Does China Now Have The Upper Hand in Trade Talks

Okay, very good morning to everyone. It is Wednesday, 28th of August. I hope you are doing well. I'm going to have a look at a few different things this morning. An update on what the general media take is on the latest kind of flip-flop from Trump on the status of the Chinese-US trade talks. And how that's being perceived. Also, a very interesting open editorial piece from the former Fed member William Dudley and the implications of what I think that could have for market sentiment. And then a few other bank calls, UBS and JP Morgan, our latest research notes they issued yesterday and what their outlooks are for US stocks. And then wanted to have a brief talk about something which I was questioned questioned on by one of the guys here yesterday, which, which is German state elections which are happening this weekend, which might see the far right taking the helm. And is there any type of reaction that I'd be expecting then for the markets on the reopening on Monday? So that's what I'm going to address. First off though, a quick touch upon the general market sentiment this morning, and things are relatively quiet. We've had a slight downturn here in the DAX, but looks more to me technically led. You can see here on the center left chart a technical breach of the pivot level which was holding the overnight Asia-Pacific fairly tight range, and we've just seen a bit of downside come in. Likewise in the US futures, the NASDAQ also pushing through its respective pivot, but otherwise pretty quiet. The US 10-year is basically flat, up marginally, a bit of support again around its daily pivot, up about 2 ticks. Gold Not a little bit of movement overnight, but recovered the initial dip that was seen in the first phase of the actual Asia-Pacific session. And again, hugging its pivot level. So overall, fairly quiet. The dollar index is basically flat and the major currency pairs largely reflecting that type of price movement as well. So I'll let Sam go into the charts in more detail. Probably the one standout chart, if there is, in regard to price reaction is that of WTI crude. Not sure if you guys saw that last night, but you had, of course, the API inventories, and we did see a sizable drawdown, and that caused a breach of the previous weekly high that was printed on Monday, and a snap through that in the fairly illiquid conditions overnight did see a push higher in the price, and oil trades up about 64 cents this morning. All right, run through of the major headlines, and really I don't want to spend too much time on this because it's very much in fitting of what we were talking about in the briefing yesterday, which is the point of this kind of almost apparent loss of control that Trump had on Friday when he appeared particularly frustrated by the Jackson Hole speech from Jerome Powell. He then lashed out at China, then 24 hours at the G7 in Biarritz, started talking about how they're very close to the deal and how they had a phone call, which China said didn't even happen. And this is leading to, I think, again, just to reemphasize, a very important shift in the dynamic of the trade negotiation. And in general terms, what I mean is that a lot of the power now is transitioning out of Trump's hands and over to the Chinese. Of which I think is the first time really that this is happening since the entire process has begun. And one of the main things here is that China— and this had been a growing kind of feeling domestically in China if you read a lot of what analysts have been saying, as well as their general state media— is that Trump's tactics have further deepened the distrust. I.e., how can you go into negotiation with a guy that changes his mind like the change of wind. And with that feeling, then China now have kind of, kind of battled down the hatches, if you like, and said, well, we just need to prepare then for this trade war to materially worsen, and that's just a matter of fact. But that then is kind of almost calling the bluff of Trump. And so this is the kind of situation that the president is kind kind of landed himself in by being so, um, you know, uncommitted to a consistent message. What this has led to, um, remember yesterday we were looking at the percentage fluctuation on the daily from the S&P 500, and the last period of about 2 weeks that we've gone through has seen the biggest, um, more than 1% swings in the S&P than we've seen in the last 12, 18 months. That then largely reflective— this is effectively the narrative that the chart is showing you. This is the Chicago Board Options Exchange Volatility Index, otherwise known as the VIX. And so people often look at this as a barometer for general market sensitivity, and often more of a negative way. Uh, 20 often seen as the kind of symbolic threshold of when above that level it tends to be a signal of market stress or panic and can translate into kind of negative trades. Certainly helps fuel the further inversion of the 2/10 yield curve, which we continue to see at the moment. And you can see these flashpoints that we have of when it spikes and then dramatically comes back as the messaging changes to and fro. The other very important part, though, and it's very much an extension of this situation, is there was an open editorial article written by a chap called Bill Dudley. Now, Bill Dudley, for those not familiar, was the former head of the New York Fed and the vice chair of the Federal Reserve. He is no longer part of the Fed. However, he was a very high-ranking figure of seniority within Fed and its decision-making process, particularly anyone tied with the New York Fed has that kind of, that significance in the value of their position. And he wrote yesterday, basically highly criticizing the president and talking