ECB Concern Over Rising Euro

Okay, very good morning to you. It's Thursday the 3rd of September. Hope you are all doing well. First things first, we do have tomorrow the live payroll webinar that myself going to be joined by the head of trading peers. We've got Sam, Alex, Will, everyone's going to be online to cover that live and take any questions. And hopefully you can see us in action. So remember to go on the link in the registration in the description of this video and in the comment section. And also, I was looking at some of the analytics yesterday for the YouTube channel, and quite a few people aren't subscribed. So I'd really appreciate it if you did hit that subscribe button, and you'll get the alerts every day from me and the rest of the team covering different areas as well. But let's get straight into it. And what have we got this morning? Continuation, really, of some sorts. We had a momentary sell-off at the open on Wall Street yesterday in the NASDAQ. And someone was pulling my chain slightly yesterday because I entitled the YouTube briefing that I, that I posted as NASDAQ to Infinity and Beyond. And someone commented, wouldn't it be funny if your comment was the top in the market? And then obviously we sold off quite aggressively at the open, and that person was feeling pretty pleased about their they're cool. But there goes the point that I was trying to say with equities yesterday, and I continue to hold that view, uh, really, which is, you know, this amazing recovery that we continue to see. Anytime that there is any time of shakeout, profit-taking if you want to call it that, when we've squeezed up to these new highs, particularly given the way that the tech sector has outperformed against the other indices, then it's just another opportunity to buy into. And I was talking to some of our interns yesterday, and I was kind of just, you know, a lot of them were quite new to trading, particularly things like technical analysis. And I was kind of doing a test where I'd click on a chart and roll my chart down like this, and I'd say to them, you tell me when. You're not allowed to sell, you're only allowed to buy. And I'd put the cursor and I'd say, tell me where you want to buy. And they said, okay, yep, there. There. And so using just very simple, just areas of congestion before, or where the market has responded in support and resistance, just on simple horizontal support lines. And the notion being that they don't want to short the market, they want to be long, but where to get long? And you can see how the— when they were marking up these rectangles yesterday with me, and how the market really did react to these levels initially here the break lower when it did come, a little bit volatile around the cash equity close in Europe, but again responding technically to its respective S1 on the day in those previous areas of resistance and support as well. So yeah, for the time being equities continue to remain on the ascent. The DAX I can see here on the left, it's just having a bit of a pop as we've just gone through the cash equity open this morning, and we've just had a bit of a retest up and around that initial Eurex gap up that we saw, just given the general performance on the close on Wall Street and some of the domestic markets overnight, the Asia-Pacific region. One thing that people were talking about yesterday, just while I'm on stocks, a few people were looking at this idea of rotation away from the tech titans that have led the gains this year, uh, with the likes of Apple, as you can see here on the left-hand side, down about 2%. Tesla came off at one point, I think they were down as much as 15% yesterday. And Zoom Video were also down a lot. I would— I mean, a lot of people think that rotation out of tech names in a broader market rally is seen as a net positive sign, that actually it's a sign of confidence about the broader economic recovery if all equities start to rise rather than it being isolated to just a small portion of these tech giants just dragging everything up. Now, I would agree with that assessment in terms of a theory, Yes, a more broadening buy-in to the stock rally is definitely important, but I would say people are just making a little bit of a mountain out of a molehill. Yesterday, Apple shares, in my mind, they've been up, what, some 8% or so in the prior two-day sessions. Zoom shares had an incredible 25% pop on their earnings just a few days ago, and Tesla have just been going parabolic of late. So a pullback of some 15% and then closing the day down in, in kind of high single-digit percentages. To me, that's just a reflection of the extreme nature of some of their individual share price moves that they've had. So yeah, I agree, you know, I still don't detract from the point. I think this equity rally still got some legs in it at this point. But talking about a rotation away from tech and it's a broader sign of the economic recovery, I think you're getting a little bit ahead of yourself there. I think that yesterday's moves the, the pullback we've seen in those aforementioned shares— Apple, Tesla, and Zoom— it's just a reflection of some of the recent price, share price activity isolated to those individual stocks. Um, but nonetheless, look, some of the other areas you can see some, some strong gains overall. So, um, some decent moves there. The other thing overnight that we did have was some Chinese data, Chinese service sector activity. This follows on from the decent manufacturing number that they've had earlier in the week. And the service activity grew for the fourth straight month. You can see here we've gone back above 50, which is that symbolic level to measure the PMI numbers about expansion and contraction. So that brief period that we had in the initial outbreak of coronavirus in, in Wuhan obviously impeded this the most when it went into extreme lockdown back in February. Remember, so it was front-running