Concerns over global growth continue

Guten Morgen, Friday 14th of December. Hope everyone is well. A quick overview of what I'm going to cover, and unfortunately it's not a happy Friday, it's a slightly negative Friday as far as the news. I've— it's all a bit doom and gloom, I'm afraid. Not only is it cold outside, but I've got to talk about some weakening European economic data we've just seen hit the tape just now. Comes on the back of a fairly dovish ECB from yesterday with Mario Draghi. Also going to talk about Trump and his hush money and what that could mean. And then obviously this, this impasse in Brexit once again after Europe weren't particularly responsive to the requests of Theresa May yesterday. So quite a few things to get through, all of which is leading to— if we flip over the charts— a relative risk-off morning. That being said, gold a little less responsive than what you typically might expect in this type of conditions. Normally you'd get a bit of a flight to quality bid here. Fixed income futures, both T-notes bottom right and the Bund future, are moving to the upside. The 10-year up about 9 ticks at this time of the day is a fairly decent move already. But gold, a little less responsive. We're down about $5, but keeping in mind, you know, we have been on a pretty phenomenal tear in gold over recent weeks, and we're at quite a sound technical point at the moment, which we'll look at in a second. The thing I want to jump immediately to though is this FX move, and it's a bit of a double whammy really. Both EURUSD and Cable under pressure, because if you think about these currency pairs, you are of course trading them against the dollar. And basically there isn't really any new dollar stories, but the fundamentals in the short term definitely have, have weakened considerably in Europe. As we're going to see, the economic data has been poor, and it comes after the ECB's forecasts, which we'll have a look at again, a recap from their, their macroeconomic projections yesterday, particularly downbeat. So prospects for Europe kind of diminishing over time. And then likewise, cable, which saw, you know, really nice rally when it was kind of clear that Theresa survived the confidence vote. Well, we've kind of broken out of that area of consolidation post that event and now moving back to the downside. And we'll have a little bit of a closer look as to why that is happening and, and how Europe didn't respond probably quite as open to some of the ideas that Theresa May was putting forward in the, the summit in Brussels yesterday. Likewise, stock futures on the back foot, the DAX moving lower. Just having a look here, making the DAX chart a bit bigger, you can see we're just coming back down to some of the lower bound of the, the price action we've had of late. So here, that retest, you can see I guess technically responding given the, the way the DAX moves. It's a fairly fast-moving asset, and so people just targeting the nearest point of technical relevance when you see these fast money moves occurring. And then the US index futures, similar story. I mean, if you're looking at the Dow future, we're already down about 250, um, with all the negatives. I've not even got around to China, of which there was a slew of weak Chinese economic data also overnight. So a lot in play. So I'm going to focus more on the news really to get you up to speed, and I'll let you guys handle your own technical analysis how you see fit. One thing to be aware of, if you are looking, um, I know some of the live guys in the futures markets, you have had the roll from the DEC into March front month now, just to be aware of. All right, we're going to start and try and tackle this then chronologically, and let's start with the ECB from yesterday. We've obviously reviewed this, but just to give you an overall flavor, because it leads it quite nicely into this latest PMI data we've had this morning. And this is the ECB statement from yesterday, kind of scratching out then the previous and highlighting in yellow the additional comments. So seeing the subtractions and additions that we've had to their text, and obviously one of the most Compelling things we saw here, which, you know, also helps this kind of weakening, if you like, of the euro— did briefly at the time of the initial release— was that the intention to continue reinvesting in full the principal payments from maturing securities purchased as part of the asset purchase program for an extended period of time to the date when it starts raising key interest rates. So obviously that's not going to happen for a long period of time. Probably as market expects at this point, at least a year. And so all this means then is that it's kind of QE light. Rather than just ending the program and immediately start unwinding it, it's about just putting it on pause, letting the market get back on its feet. Let's see how it copes, and then looking later down the line to do any type of quantitative tightening like what the Fed have done, and then raising rates thereafter. But all of this, an incredibly long, slow, drawn-out process. One of the big