ECB: What Happened & What Next

Okay, very good morning. I hope you are well. It's Friday the 13th of September. As you can see, the main man Mario to the side of me. Gonna have a bit of a recap of the ECB from yesterday. Particularly choppy price action, of course. We had that Initial spike and sell-off in the first move, which was correctly anticipated by none other than Mr. Sam North yesterday. So a great call on how he saw that playing out. Um, again, really very much— if I just bring up the chart— a function of how the news comes out when you're trading a monetary policy event. I guess for anyone new to this, it was a really good example of why you shouldn't commit immediately to the first spike that you see in the marketplace. This is particularly prevalent when trading something as complex as a monetary policy announcement. It's very nuanced, it is very complicated, and it has many parts, which means then that what normally happens is the first headline that drops down, let's say a Bloomberg terminal, of which, say, algorithms are responding to, that's the first immediate move that gets hit. And in this case, if they cut only 10 basis points when the market was more positioned for something potentially more, and then they do QE of $20 billion, the market was expecting $30, that's when you get an initial very quick spike. But then when it comes out and it's open-ended, there's a tiering system, there's more favorable terms around the targeted long-term refinancing operations and everything else that's more dovish, market then comes off. And so it really goes to show that, you know, you really shouldn't— and this goes really more often than not for trying to trade more complex economic data sets like non-farm payrolls, when then they're not binary events, they have, you know, multiple numbers and variables to monitor. So I think a good example yesterday, and I hope if there's anyone new to markets who watches our briefings, that You know, this was an example of you don't need to have that FOMO. There can be plenty of opportunity thereafter. And if you actually look at the market as we went through the afternoon, you actually had a really quite impressive rally after all. You know, is what he's done enough, particularly on the tiering side, which we're going to discuss shortly, to help alleviate any of the tensions in the kind of interbank market that banks can lend and therefore offset offset this looming downturn that seemingly feels almost inevitable in the eurozone. And as such, then the euro continues to recover at the moment. But we're going to go through and we'll have a look and review exactly what else happened elsewhere. The pound seeing a little bit of upward move this morning, and I'm also going to go into some— excuse me— articles of interest, particularly in regard to the DUP. Report in the Times overnight, um, that was quite interesting, which I'll explain more. But you can see sterling already breaking above yesterday's high, above its R1, finding some technical resistance at the daily pivots at the R2 this morning. Uh, equity markets pretty quiet, although European bank stocks off to a pretty decent start on the back of the tiering announcement of the ECB yesterday. And fixed income futures pretty flat in the case of the US 10-year. However, the Bund trading down a decent amount this morning, underperforming in the wake of the ECB. Okay, so let's get into the news, and as per usual, let Sam go over the charts in more detail. So let's see what this chap unveiled in his penultimate meeting before he departs and hands over to Christine Lagarde at the end of October. So here is the kind of summary of what happened. So they cut the deposit rate. Rates, obviously there's 3 major rates in Europe. The one that people focus on the most, deposit rate, being that the one in negative territory. So they cut that by 10 basis points. But as Sam was informing you guys yesterday in the briefing, there were some outside bets that they could have gone more aggressive, 20 basis points. I'm not sure if you saw that ING graphic that their kind of crib sheet infographic, and they were going for 20. They weren't the only bank out there with those calls, so we only got a 10 cut. The other thing then, I'm going to come back to the tiering and the forward guidance, was here: quantitative easing. Net purchases will be restarted at a monthly pace of $20 billion as of November 1st, purchases to continue until shortly before the first rate increase. Very important, that latter phrase. Basically, they're saying that it's open-ended. It's not until they start lifting rates, which is way off the cards now. Um, remember, we were only a few months ago talking about language that would specify from a seasonal point of view that rates would rise basically in the autumn. We're now talking— we have seen execution of rate cut, and now the likelihood that QE is going to continue for some time. This is a look at QE in its historic form from Europe. And as you can see, going all the way back to 2014, '15, '16, when it hit its peak, when