ECB Preview ahead of Interest Rate Decision

Hi guys, it's Thursday the 6th of June, just gone half 7 here in London. Theresa May stepping down tomorrow. This man on my right taking the seat today for the ECB meeting and press conference. We'll have a look over— well, we'll look ahead to that, what to look out for. And we'll have a quick look over the markets from yesterday, how we're trading, uh, as well. Obviously some decent reactions over the last couple of days, most notably with the, the dollar where we've seen some weakness and then we saw some strength yesterday. Stock market's still higher, but as you, uh, will see slightly this morning, they're just coming under a touch of pressure, uh, now to their lower points of the day. The DAX here, obviously ahead of the ECB, likely to be a bit more subdued but just coming under a touch of pressure as well. The same can be said for the S&P and the NASDAQ, which fought off, um, the, the gap close to push on before coming back lower. Yesterday we saw the Mexican peso push higher in the, the early part of the afternoon. If I can just circle this here on the idea, Navarro coming out and saying there was gonna be a deal reached, if you like. But you can see this market gapping lower overnight, uh, as they are far from that deal. So one to keep an eye out for, uh, today. You can see that the peso under a series of pressure really from the beginning of the, uh, the week. You can see the big, big one for the 31st, I should say, big gap down, bit of a recovery yesterday, short-lived, and then the gap lower as well. Unfortunately for any Mexican peso traders, hopefully you weren't holding a position overnight. There. As you can see, that gap lower, quite significant. We'll also take a look obviously at the, uh, the euro ahead of this meeting. We're on a quite a key level. If I just bring over this area from the left-hand side, the previous high, uh, back on the 24th and 27th. I'll be keeping a close eye on that this morning. Whether we can have a decent reaction either way before that meeting, I wouldn't be too sure. Yesterday as well, one of the, the bigger movers in the market, oil. You can see if, especially if we lower this time frame down from the DOE numbers, uh, pushing down to the lowest point of the year. Those numbers, you can see here, if I just transition my chart, coming in as a build for, for everything. 6.7 million, uh, obviously more than expected. API gave the signal, uh, on Tuesday evening that there was going to, uh, be a build but not as big as was expected. And price did come under, uh, a bit of pressure. And even late last night where we had a bit of a recovery, the S1 previous low of the day has acted as a quite good level, uh, of resistance there. Just having a look at oil on that longer-term chart. So in the, in the weekly strategy, let me just remove all of these studies. You can see we were talking about the importance of this, this level in general and call it a zone really from the the lows that we had back in February and January of this, uh, of this year. We have now had a go at trying to break through to the downside, closing below these, these key levels. So I'll just be keeping an eye, especially where we close the week. Is it going to be an opportunity to get long and we start to see a reversal, or is this just the start of a further push down from the top of the year to the low, uh, 24, nearly 25% move to the downside. So big, uh, big push there. Also yesterday, and, and this was a, uh, well, if I told you looking at this chart with euro dollar on the low of, well, today and yesterday, that ADP was the worst number in 9 years, you would think this chart is upside down. Uh, that number coming in a lot less than expected. 180,000 was expected and a miss of nearly 160,000, 150,000 on that. Uh, took a while, it did take a while to push on, and this gave the opportunity for, for people to get in. And, and what a great trade it was around 1:15, the usual, uh, release for that. We pushed higher, uh, and since then, uh, well, since then it's just drifted down from the R2. We did have some other figures out, and I suppose as we come into the, the ECB meeting. I understand it's under a bit more cautious approach, but good opportunity nonetheless. Uh, that number you can see here, uh, on the trading economics, 27,000. Uh, when this, this figure came out, Piers was, was doing some work next door and he came running across and he goes, you know, this is a bad number, this is the, the worst for at least 10 years. And I got the, the chart up I put in 5 years and okay, yeah, so it's definitely not 10 years going back. And you can see, well, this is the, you know, the lowest number we've had since 2010 when we had negative readings. So really bad number here. And you know, you have analysts, some analysts over overnight and yesterday suggesting, well, now you're starting to see the impact of the trade wars and the global slowdown really coming to play here. It would obviously, be prudent to, you know, use this as a guide for non-farm payrolls, which is expected to come in at a similar number. So knowing the ADP is missed by so much, you know, you will have a bad number half priced in on Friday off that headline. But as we know, certainly over the last couple of years or so on the non-farm payroll day, it's all about the hourly earnings for that. Just having a look, uh, at the Fed probability for rate cuts. Now this was again something that it took me by surprise. I was, uh, uh, coming back. We had a seminar here last night for the students that come in over the summer for