things though that Draghi said yesterday was when we were looking for those key words about whether or not, you know, the risks to the eurozone economy. And before they had said broadly balanced, and he basically said the same, broadly balanced, but then with the addition of however, you know, there are starting to materialize some downside risks. And obviously that being then also reflected in their economic projections, really the growth one is what I'm focusing on. And compared where we're anticipated to be at the end of this year, going forward 2019, 2021, obviously there's a continuation of the slowdown in economic growth. And what then is very interesting is we've just had the latest numbers. Now, this was the French one, this was the manufacturing PMI falling into a contraction here. The contraction was the fastest for 44 months. You can see here you've got to go back to 2016. If we throw in the services to look at the composite number, um, it was in contractionary territory, first time since 2016. And an interesting point here with France in particular is obviously we're looking at data from months of December, and this will encapsulate then the end of the quarter. When we come into January, we're looking at Q4 growth for France. Not only are we already seeing this quite rapid slowdown— I mean, look where we were at the beginning of the year, all things were looking very rosy picture. And then this, this slowdown has really picked up pace. And not only that, France has to deal with more yellow vest protests expected across France this weekend. And then obviously this type of situation, including as well security concerns raised by the recent terror attack that we saw a few days ago, this is all going to have probably a weighted factor on the growth prospects over the fourth quarter. So if anything, you can expect French growth to remain under pressure. Now we just had the German numbers as well, and the manufacturing was a little bit softer, albeit just above 50. Same case with the services, which meant the composite reading was a touch weaker than expected. So hence the reason why you've had a bit of a continuation in the euro currency, a further fall and pullback. And so looking at the euro here, just retesting down at around the lows we were printing. I mean, this was going back to what, Tuesday session, having snapped through then the initial ECB low that we had yesterday and its corresponding S1 level on the intraday pivots. Just remember as well, if you mean this is futures, but here you can see the contract has rolled. So remember, you probably have to do your, your tech analysis from fresh today. Another thing as well, just to add fuel to the fire, is you've also had the Bundesbank come out, the German central bank, this morning. They've also quite radically cut their 2018 GDP forecast. I think this is just a bit of a byproduct of timing. They haven't last issued this since the summer, so as a semi-annual number, obviously the economic environment changes radically over a 6-month period, particularly in the the environment we're in at the moment. So I don't find this wholly surprising, but the number of course is quite worrying— 1.5%. So actually weaker than the ECB's model itself that we just saw. The one thing the Germans are blaming it on is not so much their own economy, but the uncertainties over Brexit. So actually, you know, it's an interesting point here where the economic data is becoming quite compelling and risks to a no deal or an unresolved Brexit is equally as troublesome and worrying for confidence and economic prospects for Europe as it is for the UK. And actually then, having seen these types of data points and the bigger picture is getting materially worse, you know, is this playing actually in a rather perverse way into Theresa May's hands where Europe are really left without much of a choice, because this slowdown that we're just discussing in Europe— is it— obviously this has been happening for a while now in the UK, but it's only going to get significantly worse if they don't make a concession and they don't get this Brexit deal over the line so we can move into the transitionary phase. Because once the UK recovers and you remove then one of the biggest 2019 Q1 risks, that certainly would help mitigate some of this, this growing negativity. And so, you know, is this actually politically kind of gonna, gonna force them to make a deal or a concession? In that sense, it's going to be very interesting to see how that plays out. Okay, other news stories. US equity indices were already actually under a bit of pressure last night. and although this really hasn't been a Trump week, obviously we can't go a week without talking about the main man himself. And this was because yesterday there was some legal documentation that got filed, and essentially it said— it goes back to the pre-presidential campaign era of Donald Trump and this whole idea whether or not he was using campaign funds and connections to then pay hush money to a former Playboy model and a porno star actress while he was having his affairs, or whatever you want to call