ECB Preview: What To Expect From Today's Meeting

Okay, very good morning to you. It is Thursday, the 10th of December. Hope you are doing well. And we had another great masterclass session with one of our senior traders, Tim Duggan, last night. So if you're on the Amplify Live platform, that will be available in the recordings if you missed it. If you haven't been on Amplify Live, feel free to check out a free trial on the link below if you're watching this on YouTube. But having a look then at the charts this morning at the European Open, so having gone through 7 o'clock, and yeah, really it's a bit of a digestion after what was quite a heavy selling day on Wall Street, particularly led by a lot of the tech names. The NASDAQ 100 did underperform, it was down over 2% comparative to losses of just around 0.3% in the Dow and 0.75% in the S&P. So as we're used to seeing these days. The Nasdaq either out or underperforming, and definitely some of the tech names getting hit fairly hard yesterday. In particular, quite a lot of press attention to Facebook, maybe one to watch just as we go forward, and not necessarily today, but, you know, in a new Biden era. Although at the moment, we'll see how the, the remaining Senate race seats coming up here in literally a couple of weeks will play out to see definitively whether or not The Senate will remain in Republican hands as expected, but the big kind of risk was, of course, about Joe Biden, which was the idea of looking to be a little bit— toughen up regulations on, on some of the big tech names. And Facebook was one yesterday. A US antitrust lawsuit seeks now the divestment of Instagram and WhatsApp, and this was to do with the kind of monopoly, monopoly that they've, they've dominated by securing the likes of those two social media platforms. And the regulator's not happy about it. And so Facebook was down a little bit, underperforming the market yesterday, just generally compared to other mega-cap tech names, losses around 2%. But quite an interesting development that came last night. You had the likes of Tesla, they were down about 7%. JP Morgan were out on the latest banknote calling them as dramatically overvalued. I've read a couple of other banks this morning. I think it was Bernstein saying something similar, downgrading Tesla as well. And New Street, one of the analysts there I saw was touted as probably the most successful in calling Tesla on the way up, but also when the stock should take a breather. And he's come out and he's downgraded Tesla to neutral after the epic run. They expect 2021 to play out strong with deliveries above consensus and strong margin trajectory but they see limited room for near-term valuation upside even in this euphoric valuation environment. So it's worth noting that as well. Also, don't forget, markets still a little bit apprehensive, just the general impatience toward not seeing any definitive progress on the stimulus deal coming out of Washington. That was a predominant factor that was lifting markets up to record high territory last week, and that still is yet to come to fruition at this point. Point. The one thing to note there, though, the House of Representatives did pass last night a one-week government funding measure to buy some more time on a broader spending package and coronavirus relief. But that, I think, was largely as expected. We'll see what the Senate have to say, I think, later on today. But yeah, a little bit of a pullback. We'd commented before about this, the idea of, well, three real areas, I guess, is the idea that equities were just consistently moving up, particularly the NASDAQ. You know, yesterday's downfall came after 10 consecutive up days, so unusual to continue that streak given that was the best performance in a year without a fresh new fundamental catalyst. And then the idea then that the markets are pretty hyped up on the stimulus— that hasn't happened as yet. And there was also a little bit of slight contributing factor towards then reports of two people with allergies experiencing reactions to the Pfizer shot, which has been obviously rolled out for the first time in the UK just two, three days ago. I would say that I think, you know, reading some of the press, obviously things like the Daily Mail is kind of like you know, the killer vaccine, don't take it, all that kind of headline nonsense. I think that's obviously, it's going to be a headline that's going to strike a chord with the national public and sell a lot of papers or a lot of clicks on your website. But, you know, as per everything, you read beyond the headlines, and the two NHS workers in question, given the injections are given to frontline workers, have had a history of serious allergies and carry adrenaline pens around with them all of the time. So I think you just need a little bit of context there. But definitely it is something we've been discussing in the Amplify Live chat room, just about, you know, the what-if scenarios. If we did see someone die having— after taking this virus, whether unrelated or not, I think perhaps it will be drummed up enough by the mainstream media then it might cause an initial knee-jerk reaction to some sort. So something maybe just to be aware of. Um, and then the big