about this idea that President Trump's trade war on China keeps undermining the confidence of businesses and consumers and is worsening the economic outlook, and basically suggesting that the Fed should definitely take this into consideration of what their decision-making would mean in terms of the prospects of him securing a second term. and so it was highly critical of Trump and his intervention being so explicit, we're trying to force the Fed to do certain things. Now the Fed themselves have come out to try and de-escalate this situation and said, look, we're not here to get involved in politics, we are independent of that decision-making process. But nonetheless, reading between the lines, you've got to feel that This is, you know, someone like Dudley to come out like this, given the timing of what happened at the end of last week, and given— I've counted the tweets— in one week, Trump has made 11 tweets criticizing directly the Fed and Jerome Powell. And so a little bit of defense tactics perhaps, but ultimately I feel what this means is that if China now are willing to not play ball, and as to, uh, the Fed, well, Trump's got a massive problem on his hands because then all of a sudden that adverse feedback loop that we were talking about last week, which definitely plays into a win-win scenario for Trump, that starts to dissipate and no longer continues. And now he's got to start toeing the line basically and actually making concrete progress without being so aggressive. But remember if he dials down too much the rhetoric in its aggression, well then that's not going to sit well with his electorate base going into a campaign year. And hence comes the, the rock and a hard place situation for Donald Trump to now, if he cannot rescue or wrestle back control away from what has happened over the, literally the period of the last couple of days. So I do think it's quite a pivotal change here. Interestingly, China overnight have said, um, well, are seen now by the majority of analysts and economists of cutting key rates from September, but moves likely to be, to be gradual in fashion. And so again, another step from China looking to manage the process of now weakening of their currency in an orderly and controlled in fashion, which is hugely important for them to have more flexibility and maneuver to now counteract this latest Trump episode without the fear of then mass exodus of capital outflows. So cutting rates, tax cuts, fiscal spending, all of that's to come from China, given the fact that their rhetoric now is that they're willing to prepare, that things are going to get a lot worse. And that is worrying for Donald Trump. So yeah, I mean, that's— it's pretty much a continuation of yesterday. I mean, does this translate into anything immediate for now? No. But I definitely think, you know, this trade war is not going anywhere and definitely is going to remain a key driving topic over the next 12, 18 months. Particularly, it's so key and instrumental to the likelihood or not of Trump securing his second term. That this, I think, we'll look back at this weekend at the G7 in France as one of the pivotal moments of where this whole negotiation shifts. We'll see in time. Other things that I wanted to quickly run through: equity markets. You know, although we've had this incredible bout of volatility, I was looking at the S&P, just talking about more broader global macro issues. To a group of interns actually yesterday, and I was looking at the S&P and I was thinking, now with all this drama that's unfolding, where are we at the moment? And actually, you know, we're still just a couple of percent off all-time highs. So as much as it feels like, you know, the end is nigh and the inversion of the yield curve and so on, you know, the idea of the fact that it's panic stations just yet, I think is is incorrect. And one of the things that was interesting last night was I was reading a couple of bank research reports, and here's one out of JP Morgan, and they were suggesting that the time to buy equities is fastly approaching. And they were essentially suggesting that actually come September it's going to be the commencement of an upward trend. Now supporting that reasoning, they were looking at the fact that the ECB is very much likely to restart its QE program. Remember, timings-wise, we are anticipating ECB will cut its deposit rate by 10 basis points next month, and ultimately the likelihood has grown that they will continue or restart their QE program and announce that in time towards year-end. They were also talking about potential for a deeper Fed rate cut. As much as I kind of disagree with that at the moment, again, it's a potentiality. Signs activity may have bottomed. So looking at economic data and understanding the fact that, well, perhaps now we've hit this trough and the worst economic data point readings, and now it's time for a little bit of a rebound perhaps, and then improving technical indicators. So of course you have to understand that these are sell-side institutions. They have, you know, generally a line that they're trying to push onto their client base. And let's not forget the head of quant trading from JPM said only a couple weeks ago, talking about the idea of an August, end of August rally on a portfolio rotation out of the fact that they're underweight stocks and need to build up a position again. That hasn't happened really yet, still got a couple days yet for his call to come true, but definitely JPM super bullish. But what was interesting, I thought, and what definitely makes a market UBS Wealth Management came out last night and they said they've gone underweight equities, the first time since the euro area crisis. They're cutting their stock positioning relative to high-grade bonds to reduce