them. So this would obviously be a breach of the rules, which actually in fact then would be something which he could then come into questioned upon after his term served as president. And so a lot of people questioning this, kind of more headache. I don't think there's much legs in this really, but it just adds to the whole kind of, you know, can they bring anything against Donald Trump? He obviously has been involved with some pretty gray areas, but he survived these things before. I'm sure that he's going to manage to wiggle his way out of this one again. But it just kind of brings to question of, you know, potential political uncertainty or disruption in America, the potential inability to implement his proposals while he's trying to deal with these external kind of headaches, which detracts then from him focusing on his fiscal policies. And that takes another wind out of the sails of those kind of more economic-friendly proposals. And so you remove that. Again, that adds to some of the downside negativity for US equity markets. Moving on the other side of the world, we've got China. And, you know, this is something which, you know, is looking quite worrying. We had a string of economic data actually overnight. And actually, let me bring you up this tweet. It probably summarizes it much better and we can talk through this. This is a snapshot of the takeaways from the Chinese data overnight. Industrial production weaker than all forecasts, rose less than almost all. Investment gains suggest stabilization as a result of government infrastructure push, but industrial output slowest pace since 2008. Retail sales slowest pace since 2003. Bloomberg's own internal Economics Monthly GDP tracker has now dropped to its weakest since Feb 2016. So the Stats Bureau in China saying that raising trade tensions has affected the global economy, but they're trying to keep some positivity, saying hasn't altered China's stable expansion though. But as they're saying at the, the tail end of this, and I do agree, softer data is seen raising the stakes for China's trade talks with US and Chinese leadership that are happening, uh, basically early next week. And so that's when they'll look to set out their 2019 economic policy targets. So The situation continues at this point, and that temporary truce ending so quickly means that again, one of the biggest threats Q1 of 2019 alongside a no-deal Brexit is the bigger global issue of the trade war. And the Chinese economy is continuing to suffer at this point, and obviously that has consequences for overall global economic growth. So adding to the, again, this belief that in the short term it validates that view and equity index futures continue to remain under pressure here. All the meanwhile, well, where does all the, the safe haven flow to? Well, the greenback gets a good kick. So the dollar index is up about 0.5% this morning. So that's probably what's capping some of the gains for gold in the traditional flight to quality sense. Because that's a pretty decent move to be coming up to 9 o'clock this morning. The dollar strengthening at a fairly rapid pace, but as I said, that comes as the euro's also plummeted, probably helping accelerate that move on the back of the weak data that we've had, and in context then of the slightly more pessimistic ECB yesterday and the weakness in sterling, all kind of adding to that move. That being said then, uh, still looking at crude oil. We've managed to, to evert the, the kind of crucial tests down at those lower levels that, uh, you know, a couple times me and Sam have been saying that we're looking at. But we bounced very aggressively, uh, yesterday afternoon. We're back to the $52 handle. If the dollar keeps strengthening and you know, people start to latch on to this slowing narrative of global economic growth, both from China to Europe, impacting on demand, then, you know, you'd say there's still a kind of weighted bias for, for the fundamental side, for more weight for, for crude. Okay, moving on. Brexit then. What exactly is the state of play? Well, I just wanted to highlight a couple of key things so we're all on point of what we're looking out for here for sterling. I thought this was a cracking picture. This is the Dutch PM pumping fist pump here with his European partners while Merkel's having a kiss on Macron's cheek. And then Theresa May's just kind of left there in the cold looking down at the fist pump going, "Whew, wish I was part of this group." But the point here is that she gave an hour-long presentation Yesterday, Mrs. May succeeded in alienating many fellow leaders after making a series of ambitious proposals to appease, obviously, her domestic critics, including a 1-year time limit on the Irish backstop. After this, then, the EU leaders basically had their own 2-hour discussions over dinner, and EU leaders agreed to scrap plans for a formal process to provide reassurances to Britain until Mrs. May decided what she wants. A lot of them reading the kind of interpretations of various unnamed EU diplomats this morning in the FT, they were saying it's like Salzburg all over again. This