ECB Preview & Trading Day Ahead

Okay, very good morning to you. It is Thursday, 22nd of July and ECB day, and so we're going to talk over this crib sheet here in a little bit more detail in this briefing, what to expect and how markets might react to the latest comments out of Christine Lagarde and her Governing Council. We're also going to talk about Powell's, um, prospect of being reappointed as Fed chair and what the White House advisors have to say at the moment about their feelings of reappointing him. We're also going to talk about Elon Musk doing the flip-flop again on his stance on Bitcoin, with the digital currency rising in yesterday's session. And then we're also going to talk a little bit about the relationship between the US and China on trade, specifically by the numbers, and what I think is quite interesting from a political point of view and for the kind of optics on the foreign affairs situation there. And then we've got a couple of other data points— weekly jobless, got some housing data out of the States this afternoon. We've also got some more corporate earnings, of course, coming out as well, pre- and post-market today. So first things first, let's start with the usual look around the markets from a sentiment perspective. And starting chronologically, we finished on Wall Street with gains of around 0.8%. 0.1% across the major 3 indices. Pretty uniform finish, in fact, on Wall Street. But, um, just quickly again, looking at these major charts like the S&P 500 future— full reversal then from the negativity that developed at the beginning of the week, and pretty much the entirety of that whole sell-off has been taken back yesterday. Quite a nice respect of a trend line from the double top all-time high from Friday's session high. And you can see initially resistance and then using that trend line as a nice springboard for then a push-up coming into that, that kind of somewhat infamous half an hour ramp that we tend to get into the closing bell on Wall Street. And then overnight in Asia, super quiet, and we've just kind of gone sideways and likely to remain the case really until the US start to come in, or unless Christine Lagarde says something meaningful that really moves European equity markets and in sympathy might move US futures, but really looking for the US session to dictate things there. So again, equity markets recovering. The kind of shape of the Nasdaq is pretty similar from a technical perspective in the Nasdaq 100 future. Just looking on the upside, some short-term resistance here. Looking on the 30-minute chart, you can see from this marked up rectangle from the previous price points from the beginning of last week and then that peak that we saw on Friday session before the material decline of US equity overall, and then the COVID kind of panic that we had on Monday. And looking at where we are at the moment, we've recovered pretty much to that Friday peak. And so short term, you can see in the Asia-Pac session that upward movement seen into the final— the breakout above then some of that range high that we were seeing earlier in the week through that final half an hour ramp on Wall Street has just faded a little bit from the Asia-Pac high. And then elsewhere, Quick look at the currency markets. Pretty quiet overall for the DXY this morning, relatively flat, but certainly a little bit different from my thoughts initially that I thought there was a bit more room to run for the dollar strength. And certainly yesterday was the opposite of that. We saw quite a distinct pullback in the dollar, and that certainly helped give some reprieve to the major currency pairs, and Cable for sure being one of those. And this morning, from a technical perspective, Cable Up marginally, both major pairs up in equal amount, 10 pips each in EURUSD and Cable, but just getting above a short-term area. We're having a look at the moment in the futures of 1.3725 resistance, which was the late US session high and also the high we printed in the afternoon back on Monday before we saw some of that extension of the sterling gains that were seen at the time. So upside in Cable, you've got the R1 which encapsulates some of the support and resistance levels around 137.62 if that directional trend is to continue any further. Nothing particularly new in UK fundamentals, so definitely much more kind of dollar dynamics and technically driven, I would say. For euro, pretty quiet as you'd expect. We're kind of just fleshing out a bit of a range here at the moment as we await the major event, which of course will be Christine Lagarde and the ECB statement. Remember, two-part event, 12:45 and then 1:30 for the for the presser. Elsewhere in terms of commodities, WTI crude, similar fashion, and really goes to show then that this really is a kind of top-level macro theme market at the moment, derived a lot from sentiment based on the COVID situation. But seemingly a lot of calm has been restored after the Monday kind of shakedown in, in various different assets. And nothing really new has happened from the COVID front. You know, that's what's so interesting about the behavior of markets, particularly with the light economic calendar like we've had, particularly on Monday in the beginning of the week, tends to bring then further emphasis to those developments on the Delta variant. Nothing's really changed there, and yet look, markets have recovered in equities and in the oil market, which I think is, is quite telling for the time being. But here again, the trend line, just looking back to Friday Friday. What we had was the peak yesterday before Europe— well, just around when Europe was exiting the market, the Asia-Pac high— and we're right testing that trend line again at the European entrance then for today. So just keeping an eye there at