ECB Preview: Wait-And-See

Okay, very good morning to you. It's Thursday the 16th of July. Going to talk to you a little bit about how the European Open is sentiment-wise, a quick run-through of the different asset classes on the charts, and then we're going to talk about the ECB ahead of the interest rate decision later on today. So without further ado, let's have a look at the charts and how things have fared in the close on Wall Street overnight in Asia and how we're set then, uh, technically speaking, for the market open here in Europe, having just gone through 7 AM now in London. And looking at the equity markets firstly, I've still got those markups from yesterday when we have had kind of the weekly price movement defined by the rolling back of some of the reopening plans for the state of California, which caused one of the big sell-offs earlier in the week. However, then the somewhat recovery of that and the Moderna news that was positive this time yesterday that we were discussing and the gap up in prices. Then that idea as well, at the time as I was saying, feeling a little bit more just generally bullish in a sense of the fact that downside could be relatively limited. And yesterday's price action technically very sound to that point of the initial closing, uh, kind of candlestick wick that we saw in futures trade in the S&P. 2 days ago, and we retested that. So at 31.92 and 3/4, quite a key level here. And the market also bouncing at around the respective S1 so far in the overnight session, which was also really exiting out that initial dip that we had just momentarily going post-European close yesterday. It's been a relatively good area of support here. You can see we tested it early in the European morning yesterday, had the slight breakthrough and that gap fill printed shortly after Europe left the market. But then we've tested that again, and that coinciding with the S1 today. So some decent downside levels again of support I'd keep an eye on in the S&P. So first off being here, if we did break down further, then this next level at 81, um, and three-quarters I'd probably be keeping an eye on. You can see here where the market has reacted on some prior occasions as well as some of the reopening of trade here after that initial pop higher that we had on the Moderna story. And then below there, started to bring in then the previous highs that we've had. So good, good areas of support here. On the upside, the pivot level, which would also signify the Asia-Pacific high end of the range. So worth keeping an eye if you're looking at that range. First of all though, we've got to get above where we're at around the moment, those 6.5, 7s. If we did push higher, then again, quite a nice area of upside resistance to keep an eye on today. So relative to this here, kind of keeping an eye on these spots, 15.29 on the upside, and on the downside, you've got a nice area of support, 97.93s, then any further breakdown down to 81.75. Again, from a sentiment point of view, I don't really see too much this morning in the news that I'm reading. I'm obviously going to run you through the stories, but wouldn't be too surprising if, you know, X-ing out these levels, if you're just looking at this market more broadly, well then why not just have a bit of a range play going through these levels here for the rest of the session until something more definitive starts to break. So that, if you're looking at it a little bit more conservative, would be the upper and lower boundaries that I'd be keeping an eye on. The NASDAQ is a little bit lower in terms of its setup. So you can see here in the center chart, I'd just be keeping an eye on that S1. Could be quite critical because just below there is the low point that we had at around the same time the European exit in the futures yesterday. Um, and then in the DAX, again, from a technical perspective, quite nice in terms of a cluster of areas of, of relative support that have helped some of the price action of late. You've got a bit of a bounce off the initial lows seen late in the Asia-Pacific region. And then here you can see some areas from going back to beginning of the week on Monday where that S1 is placed in the futures also encapsulates some of the lower bound of the price activity from yesterday morning at around similar time to, to now. And also that closing price before the Moderna and the DAX following suit with the US indices popping higher in the futures market. So again, some nice lower levels of support if the price was to come a little bit lower here. Elsewhere, gold, um, continues to kind of play that range overall. I mean, I haven't really looked at it too intently from the lower time frame, but looking on the 30-minute candlestick, from a conversation I was having with a couple of the traders on Monday, we just identified basically the, the upper and lower bound of this range that we've been trading since really last Thursday of of last week, and you can see we respected that again yesterday, uh, on both the European morning and in toward the late US trading hours as well. So for the