the ECB were buying in excess of €80 billion net asset purchases per month, finished at the beginning of the year. It's going to restart then in November. Excuse me. And this is where we're at at the moment. So back to €20 billion, but remaining at that pace. Now, a couple things around this. If you take into account the recycling of the proceeds of existing bond holdings that mature, because you remember there are a number of bonds, uh, bonds by nature hit their end date and their redemption. And what the ECB effectively have been doing, like other central banks like the Bank of England and so on, unlike the Fed who have a period conducted quantitative tightening others, and ECB will continue to roll over those maturing bonds. So other than the €20 billion that they're buying, that does also mean that if you take into account the recycling of those proceeds of maturing bonds, they could end up purchasing about €35 billion a month. So it's definitely a substantial quantitative easing program. And is this enough then, as they have aimed to do in previous years, to counteract the economic deterioration that's been happening at the moment. QE though wasn't completely— I mean, there wasn't a consensus here. As you can see, countries which you would imagine, the likes of Germany, Austria, and the Netherlands, all were against and opposed what Draghi wanted, which was to go into this QE announcement to restart in November. Estonia and France were actually the other countries which also opposed. But as you would imagine, this kind of north-south divide— Italy, Spain, Greece, of course, Ireland, the other country bailed out over the last couple of years— all backers of restarting the quantitative easing program. This does though have ramifications, I feel, for the fact that Draghi is not going to be there for much longer. And if you're Christine Lagarde at the moment, you've got an absolutely divided eurozone about what they feel is the best course of action to manage this economic environment at the moment. So she's definitely got her work cut out as soon as she comes in. But the stall has been set now from Draghi, and we are expecting continuity in approach. It's whether or not she can appease then her, her former country of finance minister she used to be back in what, 2007, '09 in France, and then the others as well, mainly being Germany. The other thing, of course, that the ECB announced was this, was tiering. Now, me and Piers were actually talking about this, uh, at 10 o'clock last night. That's how, you know, how ridiculous it does get at times. But the tiering system is, is incredibly complicated. I started reading some research reports last night and I thought, you know what, I'm just gonna go to bed because I need more time to figure this out. But from a top level, I can express it as far as traders are concerned because there's a big difference in markets. And I try to express this to a lot of our interns, newer traders, that what economists write, and these are certainly the research reports that I'll read, it really doesn't hold much, um, use for an intraday short-term speculative trader. It really is too complex. What The Economist write are really to satisfy more hedge funds, for example, portfolio managers who are investing much more in the long term and really need to get under the bonnet to understand what are the ramifications for different sector out and underperformance, what's the overall medium-long-term picture from a trading point of view, it's very different, um, in, in the short, more volatility environment. And from that, there's a couple of things that I can definitely go over. So to counteract the idea of negative rates, if you think about it, the banking sector— this has been very prevalent overall since we've hit this zero interest rate policy era. Banks have really struggled because their margins are getting squeezed. And particularly if we go into this negative rate environment, that's only going to hurt banks more. But if you think about the transmission of monetary policy into the system, it's not the central bank that goes straight into the consumer. The central bank must operate and lend and add liquidity to the interbank market, the big banks who then lend amongst each other, which then artificially then lowers the lending rate for us the consumer, as well as having a low interest rate environment direct from the central bank. So managing of this these intermediaries, these banks, is critical. But the problem you have in the eurozone at the moment is a lot of disruption in Italy. Banks there have been under incredible amount of stress, as too in other countries like Spain. But then you've got, you've got banks like Deutsche Bank which have been absolutely under pressure at the moment and are systemically important to the functioning of the financial system. So the central bank, like the ECB, know they cannot risk having any type of concerns around these big banks. So how can they counteract this but keep the, the negative rate in place? So what they did, or what they've done, is