the internship program, and I was just doing a bit of research before I was going on to talk, and there's an article just posted from the FT. Not this one that you see on my right, but the one I'm going to show you, and Uh, this was effectively this time yesterday where you've got the probabilities of, of rate cuts. And you can see June, you know, I guess you can call that 10%. July, uh, between 40 and, and, well, 50%. And then after that ADP reading, we really have now priced in— I mean, it was 63% chance. I think it's 63. Let me just get that figure exactly right for you. Yeah, 63% chance that there's going to be at least 3 rate cuts in 2019. I was saying this to Charlie, the Stage 1 mentor here as well, and I mean, he couldn't quite believe that's what the market necessarily priced in and thought itself. And I would be surprised myself if we were to have 3 cuts for now. But quite interesting to see just from that ADP number. Now you have this growing sense of concern for sure that on Wall Street, and also you hear that the US economy is facing stronger headwinds just as a trade war between America and China is stalled, is hotted up. So non-farm payrolls, I would usually, certainly in the last couple of years, have said it's, it's a much about nothing, but it could be quite an interesting one. You know, if we were to have a really bad number, well, the Fed are gonna, gonna look to act. And just having a look at, um, the, the countdown, the, the FedWatch tool. So for June, 28% chance of, uh, of a cut. As we go into July, you've got that— I mean, it's, it's going to happen by the looks of this, 72% chance of a rate cut in, in July. So these, uh, figures worth keeping an eye on. If you, if you, you know, haven't used this, this tool before, it's definitely useful. So I'll just pop that into, into the chat just to get an idea of what the, the market is, is pricing in and, uh, and what to expect. But you can see just from this chart here on, um, on the Financial Times, just the probability of those free cuts, just the way that's really pushed on. And, and that ADP number being so weak, I mean, just look at that. Incredible, incredible. And it was a shock to the market. I mean, the one of the biggest shocks yesterday was just how long it took for the dollar to weaken. I mean, here we've got the— I'll put this on to, well, maybe even a minute chart. I'm not going to scroll back, so give me a bit of time. So you can see, yes, we had the, the push, but I mean, this initial algo spike, if you like, was only 68, uh, 14 ticks. And for the worst reading since 2010 you know, then we came back lower before pushing on. I mean, obviously, like I said, it's a great opportunity. Um, would have been a bit confusing at first to have seen it stalled, but decent push higher nonetheless. Eyes on non-farm payrolls. And if we have a look at the dollar recently, uh, over the last— well, I mean, you can argue first, you know, two Thursdays ago in the— on the EUR/USD, but we've had the dovish comments from Powell, we've had the dollar weakening elsewhere, you know, affecting gold prices, pushing on and on. You can see that recovery, um, you know, of this, this push higher yesterday in gold. We did come back lower when we had some dollar strength. So, you know, the market is still susceptible, uh, well, gold I should say, is still susceptible to some strength of the dollar. So, you know, really, you know, surprising maybe if non-farm payrolls will come out really good a good opportunity to, to get short, uh, gold. But like I was saying, we've had these dovish comments from, from Powell, and this has led to some weakness definitely, uh, in the dollar. And the euro-dollar has pushed higher, uh, in turn, which makes this ECB, uh, meeting, uh, quite interesting. So you've got the, uh, the, the picture of Draghi here, and he's ever the professional. Usually the, the press conferences are, well, I guess pretty boring, but I, you know, that's probably what he wants. He, you know, doesn't want to give too much away. But certainly looking at, uh, just doing the research this morning, and we sent out a good, um, a good article by, uh, not articles or research material from, from Ranscourt that they did. So that should be in your inboxes. If anyone didn't get that, do, uh, let me know. But certainly Uh, looking at this, this meeting, I think it's, it's got the opportunity for certainly to the downside anyway, just due to the fact that the, the euro-dollar is pushed higher, that we could effectively correct if you like, or we've now got quite a bit of room to come lower. Since the last meeting, uh, eurozone growth has improved, uh, to 0.4 from that 0.2. So this is obviously a positive, been encouraging for the ECB, uh, and confirmed its assessment that the recent slowdown does not consist of an outright risk to imminent recession. So okay, that's ticked, one, one positive. However, on the flip side, the inflation numbers for May badly disappointed. So the inflation headline to 1.2% year on year, and the core worse at 0.8%. So quite a way away from that 2% goal, and by a larger margin than had been anticipated for comments on inflation, those, those forecasts will be key. It's pretty much bang on priced in that they are going to lower the 2019 forecast for inflation. So you hear that, I would even— I would just brush it under the carpet, move on. What will be interesting is if they are going to lower 2020 as well. Also, what's been quite interesting as well is the, the— if I bring this in here— the the ECB cut percentage. So not too long ago we were talking about an interest