the moment. Any further run-up on that price, probably eyeing the $71 handle psychologically, which was as well technically support and resistance through this period of, of last week's price activity. Oil inventory numbers, sure, in the aftermath we did move a little higher yesterday. And we've got the kind of OPEC deal that's now gone through. Again, none of these I think are particularly directly important for price right now. And definitely I'm still putting greater weight on the demand implications tied to people's sentiment around the COVID developments at the moment and the subsequent impacts that could have on economic activity. If new restrictions are implemented in, um, kind of strategically important economic areas. But let's get straight to it. Let's talk about the ECB then, and let's talk about some of the headlines to go through. And so starting off with the ECB, and one of the things I wanted to cover first was the fact that this is— this has gone from a pretty much a non-event to actually something a little bit more meaningful And the, and the reason for that is we've just had recently the ECB strategic review. And so now that that's ended, people are looking for a new kind of shift in some of the language around the important components that would be, that would constitute their forward guidance. And so with the ECB shifting the inflation target from below but close to 2% to now 2% with a commitment to symmetry, with the new strategy could be interpreted as either a formalization of what has been doing over the last few years anyway, or a step towards more dovishness. So essentially allowing, kind of like the Fed have done with AIT, for inflation to temporarily run a little bit hot. And so yeah, definitely it's going to be interesting to see how she manages this, Christine Lagarde, and the type of language she has often said she wants to simplify the kind of language that's used to make it more appealing and more understandable to a broader audience. But generally, markets don't like change, and change brings uncertainty, and uncertainty brings kind of risks surrounding potential volatility on its release. So hence the reason why today's quite interesting. This, of course, is going to be the first press conference since those changes have happened, and so What are we to expect? Well, the crib sheet from ING is always super useful where it constructs then the kind of 4 key elements of policy on the inflation growth outlook on the left, and then the interest rate, the actual policy tools, and any commentary expected on the exchange rate, which I'd say is much lower a case in this current point in time. And then going from top to bottom, very dovish to very hawkish, and then the subsequent impact that that can have on the euro-dollar given those circumstances. Their base case, again, uh, probably the most agreeable, um, I would say, is that on the inflation outlook, recent data suggests a return to too low core inflation in 2022. So again, this idea about the transitory measures, she'll likely be asked about that again at this point in time, just given what's happening globally at the moment on the inflation side. On growth, recovery will gain momentum over the summer but high uncertainties So kind of optimism just overlaid with a degree of caution. And then from the policy point of view, which is probably the most interesting, um, ING reckon there'll be no change. Again, I think one of the important things here— I did see a good soundbite, um, from a market commentator who said that this July decision from the ECB is not about changing so much language and guidance. Also, it is about changing language and guidance to fit with the new strategic review, but any outright policy shifts are very unlikely. And so there's tougher and more contentious discussions around starting to withdraw support. But the likelihood is, is that's too soon right now, particularly with the Delta variant that we're seeing in mainland Europe. And that's likely to come after the summer break. So at the moment, it's— it really is just about the nuance around the change in language and guidance to match that recent strategy review more than anything. So I think that's the way I'd be looking at it. Most people in summary are kind of talking about a hawkish tilt given the change, and those— so therefore subsequently there could be downside risk for EURUSD. But the more that that gets talked about, um, the more I think the expectations are going to be high that that needs to materialize. And if it doesn't, you could see quite a meaningful upside response. The one thing is the euro hasn't really been moving a great deal going into this. And so there isn't too much of a degree of kind of pre-positioning of people, I would say, from a positioning point of view, looking for a real dovish outcome today, albeit most analysts are erring on that side on balance. So something to just be, be aware of. All right, in terms of other things I want to quickly just run through, Jerome Powell enjoys broad support for his re-nomination among top White House advisors. Though the decision in itself is not expected till later this year, he hasn't— and hasn't yet been put forward to President Joe Biden. But that's the latest update that he is seen as the most favored candidate, according to people familiar with the matter. Experts and outside analysts say that if Biden is looking to change leadership, then the current governor, Lior Brainard, is the likely candidate to take that position. Elsewhere, in addition to Powell, Randall Quarles, term as the Vice Chair for Supervision, obviously important for regulation in the US. His term will expire in October, and the board term for Governor Richard Clarida expires in January as well. So quite a few senior mainstay people on