is a reference to a meeting in Salzburg, I think it was probably about 2, maybe 2 and a half months ago, when everything was looking positive going into the event, and then she came in and then she was absolutely said the complete opposite. Brexit means Brexit, and all these types of phrases. And that really got European backs up, and they, they kind of turned down any of her proposals at that time. So it's looking fairly similar at this point. So again, as I said on the cable chart, a little bit of weakness coming into the pair, reversing the initial survival of no-confidence vote. And I think that's fair because, you know, maybe not as smooth a passage as some might have believed in the first instance. Sebastian Kurz, who is the Chancellor of Austria but also in place at the moment, holds the role of EU President, suggested another EU summit on Brexit could be needed in January, although after last night's dinner all preparations have now been put on hold. From an EU side, to increase pressure on May, the European Commission will prepare a raft of new contingency plans on December 19th. For a no-deal exit. So, you know, no better threat in the middle of a negotiation to start putting forward out proposals and what you're going to do in a no-deal, because obviously in Theresa May's mind, well, there's no point you needing to do that, just cut me a deal. So this is the kind of standoff at the moment. For me, actually, I think this type of activity, the toing and froing between what May wants and what Europe wants. I think this is going to go on for a little while, quite honestly, and I think it's going to carry us through the Christmas period. I don't think it's really, again, we know that next kind of real meaningful deadline. I think there's a self-imposed deadline May's put on herself of January 21st to have the vote in the lower house on her plan. I think strategically it would be wise for her to push that all the way up to as last minute as possible to both leverage then Europe, which are already, as we're seeing, are going to be continuing to have an economic deterioration in their own economies. So they're going to be forced into a compromise. And then likewise, the prospects of having a no deal should hopefully see the domestic situation also fall in line. So I think you're going to get a lot more of this type of noise from Europe and, you know, kind of usual headaches about uh, the Brexiteers on May. So with that being said, I do feel like there could be more downside to come for, for sterling. This was that longer daily continuation chart that we had looked at, and when that was the real key area, the kind of block of color there I've shaded, when we were that kind of mid-August low from 2018 and the previous support and resistance levels going further back, when we broke that, you can see that accelerated the downside before we kind of bounced around the 125 handle and then on a recovery we've come all the way back down to exact same kind of zone of price action. And so for me, I think we go back to that previous low down at 124.79, so the handle. I think that's going to be seen, if not challenged, and if not move below, because then ultimately I think come Jan, um, we do get the deal over the line and then we see the bigger, broader recovery going into Q1. But as I said before, it's got to get a little worse before it gets a little better, um, in regards to Brexit. I still kind of think that's going to be the case now going forward. But the euro is the one we're looking at this morning. Just seen it here, another leg lower, so still remaining under pressure. Okay, quick look at the calendar, wrap things up then. So we've already had the Chinese data, again weak across the board. We've had the Manufacturing service PMIs in Europe also weak. That pretty much concludes the morning scheduled economic data, but in the US this afternoon there are some key things. CPI was a bit of a non-event actually for the Americans midweek, but we're going to have retail sales this afternoon, and obviously this is going to be closely watched as to, again, the economic activity in the States as for how um, dovish the FOMC might sound in their final meeting, and interest rate hike anticipated next week. And then you've got not just retail sales, industrial production, cap utilization. You've also got the service and manufacturing PMIs, business inventories. So quite a few things to come later on this afternoon as well. From a speaker's point of view, uh, I mean, these are all kind of off-topic speeches, but of course I'd still be mindful of monitoring anything on the Brexit front and anything on the trade war front. However, I would say given that hush money story on Trump, he's going to be way more busy tweeting to try and put out that fire first before he starts talking about China, I would have it, I guess. All right, markets are moving still, so I'm going to let you guys get on with things. I'll be available in the chat throughout the day or morning. Piers will be covering them, me in the afternoon. So I wish you all a good day ahead and a fantastic weekend. Take care.