rate rise in, in equity market, in, in Europe, uh, at the— well, they were calling it what, what is the, the back end of summer. So was it going to be August, October, November, uh, when they were looking to rise rates? Now it's looking like, well, actually in, uh, July next year we're going to be lowering interest rates. So yeah, one to keep an eye on. I think the— who would want to be a central head of central bank at the moment with obviously the trade talks all going on and— or not going on, uh, sort of weighing on, on policy and making it hard. And with Draghi, of course, uh, July, August, September, October, November, 5 months before he's headed out, it's odds on now that he's not going to raise interest rates. in his, uh, couple of terms that he has done, which is, is pretty incredible to, to say the least. Um, but those inflation forecasts will be certainly one to, to keep a, a close eye on, um, at 12:45 today UK time, and then any comments on that at 1:30. Speaking of trade for, for the ECB, obviously talks between the US and China have broken down. As we know, trade war has been intensifying weighed on stocks. We have had a slight recovery, of course, helped by Powell. But these, these comments on trade will be interesting, especially as we've just overnight had the Mexican sort of gap lower on the idea that they're not going to be spared and there's no deal right there for now. And when Draghi, you know, has said risks are moving to the downside regarding the trade, he's also lists protectionism. So this is, this is the word for now, protectionism. And we want a, a dictionary definition. Well, I've got one right here for you: the theory or practice of shielding a country's domestic industries from foreign competition by taxing imports. So it's all about this now. What is the situation between the US and Europe? The, the delay on, uh, on tariffs was seen as a positive, albeit briefly, for the markets. We saw a rally in the DAX, we saw a rally in the euro, only to come back down partly that day, but then over the coming days as well. Um, so the comments based on, on what's going on between the US and Europe will, will obviously be quite key. Um, the US has kept its threat, uh, to hit the EU with levies on cars and car parts. Uh, so yeah, certainly an interesting one. The ECB also has pledged to keep interest rates, uh, current or lower levels until at least the end of 2019. So that really has pushed on, you know. They— this is now, you know, the, the hike in, or, uh, in autumn is of course not priced in whatsoever. And now it looks like the markets are expecting, uh, by July next year a rate cut. 3 rate cuts now expected in the US. Pretty unbelievable, um, you know, new age economics if you like, where these rates are just so low and the markets can't seem to, to deal with them. Um, so those new forecasts I mentioned, obviously at 12:30, uh, or 1:30, I said you had the opening statement from, from Draghi. And last few ones have been pretty boring. Uh, also worth noting, the last few meetings we've either gone higher to come back lower in the press conference, or gone lower to come back to pretty much exactly where we were. So the idea that maybe there's going to be a long-lasting effect from this press conference or meeting, I would say it is slim. But certainly from an opportunity, it could be a good one to the downside, just considering how we have recovered and the US at the moment is a— seems a much more attractive place for an investor than certainly Europe. So those inflation forecasts, as mentioned, will be important to keep an eye on. And if they were to change that, uh, well downgrade the 2019 outlook expected, but the 2021— and if they're pessimistic on that, the euro certainly, uh, will have a bit more, more room to, to fall, uh, if you like. Elsewhere, uh, in markets, uh, obviously we've, uh, well, we had a couple of comments overnight. Chinese President Xi saying the economy is improving and that China has ample room to use policies to deal with risks. Uh, Mnuchin, US Treasury, will meet, uh, PBOC Governor Yi Jiang at the G20 finance meeting in Japan. So these comments slightly more positive for stocks. And my, my view on, on US equities and equities in general is I think we, we do continue to push higher in the short term. I don't necessarily think the, the push to all-time highs is again ready just yet, but maybe the next week or so we might just have seen a shorter-term bottom. Um, we'll obviously remain to see how that goes, uh, as well. But that's just my, my personal view on that. I'll be interested to see what you guys think. Have we seen the, the bottom, short-term bottom for stocks, or Um, have we, uh, you know, or have we seen the bottom and we're going back up to the highs? Trump, uh, was, was in Ireland yesterday as well. I'm sure anyone on Twitter was, was enjoying those comments when he was starting talking about a border wall between Ireland and Northern Ireland in typical Trump fashion, going there. And he was saying how everything's going to be okay for you guys as well, uh, to Ireland. He is now off to to France for the 75th anniversary of D-Day landings. I think ultimately from the meeting with Ireland, more questions that were there than answers. Also, I mentioned at the beginning Theresa May has one day left before standing down and staying in Nostril overseeing that Conservative leadership. Michael Gove yesterday, um, said that he could live with another short delay to the October 31st deadline. Uh, again, another question. What's, um, I've just seen a question there from Andy. Wonder