choppy and recovered as equities were coming under pressure. It's a bit of a tricky one. Sometimes it's acting as a safe haven, sometimes it's not, sometimes it's going off dollar strength or weakness. Sometimes it is not as well. So I'll just be slightly careful for gold in trying to pick the overall direction. I mean, just looking at this on the 4-hour chart, I mean, you know, what's going on there? It's, uh, it's almost better sometimes, you know, not to get too involved in a market when you don't— well, maybe don't understand it. For example, just having a look through here there wasn't really that much respect for the trend, trend lines, or, or even, you know, significant levels of support or resistance. Obviously that one at S2 just getting blown across straight away. However, we have just, uh, well, almost come up to test the, the top end of this around 1284, and the futures was the high that we had before the breakdown yesterday. So technically speaking is obviously a big level, and you can argue, argue around the previous highs of the day, 1281, could be a good level of support, as well as the trend lines where we were getting squeezed in earlier. So you can see technically works well today. Yesterday, you know, not so much as levels of support. However, we did obviously break down quite nicely just before the gold open as well. Any questions, as usual, uh, please do let me know. Obviously equity S&P's, uh, under pressure a bit this morning, uh, and would be something to focus on. But we are just having a bit of a pause. 2800 is key to the upside, so for the bears to, to contain in the 200-day moving average about 10 points below here on the S&P in the futures will be one to focus on, uh, as well. Pound and euro, uh, under a bit of pressure this morning just as the dollar was strengthening. I think with the pound, I'm not sure if I'd I did actually talk about the pound, actually. But you can see that trend line from yesterday still very much intact. Uh, and also I think it's a matter of time before we, we do drift down and, and get 1.26. So be keeping an eye out for that. But yeah, any questions, as usual, please, uh, do let us know. I hope you'll have a great trading day.