they've announced a tiering system to exclude some of the bank's excess deposits from negative rates. Now, in theory, some calculations from some analysts say this would cut banks' costs of negative rates, i.e., the bank's amount that is being penalized by negative rates, from €9 billion a year to €6 billion. That's a substantial decrease to add then and kind of release more liquidity into the market, which should effectively help then lending conditions to offset then this looming economic recession if the inversion of the yield curve does inevitably prove to be correct. Now, while tiering will help Northern European banks because they have generally large excess deposits, cheap loans will also help Southern European lenders who obviously face higher funding costs given that they're generally seen as a lesser creditworthy place to park your cash. So all of this, I think that's probably the singular most important thing that actually came out yesterday. I think that's the first time that they've moved into this tiering system. They're not the first central bank to do this. I think Japan, and this follows, I think, the Swiss model. This dates back a couple of years ago when obviously they dropped the floor on protection of 120 in Euro-Swiss. They went negative in rates, but they also adopted this tiering, two-step tiering system. So yeah, very important, that development. The other thing, of course, that they did was down at the bottom. This is Targeted Long-Term Refinancing Operations, or otherwise shortened to TLTROs. Now, what they did here, as you can see on the right-hand side, they came out and confirmed plans to offer cheap loans for banks under their third TLTRO, sweetening the terms by cutting the cost of borrowing and extending, lengthening maturity to 3 years from 2 years. So another particularly dovish move. And again, this in combination with the QE open-endedness, with the tiering system, all offset then the initial spike on the more dovish disappointment on the 10 cut and the €20 billion. And so that's where you had that mixed move overall, though these latter measures, as well as the ECB keeping a little bit left as ammunition by not going as big on the first two parts, means that actually, is this a positive thing? Does this mean then that this is a good measure to try to counteract this eurozone downturn? Therefore, medium term, outside of that initial volatility, this is a euro-positive development, this is a European equity-positive development, and therefore net negative European fixed income. And that's what you're seeing in the market this morning as far as the asset classes are concerned. So hopefully that gives you a bit of a summary of why the market did what it did and, and the importance of the announcements that they made. All right, let's jump over to the US. I did see that all three major US indices closed in positive territory yesterday. Not only had the ECB stepping up in terms of their monetary toolbox being unleashed, you've also got more positive news on the trade side. And of course, this still remains the biggest threat to the global economy. But this was something which has kind of developed further from headlines from the day before. Trump administration officials have discussed offering a limited trade agreement to China that would delay, but most importantly, and for the first time the trade war has kicked off, they would even consider rolling back some US tariffs, according to 5 people in familiar with the matter in the Bloomberg article from late yesterday. Now, that latter point, I feel, is very important. If they start to roll back US tariffs, I think that is a meaningful shift in a more positive direction for these trade talks. Interestingly, we've been seeing, um, activity-based economic data in the US, like manufacturing PMIs, started to weaken. The consumer, so far, data has remained robust. However, if manufacturers and corporates start to suffer, inevitably this starts to lead then to potential threats for unemployment to rise, wages then to decrease, which inevitably means the consumer becomes less confident, and then that consumer data starts to weaken. Trump knows this, and that's a risk to the US economy going into an election year. He can't allow that to happen, so rolling back US tariffs. Is it inevitable at some point if he's to fulfill his mandate of securing a second term? Now, one of the things then— this follows, of course, what we had on late Wednesday. Trump tweeted that would be putting off 5% increase on tariffs on Chinese goods. This comes ahead of working meetings between the teams of US and China which are going to take place next week. So all positive signals. And there was an article, if I flip over to this one in Reuters, privately run Chinese firms bought at least 10 boatloads of US soybeans on Thursday, the country's most significant purchase since at least June. Beijing this week renewed a promise to buy US agricultural goods such as pork and soybeans And of course, that is the most valuable US farm export, where agriculture is, uh, absolutely