exposure to trade war and political uncertainty. So UBS taking the opposite opinion, and they're looking to— this would be a classic move into safer assets particularly not looking to pick up speculative or junk yielding, high-yielding bonds, um, like some of the Southern European states, for example, or more emerging market status where you can get a higher return but associated higher risk. They're talking about high-grade bonds, so higher sovereign creditworthiness, looking for a store of value over time with consistent returns for that investment. So rotating out of more riskier investments like equities. So for them, they're looking at the opposite opinion. Now, one thing I would say is that for me, the, the fact that this is a wealth management division, I can understand this from a longer time horizon for the preservation of looking to mitigate risk, to have just a return on investment or capital over time. I would say, not to think that these are complete contrasting calls, I would say these are different investment durations. This is more medium-long term, I would say, as an astute play for the savvy investor. This is more relevant for the trader from JP Morgan's point of view, because this is looking more in the short-term reasoning about the next couple of weeks, whereas this is talking about the next, I would say, 6 to 12 months. So yeah, but just quite interested to see how these different— you know, one of the main things in my role that I always do is I always want to know what other big players in the market are thinking. Now, does that mean that I pin my flag to whatever UBS or JPM is saying? Absolutely not. But what I do do is I read not just what these two banks say, but what all banks say. And that's how I form my opinion about general herd mentality of whereabouts the market is in its consensus view for what happening at the moment as a base case scenario. Very important if you try to ascertain how markets are going to react by going through that process. All right, the final thing I just want to mention before I hand you over to Sam is this is a map of Germany, of course, and as you can see, these are divided into the different states of Germany, of which you're probably familiar with. But two of which have come into stark focus in the last couple of days and will do as we go into the weekend, is that the anti-immigration and the anti-euro AfD party in Germany took the lead in Brandenburg in three of the last five polls and is in striking distance of doing the same in Saxony, of which we're going to see state elections taking place at the weekend on Sunday, the 1st of September. Now, geographically, just to explain very quickly, if you look at where Brandenburg and Saxony are situated, so these would contain obviously some of the key areas. Berlin, its own district, if you like, in the center of Brandenburg, but then Dresden is in Saxony. But these are on the eastern border of Germany. Now, just to refresh your memory of the geography of Germany, obviously this is is connected to on the eastern side, Dresden and Berlin, Poland, and the Czech Republic. And Austria is down at the bottom, which would then be Bavaria. So all of these sides here have been ones where immigration has been an absolute key part of the political kind of posturing, if you like, to gain more popular votes, given the fact that majority of these connected countries on the Eastern Bloc tend to be more, uh, far right or right-leaning in their political stance, which has led then to a kind of transitioning, a crossover to filter in into further increased popularity to the AfD. Now, the point being here, from a trade perspective, do I think that this is going to be, you know, a kind of a big gap open in, let's say, the euro currency or European assets on Monday? I think not. The rise of the, the, the right parties in Germany is not anything particularly new, although it would be somewhat symbolic the fact that if they could win these states, sure, and have higher representation just generally in the political scene in Germany. But the point is, is that this has been a process that's been happening over the last 3 years or so, where influence, power, and popularity from the CDU/CSU coalition led by Angela Merkel has been diminishing. And as a natural European political development that's been happening across all nations, the right-leaning parties have been picking up that more traction. As those more traditional parties have faded. So I don't think it would be a huge surprise, is the point. So I wouldn't— although I will be updating this over the weekend, of course I'll be tweeting— I don't really see it being too much of a big deal. But I am almost sure the press will make a big deal out of it because it just makes a good sensational headline about how the far-right are rising and so on in European in politics. Okay, that is it from me. I'll let you guys, uh, listen to the technical wrap-up from Sam. Calendar-wise today, not a great deal going on, to be honest. There's nothing major coming out of this morning in the eurozone and equally in the US. The only thing really you need to be aware of is the US oil inventory data. And just quickly on that note, here is the API data from last night. We had a drawdown of 11.1 million Now expectations were for a draw of just 2.25 million, so much larger drawdown than expected. And as I showed you earlier, that did accelerate the price of oil overnight, and it does hold on to some of those gains at the moment. Uh, is the biggest drawdown since June in the headline figure. Drawdown of 2.4 million in Cushing, drawdown of 350,000 gasoline, distillate draw of 2.5 million. So we will look at that again later on. Okay, let me just hand you over to Sam then, and I'll see you in the chat room. Thanks very much.