moment, coming back towards mid of that range. And then in oil markets, obviously we had the OPEC JMMC meeting. They followed through, but that was absolutely as per expectations in regards to tapering back on the stringency of their supply cut. Slightly offset to a certain degree of a few hundred thousand by the compensatory cuts to be made from the likes of Iraq, Kazakhstan, Nigeria, these types of countries who have been uncompliant in the past, who will have to now over-comply to make up in order to adhere to the deal. It was quite interesting actually because some of our newer traders, we got through to 2 PM and that obviously is the traditional NYMEX pit opening hours and soon as the market opened, the OPEC kind of news had already come out before this. Markets just dropped fairly rapidly, and a lot of the new traders were kind of like, oh, what's the headline? Where's the news? You know, the point being is you just got to be aware of the structural kind of volume profile of a day, and you do tend to see then a lot of the spike in movement at around these opens. It's not just oil, it would be the same on COMEX for gold, for equities on the NYSE for example. You know, so around then, for any, again, new market participants, if you're looking at markets for the first time, it's not just about an economic calendar, it's about knowing your products and knowing the kind of the structure of the ebb and flow typically that you see on the day where volume peaks tend to happen at the open and close of these products. And yeah, a lot of people were losing faith at the time because we were— we on the desk were quite bullish about the prospects for oil yesterday, just given the long longer-term kind of setup of what we've been seeing from that kind of fateful OPEC failure that we had, uh, back in March of this year, and the kind of squeezing of the price activity into this $41. And obviously, as you can see here on the shorter time frame, we actually did break— we saw a nice little break higher when we got above yesterday's R1, which was that double top, and the prices ran up to around $41.25 before we've really consolidated since since then, late yesterday and in the overnight session. So it's going to be interesting now. Does feel like we were somewhat knocking on the door of this key level multiple times over the course of the last 2 weeks. Yesterday looked— now that OPEC news is out of the way, and importantly in my mind, the market's not moved lower in a consistent fashion, that does open the prospect then for potentially a little move higher. And technically speaking, if we did move higher then, you know, the nearest clearest targets I'd be looking at would be, um, essentially up at this 43.32. You've got 45 handle here, you know, absolutely would not see that as an impossible target, um, in the near term. And I know talking 41 to 45 sounds like a big leap. I'm not talking about necessarily an intraday move, but just look at how far we've come in such a short period of time. I mean, in the last 3 months we've effectively doubled price from $20 to $40. So the idea of then just going from $41 to $45, I think, is absolutely realistic, uh, given the situation at the moment where I was reading yesterday Chinese imports at this point in time are back to record high levels. They're in fact 15% above Chinese oil imports of where we were pre-pandemic. And as we're going to see with some data points I'm going to show you shortly, Chinese GDP has bounced back into positive territory as well, albeit it's not an assured recovery. There's still uncertainties, of course, behind the COVID situation. But the ongoing, I think, commitment of OPEC to still remain compliant, the fact that there is this supply cut deal, the fact that the global economy has somewhat relative stabilized comparative to where we were just a few months ago, I don't see any reason why at some point this level doesn't break. I still think that at the moment it's not a fixed and definitive ceiling. I think we actually get above there. I guess timing is just key though of when that happens. So yeah, that's the overall mix on the charts. The currency market, Dixie's touch firmer this morning, just reversing some of the decent selling that was observed yesterday. So Dixie up 0.1%, just just imparting some minor downside pressure onto the major currency pairs. Euro top left here, just keeping an eye as it comes into close proximity to yesterday morning's open level, which was around that 114 handle. Way in the futures you've also got the S1. All right, well, let's get stuck into some headlines. And first of all, let's start chronologically then with the Chinese and Asia Pacific session, where generally in the region things were a little bit dampened. Um, not, not huge sell-offs, but just negative pretty much across the board. The CSI 300 index, so the biggest companies in China, was down multiple percentage points at one point. It's kind of pulled back a little bit, but still negative territory. This would mark the first 3-day loss, in fact, for that index in China since May. Now I know that sounds