pivotal to the performance of not only the US economy from a revenue stream, but importantly, and what will be key for the political popularity for Donald Trump, where farmers are becoming increasingly frustrated by the fact that the trade wars are now having a meaningful impact on their ability to perform. So all of this again quite positive. This in combination with the ECB, equities did finish positive, and all things remain equal at the moment, I'm feeling quite bullish again. But as we know, headline risk is key. Just because they are, you know, looking positive at the moment, we've seen this many times before. And if there's one distinct pattern of behavior Donald Trump has had If they are going to have any type of meeting, whether next week or potentially face-to-face in future, Trump loves to then just remind them via Twitter who's the boss. And he comes out and says something just the day before a meeting that's quite critical of China, just to appease the kind of domestic electorate that he's being really aggressive going in and strong-handed for the best interests of America. So I do feel quite bullish for the moment though. Um, all I would say is there's always headline risk associated though to these things, so you need to be quite responsive to keeping an eye on Twitter for anything out of Trump. Okay, final stories before I hand you to Sam. If I just have a look at the pound this morning, the pound is actually outperforming cables up 57 pips, breaking a bit of a range here of the price activity of the recent days. You can see here We've broken the high that was seen on the 9th, breaking some of that range as well from the 10th. We've already tested the R2. Now, a couple things I'd like to stress here. One is this story came out overnight. It's kind of came out at midnight. The DUP opens door to new Brexit deal for Boris Johnson. Party agrees Northern Ireland could take some EU rules. This is according to advisers close to Arlene Foster. Now that report has already been refuted. The BBC have quoted her as saying the DUP denies the report, it would accept Irish sea checks. So that came out overnight, 1 minute past midnight. So a couple of important points here as the way of news is released, just given the fact of the job that I've always done, I'm aware of these kind of mechanisms. So the Times often have a, an important article that they released by an automated fashion at 1 minute past midnight. If you were to look at the Sunday Times website at 1 minute past midnight, you'll see that all of the major articles initiate on their website live at 1 minute past midnight. Now that's fine, it's not really important at the weekend, but definitely if you're going to get a breaking piece of news to get some edge potentially on a move just be aware that that's the mechanism of how the news is released when it comes to the Times, of what I've seen over the years. Now importantly, even though this was denied already earlier this morning, that always doesn't matter. Remember, if people start to circulate this article, think about the way of which news is disseminated. Even though this has already been denied by Arlene Foster, It doesn't matter because if people start sharing this news without the rebuttal, the market's going to move and you're just being stubborn if you're not going to get involved. If you're a speculative short-term trader looking to get hold of some momentum, if you are a more activist type trader, yeah, you've just got to go with what the market's doing. Stop using your brain trying to rationalize the situation. That's when you've got to go with what's happening on the screen. Importantly though, I think from a bigger context here, for me personally, politically, there is no smoke without fire. Now think about this. We are going into a general election. All that's happened, in my opinion, is it's been delayed. We are going to a general election. The potential outcome of that general election is that Boris Johnson may well come out with a majority government. Now the There's obviously a lot of risk to this and so on. But let's stay with me, let's talk this through. If he does get a majority, he doesn't need the DUP anymore, and Arlene Foster does not matter. This lady who's been absolutely pivotal during the Brexit process, now you don't matter anymore, so step aside. So what does that mean if I'm Arlene Foster? Well, if I'm Arlene Foster, I know this. I'm going to start talking to Boris Johnson, and I'm going to start saying to Boris Johnson, potentially we could accept a couple of European rules, actually, if it helps you get the deal over the line, as long as we can be involved in your government and have some say and ultimately receive funding and still be aligned to appease that we're part of Britain. So again, as I say, I don't think you get smoke without fire, and I think that this is true, even though she's come out and denied it this morning and refuted the report. This is the way that journalism works, uh, to that. So that's just my view. I think the pound is absolutely