story, of course, to talk about is Brexit. You know, what is the latest with Brexit? And I don't think it will come as much surprise to you when I say that after they had their fish supper last night, literally, um, they have said that basically they're committed to keep talking to get a breakthrough, but there wasn't one as yet. And so the goalposts have moved again from Sunday— from Friday last week to Monday to Wednesday back to Sunday. So if you were to ask me if I was a betting man, is that the endgame Sunday? I'd say no. I'd say I'll see you next week. So a couple things to be aware of here then. So EU27 leaders, they're meeting today in Brussels. It's the commencement of a 2-day meeting. They've kind of loosely put an update on the Brexit situation on the agenda to update those leaders from the European Commission President, but other than that, it's really not on their agenda. And so talks, I'm sure, behind the scenes with the negotiating teams will continue in earnest, and I'm sure we'll get some more tweets and things like that, rumors, but it's likely going to be intensifying over the weekend into Sunday. Sunday. So already now Sunday night, as much as I still don't believe that they'll craft a deal, an agreement by Sunday night, the implication will be then, well, how does the market open on Sunday night into Monday session, which will be quite key depending on the weekend press. Um, a few things then to be aware of there. One thing I would say is that it does mean you need to be aware of in terms of how the pound might react. And think of it as in we've got, you know, 21 days left of the month where there is the hardest of deadlines that they can come up with, which is the legal end of the transition period, which would automatically, unless something were to change of course, reset us into this kind of WTO-based rule system if we had a disorderly no-deal Brexit. Which is obviously a massive risk. What likely will happen is that as the clock continues to tick down, market probability of no deal starts to creep up, even if the most broad consensus across the street is that they'll get a deal. You have to then, you know, kind of take a little bit off the table in terms of probabilities and weighing it more so than a no-deal scenario, and that will ultimately start to just ground down the pound if then we get really to the back end of December. So really from now that could start happening. Uh, the kind of time frame we've always kind of looked for is kind of the mid to late Dec for when the deal is going to get done. And so that's how I'd be kind of approaching the pound at the moment. And if you're looking at sterling, already this morning it's underperforming. Uh, EURUSD is up 19-20 pips. Cable is down 85 pips, so there's definitely a disparity there, weighed by sterling weakness more than anything else. The Dixie is actually flat this morning, so a bit of reaction then as European players come in and they're kind of reacting to the latest impasse that we've had in these, these negotiations. As we come down here, I'm looking on a 60-minute candlestick. You've got the S1, the 133 handle, and the futures, which was then the low that we printed on Tuesday. And you can see here was a nice area of the low of the range that was in play on the week commencing the 23rd into then the 2nd of December. And so that's a, that's a good level to look at today. Um, the, the UK GDP numbers for October came out this morning, but 0.4% was bang in line with expectations. That's not really what's in focus. What is in focus is the latest developments on this this situation. So could we get down through here? Well, at the moment, the— it's definitely still worth keeping a half an eye on, on the dollar, although this really is a Sterling-based move so far. It is already down nearly a full point on the session. There's a good area of support here, and generally speaking, if the dollar pops up as it did yesterday, it tends to fade that move and revert back to trend. So if we start to see some dollar weakness re-emerge that might just restrict the size of the downside here, barring any unexpected comments that come out for Cable to run. But just going forward over the period of the next week or so, the, the lack of making a breakthrough will continue to weigh on this market. And if we're looking on a, on a daily, let me just zoom this in a little bit to the near-term price action because it can bring in at least some of the, the multi-month price activity. Um, we're at a fairly interesting level, or close to it at the moment, which is kind of around here, which is that 133 handle we've just been talking about. So any breakthrough or breakdown in talks from here, be looking for a deeper push really down to the 132 handle. Could that happen today? Sure it could. Um, how likely is it to 132 today? I'd say not a great deal. But will we get down there because of the belief that I don't think they're going to get anything done by the end of the week and then not even on Sunday? Well, then, yeah, I think we do go down that low. And this is that idea of then pricing in the no deal. So if we were to get down to, say, the end of DEC, we start getting into the final week and Christmas is gone and we're going into