like a, like a newswire statistic, somewhat sensationalized. Because don't forget how, um, how much we rallied over the course of the last several sessions, a week and a half or so, in China. You know, the local indices were up, you know, in excess of well into double-digit percentage gains. So rallying 13% and coming off 3% doesn't sound so frightening when you put it into context, rather than just believing a one headline that you're reading this morning. So That doesn't really spook me too much, to be honest. From a data point of view, there are a few things that have come out. Notably, you've had— if I just jump to here, this is GDP, industrial output, and retail sales. So just running you through these numbers, GDP for Q2 came in at +3.2% in the 3 months into June from a year ago. That reversing, of course, the black line, the heavy contraction of around 6.8% that we had in Q1. Um, so this GDP number at 3.2% for China was better than expectations of 2.4%. The industrial output rose 4.8%, but that was basically in line with expectations. The retail sales number though was a disappointment for June. That came in at -1.8% against expectations of a +0.5%. Reading. So if you read between these, the kind of headline figures, and you start looking at this a bit more intently, essentially what it's telling us is that the recovery is still largely industry-driven. Consumer sentiment, though, is still somewhat fragile. And I think this is a really important point here for, for China generally and how to interpret this economic data, because what you're seeing at the moment is, if you're tracking a lot of these mobility reports Yes, China has seen a degree of return of, let's say, normalizing in its behavioral patterns, but we're still quite a fair way off pre-pandemic kind of activity. And, you know, consumer psyche certainly is such a fragile thing when you're talking about people returning back to, from a consumption point of view, normal behavior in terms of dining outside, going to bars, restaurants, but also shopping high streets. Shopping centers, these types of things. And so that's not yet recovered, and that's quite telling because then if an economy like China, which is heavily still dependent on manufacturing activity and exports, well then you're reliant then on external customers buying your goods and importing. And one of the things here though is that the rest of the world is in— is still trying to find its feet and deal with what is going to be a very deep recession. And so if China doesn't see this internal consumption start to increase and consumers really start to step up to the plate, then it's hard really to see any real further improvement on what's just happened at the moment. And obviously you'll be eyeing what type of consistency this Chinese economic recovery can have if it is then dependent on external forces when those as such, in the case of the US and elsewhere globally, are relatively weak at this point in time. So yeah, quite interested to see how that plays out. Otherwise, on the US-China trade front, there's been a couple of new developments. President Trump has indicated to aides that he does not want to further escalate tensions with Beijing, is the latest from overnight. He's ruled out additional sanctions on top officials for now, according to people familiar with the matter. This comes on the back of some reports that his administration is considering a sweeping ban on travel to the US by Chinese Communist Party members. So again, I do feel like this trade war, it's not really having too much of an impact on prices at the moment. I almost feel like Trump is kind of falling a little bit into the boy who cried wolf as far as the market's perception is concerned. And the more he kind of talks about it, the less impact that he's now having. So I think he's just reining in a touch. Um, again, anything that's coming out at this point is not really that market moving that we're hearing. So yeah, I, I would disregard that for the time being. That, that doesn't mean that we still don't remain somewhat vigilant for any further updates on that front. Moving on then, the main thing that we're looking out for here is the ECB, of course. This is the, the kind of the Decision Day guide of what we're looking out for. And the really, the, the summary here is they're expected to keep their major policy tools unchanged. Remember, it was just the last meeting where they did a slightly bigger increase, top-up to the, uh, the pandemic emergency purchase program in order to kind of get ahead of then what was a slightly worse economic development in the eurozone that they previously foresaw. So there's no real need for them to take any further action at this point. However, That does not mean that we'll be closely monitoring Christine Lagarde's press conference as usual to get a little bit more of a feel and an insight of where their head's at right now about the current context, but also about what they feel about whether their current level of policy that's being implemented and that's available is going to be sufficient or is