the board, as well as the chair himself, coming up for potential re— re-nominations. So definitely worth being aware of that. Is it important for today and right now for a trading strategy? Know what's my view on the chances of Powell getting reappointed, I would say very high. And the market will, will generally not see a big response to that, but like it in the form of continuity in that respect. Elsewhere, just wanted a quick word on US and China. I just thought it's an interesting article, not that I, again, that I think it constitutes a real market move as far as this morning is concerned, but reports on Bloomberg were suggesting that China and the US are shipping goods to each other at the briskest pace years, making the world's largest bilateral trade relationship look as if it was— look as if the protracted trade war and pandemic never happened. So what's been happening is China is purchasing millions of tons of US farm goods for this year and next, and stuck-at-home US consumers still shopping and importing in record amounts, which means then the trade between the two nations is kind of better than ever as far as recent times are concerned. And although China obviously signed an agreement during the Trump era to adhere to buying large quantities of US farm goods in order to stop then any further elevation in friction between the two nations, the fact is, is that despite then a lot of the geopolitical risk that we keep reading about between tensions, between individuals getting sanctions, tech stocks, the the military in the East China Sea and Taiwan and so on and so forth, the sanctions because of the way of which Uyghur Muslims are being treated in Western China, to Hong Kong and their diplomacy. It's funny how in actuality, under the bonnet, um, there is still pretty healthy trade happening between the two nations. And I think it really goes some way to show then how important the optics are for domestic politics on both sides to manage that relationship in the public eye. But in reality, I think that, um, it goes some way to show that a real true destabilization of the relationship between these two nations is highly unlikely, in my opinion. So again, this is all, for me, it carries very big tail risk, of course, given how important these two economic nations are. But for me, the breakdown completely to sever ties in a way that would really impede trade, importantly I think is highly unlikely. And so as much as this kind of tit-for-tat word kind of sparring is going on geopolitically at the moment, I would expect that to continue, to be quite frank, because you've got the midterms happening in a year's time or so, and I think both will want to have a pretty firm stance at that point. And the US probably will be the aggressor in the commentary, and then China will just respond in kind at that point. So Yeah, all in all, I think it just says a lot about what you read about and you hear about to what actually is happening, which is a fairly healthy situation between the two nations despite the apparent fallout that's happening on the top level. And then Bitcoin, you know, everyone was kind of hating on the crypto space earlier in the week because things were selling off quite heavy, but things have rallied pretty decent amount in the last 24 hours. Bitcoin futures reclaiming a $32,000 handle this morning. This morning and yesterday. I think there's been a couple of comments. Cathie, Cathie Woods has been talking it up again, and Elon Musk has come out and basically disclosed for the first time that his private rocket company SpaceX holds Bitcoin and that Tesla could well most likely resume accepting payment for its electronic cars. So he's done again another kind of about-turn on that, on that space. And he was talking on a panel with Jack Dorsey of Twitter as well as the ARK chief Cathie Wood yesterday. And then as far as the calendar is concerned for today, it's pretty quiet overall this morning. And we've got weekly jobless claims happening at 1:30. Expectations are for another slight decrease down to 350,000 from 360,000. US existing home sales due at 3 o'clock, and a 2.57% and 2-year floating rate note announcement out the US Treasury happening at 4 PM. And then from an earnings perspective, let me just quickly, um, bring this up. And from an earnings perspective, there are a couple that we're looking out for. So in the European morning today, you've got ABB, Roche, Unilever are some of the bigger names. From the stateside pre-market, you've got AT&T, it's probably one of the most notable names. And then you've also got aftermarket Intel, Snap, Twitter, and a few others to look out for as well. So, um, not so much index moving, but single stock relevant for sure. I'd like to see fluctuations in, in the pre- and post-market trade for these particular individual equities. So far though, earnings have been generally quite good. I mean, that's what a lot of people are pinning on the equity— that supported the equity recovery yesterday, irrespective of the COVID growing concerns on the Delta variant. Strong earnings yesterday helped generally lift sentiment. If you remember, Coca-Cola raised its full-year sales and profit forecasts, anticipating surging demand as reopening restaurants and stadiums start to get back underway. Verizon also beat consensus estimates set by analysts, and actually by the numbers More than 85% of the S&P 500 firms reporting results so far have beaten analyst predictions, according to data compiled by Bloomberg. So that's kind of offset a little bit, perhaps some of the negativity at the beginning of the week. And we'll see if these, these companies today can follow suit. All right, going to leave it there, let you get on. Good luck for the ECB today, and I'll catch you tomorrow. Thanks very much.