of what we had in the lockdown, say, in more like April late March in the rest of the Western world. And we've continued to rebalance since then, and hence the reason why another component of the relative low VIX, low volatility conditions, general stability in markets coming from— yes, of course, the massive firepower coming on the force of, from authorities, central bank stimulus, fiscal stimulus— but China is a key component, and economically things have continued to stabilize. Um, on the breakdown of the data, new orders rose markedly, uh, despite easing further from June's recent record, while employment increased for the first time in 7 months, in fact, underlying within that service sector in China. So some other positive signs there. Before I really move on though, let's just have a quick look elsewhere. I'll gloss over the other charts and what's happening. So equity index futures in the US, I'd say, are fairly sideways this morning. The S&P is pretty flat. We're both trading in the futures, NASDAQ and S&P, above their pivot for the moment. So still in close proximity to the, the push-up to the all-time highs yesterday. The DAX, as I said, it's finding a little bit of resistance around that overnight high, a bit of a false breakout as the initial volumes in the futures pick up through the cash open this morning. Elsewhere, oil still a little lower. We're going to talk about Iraq and compliance in a moment as one of the headline stories, but obviously came on some selling pressure, breaking down through a couple of key technical levels yesterday, uh, pre— actually even the infantry data, which on the headline reading of course would have been technically more bullish with the sizable drawdown of near 10 million. Uh, but if you look here, I'd say there was a combination of a few different things, um, despite that golden cross yesterday, which would normally be a more bullish signal. I think technically you had a bit of a catalyst here with the break through that 21 DMA, which has been a really nice strong area of support generally from a technical perspective, and you broke through that low we had on the 27th, and I think that just exacerbated then the initial break that we saw at the time around that $42.36 that contributed to that run lower. So some good support though seen around crude just around that $41 handle. That was that low we had on the 7th of August, so worth keeping an eye there. Any further breakdown, obviously you've got the $40 handle and those lows we had back on the beginning of August would come in at 3958 if the trend were to continue. Elsewhere then, currency markets— I'm going to talk about the euro quite a bit in a moment. That's really the predominant main story from this morning, an FT exclusive. The ECB coming out in full force trying to verbally manage the resurgence of the euro we've had in recent weeks. So follows on from Philip Lane, the chief economist of the ECB yesterday, who was doing a similar thing. So I'll get into that in a moment, but both major currency pairs lower. Bank of England Treasury Committee meeting yesterday, and they too were talking about the options they have for still firepower on the monetary policy front. And so therefore, as a net result, the dollar strengthening. Dixie, yeah, initiated by the ISM Manufacturing good number we had 2 days ago, that boosted things. Now you're getting the likes of the ECB talking down the euro more policy, policy easing options coming our way of Bank of England in some of the recent commentary that we've had from Ramsden and Bailey. And so, uh, factory order activity yesterday in the US was pretty decent despite the miss on the ADP figure. So the Dixie's making a bit of resurgence. So having broken through 92 in the Dixie, uh, we're now all the way back up to around the 93 level, and that's continued to weigh on some of the major pairs, subsequently also weighing a little bit on gold. So after we had that 2000 rejection, uh, symbolically and technically, um, 2 days ago. It continues to remain on the back foot for the moment. So we're trading back to around 1938 at the moment. But albeit, if you're looking at the last couple of weeks of price action, that's kind of mid-range. Uh, obviously the range is quite extreme given how volatile gold has been. So yeah, that's the overall flavor of what's going on. Let's have a look at a couple of other things because You know, with equities moving higher yesterday, there's a few other things. As I mentioned, there is quite a bit of dovish rhetoric coming out overall from central banks, but also a little bit of perhaps stimulus optimism. US Treasury Secretary Steven Mnuchin has restarted talks with Nancy Pelosi as well. And obviously that comes after that impasse we had 2 weeks or so ago where they weren't able to come to a compromise deal on this new level of fiscal stimulus coming out of the US. But That's a key component to keep this show running in terms of the overall risk appetite. Um, and vaccine optimism has been something which is being mentioned as well. And let's have a bit of a catch-up what's going on, not so much with COVID cases, but with the vaccine situation. And this is one of the main things that people are looking at this morning. Um, and Sanofi in partnership with GlaxoSmithKline, so you're talking about two of the largest pharmaceutical companies in the world. They administered their first patients with this experimental COVID-19 vaccine on Thursday, bringing it a step closer to the late-stage clinical trials it aims to kick-start before year-end. Although Sanofi and Glaxo are just now starting their latest trial, the vaccine front-runners may deliver interim data for their late-stage studies as early as this month according to some of the, the articles here on Bloomberg in circulation this morning. Now one of the things here, it comes on the coattails of yesterday, the US CDC, the Centers for Disease Control and