valid to rally, even though she's denied it this morning. And the move though, in my opinion, is done at this point. I think if you, if you've missed it, I'd be a little reluctant to get too aggressive to want to get in again at this point. Perhaps if we come for a little bit of a further pullback, uh, could be interesting. I'd be more concerned then or how other asset classes and general market sentiment for the day is shaping up in that regard. Okay, quick look at the calendar. I feel like I've been ranting a little bit with this briefing, so let me just wrap things up. If I just make this a bit bigger, let's see what's on the agenda for today. Um, you've got very light morning, um, going into the US session. Import-export prices, US retail sales of course will be interesting. We are looking for a slight decrease at 0.3 from 0.7 in the month-to-month retail sales. Remember again, retail sales, as I was kind of suggesting with monetary policy events, retail sales is quite a tricky one. If you actually look at retail sales, it's month-to-month, year-on-year, ex-auto month on month, ex-auto gas, and you get the retail control group. Now, not only that, you get revisions to all previous of those numbers. So even with retail sales report on its own, excluding the fact that we also have business inventories— well, that's later, excuse me— including the fact we have import-export prices coming out at the same time, retail sales alone is 1, 2, 3, 4, 5 times 2, 10 pieces of data coming out. So again, it's not about trying to commit and take a gamble and risk inappropriately to try and trade this data. It's about understanding it and then looking to take action if it should show its hand, i.e., if it's an outlying number and if it's all pointing in the same direction, could then often offer the best opportunity. So 1:30, some data, and then you've got the preliminary University of Michigan. Not expecting a great deal out of that, to be honest. I still think the consumer relatively holding on to some degree of positivity at the moment. Then any oil traders, Baker Hughes rig count later. And then for any sterling traders, Bank of England's Cunliffe is speaking at a Eurogroup forum later this morning at 10:15. Okay, that's it from me. Going to wish you a fantastic weekend ahead, and I'll see you on Monday. Thanks very much, guys.

Yeah, hi guys, uh, good morning. Happy Friday the 13th. Hopefully not too, uh, spooky of a day. We'll have a look over the pounders. As you can see, breaking, uh, higher, um, and, uh, yeah, now 1.2457. Of course, the, the futures roll over now, trading, uh, the December, uh, contract as well. So now we're back above the that level that was the 9th, of course, what was quite a good level, 124 technically on the old contract. Now we are above that, but yeah, this headline putting us, uh, us through here. And just having a quick look on the, on that daily, you can just see how important it's going to be. Literally where we're trading now was the, the low that we had back on the, uh, 17th of July of this contract. So where we closed the week, the effectively the day as well, will be massive for this market. And at the moment, it seems that that conversation me and Ant had about the, uh, chance of a lifetime to get long pound could well be right now, uh, looking like a massive mistake. 400 ticks above that low. And you can see what happened just psychologically when we failed to close below 120, and we're now all the way up here. And what a difference a few weeks has made there. The pound, obviously, this is, this is that key level to keep an eye on and focus on for the remainder of the week. Having a look, euro, euro's loving it as well, of course. So what's good for the pound because of Brexit, it's gonna be good for the euro to an extent as well. And euro-pound Well, I just want to bring in EUR/GBP before we go back to that euro because that's got a very important area as well. Can we, for the pound here, get below what has been such a good area of support going back to June as well? Had another test in July and then a couple of days ago, uh, you know, to focus on that area for the end of the week would be massive, massive if we can get a close below there for the euro-pound. Euro, as mentioned, pushing higher as well, and we're coming up to levels not seen since 29th of August. So quite a key point to keep an eye on there. And, you know, speaking to a couple of friends yesterday, yesterday, and I've told you guys, I had a friend who was— who's been long silver for quite some time, and it was going well, and it was a winning trade for him. And they were looking to get back in. And the idea of, you know, yesterday with some dollar weakness and with the ECB cutting rates and Donald Trump within a matter of moments on the Twitter saying that the Fed should be doing so as well, you know, are we going to get now some dollar weakness into the Fed meeting next Wednesday? And of course, silver and gold may like the, the look of that. Uh, the dollar already down 0.2 today, so a bit of a dollar weakness across