that period between between literally the 28th of Dec when they've said that either they can have a final signing off, then I would expect this pound to be further down the 131 mark, maybe even lower toward 130 at that point. That just meaning then that there'll be an even bigger relief rally once the inevitable deal is then struck. So, so I'll be looking at things in the pound at the moment. Um, quick update on other things, um, on the COVID situation, uh, and stimulus then. I did mention briefly a lack of it happening in, in the US at the moment. The latest there was that Senate Leader McConnell expressed his dissatisfaction with the Democrats and alleged that they rejected further GOP aid proposals. So given the fact now the House have passed that one week government funding measure, probably the likelihood is, knowing what these politicians are like, they'll stretch this out then all the way for another week. So really there's a lack of stimulus coming this week at this point in time. So this was kind of the risks that we've been talking about in Amplify Live— the market being quite pumped up from some of the recent gains we've seen in past sessions and the lack of stimulus Even more so emphasis given the lack of general economic calendar events this week, compounded by continued impasse in Brexit, was enough to kind of create a little bit of just taking some profits on those— that recent run in equities, particularly in the NASDAQ. Um, the guys will go over the charts from a technical perspective then, from what we think from here, with some key equity levels to look out for. But the other thing is COVID-19, of course. Deaths in the US from COVID-19 have now surpassed 3,000 in a day for the first time. So remember, we were looking maybe 6 weeks ago, massive acceleration in cases, and at the time death rates were 1,000. The spring kind of peaks were up around 2,000, 2,500, and we were saying, well, the way that this generally works out is that we're gonna, we're gonna smash through that and and we have. And so at the moment, California's average rate of positive tests over 14 days reached 8.8%. Um, so obviously, yeah, a lot, a lot of testing going on at the moment trying to get this under control. Uh, but those numbers are particularly high, uh, and in fact the highest since the spring as cases surged to another record within the state. So definitely, um, that, that situation is continuing to deteriorate at the moment, which again keeps further pressure on year-end for them to deliver this stimulus package. Final thing I just wanted to talk about, and me and the team will do a full run-through of this on the, on the Amplify Live stream later today, and that is the ECB. And as ever, ING doing a really fantastic crib sheet in order to just kind of break it down into a much more simplistic, which I find much more trade action plan tradable way, which is looking at the kind of base case and then dovish, hawkish scenarios, what the current statements are for the 4 main key policy areas that you're looking at, both from a general economic outlook, inflation and growth, but then from policy tool perspective, and also of course the heightened vigilance on the commentary pertaining to the exchange rate. And so here then, just running through the, the base case, and I'll let you digest this in, in your own time. On inflation, recent data suggests only gradual increase in CPI. For growth, recovery will gain momentum over the summer, but there's still high uncertainties. Probably the main headline, uh, 12:45 statement, which will be key will be the changes that they actually make definitively to policy. And there are a number actually which— to address one of the questions I have from one of the new traders this morning, uh, I definitely would not be of the mindset of looking to build into any position, kind of pre-positioning the euro for any type of anticipated outcome, because there's a variety of outcomes, meaning it's quite uncertain really as to how the euro might react. I'd say you're probably better off just standing pat, doing your scenario planning, looking at all the different permutations that policy, uh, could come out or be announced in terms of any changes they could do, and then what the subsequent then market reaction would be under those different circumstances. It's probably the better way to approach it. So here the base case is of course they're going to do a $500 billion top-up to the PEP. So there's question 1. Do they do it? I mean, it would be incredibly hawkish if they didn't. If they do 500, do they do 650? Some banks have said so. That's one of the first areas to have a look out for. The other thing is about extension of that program through to the end of 2021, which is pretty much those two factors baked into price. The other things then are about the speed of which they're purchasing. On the APP. So away from the PEP, the monthly asset purchases, uh, the asset purchase program, um, will they increase that? Now there's two things here. Will it go as the current 20 billion? Will it stay at that? Some expectation that that could be doubled to 40 billion. Obviously more firepower, the more potent than it is of utilizing that particular tool, of which they have some