Prevention in the US, told states to prepare for COVID-19 vaccine to be ready by November 1st. Obviously this is an extremely aggressive goal and obviously well-timed because November 1st is just days before the actual US election. So I don't know who Donald Trump's got on the book at the US CDC, but he's definitely getting his money's worth there. I absolutely do not believe that there's going to be a vaccine ready for then, but I guess this is the whole point of they're just making these comments. That does not mean necessarily that there's a vaccine that's ready for, um, implementation or usage and distribution. It just needs to be that there's a trial that said that it's ready. As long as he can spin this type of narrative, um, I think that it's a positive in regards to Donald Trump, which obviously has taken the biggest political hit over the handling of the pandemic in itself. Hence the reason why I think it's a difficult one for, for Trump to manage, and why you're seeing him being so persistent on the argument of law and order. I think that's where he's going to have a much greater success. But yeah, just interesting at the moment, there is quite a few people getting a little bit optimistic about vaccines again in terms of the timeline. Most people were looking out into, you know, well into 2021. and some of the things being banded around at the moment would indicate being much earlier than that. So I think that's also another contributing factor to some of the risk appetite at the moment. Let's talk about the euro then, just quickly on the chart. The euro has come off fairly, fairly considerably actually over the course of the last day or so. Remember yesterday we were talking about a pretty big level around this 1.2050. I know Alex on our trading team was talking about this a lot with our guys, about a good level of technical resistance around those low of 2012 and that period of resistance back in September of 2017. And after that breakout and run push-up that we've had, and this quite extreme move to the upside in nature, almost being overbought here in EURUSD, that it was susceptible for a bit of a pullback. And that overlaid with the fundamental understanding that given just how quickly the euro has risen Literally in the course of going from late June to where we are now in early September, I mean, we've basically traded from around a 112 handle all the way up to 120. So, you know, 8 full point move, which is pretty incredible. Obviously initiated by a number of different factors, whether it be the recovery fund, German stimulus, general perception about the euro being a better positional play than the dollar. There was a lot of the talk at the time, although that's eased. One of the things here then is about the euro being at a level that makes the ECB very conscious about what that does and have implications then for the European economic recovery. So it did almost feel somewhat inevitable then at some point the ECB would start to do what we call the kind of prevention of further appreciation of their currency by trying to intonate towards some degree of concern or policy easing to tame the rise in the currency. So rather than, you know, physically intervening like you would do in emerging market currency, for example, obviously the euro hasn't got quite that extreme yet, but there's almost like these thresholds where the ECB rhetoric intensifies And it's interesting that 1.20 then has acted as that first kind of barrier for them to look to try and counteract the euro's recent surge. So the actual FT article, what is it saying? It's basically saying that the euro's rise is worrying top policymakers at the ECB, who warn that if the currency keeps appreciating, it will weigh on exports, drag down prices, and intensify the pressure for more monetary stimulus. So if you read between the lines, then that's them just, you know, really coming out and just, just forcefully trying to weaken the euro. And obviously a weaker euro in the short term probably gives the DAX just another reason into a fairly bullish backdrop, just given the overall global indices performances we're seeing at the moment. Uh, the DAX already moving in sympathy with the general gains seen in the US, but you can see here the DAX just squeezing higher now. Getting more of a definitive break of that overnight high. But the weakening euro will probably help that as well, given the heavy weighting that the DAX has towards export names. And a weakening euro would certainly alleviate some of that pressure that they might have been feeling under the, the appreciation of the euro of the last couple of weeks. Several members of the ECB Governing Council apparently told the FT that the euro's rise against the US dollar and many other currencies risks holding back the eurozone's economic recovery. And all of this, of course, is particularly well-crafted in terms of timing because it's the ECB next week. They have their next monetary policy meeting. And so, you know, these things are always planned in regards to when they like to start talking about this. So it's almost like they're already drip-feeding it in now ahead of that event, just looking to maximize their opportunity to kind of guide the market with their, with their forward guidance. So yeah, the euro is quite a big story this morning. Elsewhere, sticking with the European front, we've had this headline: Macron in France, his government unveiled a long-awaited €100 billion stimulus plan. The plan, dubbed the so-called, quote, French relaunch, includes wage subsidies, tax cuts for businesses, and funding for environmental projects. Now, one of the things here is twofold. For one, this is looking at— the red bar would be indicative of French GDP, the blue bar for the euro area. And as you can see here, the French economy may shrink as much as 10% this year in 2020, which would actually be more than the euro area as a whole, which is