there going to be need to be more in future. So the forward guidance, essentially, you can expect her as well to say things like the further renewed call on governments to step up to the plate with a joint fiscal stimulus. This kind of puts the pressure on them from a timing perspective on the EU leaders gathering, which of course happens on Friday going into Saturday, when they're looking to get some more concrete, um, definitive confirmation on this European-wide recovery fund, which as far as the ECB is concerned is pivotal to complement the monetary stimulus to safeguard the economic recovery of the euro area. As per usual, I did tweet this yesterday. My handle is here if you want to check it out in more detail. This is that really great crib sheet that the chaps at ING put together. It's the most easiest way that I can express them trying to prepare for a monetary policy decision, which is rather than get too bogged down in the complexities of monetary policy and the nuances of its language I mean, it is a very high-level way of looking at markets and trying to understand things. I think simplicity is key when you're trying to trade. You kind of want to eliminate those complexities and make it as actionable as possible, and you can't really get much more than that than what they've created here in this crib sheet. So if you're new to this and you haven't seen it before, they've basically defined Eurozone policy into 4 distinct categories: inflation, growth outlooks, and then more kind of the tools that would create then policy, that being interest rate and QE, and this on top then emergency pandemic, uh, kind of bond buying program. And then what you have here is their base case in orange, their then potential targets for any euro-dollar type post-reaction that you might see. And so Anything north of the base case would be dovish, i.e., the euro-dollar pair getting weaker, euro weakness. Anything south would be a more hawkish interpretation. And then each one of these boxes would be the suggested change to then the current fixed language in orange, what would need to be said in order to create this more hawkish or dovish type reaction. So it really is a great matrix. Now here then, what is the base case? So currently the inflation and growth outlooks are probably the two things that might see some subtle changes rather than on the right-hand side the guidance around rates and the PEPP program. They're unlikely to be changed. So what are we looking out for? Well, the current inflation outlook is surrounded by exceptional degree of uncertainty is what they said last time. What ING is suggesting is that the recent data suggests the CPI pickup will take longer. So here, rather than just sort of saying nothing and just talking about uncertainties, they're refining it a little bit and taking quite a dovish stance to be supportive then to markets, that they're willing to do as they have done as much as possible to support the recovery. So that, that I think is a reasonable assessment and assumption. On the growth outlook, they previously said activity is expected to rebound in the third quarter, and ING looking for them to say recent data suggests significant slowdown in activity. So if anything, what they're suggesting is from where we were before to where we are now, and I think that makes sense, is that they've become a little bit more kind of downbeat in their rhetoric. But that doesn't yet, um, become downbeat enough that they need to be making immediate changes to what they've already implemented which they need to see, like the fruits of their labor, if you like, for what they've already unveiled. On the more kind of dovish end, if they start talking about, you know, inflation pickup is far too slow to hit our target, recent data doesn't suggest a sustained easing of risks, i.e., risks are still clear and apparent, that would be more dovish, i.e., it's going down, and even more pessimistic conclusion of the current events that are unfolding. On the flip side, if they talk about, you know, risks to inflation are balanced, the economic outlook has become balanced, if they start signaling the Governing Council of it on an increase to the PEPP a bit later on down the line, for example, if there's no change or hint another easing of their, their kind of liquidity programs or their loan facilities like the TLTROs then these could be quite, quite hawkish. Overall though, to keep things simple, I'm not really expecting too much, to be quite frank, from this. I think this is one of those meetings where it's a little bit, um, the kind of status quo. She just needs to deliver a fairly calm and assured performance in order to just calm and alleviate markets' concerns at this point. There's no need to rock the boat too much. So the Q&A will be key. The initial— as it's a two-part event— the initial rate part at 12:45 is unlikely to be that exciting. 