Hi guys, hope we're all doing well. Um, we'll start with that oil chart, and you can see Ant marked up, uh, the high that we had back on, on Monday. So definitely worth keeping an eye as that's not too far, uh, away here from potentially getting tested. And you can see around the pivot, 55, obviously a key level to, to the downside. And then below that, I'll be keeping an eye on 54, 58 before we did push higher into the back end of the, the session as well. To the upside, uh, just gonna move this that way. You can see some quite key levels just above where we're trading, 55.87. Not too much in, in the way of sort of trend lines for now that I'd be, you know, too bothered about unless we were to really, uh, push on. And, and then we're looking here more towards, uh, and above the, the R1. So for, for now, uh, I think it's just a case of, you know, maybe waiting for that DOE data, favoring the, the upside, uh, you know, to, to, to get long. Um, but, uh, yeah, where we can get down towards that pivot, um or 5526 before, uh, will remain to be seen. Uh, worth having a look over the currencies. You can see, well, as of— yeah, we still are. So currently having that— well, we're down for the day, which would make 3 so far. So worth keeping an eye what happens with this, this euro and the dollar in general, which is just up a touch on the day. Obviously we had that big push on, on Friday. We've then drifted lower as Trump has eased off a touch. Um, so if I put this onto a longer term chart, I'm just going to remove the pivots. And this is, you know, what I'm looking at here for, for the euro. You can see we obviously spiked through, uh, this trend line a couple of times. And really more as a guide, not necessarily looking to, to get in as soon as we break or not, but this is a feel for sentiment that if we were to get back below, uh, 1.11 and kind of this trend that's on here, then I would feel pretty confident that we actually do get a test of that low of the year again. Each time we've had that push again, we get those breaks through. And while previously in, in, in the, the year where we've had those trends higher and then break, that hasn't really happened as much as of late. It's more just been a strong push higher before a gradual move to the downside. Be interesting to see what happens should we close the day below 111. Certainly something I would have marked up. And with the pound as well, another update yesterday, we touched 123 on, on the futures. And as I've said a few times, I really do like the, the look of a short from, from 124. Just to bring in that again here, you can see that trendline break, the low that we had back on the 15th of July or that week So can we get back up to there? Obviously we've had 2 up weeks in a row, which just looking at the pound here, the last time that took place was back in February. So well, whether we can, can get back to towards there, 124 this week or not, will remain to be seen. But certainly a level I would have marked up, and from a technical point of view, I really do like the look of that as a, as a trade really back down towards this the lows that we had, uh, of the year, and of course that big 1.20 handle. We're looking more intraday on, uh, on the pound and just bringing the pivots on to give us a bit of a sense of what is going on here. Um, to the upside, uh, obviously we've got those, uh, well, if I make this a bit smaller, you can see that 1.24, you can see, is quite far away. But so for that to get here, I would say it's pretty unlikely. Um, but certainly if we were— let me just get the trend out— uh, to push higher, you know, you would look to be having fingers on like this. This is a bit of resistance points before we would get to 124, because obviously while that is quite unlikely, and you have obviously the, the highs of today and yesterday all to get through anyway, um, certainly, um, yesterday in the brief, and this is when that move started to the upside, we then broke through and came back to retest what what was quite good resistance on Monday. So that's still a level, 122.5650, that I would still have on as well. And then from to the downside, you've got quite a good, uh, that sort of upward trend as well that I would still keep a close watch if we were to drift lower. I think for this market, I think a push higher gradually is, is, is on the cards. And then it's just what happens for me at 124, which will be key. Well, I'm in favor that the euro does overall push lower. Speaking of pushing lower, I can't really believe I'm saying this, but at the moment I do think equities will unfortunately drift down. For, you know, a long-time equity bull, yeah, people won't necessarily believe I'm saying that. I wouldn't feel comfortable, medium term I'm talking now, really getting long unless we get above the 2940. 