the board. Key level for euro just being tested, and of course you'll be looking at any of those other, uh, previous highs as areas of support. In terms of looking for a reversal for, for the euro, understandably we're finding some resistance there. I think it's, you know, probably we haven't quite got it yet, but what has really helped the, uh, the euro in, in recent times. When you do get pushed higher to then get short again is when you can get a buildup of a trend line, uh, from, from the lows as well. And yeah, you know, if we close below, say, the previous high of yesterday, then we can drift lower, of course. But certainly for a more medium-term trade, I'd like to see a trend line kind of build up, uh, much like the last few weeks and months, and, and that to break and, and and that could be cute to get short again. But we will see. Of course, with the Fed coming next week, it'll be interesting to see what stocks do. And, uh, we're, you know, a similar day from yesterday away from all-time highs again in, in U.S. equities. And, um, there we go. Let's draw that, that line on there at the 45, 2945. You see what happens just technically, just technically break above, then the good stories make more impact to the upside. People that were short don't want to be short anymore. And the next resistance we found, um, you can see from the breakdown before the last day of July, and then yesterday, the lower point of the, the day, 3,000 psychological handle on futures. So technically working very well, uh, there. And, and you can see, I think the, the all-time high is about just under 29, 30, 29. So So yeah, it wouldn't be too surprising to see us to get that today. However, we have hit the, the high from yesterday already, uh, 1, 2, 3, 4, 5, 6 times on the hourly. So strong resistance there. Keep an eye on that because a break above there when there's real volume could be a formality up to the all-time high. Worth keeping an eye, however, on the, you know, the trend that's just starting to form from the, the lows. We're keeping obviously a watch on the DAX, what that, that does as well this morning. But I think overall we've got to be favoring places to look to get long for US equities. 3000 has worked though, so to the downside there's some other key points just below the previous highs that we had back on the 9th and the 11th at 2992, which I'd also like to see hold as support. And only really then if we were to get below there, yes, back into into no man's land. But as a key area of support broken, then I guess we could start looking for that real test of 2944 again, which hasn't actually come as of yet. So stocks are higher, dollar is weak today. Donald Trump will be happier. And of course, oil, a couple of days, uh, has finished lower, coming up to a key point. I'm just going to put this back onto a 15-minute chart just to show you how key this area of resistance could be for, for oil price. And we're just coming to the lower point of that zone, $55.26 to $58, give or take a couple of cents either way. You can see we struggled 1, 2, 3, 4, and now 5 times to really get back above that area. So definitely one to keep an eye on for oil traders. And to the downside, the, uh, the lows of today have been again tested quite quite a lot as well. So perhaps a mini range coming in, uh, and as good as ever for a line in the sand for oil price there as well. If we were to break out the top part of this range, obviously just keeping an eye on the low that we had from Wednesday, which ignited another leg lower around 10:30 yesterday when that had broken. Quick look over at gold, as we did have a push this morning on that dollar weakness. We come back to to test there what's been really key technical level, uh, 1508.7. You can see from yesterday, uh, afternoon and this morning and again just now. So just keep an eye on this, how well the bulls defend this level. Back below there, while you would still have an area of support on these previous highs, I would just, uh, just be favoring— I would say if we can get below 1507 0.8. So around where I'm just going to draw this circle, that's when I would then be confident we can then drift lower. But at the moment, the bulls are in control, and the high of the day, you can see, uh, not too far away from where we are trading. Quick look over at what the DAX is doing, as it's going to be important whether US equities as well can get a break of that 5 times tested high from the last 24 hours. It's found resistance on its high, just coming down the pivot, a key area of support. It's a bit of a small range, not too unlike the DAX, to be contained on a Friday morning. Any questions, as usual, please do let us know. Obviously, with it being Friday the 13th, we hope you're all very safe out there. But any questions, please do feel free to contact us throughout the day. A couple key levels to keep an eye on as we go into the close close of the week. Just be aware of that contract rollover on the futures. And when we speak to you all Monday, could well be that stocks are at new all-time highs.