1:30 is where the focus will be. But again, as we've just discussed here, the, the likelihood of her saying something that I think is going to really change and move the needle of market perception of the near-term changes of any policy I think are fairly limited. That doesn't mean that we won't go into this marking out both levels on euro-denominated assets, so we're best placed to take action accordingly, proactively, if that does materialize as a scenario. From the calendar for today, a few things to have a look out for. I have seen some of the UK data already come out. The average UK earnings, 0.7% against expected 0.5. I did hear though the squawk were talking about— I think this was more to do with the claimant count rate, which was particularly low, but the methodology of that number is somewhat impacted by the furlough schemes. So I wouldn't read too much into any disconnect on those claimant count readings. But as you can see, no real impacts on the pound on that. So looking further forward then, there's not too much for the rest of the morning from a fixed data point until we get to the ECB Part 1, 12:45, Part 2 press conference at 1:30. The weekly jobless claims coming out of the US, I don't really think that's too much of a focal point. We are continuing to hover just above that 1 million marker that we have been for the last couple of weeks. The range here, 1 at the low to 1.35 at the high, and even a breach on either side of that, I don't really see too much of a catalyst to really spark real firm consistent directional movement for the rest of the session. Philly Fed Business Index, you've got the US retail sales report as well coming back. And you know, if you think about retail sales in America, this is the June reading. If you think about it, we had April, May, now we're going to June. So it's kind of like this V, the first part of the V, a massive bounce back, you know, meteoric rise last month, and now we revert back to some type of normality to a certain degree. So again, yeah, to be watched for sure. I guess one thing I think that, I think that we'll start seeing is that we went through a period because we were such a low base when we were at the bottom of the V kind of coming out of April and going into May data, that we were seeing these spectacular beats on US economic data. that will, in my mind, start to fizzle out now as we go through the next month or so, just given the fact that a lot of that data was by default because we were coming from such a low starting point. Speaker-wise, there's quite a lot actually that you need to be aware of on the speaker slate. You can see you've got Bank of England's Haldane is speaking at 11:45. Now, he's particularly interesting, of course, because you'll remember he was the sole dissenting person on the Monetary Policy Committee at the Bank of England who did not want to do QE. So he is seen now as much more hawkish as far as the, the group is concerned. So he's speaking just before midday, and then Bailey, his boss if you like, the governor, is speaking on what appears to be a separate event. That'll be afterwards at 12:15. Christine Lagarde's press conference at 1:30 kind of the main event of the actual speeches for today. Fed Williams, a voting member, at 4 PM. Evans at a separate event but non-voting member. And then also, just given the current state of the ongoing situation with China and this Hong Kong security law change that we've had, Secretary of State Pompeo, who is probably the most tied toward that type of subject matter, is going to be speaking at 7 PM. So worth keeping an eye out for that speech as well for geopolitical news. Fixed income, just quickly, a lot of supply coming out of France and Spain this morning if you're trading those relatable products. You've also got the WTI August options expiry at around the close this evening. And then from the bank side, following on from the likes of GS who had a phenomenal performance in their fixed income trading division, their equity trading division and investment banking advisory fees were all up. So that financial sector all going as per analyst expectations at the moment, with the divergence between those investment banking more defined, uh, banks comparative to the more kind of, I guess, holistic financial services banks, which includes things like lending, which in a sense then are going to have a higher commitment for for bolstering their credit reserves given the ongoing situation of a pandemic at the moment, the risks entailed towards having greater credit provisions. Otherwise, J&J, perhaps a bigger company of those banks, MS, Bank of America, Abbott, and Netflix, obviously always quite an interesting one, tends to see large price swings on the back of their earnings, as seen as one of those kind of FAANG stocks. Will probably generate some headline activity. All right, that is it. So I'm gonna wish you guys a good day. Any questions at all, just let me know in the chat. And good luck for the ECB. Again, hopefully it will provide us with some opportunities, but might well be a case of, look, prepare for every scenario, but be fully willing to be disciplined that it could be a fairly calm event, all things going as per planned with expectations. Okay, leave it at that. See you guys tomorrow. Thanks very much.