40, to be honest. And just because of just how similar it feels and looks to October, November, December last year, and just the failure here to really get above that every time, uh, just seems very similar to price action before. So unless that was to happen, you can see was how good 2900 yesterday was as a resistance point, the low that we had, uh, really on cash open of Friday before that big push lower. So as you'd expect, first real test of that, pretty strong. So yeah, sure, you know, that could be the line in the sand. Buyers above 2900, sellers in control below. But I would just for now be favoring, with, you know, unless there is any further developments, a push to the downside. Worth having this potential trend on as well over the last couple of sessions, and, and that will come in around 2862.5 in the futures. So that's something I would, would have marked up. And of course you have quite a lot of potential, uh, support places just below that we, we did make on, uh, on, on Monday, uh, in the Asian session before that big rally that we had, of course, in the UK bank holiday. So that's something I would, would for sure have, uh, marked up. Quick look over at gold. You can see, uh, we did, uh, start the day just pushing higher, but the failure to get above yesterday's high saw us push down and And so that's a really key level, not just from overnight and yesterday, but also from Monday as well. So 1554.6, give or take a couple of cents either way, that will be certainly somewhere to have marked up. And that support level that we talked about yesterday's briefing, very key as well. So we've almost got this mini range here. Uh, it's the upside is, is your favorite, and sure, wait for that to break and we can look for, you move towards the R1 and resistance that we had back on Monday as well. A break of 1535.2, this lower support— as I said yesterday, just be aware of any of these previous highs. The way gold can move, certainly if that was to break, well, it could be pretty aggressive. For now though, I think I do favor the, uh, the upside. And, and one market I do want to touch upon here is, is just to wrap things up for— I'm going to look at Europe is is silver, which has been on such a journey really, and it's playing catch-up for much of the year. And just over the last few days has really, really accelerated higher, and we're now looking at levels— well, you can see we broke above the point from April 2018, but not far. It's in the journey here to reaching 25th of January 2018 high. It doesn't look too far away. It's at all. A day like yesterday, we get that. I actually have some of my friends that are long silver, so they'll be pleased to see just the, the move that this has been on. But certainly from a technical point of view, looks as good a place as any to de-risk around there, 18.58 or so. So silver has been on a big move. Having a look over European stocks, the DAX pushing down on the first 30 minutes Uh, oh, sorry, actually no, it didn't. It recovered just pushing down before the open, and we're just having a little recovery now. Uh, the failure again, you can see, just like your US stocks, to push on, found some resistance really around the R1, and the failure to really close above there saw us push down. It is in a bit of a choppy range. I mean, I would keep an eye on, see, on the pivot, just due to— if we put this on a 15-minute, how important that whole area has been. This morning. Again, good, again, good line in the sand as you could want. But it does seem pretty choppy, uh, so far. So no harm in sort of holding out for that really key level support just below the S1 from the last couple of days. Uh, you can see yesterday's low is also Monday afternoon's low as well. So it's important support points, uh, below there as well. Any questions, as usual, please, uh, do let us know. If not, I hope you have a good trading day.