what color tie Draghi will wear today. Well, these are the important questions. Um, but certainly with the October 31st deadline, you know, who, who thinks, and let me know in the, in the chat, Y or N, yes or no, who thinks we will have left Europe, deal or no deal, by 31st of October. The comments overnight from, from Gove stating that he is, you know, not too bothered, if you like, by a continuation past that. The, the rules going forward, we briefly touched upon this yesterday from a good, good tweet from, from Adam Linton at Ransquawk about the leadership race. The rules here are by, uh, candidates need to be nominated by 8 members of parliament, a higher bar than previously. Nominations open and close June the 10th, so expect a lot of movement over the weekend. Names in the hat, people backing this person, people backing that person. Um, obviously Boris is, is now back to even money, uh, maybe even a bit below now. So you've got to be slightly careful about maybe looking to get too short the pound if it does look like he's gonna be the favorite for now, as a lot of that is priced in. I would only start looking to go heavy short the pound if he steps up his rhetoric on no deal. Conservative lawmakers then vote in a series of secret ballots to knock out the least popular candidates. Sometimes candidates withdraw themselves. That will happen, I think. You know, to save a bit of pride, people might just remove themselves ahead of that. The ballots then continue until a shortlist of 2 emerges. For, for my betting money, I think that's going to be Gove, and I think that's going to be Boris. I think at the time when, uh, we were— when, when Theresa May resigned, I think, you know, Gove looked good money at 10 to 1. He's now down to 5s. Understandably, Boris is still the favorite despite the, um, the court order. The final pair then take part in hustings around the country from June 22nd, and Conservative Party's estimated 160,000 members mail in their votes. The process wraps up, uh, week of July 22nd. We know there's recess in August, we know August is a quiet month, so, you know, are they really going to get anything done gives them maybe September to do stuff, and then next thing you know it's October and Europe aren't going to change their mind. And well, maybe we're just about to see just how— I'm not going to say good Theresa May did, but how hard it was for her to do anything. May obviously remains Prime Minister until the successor is chosen. It's quite interesting as well, I was just having a look down, and according to a poll or research, I should say. Um, 64% of card-carrying Tory members are men, 40% are over the age of 65. Significantly, 86% regarding leaving the EU as the most important issue facing the country, according to the December analysts. So I mean, this is, you know, quite old and perhaps not worth looking too far into it, but the one thing, uh I found quite interesting. Two-thirds of Conservative members back a no-deal exit. Uh, Boris, uh, has, you know, been, been leading this race for the main— most part of it. Gove as well, as, as I said previously, he likes the idea of this no-deal, which brings us back on to, to the pound. And in my opinion, despite, you know, if we have a look certainly at the, the recent trend of May, you know, the top of the May here, 132. You know, we have come down a fair whack, and that is, you know, the uncertainty. That is perhaps Boris as well. I do think if he was to step up that rhetoric of the no deal and be very bullish and hawkish in that talk, then we do have a bit more room to come down. And unfortunately, and you know, I'm a longer-term pound bull, if you like, I think we could get down to 122 quite sharpish. But for now, those, uh, those trend lines we've talked about in, in previous times, in the, the previous low from, uh, you know, the— when is it, 2017s? Yeah, uh, have held pretty, pretty good. Uh, and if anything, well, it's just in a range, right? Well, a weekly range going back from 17th of September last year to the double bottom now and the double top as well. So from here, technically we go higher, hopefully, as I'm off holiday tomorrow. But any questions, as usual, guys, please, you know, do let me know. Just having a quick look at the calendar, and just for the guys watching, you know, this later on, um, 1, 2, 3, 4 The majority of people are saying we will not get a deal done by 31st of October, and I think that resembles as well a bit of the market pricing in that and the uncertainty, which markets obviously hate. Uh, just going back to, to the calendar, having a look here, we have the GDP revised figures from, uh, from Europe. Not expecting in any way a reaction from that. One, because it's revisions. Two, because you have the ECB at 12:45, press conference 1:30, uh, as well weekly initial jobless claims also at the same time as the press conference. Very rarely is going to move the market anyway, but obviously focus is going to be on Draghi's opening statements from then. Uh, as we go into the back end of the afternoon or the back end of the morning, uh, we've got Carney speaking, obviously Draghi as we mentioned 1:30, uh, Kaplan the non-voter at 1:40 before Fed's Williams at 6 o'clock. There's been some decent opportunities in the market following Fed comments, so just be, uh, close watching those times and any positions that you do have, as it could of course be, uh, to, to the detriment to not have that risk management in place. But I hope you all have a good trading day. We'll obviously be on the mic closer to the ECB I hope you'll have a good day ahead.