anticipated to contract by just 8%. So all of this, of course, is well-timed again because Macron is up for reelection in 2022. And obviously that might seem technically quite far away, the best part of a year or so, but these things take time in terms of the, I guess, the procedure that needs to go through in order to get these things finalized and implemented and also then to really start happening. But he's already thinking down the road, and I think actually strategically this is quite an interesting and well-timed move for him because for me, obviously borrowing money, increasing your debt burden, is not a good situation, particularly for someone like France, who generally the debt-to-GDP ratio is somewhat getting a little bit questionable in recent years. But you can almost disguise now stimulus, I feel, if you're a government like France. And if I was Macron, I would be quite encouraged to go for these big new injections of stimulus to ensure then my political longevity by doing things like wage subsidies and tax cuts and helping businesses and all these sorts of things, so it improves my favorability rankings. I don't then have to really say that that's hurting debt because I can contribute it or attribute it to the fact that this was all COVID-19. So it's almost like you can get some extra stimulus into the system under the cloud of COVID where not— perhaps not necessarily it's entirely that. It's more driven out of your own political agenda to prepare yourself in the best possible way for being reappointed in an upcoming election, which is happening in 2022. So I just thought it was quite interesting. This isn't really market moving. The, the, the ECB talk in the FT about the euro is way more important than that, but I just thought I would point it out. The other things then The Bank of England— I'm just talking about the Bank of England because I briefly mentioned not just the ECB talking the euro down, but the pound has also weakened. Combination, of course, a bit of resurgence we've had in the last 2 days in the dollar. But in terms of sterling, we did have the, the MPC members testifying to lawmakers, part of their regular procedure, yesterday. And the Deputy Governor Dave Ramsden said the Bank of England has the capacity to increase the pace and the size of bond buying program if needed. This does, of course, comes after Andrew Bailey last week said the central bank had plenty of room to add monetary stimulus, including negative interest rates. Now, again, I was talking to a couple of guys about this yesterday, um, some of the kind of junior traders, and kind of explaining then the nuances and the use of how important credibility is for for then people to believe in this kind of forward guidance communication tactic that this is ultimately what they're deploying at the moment with the Bank of England. It's, look, I think they're, even though the market might be pricing this later on, I think the Bank of England are really far away from ever adopting negative rates. But as long as you can put those weapons on the table and everyone in that room, i.e., the marketplace, knows that you've got those weapons, it might well be that you never actually need to adopt them because the market takes confidence on the fact that they're there. In the first place. So I think this is what's really happening with the UK. But it does go some way to show, though, there are some significant potential speed bumps coming for the UK economy. You've got a kind of a trifecta of issues, potential resurgence of coronavirus. Obviously, kids are going back to school now, not just for the kids, but obviously do they transmit the disease and pass that on to their families and their parents, their working parents and these sorts of things? So is there going to be potentially a renewed outbreak? On top of that coming with the seasonal aspect of winter is coming. So that's point one. You've got a potential spike in unemployment because ultimately the furlough scheme does need to come to a close at some point, and obviously that's looming in October. And that obviously overlays then with the exact timing of the soft deadline at the beginning of October for when we should be looking to get a tentative kind of deal, if you like, done with Europe. And that in itself is not looking great because the EU chief negotiator Barnier said just yesterday, he's kind of pointing the finger, Britain is shunning any offers to make any progress with these talks. So that side of things still looking particularly uncertain at the moment. And then the other thing was yesterday you had Boris Johnson, the Prime Minister, warning the UK's economic outlook was about to get tough, he said, as Rishi Sunak, the Chancellor, admitted tax rises would be required to pay for the economic chaos brought on by coronavirus. And this is one of the other things that I was talking about in a briefing maybe 2 months ago or so when everyone was kind of loving Rishi because he was coming out with these, you know, the furlough scheme. He was coming out with all these extra things, but I was kind of of the opinion more of, okay, that's great short-term. Long-term, you know, there's no such thing as a free lunch, and someone's got to pay for this. And you're gonna have to pay for it in higher taxes at some point, which is gonna also impede then the ability for the speed of recovery in the UK. So yeah, it is, it is important that the Bank of England have this type of communication at the moment, that they've got room to move to the downside in multiple tools, because things potentially could get worse. And, and, and Johnson is right, things are about to get tougher. And so for him, it's about political management of expectations now, hence the reason why he used that phrase yesterday. So yeah, all in all, perhaps then there has been a degree of inevitability, I think, about the pound. Obviously the pound has been on fire, chiefly buoyed