capacity to do so at this point. The other thing, of course, then is the commitment as to the timing of that. How long will it go on for? Now, generally speaking, it's to do with market conditions dictating the pace of their purchases. But do they go down the Fed route where they commit to, say, open-ended, unlimited, this type of phrasing? That would be much more dovish if that was to materialize. The other thing then is about these TLTROs, the Targeted Long-Term Refinancing Operations. So again, if you're unfamiliar with this terminology, just do your prep work ahead of the event, make sure you're fully up to speed. If there's any questions at all, let me know in the Amplify live chat. More than happy to talk this through. But essentially, just think of it as favorable multi-year loans that big banks can access from the central bank in order then to have capital to keep the system liquid. So rather than the central bank doing all the lifting, they can offer the kind of interbank market rates to keep them lower, commercial lending rates, which subsequently feeds through to us as the consumers. And so here, the idea being that an extension of the generous Teltro interest rate by 6 to 12 months, so just to prolong that out, the even though we're anticipating then an economic recovery in 2021, there's obviously room then for them to make that particular tool more accommodative by just, just continuing it to be supportive for a longer period of time. The other thing then is the tiering facility to exempt a greater part of the bank's liquidity from the negative deposit rates. This is really fine-tuning around the actual the rules and parameters of which they operate in terms of a lot of the functionality and implications for banks, which would be much more favorable in this sense. And then the so-called fallen angels, so the types of bonds that gets, gets purchased, so corporate bonds downgraded during the crisis, do they get included into the the corporate bond buying program. And that's one step which has been mentioned before around the ECB, but they've never really had to go that far. So there are a number of options here that they could do. Perhaps they, they're also conscious of the fact that they want to keep some ammunition back. But I'm also conscious of the fact that the ECB, a little bit under Christine Lagarde, but definitely under Mario Draghi, have had a reputation of overdelivering to try and soothe any investor concerns. And so therefore, could we be in for that again today? And that in itself, a tricky one, because how do you interpret that for the euro? Uh, in a traditional era, a more expansive, looser monetary policy would typically weaken the euro. But if you think about then back in May when we were seeing the ECB overdelivering, the European Recovery Fund was announced the euro actually rallied because if anything, markets were more relieved to assure a more solid, consistent economic recovery rather than the more traditional economic kind of reaction of increasing money supply and kind of diminishing value of that currency. So yeah, better to just wait it out, I think, and see and have a real think-through of some of these things. The exchange rate is the other one. I'm sure she's going to be asked about this in the Q&A from 1:30. The kind of base case, which I think that they will probably say, is the exchange rate is not, uh, is not a target, but the ECB is attentive. I'd say that's pretty bang on. If they say euro strength having a limited impact on the economy or the CPI outlook, that of course would be massively hawkish. Because they're basically saying that, look, we're not bothered, the euro can run higher, and it will run higher just on the fact if they said that. The opposite side could be that a strong euro is weighing on potentially on growth and they are concerned. Any wording around that could be a signal to, in the short term at least, weigh on the euro intraday. But ultimately, I think most people of the opinion that the euro is probably going to remain fairly well supported in the weeks, months ahead, predominantly buoyed by the weakening trend in the dollar at the moment. So yeah, hopefully that's an ECB summary of sorts and gets you up to speed. Me and the team, as I said, will cover this fully at the time of release from around— we'll start the rundown at around 12:15 on Amplify Live. All right. Finally, on the, the rest of the day, other than the ECB, you've got US CPI. Not really looking for that to be too much of a market mover, if I'm honest. The expected 1.1%, previous 1.2%. You've got your weekly jobless claims, of course, uh, and actually, if you remember, that was after two consecutive increases. We had quite a dramatic drop last week. Be interested to see where we're at this time round, and expectations are for a minor pickup but just given, as I mentioned, situation in the US deteriorating with COVID be interested to see whether or not any more of these restrictions are starting to bite. Initial jobless claims are continuing the, the 4-week average of generally moving higher. Um, and that's really it. So I'm going to leave it there. Wish you guys a good day. I'll see you in the chat room if you have any questions. All right, thanks very much.