by none other than the dollar more than anything else, and the fact that Brexit kind of deadlines and everything else, um, furlough has been so far away. But those timelines are now diminishing, and also if we start to see the dollar having a bit of a comeback as we have had And as we go further toward October, I do think that the pound will have to start building in some of these renewed risks, but perhaps a little early, but, but going forward in the coming weeks. All right. Elsewhere, oil. This was one of the other stories. I find this absolutely not surprising at all. Iraq may ask for a 2-month extension to implement the extra production cuts it's carrying out as part of the OPEC+ deal. Remember, The OPEC+ deal was that non-compliant nations, so people like Iraq or Nigeria, who typically don't agree to the defined quota, they have to then, on top of the existing cuts, catch up and make up for the lost cuts that they should have done in prior months that have gone by. Iraq has not been able to achieve that, and they're asking for an extension. Is this important for oil? I know oil is falling this morning, but I don't really think it's too much tied to this, to be quite honest, because at the end of the day, other countries like Saudi Arabia always carry the slack for Iraq. I guess though, if you were looking at it from a real top level, Iraq is a particularly large producer. I mean, as you can see here, in August their output was 3.72 million, they are de facto, after Saudi, one of the kingpins in the Middle East in terms of production. And if they're not adhering to the deal, then does this, in terms of an idea of compliance, start to then make other countries also think that they can get away with it and get away with not being fully compliant? And then does that whole deal start to disintegrate? I think that's a little bit far-fetched. I think oil's just moving lower at the moment, just because, I mean, technically, as we discussed, it broken down a little bit. A couple of key technical levels in the near term have broken down, so I don't think it's too much to over-interpret, to be honest. And I find Iraq asking for this request is, is as per my expectation overall. All right, quick look at the calendar. What have we got today? Uh, there are a few things, um, going through the morning. We get the final service PMI numbers coming out the eurozone and the UK, so to just be aware of, but these are final figures. We then get the US session where there's two main things really. We've got the initial jobless claims and the ISM non-manufacturing PMI. So for initial jobless claims, the expectation is for a number just shy of 1 million. Jobless claims have fluctuated quite a bit recently. We saw that dramatic drop right at the end of July where it decreased from around 1.4 to 1.2 million. And then decreased again. So this was quite a positive development that was happening. It jumped up and down. So at the moment, I think when we're seeing this type of pattern, I guess overall what the market's looking for here is, is stabilization to some degree. These numbers though probably going to level out around 1 million for the time being, uh, would be my expectation. The extremity of the range for initial jobless would be 775,000 to 1.175 million. And even at those end of ranges, I don't really see too much in the way of a real reaction, to be quite honest. Perhaps one thing that will be very interesting to watch, though, will be the ISM non-manufacturing PMI. And the reason for that is, I mean, we had such a phenomenal reading the last time this data came out. In fact, the last reading pointed to the steepest month of expansion in the service sector since February of 2019, obviously, as the service sector starts to get back on its feet after the extremity of the lockdown experienced in April and May in the United States. Now, expectations for that figure is for 57, so it is expected to cool slightly, but there is a range of 54.5, which would be around here, to 61. I mean, if we got a 61 print, that would put us all the way back up here to around the highs we were seeing in 2018. Which if you look at that, that puts us at the highest really that we've seen in the last 20 years as far as the service sector is, is concerned. As ever, given we've got payrolls on Friday, keep an eye out for the employment constituent, and that's one of the main figures comprised within the report. The actual ISM Manufacturing we had earlier in the week was a decent top-level reading. Export— new export figures which were strong, which is all positive signs. However, the employment number was still pretty lackluster. So be interested to see how that comes out. If that's lackluster and jobless claims, we can see, are generally stable, but then if ADP was weak, that could mean that there's more of a downside bias towards the payroll report that might come on Friday. Otherwise, speakers, you got Andrew Bailey. He's, uh, he's a, he's a busy chap at the moment. He's back on Speaking again this afternoon, but he's talking about crypto, uh, so I'd say it's doubtful that he'd say anything particularly interesting on monetary policy of the economy, but he is the governor, so I'd keep an eye out for that. ECB Schnabel, just given the back of the context of the FT report this morning, um, I'd keep an eye on that. That's at 4 PM. And then Fed's Evans, but a non-voter, is talking about economic conditions and monetary policy at 5:30. And then finally, you've got quite a bit of fixed income supply coming out of France, Spain, and the UK if you're trading fixed income futures. All right, that is it. So again, if you've made it to the end of the briefing, thank you for sticking with me. Don't forget to subscribe to the channel. Really appreciate all the support and engagement that we get online. And then don't forget to register for the payroll event on Friday. Okay guys, have a good session ahead. Take care.